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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 001-12929
CommScope, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 CommScope Place, SE
P.O. Box 339
Hickory, North Carolina
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
As of November 7, 2003 there were 59,267,185 shares of Common Stock
outstanding.
CommScope, Inc.
Form 10-Q
September 30, 2003
Table of Contents
Page No.
---------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income (Loss) 6
Notes to Condensed Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Item 4. Controls and Procedures 22
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 148,723 $ 147,819 $ 419,513 $ 462,584
Operating costs and expenses:
Cost of sales 118,082 120,743 335,956 368,360
Selling, general and administrative 20,851 20,508 62,732 82,801
Research and development 1,486 1,069 4,530 4,847
Impairment charges for fixed assets -- 25,096 31,728 25,096
--------- --------- --------- ---------
Total operating costs and exenses 140,419 167,416 434,946 481,104
--------- --------- --------- ---------
Operating income (loss) 8,304 (19,597) (15,433) (18,520)
Other income, net 4 392 209 751
Interest expense (2,207) (2,419) (6,548) (6,860)
Interest income 649 696 1,981 1,702
--------- --------- --------- ---------
Income (loss) before income taxes and equity
in losses of OFS BrightWave, LLC 6,750 (20,928) (19,791) (22,927)
Provision for income tax (expense) benefit (2,498) 7,725 7,322 8,465
--------- --------- --------- ---------
Income (loss) before equity in losses of
OFS BrightWave, LLC 4,252 (13,203) (12,469) (14,462)
Equity in losses of OFS BrightWave, LLC (3,130) (6,359) (40,857) (49,239)
--------- --------- --------- ---------
Net income (loss) $ 1,122 $ (19,562) $ (53,326) $ (63,701)
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.02 $ (0.32) $ (0.90) $ (1.03)
Assuming dilution $ 0.02 $ (0.32) $ (0.90) $ (1.03)
Weighted average shares outstanding:
Basic 59,220 61,763 59,220 61,745
Assuming dilution 59,610 61,763 59,220 61,745
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
September 30, December 31,
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 171,293 $ 120,102
Accounts receivable, less allowance for doubtful
accounts of $15,293 and $11,811, respectively 76,096 64,787
Inventories 34,880 36,254
Prepaid expenses and other current assets 12,535 20,737
Deferred income taxes 15,955 16,579
--------- ---------
Total current assets 310,759 258,459
Property, plant and equipment, net 183,674 229,515
Goodwill, net of accumulated amortization of
$59,562 and $59,520, respectively 151,350 151,334
Other intangibles, net of accumulated amortization of
$41,809 and $39,930, respectively 6,956 8,835
Deferred income taxes 33,281 3,572
Investment in and advances to OFS BrightWave, LLC 46,556 111,528
Other assets 8,989 9,425
--------- ---------
Total Assets $ 741,565 $ 772,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 19,572 $ 18,483
Other accrued liabilities 33,854 26,005
--------- ---------
Total current liabilities 53,426 44,488
Long-term debt 183,300 183,300
Other noncurrent liabilities 34,638 27,345
--------- ---------
Total Liabilities 271,364 255,133
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares:
20,000,000; Issued and outstanding shares: None at
September 30, 2003 and December 31, 2002 -- --
Common stock, $.01 par value; Authorized shares:
300,000,000; Issued shares, including treasury stock:
61,762,667 at September 30, 2003 and December 31, 2002;
Issued and outstanding shares: 59,219,567 at
September 30, 2003 and December 31, 2002 618 618
Additional paid-in capital 383,541 383,541
Retained earnings 108,189 161,515
Accumulated other comprehensive loss (8,923) (14,915)
Treasury stock, at cost: 2,543,100 shares at
September 30, 2003 and December 31, 2002 (13,224) (13,224)
--------- ---------
Total Stockholders' Equity 470,201 517,535
--------- ---------
Total Liabilities and Stockholders' Equity $ 741,565 $ 772,668
========= =========
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Nine Months Ended
September 30,
---------------------------
2003 2002
--------- ---------
Operating Activities:
Net loss $ (53,326) $ (63,701)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 25,523 27,906
Equity in losses of OFS BrightWave, LLC, pretax 64,978 78,280
Impairment charges for fixed assets 31,728 25,096
Deferred income taxes (27,820) (26,421)
Tax benefit from stock option exercises -- 128
Changes in assets and liabilities:
Accounts receivable (10,415) 24,144
Inventories 2,187 2,162
Prepaid expenses and other current assets 8,787 (9,310)
Accounts payable and other accrued liabilities 9,203 9,715
Other noncurrent liabilities 4,033 4,023
Other 115 101
--------- ---------
Net cash provided by operating activities 54,993 72,123
Investing Activities:
Additions to property, plant and equipment (4,088) (8,335)
Proceeds from repayment of advance to OFS BrightWave, LLC -- 6,146
Proceeds from disposal of fixed assets 211 333
--------- ---------
Net cash used in investing activities (3,877) (1,856)
Financing Activities:
Principal payments on long-term debt -- (2,107)
Long-term financing costs (1,215) (345)
Proceeds from exercise of stock options -- 1,029
--------- ---------
Net cash used in financing activities (1,215) (1,423)
Effect of exchange rate changes on cash 1,290 802
--------- ---------
Change in cash and cash equivalents 51,191 69,646
Cash and cash equivalents, beginning of period 120,102 61,929
--------- ---------
Cash and cash equivalents, end of period $ 171,293 $ 131,575
========= =========
See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED -- IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Nine Months Ended
September 30,
----------------------------
2003 2002
----------- -----------
Number of common shares outstanding:
Balance at beginning of period 59,219,567 61,688,256
Issuance of shares to nonemployee director -- 1,000
Issuance of shares for stock option exercises -- 73,411
----------- -----------
Balance at end of period 59,219,567 61,762,667
----------- -----------
Common stock:
Balance at beginning of period $ 618 $ 617
Issuance of shares for stock option exercises -- 1
----------- -----------
Balance at end of period $ 618 $ 618
----------- -----------
Additional paid-in capital:
Balance at beginning of period $ 383,541 $ 381,823
Issuance of shares to nonemployee director -- 16
Issuance of shares for stock option exercises -- 1,028
Tax benefit from stock option exercises -- 128
----------- -----------
Balance at end of period $ 383,541 $ 382,995
----------- -----------
Retained earnings:
Balance at beginning of period $ 161,515 $ 228,667
Net loss (53,326) (63,701)
----------- -----------
Balance at end of period $ 108,189 $ 164,966
----------- -----------
Accumulated other comprehensive loss:
Balance at beginning of period $ (14,915) $ (4,593)
Other comprehensive income (loss) 5,992 (13,796)
----------- -----------
Balance at end of period $ (8,923) $ (18,389)
----------- -----------
Treasury stock, at cost:
Balance at beginning of period $ (13,224) $ --
Treasury shares repurchased -- --
----------- -----------
Balance at end of period $ (13,224) $ --
----------- -----------
Total stockholders' equity $ 470,201 $ 530,190
=========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------------
2003 2002 2003 2002
-------- -------- ----------- -----------
Comprehensive income (loss):
Net income (loss) $ 1,122 $(19,562) $ (53,326) $ (63,701)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries 275 1,276 (346) 3,413
Foreign currency transaction gain (loss) on long-term
intercompany loans - foreign subsidiaries (662) (10,311) 8,487 (16,403)
Hedging gain (loss) on nonderivative instrument -- 74 -- (717)
Loss on derivative financial instrument designated
as a cash flow hedge -- (102) -- (89)
Loss on derivative financial instrument designated
as a net investment hedge (488) -- (2,149) --
-------- -------- ----------- -----------
Total other comprehensive income (loss), net of tax (875) (9,063) 5,992 (13,796)
-------- -------- ----------- -----------
Total comprehensive income (loss) $ 247 $(28,625) $ (47,334) $ (77,497)
======== ======== =========== ===========
See notes to condensed consolidated financial statements.
6
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned
subsidiaries and equity method investee, operates in the cable manufacturing
business, with manufacturing facilities located in the United States, Europe and
Latin America. CommScope, Inc. was incorporated in Delaware in January 1997.
CommScope is a leading worldwide designer, manufacturer and marketer of a wide
array of broadband coaxial cables and other high-performance electronic and
fiber optic cable products for cable television, telephony, Internet access,
wireless communications and other broadband services. Management believes
CommScope is the world's largest manufacturer of coaxial cable for hybrid fiber
coaxial (HFC) broadband networks. CommScope is also a leading supplier of
coaxial, twisted pair, and fiber optic cables for premise wiring (local area
networks), wireless and other communication applications. In late 2001,
CommScope acquired an equity interest in an optical fiber and fiber optic cable
manufacturing business (see Note 5).
Basis of Presentation
The condensed consolidated balance sheet as of September 30, 2003, and the
condensed consolidated statements of operations, cash flows, stockholders'
equity and comprehensive income (loss) for the three and nine month periods
ended September 30, 2003 and 2002 are unaudited and reflect all adjustments of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of the interim period financial statements. The results of
operations for the interim period are not necessarily indicative of the results
of operations to be expected for the full year.
The unaudited interim condensed consolidated financial statements of
CommScope have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. These interim condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 2002 audited consolidated financial statements and notes thereto included in
the Company's 2002 Annual Report on Form 10-K.
Concentrations of Risk
Net sales to Comcast Corporation ("Comcast"), which merged with AT&T
Broadband in November 2002, accounted for 17% and 19% of the Company's total net
sales during the three and nine months ended September 30, 2003, respectively.
During the three and nine months ended September 30, 2002, net sales to Comcast,
as if combined with AT&T Broadband during the period, accounted for 23% and 18%,
respectively, of the Company's total net sales. No other customer accounted for
10% or more of the Company's total net sales for the three and nine months ended
September 30, 2003 and 2002.
Accounts receivable from Comcast comprised approximately 18% of the Company's
net accounts receivable as of September 30, 2003, compared to 23% as of December
31, 2002. Accounts receivable from another customer represented approximately
11% of net accounts receivable as of September 30, 2003, compared to 14% as of
December 31, 2002.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
Goodwill and Other Intangible Assets
The Company tests goodwill for impairment annually at the same time each year
and on an interim basis when events or circumstances change. Management has
completed the annual goodwill impairment test as of August 31, 2003 and believes
that goodwill was not impaired as of this date. There have been no events or
changes in circumstances requiring additional goodwill impairment testing.
The carrying value of other intangible assets as of September 30, 2003 in the
amount of $7.0 million, net of accumulated amortization of $41.8 million,
represents patented technology, with a carrying value of $0.1 million, and
customer relationship assets, with a carrying value of $6.9 million.
Amortization expense associated with these intangible assets was $0.6 million
for the three month periods ended September 30, 2003 and 2002 and $1.9 million
for the nine month periods then ended. Annual amortization expense for these
other intangible assets is expected to be $2.5 million in 2003, $2.4 million in
2004, $2.4 million in 2005 and $1.5 million in 2006.
The slight change in goodwill from December 31, 2002 to September 30, 2003
was due to the impact of translating the euro-denominated goodwill on the
balance sheet of the Company's Belgian subsidiary into CommScope's US dollar
reporting currency.
Stock Options
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123" amends APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in interim financial
information about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. The interim
reporting provisions of SFAS No. 148 were effective for the Company as of March
31, 2003, and management has modified the Company's quarterly disclosures in
accordance with the new requirements.
As of September 30, 2003, the Company had one stock-based employee
compensation plan, the Amended and Restated CommScope, Inc. 1997 Long-Term
Incentive Plan. The Company accounts for this plan under the intrinsic value
method recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. No stock-based employee compensation cost is reflected in net
income (loss), as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The following table illustrates the effect on net income (loss) and net
income (loss) per share as if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
using the Black-Scholes option pricing model:
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss), as reported $ 1,122 $(19,562) $(53,326) $(63,701)
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 1,694 2,062 5,133 5,846
-------- -------- -------- --------
Pro forma net loss $ (572) $(21,624) $(58,459) $(69,547)
======== ======== ======== ========
Net income (loss) per share:
Basic--as reported $ 0.02 $ (0.32) $ (0.90) $ (1.03)
Basic--pro forma $ (0.01) $ (0.35) $ (0.99) $ (1.13)
Diluted--as reported $ 0.02 $ (0.32) $ (0.90) $ (1.03)
Diluted--pro forma $ (0.01) $ (0.35) $ (0.99) $ (1.13)
Impact of Newly Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,"
which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements." FIN 46 addresses how to identify a variable interest
entity and provides guidance on when such an entity should be consolidated by an
enterprise. The Company does not currently hold an interest in a variable
interest entity, thus the initial application of this Interpretation did not
affect the Company's results of operations, financial position or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 clarifies the conditions under which a
contract with an initial net investment meets the characteristic of a
derivative; clarifies when a derivative contains a financing component; amends
the definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others;" and amends
certain other existing pronouncements. This Statement is effective for contracts
entered into or modified by the Company after September 30, 2003 and for hedging
relationships designated by the Company after September 30, 2003. All provisions
of this Statement will be applied prospectively. The application of this
Statement is not expected to have a material effect on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for the classification and measurement of certain
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
financial instruments with characteristics of both liabilities and equity. It
clarifies when an issuer must classify certain financial instruments as
liabilities (or as assets, in some circumstances), rather than including them
within stockholders' equity or separately classifying them as mezzanine equity.
This Statement was effective for CommScope for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective for the Company
in the third quarter of 2003. The Company has not issued any financial
instruments within the scope of SFAS No. 150; therefore, the application of SFAS
No. 150 is not expected to affect the Company's results of operations, financial
position or disclosures.
2. INVENTORIES
September 30, December 31,
2003 2002
--------- ---------
Raw materials $ 10,553 $ 12,402
Work in process 9,267 11,160
Finished goods 15,060 12,692
--------- ---------
$ 34,880 $ 36,254
========= =========
3. LONG-TERM DEBT
September 30, December 31,
2003 2002
--------- ---------
Convertible Notes $ 172,500 $ 172,500
IDA Notes 10,800 10,800
--------- ---------
$ 183,300 $ 183,300
========= =========
The Company entered into a $100 million senior secured revolving credit
facility, which closed January 10, 2003. The facility, which was established for
future liquidity, working capital needs and other general corporate purposes,
was not drawn at closing and has not been drawn in any amount from that date
through September 30, 2003. The facility is secured by substantially all of the
Company's domestic assets and can have a maximum availability of up to $100
million over its three and a half year expected term (see Note 10), subject to
certain covenants and conditions contained in the agreement. As of September 30,
2003, the Company had availability of approximately $74 million and no
outstanding borrowings under this senior secured revolving credit facility.
4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
applicable periods. Diluted net income (loss) per share is based on net income
(loss) adjusted for after-tax interest and amortization of debt issuance costs
related to convertible debt, if dilutive, divided by the weighted average number
of common shares outstanding adjusted for the dilutive effect of stock options
and convertible securities.
On December 15, 1999, the Company issued $172.5 million in convertible notes,
which are convertible into shares of common stock at a conversion rate of
20.7512 shares per $1,000 principal amount. The effect of the assumed conversion
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
of these notes was excluded from the calculation of net income (loss) per share,
assuming dilution, for the three and nine month periods ended September 30, 2003
and 2002 because it would have been antidilutive in all periods.
Additionally, options to purchase approximately 5.9 million common shares
were excluded from the computation of net income (loss) per share, assuming
dilution, for the three and nine months ended September 30, 2003 because they
would have been antidilutive in both periods. Options to purchase approximately
6.3 million and 4.0 million common shares were excluded from the computation of
net loss per share, assuming dilution, for the three and nine months ended
September 30, 2002, respectively, because they would have been antidilutive in
both periods.
5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an approximate 18.4%
ownership interest in OFS BrightWave, LLC ("OFS BrightWave"), an optical fiber
and fiber cable venture between CommScope and The Furukawa Electric Co., Ltd. of
Japan. CommScope's portion of the losses of OFS BrightWave for the three and
nine month periods ended September 30, 2003 and 2002 has been included in the
condensed consolidated financial statements of CommScope for the respective
periods. These results are net of elimination of intercompany profit in the
amount of $25 and $79, net of tax, for the three and nine month periods ended
September 30, 2003, respectively, and $21 and $52, net of tax, for the three and
nine month periods ended September 30, 2002, respectively, related to interest
payments received from OFS BrightWave under a $30 million revolving note. OFS
BrightWave has elected to be taxed as a partnership; therefore, the Company's
income tax benefit from flow through losses has been recorded based on the
Company's tax rates. Income tax expense or benefit provided by OFS BrightWave
for income or losses generated by its c-corporation subsidiary does not flow
through to CommScope and, therefore, does not impact CommScope's income tax
benefit from flow-through losses of OFS BrightWave. However, the income tax
expense or benefit provided for the income or loss generated by OFS BrightWave's
c-corporation subsidiary does impact CommScope's equity in the net assets of OFS
BrightWave, as shown in the reconciliation below.
OFS BrightWave incurred significant charges during the nine months ended
September 30, 2003 primarily related to fixed asset impairment, restructuring
and cost reduction efforts. The total of these charges recognized by OFS
BrightWave in the second quarter of 2003 was $257.9 million. CommScope's equity
method share of these charges resulted in an increase of $17.3 million in
CommScope's noncurrent deferred tax asset during the nine months ended September
30, 2003. OFS BrightWave also incurred charges of $211.0 million in the second
quarter of 2002, primarily for the write-off of goodwill and certain fixed
assets, in addition to restructuring and cost reduction efforts.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The following table provides summary financial information for OFS
BrightWave for the three and nine month periods ended September 30, 2003 and
2002 and as of September 30, 2003 and December 31, 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Income Statement Data:
Net revenues $ 25,286 $ 21,019 $ 75,333 $ 69,856
Gross profit (14,299) (35,684) (76,691) (147,494)
Net loss (27,171) (53,992) (352,528) (392,635)
As of
------------------------
September 30, December 31,
2003 2002
-------- --------
Balance Sheet Data:
Current assets $ 76,729 $ 83,876
Noncurrent assets 376,889 655,265
Current liabilities 64,315 57,353
Other noncurrent liabilities 249,028 182,297
Minority interests 38,609 45,338
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity in the net assets of OFS BrightWave as
of September 30, 2003 and December 31, 2002 was as follows:
As of
--------------------------
September 30, December 31,
2003 2002
--------- ---------
Net assets of OFS BrightWave, LLC $ 101,666 $ 454,153
CommScope ownership percentage 18.43225% 18.43225%
--------- ---------
CommScope equity in net assets of OFS
BrightWave, LLC 18,739 83,711
Plus:
Notes receivable from OFS BrightWave, LLC 30,000 30,000
Direct costs of acquisition 4,763 4,763
Pushdown and other adjustments by majority
member in OFS BrightWave, LLC (1,036) (1,036)
Less:
Income tax benefit related to CommScope's
share of losses generated by OFS
BrightWave, LLC's domestic c-corporation
subsidiary (5,910) (5,910)
--------- ---------
Investment in and advances to OFS Brightwave,
LLC $ 46,556 $ 111,528
========= =========
6. IMPAIRMENT CHARGES FOR FIXED ASSETS
During the second quarter of 2003, management concluded that certain
manufacturing assets had no future use to the Company and initiated a formal
impairment review of these assets based on this change in circumstances. Most of
these assets were used in or acquired for use in the manufacture of the
Company's broadband and video distribution products ("Broadband/Video
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
Products"), which have been adversely affected by the difficult global business
environment in telecommunications and a decline in demand both domestically and
internationally. These assets were either uninstalled, underutilized, or idle,
generating no current operating cash flows. In addition, based on management's
conclusion that these assets had no future use to the Company, there were no
expected future operating cash flows for these assets. This absence of operating
cash flows indicated that the carrying amounts of these assets may not be
recoverable as of June 30, 2003. Accordingly, management obtained third party
appraisals of the majority of these specifically-identified assets to determine
their fair values and the resulting amount of impairment losses to be
recognized. Based on these appraisals, CommScope recognized pretax impairment
charges in the amount of $23 million, or $0.25 per share, net of tax, related to
these specifically-identified assets. Management had not made a final decision
as to the disposition of these assets as of September 30, 2003, and therefore,
they have been classified as assets to be held and used, as required by SFAS.
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
In addition, the Company's Brazilian operation, which primarily manufactures
Broadband/Video Products, has experienced declining local demand in addition to
reduced export sales and profitability resulting from pricing and competitive
pressures primarily due to the impact of unfavorable local currency
fluctuations. As a result of this change in circumstances, management performed
a test of recoverability for the Brazilian manufacturing assets during the
second quarter of 2003. The Company's long-term undiscounted cash flow forecasts
for its Brazilian operation indicated that the carrying amounts of the
manufacturing assets at this facility may not be recoverable as of June 30,
2003. Accordingly, management obtained third party appraisals of the Brazilian
manufacturing assets to determine their fair values and the resulting amount of
impairment losses to be recognized. Based on these appraisals, CommScope
recognized pretax impairment charges in the amount of $8.7 million, or $0.09 per
share, net of tax, of which $6.4 million were related to broadband cable
manufacturing assets and $2.3 million were related to wireless cable
manufacturing assets. Management intended to continue to use these assets in
production as of September 30, 2003, and therefore, they have been classified as
assets to be held and used.
The Company recognized total pretax impairment charges for fixed assets in
the amount of $31.7 million, or $0.34 per share, net of tax, during the second
quarter of 2003. These impairment charges resulted in an increase of $8.5
million in CommScope's noncurrent deferred tax asset during the second quarter
of 2003. The breakdown of these impairment charges was as follows (in millions):
Domestic broadband cable manufacturing assets $ 21.4
Brazilian manufacturing assets 8.7
Other domestic manufacturing assets 1.6
------
Total impairment charges $ 31.7
======
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
7. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME/LOSS
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Income tax benefit for components of other
comprehensive income/loss:
Hedging gain/loss on nonderivative instrument $ -- $ (44) $ -- $ 421
Loss on derivative financial instrument
designated as a cash flow hedge -- 60 -- 52
Loss on derivative instrument designated as
a net investment hedge 286 -- 1,262 --
------ ------ ------ ------
Total income tax benefit for components of
other comprehensive income/loss $ 286 $ 16 $1,262 $ 473
====== ====== ====== ======
8. DERIVATIVES AND HEDGING ACTIVITIES
As of September 30, 2003, the only derivative financial instrument
outstanding was a cross currency swap, which was designated and documented at
inception as a net investment hedge of a portion of the Company's net investment
in its Belgian subsidiary. The notional amount of this derivative financial
instrument, which is a cross currency swap of US dollars for euros, was $20
million at inception of the hedging relationship and as of September 30, 2003.
This hedging instrument was effective at inception of the hedging relationship
and at September 30, 2003 and is expected to continue to be effective for the
duration of the agreement, resulting in no anticipated hedge ineffectiveness.
The fair value of this derivative instrument, reflected in other noncurrent
liabilities, was approximately $4.4 million as of September 30, 2003, compared
to $1.3 million as of December 31, 2002.
The only derivative instrument outstanding for the three months ended
September 30, 2002 was an interest rate swap, which effectively converted the
variable-rate Eurodollar Credit Agreement to a fixed-rate basis. As of December
2, 2002, the Company terminated both the Eurodollar Credit Agreement and the
related interest rate swap agreement, which were both scheduled to expire on
March 1, 2006. This interest rate swap was designated and documented as a cash
flow hedge of the changes in the cash flows attributable to fluctuations in the
variable benchmark interest rate associated with the underlying debt being
hedged.
There were no material reclassifications from other comprehensive income
(loss) to earnings during the three and nine month periods ended September 30,
2003 and 2002.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
Activity in the accumulated net gain (loss) on derivative instruments
included in accumulated other comprehensive loss for the three and nine month
periods ended September 30, 2003 and 2002 consisted of the following:
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Accumulated net gain (loss) on derivative
instruments, beginning of period $(2,463) $ 40 $ (802) $ 27
Net loss on derivative financial instrument
designated as a cash flow hedge -- (102) -- (89)
Net loss on derivative financial instrument
designated as a net investment hedge (488) -- (2,149) --
------- ------- ------- -------
Accumulated net loss on derivative
instruments, end of period $(2,951) $ (62) $(2,951) $ (62)
======= ======= ======= =======
9. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
---------------------
2003 2002
------ ------
Cash paid during the period for:
Income taxes $ 360 $ 599
Interest (net of capitalized amounts) 3,826 4,716
10. SUBSEQUENT EVENT
On October 27, 2003, CommScope announced that it had signed a definitive
agreement with Avaya Inc. ("Avaya") to acquire its Connectivity Solutions
("ACS") business for cash and securities valued at approximately $263 million.
Under the terms of the agreement, Avaya will receive $210 million in cash, an
$18 million convertible subordinated note from CommScope and $34.9 million in
CommScope common stock, subject to adjustment. The cash component of the
transaction is expected to be funded primarily from CommScope's existing cash
balances and through a new $150 million senior secured credit facility
underwritten by Wachovia Securities, subject to adjustment. CommScope had $171
million in cash and cash equivalents on its balance sheet as of September 30,
2003. CommScope will purchase the net assets of ACS, including certain defined
current liabilities and assets, which totaled approximately $300 million as of
June 30, 2003, based upon Avaya's historical financial statements. CommScope
will also assume up to approximately $75 million of other specified liabilities
of ACS, primarily related to employee benefits. The transaction, which is
subject to customary closing conditions and approval by necessary regulatory
authorities, is expected to close within 90 days of signing except with regard
to certain international operations. CommScope is evaluating various operating
structures for the ACS business to be acquired.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included in
this document as well as the audited consolidated financial statements, related
notes thereto and management's discussion and analysis of financial condition
and results of operations, including management's discussion and analysis about
the application of critical accounting policies, for the year ended December 31,
2002 included in our 2002 Annual Report on Form 10-K.
HIGHLIGHTS
For the quarter ended September 30, 2003, net income was $1.1 million, or
$0.02 per share, compared to a net loss of $19.6 million, or $0.32 per share,
for the quarter ended September 30, 2002. Included in these results were
after-tax equity method losses in OFS BrightWave, LLC ("OFS BrightWave") of $3.1
million, or $0.05 per share, during the three months ended September 30, 2003,
compared to $6.4 million, or $0.10 per share, during the three months ended
September 30, 2002. The net loss for the quarter ended September 30, 2002 also
included after-tax charges of $15.8 million, or $0.26 per share, for the
impairment of our fixed assets.
For the nine months ended September 30, 2003, we incurred a net loss of $53.3
million, or $0.90 per share, compared to a net loss of $63.7 million, or $1.03
per share, for the nine months ended September 30, 2002. Included in these net
losses were after-tax equity method losses in OFS BrightWave of $40.9 million,
or $0.69 per share, during the nine months ended September 30, 2003, compared to
$49.2 million, or $0.80 per share, during the nine months ended September 30,
2002. The net loss for the nine months ended September 30, 2003 also reflected
after-tax impairment charges of $20.0 million, or $0.34 per share, primarily
related to our broadband cable manufacturing assets. In addition, the net loss
for the nine months ended September 30, 2002 included after-tax charges of $15.8
million, or $0.26 per share, for the impairment of our fixed assets and
after-tax charges of $13.5 million, or $0.22 per share, related to the write-off
of Adelphia Communications Corp. ("Adelphia") receivables
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2003 WITH THE THREE- AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002
Net sales
Net sales for the quarter ended September 30, 2003 increased $0.9 million, or
0.6%, to $148.7 million, compared to the quarter ended September 30, 2002. This
increase was due to higher sales of wireless and other telecommunications
products ("Wireless and Other Telecom Products"). Net sales for the nine months
ended September 30, 2003 decreased $43.1 million, or 9.3%, to $419.5 million,
compared to the nine months ended September 30, 2002. The decrease in net sales
for this nine-month period was due to lower sales of broadband and other video
distribution products ("Broadband/Video Products").
Domestic sales increased 1.2% to $122.2 million in the third quarter of 2003
compared to the third quarter of 2002. The increase was due primarily to higher
Wireless and Other Telecom Products sales. Domestic sales decreased 9.6% to
$340.6 million in the nine months ended September 30, 2003 compared to the same
period in 2002. The decrease was due to lower Broadband/Video Products sales
volume and ongoing pricing pressure for fiber optic cable products.
International sales decreased 1.9% to $26.5 million in the third quarter of 2003
and 8.2% to $78.9 million in the nine months ended September 30, 2003 compared
to the same periods in 2002.
16
Net sales of Broadband/Video Products for the third quarter of 2003 decreased
$2.4 million, or 2.0%, to $117.9 million, compared to the same period in 2002.
This decrease primarily resulted from lower sales of fiber optic cable. Sales to
Comcast Corporation ("Comcast") decreased $7.5 million, or 22.6%, in the third
quarter of 2003 compared to the same period in 2002. For the nine months ended
September 30, 2003, net sales of Broadband/Video Products decreased $50.9
million, or 13.4% to $327.7 million, compared to the same period in 2002. This
decrease primarily resulted from a lower year-over-year volume of sales to
Charter and Adelphia, in addition to a decline in fiber optic cable pricing and
international sales volume. Net sales of Broadband/Video Products increased by
$9.4 million, or 8.7%, from the second quarter to the third quarter of 2003
primarily due to stronger sequential sales to essentially all major broadband
service providers, including Comcast. Sales to Comcast represented approximately
17% of total quarterly net sales in the third quarter of 2003.
Pricing for coaxial cable remained relatively stable during the three and
nine months ended September 30, 2003, compared to the same periods last year.
However, we expect increasing pricing pressure for certain coaxial cable
products due to ongoing competitive pressures. Sales of fiber optic cable, which
represented more than 10% of total net sales during the three and nine month
periods ended September 30, 2003 and 2002, continued to experience significant
pricing pressure. Sales of fiber optic cable for broadband applications declined
by more than 20% year over year in both the three and nine month periods ended
September 30, 2003 compared to the same periods in 2002. We expect ongoing
pricing pressure and weak demand industry wide for fiber optic cable products at
least through 2003.
Net sales of local area network and other data applications products ("LAN
Products") for the third quarter of 2003 were approximately $24 million,
representing a slight decrease from both the quarter ended June 30, 2003 and the
quarter ended September 30, 2002. For the nine months ended September 30, 2003,
sales of LAN Products increased $4.5 million, or 6.7%, to $71.6 million compared
to the same period in 2002. Sales of LAN Products benefited from strengthening
project business and increasing fiber optic cable and apparatus sales volumes.
Net sales of Wireless and Other Telecom Products for the third quarter of
2003 more than doubled to $6.8 million, compared to the same period in 2002. For
the nine months ended September 30, 2003, sales of Wireless and Other Telecom
Products increased $3.3 million, or 19.5%, to $20.2 million compared to the same
period in 2002. These increases were primarily due to higher volume and product
mix. We expect ongoing aggressive competition for Wireless and Other Telecom
Products. Although wireless telecommunications capital spending remains weak, we
believe that we have made progress communicating the Cell Reach(R) value
proposition to customers and remain optimistic about long-term wireless
opportunities.
Gross profit (net sales less cost of sales)
Gross profit for the third quarter ended September 30, 2003 increased to
$30.6 million, compared to third quarter 2002 gross profit of $27.1 million.
Third quarter 2003 gross profit margin increased to 20.6% from 18.3% in the
third quarter of 2002. Gross profit and margin improved year over year in the
third quarter primarily due to lower costs from workforce reductions, reduced
depreciation expense from prior period asset impairments and higher sales of
Wireless Products. For the nine months ended September 30, 2003, gross profit
decreased to $83.6 million, compared to $94.2 million for the same period in
2002, with gross profit margins of 19.9% and 20.4%, respectively. The decrease
in gross profit and margin was primarily due to competitive pricing pressure
primarily for fiber optic cable products and lower Broadband/Video Product sales
volume, somewhat offset by lower costs.
We reduced our workforce by approximately 200, or 8%, during the third
quarter of 2002, primarily in response to the challenging global business
environment. We recorded pretax charges of approximately $1 million in cost of
sales for employee termination benefits in the third quarter of 2002. We intend
to continue evaluating all aspects of our business and to take appropriate
action to position us for long-term success and strong competitiveness.
17
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for the third quarter
ended September 30, 2003 was $20.9 million, or 14.0% of net sales, compared to
$20.5 million, or 13.9% of net sales, for the same period in 2002. For the nine
months ended September 30, 2003, SG&A expense was $62.7 million, or 15.0% of net
sales, compared to $82.8 million or 17.9% of net sales in the same period last
year. SG&A expense for the nine months ended September 30, 2002 included bad
debt expense of $21.4 million related to the write-off of Adelphia receivables.
Excluding the Adelphia write-off, SG&A expense was $61.4 million, or 13.3% of
net sales, for the nine months ended September 30, 2002. The year-over-year
increases in SG&A expense and SG&A expense as a percentage of net sales,
excluding the Adelphia write-off, were primarily due to an increase in bad debt
expense. We believe we have taken appropriate charges for doubtful accounts as a
result of the difficult market environment based on our analysis of customer
financial difficulties, age of receivable balances and other relevant factors.
Research and development
Research and development ("R&D") expense increased to $1.5 million, or 1.0%
of net sales, for the third quarter ended September 30, 2003 from $1.1 million,
or 0.7% of net sales, for the same period in 2002. For the nine months ended
September 30, 2003, R&D expense decreased to $4.5 million, or 1.1% of net sales,
compared with $4.8 million, or 1.0% of net sales, for the same period in 2002.
We expect R&D expense to remain at approximately 1% of net sales in the near
term.
Impairment charges for fixed assets
We recognized total pretax impairment charges for fixed assets in the amount
of $31.7 million, or $0.34 per share, net of tax, during the second quarter of
2003. The breakdown of these impairment charges was as follows (in millions):
Domestic broadband cable manufacturing assets $ 21.4
Brazilian manufacturing assets 8.7
Other domestic manufacturing assets 1.6
------
Total impairment charges $ 31.7
======
During the second quarter of 2003, we concluded that certain manufacturing
assets had no future use to us and initiated a formal impairment review of these
assets. Most of these assets were used in or acquired for use in the manufacture
of our Broadband/Video Products, which have been adversely affected by the
difficult global business environment in telecommunications and a decline in
demand both domestically and internationally. Based primarily on third party
appraisals, we recognized pretax impairment charges in the amount of $23
million, or $0.25 per share, net of tax, during the second quarter of 2003
related to these specifically-identified assets.
In addition, our Brazilian operation, which primarily manufactures
Broadband/Video Products, has experienced declining local demand in addition to
reduced export sales and profitability resulting from pricing and competitive
pressures primarily due to the impact of unfavorable local currency
fluctuations. As a result, we performed a test of recoverability for the
Brazilian manufacturing assets during the second quarter of 2003. Based on third
party appraisals, we recognized pretax impairment charges in the amount of $8.7
million, or $0.09 per share, net of tax, during the second quarter of 2003
related to Brazilian manufacturing assets.
Net interest expense
Net interest expense for the quarter ended September 30, 2003 was $1.6
million, compared to $1.7 million for the same period in 2002. For the nine
months ended September 30, 2003, net interest expense decreased to $4.6 million
compared with $5.2 million for the same period in 2002. The decrease in net
18
interest expense during the nine months ended September 30, 2003 compared with
the same time period in 2002 was primarily due to an increase in interest income
earned on a higher level of cash and cash equivalents.
Income taxes
Our effective income tax rate was 37% for the three and nine month periods
ended September 30, 2003 and 2002.
Equity in losses of OFS BrightWave, LLC
For the three months ended September 30, 2003 and 2002, our 18.4% equity
interest in the losses of OFS BrightWave was approximately $5.0 million and
$10.1 million, pretax, respectively. For the nine months ended September 30,
2003 and 2002 our 18.4% equity interest in the losses of OFS BrightWave was
approximately $65.0 million and $78.3 million, pretax, respectively. Since OFS
BrightWave has elected to be taxed as a partnership, we recorded a tax benefit
related to our 18.4% equity interest in the flow-through losses of approximately
$1.9 million and $3.7 million for the three months ended September 30, 2003 and
2002, respectively. For the nine months ended September 30, 2003 and 2002 we
recorded a tax benefit related to the flow-through losses of approximately $24.0
million and $29.1 million, respectively. OFS BrightWave operates in some of the
same markets we do and its financial results were also adversely affected by the
difficult market environment in telecommunications and the challenging global
business environment. Due to these conditions, OFS BrightWave incurred
significant charges during the nine months ended September 30, 2003 primarily
related to fixed asset impairments, restructuring and cost reduction efforts.
The total of these charges recognized by OFS BrightWave during the nine months
ended September 30, 2003 was $257.9 million. OFS BrightWave also incurred
charges of $215.0 million during the nine months ended September 30, 2002,
primarily for the write-off of goodwill and certain fixed assets, in addition to
restructuring and cost reduction efforts.
We expect ongoing pricing pressure and weak demand industry wide for fiber
optic cable products at least through 2003. Therefore, we believe OFS BrightWave
will incur losses at least through 2003, and as a result we will continue to
recognize noncash equity method losses from our investment in OFS BrightWave.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity both on a short-term and long-term basis
are cash and cash equivalents, cash flows provided by operations and
availability under our senior secured revolving credit facility ("secured credit
facility"). Reduced sales and profitability could reduce cash provided by
operations and limit availability under the secured credit facility. In
addition, increases in working capital, due to seasonal fluctuations in sales
and collections, among other things, could reduce our operating cash flows in
the short term.
Cash provided by operating activities was $55.0 million for the nine months
ended September 30, 2003, compared to $72.1 million for the same period in 2002.
The year-over-year decrease in operating cash flows was primarily the result of
a decrease in gross profit due to lower sales during the nine month period ended
September 30, 2003, compared to the same period in 2002, in addition to an
increase in accounts receivable during the nine month period ended September 30,
2003 due to an increase in sequential sales from the second to the third
quarter. We also received a $13.5 million tax refund in the third quarter of
2003, which primarily related to the carryback of 2002 deductible losses from
OFS BrightWave and the write-off of Adelphia receivables.
Working capital was $257.3 million at September 30, 2003, compared to $214.0
million at December 31, 2002. This increase in working capital during the nine
months ended September 30, 2003 primarily related to an increase in cash of
$51.2 million over the same period to $171.3 million as of September 30, 2003.
19
During the nine months ended September 30, 2003, we invested $4.1 million in
property, plant and equipment compared to $8.3 million during the same period in
2002. While we may place production capability in certain international markets,
we expect capital expenditures to remain at a level below depreciation and
amortization expense for the next several years. We currently expect capital
expenditures to be less than $10 million in 2003, primarily for cost reduction
efforts and information technology initiatives, depending upon business
conditions.
We owed total long-term debt of $183.3 million as of September 30, 2003 and
December 31, 2002. This debt represented 28% of our book capital structure,
defined as long-term debt and total stockholders' equity, as of September 30,
2003, compared to 26% as of December 31, 2002.
We entered into a $100 million senior secured revolving credit facility,
which closed January 10, 2003. The facility, which was established for future
liquidity, working capital needs and other general corporate purposes, was not
drawn at closing and has not been drawn in any amount from that date through
September 30, 2003. The facility is secured by substantially all of our domestic
assets and can have a maximum availability of up to $100 million over its three
and a half year expected term (see "Subsequent Event" below), subject to certain
covenants and conditions contained in the agreement. As of September 30, 2003,
we had availability of approximately $74 million and no outstanding borrowings
under this secured credit facility.
In April 2003, Standard & Poor's Rating Services ("S&P") announced that it
lowered its corporate credit rating on CommScope to "BB" from "BB+" and its
subordinated debt rating to "B+" from "BB-." Although S&P indicated that the
outlook for CommScope is stable, the downgrade was mainly based on reduced sales
and profitability forecasts. On October 27, 2003, S&P and Moody's Investors
Service announced that they placed our credit ratings under review for possible
downgrade, prompted by the announcement of our intent to acquire certain assets
and assume certain liabilities of Avaya Inc.'s Connectivity Solutions business
(see further discussion under "Subsequent Event" below). The lower ratings do
not affect interest rates or covenant compliance under our existing debt
agreements, and we do not expect them to affect interest rates or covenant
compliance under the contemplated credit agreements discussed under "Subsequent
Event" below. As a result, we believe the lower ratings do not have a material
impact on our financial position, cash flows or results of operations.
SUBSEQUENT EVENT
On October 27, 2003, we announced that we had signed a definitive agreement
with Avaya Inc. ("Avaya") to acquire its Connectivity Solutions ("ACS") business
for cash and securities valued at approximately $263 million. Under the terms of
the agreement, Avaya will receive $210 million in cash, an $18 million
convertible subordinated note from us and $34.9 million in our common stock,
subject to adjustment. The cash component of the transaction is expected to be
funded primarily from our existing cash balances and through a new $150 million
senior secured credit facility underwritten by Wachovia Securities, subject to
adjustment. We had $171 million in cash and cash equivalents on our balance
sheet as of September 30, 2003. We will purchase the net assets of ACS,
including certain defined current liabilities and assets, which totaled
approximately $300 million as of June 30, 2003, based upon Avaya's historical
financial statements. We will also assume up to approximately $75 million of
other specified liabilities of ACS, primarily related to employee benefits. The
transaction, which is subject to customary closing conditions and approval by
necessary regulatory authorities, is expected to close within 90 days of signing
except with regard to certain international operations. We are evaluating
various operating structures for the ACS business to be acquired.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q that are other than historical facts are
intended to be "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and
20
other related laws and include but are not limited to those statements relating
to sales and earnings expectations, expected demand, cost and availability of
key raw materials, internal production capacity and expansion, competitive
pricing, relative market position, anticipated timing of closing related to our
planned acquisition of ACS and outlook. While we believe such statements are
reasonable, the actual results and effects could differ materially from those
currently anticipated. These forward-looking statements are identified,
including, without limitation, by their use of such terms and phrases as
"intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes," "think," "thinks" and "scheduled" and similar
expressions.
These statements are subject to various risks and uncertainties, many of
which are outside our control, including, without limitation, our ability to
complete the planned acquisition of ACS; the challenges of integration and
restructuring associated with the planned acquisition of ACS; the challenges of
achieving anticipated synergies associated with the planned acquisition of ACS;
the ability to retain qualified employees and existing business alliances
subsequent to the planned acquisition of ACS; maintaining satisfactory
relationships with represented employees subsequent to the planned acquisition
of ACS; customer demand for ACS products, applications and service; expected
demand from Comcast Corporation and other major domestic MSOs; ability of our
customers to secure adequate financing to fund their infrastructure projects or
to pay us; product demand and industry excess capacity; changes or fluctuations
in global business conditions; financial performance of OFS BrightWave;
competitive pricing and acceptance of our products; changes in cost and
availability of key raw materials (including without limitation polyethylene and
other plastics, bimetallic center conductors, optical fibers, fine aluminum wire
and fluorinated-ethylene-propylene which are available only from limited
sources); our ability to recover higher material and transportation costs from
our customers through price increases; possible future impairment charges for
goodwill and other long-lived assets; industry competition and our ability to
retain customers and negotiate contract renewals on acceptable terms; possible
disruption due to customer or supplier bankruptcy, reorganization, restructuring
or consolidation; our ability to obtain financing and capital on commercially
reasonable terms; covenant restrictions and our ability to comply with covenants
in our debt agreements; successful operation of bimetal manufacturing and other
vertical integration activities; successful expansion and related operation of
our facilities; achievement of sales, growth, and earnings goals; our ability to
achieve reductions in costs; margin improvement; our ability to retain and
attract key personnel; developments in technology; intellectual property
protection; product or raw material performance issues; adequacy and
availability of insurance; litigation or regulatory developments, including
future or pending tax legislation; stock price fluctuations; foreign currency
fluctuations; technological obsolescence; acquisition and divestiture activities
and our ability to integrate acquisitions; environmental issues; our
participation in joint ventures; international economic and political
uncertainties; possible disruption due to terrorist activity or armed conflict;
political instability; major health concerns and other factors discussed. Actual
results may also differ due to changes in telecommunications industry capital
spending, which is affected by a variety of factors, including, without
limitation, general business conditions; acquisitions of telecommunications
companies by others; consolidation within the telecommunications industry; the
financial condition of telecommunications companies and their access to
financing; competition among telecommunications companies; technological
developments and new legislation and regulation of telecommunications companies.
These and other factors are discussed in greater detail in Exhibit 99.1 to this
Form 10-Q. The information contained in this Form 10-Q represents our best
judgment at the date of this report based on information currently available.
However, we do not intend, and are not undertaking any duty or obligation, to
update this information to reflect developments or information obtained after
the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2002, our major market risk exposure relates to adverse fluctuations in
commodity prices, interest rates and foreign currency exchange rates. We have
established a risk management strategy that includes the reasonable use of
21
derivative and nonderivative financial instruments primarily to manage our
exposure to these market risks. We believe our exposure associated with these
market risks has not materially changed since December 31, 2002. We have not
acquired any new derivative financial instruments since December 31, 2002 or
terminated any derivative financial instruments that existed at that date.
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Our Chief Executive Officer and our Chief Financial Officer
have reviewed the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report and have concluded that the
disclosure controls and procedures are effective.
22
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
pursuant to Item 601(b)(32)(ii) of Regulation S-K).
99.1 Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended September 30,
2003:
On August 11, 2003, we furnished a current report on Form 8-K announcing
our financial results for the second quarter of 2003.
On August 29, 2003, we furnished a current report on Form 8-K announcing
that we would be participating in the Smith Barney Citigroup 2003
Technology Conference.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
November 12, 2003 /s/ Jearld L. Leonhardt
- ----------------- -----------------------
Date Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
signing both in his capacity as Executive Vice
President on behalf of the Registrant and as Chief
Financial Officer of the Registrant
24