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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(Mark One)
/X/ For the fiscal year ended October 31, 1996
OR
/ / For the Transition period from ___________ to ___________
Commission File No. 0-1424
ADC Telecommunications, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0743912
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12501 Whitewater Drive
Minnetonka, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 938-8080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.02 par value
Common Stock
Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / / No
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of January 2, 1997, was approximately $3,950,151,836 (based on
the last sale price of such stock as reported by the Nasdaq Stock Market
National Market).
The number of shares outstanding of the registrant's common stock, $.20
par value, as of January 2, 1997, was 130,481,850.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G(3), the responses to Items 10, 11, 12
and 13 of Part III of this report are incorporated herein by reference to the
information contained in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before February 25, 1997.
PART I
ITEM 1. BUSINESS
ADC designs, manufactures and markets transmission and enterprise
networking systems and connectivity products for use in fiber optic, twisted
pair, coaxial and wireless broadband global networks. The Company's wide
range of products employ fiber optic, hybrid fiber coax, wireless and
traditional copper-based technologies. The Company's customers include:
public network providers, which consist of all seven of the Regional Bell
Operating Companies (RBOCs), other telephone companies, long distance
carriers, wireless service providers, major cable TV operators and other
domestic public network providers; private and governmental network providers
(such as various large business customers and governmental agencies);
international network operators; and major telecommunications Original
Equipment Manufacturers (OEMs). The Company's products enable these network
providers to build and upgrade their networks to support increasing user
demand for voice, data and video services.
As used in this report, unless the context otherwise requires, the terms
"Company" and "ADC" refer to ADC Telecommunications, Inc. and its wholly
owned and majority owned subsidiaries; 1994, 1995 and 1996 refer to the
Company's fiscal years ended October 31, 1994, 1995 and 1996, respectively;
and 1997 refers to the Company's fiscal year ending October 31, 1997.
INDUSTRY BACKGROUND
Since the 1970's, the telecommunications equipment industry has grown and
changed substantially, primarily as a result of continuous technological
development; increased demand for the high speed transmission of data and
video traffic and the convergence of all network traffic into integrated
multimedia services over public and private networks; and a changing
regulatory and competitive environment. The Company believes that these
trends will continue to drive changes in the telecommunications equipment
industry for the foreseeable future.
Several important technological developments have spurred the evolution
of the telecommunications equipment industry. One important technological
change has been the deployment of fiber optic transmission systems. In a
fiber optic system, lasers transmit voice, data and video traffic in the form
of analog or digital coded light pulses through glass fibers. The increasing
shift to fiber optic transmission systems has been principally due to the
ability of fiber optics to carry large volumes of information at high speeds,
its insensitivity to electromagnetic interference and the high transmission
quality made possible by the physical properties of light.
The development of cost-effective digital technology has allowed greater
capacity (or speed) in network transmission and has resulted in an increasing
trend over the past decade to replace analog technology in copper, fiber and
wireless transmission networks. In analog technology, information is
converted to a voltage or current wave form for processing or transmission.
In digital technology, information is converted to digital bits and then
processed or transmitted using computer based components. Very high-speed
digital technology
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developments such as cell based Asynchronous Transfer Mode (ATM) technologies
and Synchronous Optical NETwork (SONET) technologies have enabled network
providers to transmit increasing amounts of data and video communications.
Another important technological change in the telecommunications
marketplace is the use of integrated circuits in both public and private
telecommunications networks, facilitating significantly more complex
networks. Network equipment utilizing integrated circuits is increasingly
performing the high speed switching, network performance monitoring, network
management, information compression, data translation and other complex
functions required to address expanding users' needs.
More recently, wireless technology developments are having an impact on
the telecommunications equipment industry. There has been substantial growth
in wireless communications such as cellular telephone services and
satellite-based services, and significant preparations for increasing use of
Personal Communications Services (PCS) communications, Multichannel,
Multipoint Distribution Systems (MMDS) for wireless cable services and
wireless data and paging services. This growth has been spurred by the
convenience of mobility and the limits of wireline infrastructure. In
particular, in countries without reliable or extensive wireline systems,
wireless service could ultimately provide the primary service platform for
both mobile and fixed telecommunications applications, because of the
potential savings in installation time and cost. The Company believes that
in future years the continuing development of wireless communications
technology could substantially extend the reach of current communications
networks.
Finally, over the past two years, Digital Subscriber Line (DSL)
technology advancements have resulted in a resurgence of copper-based
transmission of high bandwidth services to business customers. The Company
believes that in future years the continuing development of DSL technology
could enable network providers to transport residential broadband services
over copper-based systems in certain applications.
Demands on network infrastructure have grown substantially in the past
decade. Networks increasingly are required to transmit large volumes of data
and video for the purpose of communicating information, conducting business
and delivering entertainment. In addition, both public and private network
customers are requesting the convergence of their voice, data and video
traffic into integrated multimedia services transmitted over one network.
Such demands have prompted the development and use of "broadband" networks,
which feature the improved reliability and increased speed of transmission
generally required for data and video transmission over the network.
Specifically, the industry term "broadband" refers to all transmission speeds
of T1 (1.544 million bits per second) and higher. Growth in broadband
network applications has fueled increased infrastructure investment by
network operators in order to expand network capacity and provide new
applications and services to meet users' needs.
The evolution in technology and user needs has been accompanied by
changes in the domestic and international regulatory environment. Since the
divestiture of the AT&T regional operating companies in 1984 (under a consent
decree), the RBOCs have been prevented from
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manufacturing equipment for use in telecommunications networks. As the RBOCs
have embarked on aggressive expansion plans, significant opportunities have
been created for independent telecommunications equipment manufacturers such
as the Company.
In February 1996, the U.S. Congress enacted the Telecommunications Reform
Act of 1996 (the Telecommunications Act), which opened competition for local
loop access services to local telephone companies, long distance telephone
companies, cable TV companies, electric utilities and potentially others.
The Telecommunications Act represents a fundamental change from the
Communications Act of 1934 (the basis of the U.S. telephone industry
structure prior to 1996) which protected franchised monopolies in local
telephone service. The Telecommunications Act also allows the RBOCs to
provide long distance service and manufacture telecommunications equipment
under certain circumstances, a significant change from the 1984 consent
decree which required divestiture of the AT&T regional operating companies.
The objective of the Telecommunications Act is to reduce regulation and
stimulate competition in telecommunications services, which in turn is
expected to result in more rapid introduction of new technologies and
services, better quality of service, a broader range of service options,
lower costs to consumers and stimulation of the overall economy through an
improved information system infrastructure.
Since the passage of the Telecommunications Act, the Federal
Communications Commission (FCC) and the federal courts, as well as various
state governments and agencies, have initiated activities to define and
establish rules for implementation of the new law. The Company believes that
the impact of the Telecommunications Act in reducing regulation of and
restrictions on the U.S. telecommunications industry will unfold over the
next several years.
Outside the United States, the telecommunications equipment market has
also expanded and changed significantly in recent years, as network users
have increasingly demanded access to voice, data and video communications
capabilities. Many countries without reliable or extensive wireline systems
are seeking to develop and enhance their telecommunications infrastructure.
This growth in demand for network services and infrastructure has been
accompanied by changes in the international regulatory environment. In many
countries, government operated telecommunications monopolies are being
converted to private network services providers, and competition among such
carriers is expected to intensify. Policies of deregulation and
privatization are currently being followed in many countries, thereby
increasing opportunities for independent companies to supply products and
services within public telephone system markets and within private voice,
data and video communications markets.
The Company believes that "broadband global networking" (the emerging
series of worldwide broadband networks) represents a key enabling capability
for meeting the information needs of network users. The addition of high
speed data and video traffic has driven the need for broadband infrastructure
and has enabled the creation of a wide range of new applications, including
broadband Internet access and e-mail, video on demand, electronic commerce,
distance learning, telecommuting and remote medical imaging. The Company
participates in this emerging broadband global network market by providing a
broad variety of equipment, services and integrated product solutions.
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STRATEGY
ADC's strategy is to capitalize on opportunities in the evolving global
telecommunications market by providing equipment, services and integrated
solutions for its customers' voice, data and video telecommunications
networks. ADC's broad range of products addresses key areas of the
telecommunications network infrastructure, and these products are used to
connect physical networks, access network services, transport network traffic
and manage networks. ADC's diverse product offerings address the needs of
its customers, which include the RBOCs, other telephone companies, long
distance carriers, wireless service providers, the major cable TV operators,
other public network providers, private network providers and
telecommunications OEMs.
Key components of the Company's strategy include:
FOCUS ON BROADBAND NETWORK OPPORTUNITIES. In recent years, broadband
requirements for both public and private networks have grown significantly.
Accordingly, ADC is focusing its product development and marketing efforts on
opportunities in emerging broadband networks. In the public network market,
broadband deployment has been driven by telephone and cable television
providers seeking to establish the infrastructure required to offer Internet
access, new data, video and telephony services, entertainment and other
interactive services to residential customers over a single network. In the
private network market, broadband requirements have been driven by the growth
of data, voice and video applications utilizing increasing amounts of
bandwidth. Examples of products developed by ADC to target these
opportunities include the Company's Homeworx-TM- system, which has been
designed to enable telephone and cable television companies to provide a
range of voice, video and data services to residential customers; the
Soneplex-Registered Trademark- product platform, which allows public network
providers to cost effectively deliver and manage broadband services over the
public network for their business customers; the AAC-3-TM- ATM access
concentrator, which allows customers to gain access to high speed switched
voice, data and video traffic on public networks from their private networks;
and the Company's family of CityWide-TM- wireless systems, which provide
access to, add to and extend cellular communications coverage. In addition,
ADC's 1996 acquisitions and joint ventures improved the Company's ability to
target broadband network opportunities. See "PURSUE STRATEGIC ALLIANCES AND
ACQUISITIONS" strategy discussion below.
PROVIDE END-TO-END NETWORK SOLUTIONS. ADC offers a broad line of
telecommunications equipment that addresses customers' key network needs from
the central office, through the local loop (the portion of a network that
connects a subscriber's equipment to a local central office), into the
customer premise and across enterprise networks. Through internal
development, acquisitions and joint ventures, ADC has formed its expertise in
three major network areas: transmission, enterprise networking and broadband
connectivity. In addition, during 1996, ADC significantly enhanced its
network management and systems integration capabilities through acquisitions,
joint ventures and internal developments to enable it to offer customers more
complete solutions to their network needs.
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LEVERAGE TECHNOLOGICAL CAPABILITIES ACROSS PRODUCT GROUPS. ADC has
developed substantial expertise in fiber optics, broadband, video and
wireless technologies. The Company has built these core competencies through
internal development, acquisitions, joint ventures and technology licensing
arrangements. ADC's strategy is to leverage these core competencies across
its product groups in order to develop new product architectures and network
management tools for its customers' evolving voice, data and video network
needs in various market areas. For example, the Company is continuing
development of its wireless technologies for use in converging wired and
wireless applications, such as potential wireless local loop products. See
"PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS" strategy discussion below for
recent wireless technology additions.
EXPAND INTERNATIONAL PRESENCE. ADC believes that significant growth in
the telecommunications equipment market will occur outside the United States
as a result of deregulation and the need of many foreign countries to
substantially expand or enhance their telecommunications services. ADC's
strategy is to continue to expand its international presence by increasing
its international sales and marketing resources, leveraging its existing
customer relationships, developing additional international distribution
channels and seeking strategic alliances and acquisitions. During 1996, this
strategy resulted in ADC increasing its international sales approximately
65%, to a level representing approximately 21% of total sales. Two of the
companies ADC acquired during 1996 and several of its new strategic alliance
partners have their principal operations outside the United States.
PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. ADC has sought and intends
to continue to seek alliances and acquisitions which will: (i) add key
technologies that it can leverage across its businesses, (ii) broaden its
product offerings, (iii) permit the Company to enter attractive new markets
and (iv) expand or enhance its distribution channels. Recent examples of
such alliances and acquisitions include: (i) the acquisition of Da Tel
Fibernet, a provider of engineering, design and installation services and
manufacturer of telecommunications infrastructure products, (ii) the
acquisition of Information Transmission Systems Corp. (ITS), a manufacturer
of television transmission products for the wireless cable and broadcast
industry, (iii) the acquisition of Metrica Systems Ltd., a United Kingdom
software design firm specializing in applications-based network management
tools for global wireless and, increasingly, wireline networks, (iv) the
acquisition of Skyline Technology, Inc., a manufacturer of ISDN/Frame Relay
access products for Internet and other high-speed digital connections, (v)
the acquisition of Solitra Oy, a Finnish wireless infrastructure company that
designs, manufactures and markets radio frequency filters and other wireless
base station equipment components and subsystems; (vi) the acquisition of the
wireless infrastructure equipment group of Pacific Communication Sciences,
Inc. (PCSI-Registered Trademark-), a provider of systems level design and
wireless base station equipment in various wireless technologies; (vii) ADC's
joint venture investment in PCS Solutions, LLC, a Personal Communications
Services (PCS) company that designs, manufactures and markets cable microcell
integrators; (viii) ADC's joint venture with Nanjing Panda Electronics
Company, Ltd. to provide hybrid fiber coax technology for telephony and data
services delivery in China; (ix) ADC's joint development and marketing
alliance with Nippon Telephone & Telegraph International (NTTI) for public
network ATM access products; and (x) ADC's distribution
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agreement with Nanjing Telecommunications Equipment Factory to market fiber
optic cabling systems throughout China.
The ability of the Company to effectively implement its strategy is
subject to many uncertainties and there can be no assurance of any future
results of the Company's activities.
PRODUCT GROUPS
The Company's products can be categorized into three general functional
groups: (i) transmission, (ii) enterprise networking and (iii) broadband
connectivity. These product groups accounted for approximately 37%, 18% and
45%, respectively, of the Company's net sales during 1996. Each of these
product groups is discussed below.
TRANSMISSION
ADC's transmission products provide electronic and optical signal
generation within predominantly global, public networks. Certain of the
transmission products also provide access to the network in order to monitor,
test and reroute circuits within telecommunications transmission systems.
ADC's transmission products are designed for use in copper-based, coax-based,
fiber-based or wireless transmission networks and are sold to telephone
companies, cable TV companies, other public network providers and to users of
private voice, data and video networks. Transmission products and services
include fiber optic video delivery products, other high speed voice, data and
video delivery and access platforms, wireless cable and broadcast TV
transmission equipment, wireless microcell systems, wireless performance and
network management systems, test and monitoring systems, digital repeaters
and systems integration services and products. Certain of the Company's
transmission products are described below.
DV6000-TM- SYSTEM AND OTHER FIBER VIDEO DELIVERY EQUIPMENT. The DV6000
system transmits a variety of signal types using a high speed, uncompressed
digital format (at speeds up to 10 billion bits per second) over fiber in the
super trunking portions of broadcast and interactive video networks. This
system is used in significant public residential broadband networks, such as
Viacom Cable's San Francisco Bay Area video backbone network, the regional
headend network in Florida of TCI Cablevision of Florida, Inc., and new video
networks installed by telephone companies, including Southern New England
Telephone Corporation (SNET) and Ameritech Corporation. The Company also
manufactures various analog video transmission systems used in cable TV and
broadcast applications and interactive systems for distance learning and
campus interconnects.
HOMEWORX-TM- ACCESS TRANSPORT PLATFORM. The Company's Homeworx access
transport platform is a customer loop transmission system for small business
and residential customers utilizing hybrid fiber coax technology. The
Homeworx system has been designed for deployment on video-only, integrated
video and telephony and telephony-only broadband networks provided by
telephone operating companies, cable TV companies and other
telecommunications common carriers. The Homeworx system has been selected
for video-only use in the residential broadband networks of Ameritech
Corporation, SNET, MediaOne, Cox Cable Communications, Inc. and Cable
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Bahamas. Test trials for the enhanced telephony version of the Homeworx
system have commenced with a number of customers. Optus Vision Pty. Ltd. in
Australia has elected to use the telephony capability of the integrated video
and telephony Homeworx system in its residential broadband network
deployment, and the Company commenced shipping this product in commercial
volumes in the first quarter of 1997. Recently, a unit of a Malaysian
telecommunications company, Binariang Sdn, Bhd., selected ADC's cable
telephony equipment for construction of a network which is expected to
provide telephony, data and cable television services to more than 100,000
residential and commercial customers by the end of calendar 1997. Finally,
the cable data modem portion of the system (developed in partnership with
NetComm Limited of Sydney, Australia) is being tested by a limited number of
the Company's customers both in the United States and internationally. The
Company currently expects to begin shipping commercial volumes of the cable
data modem product in the second half of 1997.
SONEPLEX-Registered Trademark- SERVICE DELIVERY PLATFORM. The Company's
Soneplex platform is an intelligent loop access platform enabling public
network providers to deliver T1-based services over copper or fiber for
business customers. The Company's Soneplex family of platforms and modules
employ electrical-to-optical conversion for transport of voice, data and
video over fiber facilities and High bit-rate Digital Subscriber Line (HDSL)
transmission technology for transport of high bandwidth services over
copper-based systems. Soneplex products also integrate remote provisioning,
circuit performance monitoring and test access capabilities to help public
network carriers provide reliable service at a low operational cost. The
Company introduced new modules and capabilities for the Soneplex platform
(including SONET interworking and HDSL-based Internet and LAN access and
routing) during 1996, and has the next-generation Soneplex platform under
development for anticipated testing by a limited number of customers in 1997.
WIRELESS CABLE/BROADCAST TELEVISION TRANSMISSION EQUIPMENT. During 1996, the
Company entered the wireless cable and television broadcast markets with its
purchase of ITS, which is headquartered in McMurray, Pennsylvania. ITS
designs and manufactures television transmission products for these markets.
Shortly after the acquisition, ITS entered into a contract to supply
transmitters, combiners, back-up equipment and antennas to CAI Wireless
Systems, Inc., the first wireless cable operator to enter into a supply
agreement with RBOCs for Multichannel Multipoint Distribution Services
(MMDS). ITS's wireless products complement and expand ADC's residential
broadband product portfolio.
CITYWIDE-TM- PRODUCTS. The Company's family of CityWide wireless systems
products includes the CityCell-Registered Trademark- wideband digital
microcells for adding and extending cellular communication coverage, both
out-of-doors and in-building. The CitySector-Registered Trademark- microcell
is the first fully sectorized microcell offering 25 to 100 watts of Radio
Frequency (RF) power per sector. Fully transparent to analog or digital
modulation, the CityWide products have been commercially deployed by six RBOC
cellular network providers. The next generation wideband CityCell microcell,
currently in customer test trials, utilizes T1 copper transport rather than
fiber transport. The Company has begun shipping its CityRFX-Registered
Trademark- cellular indoor antenna distribution systems and has under
development PCS and Global System for Mobile Communications (GSM) versions of
these systems. The Company also offers advanced intelligent network
solutions for its CityWide product family.
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PCS EQUIPMENT. During 1996, the Company made a joint venture investment in
PCS Solutions, LLC, a company that designs, manufactures and markets cable
microcell integrators (utilizing Remote Antenna Distribution or RAD
technology). In addition, ADC significantly advanced its PCS developments
with its recent acquisition of the wireless infrastructure equipment group
from PCSI-Registered Trademark-, a provider of systems level design and
wireless base station equipment for various PCS, Cellular Digital Packet Data
(CDPD) and paging technologies. The Company also has developed and begun
shipping in-building distributed antenna systems. ADC expects to introduce
various PCS products and systems during 1997, and to begin customer field
trials for several of these new products during 1997.
WIRELESS PERFORMANCE AND NETWORK MANAGEMENT SYSTEMS. Through its acquisition
of London-based Metrica Systems Ltd. in 1996, the Company significantly
expanded its software product offerings. Metrica Systems is a software
design firm specializing in network performance management tools. Its
software systems are used in the infrastructure management systems of several
wireless and, increasingly, wireline public network operators throughout the
world.
TEST AND MONITORING SYSTEMS. The Company manufactures a variety of remote
digital test and performance monitoring products for copper-based and
fiber-based systems.
DIGITAL REPEATERS. The Company's copper-based digital repeaters are used
primarily in central office applications to regenerate digital signals that
have degraded because of transmission over long distances.
SYSTEMS INTEGRATION SERVICES AND PRODUCTS. During 1996, ADC significantly
increased its systems integration capabilities with the acquisition of Da Tel
Fibernet, a provider of engineering, design and installation services and a
manufacturer of telecommunications infrastructure products. Systems
integration services relating to the Company's transmission product group are
provided in the following areas: overall project management; technical
consulting and design; implementation; product support; performance
assessment; and training services. ADC's systems integration products
consist of multimedia systems from several ADC product areas designed
specifically for integrated voice, data and video applications such as
distance learning, business, medical and government networks. The Company
supplies its systems integration services and products primarily to telephone
operating companies, other common carriers and users of private
telecommunications networks.
ENTERPRISE NETWORKING
ADC's enterprise networking products provide interconnection and
transmission of voice, data and video signals within a private network and
also provide access to the public network. These products are designed for
use in copper-based, fiber optic and wireless global networks and are sold to
users of private voice, data and video networks, either directly or through
telecommunications common carriers or Value Added Resellers (VARs).
Enterprise Networking products include public network access equipment,
internetworking products and data network
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management products. Certain of the Company's enterprise networking products
are described below.
PUBLIC NETWORK ACCESS EQUIPMENT. The Company manufactures a family of
Channel Service Unit (CSU) and Data Service Unit (DSU) products which are
used to interconnect digitally the public network and the private network.
This equipment monitors circuits and provides system protection and other
network management functions. Certain of these products also enable the
customer to test the performance of its voice network and allow connection of
voice, data and video circuits. These products support T1, T3 (44.6 million
bits per second) and OC3 (155 million bits per second) services and a variety
of data protocols, including Frame Relay, Switched Multi-megabit Data Service
(SMDS), ATM, ISDN, HDSL and the Internet protocols. During 1996, the Company
enhanced its AAC-1-TM- and AAC-3-TM- ATM access concentrators. These products
adapt, aggregate, multiplex and manage voice, data and video signals in
various speeds, technologies and protocols for transport over T1, E1, T3 and
E3 speed ATM networks. The Company also acquired Skyline Technology, Inc., a
manufacturer of ISDN and Frame Relay access products for Internet and other
high-speed digital connections and commercially released several remote
access and routing products, some specifically designed for Internet access.
The Company has entered into agreements with ATM equipment suppliers to
integrate ADC's ATM adaptation and concentration technologies into those
companies' ATM switching and routing products, and to jointly market ADC's
ATM access concentrators. During 1996, ADC entered into an agreement with
NTTI to jointly develop and market public network ATM access products, and
agreements with Ericsson and Lucent Technologies to market ADC's ATM access
concentrators.
INTERNETWORKING PRODUCTS. Internetworking products include fiber optic
backbones used to transport high speed multiple voice, data and video signals
simultaneously over private networks and link Local Area Networks (LANs),
mainframes, minicomputers, personal computers, telephone systems and video
equipment with diverse protocols within private networks or over the public
network; intelligent wiring hub products which interconnect workstations,
personal computers and terminals, utilizing many different LAN protocols and
types of cables; and network management systems.
PATCH/SWITCH SYSTEM AND PATCHMATE-TM- MODULE. The Company's Patch/Switch
system is a data network management product which provides access to and
monitors, tests and reconfigures digital data circuits and permits local or
remote switching to alternate circuits or backup equipment. This system is
modular, permitting the user to select and combine the particular functions
desired in a system. The PatchMate module is a manually operated
electromechanical device used to gain access to the network in order to
monitor, test and reconfigure digital data circuits.
Recognizing changes in the competitive environment for LAN equipment,
during 1995 the Company realigned its Kentrox and Fibermux subsidiaries into
one business unit to better address the industry trend toward integration of
LAN and Wide Area Network (WAN) technologies and products. This group combines
LAN and WAN expertise in order to develop, manufacture and distribute
advanced network access and transport products for use in current and
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future broadband enterprise networks. The Company recorded a 1995 charge of
$3.9 million related to a personnel reduction at the Fibermux facility and
other expenses resulting from the integration of Kentrox and Fibermux.
Further integration and consolidation of these two subsidiaries is planned
for 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 of "Notes to Consolidated Financial
Statements."
BROADBAND CONNECTIVITY
ADC's broadband connectivity products provide the physical contact points
for connecting different telecommunications system components and gaining
access to telecommunications system circuits for the purpose of installing,
testing, monitoring or reconfiguring such circuits within global public and
private networks. These products are sold to the RBOCs, other telephone
companies, long distance carriers, other public network providers such as
cable TV companies and wireless services providers, international network
operators, private network providers and telecommunications OEMs. The
Company's broadband connectivity products are designed for use in
copper-based, coax, fiber optic or wireless transmission networks. Broadband
connectivity products and services include various network access/connection
devices for copper and coax networks, various network access/connection
devices for fiber optic networks, modular fiber optic cable routing systems,
outside plant cabinets and enclosures, wireless infrastructure equipment and
subsystems, broadband software infrastructure management systems and systems
integration services. Certain of the Company's broadband connectivity
products are described below.
JACKS, PLUGS AND PATCH CORDS. Jacks and plugs are the basic components used
to gain access to copper telecommunications circuits for testing and
maintenance. Patch cords are wires or cables with a plug on each end. ADC
incorporates its jacks, plugs and patch cords into its own products and also
sells them in component form, primarily to OEMs. These components are
generally manufactured to industry-recognized compatibility and reliability
standards as off-the-shelf items.
JACKFIELDS AND PATCH BAYS. A jackfield is a module containing an assembly of
jacks wired to terminal blocks or connectors and used by telecommunications
companies to gain access to copper communication circuits for testing or
patching the circuits. ADC manufactures jackfields in both longframe and
bantam formats, including prewired and connectorized models. When testing a
large number of circuits, series of jackfields are combined in specialized
rack assemblies, which often may include test modules. These assemblies are
called patch bays. ADC manufactures a range of jackfields and patch bays in
various configurations. Certain of these jackfields are specialized for use
in audio and visual transmission networks in the broadcast industry.
DSX PRODUCTS. ADC manufactures digital signal cross-connect (DSX) modules
and bays, which are jackfields and patch bays designed to gain access to and
cross-connect digital copper circuits for voice, data and video transmission.
Since the introduction of DSX products in 1977, the
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Company has continued to expand and refine its DSX product offerings, and has
become a leading manufacturer of products for the mechanical termination and
interconnection of digital circuits used in voice and data transmission. The
Digital Distribution Point (DDP) family of products within the DSX product
group are mechanical alternatives to hard-wiring equipment used for cable
management and circuit access with software based, electronic digital
cross-connect systems.
TERMINAL BLOCK AND FRAME PRODUCTS. Terminal blocks are molded plastic blocks
with contact points used to facilitate multiple wire interconnections. ADC
manufactures a wide variety of terminal blocks. The Company's cross-connect
frames are terminal block assemblies used to connect the external wiring of a
telecommunications network to the internal wiring of a telephone operating
company central office or to interconnect various pieces of equipment within
a telephone company central office or at a customer's premise.
VIDEO SIGNAL DISTRIBUTION PRODUCTS. ADC's series of Video Signal
Distribution (VSD) products are designed to meet the unique performance
requirements of Radio Frequency (RF) video transmission over coax cable.
This product family includes a series of splitter/combiner panels, a series
of video jacks and panels which monitor, patch and provide a test access
point and an analog video interface system panel designed for on-demand
testing.
FIBER OPTIC PATCH CORDS AND CABLE ASSEMBLIES. Fiber optic patch cords are
functionally similar to copper patch cords and are the basic components used
to gain access to fiber telecommunications circuits for testing, maintenance,
cross-connection and configuration purposes. The Company's
LightTracer-TM- fiber optic patch cords provide immediate identification of
fiber optic connections. The Company incorporates its fiber optic patch
cords and cable assemblies into its own products and also sells them in
component form.
FIBER OPTIC COUPLERS. Fiber optic couplers are passive connection devices
used in fiber optic transmission systems to conform to the stringent
environmental, reliability, performance and mechanical standards required in
global broadband network and test equipment markets. These products, which
include optical splitters and wavelength division multiplexers, enable
efficient and cost-effective deployment of broadband networks. Fiber optic
couplers were added to ADC's product line through the acquisition of AOFR
Pty. Ltd. in Australia during 1995.
FIBER DISTRIBUTION PANELS AND FRAMES. Fiber distribution panels and frames
are functionally similar to copper jackfields and frames designed with
special considerations of fiber optic properties. They also provide
interconnection points between fiber optic cables entering a building and
fiber optic cables connected to fiber optic equipment within the building.
FIBERGUIDE-Registered Trademark- SYSTEM. The FiberGuide system is a modular
routing system which provides a segregated, protected method of storing and
routing fiber patch cords and cables within buildings.
OUTSIDE PLANT PRODUCTS. Outside plant (OSP) products consist of cabinets and
other enclosures configured to locate and integrate the functions of passive
fiber optic equipment outside the
12
telephone central office/cable TV headend switching and transmission
facilities. The Company's OSP products provide flexible management of the
network and environmental protection for various telecommunications
topologies and architectures.
WIRELESS INFRASTRUCTURE EQUIPMENT AND SUBSYSTEMS. During 1996, ADC acquired
Solitra Oy, a Finland-based, wireless infrastructure company that designs,
manufactures and markets radio frequency filters and other wireless base station
and subscriber equipment components and subsystems. As a result of the Solitra
Oy acquisition, ADC significantly expanded its broadband wireless connectivity
product portfolio. These products are sold primarily to wireless OEMs.
BROADBAND SOFTWARE INFRASTRUCTURE MANAGEMENT SOLUTIONS. ADC has developed a
number of software products which provide management of fiber optic
infrastructure connectivity, geographical tracking of equipment, cables and
other network elements in the telephone company central office, cable TV company
headend and outside plant portion of those networks, and extensive database
reporting.
SYSTEMS INTEGRATION SERVICES. The Company's systems integration services
relating to the Company's broadband connectivity product group are divided into
three areas: technical service design and management; operations and
implementation; and training and documentation services. These services
usually consist of layout and installation of new telecommunications networks,
modification of existing networks or the addition of equipment to existing
networks. The Company provides its systems integration services primarily to
telephone operating companies, other common carriers and users of private
telecommunications networks.
SALES AND MARKETING
ADC sells its products to customers in three primary markets: (i) the
United States public telecommunications network market, which consists of all
seven of the RBOCs, other telephone companies, long distance carriers, wireless
service providers, the major cable TV operators and other domestic public
network providers; (ii) the private and governmental voice, data and video
network market in the United States, such as various large business customers
and governmental agencies that own and operate their own voice, data and video
networks for internal use; and (iii) the international public and private
network market. The U.S. public, U.S. private and governmental and
international market segments accounted for 58%, 21% and 21%, respectively of
the Company's net sales for the year ended October 31, 1996; 58%, 24% and 18%,
respectively of the Company's net sales for the year ended October 31, 1995; and
57%, 28% and 15%, respectively, of the Company's net sales for the year ended
October 31, 1994. The Company also sells product for each of these customer
groups to the major telecommunications OEMs.
Purchases of products by public network providers and the OEMs which supply
such companies have accounted for the largest portion of the Company's net sales
in recent periods. The Company's transmission and broadband connectivity
products for public network providers are primarily located in central
transmission facilities (such as telephone company network central offices,
cable TV company network supertrunks and headend offices, and wireless
13
network global switching centers and base stations, all of which contain the
equipment used in switching and transmitting incoming and outgoing circuits).
Increasingly, portions of the Company's public network transmission systems
are located in the public network outside plant facilities (outside the
central transmission buildings) and on customers' premises. The Company's
private and governmental network customers generally purchase the Company's
enterprise-wide communications systems and public network access equipment
for installation in the networks located at their premises. The Company also
markets its products outside the United States primarily to telephone
operating companies and cable TV companies for public telecommunications
networks.
A majority of the Company's sales are made by a direct sales force, and
the Company maintains sales offices throughout the United States as well as
in Canada, Europe, Asia, Australia and Central and South America. The
Company's products are sold in the United States by field sales
representatives located in 13 sales offices throughout the country, and by
several dealer organizations and distributors. The Company products are
sold outside the United States by independent sales representatives located
in 20 field sales offices and distributors, as well as through United States
public and private network providers who also distribute outside the United
States.
The Company has a customer service group that supports field sales
personnel and is responsible for application engineering, customer training,
entering orders and supplying delivery status information, and a field service
engineering group that provides on-site service to customers.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing telecommunications environment, to maintain its
significant expertise in core technologies and to continue to meet and
anticipate its customers' needs. The Company continually reviews and evaluates
technological changes affecting the telecommunications market and invests
substantially in applications-based research and development. The Company
intends to continue an ongoing program of new product development that combines
internal development efforts with acquisitions, joint ventures and licensing or
marketing arrangements relating to new products and technologies from sources
outside the Company.
In recent years, increasingly significant portions of new
telecommunications equipment purchased by public network providers and private
network customers have utilized fiber optic transmission technology and have
employed digital technology. In the future, these telecommunications network
equipment purchasing trends will include increasingly sophisticated, software
intensive, switching and network management systems. In addition, there has
been significantly increased demand for wireless communications services and
higher speed transmission technologies. As a result, the Company's internal and
external product development activities are directed at the integration of fiber
optic technology into additional products, the continuing development of its
Homeworx system for telephony, data and integrated video,
14
telephony and data applications, the development of network systems software,
the continuing development of wireless products, the incorporation of ATM
technology into voice, data and video products for both public and private
telecommunications networks, and the addition of video compression technology
to its product line. The Company is also developing copper and fiber optic
products for applications in local loop systems.
New product development often requires long-term forecasting of market
trends, development and implementation of new processes and technologies and
a substantial capital commitment. As a result of these and other factors,
development and customer acceptance of new products is inherently uncertain,
and there can be no assurance that such products will be developed on a
timely basis or achieve market acceptance.
COMPETITION
Competition in the telecommunications equipment industry is intense, and
the Company believes that competition may increase substantially with the
deployment of broadband networks and regulatory changes. Many of the Company's
foreign and domestic competitors have more extensive engineering, manufacturing,
marketing, financial and personnel resources than those of the Company. The
Company's transmission products are competitive with products offered by several
other companies, including Lucent Technologies, Northern Telecom, Inc. and
Motorola, Inc. The Company's enterprise networking products are competitive
with the products of a number of other companies, two of which (Bay
Networks, Inc. and Cabletron Systems Inc.) are dominant in its intelligent
wiring hub markets, and the Company's products face both strong price
competition and pressure from alternative distribution strategies utilized by
these other companies. The Company's broadband connectivity products are
competitive with the products offered by numerous other companies, including
Lucent Technologies, Siecor, Telect and Augat. In addition, the Company faces
increasing competition from a number of other smaller competitors, none of which
is dominant at this time.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to the Company's group of competitors. The
Company believes its success in competing with other manufacturers of
telecommunications products depends primarily on its engineering, manufacturing
and marketing skills, the price, quality and reliability of its products and its
delivery and service capabilities. While the market for the Company's products
has not historically been characterized by significant price competition, the
Company may face increasing pricing pressures from current and future
competitors in certain or all of the markets for its products.
The Company believes that technological change, the increasing addition
of data, video and other services to integrated multimedia networks,
continuing regulatory change and industry consolidation or new entrants will
continue to cause rapid evolution in the competitive environment of the
telecommunications equipment market, the full scope and nature of which are
difficult to predict at this time. Increased competition could result in
price reductions, reduced margins and loss of market share by the Company.
The Company believes industry regulatory change may create new opportunities
for suppliers of telecommunications equipment. The
15
Company expects, however, that such opportunities may attract increased
competition from others as well. In addition, the Company expects that
Lucent Technologies will continue to be a major supplier to the RBOCs, and
compete more extensively outside the RBOC market. The Company also believes
that the rapid technological changes which characterize the
telecommunications industry will continue to make the markets in which the
Company competes attractive to new entrants. There can be no assurance that
the Company will be able to compete successfully with its existing or new
competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.
MANUFACTURING AND SUPPLIES
The Company manufactures a wide variety of products which are fabricated,
assembled and tested in its own facilities or in subcontracted facilities. In
an effort to reduce costs, the Company also takes advantage of off-shore
assembly and sourcing. The manufacturing process for the Company's electronic
products consists primarily of assembly and testing of electronic systems built
from fabricated parts, printed circuit boards and electronic components. The
manufacturing process for the Company's electromechanical products consists
primarily of fabrication of jacks, plugs, and other basic components from raw
materials, assembly of components and testing. The Company's sheet metal,
plastic molding, stamping and machining capabilities permit the Company to
configure components to customer specifications.
The Company purchases raw materials and component parts, consisting
primarily of copper wire, optical fiber, steel, brass, nickel-steel alloys,
gold, plastics, printed circuit boards, solid state components, discrete
electronic components and similar items, from several suppliers. Although a few
of the components used by the Company are single sourced, the Company has
experienced no significant difficulties to date in obtaining adequate quantities
of these raw materials and component parts. This circumstance could change in
the future, however, and the Company cannot be sure that the quantity or quality
of raw materials and component parts will be as readily available in the future.
PROPRIETARY RIGHTS
The Company owns a number of United States and foreign patents relating to
its products. These patents, in the aggregate, constitute a valuable asset of
the Company. The Company, however, believes that its business is not dependent
upon any single patent or any group of related patents.
The Company has registered the initials ADC alone and in conjunction with
specific designs as trademarks in the United States and various foreign
countries.
16
EMPLOYEES
As of October 31, 1996, there were approximately 4,620 persons employed by
the Company. The Company considers relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters are currently located in four leased
buildings in Minnetonka, Minnesota comprising an aggregate of approximately
286,400 square feet. Leases for the Company's headquarters expire at different
times through 2001.
The Company also owns and leases a variety of other facilities for the
Company's manufacturing, development, distribution, warehousing, sales and other
activities. These facilities, including sales offices, are located in various
cities in the United States, Canada, Mexico, Venezuela, the United Kingdom,
Belgium, Germany, Finland, Australia, Singapore, Argentina, Malaysia, Korea and
China.
The Company believes that the facilities used in its operations and
currently under development are suitable for their respective uses and adequate
to meet the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Office Officer Since Age
- ---- ------ ------------- ---
William J. Cadogan Chairman of the Board, 1987 48
President, Chief Executive
Officer and Chief Operating
Officer
Lynn J. Davis Senior Vice President, 1984 49
President Broadband
Connectivity Group
Richard S. Gilbert Senior Vice President, 1994 44
President Enterprise
Networking Group
Donald J. Render Senior Vice President, 1996 53
International Sales
William L. Martin III Vice President, President 1994 49
Network Services Division
Vivek Ragavan Vice President, President 1996 44
Broadband Communications Division
Jack P. Reily Vice President, Business 1994 46
Development
Charles T. Roehrick Vice President, Controller 1995 42
John A. Schofield Vice President, President 1996 48
Systems Integration Division
Robert E. Switz Vice President, Chief Financial 1994 50
Officer
The Company's executive officers were last elected as executive officers by
the Board of Directors on February 27, 1996, except Messrs. Ragavan and
Schofield were elected to their positions on June 4, 1996. Messrs. Cadogan,
Davis and Reily have served in various capacities with the Company for more than
five years. Biographical information regarding the other named officers
follows.
18
Mr. Gilbert joined the Company in June 1992. Prior to November 1994 he was
Vice President and General Manager, Access Group for six months and Vice
President Engineering for two years. From 1991 to 1992 he was Vice President of
Research and Development at Make Systems, Inc., a manufacturer of a network
design and analysis tool. From 1990 to 1991 Mr. Gilbert was Assistant Vice
President of Software Engineering for Vitalink Communications Corporation, a
manufacturer of data communications equipment.
Mr. Render joined the company in January 1996. Prior to such time he was
employed by Lucent Technologies (formerly AT&T Network Systems), a manufacturer
of public and private networks, communications systems and software, consumer
and business telephone systems and microelectronics components. Such positions
with Lucent included Central Region Vice President and Managing Director,
Italtel Alliance. From 1965 to 1985, Mr. Render was employed by AT&T Bell
Laboratories.
Mr. Martin joined the Company in September 1994. Prior to such time he was
employed by Ascom Timeplex, a manufacturer of data and telecommunications
equipment, most recently as Vice President, Technical Marketing. His previous
positions included Vice President China Business Development and Vice President
U.S. Sales. From 1987 to 1990 he was the Chief Executive Officer of Broadband
Telesystems, until that company was acquired by Ascom Timeplex.
Mr. Ragavan joined the company in January 1996. Prior to such time he was
employed by General Instrument Corp., a manufacturer of analog and digital
settops and broadband transmission equipment, as Vice President of Engineering.
His previous positions included Vice President of Engineering for COMSAT
Technology Products, a manufacturer of satellite based voice and data
communications systems.
Mr. Roehrick joined the Company in January 1995. Prior to such time he was
employed by Cray Research, Inc., a manufacturer of large scale computers, most
recently as Controller. From 1992 to 1993 he was Assistant Controller, and from
1989 to 1991 he was Director of Accounting.
Mr. Schofield originally joined the Company in October 1992. He returned
to the Company in October 1995 after holding the position with DSC
Communications as Vice President, International Sales and Marketing for a brief
period between July and October of 1995. Prior to such time, he was Managing
Director for Asia Pacific/Latin America. He was Senior Vice President, Sales
and Marketing at Telex Communications, Inc., a manufacturer and marketer of
electronic audio communications devices, from 1990 to 1992. He held several
Vice President positions at Memorex Telex Corporation, a manufacturer and
marketer of computer terminal and peripheral equipment, most recently Vice
President and General Manager, Airline and Systems Business Group.
Mr. Switz joined the Company in January 1994. Prior to such time he was
employed by Burr-Brown Corporation, a manufacturer of precision micro-
electronics, from 1988, most recently as Vice President, Chief Financial Officer
and Director, Ventures and Systems Business.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.20 par value, is traded on the Nasdaq
National Market under the symbol "ADCT." The following table sets forth the
high and low sale prices for each quarter during the years ended October 31,
1996 and 1995, as reported on that system. All prices have been restated to
reflect a two-for-one stock split effected in the form of a 100% stock
dividend paid in February 1995 and an additional two-for-one stock split
effected in the form of a 100% stock dividend paid in October 1996.
LOW HIGH
--- ----
FISCAL YEAR ENDED OCTOBER 31, 1996
First Quarter 14 1/4 24 1/8
Second Quarter 16 1/4 22 1/8
Third Quarter 19 1/2 25 3/8
Fourth Quarter 21 5/16 35 1/8
FISCAL YEAR ENDED OCTOBER 31, 1995
First Quarter 9 7/8 12 3/4
Second Quarter 11 5/16 17 1/8
Third Quarter 13 7/8 20 1/8
Fourth Quarter 16 1/2 24 11/16
No cash dividends have been declared or paid during the past five years.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. As of October 31, 1996, there were approximately 3,272
holders of record of the Common Stock.
On October 2, 1996, ADC issued 37,168 shares (the "Shares") of its Common
Stock, par value $0.20 per share, in a transaction that was not registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
Shares were issued to the former shareholders of Metrica Systems ("Metrica")
pursuant to an agreement dated May 22, 1996 (the "Acquisition Agreement")
among the Company and such former shareholders of Metrica, providing for the
acquisition of all of the issued shares of capital stock of Metrica by ADC.
The transaction between ADC and Metrica closed on May 31, 1996, and the
Shares were issued to the former Metrica shareholders in October 1996
pursuant to a post-closing adjustment provided for in the Acquisition
Agreement. No underwriter or placement agent was involved in the issuance of
the Shares, and ADC did not receive any cash consideration for the Shares
(which were part of the purchase price paid by ADC for Metrica). The Shares
were issued to the former Metrica shareholders in a transaction exempt
pursuant to Section 4(c) of the Securities Act.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of certain consolidated statement of income
and balance sheet information of ADC Telecommunications, Inc. and
subsidiaries for the five years ended October 31, 1996. This summary should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this report. All share and per share amounts
have been restated to reflect two-for-one stock splits effected in the form
of 100% stock dividends paid in June 1993, February 1995 and October 1996.
YEARS ENDED OCTOBER 31,
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 1993 1992
--------- -------- -------- -------- ---------
STATEMENT OF INCOME DATA:
Net sales $828,009 $586,222 $448,735 $366,118 $316,496
Cost of product sold 438,847 302,094 221,448 178,572 155,074
--------- -------- -------- -------- ---------
Gross profit 389,162 284,128 227,287 187,546 161,422
--------- -------- -------- -------- ---------
Expenses:
Development and product engineering 90,038 66,460 48,974 40,988 36,063
Selling and administration 160,705 130,297 110,799 93,311 82,966
Goodwill amortization 5,235 3,133 3,135 2,798 2,720
Personnel reduction -- 3,914 -- -- 3,800
--------- -------- -------- -------- ---------
Total expenses 255,978 203,804 162,908 137,097 125,549
--------- -------- -------- -------- ---------
Operating income 133,184 80,324 64,379 50,449 35,873
Other income (expense), net:
Interest 10,504 6,803 1,158 183 (942)
Other (7,025) (898) (1,216) (895) (205)
--------- -------- -------- -------- ---------
Income before income taxes and
extraordinary item 136,663 86,229 64,321 49,737 34,726
Provision for income taxes 49,200 31,043 23,800 18,101 13,700
--------- -------- -------- -------- ---------
Net income before extraordinary item 87,463 55,186 40,521 31,636 21,026
Extraordinary item, net of taxes (1) -- -- (1,450) -- --
--------- -------- -------- -------- ---------
Net income 87,463 $ 55,186 $39,071 $31,636 $21,026
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
Average common shares outstanding 128,314 117,094 111,220 109,996 108,352
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
Earnings per share before extraordinary
item (1) $0.68 $0.47 $0.36 $0.29 $0.19
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
Earnings per share $0.68 $0.47 $0.35 $0.29 $0.19
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $183,221 $238,491 $49,512 $16,324 $20,484
Working capital 357,422 358,786 132,015 87,630 75,284
Total assets 768,765 601,083 334,684 280,054 240,762
Total debt 9,160 410 810 1,110 14,434
Total stockholders' investment 617,470 510,866 264,758 220,394 182,188
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
___________
(1) An extraordinary charge of $1,450,000 (or $.01 per share), net of income
taxes, recorded in the year ended October 31, 1994, represents the charge to
clean up and repair the damage from an earthquake at the Company's facility in
California.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company offers a broad range of products to address key areas of the
telecommunications network infrastructure. To meet its customers' needs, the
Company offers equipment, services and integrated solutions within the following
general functional product groups: transmission, enterprise networking and
broadband connectivity. The Company's transmission products are sold primarily
to public network providers in the United States and internationally. The
Company's enterprise networking products are sold primarily to private voice,
data and video network providers around the world. The Company's broadband
connectivity products are sold to both public and private global network
providers.
Historically, the Company's principal product offerings have generally
consisted of copper-based and fiber-based products designed to address the needs
of its customers for transmission, enterprise networking and connectivity on
traditional telephony networks. With the growth of multimedia applications and
the associated development of enhanced voice, data and video services, the
Company's more recent product offerings and research and development efforts
have increasingly focused on emerging technologies and applications relating to
the broadband telecommunications equipment market. The market for broadband
telecommunications equipment is evolving and rapidly changing. There can be no
assurance that the Company's new or enhanced products will meet with market
acceptance or be sold profitably.
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors. The Company is experiencing growth through
acquisition and expansion and results of operations described in this report may
not be indicative of results to be achieved in future periods. The Company's
expense levels are based in part on expectations of future revenues. If revenue
levels in a particular period do not meet expectations, operating results will
be adversely affected. In addition, the Company's results of operations are
subject to seasonal factors. The Company historically has experienced a
stronger demand for its products in the fourth fiscal quarter, primarily as a
result of customer budget cycles and Company year-end incentives, and has
experienced a weaker demand for its products in the first fiscal quarter,
primarily as a result of the number of holidays during late November, December
and early January and a general industry slowdown during that period. There can
be no assurance that these historical seasonal trends will continue in the
future.
22
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three years ended October 31, 1996, and the percentage changes in
these income and expense items between years are contained in the following
table:
PERCENTAGE
PERCENTAGE OF NET SALES INCREASE BETWEEN
YEARS ENDED YEARS
----------------------------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
----- ------ ------ ------- --------
Net sales 100.0% 100.0% 100.0% 41.2% 30.6%
Cost of product sold (53.0) (51.5) (49.3) 45.3 36.4
------ ------- -------
Gross profit 47.0 48.5 50.7 37.0 25.0
Expenses:
Development and product engineering (10.9) (11.3) (11.0) 35.5 35.7
Selling and administration (19.4) (22.2) (24.7) 23.3 17.6
Goodwill amortization (.6) (.6) (.7) - -
Personnel reduction - (.7) - - -
-------- ------- -------
Operating income 16.1 13.7 14.3 65.8 24.8
Other income (expense), net:
Interest 1.3 1.2 .3 54.4 -
Other (.9) (.2) (.3) - -
-------- ------- -------
Income before income taxes and
extraordinary item 16.5 14.7 14.3 58.5 34.1
Provision for income taxes (5.9) (5.3) (5.3) 58.5 30.4
-------- ------- -------
Net income before extraordinary item 10.6 9.4 9.0 58.5 36.2
Extraordinary item, net of taxes - - (.3) - -
-------- ------- -------
Net income 10.6% 9.4% 8.7% 58.5 41.2
-------- ------- -------
-------- ------- -------
NET SALES: The following table sets forth the dollar amounts and
percentage amounts of the Company's net sales for the three years ended
October 31, 1996, for each of the functional product groups described above
(dollars in thousands):
PERCENTAGE
INCREASE
NET SALES FOR THE YEARS ENDED OCTOBER 31, BETWEEN YEARS
-----------------------------------------------------------------------
1996 1995 1994 1996 VS. 1995 VS.
------------------------------------------------------ 1995 1994
PRODUCT GROUP NET % NET % NET % ---- ----
- ------------- SALES --- SALES --- SALES ---
-------- -------- --------
Transmission $304,820 36.8% $184,432 31.5% $103,694 23.1% 65.3% 77.9%
Enterprise
Networking 145,651 17.6 127,405 21.7 123,300 27.5 14.3 3.3
Broadband
Connectivity 377,538 45.6 274,385 46.8 221,741 49.4 37.6 23.7
-------- ------ -------- ------ -------- ------
Total $828,009 100.0% $586,222 100.0% $448,735 100.0% 41.2 30.6
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
23
Net sales were $828.0 million and $586.2 million for the years ended
October 31, 1996 and 1995, reflecting 41.2% and 30.6% annual increases,
respectively. The increases in net sales in both 1996 and 1995 predominantly
reflect increases in sales of transmission products (65.3% in 1996 and 77.9% in
1995) and broadband connectivity products (37.6% in 1996 and 23.7% in 1995).
Within these two product groups, net sales increased approximately $70.0 million
in 1996 as a result of revenue contributions from companies acquired during
1996.
In addition to the growth from acquisition, the Company's 65.3% growth in
net sales of transmission products during 1996 primarily reflects increased
sales of transmission systems to public telecommunications network providers.
The Company's 77.9% growth in net sales of transmission products during 1995
primarily reflected increased sales of fiber optic transmission systems to
public telecommunications network providers. If the Company's transmission
systems internally developed or acquired within the last three years and
continuing transmission product enhancements meet with reasonable market
acceptance, the Company anticipates that net sales of transmission products will
grow as a percentage of the Company's total net sales.
The Company's 37.6% growth in net sales of broadband connectivity products
in 1996 predominantly reflects the Company's success in selling these products
into new global broadband market applications, in addition to growth from
acquisition. This success is also a primary cause of the 23.7% growth in net
sales of broadband connectivity products in 1995. Within the broadband
connectivity product group, net sales of ADC's digital signal cross-connect
(DSX) modules and bays have declined as a percentage of total net sales to 22.7%
in 1996, from 23.9% in 1995 and 27.2% in 1994. The Company believes that future
sales of DSX and other copper connectivity products will continue to account
for a substantial portion of the Company's revenues, although these products may
continue to decline as a percentage of total net sales primarily due to the
ongoing evolution of technologies in the telecommunications marketplace.
Net sales of enterprise networking products increased 14.3% and 3.3% during
1996 and 1995, respectively. These increases reflect significant growth in net
sales of public network access equipment, partially offset by decreases in net
sales of Local Area Network (LAN) equipment. Recognizing changes in the
competitive environment for LAN equipment, the Company realigned its Kentrox and
Fibermux subsidiaries into the Enterprise Networking Group during 1995 to better
address the industry trend toward integration of LAN and Wide Area Network (WAN)
technologies and products. Further integration of these two subsidiaries is
planned for 1997.
GROSS PROFIT. During 1996, 1995 and 1994, the gross profit percentages
were 47.0%, 48.5% and 50.7% of net sales, respectively. The 1996 and 1995
declines in gross profit percentages primarily resulted from the continuing
change in product sales mix toward sales of newer, lower margin products which
address emerging broadband applications. Future gross profit percentages will
continue to be affected by the mix of products the Company sells, the timing of
new product introductions and manufacturing volume, among other factors.
OPERATING EXPENSES: Total operating expenses for the years ended October
31, 1996, 1995 and 1994 were $256.0 million, $203.8 million and $162.9 million,
representing 30.9%,
24
34.8% and 36.4% of net sales, respectively. The increases in absolute
dollars of operating expenses during 1996 and 1995 were due primarily to the
expanded operations associated with higher revenue levels and, in the year
ended October 31, 1995, a charge of $3.9 million related primarily to a
personnel reduction at the Fibermux facility resulting from the realignment
of the Company's enterprise networking operations. The decreases in
operating expenses as a percentage of net sales during 1996 and 1995 reflect
the Company's ability to leverage operating expenses against higher revenue
levels.
Development and product engineering expenses were $90.0 million, $66.5
million and $49.0 million for the years ended October 31, 1996, 1995 and 1994,
respectively, reflecting increases of 35.5% during 1996 and 35.7% during 1995.
These increases resulted from substantial product development efforts in each of
the Company's three functional product groups. The Company believes that, given
the rapidly changing technology and competitive environment in the
telecommunications equipment industry, continued commitment to product
development efforts will be required for the Company to remain competitive.
Accordingly, the Company intends to continue to allocate substantial resources
to product development for each of its three functional product groups.
However, the Company recognizes the need to balance the cost of product
development with expense control and remains committed to carefully managing the
rate of increase of such expenses.
Selling and administration expenses were $160.7 million, $130.3 million and
$110.8 million for the years ended October 31, 1996, 1995 and 1994,
respectively, reflecting increases of 23.3% during 1996 and 17.6% during 1995.
These increases resulted from selling activities associated with new product
introductions, additional personnel costs related to expanded operations and, in
1996, costs associated with the three acquisitions which were accounted for as
poolings of interests.
The Company's other 1996 acquisitions were accounted for as purchase
transactions in which the initial purchase prices exceeded the fair value of the
acquired assets by approximately $59.9 million. The amortization of these
amounts over 5 to 15 years on a straight line basis resulted in increased
goodwill amortization expense for the year ended October 31, 1996, to $5.2
million, from $3.1 million in the years ended October 31, 1995 and 1994.
OTHER INCOME (EXPENSE), NET: For the years ended October 31, 1996 and
1995, the net interest income category represented net interest income on cash
balances. (See "Liquidity and Capital Resources" below for a discussion of cash
levels and the $182.0 million of cash proceeds from the Company's June 1995
secondary public offering of 6.3 million shares of common stock.)
Other expense for the year ended October 31, 1996 primarily represented the
Company's share of net operating results of its investments in other companies
accounted for on an equity basis. For the years ended October 31, 1995 and
1994, other expense primarily represented miscellaneous expense.
INCOME TAXES: See Note 8 to the Consolidated Financial Statements included
in Part II, Item 8 of this report for a reconciliation of the federal statutory
tax rate to effective tax rates of
25
36.0%, 36.0% and 37.0% in 1996, 1995 and 1994, respectively. These rates
reflect the varying amounts of non-deductible goodwill amortization during
1996, 1995 and 1994, respectively, included in operating expenses in each of
the three years, and the beneficial impact of tax credits.
EXTRAORDINARY ITEM: An extraordinary charge of $1.5 million (or $.01 per
share), net of income taxes, was recorded in 1994, representing expenses
relating to the clean up and repair of damage to the Fibermux facility resulting
from an earthquake in January 1994.
NET INCOME: Net income was $87.5 million (or $.68 per share) for the year
ended October 31, 1996, an increase of 58.5% over $55.2 million (or $.47 per
share) for the year ended October 31, 1995. Net income for 1995 represented an
increase of 41.2% over $39.1 million (or $.35 per share) for the year ended
October 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, primarily short-term investments in commercial
paper with maturities of less than 90 days, decreased $55.3 million, and
increased $189.0 million during the years ended October 31, 1996 and 1995,
respectively. The major elements of the 1996 decrease were net income before
depreciation and amortization of $121.3 million offset by the $80.9 million
increase in receivables and inventory levels, property and equipment additions
of $69.1 million and acquisition payments and long-term investments of $56.6
million. The 1996 increases in receivables and inventory levels and property
and equipment additions reflect the Company's growth. See Note 4 to the
Consolidated Financial Statements included in this report for a discussion of
1996 acquisitions. In the year ended October 31, 1995, the major elements of
the increase were the $182 million net proceeds from the Company's June 1995
public offering of 6.3 million shares of common stock and net income before
depreciation and amortization of $81.5 million, offset by the $52.6 million
increase in inventory and receivable levels (reflecting the Company's growth in
1995), property and equipment additions of $32.5 million and acquisition and
investment payments of $12.8 million.
At October 31, 1996, the Company had approximately $9.2 million of debt
outstanding. This entire amount represents debt of companies acquired during
1996.
Management believes that current cash balances and cash generated from
operating activities will be adequate to fund working capital requirements,
capital expenditures (approximately $51 million committed at October 31, 1996)
and possible acquisitions or strategic alliances for 1997. However, the Company
may find it necessary to seek additional sources of financing to support its
capital needs, for additional working capital, potential investments or
acquisitions, or otherwise.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing discussion of the Company's Business and Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and
26
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements represent the Company's expectations or beliefs
concerning future events, including the following: any statements regarding
future sales and gross profit percentages, any statements regarding the
continuation of historical trends, any statements regarding the sufficiency
of the Company's cash balances and cash generated from operating and
financing activities for the Company's future liquidity and capital resource
needs, any statements regarding the effect of regulatory changes and any
statements regarding the future of the telecommunications industry. The
Company cautions that any forward-looking statements made by the Company in
this report or in other announcements made by the Company are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including, without
limitations, the factors set forth on Exhibit 99 to the Company's report on
Form 10-K for the fiscal year ended October 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(A) STATEMENT OF REGISTRANT
No separate financial statements of the Company's subsidiaries are included
herein because the Company is primarily an operating company and its
subsidiaries are wholly-owned or majority owned.
(B) CONSOLIDATED STATEMENTS
Report of Independent Public Accountants......................................28
Consolidated Statements of Income for the years ended
October 31, 1996, 1995 and 1994...........................................29
Consolidated Balance Sheets as of October 31, 1996 and 1995...................30
Consolidated Statements of Stockholders' Investment
for the years ended October 31, 1996, 1995 and 1994.......................31
Consolidated Statements of Cash Flows for the years ended
October 31, 1996, 1995 and 1994...........................................32
Notes to Consolidated Financial Statements....................................33
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as not
required, not applicable or the information required has been included elsewhere
in the financial statements and related notes.
(C) SUPPLEMENTAL FINANCIAL INFORMATION -- Unaudited...........................41
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ADC Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of ADC
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES as of October 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADC Telecommunications, Inc.
and Subsidiaries as of October 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
November 26, 1996
28
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
-------- -------- --------
NET SALES $828,009 $586,222 $448,735
COST OF PRODUCT SOLD 438,847 302,094 221,448
-------- -------- --------
GROSS PROFIT 389,162 284,128 227,287
Gross profit percentage 47.0% 48.5% 50.7%
-------- -------- --------
EXPENSES:
Development and product engineering 90,038 66,460 48,974
Selling and administration 160,705 130,297 110,799
Goodwill amortization 5,235 3,133 3,135
Personnel reduction -- 3,914 --
-------- -------- --------
Total expenses 255,978 203,804 162,908
-------- -------- --------
OPERATING INCOME 133,184 80,324 64,379
OTHER INCOME (EXPENSE), NET 3,479 5,905 (58)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 136,663 86,229 64,321
PROVISION FOR INCOME TAXES 49,200 31,043 23,800
-------- -------- --------
NET INCOME BEFORE EXTRAORDINARY ITEM 87,463 55,186 40,521
EXTRAORDINARY ITEM, NET OF TAXES -- -- (1,450)
-------- -------- --------
NET INCOME $ 87,463 $ 55,186 $ 39,071
-------- -------- --------
-------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING 128,314 117,094 111,220
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE BEFORE EXTRAORDINARY
ITEM $0.68 $0.47 $0.36
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE $0.68 $0.47 $0.35
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
29
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - OCTOBER 31
(IN THOUSANDS)
1996 1995
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $183,221 $238,491
Accounts receivable, net of reserves of
$3,921 and $4,258 163,219 107,255
Inventories, net of reserves of
$14,603 and $8,103 130,582 86,559
Prepaid income taxes and other assets 22,479 15,442
-------- --------
Total current assets 499,501 447,747
PROPERTY AND EQUIPMENT, NET 131,080 78,686
OTHER ASSETS, PRINCIPALLY GOODWILL 138,184 74,650
-------- --------
$768,765 $601,083
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,247 $ 410
Accounts payable 49,459 28,820
Accrued liabilities 90,373 59,731
-------- --------
Total current liabilities 142,079 88,961
DEFERRED INCOME TAXES 2,303 1,256
LONG-TERM DEBT, LESS CURRENT MATURITIES 6,913 --
-------- --------
Total liabilities 151,295 90,217
-------- --------
STOCKHOLDERS' INVESTMENT:
Common stock, $0.20 par value; authorized
300,000 shares; issued 65,177 and 62,737
shares 13,035 12,547
Paid-in capital 232,266 219,266
Retained earnings 373,540 280,662
Cumulative translation adjustment 232 (715)
Deferred compensation (1,603) (894)
-------- --------
Total stockholders' investment 617,470 510,866
-------- --------
$768,765 $601,083
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
30
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED OCTOBER 31
(IN THOUSANDS)
Common Stock Cumulative
---------------- Paid-in Retained Translation Deferred
Shares Amount Capital Earnings Adjustment Compensation
------ ------- -------- -------- ----------- ------------
Balance, October 31, 1993 27,697 $ 5,539 $ 29,465 $186,405 -- $(1,015)
Stock issued for employee benefit plans 191 38 5,386 -- -- (1,262)
Reduction of deferred compensation -- -- -- -- -- 1,131
Net income -- -- -- 39,071 -- --
------ ------- -------- -------- ----------- ----------
Balance, October 31, 1994 27,888 5,577 34,851 225,476 -- (1,146)
Stock split effected in the form of a
stock dividend 28,044 5,609 (5,609) -- -- --
Stock issued for secondary public offering 6,325 1,265 180,489 -- -- --
Stock issued for employee benefit plans 480 96 9,535 -- -- (714)
Reduction of deferred compensation -- -- -- -- -- 966
Translation adjustments -- -- -- -- $ (715) --
Net income -- -- -- 55,186 -- --
------ ------- -------- -------- ----------- ----------
Balance, October 31, 1995 62,737 12,547 219,266 280,662 (715) (894)
Stock issued for business acquisitions 1,911 382 198 5,415 -- --
Stock issued for employee benefit plans 529 106 12,802 -- -- (1,490)
Reduction of deferred compensation -- -- -- -- -- 781
Translation adjustments -- -- -- -- 947 --
Net income -- -- -- 87,463 -- --
------ ------- -------- -------- ----------- ----------
Balance, October 31, 1996 65,177 $13,035 $232,266 $373,540 $ 232 $ (1,603)
------ ------- -------- -------- ----------- ----------
------ ------- -------- -------- ----------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
31
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31
(IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 87,463 $ 55,186 $ 39,071
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 33,794 26,341 23,366
Reduction in deferred compensation 781 966 1,131
Decrease in deferred income taxes (3,448) (4,652) (1,786)
Other 28 455 --
Changes in assets and liabilities
Accounts receivable (45,767) (31,130) (8,518)
Inventories (35,100) (21,466) (15,925)
Prepaids and other assets (3,048) (2,455) 1,010
Accounts payable 15,104 6,559 8,438
Accrued liabilities 13,650 14,455 11,414
--------- --------- ---------
Total cash from operating activities 63,457 44,259 58,201
--------- --------- ---------
INVESTMENT ACTIVITIES:
Property and equipment additions, net (69,057) (32,456) (21,788)
Acquisition payments (49,291) (4,676) (7,087)
Long-term investments (7,268) (8,139) --
--------- --------- ---------
Total cash used for investment
activities (125,616) (45,271) (28,875)
--------- --------- ---------
FINANCING ACTIVITIES:
Decrease in long-term debt (4,897) (400) (300)
Common stock issued 11,696 190,671 4,162
--------- --------- ---------
Total cash from financing activities 6,799 190,271 3,862
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 90 (280) --
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (55,270) 188,979 33,188
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 238,491 49,512 16,324
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 183,221 $ 238,491 $ 49,512
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 46,129 $ 27,549 $ 21,802
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
32
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of ADC Telecommunications, Inc. (a Minnesota corporation) and
all significant subsidiaries in which ADC has more than a 50% equity
ownership, (collectively, the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS: Cash equivalents primarily represent short-term
investments in commercial paper with maturities of three months or less.
The carrying amount of these investments approximate their fair value due
to their short maturities.
INVENTORIES: Inventories include material, labor and overhead and are
stated at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of
three to thirty years or, in the case of leasehold improvements, over the
term of the lease, if shorter. Both straight-line and accelerated methods
of depreciation are used for income tax purposes.
GOODWILL: The excess of the cost of acquired businesses over the fair
value of the net assets acquired is being amortized on a straight-line
basis ranging from 5 to 25 years. Management periodically assesses the
amortization period and recoverability of the carrying amount of goodwill
based upon an estimate of future cash flows from related operations.
RESEARCH AND DEVELOPMENT COSTS: The Company's policy is to expense all
research and development costs in the period incurred.
INCOME TAXES: The Company utilizes the liability method of accounting for
income taxes. Deferred tax liabilities or assets are recognized for the
expected future tax consequences of temporary differences between the book
and tax bases of assets and liabilities.
EARNINGS PER SHARE: Earnings per share is computed using the weighted
average number of common shares outstanding during the year, after
consideration of the dilutive effect of stock options and restricted stock
awards.
33
FOREIGN CURRENCY TRANSLATION: The Company accounts for translation of
foreign currency in accordance with the provisions of SFAS No. 52. The
resulting translation adjustments are recorded directly to a separate
component of stockholders' investment.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
NEW ACCOUNTING PRONOUNCEMENTS: SFAS NO. 123 - Accounting for Stock-Based
Compensation, encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity instruments. As
permitted under the new standard, the Company will continue to account for
employee stock options under APB No. 25. The pro-forma disclosures
required by this standard will be included in the Company's 1997
consolidated financial statements.
(2) CONSOLIDATED INCOME STATEMENT INFORMATION
EXPORT SALES: Export sales were $172,212,000, $106,416,000 and $67,113,000
during 1996, 1995 and 1994, respectively.
OTHER INCOME (EXPENSE), NET:
--------------------------------------------------------------------------
1996 1995 1994
(In Thousands)
--------------------------------------------------------------------------
Interest income $10,906 $7,078 $1,309
Interest expense (402) (275) (151)
Other income (expense), net (7,025) (898) (1,216)
-------- ------- -------
$3,479 $5,905 $(58)
-------- ------- -------
-------- ------- -------
PERSONNEL REDUCTION: During the quarter ended April 30, 1995, the Company
initiated a realignment of its Kentrox and Fibermux subsidiaries into one
business unit. The Company recorded a charge of $3,914,000 in conjunction
with the realignment, related primarily to a personnel reduction. As a
result of the realignment, approximately 100 Fibermux employees, primarily
in sales, administration and engineering, were separated from the Company.
Substantially all separation benefits were paid by January 31, 1996.
EXTRAORDINARY ITEM: The building that serves as headquarters for Fibermux
suffered damage as a result of the earthquake that struck Los Angeles on
January 17, 1994. The facility sustained damages of $2,300,000 ($1,450,000
after the $850,000 tax benefit). All operations resumed by February 8,
1994.
34
(3) CONSOLIDATED BALANCE SHEET INFORMATION
--------------------------------------------------------------------------
1996 1995
(In Thousands)
--------------------------------------------------------------------------
INVENTORIES:
Purchased materials and manufactured products $119,006 $75,694
Work-in-process 11,576 10,865
-------- -------
$130,582 $86,559
-------- -------
-------- -------
PROPERTY AND EQUIPMENT:
Land and buildings $43,965 $33,362
Machinery and equipment 209,347 139,294
Furniture and fixtures 22,319 18,881
-------- -------
275,631 191,537
Less accumulated depreciation
and amortization (144,551) (112,851)
-------- -------
$131,080 $78,686
-------- -------
-------- -------
GOODWILL:
Goodwill $136,940 $77,028
Less accumulated amortization (20,156) (14,921)
-------- -------
$116,784 $62,107
-------- -------
-------- -------
ACCRUED LIABILITIES:
Accrued compensation and benefits $42,968 $34,632
Accrued income taxes 14,566 10,088
Other accrued liabilities 32,839 15,011
-------- -------
$90,373 $59,731
-------- -------
-------- -------
(4) ACQUISITIONS
During the second quarter of 1996, the Company exchanged a total of
1,176,950 shares of its common stock in two separate business combinations
for all the outstanding shares of Da Tel Fibernet, Inc. ("Da Tel") and
Information Transmission Systems Corp. ("ITS"). Both transactions were
accounted for as poolings of interests. Da Tel provides engineering, design
and installation services for telecommunications companies. ITS designs
and manufactures wireless television transmission products for the cable
and broadcast industries.
During the third quarter of 1996, the Company acquired all of the
outstanding capital stock of Metrica Systems Limited ("Metrica") in a
transaction that was accounted for as a pooling of interests. A total of
734,015 shares of the Company's common stock were exchanged in the
combination. Metrica, based in London, England, designs and manufactures
management software for wireless networks.
35
Financial data for periods prior to the closing of these pooling
transactions has not been restated because neither the net assets nor
operating results were material, individually or in the aggregate, to the
Company's consolidated financial statements.
During the second quarter of 1996, the Company purchased all of
the outstanding stock of Skyline Technology, Inc. ("Skyline") for an
initial cash payment of $12 million and additional consideration not to
exceed $20 million. The purchase price exceeded the fair value of the
acquired assets by approximately $11 million. Additional consideration, if
any, will be payable over a three year period beginning November 1, 1996,
subject to the achievement of certain financial results. Skyline designs
and manufactures ISDN/Frame Relay access products.
During the third quarter of 1996, the Company purchased 80% of the
outstanding common stock of Solitra Oy ("Solitra"), based in Kempele,
Finland, with a commitment to acquire the remaining 20% over a three year
period. The stock was acquired for an initial cash payment of $41 million
plus additional consideration which is payable subject to the achievement
of certain financial results. The initial purchase price exceeded the fair
value of the acquired assets by approximately $38.5 million. Additional
consideration, if any, will be payable over a three year period beginning
November 1, 1996. Solitra designs and manufactures components for cellular
network base stations as well as high specification filters for mobile
phones.
The acquisitions of Skyline and Solitra were accounted for as purchases.
Accordingly, the results of operations of the acquired entities have been
included in the Company's consolidated financial statements since the
respective dates of acquisition. Goodwill associated with these
acquisitions is being amortized using the straight line method over periods
ranging from 10 to 15 years.
The inclusion of Skyline and Solitra financial data prior to the dates of
acquisition would not have materially affected reported results.
(5) DEBT
The Company has a revolving, unsecured credit agreement with four banks
which permits borrowings up to $40,000,000 through December 31, 1996,
primarily at prevailing market rates of interest. There were no borrowings
under this agreement during 1996, 1995 or 1994.
(6) EMPLOYEE BENEFIT PLANS
PENSION PLAN: The Company maintains a defined benefit plan covering a
majority of its employees. The plan is funded in accordance with the
requirements of Federal laws and regulations. Plan assets consist of fixed
income securities and a managed portfolio of equity securities.
36
Pension expense included the following components:
--------------------------------------------------------------------------
1996 1995 1994
(In Thousands)
--------------------------------------------------------------------------
Service cost for benefits
earned during the period $2,368 $1,766 $1,804
Interest cost on the projected
benefit obligation 1,944 1,682 1,522
Return on assets (4,614) (3,627) (633)
Net amortization and deferral 2,891 2,240 (700)
------- ------- -------
$2,589 $2,061 $1,993
------- ------- -------
------- ------- -------
Discount rate used to determine
actuarial present value of
benefits at October 31 8.0% 7.5% 7.5%
------- ------- -------
------- ------- -------
The rate of compensation increase used to measure the projected benefit
obligation was 5% for all three years. The expected long-term rate of
return on plan assets was 9%.
The following table sets forth the funded status of the plan as of
October 31:
--------------------------------------------------------------------------
1996 1995
(In Thousands)
--------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $(21,926) $(20,357)
Nonvested (1,376) (1,509)
--------- ---------
Total (23,302) (21,866)
Excess of projected benefit obligation
over accumulated benefit obligation (7,366) (4,055)
--------- ---------
Projected benefit obligation (30,668) (25,921)
Market value of plan assets 29,011 20,939
--------- ---------
Unfunded projected benefit obligation (1,657) (4,982)
Unrecognized net gain (4,769) (3,240)
Unrecognized prior service cost 1,717 1,842
Unrecognized transition liability 780 851
--------- ---------
Total accrued pension liability $(3,929) $(5,529)
--------- ---------
--------- ---------
RETIREMENT SAVINGS PLAN: The Company maintains a Retirement Savings Plan
for employees who have completed one year of service. The Company
contributes 1% of wages and, depending on Company performance, partially
matches employee contributions to the Plan up to 6% of wages. Employees
are fully vested in all contributions. The Company's contributions to the
plan totaled $7,394,000, $6,141,000 and $5,830,000 during 1996, 1995, and
1994, respectively. A portion of the Company's cash contributions is
invested in the Company's stock by the Plan's trustee.
37
STOCK AWARD PLANS: The Company maintains a Stock Incentive Plan to grant
certain stock awards, including stock options at fair market value and
restricted shares, to key employees of the Company. A maximum of
16,431,708 stock awards can be granted under this plan; 8,392,326 stock
awards were available for grant as of October 31, 1996. The Company also
maintains a Nonemployee Director Stock Option Plan in order to enhance the
ability to attract and retain the services of experienced and knowledgeable
outside directors. This plan provides for granting of a maximum of 440,000
non-qualified stock options at fair market value. As of October 31, 1996,
120,000 shares were available for option grants under this plan.
The following schedule summarizes activity in the plans:
--------------------------------------------------------------------------
Stock Restricted Grant
Options Stock Price
--------------------------------------------------------------------------
Outstanding at October 31, 1994 3,945,612 201,620 $ 1 - $11
Granted 3,246,882 40,500 $10 - $21
Exercised (1,273,476) $ 1 - $13
Restrictions Lapsed -- (1,440) $ 9 - $11
Canceled (599,624) (75,540) $ 6 - $16
----------- ---------
Outstanding at October 31, 1995 5,319,394 165,140 $ 1 - $21
Granted 1,206,116 70,378 $ 1 - $33
Exercised (963,514) -- $ 1 - $21
Restrictions Lapsed -- (104,932) $ 6 - $23
Canceled (353,920) (22,000) $ 5 - $23
----------- ---------
Outstanding at October 31, 1996 5,208,076 108,586 $ 1 - $32
----------- ---------
----------- ---------
Exercisable at October 31, 1996 2,979,140 -- $ 1 - $20
----------- ---------
----------- ---------
During 1994, options for 648,796 shares were exercised at prices ranging
from $1 to $5 per share.
(7) CAPITAL STOCK
AUTHORIZED STOCK: The Company is authorized to issue 300,000,000 shares of
$0.20 par value common stock and 10,000,000 shares of no par value
preferred stock. There are no preferred shares issued.
STOCK SPLIT: On September 24, 1996, the Company declared a two-for-one
stock split effected in the form of a 100% stock dividend paid October 31,
1996, to stockholders of record as of October 15, 1996. All references in
the accompanying financial statements and notes to earnings per share,
average common shares outstanding, Stock Award Plan data and related share
prices have been adjusted to reflect the split.
STOCK OFFERING: On June 14, 1995, the Company completed a secondary public
offering of 6,325,000 shares of its common stock at $30 per share. The net
proceeds from the offering were $181,754,000, which will be used for
general corporate purposes, including
38
working capital, capital expenditures and possible acquisitions or
strategic alliances.
SHAREHOLDER RIGHTS PLAN: On November 28, 1995, the Board of Directors
amended and restated the Company's Shareholder Rights Plan that was
originally adopted during 1986. Under the original Plan, the Board of
Directors declared a dividend of one right for each outstanding share of
the Company's common stock. The Plan, as amended, provides that if any
person or group acquires 15% or more of the Company's common stock, each
right not owned by such person or group will entitle its holder to
purchase, at the Right's then-current purchase price ($62.50 for each one-
half share of the Company's common stock at October 31, 1996, after giving
effect to the October 31, 1996 stock split), common stock of the Company
having a value of twice the Right's purchase price. The Rights would not
be triggered, however, if the acquisition of 15% or more of the Company's
common stock is pursuant to a tender offer or exchange for all outstanding
shares of the Company's common stock which is determined by the Board of
Directors to be fair and in the best interests of the Company and its
shareholders. At October 31, 1996, after giving effect to the October 31,
1996 stock split, the Rights are redeemable at $0.005 per share any time
prior to the time they become exercisable. The Rights will expire on
November 28, 2005, if not previously redeemed or exercised.
(8) INCOME TAXES
The components of the provision for income taxes are as follows:
--------------------------------------------------------------------------
1996 1995 1994
(In Thousands)
--------------------------------------------------------------------------
Current taxes payable:
Federal $44,483 $30,666 $21,357
Foreign 2,078 573 330
State 6,087 4,456 3,211
------- ------- -------
52,648 35,695 24,898
Deferred (3,448) (4,652) (1,098)
------- ------- -------
Total provision $49,200 $31,043 $23,800
------- ------- -------
------- ------- -------
The provision for foreign income taxes is based upon foreign pretax
earnings of approximately $8,260,000, $1,547,000 and $1,563,000 during
1996, 1995 and 1994, respectively.
The effective income tax rate differs from the Federal statutory rate as
follows:
--------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
Research and development
tax credits (1) (2) (2)
Goodwill amortization 1 1 2
State income taxes, net 3 3 3
Other, net (2) (1) (1)
---- ---- ----
Effective income tax rate 36% 36% 37%
---- ---- ----
---- ---- ----
39
Deferred tax assets (liabilities) of the Company as of October 31 are
comprised of the following:
--------------------------------------------------------------------------
1996 1995
(In Thousands)
--------------------------------------------------------------------------
Current deferred tax assets:
Asset valuation reserves $ 5,225 $ 4,002
Accrued liabilities 10,989 7,067
Other 3 396
-------- --------
Total $16,217 $11,465
-------- --------
-------- --------
Non-current deferred tax assets (liabilities):
Depreciation $(2,698) $(1,929)
Other 395 673
-------- --------
Total $(2,303) $(1,256)
-------- --------
-------- --------
(9) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: A portion of the Company's operations are conducted
using leased equipment and facilities. These leases are non-cancelable and
renewable with expiration dates ranging through the year 2004. The rental
expense included in the accompanying consolidated statements of income was
$7,281,000, $5,676,000, and $5,411,000 for 1996, 1995, and 1994
respectively.
The following is a schedule of future minimum rental payments required
under all non-cancelable operating leases as of October 31, 1996:
--------------------------------------------------------------------------
(In Thousands)
--------------------------------------------------------------------------
1997 $ 6,493
1998 5,614
1999 5,111
2000 4,664
2001 and thereafter 11,592
-----------
$33,474
-----------
-----------
CONTINGENCIES: There are no legal proceedings pending against or involving
the Company which, in the opinion of management, will have a material
adverse effect on the Company's financial position or results of
operations.
CHANGE OF CONTROL: The Board of Directors has approved the extension of
certain employee benefits, including salary continuation to key employees,
in the event of a change of control of the Company. The Board has retained
the flexibility to cancel such provisions under certain circumstances.
40
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION - UNAUDITED
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1996
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
Net Sales $162,591 $193,053 $217,313 $255,052 $828,009
------- ------- ------- ------- -------
Gross Profit 77,910 89,417 101,746 120,089 389,162
------- ------- ------- ------- -------
Income Before Income Taxes 25,487 31,094 36,206 43,876 136,663
Provision for Income Taxes 9,174 11,195 13,034 15,797 49,200
------- ------- ------- ------- -------
Net Income $ 16,313 $ 19,899 $ 23,172 $ 28,079 $ 87,463
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average Common Shares
Outstanding 125,516 128,048 129,704 130,098 128,314
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings Per Share $ 0.13 $ 0.15 $ 0.18 $ 0.22 $ 0.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
--------------------------------------------------------
1995
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
Net Sales $121,774 $140,342 $150,454 $173,652 $586,222
------- ------- ------- ------- -------
Gross Profit 59,372 69,039 71,712 84,005 284,128
------- ------- ------- ------- -------
Income Before Income Taxes 16,352 16,235 24,489 29,153 86,229
Provision for Income Taxes 5,886 5,846 8,815 10,496 31,043
------- ------- ------- ------- -------
Net Income $ 10,466 $ 10,389 $ 15,674 $ 18,657 $ 55,186
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average Common Shares
Outstanding 111,698 112,188 118,642 125,310 117,094
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings Per Share $ 0.10 $ 0.09 $ 0.13 $ 0.15 $ 0.47
------- ------- ------- ------- -------
------- ------- ------- ------- -------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Part I of this Report for information with respect to executive
officers of the Company. Pursuant to General Instruction G(3), reference is
made to the information contained under the captions "Election of Directors"
and "Section 16(a) Reporting" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before February 25, 1997, which information is
incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Executive Compensation" (except for
the information set forth under the subcaption "Compensation and Organization
Committee Report on Executive Compensation," which is not incorporated
herein) in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before February 25, 1997, which information is incorporated
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission on or before February 25, 1997, which information is
incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to the
information contained in the last paragraph under the caption "Election of
Directors -- Compensation of Directors" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before February 25, 1997, which
information is incorporated herein.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Public Accountants.
Consolidated Statements of Income for the years ended October 31,
1996, 1995 and 1994.
Consolidated Balance Sheets as of October 31, 1996 and 1995.
Consolidated Statements of Stockholders' Investment for
the years ended October 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years
ended October 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Supplemental Financial Information (Unaudited).
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as
not required or not applicable, or the information required has been included
elsewhere in the financial statements and related notes.
3. LISTING OF EXHIBITS
Exhibit
Number Description
- ------- -----------
3-a Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 dated May 24, 1996.)
3-b Composite Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 3-b to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1989.)
43
Exhibit
Number Description
- ------- ------------
4-a Form of certificate for shares of Common Stock of ADC Telecommunications,
Inc. (Incorporated by reference to Exhibit 4-a to the Company's Form 10-Q
for the quarter ended January 31, 1996.)
4-b Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 dated May 24, 1996.)
4-c Composite Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 3-b to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1989.)
4-d Second Amended and Restated Rights Agreement, amended and restated as of
November 28, 1995, between ADC Telecommunications, Inc. and Norwest Bank
Minnesota, N.A. (amending and restating the Rights Agreement dated as of
September 23, 1986, as amended and restated as of August 16, 1989), which
includes as Exhibit A thereto the form of Right Certificate. (Incorporated
by reference to Exhibit 4 to the Company's Form 8-K dated December 11,
1995.)
10-a* Stock Option and Restricted Stock Plan, restated as of January 26,
1988. (Incorporated by reference to Exhibit 10-a to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1988.)
10-b* Amendment to Stock Option and Restricted Stock Plan dated as of
September 26, 1989. (Incorporated by reference to Exhibit 10-e to the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1989.)
10-c* ADC Telecommunications, Inc. 1991 Stock Incentive Plan, as amended.
10-d* Business Unit Management Incentive Plan Document - Directors and Above
Fiscal Year 1997.
10-e* Corporate Management Incentive Plan Document - Directors and Above
Fiscal Year 1997.
10-f* International Management Incentive Plan Document Fiscal Year 1997.
10-g* Executive Incentive Exchange Plan Fiscal Year 1997.
10-h* Executive Incentive Exchange Plan Fiscal Year 1996.
44
Exhibit
Number Description
- ------ ------------
10-i* Broadband Connectivity Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-h to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-j* Corporate Management Incentive Plan Fiscal Year 1996. (Incorporated by
reference to Exhibit 10-i to the Company's Quarterly Report on Form 10-Q
for the Quarter ended January 31, 1996.)
10-k* Enterprise Networking Group Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-j to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-l* International Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-k to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-m* Network Services Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-m to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-n* ADC Video Systems Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-o to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-o* Systems Integration Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-r to the Company's Quarterly
Report on Form 10-Q for the Quarter ended January 31, 1996.)
10-p* Broadband Connectivity Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-f to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1995.)
10-q* Corporate Management Incentive Plan Fiscal Year 1995. (Incorporated
by reference to Exhibit 10-g to the Company's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1995.)
10-r* International Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-i to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1995.)
10-s* Kentrox Management Incentive Plan Fiscal Year 1995. (Incorporated by
reference to Exhibit 10-j to the Company's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1995.)
45
Exhibit
Number Description
- ------- -----------
10-t* Network Services Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-k to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1995.)
10-u* Supplemental Executive Retirement Plan Agreement for William J.
Cadogan, dated as of November 1, 1990, between ADC Telecommunications, Inc.
and William J. Cadogan, as amended.
10-v* ADC Telecommunications, Inc. Change in Control Severance Pay Plan
Statement and Summary Plan Description. (Incorporated by reference to
Exhibit 10-q to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1989.)
10-w* Compensation Plan for Directors of ADC Telecommunications, Inc.,
restated as of December 31, 1988. (Incorporated by reference to Exhibit
10-b to the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1989.)
10-x* First Amendment of the Compensation Plan for Directors of ADC
Telecommunications, Inc. restated as of December 31, 1988. (Incorporated
by reference to Exhibit 10-s to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1989.)
10-y* ADC Telecommunications, Inc. Directors' Supplemental Retirement Plan
dated as of January 23, 1990. (Incorporated by reference to Exhibit 10-m
to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1990.)
10-z* ADC Telecommunications, Inc. Nonemployee Director Stock Option Plan,
as amended.
10-aa* ADC Telecommunications, Inc. Deferred Compensation Plan, dated as of
November 1, 1978, as amended.
10-bb* ADC Telecommunications, Inc. Pension Excess Plan, dated as of January
1, 1985, as amended.
10-cc* ADC Telecommunications, Inc. 401(k) Excess Plan, dated as of September
1, 1990, as amended.
10-dd Lease Agreement, dated August 21, 1990, between Minnetonka Corporate
Center I Limited Partnership and ADC Telecommunications, Inc.
(Incorporated by reference to Exhibit 10-x to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1990.)
46
Exhibit
Number Description
- ------- -----------
10-ee Lease Agreement, dated October 26, 1990, between Lutheran Brotherhood
and ADC Telecommunications, Inc. (Incorporated by reference to Exhibit
10-w to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1990.)
10-ff Sublease Agreement, dated October 31, 1990, between Seagate
Technology, Inc. and ADC Telecommunications, Inc. (Incorporated by
reference to Exhibit 10-y to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1990.)
10-gg Sublease, dated as of February 21, 1995, between Seagate Technology,
Inc. and ADC Telecommunications, Inc. (Incorporated by reference to
Exhibit 10-a of the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1995.)
10-hh Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the Company's
facility located at 5900 Clearwater Drive, Minnetonka Corporate Center,
Minnetonka, Minnesota.) (Incorporated by reference to Exhibit 10-w to the
Company's Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-ii Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the Company's
facility located at 5950 Clearwater Drive, Minnetonka Corporate Center,
Minnetonka, Minnesota). (Incorporated by reference to Exhibit 10-x to the
Company's Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-jj Stock Purchase Agreement, dated July 1, 1996, by and between ADC
Telecommunications, Inc., ADC Mersum Oy and the Shareholders of Solitra Oy.
(Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated July 1, 1996.)
21-a Subsidiaries of the Company.
23-a Consent of Independent Public Accountants to the incorporation of their
report dated November 26, 1996, included in this Form 10-K, into the
Company's previously filed Registration Statements, File Nos. 2-83584,
33-22654, 33-40356, 33-40357, 33-52635, 33-52637, 33-58407, 33-58409,
33-59445, 333-02133, 333-04481, 333-07309 and 333-15283.
24-a Power of Attorney.
47
Exhibit
Number Description
- -------- ------------
27-a Financial Data Schedule.
99-a Cautionary Statement Regarding Forward-Looking Statements.
There have been excluded from the exhibits filed with this report
instruments defining the rights of holders of long-term debt of the Company
where the total amount of the securities authorized under such instruments
does not exceed 10% of the total assets of the Company. The Company hereby
agrees to furnish a copy of any such instruments to the Commission upon
request.
(b) REPORTS ON FORM 8-K
Form 8-K/A Amendment No. 1 to Current Report on Form 8-K dated July 1,
1996 filed on September 13, 1996 in connection with the acquisition
of Solitra Oy, a Finnish corporation.
Current Report on Form 8-K dated September 24, 1996 filed on October 7,
1996 in connection with the Company's announcement of a two-for-one
common stock split, in the form of a one-hundred percent (100%) stock
dividend.
(c) See Exhibit Index and Exhibits attached to this report.
(d) See Financial Statement Schedules included in Part II, Item 8 of this
report.
__________________
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to the Annual Report on Form 10-K.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADC TELECOMMUNICATIONS, INC.
Dated: January 9, 1997 By: /s/ William J. Cadogan
------------------------
William J. Cadogan
Chairman of the Board, President,
Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ William J. Cadogan Chairman of the Board, President, Dated: January 9, 1997
- ----------------------- Chief Executive Officer and
William J. Cadogan Chief Operating Officer
(principal executive officer)
/s/ Robert E. Switz Vice President, Chief Financial Dated: January 9, 1997
- ----------------------- Officer
Robert E. Switz (principal financial officer)
/s/ Charles T. Roehrick Vice President, Controller Dated: January 9, 1997
- ----------------------- (principal accounting officer)
Charles T. Roehrick
James C. Castle* Director Dated: January 9, 1997
Thomas E. Holloran* Director Dated: January 9, 1997
B. Kristine Johnson* Director Dated: January 9, 1997
Charles W. Oswald* Director Dated: January 9, 1997
Irene M. Qualters* Director Dated: January 9, 1997
Alan E. Ross* Director Dated: January 9, 1997
Jean-Pierre Rosso* Director Dated: January 9, 1997
Donald M. Sullivan* Director Dated: January 9, 1997
Warde F. Wheaton* Director Dated: January 9, 1997
John D. Wunsch* Director Dated: January 9, 1997
*By /s/ David F. Fisher Dated: January 9, 1997
--------------------
David F. Fisher
Attorney-in-Fact
49
ADC TELECOMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3-a Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 dated May 24, 1996.)
3-b Composite Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 3-b to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1989.)
4-a Form of certificate for shares of Common Stock of ADC
Telecommunications, Inc. (Incorporated by reference to Exhibit
4-a to the Company's Form 10-Q for the quarter ended January 31,
1996.)
4-b Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 dated May 24, 1996.)
4-c Composite Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 3-b to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1989.)
4-d Second Amended and Restated Rights Agreement, amended and restated as
of November 28, 1995, between ADC Telecommunications, Inc. and
Norwest Bank Minnesota, N.A. (amending and restating the Rights
Agreement dated as of September 23, 1986, as amended and restated
as of August 16, 1989), which includes as Exhibit A thereto the
form of Right Certificate. (Incorporated by reference to Exhibit
4 to the Company's Form 8-K dated December 11, 1995.)
10-a Stock Option and Restricted Stock Plan, restated as of January 26,
1988. (Incorporated by reference to Exhibit 10-a to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1988.)
Exhibit
Number Description Page
- ------- ----------- ------
10-b Amendment to Stock Option and Restricted Stock Plan dated as of
September 26, 1989. (Incorporated by reference to Exhibit 10-e
to the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1989.)
10-c ADC Telecommunications, Inc. 1991 Stock Incentive Plan, as amended.....
10-d Business Unit Management Incentive Plan Document - Directors and
Above Fiscal Year 1997. ...............................................
10-e Corporate Management Incentive Plan Document - Directors and Above
Fiscal Year 1997. .....................................................
10-f International Management Incentive Plan Document Fiscal Year 1997. ....
10-g Executive Incentive Exchange Plan Fiscal Year 1997. ...................
10-h Executive Incentive Exchange Plan Fiscal Year 1996. ...................
10-i Broadband Connectivity Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-h to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-j Corporate Management Incentive Plan Fiscal Year 1996. (Incorporated by
reference to Exhibit 10-i to the Company's Quarterly Report on
Form 10-Q for the Quarter ended January 31, 1996.)
10-k Enterprise Networking Group Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-j to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-l International Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-k to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-m Network Services Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-m to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-n ADC Video Systems Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-o to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
Exhibit
Number Description Page
- ------ ----------- ----
10-o Systems Integration Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-r to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31,
1996.)
10-p Broadband Connectivity Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-f to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1995.)
10-q Corporate Management Incentive Plan Fiscal Year 1995. (Incorporated
by reference to Exhibit 10-g to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.)
10-r International Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-i to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1995.)
10-s Kentrox Management Incentive Plan Fiscal Year 1995. (Incorporated by
reference to Exhibit 10-j to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.)
10-t Network Services Management Incentive Plan Fiscal Year 1995.
(Incorporated by reference to Exhibit 10-k to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1995.)
10-u Supplemental Executive Retirement Plan Agreement for William J.
Cadogan, dated as of November 1, 1990, between ADC
Telecommunications, Inc. and William J. Cadogan, as amended. .......
10-v ADC Telecommunications, Inc. Change in Control Severance Pay Plan
Statement and Summary Plan Description. (Incorporated by
reference to Exhibit 10-q to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1989.)
10-w Compensation Plan for Directors of ADC Telecommunications, Inc.,
restated as of December 31, 1988. (Incorporated by reference to
Exhibit 10-b to the Company's Quarterly Report on Form 10-Q for
the quarter ended January 31, 1989.)
10-x First Amendment of the Compensation Plan for Directors of ADC
Telecommunications, Inc. restated as of December 31, 1988.
(Incorporated by reference to Exhibit 10-s to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1989.)
Exhibit
Number Description Page
- ------ ----------- ----
10-y ADC Telecommunications, Inc. Directors' Supplemental Retirement Plan
dated as of January 23, 1990. (Incorporated by reference to
Exhibit 10-m to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990.)
10-z ADC Telecommunications, Inc. Nonemployee Director Stock Option
Plan, as amended. ...................................................
10-aa ADC Telecommunications, Inc. Deferred Compensation Plan, dated as
of November 1, 1978, as amended. ....................................
10-bb ADC Telecommunications, Inc. Pension Excess Plan, dated as of
January 1, 1985, as amended. ........................................
10-cc ADC Telecommunications, Inc. 401(k) Excess Plan, dated as of
September 1, 1990, as amended. ......................................
10-dd Lease Agreement, dated August 21, 1990, between Minnetonka
Corporate Center I Limited Partnership and ADC
Telecommunications, Inc. (Incorporated by reference to Exhibit
10-x to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990.)
10-ee Lease Agreement, dated October 26, 1990, between Lutheran
Brotherhood and ADC Telecommunications, Inc. (Incorporated by
reference to Exhibit 10-w to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1990.)
10-ff Sublease Agreement, dated October 31, 1990, between Seagate
Technology, Inc. and ADC Telecommunications, Inc. (Incorporated
by reference to Exhibit 10-y to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1990.)
10-gg Sublease, dated as of February 21, 1995, between Seagate
Technology, Inc. and ADC Telecommunications, Inc. (Incorporated
by reference to Exhibit 10-a of the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1995.)
Exhibit
Number Description Page
- ------ ----------- ----
10-hh Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the
Company's facility located at 5900 Clearwater Drive, Minnetonka
Corporate Center, Minnetonka, Minnesota.) (Incorporated by
reference to Exhibit 10-w to the Company's Quarterly Report on
Form 10-Q for the Quarter ended January 31, 1996.)
10-ii Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the
Company's facility located at 5950 Clearwater Drive, Minnetonka
Corporate Center, Minnetonka, Minnesota). (Incorporated by
reference to Exhibit 10-x to the Company's Quarterly Report on
Form 10-Q for the Quarter ended January 31, 1996.)
10-jj Stock Purchase Agreement, dated July 1, 1996, by and between ADC
Telecommunications, Inc., ADC Mersum Oy and the Shareholders of
Solitra Oy. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated July 1, 1996.)
21-a Subsidiaries of the Company. .............................................
23-a Consent of Independent Public Accountants to the incorporation of
their report dated November 26, 1996, included in this Form 10-K,
into the Company's previously filed Registration Statements, File
Nos. 2-83584, 33-22654, 33-40356, 33-40357, 33-52635, 33-52637, 33-58407,
33-58409, 33-59445, 333-02133, 333-04481, 333-07309 and 333-15283.........
24-a Power of Attorney. .......................................................
27-a Financial Data Schedule. .................................................
99-a Cautionary Statement Regarding Forward-Looking Statements. ...............