SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

o	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 incorporation or organization)		(I.R.S. Employer 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  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý  No  o

 

As of November 1, 2004 there were 54,381,736 shares of Common Stock outstanding.

 

 

CommScope, Inc.

Form 10-Q

September 30, 2004

Table of Contents

 

Part I - Financial Information (Unaudited):
Item 1.  Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Stockholders’  Equity and Comprehensive Income (Loss)
Notes to Condensed Consolidated Financial Statements
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Item 4.  Controls and Procedures
Part II - Other Information:
Item 6. Exhibits
Signatures

 

2

 

CommScope, Inc.

Condensed Consolidated Statements of Operations

(Unaudited — In thousands, except per share amounts)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net sales		$	309,090		$	148,723		$	857,100		$	419,513
Operating costs and expenses:
Cost of sales		231,101			118,082			669,550			335,956
Selling, general and administrative		51,510			20,851			139,237			62,732
Research and development		7,397			1,486			20,408			4,530
Impairment charges for fixed assets		—			—			—			31,728
In-process research and development charges		90			—			3,984			—
Acquisition-related transition and startup costs		215			—			8,196			—
Total operating costs and expenses		290,313			140,419			841,375			434,946
Operating income (loss)		18,777			8,304			15,725			(15,433		)
Other income (expense), net		603			4			(282		)	209
Loss on early extinguishment of debt		—			—			(5,029		)	—
Interest expense		(2,133		)	(2,207		)	(7,332		)	(6,548		)
Interest income		810			649			1,734			1,981
Income (loss) before income taxes, equity in losses of OFS BrightWave, LLC and net gain on OFS BrightWave, LLC transaction		18,057			6,750			4,816			(19,791		)
Income tax benefit (expense)		(2,974		)	(2,498		)	2,967			7,322
Income (loss) before equity in losses of OFS BrightWave, LLC and net gain on OFS BrightWave, LLC transaction		15,083			4,252			7,783			(12,469		)
Equity in losses of OFS BrightWave, LLC, net of tax		—			(3,130		)	(1,393		)	(40,857		)
Net gain on OFS BrightWave, LLC transaction, net of tax		—			—			76,437			—
Net income (loss)		$	15,083		$	1,122		$	82,827		$	(53,326	)
Net income (loss) per share:
Basic		$	0.28		$	0.02		$	1.42		$	(0.90	)
Assuming dilution		$	0.27		$	0.02		$	1.38		$	(0.90	)
Weighted average shares outstanding:
Basic		54,018			59,220			58,335			59,220
Assuming dilution		55,737			59,610			59,821			59,220

 

See notes to condensed consolidated financial statements.

 

3

 

CommScope, Inc.

Condensed Consolidated Balance Sheets

(Unaudited — In thousands, except share amounts)

 

		September 30, 2004			December 31, 2003
Assets
Cash and cash equivalents		$	178,856		$	206,038
Accounts receivable, less allowance for doubtful accounts of $15,181 and $12,145, respectively		142,828			69,461
Inventories		109,064			32,723
Prepaid expenses and other current assets		12,630			8,389
Deferred income taxes		16,786			14,061
Total current assets		460,164			330,672
Property, plant and equipment, net		327,691			176,290
Goodwill		151,363			151,368
Other intangibles, net of accumulated amortization of $50,862 and $42,435, respectively		79,915			6,330
Deferred income taxes		17,767			44,756
Advances to OFS BrightWave, LLC		—			13,361
Other assets		18,018			17,004
Total Assets		$	1,054,918		$	739,781
Liabilities and Stockholders’ Equity
Accounts payable		$	66,074		$	14,659
Other accrued liabilities		94,479			35,377
Current portion of long-term debt		21,500			—
Total current liabilities		182,053			50,036
Long-term debt		300,550			183,300
Pension and postretirement benefit liabilities		93,730			30,397
Other noncurrent liabilities		27,830			20,342
Total Liabilities		604,163			284,075
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at September 30, 2004 and December 31, 2003		—			—
Common stock, $.01 par value; Authorized shares: 300,000,000; Issued shares, including treasury stock: 64,528,468 at September 30, 2004 and 61,861,376 at December 31, 2003; Issued and outstanding shares: 54,328,468 at September 30, 2004 and 59,318,276 at December 31, 2003		645			619
Additional paid-in capital		430,114			384,889
Retained earnings		173,782			90,955
Accumulated other comprehensive loss		(8,251		)	(7,533		)
Treasury stock, at cost: 10,200,000 shares at September 30, 2004 and 2,543,100 at December 31, 2003		(145,535		)	(13,224		)
Total Stockholders’ Equity		450,755			455,706
Total Liabilities and Stockholders’ Equity		$	1,054,918		$	739,781

 

See notes to condensed consolidated financial statements.

 

4

 

CommScope, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited — In thousands)

 

		Nine Months Ended September 30,
		2004			2003
Operating Activities:
Net income (loss)		$	82,827		$	(53,326	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		45,161			25,523
In-process research and development charges		3,984			—
Gain on OFS BrightWave, LLC transaction, pretax		(132,425		)	—
Impairment of note receivable from OFS BrightWave, LLC, pretax		11,098			—
Equity in losses of OFS BrightWave, LLC, pretax		2,258			64,978
Impairment charges for fixed assets		—			31,728
Deferred income taxes		24,082			(27,820		)
Tax benefit from stock option exercises		1,991			—
Changes in assets and liabilities:
Accounts receivable		(24,646		)	(10,415		)
Inventories		40,007			2,187
Prepaid expenses and other current assets		446			8,787
Accounts payable and other accrued liabilities		34,461			9,203
Other noncurrent liabilities		10,062			4,033
Other		(1,188		)	115
Net cash provided by operating activities		98,118			54,993
Investing Activities:
Additions to property, plant and equipment		(7,753		)	(4,088		)
Acquisition of Connectivity Solutions		(293,271		)	—
Proceeds from disposal of fixed assets		3,926			211
Net cash used in investing activities		(297,098		)	(3,877		)
Financing Activities:
Proceeds from issuance of long-term debt		75,000			—
Principal payments on long-term debt		(13,750		)	—
Proceeds from issuance of convertible notes		250,000			—
Repayment of convertible notes		(172,500		)	—
Proceeds from issuance of stock		32,853			—
Long-term financing costs		(10,730		)	(1,215		)
Proceeds from exercise of stock options		10,907			—
Net cash provided by (used in) financing activities		171,780			(1,215		)
Effect of exchange rate changes on cash		18			1,290
Change in cash and cash equivalents		(27,182		)	51,191
Cash and cash equivalents, beginning of period		206,038			120,102
Cash and cash equivalents, end of period		$	178,856		$	171,293

 

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,
		2004			2003
Number of common shares outstanding:
Balance at beginning of period		59,318,276			59,219,567
Issuance of shares to Avaya Inc.		1,761,538			—
Repurchase of shares from Furukawa		(7,656,900		)	—
Issuance of shares for stock option exercises		905,554			—
Balance at end of period		54,328,468			59,219,567
Common stock:
Balance at beginning of period		$	619		$	618
Issuance of shares to Avaya Inc.		18			—
Issuance of shares for stock option exercises		8			—
Balance at end of period		$	645		$	618
Additional paid-in capital:
Balance at beginning of period		$	384,889		$	383,541
Issuance of shares to Avaya Inc.		32,335			—
Issuance of shares for stock option exercises		10,899			—
Tax benefit from stock option exercises		1,991			—
Balance at end of period		$	430,114		$	383,541
Retained earnings:
Balance at beginning of period		$	90,955		$	161,515
Net income (loss)		82,827			(53,326		)
Balance at end of period		$	173,782		$	108,189
Accumulated other comprehensive loss:
Balance at beginning of period		$	(7,533	)	$	(14,915	)
Other comprehensive income (loss), net of tax		(718		)	5,992
Balance at end of period		$	(8,251	)	$	(8,923	)
Treasury stock, at cost:
Balance at beginning of period		$	(13,224	)	$	(13,224	)
Treasury shares repurchased		(132,311		)	—
Balance at end of period		$	(145,535	)	$	(13,224	)
Total stockholders’ equity		$	450,755		$	470,201

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Comprehensive income (loss):
Net income (loss)		$	15,083		$	1,122		$	82,827		$	(53,326	)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) - foreign subsidiaries		(1,064		)	275			(284		)	(346		)
Foreign currency transaction gain (loss) on long-term intercompany loans - foreign subsidiaries		3,278			(662		)	(131		)	8,487
Loss on derivative financial instrument designated as a net investment hedge		(306		)	(488		)	(303		)	(2,149		)
Total other comprehensive income (loss), net of tax		1,908			(875		)	(718		)	5,992
Total comprehensive income (loss)		$	16,991		$	247		$	82,109		$	(47,334	)

 

See notes to condensed consolidated financial statements.

 

6

 

CommScope, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited - In Thousands, Except Per Share Amounts or Unless Otherwise Noted)

 

1.  BACKGROUND AND BASIS OF PRESENTATION

 

Background

 

CommScope, Inc. (“CommScope” or the “Company”), through its wholly owned subsidiaries, operates in the cable and structured cabling systems manufacturing business, with manufacturing facilities located in the United States, Europe, Australia, Asia and South America.  CommScope, Inc. was incorporated in Delaware in January 1997.  CommScope is a leading worldwide designer, manufacturer and marketer 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.  In June 2004, CommScope sold its equity interest in this optical fiber and fiber optic cable manufacturing business (see Note 6).  In January 2004, CommScope acquired substantially all the assets and assumed certain liabilities of the Connectivity Solutions business (“Connectivity Solutions,” or as operated by the Company, the “Connectivity Solutions segment”) from Avaya Inc. (“Avaya”) (see Note 2).

 

Basis of Presentation

 

The condensed consolidated balance sheet as of September 30, 2004, the condensed consolidated statements of operations, and comprehensive income (loss) for the three and nine month periods ended September 30, 2004 and 2003 and the condensed consolidated statements of cash flows and stockholders’ equity for the nine months ended September 30, 2004 and 2003 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, 2003 audited consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K/A.

 

Concentrations of Risk

 

Net sales to Anixter International Inc. and its affiliates (“Anixter”) accounted for 39.9% and 34.5% of the Company’s total net sales during the three and nine month periods ended September 30, 2004, respectively.  Sales to Anixter were primarily made from the Company’s Connectivity Solutions segment.  No other customer accounted for 10% or more of the Company’s total net sales for the three and nine month periods ended September 30, 2004.

 

Accounts receivable from Anixter represented approximately 37.9% of net accounts receivable as of September 30, 2004.  No other customer accounted for 10% or more of the Company’s net accounts receivable as of September 30, 2004.

 

7

 

Goodwill and Other Intangible Assets

 

The Company tests goodwill and other intangible assets with indefinite lives for impairment annually at the same time each year and on an interim basis when events or circumstances change.  Management has completed this annual impairment test as of August 31, 2004 and believes that neither goodwill nor other intangible assets with indefinite lives were impaired as of this date.  There have been no events or changes in circumstances requiring additional impairment testing.

 

Product Warranties

 

The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products.  These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty.  The Company records a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales and specifically-identified warranty issues.  The Company bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary.

 

Prior to the acquisition of Connectivity Solutions as of January 31, 2004, the Company’s product warranty liability and the related activity was insignificant to the financial position and results of operations of the Company.  However, the acquisition of Connectivity Solutions has increased the Company’s product warranty exposure and related liability.  During the three months ended September 30, 2004, the Company revised the estimated fair value of the product liability accrual assumed in the acquisition of Connectivity Solutions resulting in an adjustment to the purchase price allocation (see Note 2).

 

Activity in the product warranty accrual, included in other accrued liabilities, for the three and nine month periods ended September 30, 2004 consisted of the following:

 

		Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004
Product warranty accrual, beginning of period		$	8,106		$	576
Product warranty accrual assumed in the acquisition of Connectivity Solutions		(6,000		)	2,314
Provision for warranty claims		114			212
Less: warranty claims paid		(170		)	(1,052		)
Product warranty accrual, end of period		$	2,050		$	2,050

 

8

 

Stock Options

 

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 Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income (loss), as reported		$	15,083		$	1,122		$	82,827		$	(53,326	)
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		1,863			1,694			5,311			5,133
Pro forma net income (loss)		$	13,220		$	(572	)	$	77,516		$	(58,459	)
Net income (loss) per share:
Basic—as reported		$	0.28		$	0.02		$	1.42		$	(0.90	)
Basic—pro forma		$	0.24		$	(0.01	)	$	1.33		$	(0.99	)
Diluted—as reported		$	0.27		$	0.02		$	1.38		$	(0.90	)
Diluted—pro forma		$	0.24		$	(0.01	)	$	1.31		$	(0.99	)

 

Foreign Currency Translation

 

Although the Company primarily bills customers in foreign countries in US dollars, a portion of these sales was denominated in currencies other than the US dollar.  In addition, the financial position and results of operations of most of the Company’s foreign subsidiaries are measured using the US dollar as the functional currency; however, certain foreign subsidiaries use their local currencies as the functional currency.  Revenues and expenses of these local-currency-functional subsidiaries have been translated into US dollars at average exchange rates prevailing during the period.  Assets and liabilities of these local-currency-functional subsidiaries have been translated at the rates of exchange as of the balance sheet date.  Net translation gains and losses of these local-currency-functional subsidiaries are recorded to accumulated other comprehensive loss.

 

Use of Estimates in the Preparation of the Financial Statements

 

The preparation of the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources.  The Company bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary.  Significant accounting estimates reflected in the Company’s financial statements include the allowance for doubtful accounts; inventory excess and obsolescence reserves; distributor price protection reserves; reserves for sales returns, discounts, allowances and rebates; reserves for product warranty claims; income tax valuation allowances; impairment reviews for investments, fixed assets, goodwill and other intangibles; pension and postretirement benefit obligations; and the fair values of the assets acquired and liabilities assumed in the acquisition of Connectivity Solutions.  Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results.

 

9

 

Commitments and Contingencies

 

CommScope leases certain equipment and facilities under operating leases expiring at various dates, most of which expire prior to the end of 2012.  Future minimum rental payments required under operating leases with initial terms of one year or more are: $9.3 million in 2004; $8.8 million in 2005; $7.5 million in 2006; $6.7 million in 2007; $6.0 million in 2008; and $16.1 million thereafter.

 

CommScope is either a plaintiff or a defendant in pending legal matters in the normal course of business; however, management believes that none of these legal matters will have a material adverse effect on the Company’s financial statements upon final disposition.  In addition, CommScope is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials.  Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations.

 

Impact of Newly Issued Accounting Standards

 

In April 2003, the Financial Accounting Standards Board (“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 March 31, 2004 and for hedging relationships designated by the Company after March 31, 2004. All provisions of this Statement were to be applied prospectively.  The application of this Statement did not have a material effect on the Company’s results of operations or financial position.

 

In December 2003, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106.”  This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions;” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits;” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement retains the disclosure requirements contained in SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces.  Additional disclosures have been added including information describing the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.  Except as noted below, this Statement was effective for the Company as of December 31, 2003.  The interim-period disclosures were effective for the Company beginning with the interim period ending March 31, 2004.  Disclosure of certain information regarding the Company’s foreign defined benefit plan is effective for the fiscal year ending December 31, 2004.  Disclosure of the estimated future benefits is also deferred until the fiscal year ending December 31, 2004.  The Company has adjusted its quarterly disclosure and will adjust its future annual disclosure in accordance with this Statement.

 

In January 2003, the 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.  In December 2003, the FASB issued a revision of FIN 46 (“FIN 46R”) to clarify some of the provisions of the Interpretation and to exempt certain entities from its requirements. The Company does not currently hold an

 

10

 

interest in a variable interest entity; thus, the initial application of FIN 46 and FIN 46R did not affect the Company’s results of operations, financial position or disclosures.

 

In April 2004, the FASB issued FASB Staff Position (FSP) No. FAS 129-1, “Disclosure Requirements under FASB Statement No. 129, ‘Disclosure of Information about Capital Structure,’ Relating to Contingently Convertible Securities.”  This FSP interprets how the disclosure provisions of SFAS No. 129 apply to contingently convertible securities and to their potentially dilutive effects on net income (loss) per share.  The guidance in this FSP was effective immediately and applies to all existing and newly created securities.  Management believes the Company’s disclosures comply with the requirements of this FSP.

 

In June 2004, the FASB issued FSP No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.”  This FSP provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits.  It says that if the benefits provided by a plan are actuarially equivalent to Medicare Part D, measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost on or after the date of enactment should reflect the effects of the Act.  It also requires employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act.  The Company implemented this FSP on a prospective basis during the three months ended September 30, 2004.  Implementing this FSP lowered the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit cost for the three and nine months ended September 30, 2004 (see Note 12).

 

In October 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.”  Issue No. 04-8 requires that all instruments that have embedded conversion features that are contingent on market conditions indexed to an issuer’s share price be included in diluted net income per share (if dilutive) regardless of whether the market conditions have been met. The consensus reached by the EITF in this Issue is expected to be effective for reporting periods ending after December 15, 2004.  Issue No. 04-8 applies retroactively to instruments outstanding at the date of adoption of this consensus, which is the end of the first reporting period after its effective date, and requires prior period diluted net income per share amounts presented for comparative purposes to be restated to conform to this consensus.  The Company believes its 1% convertible senior subordinated debentures (see Note 4) will be subject to the requirements of Issue No. 04-8.  The impact of the application of this Issue on the Company’s diluted net income per share is presented in Note 5.

 

2.                                      ACQUISITION OF CONNECTIVITY SOLUTIONS

 

Effective January 31, 2004, CommScope completed the acquisition of substantially all of the assets and assumed certain liabilities of Connectivity Solutions.  The total purchase price consisted of $250 million in cash, subject to post-closing adjustments and the closing of the acquisition of certain international operations, and approximately 1.8 million shares of CommScope common stock.  These shares were valued at $32.4 million on the closing date, based on the five-day average market price of CommScope’s common stock beginning on the second trading day prior to the closing date and ending on the third trading day after the closing date, which was reduced by a $0.5 million accrual for estimated registration costs.  CommScope assumed certain current liabilities and up to $65 million of other specified liabilities, primarily related to employee benefits.  The cash portion of the purchase price consisted of $150 million from CommScope’s existing cash balances and $100 million from borrowing under a new 5-year, $185 million senior secured credit facility.  The Company is seeking third party resolution concerning the amount of post-closing adjustments to the purchase price, in accordance with the terms of the Asset Purchase Agreement.  Final resolution of this matter may result in an adjustment to the amounts recorded in connection with the Connectivity Solutions acquisition.  However, management does not currently believe that

 

11

 

such adjustments, if any, will have a material effect on the Company’s financial position or results of operations.

 

The Company acquired Connectivity Solutions primarily to expand the Company’s position in the ‘last mile’ of telecommunications, establish a leadership position in the global enterprise market and enhance the Company’s global growth opportunities.  The Connectivity Solutions segment is a designer, manufacturer and marketer of physical layer end-to-end structured cabling solutions supporting local area network applications for enterprises and telecommunications service providers.

 

The Company has prepared a preliminary estimate of the fair values assigned to each major asset and liability caption of Connectivity Solutions as of the January 31, 2004 closing date.  This preliminary estimate has been updated to reflect a revised purchase price allocation based on new information related to estimates of the fair values of certain assets acquired and liabilities assumed.  These values are subject to change until certain management estimates, including the amount of post-closing adjustments, have been finalized.   Changes in these estimates could have a material impact on the purchase price allocation and the resultant amounts of the assets and liabilities disclosed below.

 

		As of January 31, 2004
		(In millions)
Accounts receivable		$	46.3
Inventories		114.3
Other current assets		1.4
Property, plant and equipment		175.7
Intangible assets		86.0
Other noncurrent assets		0.1
Total assets		$	423.8
Accounts payable		$	32.1
Employee benefit liabilities		12.5
Other current liabilities		30.9
Pension and postretirement benefit liabilities		53.8
Other noncurrent liabilities		3.5
Total liabilities		$	132.8

 

Differences between the amounts reflected above and the amounts disclosed in the Company’s 2003 annual report on Form 10-K/A are due to updated information about certain estimates obtained by management subsequent to the filing of such Form 10-K/A.  Differences in the amount of assets and liabilities included in this quarterly report on Form 10-Q and the amounts disclosed in the Company’s quarterly reports on Form 10-Q for the periods ended March 31, 2004 and June 30, 2004 are due to changes in accounting estimates primarily arising from updated information about certain estimates and the availability of new information.  The effect of this change in accounting estimate on the condensed consolidated financial statements for the three and nine month periods ended September 30, 2004 was not material.

 

The values of property, plant and equipment and intangible assets reflected above have been adjusted for the pro rata allocation of the excess of the fair value of acquired net assets over the cost of the acquisition of Connectivity Solutions.  This excess was allocated to the noncurrent assets acquired based on their relative fair values.  Further adjustments to the purchase price allocation may affect the calculation of the excess of the fair value of acquired net assets over cost and therefore affect the allocation of this excess to the noncurrent assets acquired.  Adjustments to

 

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this allocation will affect amounts recognized for depreciation and amortization expense and will be disclosed in the period recognized as a change in estimate.

 

Intangible assets reflected above were determined by management to meet the criterion for recognition apart from goodwill and include the following:

 

		Estimated Fair Value			Amortization Period
		(In millions)			(in years)
Developed technologies (for internal use)		$	28.5		9.0
Developed technologies (for external use)		16.6			14.0
Customer base		11.8			9.0
Favorable contracts		9.0			3.0
Other		3.8			3.0
Total amortizable intangible assets		$	69.7
Trademarks		12.3
In-process research and development		4.0
Total intangible assets		$	86.0
Weighted average amortization period					7.0

 

Trademarks have been determined by management to have indefinite lives and will not be amortized, based on management’s expectation that the trademarked products will generate cash flows for the Company for an indefinite period.  Management expects to maintain usage of trademarks on existing products and introduce new products in the future that will also display the trademarks, thus extending their lives indefinitely.

 

In-process research and development assets were written off and reflected in the Company’s statement of operations as in-process research and development charges during the nine months ended September 30, 2004.  Management believed that the assets under development had no alternative future use as of the date of the third party valuation of this intangible asset, resulting in its immediate write-off, with subsequent adjustments and write-offs resulting from changes in the purchase price allocation in the period in which such changes are recognized.

 

The amortizable intangible assets reflected in the table above were determined by management to have finite lives.  The useful life for the developed technologies (for internal use) intangible asset was based on review of historical lives of similar products, in conjunction with technology-specific factors and anticipated future trends in the industry.  The useful life for the developed technologies (for external use) intangible asset was based on the remaining lives of the related patents.  The useful life for the customer base intangible asset was based on management’s forecasts of customer turnover.  The useful life for the favorable contracts intangible asset was based on the remaining terms of the contracts.  The useful life of the other intangible assets was based on management’s estimate of the remaining useful life.  Management’s estimate was based on the age of the underlying assets and review of historical lives of similar products.

 

These amortizable intangible assets will be amortized over their remaining useful lives on a straight-line basis.  Annual amortization expense for these intangible assets is expected to be $9.1 million in 2004, $9.9 million in 2005 and 2006, $6.0 million in 2007, $5.7 million in 2008 and $29.1 million thereafter.

 

CommScope’s consolidated results of operations for the three and nine month periods ended September 30, 2004 include the results of operations of the Connectivity Solutions segment for the three month period ended September 30, 2004 and the eight-month period from February 1, 2004 through September 30, 2004, respectively.  The following table includes the actual consolidated results of operations for CommScope for the three months ended September 30, 2004.  In addition,

 

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the table presents pro forma consolidated results of operations for CommScope for the three months ended September 30, 2003, and the nine month periods ended September 30, 2004 and 2003, as though the acquisition of Connectivity Solutions had been completed as of the beginning of each period.  This pro forma information is intended to provide information regarding how CommScope might have looked if the acquisition had occurred as of the dates indicated.  The amounts for the Connectivity Solutions business of Avaya included in this pro forma information for the three and nine months ended September 30, 2003 and the month of January 2004 are based on the historical results of the Connectivity Solutions business as a division of Avaya, however, and therefore may not be indicative of the actual results of the Connectivity Solutions segment when operated as part of CommScope.  Moreover, the pro forma information does not reflect all of the changes that may result from the acquisition, including, but not limited to, challenges of transition, integration and restructuring associated with the transaction; challenges of achieving anticipated synergies; ability to retain qualified employees and existing business alliances; maintaining satisfactory relationships with represented employees; and customer demand for Connectivity Solutions segment products.  The pro forma adjustments represent management’s best estimates based on information available at the time the pro forma information was prepared and may differ from the adjustments that may actually be required.  Accordingly, the pro forma financial information should not be relied upon as being indicative of the historical results that would have been realized had the acquisition occurred as of the dates indicated or that may be achieved in the future.

 

		Actual			Pro Forma			Pro Forma
		Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,
		2004			2003			2004			2003
Revenue		$	309,090		$	289,411		$	882,810		$	824,844
Net income (loss)		15,083			4,306			75,762			(51,245		)
Net income (loss) per share, assuming dilution		0.27			0.07			1.26			(0.84		)

 

These pro forma results reflect the elimination of intercompany sales during each period and immaterial pro forma adjustments for interest expense, depreciation, amortization and related income taxes.  These pro forma results also include $10.8 million and $35.3 million of corporate overhead costs allocated by Avaya to the Connectivity Solutions business during the three and nine month periods ended September 30, 2003, respectively.  The pro forma results for the nine month period ended September 30, 2004 include an estimate of $4.0 million for corporate overhead costs that would have been allocated by Avaya to the Connectivity Solutions business during January 2004.  During the three month period ended September 30, 2004 and the eight month period from February 1, 2004 through September 30, 2004, CommScope incurred corporate overhead costs of approximately $2.0 million and $5.4 million, respectively, on behalf of the Connectivity Solutions segment.  Certain overhead costs previously incurred on behalf of and allocated to the Connectivity Solutions business by Avaya are now being incurred directly by the Connectivity Solutions segment.

 

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Net income and net income per share for the three and nine month periods ended September 30, 2004 include certain material charges incurred during the periods, as listed below on a pretax basis:

 

		Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004
Impact of inventory purchase accounting adjustments		$	—		$	14,628
Acquisition-related in-process research and development charges		90			3,984
Acquisition-related transition and startup costs		215			8,196
Loss on early extinguishment of debt		—			5,029

 

3.  INVENTORIES

 

		September 30, 2004			December 31, 2003
Raw materials		$	37,988		$	10,285
Work in process		17,762			9,708
Finished goods		53,314			12,730
		$	109,064		$	32,723

 

4.  LONG-TERM DEBT

 

		September 30, 2004			December 31, 2003
Senior Secured Term Loan		$	61,250		$	—
1% Convertible Debentures		250,000			—
4% Convertible Notes		—			172,500
IDA Notes		10,800			10,800
		322,050			183,300
Less: current portion		(21,500		)	—
		$	300,550		$	183,300

 

The Company entered into a new 5-year, $185 million senior secured credit facility on January 31, 2004, in connection with its acquisition of Connectivity Solutions.  The new credit facility, which amended and restated CommScope’s previous credit facility, is comprised of a $75 million term loan and a $110 million revolving credit facility.  The credit facility is secured by substantially all of the Company’s assets, is guaranteed by all of the Company’s material domestic subsidiaries and contains certain financial and restrictive covenants.  The term loan facility is required to be repaid by CommScope in consecutive quarterly installments of $3.75 million from March 31, 2004 to September 30, 2004, $11.75 million on December 31, 2004 and $3.25 million on each quarterly payment date thereafter with a final payment of all outstanding principal and interest at maturity on December 31, 2008.  The Company is required to make additional repayments under the term loan facility in the event that a significant asset or group of assets included in the collateral base is sold.  The Company repaid an additional $2.5 million under the term loan facility during the three months ended September 30, 2004 due to the sale of its idle Kings Mountain facility.  In connection with this credit facility, the Company incurred costs of approximately $4.6 million, which were capitalized as other assets and are being amortized over the term of the facility.  The interest rate on the $75 million term loan facility is, at CommScope’s option, either the London Interbank Offered Rate plus 2.250% to 3.250%, or the Base Rate, defined as the higher of Prime Rate or Federal Funds Rate plus 0.500%, plus 0.750% to 1.750%, in each case based on the Company’s fixed charge coverage ratio.  The interest rate on the $110 million senior secured revolving credit

 

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facility is, at CommScope’s option, the London Interbank Offered Rate plus 2.00% to 3.00% or the Base Rate plus 0.500% to 1.500%, in each case based on the Company’s fixed charge coverage ratio.  As of September 30, 2004, the Company had availability of approximately $52 million and no outstanding borrowings under this senior secured revolving credit facility.  The Company’s ability to borrow under this facility depends on the amount of the borrowing base, which is determined as specified percentages of eligible receivables and inventory, reduced for certain reserves.  The facility contains certain restrictive covenants, including restrictions on incurring other indebtedness, entering into transactions to acquire or merge with any entity, making other fundamental changes, selling assets and paying dividends, among other things.  The Company is also required to comply with certain financial covenants, as defined, including a fixed charge coverage ratio, a funded senior debt to EBITDA ratio, a maximum annual capital expenditures covenant and a covenant requiring minimum ongoing excess borrowing availability of $10 million.  Management believes the Company was in compliance with all of its covenants under this facility as of September 30, 2004.

 

In March 2004, the Company issued $250 million aggregate principal amount of 1% convertible senior subordinated debentures due March 15, 2024.  The proceeds from these debentures were used primarily to extinguish the Company’s outstanding 4% convertible subordinated notes due December 15, 2006, to repay outstanding borrowings under the Company’s revolving credit facility, and for general corporate purposes.  The Company repurchased $102.9 million of its 4% convertible subordinated notes during March 2004, and redeemed the remaining $69.6 million of these notes in April 2004.  The repurchase and redemption of these 4% convertible notes resulted in a $5.0 million pretax loss on the early extinguishment of debt during the first quarter of 2004.  The Company also repaid $25 million of borrowings under its senior secured revolving credit facility in March 2004.  In connection with the issuance of the debentures, the Company incurred costs of approximately $6.9 million, which were capitalized as other assets and are being amortized over a period of five years, representing the period through the date on which the debenture holders may first require the Company to repurchase the debentures.

 

The Company may redeem some or all of these debentures at any time on or after March 20, 2009 at a redemption price equal to 100% of the principal amount of the debentures, plus accrued interest.  Additionally, holders of these debentures may require the Company to repurchase all or any portion of their debentures for cash on March 20, 2009, March 15, 2014 and March 15, 2019 at a price equal to 100% of the principal amount of debentures to be repurchased, plus accrued interest.

 

These debentures are convertible into shares of CommScope common stock in the following circumstances: during any fiscal quarter commencing after June 30, 2004, (1) if the closing price of CommScope common stock exceeds 120% of the conversion price then in effect for at least twenty trading days in the thirty consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter; (2) subject to certain exceptions, during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of the debentures for each day of such period was less than 98% of the product of the closing sale price of CommScope common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures; (3) if the debentures have been called for redemption; or (4) upon the occurrence of certain corporate transactions.

 

The current conversion rate of these debentures is 45.9770 shares per $1,000 principal amount of debentures, representing a conversion price of $21.75 per share.  The conversion rate is subject to adjustment, without duplication, upon the occurrence of any of the following events, as more fully explained in the Indenture:  (1) payment or issuance of common stock as a dividend or distribution on the Company’s common stock; (2) the issuance to all holders of common stock of rights, warrants or options to purchase the Company’s common stock for a period expiring within 45 days of the record date for such distribution at a price less than the average of the closing sale prices for the 10 trading days preceding the declaration date for such distribution; (3) subdivisions, splits or combinations of the Company’s common stock; (4) distributions by the Company to all holders of the Company’s common stock of shares of the Company’s capital stock, evidences of indebtedness, property or assets, including rights, warrants, options and other securities but excluding dividends or distributions covered by clauses (1) or (2) above or any dividend or

 

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distribution paid exclusively in cash; provided that in the event that the Company distributes capital stock of, or similar equity interests in, a subsidiary or other business unit of the Company, then the conversion rate will be adjusted based on the market value of the securities so distributed relative to the market value of the Company’s common stock, in each case based on the average closing sales prices of those securities (where such closing prices are available) for the 10 trading days commencing on and including the fifth trading day after the date on which “ex-dividend trading” commences for such distribution on the New York Stock Exchange or such other principal national or regional exchange or market on which the securities are then listed or quoted or in the absence of such a quotation, a closing sale price determined by the Company on a basis it considers appropriate; (5) the payment of cash as a dividend or distribution on the Company’s common stock, excluding any dividend or distribution in connection with the Company’s liquidation, dissolution or winding up; or (6) the Company or any of its subsidiaries makes a payment in respect of a tender offer or exchange offer for the Company’s common stock to the extent that the cash and value of any other consideration included in the payment per share of the Company’s common stock exceeds the closing sale price per share of the Company’s common stock on the trading day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer.

 

To the extent that the Company’s shareholder rights agreement dated June 12, 1997, as amended, or any future rights plan adopted by the Company is in effect upon conversion of the debentures into common stock, holders of the debentures will receive, in addition to the common stock, the rights under the rights plan unless the rights have separated from the common stock at the time of conversion, in which case the conversion rate will be adjusted as if the Company distributed to all holders of its common stock, shares of its capital stock, evidences of indebtedness, property or assets as described in clause (4) above, subject to readjustment in the event of the expiration, termination or redemption of such rights.

 

In the event of (1) any reclassification of the Company’s common stock; (2) a consolidation, merger or binding share exchange involving the Company; or (3) a sale or conveyance to another person or entity of all or substantially all of the Company’s property and assets, in which holders of the Company’s common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock, upon conversion holders of the debentures will be entitled to receive the same type of consideration that they would have been entitled to receive if they had converted the debentures into the Company’s common stock immediately prior to any of these events.

 

The Company may, from time to time, increase the conversion rate if the Company’s board of directors has made a determination that this increase would be in the Company’s best interests.  In addition, the Company may increase the conversion rate if the Company’s board of directors deems it advisable to avoid or diminish any income tax to holders of common stock resulting from any stock or rights distribution.

 

5.  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 aggregate principal amount of convertible notes, which were 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 of these notes was excluded from the calculation of net loss per share, assuming dilution, for the three and nine month periods ended September 30, 2003 because it would have been antidilutive in all periods.

 

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The Company repurchased $102.9 million of these notes during March 2004, and redeemed the remaining $69.6 million of these notes in April 2004.

 

In March 2004, the Company issued $250 million aggregate principal amount of 1% convertible senior subordinated debentures, which are convertible into shares of common stock at a conversion rate of 45.9770 shares per $1,000 principal amount representing a conversion price of $21.75 per share.  These debentures are convertible into shares of CommScope common stock under specific circumstances as described in Note 4.  The effect of the assumed conversion of these debentures was excluded from the calculation of net income (loss) per share, assuming dilution, for the three and nine month periods ended September 30, 2004 because the conversion contingencies were not met during such periods.

 

Below is a reconciliation of weighted average common shares outstanding for basic net income (loss) per share to weighted average common and potential common shares outstanding for diluted net income (loss) per share.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Numerator:
Net income (loss) for basic and diluted net income (loss) per share		$	15,083		$	1,122		$	82,827		$	(53,326	)
Denominator:
Weighted average number of common shares outstanding for basic net income (loss) per share		54,018			59,220			58,335			59,220
Effect of dilutive employee stock options (A)		1,719			390			1,486			—
Weighted average number of common and potential common shares outstanding for diluted net income (loss) per share		55,737			59,610			59,821			59,220

 

(A)      Options to purchase approximately 630 thousand and 661 thousand common shares were excluded from the computation of net income per share, assuming dilution, for the three and nine month periods ended September 30, 2004, respectively, because they would have been antidilutive in both periods.  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 month periods ended September 30, 2003 because they would have been antidilutive in both periods.

 

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The consensus reached by the EITF on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” is expected to be effective for reporting periods ending after December 15, 2004.  The consensus requires restatement of previously reported net income per share, assuming dilution (see Note 1 for further discussion of Issue No. 04-8).  The Company did not have any contingently convertible debt outstanding prior to the issuance of its 1% convertible senior subordinated debentures in March 2004.  Accordingly, no restatement of periods prior to the three months ended March 31, 2004 is required under this consensus.  If the consensus had been applied during the three and six months ended June 30, 2004 and the three and nine months ended September 30, 2004, the impact would have been as follows:

 

		Three Months Ended June 30, 2004			Six Months Ended June 30, 2004			Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004
Net income per share, assuming dilution, as reported		$	1.37		$	1.10		$	0.27		$	1.38
Net income per share, assuming dilution, applying EITF Issue No. 04-8 consensus		$	1.16		$	1.01		$	0.23		$	1.24

 

There would be no effect from applying the consensus to the three months ended March 31, 2004 as the result would have been antidilutive due to the net loss for the period.

 

6.  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 (“Furukawa”).  During the three months ended March 31, 2004, OFS BrightWave began to move certain cable production from the Norcross facility to the Carrollton facility.  Effective April 1, 2004, Furukawa contributed its investment in the Carrollton facility to OFS BrightWave.  Because CommScope did not elect to make further corresponding investments in OFS BrightWave, this additional investment in OFS BrightWave by Furukawa reduced CommScope’s ownership percentage in OFS BrightWave from 18.4% to 9.4%, effective April 1, 2004.

 

Primarily as a result of the continuing weakness in the global fiber optic cable market and Furukawa’s continuing efforts to restructure its OFS operations, the Company agreed with Furukawa to further amend their existing contractual arrangements in the second quarter of 2004 for the mutual benefit of both companies.  On June 11, 2004, CommScope assigned all of its rights and duties under its contractual arrangements with Furukawa to its wholly-owned subsidiary, CommScope Optical Technologies, Inc. (“CommScope Optical”).  On June 14, 2004, CommScope Optical and Furukawa changed the period in which CommScope Optical could exercise its contractual right to sell its ownership interest in OFS BrightWave to Furukawa from 2006 to any time on or after June 14, 2004 and changed the exercise price from $173.4 million in cash to the approximately 7.7 million shares of CommScope common stock owned by Furukawa.  On June 14, 2004, CommScope Optical exercised its contractual right to sell and sold its 9.4% ownership interest in OFS BrightWave to Furukawa in exchange for the approximately 7.7 million shares of CommScope common stock owned by Furukawa, which were valued at $132.3 million as of the

 

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transaction date.  CommScope currently holds these shares as treasury stock.  As a result of this transaction, CommScope no longer owns any equity interest in OFS BrightWave.

 

This transaction does not affect CommScope’s right to receive full payment from OFS BrightWave under the $30 million revolving note due in 2006, based on its original terms.  The carrying value of this note was reduced to approximately $11.1 million as of June 14, 2004 as a result of CommScope recording its equity in losses of OFS BrightWave under equity method accounting rules, which require accounting for an advance to an equity method investee in the same manner as the investment, once the carrying value of the investment has been reduced to zero.  Primarily due to market conditions for optical fiber and because CommScope will no longer have an equity ownership interest in OFS BrightWave, CommScope determined that there was an other-than-temporary impairment in the carrying value of this asset as of the transaction date.  Accordingly, a pretax impairment charge of $11.1 million was recognized as a reduction of the gain on the OFS BrightWave transaction during the quarter ended June 30, 2004.

 

The OFS BrightWave transaction resulted in a net pretax gain of $121.3 million, or $1.24 per diluted share, net of tax, during the second quarter of 2004. This gain represents (1) the fair value of the common stock received by CommScope in exchange for CommScope’s transfer of its ownership interest in OFS BrightWave to Furukawa, plus (2) the realized gain from CommScope’s cumulative equity method share of OFS BrightWave’s unrealized foreign currency translation gains previously recorded in accumulated other comprehensive loss, less (3) the impairment charge related to the $30 million note receivable from OFS BrightWave.  The after-tax net gain of $76.4 million is reflected in the Company’s statement of operations after income (loss) before equity in losses of OFS BrightWave, LLC and net gain on OFS BrightWave, LLC transaction.  The income tax impact of this gain enabled the Company to realize its deferred tax asset related to the Company’s share of the cumulative financial statement net losses of OFS BrightWave.  In addition, this transaction created a capital gain for tax purposes, which allowed the Company to deduct a capital loss related to the 2001 impairment of an investment, creating a current tax benefit of $1.4 million from this capital loss deduction.

 

CommScope’s portion of the losses of OFS BrightWave for the period from January 1, 2004 through June 14, 2004 and the three and nine month periods ended September 30, 2003 have been included in the condensed consolidated financial statements of CommScope for the respective periods.  These results are net of elimination of intercompany profit related to interest payments received from OFS BrightWave under the $30 million revolving note.    The elimination of intercompany profit, net of tax, was $30 for the period from January 1, 2004 through June 14, 2004 and $25 and $79 for the three and nine month periods ended September 30, 2003, respectively.

 

The following table provides summary financial information for OFS BrightWave for the period from January 1, 2004 through June 14, 2004 and the three and nine month periods ended September 30, 2003:

 

		Three Months Ended September 30, 2003			Period from January 1 through June 14, 2004			Nine Months Ended September 30, 2003
Net revenues		$	25,286		$	40,497		$	75,333
Gross profit		(14,299		)	(8,612		)	(76,691		)
Net loss		(27,171		)	(20,860		)	(352,528		)

 

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7.  INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME/LOSS

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Income tax benefit for components of other comprehensive income/loss:
Loss on derivative instrument designated as a net investment hedge		$	179		$	286		$	178		$	1,262

 

8.  DERIVATIVES AND HEDGING ACTIVITIES

 

As of September 30, 2004 and 2003 the only derivative financial instrument outstanding was a cross currency swap of U.S. dollars for euros, which was designated and documented at inception, and quarterly thereafter, as a net investment hedge of a portion of the Company’s net investment in its Belgian subsidiary.  The original notional amount of this derivative financial instrument was $20 million at inception of the hedging relationship and as of September 30, 2003.  The Company amended this agreement in October 2003 to reduce the notional amount to $14 million.  No cash was required to effect this amendment; the change in the notional amount was offset by an adjustment in the exchange rate underlying the swap.  The amended hedging instrument was effective as of the amendment date and as of September 30, 2004, and is expected to continue to be effective for the duration of the agreement, resulting in no anticipated hedge ineffectiveness.  The original hedging instrument was effective as of the inception date and as of September 30, 2003.  The fair value of the amended derivative instrument, reflected in other noncurrent liabilities, was approximately $6.3 million and $6.0 million as of September 30, 2004 and December 31, 2003, respectively.

 

There were no material reclassifications related to hedging activities from other comprehensive income (loss) to earnings during the three and nine month periods ended September 30, 2004 and 2003.

 

Activity in the accumulated net loss on derivative instruments included in accumulated other comprehensive loss for the three and nine month periods ended September 30, 2004 and 2003 consisted of the following:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Accumulated net loss on derivative instruments, beginning of period		$	(3,978	)	$	(2,463	)	$	(3,981	)	$	(802	)
Net loss on derivative financial instrument designated as a net investment hedge		(306		)	(488		)	(303		)	(2,149		)
Accumulated net loss on derivative instruments, end of period		$	(4,284	)	$	(2,951	)	$	(4,284	)	$	(2,951	)

 

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9.  SUPPLEMENTAL CASH FLOW INFORMATION

 

		Nine Months Ended September 30,
		2004			2003
Cash paid during the period for:
Income taxes		$	10,270		$	360
Interest (net of capitalized amounts)		5,706			3,826
Noncash investing and financing activities:
Fair value of CommScope, Inc. common stock received from Furukawa in exchange for CommScope Optical’s transfer of its investment in OFS BrightWave, LLC to Furukawa		$	132,311		—

 

10.            SEGMENTS

 

During the three and nine month periods ended September 30, 2004, the Company’s management evaluated the results of operations in two reportable segments: the Cable segment, which is CommScope’s legacy cable business, and the Connectivity Solutions segment, which is the acquisition that was completed as of January 31, 2004.  As the Company continues to integrate the Connectivity Solutions segment into its global operations and financial reporting systems, the Company’s management expects to reorganize its internal reporting, which may require reporting of its results in more or different reportable segments in future periods.

 

The following tables provide summary financial information for these two reportable segments as of September 30, 2004 and for the three and nine month periods ended September 30, 2004 and 2003:

 

		As of September 30, 2004
Total assets
Cable segment		$	591,967
Connectivity Solutions segment		462,951
Consolidated total assets		$	1,054,918

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net sales:
Cable segment		$	165,040		$	148,723		$	470,365		$	419,513
Connectivity Solutions segment		151,869			—			405,240			—
Inter-segment eliminations		(7,819		)	—			(18,505		)	—
Consolidated net sales		$	309,090		$	148,723		$	857,100		$	419,513
Operating income (loss):
Cable segment		$	7,458		$	8,304		$	20,256		$	(15,433	)
Connectivity Solutions segment		10,993			—			(4,426		)	—
Inter-segment eliminations		326			—			(105		)	—
Consolidated operating income (loss)		$	18,777		$	8,304		$	15,725		$	(15,433	)

 

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