Risks Related to Our Business
Our operating results have been adversely affected by the significant downturn
in the communications equipment industry and the slowdown in the United States economy.
Our operating results during fiscal 2003, 2002 and
2001 have been significantly impacted by the substantial downturn in the telecommunications equipment industry. In this market environment, many of our
customers reduced their equipment purchases and have deferred capital spending. As a result, our revenues have decreased in each of the last three
fiscal years. A majority of our revenues are derived from telecommunication service providers. These customers have greatly reduced their spending on
communications equipment. Our business has also been negatively impacted by reduced or deferred capital spending by our cable industry customers.
Moreover, some of our customers have experienced serious financial difficulties, which in certain cases has resulted in bankruptcy filings or cessation
of operations.
The general slowdown in the United States economy in
the last three years has also negatively impacted, and may continue to adversely affect, our business and operating results. We expect any recovery in
the communications market to lag behind a general economic recovery. Our customers are dependent on the level of end user demand for communication
services, and they are likely to continue to defer significant network expansions until there is greater demand for telephone, internet and data
services. If general economic conditions in the United States and globally do not improve, or if there is a worsening of the United States or global
economy, we may continue to experience material adverse effects on our business, financial condition and results of operations.
We incurred significant net losses in fiscal 2003, 2002 and 2001. No assurance
can be given that we will achieve operating profitability in the future.
We incurred net losses of $76.7 million, $1.15
billion and $1.29 billion in fiscal 2003, 2002 and 2001, respectively. Although we reported net income in the fourth quarter of fiscal 2003, it is not
clear that we will be able to achieve revenue and gross margin levels needed to sustain profitability.
When the significant reduction in communications
equipment spending became evident in fiscal 2001, we began implementing a restructuring plan to reduce operating expenses and capital expenditures and
to narrow the strategic focus of our business. As a result in large part of this structuring plan, we incurred impairment and restructuring charges of
$57.4 million, $567.9 million and $697.1 million in fiscal years 2003, 2002 and 2001, respectively. Although most of the restructuring plan initiatives
have been implemented, we may be required to further restructure our business if we do not achieve profitability.
As a result of the restructuring plan, we have
significantly reduced expenses and lowered our quarterly revenue break-even point. However, we may not be able to achieve anticipated revenue levels in
future quarters or further reduce our expenses if revenue shortfalls occur. As a result, no assurance can be given that we will achieve operating
profitability.
Shifts in our product mix may result in declines in gross profit, as a
percentage of net sales.
Our gross profit, as a percentage of net sales,
varies among our product groups. Our overall gross profit, as a percentage of net sales, has fluctuated from quarter to quarter as a result of shifts
in product mix (that is, how much of each product type we sell in any particular quarter), the introduction of new products, decreases in average
selling prices and our ability to reduce manufacturing costs. We expect such fluctuation in gross profit to continue in the future.
Consolidation among our customers could result in our losing a customer or
experiencing a slowdown as integration takes place.
We believe it is likely that there will be increased
consolidation among our customers in order for them to increase market share, diversify product portfolios and achieve greater economies of scale.
Consolidation is likely to impact our business as our customers focus on integrating their operations and choosing their equipment vendors. After a
consolidation occurs, there can be no assurance that we will
10
continue to supply equipment to the surviving communications service provider. For
example, the acquisition of AT&T Broadband, which was a customer of our IP Cable products, by Comcast Corporation during fiscal 2003 resulted in a
substantial decline in the net sales of our IP Cable products and Comcast has informed us that we have not been approved as a continuing supplier of
certain IP Cable products.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products.
Our customer base is relatively concentrated with
our top ten customers accounting for 44.5%, 47.2% and 51.7% of net sales for fiscal years 2003, 2002 and 2001, respectively. If we lose a significant
customer, our sales and gross margins would be negatively impacted. In addition, the loss of sales may require us to record additional impairment and
restructuring charges or exit a particular business or product line.
Our market is subject to rapid technological change, and to compete effectively,
we must continually introduce new products that achieve market acceptance.
The communications equipment industry is
characterized by rapid technological change. In our industry, we also face evolving industry standards, changing market conditions and frequent new
product and service introductions and enhancements by our competitors. The introduction of products using new technologies or the adoption of new
industry standards can make our existing products or products under development obsolete or unmarketable. In order to grow and remain competitive, we
will need to adapt to these rapidly changing technologies, to enhance our existing solutions and to introduce new solutions to address our
customers’ changing demands.
We cannot accurately predict technological trends or
new products in the telecommunications equipment market. New product development often requires long-term forecasting of market trends, development and
implementation of new technologies and processes, and a substantial capital commitment. In addition, we do not know whether our products and services
will meet with market acceptance or be profitable. Many of our competitors, particularly in our software and IP Cable businesses, have greater
engineering and product development resources than us. Although we expect to continue to invest substantial resources in product development
activities, our efforts to achieve and maintain profitability will require us to be more selective and focused with our research and development
expenditures. If we fail to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry standards or
customer requirements, or if we have any significant delays in product development or introduction, our business, operating results and financial
condition could be materially adversely affected.
We may make additional strategic changes to our product portfolio but our
strategic changes and restructuring programs may not yield the benefits that we expect.
During fiscal 2003, we announced a new product
portfolio review initiative to focus on opportunities to enhance shareowner value in the difficult and changing communications equipment industry. We
intend to focus on product markets in which we are, or believe we can become, one of the leading suppliers. As part of the current product portfolio
review, we may make strategic acquisitions and may divest current product lines.
The impact of potential changes to our product
portfolio and the effect of such changes on our business, operating results and financial condition, are unknown at this time. If we determine to
acquire other businesses in our areas of strategic focus, we may have difficulty assimilating these businesses and their products, services,
technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase
our expenses and adversely affect our operating results and financial condition. In addition to these integration risks, if we acquire new businesses,
we may not realize all of the anticipated benefits of these acquisitions, and we may not be able to retain key management, technical and sales
personnel after an acquisition. Divestitures or elimination of existing businesses or product lines could also have disruptive effects and may cause us
to incur material expenses.
11
If we seek to secure additional financing, we may not be able to obtain it.
Also, if we are able to secure additional financing, our shareowners may experience dilution of their ownership interest or we may be subject to
limitations on our operations.
We currently anticipate that our available cash
resources, which include existing cash and cash equivalents, will be sufficient to meet our anticipated needs for working capital and capital
expenditures for the remainder of fiscal 2004 and, if we are able to maintain breakeven or positive cash flow from operations, for the next several
years. If our estimates are incorrect and we are unable to generate sufficient cash flows from operations, we may need to raise additional funds. In
addition, if one or more of our strategic acquisition opportunities exceeds our existing resources, we may be required to seek additional capital. We
do not currently have any available lines of credit or other credit facilities, and we are not certain that we can obtain commercial bank financing or,
if it is available, whether it will be on acceptable terms. If we raise additional funds through the issuance of equity or equity-related securities,
our shareowners may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of common
stock. See “Risks Related to our Common Stock” below. If we raise additional funds by issuing debt, we may be subject to restrictive
covenants that could limit our operating flexibility.
Our industry is highly competitive and subject to pricing
pressure.
Competition in the communications equipment industry
is intense. We believe our success in competing with other manufacturers of communications equipment products and services will depend primarily on our
engineering, manufacturing and marketing skills, the price, quality and reliability of our products, our delivery and service capabilities and our
control of operating expenses. We have experienced and anticipate experiencing increasing pricing pressures from current and future competitors as well
as general pricing pressure from our customers as part of their cost containment efforts. Our industry is currently characterized by many vendors
pursuing relatively few and very large customers, which provides our customers with the ability to exert significant pressure on their suppliers. Many
of our competitors have more extensive engineering, manufacturing, marketing, financial and personnel resources than we do. As a result, other
competitors may be able to respond more quickly to new or emerging technologies, changes in customer requirements or offer more aggressive price
reductions.
Possible consolidation among our competitors could result in a loss of
sales.
We expect to see continued consolidation among
communication equipment vendors. This can result in our competitors becoming financially stronger and obtaining broader product portfolios. It is
possible that such consolidation can lead to a loss of sales for us as our competitors increase their resources through consolidation.
Our operating results fluctuate significantly, and if we miss quarterly
financial expectations, our stock price could decline.
Our operating results are difficult to predict, and
fluctuate significantly from quarter to quarter. It is likely that our operating results in some periods will be below investor expectations. If this
happens, the market price of our common stock is likely to decline. Fluctuations in our future quarterly earnings results may be caused by many
factors, including:
• |
|
the volume and timing of orders from and shipments to our
customers; |
• |
|
work stoppages and other developments affecting the operations
of our customers; |
• |
|
the timing of and our ability to obtain new customer
contracts; |
• |
|
the timing of new product and service announcements; |
• |
|
the availability of products and services; |
• |
|
the overall level of capital expenditures by our
customers; |
• |
|
the market acceptance of new and enhanced versions of our
products and services or variations in the mix of products and services we sell; |
12
• |
|
the utilization of our production capacity and employees;
and |
• |
|
the availability and cost of key components. |
Our expense levels are based in part on expectations
of future revenues. If revenue levels in a particular period are lower than expected, our operating results will be affected
adversely.
In addition, prior to fiscal 2001, our operating
results were subject to seasonal factors. We historically have had stronger demand for our products and services in the fourth fiscal quarter ending
October 31, primarily as a result of our year-end incentives and customer budget cycles. We typically have experienced weaker demand for our products
and services in the first fiscal quarter ending January 31, primarily as a result of the number of holidays in late November, December and early
January, the development of annual capital budgets by our customers during that period, and a general industry slowdown during that
period.
Due to the economic downturn in the communications
equipment and services market during fiscal 2001-2003, this historical trend of seasonality was not evident during these three fiscal years. We cannot
predict if these historical seasonal trends will return.
The regulatory environment in which our customers operate is
changing.
Although our business is not subject to direct
regulation, the communications service industry in which our customers operate is subject to federal and state regulation in the United States and in
other countries. In early 1996, the United States Telecommunications Act of 1996 was enacted. The Telecommunications Act lifted certain restrictions on
the ability of companies, including the Regional Bell Operating Companies and other ADC customers, to compete with one another. The Telecommunications
Act also made other significant changes in the regulation of the telecommunications industry. These changes generally have increased our opportunities
to provide solutions for our customers’ Internet, data, video and voice needs.
However, the established telecommunications
providers have stated that some of these changes have diminished the profitability of additional investments made by them in their networks, which
reduces their demand for our products. On February 20, 2003, the Federal Communications Commission (“FCC”) adopted rules under the
Telecommunications Act concerning the obligation of the established telecommunication service providers to share their networks with competitors, a
practice known as “unbundling.” The FCC essentially retained the existing unbundling obligations of the carriers with respect to their
historic copper-based network infrastructure, and ruled not to require the unbundling of certain network elements in their next generation hybrid and
fiber networks. In August 2003, the FCC issued its final rules on unbundling obligations. It is too early to predict what effect these rules will have
on capital spending by our customers. Portions of these rules have already been subjected to legal challenges by various constituents within the
telecommunications industry, and additional legal challenges are likely. We do not anticipate that these rules will result in increased capital
spending by the incumbent carriers or new competitors in the near term.
Future regulatory changes affecting the
communications industry are anticipated both in the United States and internationally. These changes could negatively affect our customers and reduce
demand for our products. In addition, competition in our markets could intensify as the result of changes to existing regulations or new regulations.
Accordingly, changes in the regulatory environment could adversely affect our business and results of operations.
Customer payment defaults could have an adverse effect on our financial
condition and results of operations.
As a result of adverse conditions in the
telecommunications market, some of our customers have and may continue to experience serious financial difficulties, which in some cases have resulted
or may result in bankruptcy filings or cessation of operations. In the future, if customers experiencing financial problems default and fail to pay
amounts owed to us, we may not be able to collect these amounts or recognize expected revenue. In the current environment in the telecommunications
equipment industry and the United States and global economy, it is possible that customers from whom we expect to derive substantial
13
revenue will default or that the level of defaults will increase. Any material
payment defaults by our customers would have an adverse effect on our results of operations and financial condition.
We also have provided financing to some of our
customers for purchases of our equipment. As of October 31, 2003, we had commitments to extend credit of approximately $26.5 million, of which
approximately $23.2 million was outstanding on this date. At such date, we had recorded approximately $19.4 million in loss reserves in the event of
non-performance related to these financing arrangements.
Many of our competitors engage in similar financing
transactions in order to obtain customer orders. To remain competitive, we believe that it may be necessary for us to continue to offer financing
arrangements in the future. We intend under certain circumstances to sell all or a portion of these commitments and outstanding receivables to third
parties. In the past, we have sold some receivables with recourse and have had to compensate the purchaser for the loss.
Our ability to collect on these financing
arrangements is contingent on the financial health of the companies to which we extend credit. The condition of these companies is affected by many
factors, including, among others, general conditions in the communications equipment and services industry, general economic conditions and changes in
telecommunications regulations. We may experience credit losses that could adversely affect our operating results and financial
condition.
Conditions in global markets could affect our operations.
Our non-United States sales accounted for
approximately 36.3%, 27.1% and 28.8% of our net sales in fiscal 2003, 2002 and 2001, respectively. We expect non-United States sales to remain a
significant percentage of net sales in the future. In addition to sales and distribution in numerous countries, we own or lease operations located in
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Hungary, India, Ireland, Italy, Japan, Malaysia, Mexico, Puerto Rico, Russia,
Singapore, South Korea, Spain, the United Arab Emirates, the United Kingdom and Venezuela. Due to our non-United States sales and our non-United States
operations, we are subject to the risks of conducting business globally. These risks include:
• |
|
local economic and market conditions; |
• |
|
political and economic instability; |
• |
|
unexpected changes in or impositions of legislative or
regulatory requirements; |
• |
|
fluctuations in the exchange rate of the United States
dollar; |
• |
|
tariffs and other barriers and restrictions; |
• |
|
difficulties in enforcing intellectual property and contract
rights; |
• |
|
greater difficulty in accounts receivable
collection; |
• |
|
potentially adverse taxes; and |
• |
|
the burdens of complying with a variety of non-United States
laws and telecommunications standards. |
We also are subject to general geopolitical risks,
such as terrorism, political and economic instability and changes in diplomatic and trade relationships. We maintain business operations and have sales
in many non-United States markets. Economic conditions in many of these markets represent significant risks to us. We cannot predict whether our sales
and business operations in these markets will be affected adversely by these conditions.
Instability in non-United States markets,
particularly in the Middle East, Asia and Latin America, could have a negative impact on our business, financial condition and operating results. The
aftermath of the war in Iraq and other turmoil in the Middle East also may have negative effects on the operating results of some of our businesses. In
addition to the effect of global economic instability on non-United
14
States sales, sales to United States customers having significant non-United States
operations could be impacted negatively by these conditions.
Our intellectual property rights may not be adequate to protect our
business.
Our future success depends in part upon our
proprietary technology. Although we attempt to protect our proprietary technology through patents, trademarks, copyrights and trade secrets, these
protections are limited. Accordingly, we cannot predict whether such protection will be adequate, or whether our competitors can develop similar
technology independently without violating our proprietary rights.
Also, rights that may be granted under any patent
application in the future may not provide competitive advantages to us. Intellectual property protection in foreign jurisdictions may be limited or
unavailable. In addition, many of our competitors have substantially larger portfolios of patents and other intellectual property rights than we
do.
As the competition in the communications equipment
industry increases and the functionality of the products in this industry further overlaps, we believe that companies in the communications equipment
industry are becoming increasingly subject to infringement claims. We have received and may continue to receive notices from third parties, including
some of our competitors, claiming that we are infringing third-party patents or other proprietary rights. We cannot predict whether we will prevail in
any litigation over third-party claims, or whether we will be able to license any valid and infringed patents on commercially reasonable terms. It is
possible that unfavorable resolution of such litigation could have a material adverse effect on our business, results of operations or financial
condition. Any of these claims, whether with or without merit, could result in costly litigation, divert our management’s time, attention and
resources, delay our product shipments or require us to enter into royalty or licensing agreements, which could be expensive. A third party may not be
willing to enter into a royalty or licensing agreement on acceptable terms, if at all. If a claim of product infringement against us is successful and
we fail to obtain a license or develop or license non-infringing technology, our business, financial condition and operating results could be affected
adversely.
We are dependent upon key personnel.
Like all technology companies, our success is
dependent on the efforts and abilities of our employees. Our ability to attract, retain and motivate skilled employees is critical to our success. In
addition, because we may acquire one or more businesses in the future, our success will depend, in part, upon our ability to retain and integrate our
own personnel with personnel from acquired entities who are necessary to the continued success or the successful integration of the acquired
businesses.
Our recent initiatives to focus our business on core
operations and products by restructuring and streamlining operations, including substantial reductions in our workforce, have created uncertainty on
the part of our employees regarding future employment with us. This uncertainty, together with our operating losses and lower stock price, may have an
adverse effect on our ability to retain and attract key personnel.
Product defects could cause us to lose customers and revenue or to incur
unexpected expenses.
If our products do not meet our customers’
performance requirements, our customer relationships may suffer. Also, our products may contain defects. Any failure or poor performance of our
products could result in:
• |
|
delayed market acceptance of our products; |
• |
|
delays in product shipments; |
• |
|
unexpected expenses and diversion of resources to replace
defective products or identify the source of errors and to correct them; |
• |
|
damage to our reputation and our customer
relationships; |
• |
|
delayed or lost revenue; and |
15
• |
|
product liability claims or other claims for damages that may be
caused by any product defects or performance failures. |
Our products are often critical to the performance
of communication systems. Many of our supply agreements contain limited warranty provisions. If these contractual limitations are unenforceable in a
particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a successful claim could harm our
business.
We may encounter difficulties obtaining raw materials and supplies needed to
make our products.
Our ability to produce our products is dependent
upon the availability of certain raw materials and supplies. The availability of these raw materials and supplies is subject to market forces beyond
our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for
our products. In addition, the costs to obtain these raw materials and supplies are subject to price fluctuations because of market demand. Many
companies utilize the same raw materials and supplies in the production of their products as we use in our products. Companies with more resources than
our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. Reduced supply and higher prices of raw
materials and supplies may affect our business, operating results and financial condition adversely.
In addition, we have increased our reliance on the
use of contract manufacturers to make our products on our behalf. If these contract manufacturers do not fulfill their obligations to us, or if we do
not properly manage these relationships, our existing customer relationships may suffer. We intend to outsource additional functions in the
future.
We have been named as a defendant in securities and other
litigation.
We are the defendant in two purported shareowner
class action lawsuits. In the first such lawsuit, In Re ADC Telecommunications, Inc. Securities Litigation, the complaint alleges that we
violated the securities laws by making false and misleading statements about our financial performance and business prospects.
We have also been named as a defendant in a
purported class action lawsuit alleging breach of fiduciary duties under ERISA. This case, In Re ADC Telecommunications, Inc. ERISA Litigation,
has been brought by individuals who seek to represent a class of participants in our Retirement Savings Plan who purchased our common stock as one of
the investment alternatives under the plan.
Litigation is by its nature uncertain and
unfavorable resolutions of these lawsuits could materially adversely affect our business, results of operations or financial
condition.
We are a party to various other lawsuits,
proceedings and claims arising in the ordinary course of business or otherwise. The amount of monetary liability resulting from an adverse result in
many of such lawsuits, proceedings or claims cannot be determined at this time. As of October 31, 2003, we had recorded approximately $9.1 million in
loss reserves in the event of such adverse outcomes in these matters. Because of the uncertainty inherent in litigation, it is possible that
unfavorable resolutions of these lawsuits, proceedings and claims could exceed the amount currently reserved and could have a material adverse affect
on our business, results of operations or financial condition.
We are subject to risks associated with changes in security prices, interest
rates and foreign exchange rates.
We face market risks from changes in security prices
and interest rates. Market fluctuations could affect our results of operations and financial condition adversely. At times, we reduce this risk through
the use of derivative financial instruments. However, we do not enter into derivative instruments for the purpose of speculation.
Also, we are exposed to market risks from changes in
foreign exchange rates. To mitigate this risk, we have instituted a balance sheet hedging program. The objective of this program is to protect our net
monetary assets and liabilities in non-functional currencies from fluctuations due to movements in foreign
16
exchange rates. We attempt to minimize exposure to currencies in which hedging
instruments are unavailable or prohibitively expensive by managing our operating activities and net assets position.
Risks Related to Our Common Stock
Our stock price is volatile.
Based on the trading history of our common stock and
the nature of the market for publicly traded securities of companies in our industry, we believe that some factors have caused and are likely to
continue to cause the market price of our common stock to fluctuate substantially. The fluctuations could occur from day-to-day or over a longer period
of time. The factors that may cause such fluctuations include:
• |
|
announcements of new products and services by us or our
competitors; |
• |
|
quarterly fluctuations in our financial results or the financial
results of our competitors or our customers; |
• |
|
customer contract awards to us or our competitors; |
• |
|
increased competition with our competitors or among our
customers; |
• |
|
consolidation among our competitors or customers; |
• |
|
disputes concerning intellectual property rights; |
• |
|
the financial health of ADC, our competitors or our
customers; |
• |
|
developments in telecommunications regulations; |
• |
|
general conditions in the communications equipment industry;
and |
• |
|
general economic conditions. |
In addition, communications equipment company stocks
in the past have experienced significant price and volume fluctuations that are often unrelated to the operating performance of such companies. This
market volatility may adversely affect the market price of our common stock.
We have not in the past and do not intend in the foreseeable future to pay cash
dividends on our common stock.
We currently do not pay any cash dividends on our
common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if
any, to finance our operations and for general corporate purposes.
Anti-takeover provisions in our charter documents, our shareowner rights plan
and Minnesota law could prevent or delay a change in control of our company.
Provisions of our articles of incorporation and
bylaws, our shareowner rights plan (also known as a “poison pill”) and Minnesota law may discourage, delay or prevent a merger or acquisition
that a shareowner may consider favorable and may limit the market price for our common stock. These provisions include the following:
• |
|
advance notice requirements for shareowner
proposals; |
• |
|
authorization for our Board of Directors to issue preferred
stock without shareowner approval; |
• |
|
authorization for our Board of Directors to issue preferred stock
purchase rights upon a third party’s acquisition of 15% or more of our outstanding shares of common stock; and |
• |
|
limitations on business combinations with interested
shareowners. |
Some of these provisions may discourage a future acquisition of ADC even though our
shareowners would receive an attractive value for their shares or a significant number of our shareowners believed such a proposed transaction would be
in their best interest.
17
Item 2. PROPERTIES
Our corporate headquarters are located in Eden
Prairie, Minnesota. Our corporate headquarters comprise approximately 500,000 square feet and we own this facility.
In addition to our headquarters facility, our
principal facilities as of October 31, 2003, consisted of the following:
• |
|
Shakopee, Minnesota—approximately 360,000 sq. ft. owned
facility; general purpose facility used for engineering, manufacturing, and general support of our connectivity products; |
• |
|
Juarez and Delicias, Mexico—approximately 228,000 and
139,000 sq. feet, respectively, owned facilities; manufacturing facilities used for our connectivity products; |
• |
|
Westborough, Massachusetts—approximately 64,000 sq. ft.
leased facility; general purpose facility used for engineering, testing, and general support of our IP cable products; |
• |
|
Raleigh, North Carolina—approximately 40,000 sq. ft leased
facility; general purpose facility used for engineering, testing and general support for our wireline products; and |
• |
|
Santa Teresa, New Mexico—approximately 208,000 sq. ft.
leased facility; global warehouse and distribution center with approximately 60,000 sq. ft. dedicated to selected finished product assembly
operations. |
We also own or lease approximately 74 other
facilities in the following locations: Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Hungary, India, Ireland, Italy, Japan,
Malaysia, Mexico, Puerto Rico, Russia, Singapore, South Korea, Spain, the United Arab Emirates, the United Kingdom, the United States and
Venezuela.
We believe that the facilities used in our
operations are suitable for their respective uses and adequate to meet our current needs. During fiscal 2003, we continued to take steps to reduce and
consolidate our facilities in response to the downturn in the communications equipment industry. At the end of fiscal 2002, we had active space and
irrevocable commitments to activate space totaling approximately 3.0 million square feet. Through the sale or subleasing of facilities, the placement
of sites on inactive status, we presently maintain approximately 2.3 million square feet of active space.
Item 3. LEGAL PROCEEDINGS
On March 5, 2003, we were served with a shareowner
lawsuit brought by Wanda Kinermon that has been filed in the United States District Court for the District of Minnesota. The complaint names ADC,
William J. Cadogan, our former Chairman and Chief Executive Officer, and Robert E. Switz, our Chief Executive Officer, as defendants. During the period
the lawsuit covers, Mr. Switz held the position of Executive Vice President and Chief Financial Officer. Since this lawsuit was served, we were named
as a defendant in 11 other substantially similar lawsuits. These shareowner lawsuits have been consolidated into a single lawsuit, which has been
captioned In Re ADC Telecommunications, Inc. Securities Litigation. This lawsuit purports to bring suit on behalf of a class of purchasers of
our publicly traded securities from August 17, 2000, to March 28, 2001. The complaint alleges that we violated the securities laws by making false and
misleading statements about our financial performance and business prospects during this period. On November 24, 2003, we filed a motion to dismiss
this lawsuit. This motion is pending before the court.
On May 19, 2003, we were served with a lawsuit
brought by Lorraine Osborne that has been filed in the United States District Court for the District of Minnesota. The complaint names ADC and several
of our current and former officers, employees and directors as defendants. Since this lawsuit was served, we were served with two substantially similar
lawsuits, and all three lawsuits have been consolidated into a single lawsuit, which has been captioned In Re ADC Telecommunications, Inc. ERISA
Litigation. This lawsuit has been brought by individuals who seek to represent a class of participants in our Retirement Savings Plan who purchased
our common stock as one of the investment alternatives under the plan. The lawsuit alleges a breach of fiduciary duties under the Employee Retirement
Income Security Act.
We believe that the two lawsuits described above are
without merit and we intend to defend these actions vigorously. However, due to the uncertainty inherent in litigation, an unfavorable resolution
of
18
these matters is possible, and they could have a material adverse effect on our
business, results of operations or financial condition.
We are a party to various other lawsuits,
proceedings and claims arising in the ordinary course of business or otherwise. These matters include disputes related to intellectual property
infringement, breach of contract, employment-related claims, and other topics, many of which relate to the substantial restructuring that we conducted
over the last three fiscal years. Many of these disputes may be resolved amicably without resort to formal litigation. The amount of monetary liability
resulting from the ultimate resolution of these matters cannot be determined at this time. As of October 31, 2003, we had recorded approximately $9.1
million in loss reserves for these matters. In light of these reserves, we believe the ultimate resolution of these other lawsuits, proceedings and
claims will not have a material adverse impact on our business, results of operations or financial condition. However, litigation by its nature is
uncertain, and we cannot predict the ultimate outcome of these matters with certainty and there remains a possibility that such matters could have a
material adverse outcome.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
PART II
| Item 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
SHAREOWNER MATTERS |
Our common stock, $0.20 par value, is traded on The
Nasdaq Stock Market under the symbol “ADCT.” The following table sets forth the high and low sales prices of our common stock for each
quarter during our fiscal years ended October 31, 2003 and 2002, as reported on that market.
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
Quarter |
|
|
|
$ |
3.15 |
|
|
$ |
1.51 |
|
|
$ |
5.97 |
|
|
$ |
3.52 |
|
Second
Quarter |
|
|
|
|
2.73 |
|
|
|
2.05 |
|
|
|
4.90 |
|
|
|
3.26 |
|
Third
Quarter |
|
|
|
|
3.21 |
|
|
|
1.96 |
|
|
|
4.09 |
|
|
|
1.66 |
|
Fourth
Quarter |
|
|
|
|
2.90 |
|
|
|
2.10 |
|
|
|
1.83 |
|
|
|
1.02 |
|
As of January 7, 2004, there were 8,631 registered holders of record of our common
stock. We do not pay cash dividends on our common stock and do not intend to pay cash dividends for the foreseeable future.
20
Item 6. SELECTED FINANCIAL DATA
The following summary information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto set forth in Item 8 of this Form 10-K.
FIVE-YEAR FINANCIAL SUMMARY
Years ended October 31
(dollars in
millions, except per share data)
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
|
|
$ |
773.2 |
|
|
|
1,047.7 |
|
|
$ |
2,402.8 |
|
|
$ |
3,287.9 |
|
|
$ |
2,151.8 |
|
International
sales |
|
|
|
|
280.7 |
|
|
|
283.6 |
|
|
|
692.2 |
|
|
|
708.1 |
|
|
|
499.3 |
|
Gross
profit |
|
|
|
|
291.4 |
|
|
|
246.5 |
|
|
|
725.0 |
|
|
|
1,608.9 |
|
|
|
1,003.4 |
|
Research and
development expense |
|
|
|
|
108.6 |
|
|
|
182.8 |
|
|
|
287.3 |
|
|
|
367.2 |
|
|
|
251.4 |
|
Selling and
administration expense |
|
|
|
|
222.1 |
|
|
|
374.0 |
|
|
|
715.3 |
|
|
|
683.5 |
|
|
|
445.8 |
|
Goodwill
amortization |
|
|
|
|
— |
|
|
|
— |
|
|
|
56.6 |
|
|
|
34.3 |
|
|
|
22.2 |
|
Operating
(loss) income |
|
|
|
|
(96.7 |
) |
|
|
(878.2 |
) |
|
|
(1,031.3 |
) |
|
|
365.9 |
|
|
|
135.0 |
|
(Loss) income
before income taxes |
|
|
|
|
(82.1 |
) |
|
|
(882.2 |
) |
|
|
(1,920.7 |
) |
|
|
1,460.4 |
|
|
|
134.9 |
|
(Benefit)
provision for income taxes |
|
|
|
|
(5.4 |
) |
|
|
262.8 |
|
|
|
(633.0 |
) |
|
|
592.3 |
|
|
|
57.0 |
|
Net income
(loss) |
|
|
|
|
(76.7 |
) |
|
|
(1,145.0 |
) |
|
|
(1,287.7 |
) |
|
|
868.1 |
|
|
|
77.9 |
|
(Loss)
earnings per diluted share |
|
|
|
|
(0.10 |
) |
|
|
(1.44 |
) |
|
|
(1.64 |
) |
|
|
1.13 |
|
|
|
0.11 |
|
Impairment
and restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charges |
|
|
|
|
15.6 |
|
|
|
348.3 |
|
|
|
501.7 |
|
|
|
— |
|
|
|
— |
|
Restructuring
charges |
|
|
|
|
41.8 |
|
|
|
219.6 |
|
|
|
195.4 |
|
|
|
158.0 |
|
|
|
149.0 |
|
Other
disposal charges(1) |
|
|
|
|
— |
|
|
|
13.2 |
|
|
|
80.8 |
|
|
|
— |
|
|
|
— |
|
Gain (loss)
on sale or shutdown of product lines |
|
|
|
|
(1.4 |
) |
|
|
(6.7 |
) |
|
|
(81.9 |
) |
|
|
328.6 |
|
|
|
— |
|
Gain (loss)
on investments, net:
Write-down or conversion of investments |
|
|
|
|
— |
|
|
|
(50.9 |
) |
|
|
(862.5 |
) |
|
|
722.6 |
|
|
|
— |
|
Sale of
investments, net |
|
|
|
|
3.8 |
|
|
|
67.8 |
|
|
|
76.8 |
|
|
|
23.8 |
|
|
|
— |
|
Increase in
deferred tax valuation allowance |
|
|
|
|
39.7 |
|
|
|
640.2 |
|
|
|
71.1 |
|
|
|
— |
|
|
|
— |
|
Cash Flow
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash
provided by operating activities |
|
|
|
|
38.9 |
|
|
|
60.5 |
|
|
|
95.0 |
|
|
|
250.9 |
|
|
|
290.5 |
|
Depreciation
and amortization |
|
|
|
|
59.2 |
|
|
|
104.7 |
|
|
|
197.8 |
|
|
|
146.2 |
|
|
|
114.8 |
|
Capital
expenditures, net |
|
|
|
|
67.6 |
|
|
|
25.6 |
|
|
|
241.2 |
|
|
|
375.3 |
|
|
|
125.1 |
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
1,006.0 |
|
|
|
686.3 |
|
|
|
1,305.2 |
|
|
|
2,650.9 |
|
|
|
1,376.6 |
|
Current
liabilities |
|
|
|
|
265.5 |
|
|
|
397.8 |
|
|
|
599.4 |
|
|
|
1,041.3 |
|
|
|
448.5 |
|
Property and
equipment, net |
|
|
|
|
192.3 |
|
|
|
206.8 |
|
|
|
614.0 |
|
|
|
608.6 |
|
|
|
341.2 |
|
Total
assets |
|
|
|
|
1,296.9 |
|
|
|
1,144.2 |
|
|
|
2,499.7 |
|
|
|
3,970.5 |
|
|
|
2,057.8 |
|
Long-term
notes payable |
|
|
|
|
400.0 |
|
|
|
10.8 |
|
|
|
3.0 |
|
|
|
16.5 |
|
|
|
14.0 |
|
Shareowners’ investment |
|
|
|
|
627.7 |
|
|
|
732.2 |
|
|
|
1,893.4 |
|
|
|
2,912.7 |
|
|
|
1,595.3 |
|
| (1) |
|
These charges are included in cost of sales and selling and
administration expense in our consolidated statements of operations. See Note 11 to the Consolidated Financial Statements in Item 8 of this Form
10-K. |
21
| Item 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Marketplace Conditions
Our operating results during fiscal 2003, 2002 and
2001 were adversely affected by the downturn in spending for communications equipment. Although our quarterly revenues began to stabilize somewhat
during fiscal 2003, spending on communications equipment remains at low levels compared to pre-2001 levels. The reasons for this lower level of
spending include general economic conditions resulting in reduced end-user demand for communications services, excess capacity within our
customers’ communication networks, the absence of communications network buildouts by new competitive entrants in the service provider market and
a related decline in competitive response spending by incumbent service providers. When the downturn in communications equipment spending first became
evident in fiscal 2001, we began to implement restructuring plans to reduce operating expenses and capital spending and to narrow the focus of our
business. As it became evident in fiscal 2002 that our industry was experiencing an even more pronounced and prolonged economic downturn, we took
additional measures to align our cost structure with lower revenues and narrow the focus of our business. Our actions to date have
included:
• |
|
The sale or closure of non-strategic product lines; |
• |
|
significant reductions in discretionary spending; |
• |
|
the disposition of surplus equipment; |
• |
|
consolidation of facilities; and |
• |
|
substantial reductions in our workforce. |
Despite these restructuring actions, we may be
unable to meet expected revenue levels in any particular quarter, in which case our operating results could be materially adversely affected if we are
unable to further reduce our expenses in time to counteract such a decline in revenues. We continue to be dependent on telecommunications service
providers for the majority of our revenues, with the four major U.S. incumbent local exchange carriers (Verizon, SBC, Bellsouth and Qwest) accounting
for approximately 25.7%, 28.2% and 32.0% of our revenues during fiscal 2003, 2002 and 2001, respectively. In addition, our top ten customers accounted
for approximately 44.5%, 47.2% and 51.7% of our revenues during fiscal 2003, 2002 and 2001, respectively.
As the prolonged downturn in the communications
service industry continues, we expect some consolidation among our customers in order for them to increase market share, diversify product portfolios
and/or achieve greater economies of scale and improve levels of profitability. This activity is likely to have an impact on our results of operations
during the time the consolidating companies focus on integrating their operations and choose their equipment vendors. There can be no assurance that we
will be a supplier to the surviving service provider. For example, during fiscal 2003, AT&T Broadband, which was a customer of our IP cable
products, was acquired by Comcast Corporation, and Comcast informed us that we have not been approved as a continuing supplier of certain IP cable
products.
In addition to the consolidation we expect from our
customers, we expect several forms of structural change in the communications equipment industry. Competition among equipment vendors remains extremely
intense. These vendors (including us) are competing for business from relatively few, and very large, communication service providers who continue to
exert pricing pressure on their vendors. Accordingly, we expect to see continued consolidation among our competitors or more strategic alliances among
them to obtain greater economies of scale. Finally, we expect continuing product line rationalization as companies divest unprofitable product lines in
an effort to focus on profitable business opportunities.
We plan to acquire additional product lines or
businesses that are complimentary to our communications infrastructure business. We intend to pursue acquisition opportunities that will enable us to
expand our core business of supplying communications infrastructure products and services to communications service providers, as well as opportunities
that will bolster our position as a supplier to private, or enterprise, network customers. We expect to fund these potential acquisitions with all or
a
22
portion of the net proceeds of our $400 million convertible note offering completed
in June 2003, with the issuance of shares of common or preferred stock or through some combination of cash and stock. We may also divest non-strategic
product lines as we focus on growing our business profitably. In December 2003, we entered into an agreement to sell our BroadAccess40 product line.
This product line accounted for approximately 3% of our net sales in fiscal 2003. This transaction is expected to close by March 1, 2004.
On February 20, 2003, the Federal Communications
Commission (“FCC”) adopted rules under the U.S. Telecommunications Act of 1996 concerning the obligation of the established telecommunication
service providers to share their networks with competitors, a practice known as “unbundling.” The FCC essentially retained the existing
unbundling obligations of the carriers with respect to their historic copper-based network infrastructure, and ruled not to require the unbundling of
certain network elements in their next generation hybrid and fiber networks. In August 2003, the FCC issued its final rules on unbundling obligations.
It is too early to predict what effect these rules will have on capital spending by our customers. Portions of these rules have already been subjected
to legal challenges by various constituents within the telecommunications industry, and additional legal challenges are likely. We do not anticipate
that these rules will result in increased capital spending by the incumbent carriers or new competitors in the near term.
Our ability to grow our business is dependent on our
ability to effectively compete with our current products and services, our ability to develop and introduce new products, and on the growth of the
communications equipment and services market. The communications equipment industry is highly competitive. Growth in the market for broadband
communications products and services depends on a number of factors, including the availability of capital to communications service providers, the
amount of capital expenditures by communications service providers, new regulatory and legal requirements and end-user demands for Internet, data,
video, voice and other communications services.
Our revenues have declined dramatically over the
last three fiscal years, with indications of stability appearing during fiscal 2003. We cannot predict whether this stability will remain, or when
growth will occur. Prior to the downturn of fiscal 2001-2003, our results of operations had been subject to seasonal factors, with stronger demand for
our products during our fourth fiscal quarter ending October 31 (primarily as a result of customer budget cycles and our fiscal year-end incentives)
and weaker demand for our products during our first fiscal quarter ending January 31 (primarily as a result of the number of holidays in late November,
December and early January, the development of annual capital budgets by our customers during that period, and a general industry slowdown during that
period.) There can be no assurance that these historical seasonal trends will return. A more detailed description of the risks to our business related
to seasonality, along with other risk factors associated with our business, can be found in the section captioned “Risk Factors” at Item 1 of
this Annual Report on Form 10-K.
23
Results of Operations
The following table contains information regarding
the percentage of net sales of certain income and expense items for the three fiscal years ended October 31, 2003, 2002 and 2001 and the percentage
changes in these income and expense items from year to year:
|
|
|
|
Percentage of Net Sales
|
|
Percentage
Increase (Decrease)
Between Periods
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2003 vs. 2002
|
|
2002 vs. 2001
|
Net sales
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(26.2 |
) |
|
|
(56.4 |
) |
Cost of
sales |
|
|
|
|
(62.3 |
) |
|
|
(76.5 |
) |
|
|
(69.8 |
) |
|
|
(39.9 |
) |
|
|
(52.2 |
) |
Gross
profit |
|
|
|
|
37.7 |
|
|
|
23.5 |
|
|
|
30.2 |
|
|
|
18.2 |
|
|
|
(66.0 |
) |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
|
|
(14.0 |
) |
|
|
(17.4 |
) |
|
|
(11.9 |
) |
|
|
(40.6 |
) |
|
|
(36.4 |
) |
Selling and
administration |
|
|
|
|
(28.8 |
) |
|
|
(35.7 |
) |
|
|
(29.8 |
) |
|
|
(40.6 |
) |
|
|
(47.7 |
) |
Goodwill
amortization |
|
|
|
|
— |
|
|
|
— |
|
|
|
(2.4 |
) |
|
|
— |
|
|
|
(100.0 |
) |
Impairment
charges |
|
|
|
|
(2.0 |
) |
|
|
(33.2 |
) |
|
|
(20.9 |
) |
|
|
(95.5 |
) |
|
|
(30.6 |
) |
Restructuring
charges |
|
|
|
|
(5.4 |
) |
|
|
(21.0 |
) |
|
|
(8.1 |
) |
|
|
(81.0 |
) |
|
|
12.4 |
|
Operating
loss |
|
|
|
|
(12.5 |
) |
|
|
(83.8 |
) |
|
|
(42.9 |
) |
|
|
89.0 |
|
|
|
14.8 |
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net |
|
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
(25.0 |
) |
|
|
481.8 |
|
Other,
net |
|
|
|
|
1.1 |
|
|
|
(1.2 |
) |
|
|
(36.9 |
) |
|
|
166.9 |
|
|
|
(98.6 |
) |
Loss
before income taxes |
|
|
|
|
(10.6 |
) |
|
|
(84.2 |
) |
|
|
(79.9 |
) |
|
|
90.7 |
|
|
|
54.1 |
|
Provision
(benefit) for income taxes |
|
|
|
|
(0.7 |
) |
|
|
25.1 |
|
|
|
(26.3 |
) |
|
|
102.1 |
|
|
|
(141.5 |
) |
Net income
(loss) |
|
|
|
|
(9.9 |
)% |
|
|
(109.3 |
)% |
|
|
(53.6 |
)% |
|
|
93.3 |
% |
|
|
11.1 |
% |
The table below sets forth our net sales for the
three fiscal years ended October 31, 2003, for each of our reportable segments described in Item 1 of this Form 10-K (in millions).
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
Operating Segment
|
|
|
|
Net Sales
|
|
%
|
|
Net Sales
|
|
%
|
|
Net Sales
|
%
|
|
Broadband
Infrastructure and Access |
|
|
|
$ |
486.3 |
|
|
|
62.9 |
% |
|
$ |
715.1 |
|
|
|
68.3 |
% |
|
$ |
1,810.8 |
|
75.4% |
|
Integrated
Solutions |
|
|
|
|
286.9 |
|
|
|
37.1 |
|
|
|
332.6 |
|
|
|
31.7 |
|
|
|
592.0 |
|
24.6 |
|
Total
|
|
|
|
$ |
773.2 |
|
|
|
100.0 |
% |
|
$ |
1,047.7 |
|
|
|
100.0 |
% |
|
$ |
2,402.8 |
|
100.0% |
|
Net Sales
Fiscal 2003 vs. Fiscal
2002
Net sales were $773.2 million and $1,047.7 million
for fiscal 2003 and 2002, respectively, which was a 26.2% decrease. International net sales were 36.3% and 27.1% of our net sales in fiscal 2003 and
2002, respectively.
During fiscal 2003, net sales of Broadband
Infrastructure and Access products declined by 32.0% compared to fiscal 2002. Net sales in the Broadband Infrastructure and Access product lines
decreased primarily as a result of lower volumes of products sold due to reductions in communications service provider capital budgets, as well as the
lack of new network build-outs or significant expansions of existing networks. In addition, sales of our IP cable product line decreased due to a lower
level of spending by our customers in general and particularly as a result of Comcast Corporation’s acquisition of AT&T Broadband, which
previously was a significant customer for our IP cable products. Comcast has informed us that we have not been approved as a continuing supplier of
cable modem termination systems, which we previously supplied to AT&T Broadband, and has significantly reduced its purchases of our cable telephony
products. Our wireline product line continues to face strong competition, which is continuing to put pressure on our market share positions and price
levels for these products. In response, we intend to aggressively defend our current market share by delivering high quality products and superior
customer service and have taken steps to lower our production and engineering costs for these products.
24
Net sales of our Integrated Solutions products
declined by 13.7% from $332.6 million in fiscal 2002 to $286.9 million in fiscal 2003. The decrease in this segment is a result of continued reductions
in our customers’ capital spending budgets as well as our decision not to bid on low margin systems integration projects. The decrease in sales
was tempered by a broadening of the historic customer base for our systems integration services, which has predominately been the major U.S. incumbent
local exchange carriers, to include wireless carriers and long distance service providers. We anticipate that future revenue in our Integrated
Solutions segment will be subject to increased variability, because we intend to focus our software sales efforts on major accounts, which typically
have longer sales cycles for large-scale software installations.
International sales increased as a percentage of
sales in fiscal 2003 to 36.3% from 27.1% in fiscal 2002. This increase is due to a combination of more pronounced capital spending reductions by
communication service providers in the United States than in other regions and two large contract wins in Europe for our software and IP Cable
products.
Fiscal 2002 vs. Fiscal
2001
Net sales were $1,047.7 million and $2,402.8 million
for fiscal 2002 and 2001, respectively, reflecting a 56.4% decrease. International net sales comprised 27.1% and 28.8% of our net sales in fiscal 2002
and 2001, respectively.
The 56.4% decrease in net sales was largely
attributable to lower volumes of products sold due to significant reductions in communication service provider capital budgets, as well as the lack of
new network build-outs or significant expansions of existing networks. The decline was most pronounced for our broadband connectivity products, but
occurred across all product lines with the exception of our IP Cable products, which had increased sales over the prior year. Sales of our software
products also declined, which we believe was in part due to the fact that these products had been targeted for the competitive local exchange carrier
market, a segment which has been severely affected by a lack of capital resources, causing many of these companies to cease operations. In response,
during fiscal 2002, we repositioned our software products to add applications for next-generation wireless providers, enterprises and media and content
providers, which we believe will present broader and higher growth opportunities. We believe this target market transition contributed to the
year-over-year decline in sales.
The sales decline was also due to the absence of
sales from product lines we divested in fiscal 2002 and 2001. Sales from divested product lines were $14.9 million, and $404.9 million in fiscal 2002
and 2001, respectively. See Note 6 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a further breakdown of divested net sales
by segment.
Gross Profit
Fiscal 2003 vs. Fiscal
2002
Gross profit percentages were 37.7% and 23.5%,
respectively, during fiscal 2003 and 2002. The increase in gross profit percentage was due to a more favorable sales mix toward higher margin
connectivity products, our decision not to bid on low margin systems integration projects and a reduction in our fixed costs of sales as a result of
our restructuring activities. In addition, cost of sales for fiscal 2002 included $18.9 million of other disposal charges for inventory write-offs
related to divested product lines.
In addition to a more favorable sales mix, we also
benefited from production efficiencies and reduced production costs resulting from more favorable supplier pricing and the outsourcing of portions of
our manufacturing operations. We anticipate that our future gross profit percentage will vary based on many factors, including sales mix, competitive
pricing, timing of new product introductions, timing of customer acceptance and collectibility of large-scale sales transactions and manufacturing
volume.
Fiscal 2002 vs. Fiscal
2001
During fiscal 2002 and 2001, gross profit
percentages were 23.5% and 30.2%, respectively. The decrease in gross profit percentage was primarily due to a decrease in sales volume without a
corresponding reduction in fixed factory expenses, and a shift in sales mix to lower margin products and
25
services. Also, in fiscal 2002 and 2001, $18.9 million and $52.4 million of other
disposal charges for inventory write-offs and other costs to exit certain sales contracts were included in cost of product sold,
respectively.
Operating Expenses
Fiscal 2003 vs. Fiscal
2002
Total operating expenses for fiscal 2003 and 2002
were $388.1 million and $1,124.7 million, respectively. Included in these operating expenses were restructuring charges of $41.8 million and $219.6
million, respectively, and impairment charges of $15.6 million and $348.3 million, respectively. Although the largest factor in the decrease in
operating expenses was the reduction in the amount of our restructuring and impairment charges, our operating expenses also declined due to the ongoing
cost savings from our restructuring efforts.
Research and
development: Research and development expenses were $108.6 million for fiscal 2003 compared to $182.8 million for fiscal
2002, which represents a decrease of 40.6%. The decrease was largely due to the divestiture or discontinuance of certain product lines in fiscal 2002
as well as our ongoing cost containment efforts. We believe that, given the rapidly changing technological and competitive environment in the
communications equipment industry, continued commitment to product development efforts will be required for us to remain competitive. Accordingly, we
intend to continue to allocate substantial resources, as a percentage of net sales, to product development in each of our operating
segments.
Selling and
administration: Selling and administration expense decreased 40.6% from $374.0 million in fiscal 2002 to $222.1 million in
fiscal 2003. This decrease was largely due to the effect of our workforce reductions and lower occupancy costs resulting from the consolidation of
facilities. Occupancy costs were also lower as a result of the lower carrying value of certain facilities, due to the restructuring charges we incurred
in fiscal 2002.
Impairment
charges: Impairment charges represent a write-down of the carrying value of long-lived assets (principally goodwill and
fixed assets) to their estimated fair market value. These charges declined substantially in fiscal 2003 compared to fiscal 2002 ($15.6 million compared
to $348.3 million). The fiscal 2003 impairment charges consisted solely of property and equipment impairments, which impacted both the Broadband
Infrastructure and Access and Integrated Solutions segments, and were caused by our plan to dispose of excess equipment. The fair market value of this
equipment was determined using external sources, primarily proceeds received from previous equipment sales or estimates of discounted cash
flows.
The fiscal 2002 impairment charges related to the
write-down of goodwill and fixed assets. The total goodwill write-down was $136.3 million, of which $36.6 million related to our decision to exit the
optical components product line, with the remainder resulting from our annual goodwill impairment analysis of our continuing businesses. The total
fixed asset impairment charge was $212.0 million, of which $45.7 million related to our decision to sell our Glenrothes, Scotland manufacturing
facility. The remaining charges are primarily related to our decision to exit the optical components and certain other product lines.
See Notes 11 and 12 to the Consolidated Financial
Statements in Item 8 of this Form 10-K for a further discussion of our impairment charges.
Restructuring
charges: Restructuring charges represent the direct costs of exiting certain product lines, consolidating facilities and
downsizing our business. Our restructuring charges also declined significantly in fiscal 2003 compared to fiscal 2002 ($41.8 million compared to $219.6
million). The fiscal 2003 restructuring charges consisted of $30.2 million of employee severance for workforce reductions and $11.6 million of facility
consolidation charges. The employee terminations affected both the Broadband Infrastructure and Access and Integrated Solutions segments. During fiscal
2003, we reduced our workforce by approximately 1,900 employees (25% of our total workforce), which included approximately 1,450 employees impacted by
reductions in force.
The fiscal 2002 restructuring charges consisted
principally of $153.8 million related to the consolidation of facilities, $53.1 million for employee severance costs related to our workforce
reduction,
26
and $10.5 million for in-process research and development costs relating to our
decision to purchase the interest of our joint venture partner in three technology development partnerships. Of the $153.8 of facilities consolidation
costs, $84.3 million related to our decision to extend the lease on our headquarters facility. This charge represented the reduction in fair market
value of the facility below the value we had guaranteed to the lessor. (See Liquidity and Capital Resources—Finance Related Transactions below,
for a further discussion of our headquarters lease). The balance of the facilities consolidation costs related to lease termination costs for excess
facilities, as we deactivated approximately 1.8 million square feet (38% of our total space) during fiscal 2002. The employee severance costs related
to our workforce reduction of approximately 4,400 employees in fiscal 2002 (37% of our total workforce), which included approximately 2,900 employees
impacted by reductions in force.
See Note 11 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for a further discussion of our restructuring charges.
Fiscal 2002 vs. Fiscal
2001
Total operating expenses for fiscal 2002 and 2001
were $1,124.7 million and $1,756.3 million, representing 107.3% and 73.1% of net sales, respectively. Included in these operating expenses were
restructuring charges of $219.6 million and $195.4 million, other disposal charges (reversals) of $(5.7) million and $28.4 million and impairment
charges of $348.3 million and $501.7 million in fiscal 2002 and 2001, respectively. In addition to the lower aggregate amount of impairment,
restructuring and other disposal charges in fiscal 2002, our operating expenses were lower primarily due to the ongoing cost savings from our
restructuring efforts as well as the divestiture of certain product lines.
Research and
development: Research and development expenses were $182.8 million for fiscal 2002, representing a 36.4% decrease from
$287.3 million for fiscal 2001. This decrease reflected our efforts to control expenses.
Selling and
administration: Selling and administration expenses were $374.0 million for fiscal 2002, representing a decrease of 47.7%
from $715.3 million for fiscal 2001. This decrease reflects the benefits realized from our restructuring efforts. In addition, selling and
administration expenses decreased $138.7 million from 2001 due to the divestiture or discontinuance of certain product lines in fiscal 2001. Also
included in the fiscal 2002 and 2001 amounts were $(5.7) million and $28.4 million, respectively, in selling and administration expenses (reversals)
incurred to complete certain non-cancelable sales contracts and contract cancellation payments to customers as a result of our decision to exit certain
product lines.
Goodwill
amortization: In accordance with SFAS No. 142, we did not record goodwill amortization in fiscal 2002. We recorded $56.6
million of goodwill amortization expense in fiscal 2001.
Impairment
charges: Impairment charges decreased significantly in fiscal 2002 compared to fiscal 2001 ($348.3 million compared to
$501.7 million). The fiscal 2001 charges were higher because of our substantial divestiture activity in that year in response to the onset of the
telecommunications industry downturn. Of the total $501.7 million of impairment charges in fiscal 2001, $294.5 million related to the write-down of
goodwill and $207.2 million related to the write-down of fixed assets. The goodwill impairment charge was recognized as a result of our decision to
exit non-strategic product lines. The fixed asset impairment charge of $207.2 million resulted from the consolidation of unproductive and duplicative
facilities as well as the exit from non-strategic product lines.
Restructuring
charges: Restructuring charges were not significantly different in fiscal 2002 than in fiscal 2001 ($219.6 million compared
to $195.4 million). The $195.4 million of restructuring charges in fiscal 2001 related to our actions to downsize our business in response to declining
sales. These charges consisted principally of $89.0 million for employee severance costs related to our workforce reduction, and $96.0 million of
facilities consolidation costs, which consisted principally of lease termination costs. During fiscal 2001, we reduced our workforce by approximately
10,400 employees (46% of the total workforce), which included approximately 7,400 employees impacted by reductions in force. We also deactivated
approximately 1.1 million square feet of excess facilities (19% of our total space) during fiscal 2001. In addition, we incurred $10.4 million of
acquisition and integration costs and other restructuring charges in fiscal 2001, principally related to our acquisitions of CommTech Corporation and
France Electronique in early fiscal 2001.
27
Other Income (Expense), Net:
Other income (expense), net includes net interest
income (expense), gain or loss on the write-down, sale or conversion of our investments, gain or loss on the sale or shutdown of certain product lines
and other items. Each of these items is discussed below.
Interest
The net interest income (expense) category
represents net interest on cash and cash equivalents as well as debt.
Interest income was $9.9 million, $12.4 million and
$6.6 million in fiscal 2003, 2002 and 2001, respectively. Interest income decreased in fiscal 2003 compared to fiscal 2002 primarily due to lower
restricted cash balances, reduced interest-bearing customer receivables and lower yields on our short-term investments. Our interest income increased
during fiscal 2002 compared to fiscal 2001 due to higher average cash balances maintained during fiscal 2002, partially offset by lower yields on our
short-term investments.
Interest expense was $3.6 million, $4.0 million and
$8.8 million in fiscal 2003, 2002 and 2001, respectively. Interest expense declined in fiscal 2003 due to the absence of charges relating to our former
accounts receivable securitization facility and a general decline in interest rates, which were partially offset by $2.1 million of additional interest
expense relating to the convertible notes we issued in June 2003. See “Liquidity and Capital Resources” below for a discussion of cash and
debt levels.
Write-down, sale or conversion of
investments
Fiscal 2003: During
fiscal 2003, we sold common stock of certain companies in our portfolio and two investments in non-publicly traded securities for an aggregate gain of
$3.8 million. See Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion of our investment
activity.
Fiscal 2002: During
fiscal 2002, we sold common stock of certain companies in our investment portfolio and settled related hedging arrangements for a gain of $67.8
million. These gains were offset by non-cash write-downs in the amount of $5.7 million for our marketable securities investments, and $45.2 million for
our non-marketable securities.
Fiscal 2001: During
fiscal 2001, we sold common stock of certain companies in our portfolio and settled related hedging arrangements for a net gain of $76.8 million. This
gain was more than offset by a non-cash loss of $862.5 million we recognized for the decline in the market value of our marketable and non-marketable
securities.
Sale or shutdown of product
lines
Fiscal 2003: No
significant product lines were divested or discontinued during fiscal 2003.
Fiscal 2002: During
fiscal 2002, we sold non-strategic product lines in broadcast TV video routing and optical components. We also closed down our Avidia Multiplexer and
our optical laser product lines and halted further development of the U.S. version of our iAN product line. These products did not meet our growth,
profitability and market leadership criteria. The sales of these assets generated approximately $2.3 million in cash, net of cash disposed, in fiscal
2002. Included in these sales and closures were domestic operations in California, Minnesota and Texas, as well as international operations in
Australia and Sweden. These product lines generated annual net sales of $14.9 million and $36.1 million and operating losses of $96.8 million and
$170.5 million in fiscal 2002 and 2001, respectively. As a result of these actions, we recorded total losses on sales or shutdowns of approximately
$6.7 million in fiscal 2002.
Fiscal 2001: During
fiscal 2001, we sold non-strategic product lines in cable/broadcast TV transmission, broadband wireless transmission, enterprise access products,
wireless components, optical components and enhanced services software. We also closed down our Cellworx transport product line in fiscal 2001. The
sales of these assets generated approximately $117.5 million in cash, net of cash disposed, in fiscal 2001. Included in these sales were domestic
operations in California, Connecticut, Minnesota,
28
Oregon and Pennsylvania, as well as international operations in Argentina, Austria,
Denmark and Finland. These product lines generated annual net sales of $368.8 million and operating losses of $79.8 million in fiscal 2001. As a result
of these actions, we recorded total losses on sales or shutdowns of approximately $81.9 million in fiscal 2001.
Patent infringement
settlement
During fiscal 2002, we recognized a $26.2 million
gain from the settlement of a patent infringement lawsuit we brought against a competitor.
Fixed assets
In connection with our efforts to streamline and
focus our operations to reduce costs, we sold excess equipment in fiscal 2003, 2002 and 2001. As a result of these sales, we recognized a $1.0 million,
$11.5 million and $1.3 million loss in fiscal 2003, 2002 and 2001, respectively.
Other, net
Other, net primarily represents the gain or loss on
foreign exchange transactions, loss on sale-leaseback transactions and our share of losses in equity method investments. Other net income (expense) was
approximately $6.9 million, $(37.3) million and $(18.3) million in fiscal 2003, 2002 and 2001, respectively.
Income Taxes
Fiscal 2003 vs. Fiscal 2002 vs. Fiscal
2001
Note 10 to the Consolidated Financial Statements
describes the items which have impacted our effective income tax rate for fiscal 2003, 2002 and 2001. Significant items include the deductibility of
impairment charges and expiration of foreign tax credit carryovers.
In addition, as a result of our cumulative losses in
fiscal 2001 and 2002 and the full utilization of our loss carryback potential, we concluded during the third quarter of fiscal 2002 that a full
valuation allowance against our net deferred tax assets was appropriate. Since the third quarter of fiscal 2002, we have continued to provide a full
valuation allowance against our net deferred tax assets. In fiscal 2003, we recorded an income tax benefit totaling $5.4 million. This benefit is
primarily attributable to the reversal of accrued income tax liabilities resulting from the finalization of federal, state and foreign income tax
examinations.
Net Loss
Net loss was $76.7 million (or $0.10 per diluted
share) for fiscal 2003, compared to net loss of $1,145.0 million (or $1.44 per diluted share) for fiscal 2002. Net loss was $1,287.7 million (or $1.64
per diluted share) for fiscal 2001.
29
Segment Disclosures
Broadband Infrastructure and Access
Segment
Detailed information regarding our Broadband
Infrastructure and Access segment is provided in the following table:
|
|
|
|
(Dollars in millions)
For the years ended October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
External
sales |
|
|
|
$ |
486.3 |
|
|
$ |
715.1 |
|
|
$ |
1,810.8 |
|
Operating
loss(1) |
|
|
|
|
(27.8 |
) |
|
|
(208.7 |
) |
|
|
(99.2 |
) |
Depreciation
and amortization |
|
|
|
|
10.0 |
|
|
|
25.1 |
|
|
|
101.3 |
|
Capital
expenditures |
|
|
|
|
2.4 |
|
|
|
8.2 |
|
|
|
186.4 |
|
|
|
|
|
At October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Assets |
|
|
|
$ |
290.5 |
|
|
$ |
354.7 |
|
|
$ |
1,517.3 |
|
| (1) |
|
Operating loss excludes certain charges and expenses not
allocated to the segments as described in Note 14 to the Consolidated Financial Statements in Item 8 of this Form 10-K. |
Broadband Infrastructure and Access sales decreased
$228.8 million, or 32.0%, in fiscal 2003 compared to fiscal 2002, primarily due to decreased demand for broadband connectivity systems and components,
an overall weakness in the telecommunications equipment industry and product lines sold or shutdown in fiscal 2002 and 2001. In fiscal 2002, economic
and industry weakness also led to a sales decrease of $1,095.7 million, or 60.5%, compared to fiscal 2001.
During fiscal 2003, operating loss for the Broadband
Infrastructure and Access segment decreased by 86.7% to $(27.8) million compared to $(208.7) million in fiscal 2002. This improvement is primarily due
to a significant reduction in the amount of our restructuring and impairment charges, the ongoing cost savings from our restructuring efforts and the
divestiture of certain product lines. While sales decreased, margins increased due to a shift in product sales mix to higher margin products. We also
benefited from production efficiencies and related production cost declines resulting from our decision to outsource portions of our manufacturing
operations. During fiscal 2002, operating loss increased $109.5 million from fiscal 2001 due to a decrease in sales volume and an unfavorable shift in
product sales mix.
During fiscal 2003, depreciation and amortization
decreased $15.1 million compared to fiscal 2002. This decrease is the result of our restructuring efforts in fiscal 2003 and fiscal 2002, which led to
a reduction in our property, plant and equipment balances.
Capital expenditures decreased $5.8 million (70.7%)
and $178.2 million (95.6%), in fiscal 2003 and 2002, respectively. The decrease in fiscal 2003 and 2002 was a result of our company-wide efforts to
limit capital expenditures in light of the industry downturn.
30
Integrated Solutions
Segment
Detailed information regarding our Integrated
Solutions segment is provided in the following table:
|
|
|
|
(Dollars in millions)
For the years ended October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
External
sales |
|
|
|
$ |
286.9 |
|
|
$ |
332.6 |
|
|
$ |
592.0 |
|
Operating
loss(1) |
|
|
|
|
(1.7 |
) |
|
|
(32.0 |
) |
|
|
(45.3 |
) |
Depreciation
and amortization |
|
|
|
|
3.5 |
|
|
|
10.4 |
|
|
|
20.6 |
|
Capital
expenditures |
|
|
|
|
3.2 |
|
|
|
4.4 |
|
|
|
13.0 |
|
|
|
|
|
At October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Assets |
|
|
|
$ |
208.5 |
|
|
$ |
269.5 |
|
|
$ |
403.7 |
|
| (1) |
|
Operating loss excludes certain charges and expenses not
allocated to the segments as described in Note 14 to the Consolidated Financial Statements in Item 8 of this Form 10-K. |
Integrated Solutions sales decreased $45.7 million,
or 13.7%, in fiscal 2003 compared to fiscal 2002. Sales decreased in fiscal 2002 compared to fiscal 2001 by $259.4 million, or 43.8%. During fiscal
2003 and 2002, many of our customers reduced their spending budgets as well as focused on improving their existing infrastructure rather than building
new capacity. In addition, we shifted the market focus for our software products away from competitive local exchange carriers and into next-generation
service providers, enterprises and media and content providers. This transition led to a decline in software sales in fiscal 2003 as well as fiscal
2002.
During fiscal 2003, operating loss for the
Integrated Solutions segment decreased $30.3 million compared to fiscal 2002. Fiscal 2002 operating loss decreased by $13.3 million compared to fiscal
2001. The decrease in operating loss for both years was primarily due to cost savings achieved as a result of our restructuring initiatives in fiscal
2003, 2002, and 2001.
Depreciation and amortization decreased by $6.9
million in fiscal 2003 and decreased by $10.2 million in fiscal 2002. The fiscal 2003 and 2002 decrease is the result of our restructuring efforts,
which reduced the amount of property plant and equipment.
Capital expenditures decreased $1.2 million, or
27.3%, and $8.6 million, or 66.2%, in fiscal 2002 and 2001, respectively. These decreases were a result of our company-wide efforts to limit capital
expenditures in light of the industry downturn.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related
disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates
that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements
describes the significant accounting policies and methods used in preparing the Consolidated Financial Statements. We consider the accounting policies
described below to be our most critical accounting policies because these policies are impacted significantly by estimates we make. We base our
estimates on historical experience or various assumptions that are believed to be reasonable under the circumstances, and the results form the basis
for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these
estimates.
Inventories: We state
our inventories at the lower of first-in, first-out cost or market. In assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements compared with current or committed inventory levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously
expected usage periods for previously sold equipment. We have
31
experienced significant changes in required reserves in recent periods due
primarily to adverse market conditions. It is possible that significant increases in inventory reserves may be required in the future if there is a
further decline in market conditions. Alternatively, if we are able to sell previously reserved inventory, we may find it necessary to reverse a
portion of the reserves. Changes in inventory reserves are recorded as a component of cost of sales. As of October 31, 2003 and 2002, we had $45.6 and
$93.9 million, respectively, reserved against our inventories, which represents 39.6% and 49.7%, respectively, of total inventory on-hand.
Long-Lived Assets &
Goodwill: Prior to fiscal 2003, we evaluated property and equipment and identifiable intangibles for potential impairment in
compliance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In
fiscal 2003, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We record impairment losses on
long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets. Such events or circumstances include, but are not limited to, a
prolonged industry downturn, a significant decline in our market value, or significant reductions in projected future cash flows. In assessing the
recoverability of our long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If
the total of the undiscounted future cash flows is less than the carrying amount of the assets, we write down such assets based on the excess of the
carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows, including
long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, grouping of assets, discount rate and
terminal growth rates. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us
to write down the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. See Note 11 to
the Consolidated Financial Statements in Item 8 of this Form 10-K for details on our impairment charges.
We adopted SFAS No. 142, “Goodwill and Other
Intangible Assets” during 2002. We are required to test goodwill for impairment annually or at other times if events have occurred or
circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill involves a two-step
process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each
reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair
value of the reporting unit goodwill will be recorded as an impairment loss, which is a component of operating expenses. Fair value of the reporting
units was determined using the income approach. Under the income approach, value is dependent on the present value of future economic benefits to be
derived from ownership. The income approach requires significant estimates about future cash flows and discount rates. See Note 12 to the Consolidated
Financial Statements in Item 8 of this Form 10-K for information about the results of the goodwill impairment tests. At October 31, 2003 and 2002, $4.8
million and $3.8 million, respectively, of goodwill remained on our books, related solely to our Integrated Solutions segment.
Restructuring
Accrual: During fiscal 2003 and 2002, we recorded significant restructuring charges representing the direct costs of exiting
certain product lines or businesses and the costs of downsizing our business. Prior to January 1, 2003, such charges were established in accordance
with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring).” On January 1, 2003, we adopted SFAS No. 146 and record restructuring charges based on that standard (See
“Recently Issued Accounting Pronouncements” for a discussion of this standard). Restructuring charges represent our best estimate at the date
the charges were taken. Significant judgment is required in estimating the costs of disposing of excess facilities, both leased and owned facilities.
For example, in estimating the restructuring costs for excess facilities, we make certain assumptions with respect to when a facility will be subleased
or sold, the amount of sublease income or the sales price, and the amount of any fees or other transaction costs to be incurred. Adjustments for
changes in assumptions are recorded as a component of operating expenses in the period they become known. Changes in assumptions could have a material
effect on our restructuring accrual as well as our consolidated results of operations.
32
Revenue
Recognition: We recognize revenue when persuasive evidence of a final agreement exists, delivery has occurred, the selling
price is fixed or determinable and collectibility is reasonably assured. Revenue from product sales is primarily recognized at the time of delivery and
acceptance, and after consideration of all the terms and conditions of the customer contract. Revenue from services consists of fees for systems
requirements, system design and analysis, customization and installation services, ongoing system management, system enhancements, service bureau
processing, facilities management and maintenance. Services revenue is recognized as the services are performed, primarily on a time and materials
basis and to a lesser extent on a fixed fee basis over the term of the services provided. Revenue from maintenance contracts is recognized ratably over
the term of the agreement, generally one year. Revenue from the licensing of software rights is recognized at the time of delivery of the software to
the customer, provided that we have no remaining service obligations, collectibility is reasonably assured and the fees are fixed and determinable.
Where there are service obligations that are essential to the functionality of the software installed, license fees are recorded over the term of the
initial customization period.
The assessment of collectibility is particularly
critical in determining whether or not revenue should be recognized in the current market environment. As part of the revenue recognition process, we
determine whether trade and notes receivable are reasonably assured of collection based on various factors, including an evaluation of whether there
has been deterioration in the credit quality of our customers, which could result in us being unable to collect or sell the receivables. In situations
where it is unclear as to whether we will be able to sell or collect the receivable, revenue and related costs are deferred. Costs are recognized when
it has been determined that the collection of the receivable is unlikely.
We record provisions against our gross revenue for
estimated product returns and allowances in the period when the related revenue is recorded. These estimates are based on factors that include, but are
not limited to, historical sales returns, analyses of credit memo activities, current economic trends and changes in our customers’ demand. Should
our actual product returns and allowances exceed our estimates, additional reductions to our revenue would result.
Allowance for Uncollectible
Accounts: We are required to estimate the collectibility of our trade receivables and notes receivable. A considerable
amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related
aging of the past due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our
customers’ financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its
financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best
facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by
using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not
limited to, current economic trends, historical payment and bad debt write-off experience. Significant increases in reserves have been recorded in
recent periods and may occur in the future due to deteriorating market conditions. We are not able to predict changes in the financial condition of our
customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially
affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may
reverse a portion of such provisions in future periods based on our actual collection experience. Changes in the allowance are recorded as a component
of operating expenses. As of October 31, 2003 and 2002, we had $23.5 million and $33.9 million, respectively, reserved against our accounts receivable,
which represents 17.5% and 22.8%, respectively, of total accounts receivable.
Warranty: We provide
reserves for the estimated cost of warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our
warranty policy or applicable contractual warranty, our historical experience of known product failure rates, and use of materials and service delivery
costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems
arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional
warranty
33
reserves. Alternatively, if we provide more reserves than we need, we may reverse a
portion of such provisions in future periods. Changes in warranty reserves are recorded as a component of cost of sales. As of October 31, 2003 and
2002, we reserved $13.4 and $13.1 million, respectively, related to future estimated warranty costs.
Income Taxes and Deferred
Taxes: We currently have significant deferred tax assets as a result of net operating loss carryforwards, tax credit
carryforwards and temporary differences between taxable income on our income tax returns and income before income taxes under U.S. generally accepted
accounting principles. A deferred tax asset generally represents future tax benefits to be received when these carryforwards can be applied against
future taxable income or when expenses previously reported in our financial statements become deductible for income tax purposes.
In the third quarter of fiscal 2002, we recorded a
full valuation allowance against our deferred tax assets because we concluded that it was more likely than not that we would not realize these assets.
Our decision was based on the cumulative losses we had incurred to that point as well as the full utilization of our loss carryback potential. From the
third quarter of fiscal 2002 to date, we have maintained our policy of providing a full valuation allowance against all future tax benefits produced by
our operating results. We expect to continue to provide a full allowance on any future tax benefits until we can sustain a level of profitability that
demonstrates our ability to utilize these assets.
As of October 31, 2003 and 2002, our deferred tax
assets and the related valuation allowance were $751.0 million and $711.3 million, respectively. See Note 10 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for a further discussion of the accounting treatment for income taxes.
Litigation
Reserves: As of October 31, 2003 and 2002, we had recorded approximately $9.1 million and $16.9 million, in loss reserves
for pending litigation. This reserve was based on the application of SFAS No. 5, “Accounting for Contingencies,” which requires us to record
a reserve if we believe an adverse outcome is probable and the amount of the probable loss is capable of reasonable estimation. As explained in Note 13
to the Consolidated Financial Statements, and at Part I, Item 3 of this Form 10-K (Legal Proceedings), we are a party to numerous lawsuits, proceedings
and claims. Litigation by its nature is uncertain and the determination of whether any particular case involves a probable loss or the amount thereof
requires the exercise of considerable judgment, which is applied as of a certain date. Accordingly, if our assumptions or conclusions are incorrect,
the amount of the loss incurred could exceed the amount we have reserved, which could have a material adverse impact on our business, results of
operations or financial condition. In addition, the required reserves may change in the future due to new developments in each matter or if we
determine to change our strategy with respect to any particular matter.
Recently Issued Accounting Pronouncements
In October 2001, the Financial Accounting Standards
Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes
SFAS 121. SFAS 144 primarily addresses significant issues relating to the implementation of SFAS 121 and develops a single accounting model for
long-lived assets to be disposed of, whether primarily held, used or newly acquired. The provisions of SFAS 144 will be effective for fiscal years
beginning after December 15, 2001. We adopted this standard in first quarter of fiscal year 2003. In fiscal 2003, we wrote-down $15.6 million of assets
by applying SFAS 144. Prior to adopting this standard, we wrote down long-lived assets, excluding goodwill, by $212.0 and $207.2 million in fiscal 2002
and 2001, respectively, by applying SFAS No. 121.
In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 superseded Emerging Issues Task Force
(“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” The principal difference between SFAS No. 146 and EITF No. 94-3 relates to when an entity can
recognize a liability related to exit or disposal costs. SFAS No. 146 requires that a liability be recognized for a cost associated with an exit or
disposal activity when the liability is incurred. EITF No. 94-3 allowed a liability related to an exit or disposal activity to be recognized on the
date an entity commits to an exit plan. We adopted this standard on January 1, 2003, which was the standard’s effective date. Adoption of the
standard did not materially impact our consolidated financial results or financial position.
34
In November 2002, the FASB issued Financial
Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of the Indebtedness of Others,” which requires a guarantor to recognize and measure certain types of guarantees at fair value. In addition,
FIN 45 requires the guarantor to make new disclosures for these guarantees and other types of guarantees that are not subject to the initial
recognition and initial measurement provisions. The disclosure requirements are effective for financial statements with interim or annual periods ended
after December 15, 2002, while the recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted the initial recognition and measurement provision as well as the disclosure provision of FIN 45 during the first quarter
of fiscal year 2003. The initial recognition and measurement provisions did not have a material impact on our consolidated financial results or
financial position.
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosure.” The provisions of SFAS No. 148 amend SFAS No. 123,
“Accounting for Stock-Based Compensation,” to provide alternative methods of transition to a fair value-based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 also expands the disclosure requirements of SFAS No. 123 by requiring more detailed
disclosure in both annual and interim financial statements. The transition provisions of SFAS No. 148 will not have a material impact on our financial
results, as we do not plan to adopt the fair value-based accounting provisions of SFAS No. 123, which is commonly referred to as expensing of stock
options. The disclosure provisions of SFAS No. 148 are effective for interim periods beginning after December 15, 2002. Accordingly, we adopted the
disclosure provisions of this standard during the second quarter of fiscal year 2003.
In January 2003, the FASB issued FIN 46,
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, which requires companies to consolidate certain types
of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or
whose holders of the equity investments lack any of the following three characteristics: (i) the ability to make our decisions about the entity’s
activities; (ii) the obligation to absorb the entity’s losses if they occur; or (iii) the right to receive the entity’s future returns if
they occur. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created
before February 1, 2003, the provisions of the interpretation are effective for financial statements issued for the first period ending after December
15, 2003, or March 15, 2004, depending on the nature of the variable interest entity. FIN 46 is not expected to have a material impact on our
consolidated financial position or results of operations.
Liquidity and Capital Resources
Cash
Cash and cash equivalents, primarily short-term
investments in commercial paper with maturities of less than 90 days had a balance of $720.0 million at October 31, 2003, which is an increase of
$441.1 million compared to October 31, 2002. In addition, we held $35.5 million of U.S. government securities at October 31, 2003, compared to none at
October 31, 2002. The major sources of cash during fiscal 2003 were $142.7 million in income tax refunds and the net proceeds of $355.5 million from
our convertible note offering completed on June 4, 2003. These cash inflows were partially offset by $67.6 million of net property, plant and equipment
additions.
As of October 31, 2003, we had restricted cash of
$20.0 million compared to $177.0 million of restricted cash as of October 31, 2002, a decrease of $157.0 million. Our restricted cash decreased by
$148.2 million as a result of our purchase five properties subject to “synthetic” operating leases and $14.3 million to pay a guarantee of a
customer note receivable. Restricted cash represents cash pledged to various financial institutions to secure certain of our obligations, and is not
available to us for working capital. The majority of our restricted cash represents collateral for letters of credit and lease obligations. Restricted
cash is expected to become available to us upon satisfaction of the obligations pursuant to which the letters of credit or guarantees were issued. We
are entitled to the interest earnings on our restricted cash balances.
Cash and cash equivalents were $278.9 million as of
October 31, 2002, which was a decrease of $69.7 million compared to October 31, 2001. The major uses of cash during fiscal 2002 were a
35
$177.0 million net increase in restricted cash (which reduced the balance in cash
and cash equivalents), $25.6 million in property, plant and equipment additions, and $208.9 million used to pay current liabilities as well as net cash
losses from operations. These cash outflows were partially offset by $259.4 million provided from income tax refunds, and $79.6 million from more
effective working capital management such as account receivable collections, lower inventory requirements and lower prepaid assets. In addition, we
received $68.6 million on the sale of available-for-sale securities during fiscal 2002.
Finance-Related
Transactions
On June 4, 2003, we issued $400.0 million of
convertible unsecured subordinated notes in two separate transactions pursuant to Rule 144A under the Securities Act of 1933. This issuance was made
through an initial offering of $350.0 million of convertible notes on May 29, 2003, and the subsequent exercise in full by the underwriters of such
offering of their option to purchase an additional $50.0 million of convertible notes. The net proceeds to us from this offering were $355.5 million
after underwriting discounts of $10.0 million and the net payment for the purchased call options and warrant transactions described below. In the first
transaction, we issued $200.0 million of 1.0% fixed rate convertible unsecured subordinated notes that mature on June 15, 2008. In the second
transaction, we issued $200.0 million of convertible unsecured subordinated notes that have a variable interest rate and mature on June 15, 2013. The
interest rate for the variable rate notes is equal to 6-month LIBOR plus 0.375%. The interest rate for the variable rate notes will be reset on each
semi-annual interest payment date, which are June 15 and December 15 of each year beginning on December 15, 2003, for both the fixed and variable rate
notes. The initial interest rate on the variable note is 1.59625% for the period ending December 15, 2003. The holders of both the fixed and variable
rate notes may convert all or some of their notes into shares of our common stock at any time prior to maturity at a conversion price of $4.013 per
share. We may not redeem the fixed rate notes prior to their maturity date. We may redeem any or all of the variable rate notes at any time on or after
June 23, 2008.
Concurrent with the issuance of the fixed and
variable rate notes, we purchased five and ten-year call options on our common stock to reduce the potential dilution from conversion of the notes.
Under the terms of these call options, which become exercisable upon conversion of the notes, we have the right to purchase from the counterparty at a
purchase price of $4.013 per share the aggregate number of shares that we are obligated to issue upon conversion of the fixed and variable notes, which
is a maximum of 99.7 million shares. We also have the option to settle the call options with the counterparty through a net a share settlement or cash
settlements, either of which would be based on the extent to which the then-current market price of our common stock exceeds $4.013 per share. The
total cost of all the call options was $137.3 million, which is recorded in shareowners’ investment. The cost of the call options was partially
offset by the sale of warrants to acquire shares of our common stock with terms of five and ten years to the same counterparty with whom we entered
into the call options. The warrants are exercisable for an aggregate of 99.7 million shares at an exercise price of $5.28 per share. The warrants
become exercisable upon conversion of the notes, and may be settled, at our option, either through a net share settlement or a net cash settlement,
either of which would be based on the extent which the then-current market price of our common stock exceeds $5.28 per share. The gross proceeds from
the sale of the warrants were $102.8 million, which was recognized in shareowners’ investment. The call options and the warrants are subject to
early expiration upon conversion of the notes. The net effect of the call options and the warrants is to either reduce the potential dilution from the
conversion of the notes (if we elect net share settlement) or to increase the net cash proceeds of the offering (if we elect net cash settlement) if
the notes are converted at a time when the current market price of our common stock is greater than $4.013 per share.
We plan to use the cash proceeds from this offering
for general corporate purposes and strategic opportunities, including financing for possible acquisitions or investments in complementary businesses,
technologies or products.
We were party to an operating lease agreement
related to our headquarters facility in Eden Prairie, Minnesota. This lease was set to expire in October of fiscal 2006. This operating lease, which is
sometimes referred to as a “synthetic lease,” contained a minimum residual value guarantee at the end of the lease term, and also gave us a
purchase option at the end of the lease term. During the third quarter of fiscal 2003, we purchased this property for an aggregate purchase price of
$46.8 million. The entire purchase price was paid out of restricted cash.
36
In addition, during fiscal 2003, we purchased a
total of four other properties that we leased under synthetic leases. Two properties were purchased for $55.9 million and the remaining two were
purchased for $45.5 million. All of the properties were purchased using restricted cash previously pledged to secure the lease obligations. The two
properties that were purchased for $55.9 million were recorded at their fair market value of $15.7 million, which resulted in a $5.2 million impairment
charge and a $35.0 million reduction in our restructuring accrual as we previously recognized this loss in a prior fiscal year. These two properties
are currently classified as assets held for sale on our consolidated balance sheet because we intend to sell them within one year from the date of
purchase. The remaining two properties that were purchased for $45.5 million were immediately sold for total proceeds of $15.3 million, which was
available to us as unrestricted cash. The difference between the purchase price for these two properties of $45.5 million and the sale price of $15.3
million was previously included in our restructuring accrual.
Capital Expenditure and Investment
Commitments
As of October 31, 2003, we had commitments (both
cancelable and non-cancelable) for capital expenditures related to the ongoing operation of our business of approximately $5.6 million. These
commitments primarily reflect future equipment purchases as well as improvements to existing buildings and facilities. The commitments are estimated to
be paid by the end of fiscal 2004. We intend to fund these expenditures from cash on hand.
Vendor Financing
We have worked with customers and third-party
financiers to find a means of financing projects by negotiating financing arrangements. As of October 31, 2003, 2002 and 2001, we had commitments to
extend credit of $26.5 million, $58.0 million and $166.9 million for such arrangements, respectively. The total amount drawn and outstanding under the
commitments was approximately $23.2 million, $20.9 million and $80.2 million, respectively, as of October 31, 2003, 2002 and 2001. The commitments to
extend credit are conditional agreements generally having fixed expiration or termination dates and specific interest rates, conditions and purposes.
These commitments may expire without being drawn. We regularly review all outstanding commitments, and the results of these reviews are considered in
assessing the overall risk for possible credit losses. At October 31, 2003, we have recorded approximately $19.4 million in loss reserves in the event
of non-performance related to these financing arrangements.
In connection with the sale of a participation
interest in a customer note receivable for $14.3 million, we guaranteed the payment obligation of the customer to the purchaser of the participation
interest. During fiscal 2003, the underlying customer defaulted on the note receivable. Therefore, we were required to pay the purchaser of the
participation interest $14.5 million, which was the outstanding principal and interest on the note receivable at the time the customer defaulted. Of
the $14.5 million payment, we used $14.3 million from our restricted cash that was previously pledged to secure our guarantee with the remainder being
paid from unrestricted cash. This note receivable was fully reserved for as part our allowance for doubtful accounts.
Working Capital and Liquidity
Outlook
Our main source of liquidity continues to be our
unrestricted cash on hand. We believe that our current unrestricted cash on hand should be adequate to fund our working capital requirements, planned
capital expenditures and restructuring costs through fiscal 2004. If we are able to maintain break-even or positive cash flow from operations, our
existing cash should be adequate to fund such expenditures for several years.
We believe that our entire restructuring accrual of
$33.4 million as of October 31, 2003, will have to be paid from our unrestricted cash (shown as cash and cash equivalents on our balance sheet) as
follows:
• |
|
$6.8 million for employee severance will be paid in fiscal
2004; |
• |
|
$9.8 million for facilities consolidation costs, which relate
principally to excess leased facilities, will be paid in fiscal 2004; and |
• |
|
the remainder of $16.8 million, which also relates to excess
leased facilities, will be paid over the respective lease terms ending through 2015. |
37
We also believe that our unrestricted cash on hand
will also enable us to pursue strategic opportunities, including possible product line or business acquisitions. However, if the cost of one or more
acquisition opportunities exceeds our existing capital resources, additional sources of capital may be required. We do not currently have any committed
lines of credit or other available credit facilities, and it is uncertain whether such facilities could be obtained in sufficient amounts or on
acceptable terms. Any plan to raise additional capital may involve an equity-based or equity-linked financing, such as another issuance of convertible
debt or the issuance of common stock or preferred stock, which would be dilutive to existing shareholders. Following the completion of our convertible
note financing transaction in fiscal 2003, we have approximately 130 million shares of common stock available for issuance under our articles of
incorporation after taking into account our share reserves for our stock option plans and employee stock purchase plan. Accordingly, any plan to raise
capital through the issuance of shares of common stock or securities convertible into common stock may require an amendment to our articles of
incorporation, which would require the approval of shareowners. Our proxy statement for our 2004 Annual Meeting of Shareowners includes a proposal to
increase our authorized shares of common stock by 1.2 billion.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to market risk from changes in
security prices, foreign exchange rates and interest rates. Market fluctuations could affect our results of operations and financial condition
adversely. We, at times, reduce this risk through the use of derivative financial instruments. We do not enter into derivative financial instruments
for the purpose of speculation.
We are exposed to interest rate risk as a result of
issuing $200.0 million of convertible unsecured subordinated notes on June 4, 2003, that have a variable interest rate. The interest rate on these
notes is equal to 6-month LIBOR plus 0.375%. The interest rate on these notes is reset semiannually on each interest payment date, which is June 15 and
December 15 of each year until their maturity in fiscal 2013. Assuming interest rates rise an additional 1%, 5% and 10%, our annual interest expense
would increase by $2.0 million, $10.0 million and $20.0 million, respectively.
As described in Note 3 to the Consolidated Financial
Statements in Item 8 of this Form 10-K, we maintain an investment portfolio of available-for-sale equity securities of $4.7 million. The values
recorded for these investments are subject to market price volatility. We monitor these investments for impairment and make appropriate reductions in
carrying value when necessary.
We offer a non-qualified 401(k) excess plan to allow
certain executives to defer earnings in excess of the annual individual contribution and compensation limits on 401(k) plans imposed by the U.S.
Internal Revenue Code. Under this plan, the salary deferrals and our matching contributions are not placed in a separate fund or trust account. Rather,
the deferrals represent our unsecured general obligation to pay the balance owing to the executives upon termination of their employment. In addition,
the executives are able to elect to have their account balances indexed to a variety of diversified mutual funds (stock, bond and balanced), as well as
to our common stock. Accordingly, our outstanding deferred compensation obligation under this plan is subject to market risk. As of October 31, 2003,
our outstanding deferred compensation obligation related to the 401(k) excess plan was $7.3 million, of which approximately $1.4 million was indexed to
ADC common stock. Assuming a 20%, 50% or 100% aggregate increase in the value of the investment alternatives to which the account balances may be
indexed, our outstanding deferred compensation obligation would increase by $1.5 million, $3.7 million and $7.3 million, respectively, and we would
incur an expense of a like amount.
We also are exposed to market risk from changes in
foreign exchange rates. To mitigate the risk from these exposures, we have instituted a balance sheet hedging program. The objective of this program is
to protect our net monetary assets and liabilities in non-functional currencies from fluctuations due to movements in foreign exchange rates. The
program operates in markets where hedging costs are beneficial. We attempt to minimize exposure to currencies in which hedging instruments are
unavailable or prohibitively expensive by managing our operating activities and net asset positions. The majority of hedging instruments utilized are
forward contracts with maturities of less than one year. Foreign exchange contracts reduce our overall exposure to exchange rate movements, since gains
and losses on these contracts offset losses and gains on the underlying exposure. See Note 1 to the Consolidated Financial Statements in Item 8 of this
Form 10-K for information about our foreign exchange hedging program.
38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
Board of Directors and Shareowners
ADC Telecommunications,
Inc.
We have audited the accompanying consolidated balance sheets of ADC
Telecommunications, Inc. and subsidiaries as of October 31, 2003 and 2002, and the related consolidated statements of income, shareholders’
equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits. The consolidated financial statements of ADC Telecommunications, Inc., and
subsidiaries as of October 31, 2001, and for the year then ended, were audited by other auditors who have ceased operations and whose report dated
November 21, 2001, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in
the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ADC Telecommunications, Inc. and subsidiaries at October 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in
the United States.
As discussed above, the consolidated financial statements of ADC
Telecommunications, Inc., and subsidiaries as of October 31, 2001, and for the year then ended were audited by other auditors who have ceased
operations. As described in Note 12, these consolidated financial statements have been revised to include the transitional disclosures required by
Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of November 1, 2001. We have audited the disclosures in Note 12 and, in our opinion, the disclosures for fiscal
2001 in Note 12 are appropriate. However, we were not engaged to audit, review or apply any procedures to the fiscal 2001 consolidated financial
statements of the Company other than with respect to such disclosures, and accordingly, we do not express an opinion or any other form of assurance on
the fiscal 2001 consolidated financial statements taken as a whole.
Ernst & Young LLP
Minneapolis, Minnesota
December 1, 2003
39
Note: The following report is a copy of a report previously issued by Arthur
Andersen LLP (“Andersen”), which report has not been reissued by Andersen. Certain financial information for the period ended October 31,
2001 was not reviewed by Andersen and includes: (i) reclassifications to conform to our fiscal 2003 financial statement presentation and (ii)
additional disclosures to conform with new accounting pronouncements and SEC rules and regulations.
Report of Independent Public Accountants
To ADC Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of ADC
Telecommunications, Inc. (a Minnesota corporation) and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of
operations, shareowners’ investment and cash flows for each of the three years in the period ended October 31, 2001. These financial statements
are the responsibility of ADC’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in
the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly, in
all material respects, the financial position of ADC Telecommunications, Inc., and subsidiaries as of October 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Minneapolis, Minnesota
November 21, 2001
40
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of
Operations
(in millions, except earnings per share)
|
|
|
|
For the years ended October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
$ |
571.7 |
|
|
$ |
809.3 |
|
|
$ |
2,044.5 |
|
Services |
|
|
|
|
201.5 |
|
|
|
238.4 |
|
|
|
358.3 |
|
Total net
sales |
|
|
|
|
773.2 |
|
|
|
1,047.7 |
|
|
|
2,402.8 |
|
Cost of
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
316.6 |
|
|
|
593.7 |
|
|
|
1,358.2 |
|
Services |
|
|
|
|
165.2 |
|
|
|
207.5 |
|
|
|
319.6 |
|
Total cost of
sales |
|
|
|
|
481.8 |
|
|
|
801.2 |
|
|
|
1,677.8 |
|
Gross
Profit |
|
|
|
|
291.4 |
|
|
|
246.5 |
|
|
|
725.0 |
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
|
|
108.6 |
|
|
|
182.8 |
|
|
|
287.3 |
|
Selling and
administration |
|
|
|
|
222.1 |
|
|
|
374.0 |
|
|
|
715.3 |
|
Goodwill
amortization |
|
|
|
|
— |
|
|
|
— |
|
|
|
56.6 |
|
Impairment
charges |
|
|
|
|
15.6 |
|
|
|
348.3 |
|
|
|
501.7 |
|
Restructuring
charges |
|
|
|
|
41.8 |
|
|
|
219.6 |
|
|
|
195.4 |
|
Total
expenses |
|
|
|
|
388.1 |
|
|
|
1,124.7 |
|
|
|
1,756.3 |
|
Operating
Loss |
|
|
|
|
(96.7 |
) |
|
|
(878.2 |
) |
|
|
(1,031.3 |
) |
Other
Income (Expense), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net |
|
|
|
|
6.3 |
|
|
|
8.4 |
|
|
|
(2.2 |
) |
Loss on sale
or shutdown of product lines |
|
|
|
|
(1.4 |
) |
|
|
(6.7 |
) |
|
|
(81.9 |
) |
Gain (loss)
on write-down or sale of investments, net |
|
|
|
|
3.8 |
|
|
|
16.9 |
|
|
|
(785.7 |
) |
Loss on sale
of fixed assets |
|
|
|
|
(1.0 |
) |
|
|
(11.5 |
) |
|
|
(1.3 |
) |
Gain on
patent infringement settlement |
|
|
|
|
— |
|
|
|
26.2 |
|
|
|
— |
|
Other,
net |
|
|
|
|
6.9 |
|
|
|
(37.3 |
) |
|
|
(18.3 |
) |
Loss
Before Income Taxes |
|
|
|
|
(82.1 |
) |
|
|
(882.2 |
) |
|
|
(1,920.7 |
) |
Provision
(Benefit) for Income Taxes |
|
|
|
|
(5.4 |
) |
|
|
262.8 |
|
|
|
(633.0 |
) |
Net Loss
|
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,287.7 |
) |
Average
Common Shares Outstanding (Basic and Diluted) |
|
|
|
|
803.4 |
|
|
|
795.6 |
|
|
|
787.0 |
|
Loss Per
Share (Basic and Diluted) |
|
|
|
$ |
(.10 |
) |
|
$ |
(1.44 |
) |
|
$ |
(1.64 |
) |
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Balance
Sheets
(in millions)
|
|
|
|
October 31,
2003
|
|
October 31,
2002
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
720.0 |
|
|
$ |
278.9 |
|
Available-for-sale securities |
|
|
|
|
26.7 |
|
|
|
0.5 |
|
Accounts
receivable, net of reserves of $23.5 and $33.9 |
|
|
|
|
110.6 |
|
|
|
115.1 |
|
Unbilled
revenues |
|
|
|
|
30.6 |
|
|
|
25.8 |
|
Inventories,
net of reserves of $45.6 and $93.9 |
|
|
|
|
69.5 |
|
|
|
94.9 |
|
Prepaid
income taxes |
|
|
|
|
— |
|
|
|
126.6 |
|
Prepaid and
other current assets |
|
|
|
|
48.6 |
|
|
|
44.5 |
|
Total current
assets |
|
|
|
|
1,006.0 |
|
|
|
686.3 |
|
Property
and Equipment, Net |
|
|
|
|
192.3 |
|
|
|
206.8 |
|
Assets
Held for Sale |
|
|
|
|
25.1 |
|
|
|
20.0 |
|
Restricted
Cash |
|
|
|
|
20.0 |
|
|
|
177.0 |
|
Available-for-sale securities |
|
|
|
|
19.5 |
|
|
|
— |
|
Other
Assets |
|
|
|
|
34.0 |
|
|
|
54.1 |
|
Total
assets |
|
|
|
$ |
1,296.9 |
|
|
$ |
1,144.2 |
|
LIABILITIES AND SHAREOWNERS’ INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
49.3 |
|
|
$ |
73.0 |
|
Accrued
compensation and benefits |
|
|
|
|
54.9 |
|
|
|
74.1 |
|
Other accrued
liabilities |
|
|
|
|
119.6 |
|
|
|
110.8 |
|
Restructuring
accrual |
|
|
|
|
33.4 |
|
|
|
124.2 |
|
Notes
payable |
|
|
|
|
8.3 |
|
|
|
15.7 |
|
Total current
liabilities |
|
|
|
|
265.5 |
|
|
|
397.8 |
|
Long-Term
Notes Payable |
|
|
|
|
400.0 |
|
|
|
10.8 |
|
Other
Long-Term Liabilities |
|
|
|
|
3.7 |
|
|
|
3.4 |
|
Total
liabilities |
|
|
|
|
669.2 |
|
|
|
412.0 |
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
Shareowners’ Investment:
|
|
|
|
|
|
|
|
|
|
|
Common stock,
$0.20 par value; authorized 1,200.0 shares; issued and outstanding 806.6 and 799.6 shares |
|
|
|
|
161.3 |
|
|
|
159.9 |
|
Paid-in
capital |
|
|
|
|
1,246.9 |
|
|
|
1,272.6 |
|
Accumulated
deficit |
|
|
|
|
(750.0 |
) |
|
|
(673.3 |
) |
Deferred
compensation |
|
|
|
|
(9.3 |
) |
|
|
(12.3 |
) |
Accumulated
other comprehensive loss |
|
|
|
|
(21.2 |
) |
|
|
(14.7 |
) |
Total
shareowners’ investment |
|
|
|
|
627.7 |
|
|
|
732.2 |
|
Total
liabilities and shareowners’ investment |
|
|
|
$ |
1,296.9 |
|
|
$ |
1,144.2 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of
Shareowners’ Investment
(in millions)
|
|
|
|
Common Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Retained
Earnings
(Deficit)
|
|
Deferred
Compensation
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
Balance,
October 31, 2000 |
|
|
|
|
770.3 |
|
|
$ |
154.1 |
|
|
$ |
954.0 |
|
|
$ |
1,759.4 |
|
|
$ |
(39.2 |
) |
|
$ |
84.4 |
|
|
$ |
2,912.7 |
|
Net
income |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,287.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,287.7 |
) |
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
gain |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.4 |
|
|
|
12.4 |
|
Unrealized
loss on securities, net of taxes of $(338.0) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(575.5 |
) |
|
|
(575.5 |
) |
Adjustment
for write-down of securities, net of taxes of $302.1 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
514.4 |
|
|
|
514.4 |
|
Adjustment
for sale of securities, net of taxes of $(6.9) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.8 |
) |
|
|
(11.8 |
) |
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,348.2 |
) |
Exercise of
common stock options |
|
|
|
|
6.9 |
|
|
|
1.4 |
|
|
|
27.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29.0 |
|
Stock issued
for business acquisitions |
|
|
|
|
11.6 |
|
|
|
2.3 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.3 |
|
Stock issued
for employee benefit plans |
|
|
|
|
3.2 |
|
|
|
0.6 |
|
|
|
12.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.4 |
|
Reduction of
deferred compensation, net of forfeitures |
|
|
|
|
— |
|
|
|
— |
|
|
|
(3.8 |
) |
|
|
— |
|
|
|
22.5 |
|
|
|
— |
|
|
|
18.7 |
|
Tax benefits
from exercise of common stock options |
|
|
|
|
— |
|
|
|
— |
|
|
|
22.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22.5 |
|
Tax benefits
related to acquisition |
|
|
|
|
— |
|
|
|
— |
|
|
|
240.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
240.0 |
|
Balance,
October 31, 2001 |
|
|
|
|
792.0 |
|
|
|
158.4 |
|
|
|
1,256.1 |
|
|
|
471.7 |
|
|
|
(16.7 |
) |
|
|
23.9 |
|
|
|
1,893.4 |
|
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,145.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,145.0 |
) |
Other
comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
gain |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.3 |
|
|
|
2.3 |
|
Unrealized
loss on securities, net of taxes of $(1.4) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.3 |
) |
|
|
(2.3 |
) |
Adjustment
for write-down of securities, net of taxes of $1.9 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.2 |
|
|
|
3.2 |
|
Adjustment
for sale of securities, net of taxes of $(24.5) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41.8 |
) |
|
|
(41.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,183.6) |
> |
Exercise of
common stock options,
net of forfeitures |
|
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
3.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.4 |
|
Stock issued
for employee benefit plans |
|
|
|
|
6.4 |
|
|
|
1.3 |
|
|
|
13.3 |
|
|
|
— |
|
|
|
(9.9 |
) |
|
|
— |
|
|
|
4.7 |
|
Reduction of
deferred compensation |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14.3 |
|
|
|
— |
|
|
|
14.3 |
|
Balance,
October 31, 2002 |
|
|
|
|
799.6 |
|
|
|
159.9 |
|
|
|
1,272.6 |
|
|
|
(673.3 |
) |
|
|
(12.3 |
) |
|
|
(14.7 |
) |
|
|
732.2 |
|
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(76.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(76.7 |
) |
Other
comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
gain |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10.7 |
) |
|
|
(10.7 |
) |
Unrealized
gain on securities, net of taxes of $0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
4.2 |
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83.2 |
) |
Exercise of
common stock options |
|
|
|
|
2.7 |
|
|
|
0.5 |
|
|
|
3.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.1 |
|
Stock issued
for employee benefit plans, net of forfeitures |
|
|
|
|
4.3 |
|
|
|
0.9 |
|
|
|
5.2 |
|
|
|
— |
|
|
|
(1.4 |
) |
|
|
— |
|
|
|
4.7 |
|
Reduction of
deferred compensation |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.4 |
|
|
|
— |
|
|
|
4.4 |
|
Purchased call
option |
|
|
|
|
|
|
|
|
|
|
|
|
(137.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137.3 |
) |
Sale of
warrants |
|
|
|
|
|
|
|
|
|
|
|
|
102.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.8 |
|
Balance,
October 31, 2003 |
|
|
|
|
806.6 |
|
|
$ |
161.3 |
|
|
$ |
1,246.9 |
|
|
$ |
(750.0 |
) |
|
$ |
(9.3 |
) |
|
$ |
(21.2 |
) |
|
$ |
627.7 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
43
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of
Cash Flows
(in millions)
|
|
|
|
For the years ended October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,287.7 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating activities—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
59.2 |
|
|
|
104.7 |
|
|
|
197.8 |
|
Provision for
losses on receivables |
|
|
|
|
3.7 |
|
|
|
26.4 |
|
|
|
73.8 |
|
Inventory
reserves |
|
|
|
|
2.9 |
|
|
|
49.7 |
|
|
|
47.7 |
|
Purchased
in-process research and development |
|
|
|
|
— |
|
|
|
10.5 |
|
|
|
— |
|
Write-down of
inventory, property and equipment and goodwill |
|
|
|
|
23.6 |
|
|
|
367.2 |
|
|
|
477.8 |
|
Non-cash
stock compensation |
|
|
|
|
4.4 |
|
|
|
14.3 |
|
|
|
18.7 |
|
Deferred
income taxes |
|
|
|
|
— |
|
|
|
498.1 |
|
|
|
(438.9 |
) |
Loss on
write-down of investments |
|
|
|
|
— |
|
|
|
50.9 |
|
|
|
862.5 |
|
Gain on sale
of investments |
|
|
|
|
(3.8 |
) |
|
|
(67.8 |
) |
|
|
(76.8 |
) |
Loss on sale
of fixed assets |
|
|
|
|
1.0 |
|
|
|
14.8 |
|
|
|
6.5 |
|
Loss on sale
or shutdown of product lines |
|
|
|
|
1.4 |
|
|
|
6.7 |
|
|
|
81.9 |
|
Other,
net |
|
|
|
|
(1.0 |
) |
|
|
(0.1 |
) |
|
|
3.4 |
|
Changes in
operating assets and liabilities, net of acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and
unbilled receivables |
|
|
|
|
6.2 |
|
|
|
160.8 |
|
|
|
339.3 |
|
Inventories |
|
|
|
|
19.5 |
|
|
|
104.3 |
|
|
|
89.5 |
|
Prepaid and
other assets |
|
|
|
|
149.9 |
|
|
|
73.9 |
|
|
|
(185.5 |
) |
Accounts
payable |
|
|
|
|
(31.3 |
) |
|
|
(88.1 |
) |
|
|
(61.7 |
) |
Accrued
liabilities |
|
|
|
|
(120.1 |
) |
|
|
(120.8 |
) |
|
|
(53.3 |
) |
Total cash
provided by operating activities |
|
|
|
|
38.9 |
|
|
|
60.5 |
|
|
|
95.0 |
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired |
|
|
|
|
— |
|
|
|
(4.2 |
) |
|
|
(48.7 |
) |
Divestitures,
net of cash disposed |
|
|
|
|
1.9 |
|
|
|
2.3 |
|
|
|
117.5 |
|
Property and
equipment additions |
|
|
|
|
(69.5 |
) |
|
|
(39.4 |
) |
|
|
(249.2 |
) |
Property and
equipment disposals |
|
|
|
|
1.9 |
|
|
|
13.8 |
|
|
|
18.4 |
|
Change in
restricted cash |
|
|
|
|
157.0 |
|
|
|
(177.0 |
) |
|
|
— |
|
Purchase of
available-for-sale securities |
|
|
|
|
(57.0 |
) |
|
|
(3.5 |
) |
|
|
(29.0 |
) |
Sale of
available-for-sale securities |
|
|
|
|
21.9 |
|
|
|
74.4 |
|
|
|
222.0 |
|
Total cash
provided by (used for) investing activities |
|
|
|
|
56.2 |
|
|
|
(133.6 |
) |
|
|
31.0 |
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
(Repayments) of debt |
|
|
|
|
371.5 |
|
|
|
(5.9 |
) |
|
|
(35.8 |
) |
Purchase of
call spread option |
|
|
|
|
(34.5 |
) |
|
|
— |
|
|
|
— |
|
Common stock
issued |
|
|
|
|
8.2 |
|
|
|
9.1 |
|
|
|
40.4 |
|
Total cash
provided by financing activities |
|
|
|
|
345.2 |
|
|
|
3.2 |
|
|
|
4.6 |
|
Effect of
Exchange Rate Changes on Cash |
|
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
0.7 |
|
Increase
(Decrease) in Cash and Cash Equivalents |
|
|
|
|
441.1 |
|
|
|
(69.7 |
) |
|
|
131.3 |
|
Cash and
Cash Equivalents, Beginning of Year |
|
|
|
|
278.9 |
|
|
|
348.6 |
|
|
|
217.3 |
|
Cash and
Cash Equivalents, End of Year |
|
|
|
$ |
720.0 |
|
|
$ |
278.9 |
|
|
$ |
348.6 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Business: ADC
Telecommunications, Inc. is a global supplier of broadband network equipment, software and systems integration services that enable communications
service providers to deliver high-speed Internet, data, video and voice services to consumers and businesses worldwide. For management purposes, we are
organized into two reportable segments: Broadband Infrastructure and Access and Integrated Solutions.
Principles of
Consolidation: The consolidated financial statements include the accounts of ADC Telecommunications, Inc., a Minnesota
corporation, and all significant subsidiaries in which ADC Telecommunications, Inc. has more than a 50% equity ownership. In these Notes to
Consolidated Financial Statements, these companies are collectively referred to as “ADC,” “we,” “us” or “our.”
All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash
Equivalents: Cash equivalents represent short-term investments in commercial paper with original maturities of three months
or less. The carrying amounts of these investments approximate their fair value due to their short maturities. At October 31, 2003, our cash and cash
equivalents were spread between two major financial institutions to avoid any significant concentration risk.
Available for Sale
Securities: The Company classifies fixed-income securities with original maturities of more than three months but less than
one year on their acquisition date and investments in publicly held companies as currently available for sale securities. Fixed income investments with
an original maturity greater than one year on their acquisition date are classified as long-term available for sale securities.
Inventories: Inventories include material, labor and overhead and are stated at the lower of first-in, first-out
cost or market. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared to
current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements decrease due to market
conditions, technological and product life cycle changes as well as longer than previously expected usage periods.
Property and
Equipment: Property and equipment are recorded at cost and depreciated using the straight-line method over estimated useful
lives of three to thirty years or, in the case of leasehold improvements, over the term of the lease, if shorter. Both straight-line and accelerated
methods of depreciation are used for income tax purposes.
Impairment of Long-Lived
Assets: Prior to fiscal 2003, we evaluated property and equipment and identifiable intangibles for potential impairment in
compliance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In
fiscal 2003, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We record impairment losses on
long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. See Note 11 for details of our impairment charges.
Goodwill and Other Intangible
Assets: In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible
Assets.” We adopted this standard on November 1, 2001. Under the standard, goodwill is no longer amortized but will be reviewed annually for
impairment. Our other intangible assets (consisting primarily of patents and developed technology) will continue to be amortized over their useful
lives, typically seven years. Refer to Note 12 for details about the adoption of this standard and the results of our initial and annual impairment
tests.
Research and Development
Costs: Our policy is to expense all research and development costs in the period incurred.
45
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Revenue
Recognition: We recognize revenue when persuasive evidence of a final agreement exists, delivery has occurred, the selling
price is fixed or determinable and collectibility is reasonably assured. Revenue from product sales is primarily recognized at the time of delivery and
acceptance, and after consideration of all the terms and conditions of the customer contract. Revenue from services consists of fees for systems
requirements, system design and analysis, customization and installation services, ongoing system management, system enhancements, service bureau
processing, facilities management and maintenance. Services revenue is recognized as the services are performed, primarily on a time and materials
basis and to a lesser extent on a fixed fee basis over the term of the services provided. Revenue from maintenance contracts is recognized ratably over
the term of the agreement, generally one year. Revenue from the licensing of software rights is recognized at the time of delivery of the software to
the customer, provided that we have no remaining service obligations, collectibility is reasonably assured and the fees are fixed and determinable.
Where there are service obligations that are essential to the functionality of the software installed, license fees are recorded over the term of the
initial customization period.
The assessment of collectibility is particularly
critical in determining whether or not revenue should be recognized in the current market environment. As part of the revenue recognition process, we
determine whether trade and notes receivable are reasonably assured of collection based on various factors, including an evaluation of whether there
has been deterioration in the credit quality of our customers, which could result in us being unable to collect or sell the receivables. In situations
where it is unclear as to whether we will be able to sell or collect the receivable, revenue and related costs are deferred. Costs are recognized when
it has been determined that the collection of the receivable is unlikely.
We record provisions against our gross revenue for
estimated product returns and allowances in the period when the related revenue is recorded. These estimates are based on factors that include, but are
not limited to, historical sales returns, analyses of credit memo activities, current economic trends and changes in our customers’ demand. Should
our actual product returns and allowances exceed our estimates, additional reductions to our revenue would result.
Allowance for Uncollectible
Accounts: We are required to estimate the collectibility of our trade and notes receivable. A considerable amount of
judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the
past due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial
condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to
deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are
reevaluated and adjusted as additional information is received.
Warranty: We provide
reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our
warranty policy or applicable contractual warranty, our historical experience of known product failure rates, and use of materials and service delivery
costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems
arise.
Income Taxes and Deferred
Taxes: We utilize the liability method of accounting for income taxes. Deferred tax liabilities or assets are recognized for
the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the
likelihood that our deferred tax assets will be recovered from future taxable income, and we record a valuation allowance to reduce our deferred tax
assets to the amounts we believe to be realizable. We consider projected future taxable income and ongoing tax planning strategies in assessing the
amount of the valuation allowance. If we determine we will not realize all or part of our deferred tax assets, an adjustment to the deferred tax asset
will be charged to earnings in the period such determination is made. We concluded during the third
46
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
quarter of fiscal 2002 that a full valuation allowance against our net deferred tax assets was appropriate as a result of our cumulative losses to that
point, and the full utilization of our loss carryback potential. In addition, we expect to provide a full valuation allowance on any future tax
benefits until we can sustain a level of profitability that demonstrates our ability to utilize these assets.
We recorded an income tax benefit totaling $5.4
million for fiscal 2003. This benefit is primarily attributable to the reversal of accrued income tax liabilities resulting from the finalization of
federal, state and foreign income tax examinations.
Foreign Currency
Translation: We convert assets and liabilities of foreign operations to their U.S. dollar equivalents at rates in effect at
the balance sheet dates, and we record translation adjustments in shareowners’ investment. Income statements of foreign operations are translated
from the operations’ functional currency to U.S. dollar equivalents at the exchange rate on the transaction dates. Foreign exchange transaction
gains and losses are reported in other income (expense), net.
We sometimes hedge forecasted foreign currency
transactions. Derivatives entered into for this purpose are classified as economic hedges of foreign currency cash flows. Foreign currency cash flows
may arise from cross-border transactions principally in the Euro, Great British pound, Australian dollar and Canadian dollar. We record these
instruments at fair value on our balance sheet, with gains and losses recorded in other income (expense) as foreign currency
transactions.
Our foreign exchange forward contracts contain
credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. We minimize such risk by limiting our
counterparties to major financial institutions. We do not expect to realize any material losses as a result of defaults by other
parties.
Use of Estimates: The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used in determining such items as
returns and allowances, depreciation and amortization lives and amounts recorded for contingencies and other reserves. Although these estimates are
based on our knowledge of current events and actions we may undertake in the future, these estimates ultimately may differ from actual
results.
Comprehensive Income
(Loss): Components of comprehensive income (loss) include net income, foreign currency translation adjustments and
unrealized gains (losses) on available-for-sale securities, net of tax. Comprehensive income is presented in the consolidated statements of
shareowners’ investment.
Reclassifications: Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
Recently Issued Accounting
Pronouncements: In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes SFAS 121. SFAS 144 primarily addresses significant
issues relating to the implementation of SFAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether primarily
held, used or newly acquired. The provisions of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. We adopted this standard
in first quarter of fiscal 2003. In fiscal 2003, we wrote-down $15.6 million of assets by applying FAS 144. Prior to adopting this standard, we wrote
down long-lived assets, excluding goodwill, by $212.0 and $207.2 million in fiscal 2002 and 2001, respectively, in accordance with SFAS No.
121.
In June 2002, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146
superseded Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits
and
47
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS No. 146 and EITF
No. 94-3 relates to when an entity can recognize a liability related to exit or disposal costs. SFAS No. 146 requires that a liability be recognized
for a cost associated with an exit or disposal activity when the liability is incurred. EITF No. 94-3 allowed a liability related to an exit or
disposal activity to be recognized on the date an entity commits to an exit plan. We adopted this standard on January 1, 2003, which was the
standard’s effective date. Adoption of the standard did not materially impact our consolidated financial results or financial position.
In November 2002, the FASB issued Financial
Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of the Indebtedness of Others,” which requires a guarantor to recognize and measure certain types of guarantees at fair value. In addition,
FIN 45 requires the guarantor to make new disclosures for these guarantees and other types of guarantees that are not subject to the initial
recognition and initial measurement provisions. The disclosure requirements are effective for financial statements with interim or annual periods ended
after December 15, 2002, while the recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted the initial recognition and measurement provision as well as the disclosure provision of FIN 45 during the first quarter
of fiscal year 2003. The initial recognition and measurement provisions did not have a material impact on our consolidated financial results or
financial position.
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosure.” The provisions of SFAS No. 148 amend SFAS No. 123,
“Accounting for Stock-Based Compensation,” to provide alternative methods of transition to a fair value-based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 also expands the disclosure requirements of SFAS No. 123 by requiring more detailed
disclosure in both annual and interim financial statements. The transition provisions of SFAS No. 148 will not have a material impact on our financial
results, as we do not plan to adopt the fair value-based accounting provisions of SFAS No. 123, which is commonly referred to as expensing of stock
options. The disclosure provisions of SFAS No. 148 are effective for interim periods beginning after December 15, 2002. Accordingly, we adopted the
disclosure provisions of this standard during the second quarter of fiscal 2003.
In January 2003, the FASB issued FIN 46,
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which requires companies to consolidate certain types
of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or
whose holders of the equity investments lack any of the following three characteristics: (i) the ability to make decisions about the entity’s
activities; (ii) the obligation to absorb the entity’s losses if they occur; or (iii) the right to receive the entity’s future returns if
they occur. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created
before February 1, 2003, the provisions of the interpretation are effective for financial statements issued for the first period ending after December
15, 2003, or March 15, 2004, depending on the nature of the variable interest entity. FIN 46 is not expected to have a material impact on our
consolidated financial position or results of operations.
48
Notes to Consolidated Financial Statements (Continued)
Note 2: Other Financial Statement Data (in millions)
Other Income (Expense), Net:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Interest
income |
|
|
|
$ |
9.9 |
|
|
$ |
12.4 |
|
|
$ |
6.6 |
|
Interest
expense |
|
|
|
|
(3.6 |
) |
|
|
(4.0 |
) |
|
|
(8.8 |
) |
Interest
income (expense), net |
|
|
|
$ |
6.3 |
|
|
$ |
8.4 |
|
|
$ |
(2.2 |
) |
Foreign
exchange income (loss) |
|
|
|
$ |
8.1 |
|
|
$ |
(17.7 |
) |
|
$ |
(5.3 |
) |
Equity
investment losses |
|
|
|
|
— |
|
|
|
— |
|
|
|
(8.4 |
) |
Loss on lease
termination |
|
|
|
|
— |
|
|
|
(8.2 |
) |
|
|
— |
|
Other |
|
|
|
|
(1.2 |
) |
|
|
(11.4 |
) |
|
|
(4.6 |
) |
Other,
net |
|
|
|
$ |
6.9 |
|
|
$ |
(37.3 |
) |
|
$ |
(18.3 |
) |
Supplemental Cash Flow
Information:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Income tax
refunds received |
|
|
|
$ |
(142.7 |
) |
|
$ |
(259.4 |
) |
|
$ |
(24.1 |
) |
Interest
paid |
|
|
|
|
1.4 |
|
|
$ |
5.3 |
|
|
$ |
7.7 |
|
Supplemental Schedule of Investing
Activities:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
assets acquired |
|
|
|
$ |
— |
|
|
$ |
20.8 |
|
|
$ |
78.3 |
|
Less:
Liabilities assumed |
|
|
|
|
— |
|
|
|
(16.5 |
) |
|
|
(24.9 |
) |
Cash
acquired |
|
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(4.7 |
) |
Acquisitions,
net of cash acquired |
|
|
|
$ |
— |
|
|
$ |
4.2 |
|
|
$ |
48.7 |
|
Divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value of assets disposed |
|
|
|
$ |
2.6 |
|
|
$ |
22.4 |
|
|
$ |
232.6 |
|
Less:
Liabilities disposed |
|
|
|
|
(0.7 |
) |
|
|
(20.1 |
) |
|
|
(110.3 |
) |
Cash
disposed |
|
|
|
|
— |
|
|
|
— |
|
|
|
(4.8 |
) |
Divestitures,
net of cash disposed |
|
|
|
$ |
1.9 |
|
|
$ |
2.3 |
|
|
$ |
117.5 |
|
49
Notes to Consolidated Financial Statements (Continued)
Note 2: Other Financial Statement Data (in millions)
(Continued)
Consolidated Balance Sheet
Information:
|
|
|
|
2003
|
|
2002
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
Purchased
materials and manufactured products |
|
|
|
$ |
107.8 |
|
|
$ |
176.4 |
|
Work-in-process |
|
|
|
|
7.3 |
|
|
|
12.4 |
|
Total |
|
|
|
$ |
115.1 |
|
|
$ |
188.8 |
|
Property
and Equipment:
|
|
|
|
|
|
|
|
|
|
|
Land and
buildings |
|
|
|
$ |
127.5 |
|
|
$ |
113.5 |
|
Machinery and
equipment |
|
|
|
|
391.8 |
|
|
|
418.8 |
|
Furniture and
fixtures |
|
|
|
|
38.3 |
|
|
|
37.8 |
|
Less
accumulated depreciation |
|
|
|
|
(368.3 |
) |
|
|
(370.9 |
) |
Total |
|
|
|
|
189.3 |
|
|
|
199.2 |
|
Construction-in-process |
|
|
|
|
3.0 |
|
|
|
7.6 |
|
Total,
net |
|
|
|
$ |
192.3 |
|
|
$ |
206.8 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable, net |
|
|
|
$ |
7.3 |
|
|
$ |
22.8 |
|
Patents |
|
|
|
|
9.5 |
|
|
|
11.2 |
|
Intangible
assets—other |
|
|
|
|
12.4 |
|
|
|
7.0 |
|
Cost basis
investments |
|
|
|
|
— |
|
|
|
3.9 |
|
Goodwill |
|
|
|
|
4.8 |
|
|
|
3.8 |
|
Other |
|
|
|
|
— |
|
|
|
5.4 |
|
Total |
|
|
|
$ |
34.0 |
|
|
$ |
54.1 |
|
Other
Accrued Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue |
|
|
|
$ |
36.1 |
|
|
$ |
17.3 |
|
Warranty
reserve |
|
|
|
|
13.4 |
|
|
|
13.1 |
|
Accrued
taxes |
|
|
|
|
38.0 |
|
|
|
30.5 |
|
Non-trade
payables |
|
|
|
|
24.6 |
|
|
|
48.1 |
|
Other |
|
|
|
|
7.5 |
|
|
|
1.8 |
|
Total |
|
|
|
$ |
119.6 |
|
|
$ |
110.8 |
|
Note 3: Investments
As of October 31, 2003 and 2002, our
available-for-sale securities consisted of the following (in millions):
|
|
|
|
Cost
Basis(1)
|
|
Unrealized
Gain
|
|
Fair Value
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
and other U.S. government agencies |
|
|
|
$ |
35.5 |
|
|
$ |
— |
|
|
$ |
35.5 |
|
Corporate
bonds |
|
|
|
|
6.0 |
|
|
|
— |
|
|
|
6.0 |
|
Equity
securities |
|
|
|
|
0.5 |
|
|
|
4.2 |
|
|
|
4.7 |
|
Total
available-for-sale securities |
|
|
|
$ |
42.0 |
|
|
$ |
4.2 |
|
|
$ |
46.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
|
$ |
0.5 |
|
|
|
— |
|
|
$ |
0.5 |
|
Total
Available-for-sale securities |
|
|
|
$ |
0.5 |
|
|
$ |
— |
|
|
$ |
0.5 |
|
| (1) |
|
As adjusted for the write-down of certain available-for-sale
securities to a lower-of-cost-or-market basis. |
50
Notes to Consolidated Financial Statements (Continued)
Note 3: Investments (Continued)
The fair value of investments in debt securities at
October 31, 2003 by contractual maturities are shown below (in millions). Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
|
|
|
|
Fair Value
|
|
Due in one
year or less |
|
|
|
$ |
22.0 |
|
|
|
|
|
Due in one
year through five years |
|
|
|
|
19.5 |
|
|
|
|
|
Total |
|
|
|
$ |
41.5 |
|
|
|
|
|
In accordance with our policy to review our
investment portfolio for declines that may be other than temporary, we recorded a non-cash loss of approximately $0.0 million, $5.7 million and $816.3
million on a lower-of-cost-or-market write-down on certain available-for-sale securities during fiscal 2003, 2002 and 2001, respectively. We also
recorded a write-down of approximately $0.0 million, $45.2 million and $46.2 million for certain investments in non-publicly traded securities in
fiscal 2003, 2002 and 2001, respectively, as a result of the downturn in market conditions in the technology and telecommunication market sectors. The
net gains described in the following paragraphs were recorded as an offset to the loss on the write-down of our investment portfolio.
In fiscal 2003, fiscal 2002, and fiscal 2001 we sold
common stock of certain companies in our investment portfolio and settled certain related equity collar arrangements for gains of $3.8 million, $67.8
million, and $76.8 million, respectively, as follows:
Fiscal 2003
During fiscal 2003, we sold certain investments in
our portfolio for an aggregate gain of $3.8 million.
Fiscal 2002
During fiscal 2002, we sold holdings of ONI Systems
and completely settled a related hedging arrangement for an aggregate gain of $66.5 million. In addition to the ONI Systems sale, we sold a portion of
our interest in MIND C.T.I. for $4.8 million and recognized a $0.3 million gain on the sale. Finally, we liquidated our investment in Northstar
Photonics, a non-marketable security, for a gain of $1.0 million.
Fiscal 2001
On February 22, 2001, Siemens and Efficient
Networks, Inc. entered into a definitive merger agreement. Pursuant to the merger agreement, Siemens purchased all of the outstanding shares of
Efficient Networks for $23.50 in cash per share. As a result of the merger, we recorded a gain of approximately $34.6 million in fiscal 2001 from the
sale of approximately 1.8 million shares of Efficient Networks that we owned.
On July 19, 2001, America Online, Inc. acquired
InfoInterActive, Inc. Under the terms of the acquisition agreement, AOL acquired all of the outstanding shares of InfoInterActive for $1.42 in cash per
share. As a result of the acquisition, we recorded a gain of approximately $2.1 million from the sale of approximately 1.5 million shares of
InfoInterActive in fiscal 2001.
During fiscal 2001, we sold 3.4 million shares of
our investment in Redback Networks, Inc., 1.6 million shares of our investment in ONI Systems and 2.3 million shares of our investment in GlobeSpan. As
a result of these sales, we recorded a $44.6 million loss on the sale of the Redback Networks shares, a $29.6 million gain on the sale of the ONI
Systems and a loss of $8.8 million on the sale of the GlobeSpan shares.
In addition, during fiscal 2001, we entered into
cashless collar arrangements to minimize the impact of a potential decrease in the market value of portions of our remaining investment in Redback
Networks,
51
Notes to Consolidated Financial Statements (Continued)
Note 3: Investments (Continued)
ONI Systems and
GlobeSpan. These cashless collar arrangements were contracts entered into with
third-party financial institutions whereby the financial institution guarantees a
certain floor value of the securities if held to maturity while simultaneously permitting
us to participate in a certain amount of appreciation above the floor value. The
financial institutions, independent of us, engage in certain hedging transactions to
manage their risk associated with these arrangements. These arrangements were terminated
when we sold a portion of the underlying investments during fiscal 2001. We recognized a
gain of $63.9 million upon the settlement of these collars.
As of October 31, 2001, we participated in a
market-price collar arrangement that locks in a price range for the sale of certain securities held as investments, which guarantees a minimum selling
price. Such derivatives are treated as cash flow hedges. Changes in the value of these derivatives are reported as a separate component of
shareowners’ investment in accumulated other comprehensive income (loss). During fiscal 2002, when we sold such securities, we completely settled
our investment collar and recognized a gain of $66.5 million.
Note 4: Notes Payable
On June 4, 2003, we issued $400.0 million of
convertible unsecured subordinated notes in two separate transactions pursuant to Rule 144A under the Securities Act of 1933. This issuance was made
through an initial offering of $350.0 million of convertible notes on May 29, 2003, and the subsequent exercise in full by the underwriters of such
offering of their option to purchase an additional $50.0 million of convertible notes. The net proceeds to us from this offering were $355.5 million
after underwriting discounts of $10.0 million and the net payment for the purchased call options and warrant transactions described below. In the first
transaction, we issued $200.0 million of 1.0% fixed rate convertible unsecured subordinated notes that mature on June 15, 2008. In the second
transaction, we issued $200.0 million of convertible unsecured subordinated notes that have a variable interest rate and mature on June 15, 2013. The
interest rate for the variable rate notes is equal to 6-month LIBOR plus 0.375%. The interest rate for the variable rate notes will be reset on each
semi-annual interest payment date, which are June 15 and December 15 of each year beginning on December 15, 2003, for both the fixed and variable rate
notes. The initial interest rate on the variable note is 1.59625% for the period ending December 15, 2003. The holders of both the fixed and variable
rate notes may convert all or some of their notes into shares of our common stock at any time prior to maturity at a conversion price of $4.013 per
share. We may not redeem the fixed rate notes anytime prior to their maturity date. We may redeem any or all of the variable rate notes at any time on
or after June 23, 2008.
Concurrent with the issuance of the fixed and
variable rate notes, we purchased five and ten-year call options on our common stock to reduce the potential dilution from conversion of the notes.
Under the terms of these call options, which become exercisable upon conversion of the notes, we have the right to purchase from the counterparty at a
purchase price of $4.013 per share the aggregate number of shares that we are obligated to issue upon conversion of the fixed and variable notes, which
is a maximum of 99.7 million shares. We also have the option to settle the call options with the counterparty through a net share settlement or cash
settlement, either of which would be based on the extent to which the then-current market price of our common stock exceeds $4.013 per share. The total
cost of all the call options was $137.3 million, which was recognized in shareowners’ investment. The cost of the call options was partially
offset by the sale of warrants to acquire shares of our common stock with terms of five and ten years to the same counterparty with whom we entered
into the call options. The warrants are exercisable for an aggregate of 99.7 million shares at an exercise price of $5.28 per share. The warrants
become exercisable upon conversion of the notes, and may be settled, at our option, either through a net share settlement or a net cash settlement,
either of which would be based on the extent to which the then-current market price of our common stock exceeds $5.28 per share. The gross proceeds
from the sale of the warrants were $102.8 million, which was recognized in shareowners’ investment. The call options and the
52
Notes to Consolidated Financial Statements (Continued)
Note 4: Notes Payable (Continued)
warrants are
subject to early expiration upon conversion of the notes. The net effect of the call
options and the warrants is to either reduce the potential dilution from the conversion
of the notes (if we elect net share settlement) or to increase the net cash proceeds of
the offering (if we elect net cash settlement) if the notes are converted at a time when
the current market price of our common stock is greater than $4.013 per share.
We plan to use the cash proceeds from this offering
for general corporate purposes and strategic opportunities, including financing for possible acquisitions or investments in complementary businesses,
technologies or products.
Note 5: Acquisitions
On February 26, 2001, we acquired all of the
outstanding equity interests in CommTech Corporation. CommTech was a provider of end-to-end service order management, provisioning and activation
software for communications service providers. In the transaction, we issued approximately 11.6 million shares of our common stock to CommTech’s
shareholders. We also converted all outstanding CommTech stock options into options to acquire approximately 1.6 million shares of our common stock.
The transaction was accounted for as a pooling-of-interests. Since the historical operations of CommTech were not material to our consolidated
operations or financial position, prior period annual financial statements were not restated for this acquisition. We divested a substantial portion of
CommTech in November of fiscal 2003 as part of our restructuring initiatives.
Note 6: Divestitures
During fiscal 2002 and 2001, we sold non-strategic
product lines in cable/broadcast TV transmission, broadband wireless transmission, broadcast TV video routing, enterprise access products, wireless
components, optical components and enhanced services software. In addition, we closed down our Avidia Multiplexer, Cellworx transport and optical laser
product lines, and the U.S. version of our iAN product line. These products did not meet our growth, profitability and market leadership criteria.
Included in these product line sales and shut downs were domestic operations in California, Connecticut, Minnesota, New Jersey, Oregon and
Pennsylvania, as well as international operations in Argentina, Australia, Austria, Denmark, Finland and Sweden. The sales of these assets generated
approximately $2.3 million and $117.5 million, net of cash disposed, in fiscal 2002 and 2001, respectively. As a result of these divestitures and
shutdowns, we recorded losses on sales or shutdown of approximately $6.7 million and $81.9 million in fiscal 2002 and 2001, respectively. Net sales and
operating income (loss) of the product lines divested in fiscal 2002 and 2001 were as follows (unaudited):
|
|
|
|
(in millions)
|
|
|
|
|
|
2002
|
|
2001
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
Broadband
Infrastructure & Access |
|
|
|
$ |
14.9 |
|
|
$ |
300.3 |
|
Integrated
Solutions |
|
|
|
|
— |
|
|
|
104.6 |
|
Total |
|
|
|
$ |
14.9 |
|
|
$ |
404.9 |
|
Operating
loss |
|
|
|
$ |
(96.8 |
) |
|
$ |
(250.3 |
) |
Note 7: Joint Ventures
In January 2001 and December 2001, we entered into a
total of three joint ventures with Competence Research and Development Ltd., an independent company. The joint ventures were established to share
development risk and capital resources associated with the development of technology used in our iAN™, BroadAccess™ and Small Subscriber
product lines. The joint ventures were successful in advancing the
53
Notes to Consolidated Financial Statements (Continued)
Note 7: Joint Ventures (Continued)
development of
technology related to these product lines. When the joint ventures were established we
held 34%, 20% and 49% interests, respectively, in the three joint venture entities.
Because we did not have majority control over the joint ventures, these investments were
accounted for using the equity method. Therefore, a pro rata portion of the joint
ventures’ profits or losses is reflected in our consolidated income statement as
Other Income (Expense). In fiscal 2002 and 2001, we incurred approximately $2.6 million
and $9.7 million, respectively, in equity losses related to these joint ventures.
In December 2001, we purchased Competence’s 66%
interest in one of the joint ventures for $3.9 million in cash and assumption of approximately $16.5 million in debt owed by that joint venture, the
proceeds of which were being used to fund the development of technology. In February 2002, we purchased Competence’s remaining interests in the
other joint ventures for approximately $350,000 in cash and assumption of approximately $4.2 million in debt, the proceeds of which were used to fund
the development of the technology. The debt was paid off immediately following the purchases. We recorded expense for in-process research and
development projects associated with the purchase of Competence’s interest in these ventures in fiscal 2002 of $10.5 million. In addition, $10.3
million was allocated to developed technology, of which $5.3 million was written off prior to fiscal 2003. The remainder is being amortized over a
period of seven years. Appraisals for purchased in-process and developed technology were determined using the income approach, discounted based on the
estimated likelihood that the project ultimately will succeed.
Note 8: Employee Benefit Plans
Retirement Saving
Plans: Substantially all employees are eligible to participate in retirement saving plans. In the United States, effective
April 1, 2003, we match employee contributions to our plan ($0.50 for every dollar contributed) up to 6% of eligible pay, and depending on our
financial performance, we voluntarily may make an additional contribution up to 120% on 6% of wages. Prior to April 1, 2003, we matched employee
contributions to our plan up to 6% of wages, and depending on our financial performance, we voluntarily could make an additional contribution up to 70%
on 6% of wages. Employees are fully vested in all contributions at the time the contributions are made. Our contributions to our U.S. retirement
savings plan were $6.1 million, $15.3 million, and $23.0 million during fiscal 2003, 2002 and 2001, respectively. If so elected by the participants,
the trustee for our U.S. retirement savings plan invests a portion of our cash contributions in our common stock. In addition, other retirement savings
plans exist in other of our global locations, which are aligned with local custom and practice. We contributed $2.6 million, $3.4 million, and $2.8
million to our global (non-U.S.) retirement savings plans in fiscal 2003, 2002 and 2001, respectively.
Global Employee Stock Purchase
Plan: We have a global employee stock purchase plan that is available to substantially all employees. Eligible employees may
purchase our common stock through payroll deductions. Under this plan, employees are able to purchase our common stock at a price equal to the lower of
85% of the market closing price of our stock at the beginning or the end of each six-month stock purchase period. We issued 3.4 million, 4.8 million
and 3.2 million shares of common stock pursuant to this plan during fiscal 2003, 2002, and 2001, respectively.
Stock Award Plans: We
maintain a global stock incentive plan to grant various stock awards, including stock options at fair market value and restricted shares, to key
employees and to our non-employee directors. A maximum of 145.8 million stock awards can be granted under this plan. Restricted stock awards are
limited to 4,000,000 shares. As of October 31, 2003, 79.4 million shares were available for stock awards, inclusive of a maximum of 1.2 million shares
available for issuance as restricted stock awards. In December 2001, we adopted the 2001 special stock option plan and made a one-time option grant to
non-executive employees to acquire an aggregate of 9.5 million shares to address acute retention and compensation considerations. All options granted
under this plan were made at fair market value.
54
Notes to Consolidated Financial Statements (Continued)
Note 8: Employee Benefit Plans (Continued)
The following schedule summarizes activity in all
plans (shares in millions):
|
|
|
|
Stock Option
Shares
|
|
Stock Options
Weighted
Average
Exercise
Price
|
|
Restricted
Shares
|
Outstanding at October 31, 2000 |
|
|
|
|
96.5 |
|
|
$ |
13.84 |
|
|
|
3.3 |
|
Granted |
|
|
|
|
30.6 |
|
|
|
12.65 |
|
|
|
0.2 |
|
Exercised |
|
|
|
|
(7.5 |
) |
|
|
3.33 |
|
|
|
— |
|
Restrictions
lapsed |
|
|
|
|
— |
|
|
|
— |
|
|
|
(2.3 |
) |
Canceled |
|
|
|
|
(23.7 |
) |
|
|
17.24 |
|
|
|
(0.7 |
) |
Outstanding at October 31, 2001 |
|
|
|
|
95.9 |
|
|
|
12.30 |
|
|
|
0.5 |
|
Granted |
|
|
|
|
43.0 |
|
|
|
4.24 |
|
|
|
1.9 |
|
Exercised |
|
|
|
|
(1.2 |
) |
|
|
0.87 |
|
|
|
— |
|
Restrictions
lapsed |
|
|
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
Canceled |
|
|
|
|
(30.1 |
) |
|
|
11.09 |
|
|
|
(0.3 |
) |
Outstanding at October 31, 2002 |
|
|
|
|
107.6 |
|
|
|
9.54 |
|
|
|
1.7 |
|
Granted |
|
|
|
|
29.9 |
|
|
|
2.28 |
|
|
|
2.7 |
|
Exercised |
|
|
|
|
(2.6 |
) |
|
|
1.42 |
|
|
|
— |
|
Restrictions
lapsed |
|
|
|
|
— |
|
|
|
— |
|
|
|
(0.6 |
) |
Canceled |
|
|
|
|
(60.4 |
) |
|
|
10.29 |
|
|
|
(1.6 |
) |
Outstanding at October 31, 2003 |
|
|
|
|
74.5 |
|
|
$ |
6.14 |
|
|
|
2.2 |
|
Exercisable at October 31, 2003 |
|
|
|
|
41.2 |
|
|
$ |
8.50 |
|
|
|
— |
|
The following table contains details of
our outstanding stock options as of October 31, 2003:
Range of Exercise
Prices Between
|
|
Number
Outstanding
(in millions)
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted
Average Exercise
Price
|
|
Number
Exercisable
(in millions)
|
|
Weighted
Average
Exercise Price
|
|
| $0.96 |
|
|
|
$ |
2.09 |
|
|
|
3.6 |
|
|
|
8.81 |
|
|
$ |
1.65 |
|
|
|
1.4 |
|
|
$ |
1.62 |
|
| 2.16 |
|
|
|
|
2.26 |
|
|
|
17.1 |
|
|
|
9.08 |
|
|
|
2.26 |
|
|
|
.01 |
|
|
|
2.23 |
|
| 2.29 |
|
|
|
|
2.36 |
|
|
|
1.6 |
|
|
|
7.44 |
|
|
|
2.35 |
|
|
|
.2 |
|
|
|
2.29 |
|
| 2.42 |
|
|
|
|
3.89 |
|
|
|
5.7 |
|
|
|
7.38 |
|
|
|
3.11 |
|
|
|
2.7 |
|
|
|
3.37 |
|
| 4.02 |
|
|
|
|
4.37 |
|
|
|
9.9 |
|
|
|
7.93 |
|
|
|
4.36 |
|
|
|
7.8 |
|
|
|
4.36 |
|
| 4.44 |
|
|
|
|
7.68 |
|
|
|
11.4 |
|
|
|
6.80 |
|
|
|
5.97 |
|
|
|
9.1 |
|
|
|
6.02 |
|
| 7.70 |
|
|
|
|
10.76 |
|
|
|
9.9 |
|
|
|
2.31 |
|
|
|
9.45 |
|
|
|
9.4 |
|
|
|
9.45 |
|
| 11.01 |
|
|
|
|
14.56 |
|
|
|
8.1 |
|
|
|
4.56 |
|
|
|
11.75 |
|
|
|
8.0 |
|
|
|
11.74 |
|
| 16.48 |
|
|
|
|
40.94 |
|
|
|
6.9 |
|
|
|
6.80 |
|
|
|
23.13 |
|
|
|
2.3 |
|
|
|
23.14 |
|
| 41.94 |
|
|
|
|
41.94 |
|
|
|
0.3 |
|
|
|
6.69 |
|
|
|
41.94 |
|
|
|
.3 |
|
|
|
41.94 |
|
|
| $0.96 |
|
|
|
$ |
41.94 |
|
|
|
74.5 |
|
|
|
6.92 |
|
|
$ |
6.14 |
|
|
|
41.2 |
|
|
$ |
8.50 |
|
55
Notes to Consolidated Financial Statements (Continued)
Note 8: Employee Benefit Plans (Continued)
The weighted average fair value per option at the
date of grant for options granted in fiscal 2003, 2002 and 2001 was $1.13, $2.27 per share and $8.74 per share, respectively. The fair value was
estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Risk-free
interest rate |
|
|
|
|
2.62 |
% |
|
|
2.43 |
% |
|
|
3.27 |
% |
Expected
dividend |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected
volatility factor |
|
|
|
|
66.92 |
% |
|
|
67.02 |
% |
|
|
93.2 |
% |
Expected
option term |
|
|
|
3.2
years |
|
4.3
years |
|
4.4
years |
During fiscal year 2003, we adopted the disclosure
provisions of SFAS No. 148. However, as discussed in Note 1, we did not adopt the transition provisions of SFAS No. 148.
Stock compensation is awarded to certain key
employees in the form of stock options and restricted stock. We account for stock compensation in accordance with Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as amended by SFAS No. 148. All stock options are
issued at fair market value on the date of grant. Accordingly, we do not recognize stock compensation expense for stock options granted during the
periods presented.
Under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Fair
value is determined using an option-pricing model, such as Black-Scholes, that takes into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the underlying stock, the expected dividends, and the risk-free interest rate over the
expected life of the of the option.
The following table summarizes what our operating
results would have been if the fair value method of accounting for stock options had been utilized (in millions, except per share
amounts):
|
|
|
|
2003
|
|
2002
|
|
2001
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,287.7 |
) |
Pro
forma |
|
|
|
|
(119.0 |
) |
|
|
(1,259.4 |
) |
|
|
(1,393.7 |
) |
Earnings
(Loss) Per Share—Basic And Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
|
$ |
(1.64 |
) |
Pro
forma |
|
|
|
|
(0.15 |
) |
|
|
(1.58 |
) |
|
|
(1.77 |
) |
During the third quarter of fiscal 2003, we offered
to eligible employees the right to exchange certain of their employee stock options for a lesser number of new options to be granted six months and one
day following the surrender of their existing options. The new options, which were granted on December 29, 2003, have an exercise price of $2.83 per
share, which is equal to the average of the high and low trading price of our common stock on the grant date. These options will vest over a two-year
period from the grant date. For purposes of the above tabular disclosure of operating results under the fair value method of accounting stock options,
the unrecognized compensation cost of the cancelled options and the incremental fair value of the replacement options will be amortized over a 30 month
period, which consists of the 24 month vesting period for the replacement options and the six month and one day period between the cancellation of the
surrendered options and the grant of the replacement options.
As a result of the issuance of Interpretation No.
44, “Accounting for Certain Transactions Involving Stock Compensation—An Interpretation of APB Opinion No. 25,” we were required
to record a non-cash stock compensation expense and deferred compensation expense related to the unvested portion of options issued in the purchase
business combination of Centigram Communications Corporation in the third quarter of fiscal 2000. The value attributed to unvested options of $12.1
million was allocated to deferred compensation expense and was amortized over the remaining vesting period. Non-cash stock
56
Notes to Consolidated Financial Statements (Continued)
Note 8: Employee Benefit Plans (Continued)
compensation
expense recorded in fiscal 2001 relating to the Centigram acquisition was $6.0 million.
These options were cancelled shortly after the divestiture of Centigram on October 31,
2001. Further non-cash stock compensation expense of $0.9 million, $10.4 million and
$12.7 million was recognized in fiscal 2003, 2002 and 2001, respectively, as a result of
unvested stock options and restricted stock converted into ADC awards in connection with
our fiscal 2000 acquisition of Broadband Access Systems. The exercise prices on the date
of grant were deemed to be less than the estimated fair values of the awards. Expense is
being recognized over the anticipated vesting period of the awards through fiscal 2005.
Such amounts are reflected in research and development and selling and administration
expense in the consolidated statements of operations.
In addition, we incurred $3.5 million, $3.9 million
and $0.0 million of deferred compensation expense in fiscal 2003, 2002 and 2001 related to restricted stock issued as part of employee incentive plans
and was included in selling and administration expenses.
Note 9: Capital Stock and Accumulated Other Comprehensive Income
Authorized Stock: We
are currently authorized to issue 1.2 billion shares of $0.20 par value common stock and 10.0 million shares of no par value preferred stock. There are
no shares of preferred stock outstanding.
Dividends: No cash
dividends have been declared or paid during the past three years.
Loss Per Share: Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. The following
table reconciles the number of shares utilized in the loss per share calculations (in millions, except earnings per share):
|
|
|
|
2003
|
|
2002
|
|
2001
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,287.7 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic and diluted earnings per share |
|
|
|
|
803.4 |
|
|
|
795.6 |
|
|
|
787.0 |
|
Loss per
share—basic and diluted |
|
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
|
$ |
(1.64 |
) |
Employee stock options to acquire 41.2 million,
110.8 million and 64.6 million shares were excluded from the dilutive securities described above for fiscal 2003, 2002 and 2001, respectively, because
the exercise prices of these options were greater than the average market price of the common stock or due to the net loss for the respective
periods.
Warrants to acquire 99.7 million shares that were
issued in connection with our convertible notes were excluded from the dilutive securities described above for fiscal 2003, because the strike price of
these warrants were greater than the average market price of the common stock. See Note 4 for a further discussion of these warrants.
Because of their anti-dilutive effect, stock options
and all shares reserved for issuance upon conversion of our convertible notes were excluded for fiscal 2003. Upon achieving positive net income in a
reporting period, our recent issuance of convertible notes will require us to use the “if-converted” method for computing diluted earnings
per share with respect to the shares reserved for issuance upon conversion of the notes. Under this method, we will add back the net-of-tax interest
expense on the convertible notes and then divide net income by outstanding shares, including all 99.7 million shares reserved for issuance upon
conversion of the notes. If this calculation results in further diluting the earnings per share, our diluted earnings per share will include all 99.7
million shares of common stock reserved for issuance upon conversion of our convertible notes. If this calculation is anti-dilutive, the net-of-tax
interest on the
57
Notes to Consolidated Financial Statements (Continued)
Note 9: Capital Stock and Accumulated Other Comprehensive Income
(Continued)
convertible
notes will not be added back and the 99.7 million shares of common stock reserved for
issuance upon conversion of our convertible notes will not be included. See Note 4 for a
discussion of our convertible notes.
Shareowner Rights
Plan: We have a shareowner rights plan intended to preserve the long-term value of ADC to our shareowners by discouraging a
hostile takeover. This plan was amended and restated during fiscal 2003. Under the shareowner rights plan, each outstanding share of our common stock
has an associated preferred stock purchase right. The rights are exercisable only if a person or group acquires 15% or more of our outstanding common
stock. If the rights became exercisable, the rights would allow their holders (other than the acquiring person or group) to purchase fractional shares
of our preferred stock (each of which is the economic equivalent of a share of common stock) or stock of the company acquiring us at a price equal to
one-half of the then-current value of our common stock. The dilutive effect of the rights on the acquiring person or group is intended to encourage
such person or group to negotiate with our board of directors prior to attempting a takeover. If our board of directors believes a proposed acquisition
of ADC is in the best interests of ADC and our shareowners, our board of directors may amend the shareowner rights plan or redeem the rights for a
nominal amount in order to permit the acquisition to be completed without interference from the plan.
Accumulated Other Comprehensive
Income:
Accumulated other comprehensive income (AOCI)
consists of the following (in millions):
|
|
|
|
October 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Foreign
currency translation adjustment |
|
|
|
$ |
(25.4 |
) |
|
$ |
(14.7 |
) |
|
$ |
(17.0 |
) |
Unrealized
gain on available for sale securities, net of taxes |
|
|
|
|
4.2 |
|
|
|
— |
|
|
|
40.9 |
|
|
|
|
|
$ |
(21.2 |
) |
|
$ |
(14.7 |
) |
|
$ |
23.9 |
|
We specifically identify the amount of unrealized
gain (loss) recognized in other comprehensive income for each available-for-sale security. When an available-for-sale security is sold or impaired, we
remove the security’s cumulative unrealized gain (loss), net of tax, from AOCI.
Note 10: Income Taxes
The components of the (benefit) provision for income
taxes are (in millions):
|
|
|
|
2003
|
|
2002
|
|
2001
|
Current
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
$ |
(1.0 |
) |
|
$ |
(233.4 |
) |
|
$ |
(184.5 |
) |
Foreign |
|
|
|
|
(0.4 |
) |
|
|
(1.4 |
) |
|
|
(10.6 |
) |
State |
|
|
|
|
(4.0 |
) |
|
|
(0.5 |
) |
|
|
1.0 |
|
|
|
|
|
|
(5.4 |
) |
|
|
(235.3 |
) |
|
|
(194.1 |
) |
Deferred
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
— |
|
|
|
430.6 |
|
|
|
(371.3 |
) |
Foreign |
|
|
|
|
— |
|
|
|
45.0 |
|
|
|
(43.8 |
) |
State |
|
|
|
|
— |
|
|
|
22.5 |
|
|
|
(23.8 |
) |
|
|
|
|
|
— |
|
|
|
498.1 |
|
|
|
(438.9 |
) |
Total
(benefit) provision |
|
|
|
$ |
(5.4 |
) |
|
$ |
262.8 |
|
|
$ |
(633.0 |
) |
58
Notes to Consolidated Financial Statements (Continued)
Note 10: Income Taxes (Continued)
The effective income tax rate differs from the
federal statutory rate as follows:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Federal
statutory rate |
|
|
|
|
(35 |
)% |
|
|
(35 |
)% |
|
|
(35 |
)% |
Impairment
charges |
|
|
|
|
(12 |
) |
|
|
(4 |
) |
|
|
3 |
|
Research and
development tax credits |
|
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
— |
|
Deferred tax
asset valuation allowance |
|
|
|
|
48 |
|
|
|
73 |
|
|
|
— |
|
State income
taxes, net |
|
|
|
|
(21 |
) |
|
|
— |
|
|
|
(1 |
) |
Foreign
income taxes |
|
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
Other,
net |
|
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
— |
|
Effective
income tax rate |
|
|
|
|
(7 |
)% |
|
|
30 |
% |
|
|
(33 |
)% |
Deferred tax assets (liabilities) as of October 31,
2003 and 2002 are composed of the following (in millions):
|
|
|
|
2003
|
|
2002
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
Asset
valuation reserves |
|
|
|
$ |
25.6 |
|
|
$ |
41.5 |
|
Accrued
liabilities |
|
|
|
|
27.3 |
|
|
|
53.3 |
|
Other |
|
|
|
|
(0.2 |
) |
|
|
3.5 |
|
Subtotal |
|
|
|
|
52.7 |
|
|
|
98.3 |
|
Current
deferred tax asset valuation allowance |
|
|
|
|
(52.7 |
) |
|
|
(98.3 |
) |
Total |
|
|
|
$ |
— |
|
|
$ |
— |
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets |
|
|
|
$ |
321.6 |
|
|
$ |
340.5 |
|
Depreciation |
|
|
|
|
9.4 |
|
|
|
(15.7 |
) |
Net operating
loss and tax credit carryover |
|
|
|
|
327.4 |
|
|
|
152.6 |
|
Restructuring
charges and other |
|
|
|
|
39.9 |
|
|
|
135.6 |
|
Subtotal |
|
|
|
|
698.3 |
|
|
|
613.0 |
|
Non-current
deferred tax asset valuation allowance |
|
|
|
|
(698.3 |
) |
|
|
(613.0 |
) |
Total |
|
|
|
$ |
— |
|
|
$ |
— |
|
During the third quarter of fiscal 2002 we concluded
that a full valuation allowance against our net deferred tax assets was appropriate. A deferred tax asset generally represents future tax benefits to
be received when certain expenses and losses previously recognized in our U.S. GAAP-based income statement become deductible under applicable income
tax laws. Thus, realization of a deferred tax asset is dependent on future taxable income against which these deductions can be applied. Statement of
Financial Accounting Standards No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be
considered, including a company’s performance, the market environment in which the company operates, the utilization of past tax credits, length
of carryback and carryforward periods, and existing contracts or sales backlog that will result in future profits. The accounting guidance further
states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in
recent years. As a result of the cumulative losses we had incurred to that point and the full utilization of our loss carryback potential, we concluded
that a full valuation allowance should be recorded.
We recorded an income tax benefit totaling $5.4
million for fiscal 2003. This benefit is primarily attributable to the reversal of accrued income tax liabilities resulting from the finalization of
federal, state
59
Notes to Consolidated Financial Statements (Continued)
Note 10: Income Taxes (Continued)
and foreign
income tax examinations. The U.S. Internal Revenue Service has completed its examination
of our federal income tax return for all years prior to fiscal 2002.
Federal and state net operating loss carryforwards
for tax purposes, available to offset future income, were approximately $530 million at October 31, 2003. The Federal operating loss carryforwards
expire between fiscal 2016 and fiscal 2023, and the state operating loss carryforwards expire between fiscal 2007 and fiscal 2018. Federal credit
carryforwards were approximately $67.6 million at October 31, 2003, of which $28.9 million expire between fiscal 2004 and fiscal 2007, and $38.7
million expire between fiscal 2018 and fiscal 2023. Foreign operating loss carryforwards were approximately $230.7 million at October 31, 2003, most of
which are available for indefinite carryforward periods.
The provision for foreign income taxes is based upon
foreign pre-tax losses of $51.7 million, $248.6 million and $117.6 million during fiscal 2003, 2002 and 2001, respectively.
At October 31, 2003, our undistributed cumulative
earnings of foreign subsidiaries were $22.4 million. Any distribution of such earnings is not expected to result in an incremental U.S. income tax
liability.
Note 11: Impairment, Restructuring and Other Disposal Charges
During the first quarter of fiscal 2001, we launched
an initiative to focus our business on strategic and core operations and improve our operating performance by restructuring and streamlining our
operations. This initiative included the discontinuance of some product lines, the sale and exit of non-strategic businesses and the consolidation of
unproductive and duplicate facilities. This initiative also included the elimination of employee and contractor positions. Throughout fiscal 2001 and
continuing in fiscal 2002 and 2003, we took aggressive actions to achieve more cost-efficient operations.
Impairment and restructuring related charges by type
of expense and where classified in the consolidated statements of operations are as follows for fiscal 2003, 2002 and 2001 (in
millions):
Fiscal 2003
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Total
|
Employee
severance costs |
|
|
|
$ |
— |
|
|
$ |
30.2 |
|
|
$ |
30.2 |
|
Facilities
consolidation and lease termination |
|
|
|
|
— |
|
|
|
11.6 |
|
|
|
11.6 |
|
Fixed asset
write-downs |
|
|
|
|
15.6 |
|
|
|
— |
|
|
|
15.6 |
|
Total |
|
|
|
$ |
15.6 |
|
|
$ |
41.8 |
|
|
$ |
57.4 |
|
Fiscal 2002
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Cost of
Sales
|
|
Selling and
Administrative
Charges
|
|
Total
|
Employee
severance costs |
|
|
|
$ |
— |
|
|
$ |
53.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
53.1 |
|
Facilities
consolidation and lease termination |
|
|
|
|
— |
|
|
|
153.8 |
|
|
|
— |
|
|
|
— |
|
|
|
153.8 |
|
Fixed asset
write-downs |
|
|
|
|
212.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
212.0 |
|
Inventory and
committed sales contracts |
|
|
|
|
— |
|
|
|
— |
|
|
|
18.9 |
|
|
|
— |
|
|
|
18.9 |
|
Goodwill
write-downs |
|
|
|
|
136.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
136.3 |
|
Purchased
in-process research and development |
|
|
|
|
— |
|
|
|
10.5 |
|
|
|
— |
|
|
|
— |
|
|
|
10.5 |
|
Committed
sales contracts—administrative |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.7 |
) |
|
|
(5.7 |
) |
Other |
|
|
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
2.2 |
|
Total |
|
|
|
$ |
348.3 |
|
|
$ |
219.6 |
|
|
$ |
18.9 |
|
|
|
(5.7 |
) |
|
$ |
581.1 |
|
60
Notes to Consolidated Financial Statements (Continued)
Note 11: Impairment, Restructuring and Other Disposal Charges
(Continued)
Fiscal 2001
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Cost of
Sales
|
|
Selling and
Administrative
Charges
|
|
Total
|
Employment
severance costs |
|
|
|
$ |
— |
|
|
$ |
89.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
89.0 |
|
Facilities
consolidation |
|
|
|
|
— |
|
|
|
96.0 |
|
|
|
— |
|
|
|
— |
|
|
|
96.0 |
|
Fixed asset
write-downs |
|
|
|
|
207.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
207.2 |
|
Inventory and
committed sales contracts |
|
|
|
|
— |
|
|
|
— |
|
|
|
52.4 |
|
|
|
— |
|
|
|
52.4 |
|
Goodwill
write-downs |
|
|
|
|
294.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
294.5 |
|
Committed
sales contracts—administrative |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24.5 |
|
|
|
24.5 |
|
Integration
and acquisition costs |
|
|
|
|
— |
|
|
|
9.0 |
|
|
|
— |
|
|
|
— |
|
|
|
9.0 |
|
Other |
|
|
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
|
3.9 |
|
|
|
5.3 |
|
Total |
|
|
|
$ |
501.7 |
|
|
$ |
195.4 |
|
|
$ |
52.4 |
|
|
$ |
28.4 |
|
|
$ |
777.9 |
|
Restructuring
Charges: Employee severance costs relate to workforce reductions resulting from the closure of facilities and general
terminations attributed to reduced sales forecasts. During fiscal 2003, 2002, and 2001, our workforce was reduced by approximately 1,900, 4,400, and
11,500 employees, respectively. This decrease included approximately 1,450, 2,900 and 7,400 employees, respectively, impacted by reductions in force.
Additionally, in 2001 the reductions due to the divestiture of business units were effectively offset by the number of employees gained through our
acquisition of CommTech and France Electronique’s telecom systems integration business, which were completed in fiscal 2001. The costs of these
reductions have been and will be funded through cash from operations. These reductions have impacted both business segments.
Facility consolidation costs represent lease
termination costs and other costs associated with our decision to consolidate and close unproductive, duplicative or excess manufacturing and office
facilities.
Impairment
Charges: As a result of our intention to sell, scale-back or exit non-strategic businesses, we evaluated our goodwill and
property and equipment assets for impairment in accordance with SFAS No, 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” “SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets” and SFAS No. 142, “Goodwill and other Intangible
Assets.” Refer to Note 12 for a description of our goodwill impairment charges. As a result of applying SFAS No. 121 and 144 to our property and
equipment, a non-cash impairment charge was required. For fiscal 2003, 2002 and 2001, we recorded impairment charges of $15.6 million, $212.0 million
and $207.2 million, respectively.
Other Disposal
Charges: Committed sales contracts—administrative represents the administrative expenses necessary to complete or
negotiate settlements with respect to certain committed sales contracts, which costs would normally be classified as selling and administration
expenses. These costs are a direct result of our decision to exit certain product lines.
In addition, we also incurred inventory and
committed sales contract related charges which represent losses incurred to write down the carrying value of inventory and the direct costs of exiting
and maintaining certain committed sales contracts for product lines that have been discontinued.
61
Notes to Consolidated Financial Statements (Continued)
Note 11: Impairment, Restructuring and Other Disposal Charges
(Continued)
The following table provides detail on the activity
and remaining restructuring accrual by type of charges (in millions):
Type of Charge
|
|
|
|
October 31,
2002
|
|
Net Additions
(Reductions)
|
|
Cash
Charges
|
|
October 31,
2003
|
Employee
severance costs |
|
|
|
$ |
17.0 |
|
|
$ |
30.2 |
|
|
$ |
40.4 |
|
|
$ |
6.8 |
|
Facilities
consolidation |
|
|
|
|
105.6 |
|
|
|
11.6 |
|
|
|
90.6 |
|
|
|
26.6 |
|
Committed
sales contracts administrative |
|
|
|
|
1.6 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
Total |
|
|
|
$ |
124.2 |
|
|
$ |
41.8 |
|
|
$ |
132.6 |
|
|
$ |
33.4 |
|
Type of Charge
|
|
|
|
October 31,
2001
|
|
Net Additions
(Reductions)
|
|
Cash
Charges
|
|
Non-cash
Charges
|
|
October 31,
2002
|
Employee
severance costs |
|
|
|
$ |
22.3 |
|
|
$ |
53.1 |
|
|
$ |
58.4 |
|
|
|
— |
|
|
|
17.0 |
|
Facilities
consolidation |
|
|
|
|
83.6 |
|
|
|
153.8 |
|
|
|
131.8 |
|
|
|
— |
|
|
|
105.6 |
|
Inventory and
committed sales contracts |
|
|
|
|
3.8 |
|
|
|
18.9 |
|
|
|
— |
|
|
|
22.7 |
|
|
|
— |
|
Committed
sales contracts administrative |
|
|
|
|
11.1 |
|
|
|
(5.7 |
) |
|
|
3.8 |
|
|
|
— |
|
|
|
1.6 |
|
Total |
|
|
|
$ |
120.8 |
|
|
$ |
220.1 |
|
|
$ |
194.0 |
|
|
$ |
22.7 |
|
|
$ |
124.2 |
|
The total adjustment made to the restructuring
accrual for changes in assumptions was a $5.9 million and $21.3 million decrease for fiscal 2003 and 2002, respectively. The adjustment was primarily
related to changes in the assumptions related to divested product lines as these product lines were sold or shut down prior to the completion of
certain restructuring activities. This adjustment was recorded as an offset to the additions to the accrual, and thus is reflected in the “Net
Additions” column in the respective tables above.
We expect that substantially all of the remaining
$6.8 million of cash expenditures relating to employee severance costs incurred through October 31, 2003 will be paid by the end of fiscal 2004. We
expect that the $26.6 million for the consolidation of facilities will be paid from unrestricted cash over the respective lease terms of the facilities
through 2015.
In addition to the restructuring accrual mentioned
above, we have $25.1 million of assets held for sale ($5.0 million relates to our Broadband Infrastructure and Access segment and $20.1 million was not
allocated to either of our segments) at October 31, 2003. We classified these assets as “Held for Sale” after our decision to exit
non-strategic product lines and to reduce the size of our global operations. We expect to sell or dispose of these assets before the end of fiscal
2004.
Note 12: Goodwill
On November 1, 2001, we adopted SFAS No. 142,
“Goodwill and Other Intangible Assets.” Under this standard, purchased goodwill is no longer amortized over its useful life. Rather, goodwill
is subject to a periodic impairment test based on its fair value. The adoption of the standard required an initial impairment test as of November 1,
2001. We obtained an independent appraisal to assess the fair value of our business units to determine whether goodwill carried on our books was
impaired and the extent of such impairment, if any. The independent appraisal used the income approach to measure the fair value of our business units.
Under the income approach, value is dependent on the present value of future economic benefits to be derived from ownership. Future net cash flows
available for distribution are discounted at market-based rates of return to provide indications of value. We used a discount rate of 19.9% in our
calculations. Based upon this independent appraisal, we determined that our current goodwill balances were not impaired as of November 1,
2001.
During fiscal 2002, we made the decision to exit our
optical components business due to the continued downturn in the telecommunications industry coupled with future forecasts that indicated losses in
this area of the business. As a result of our decision to exit the optical components business, we re-evaluated
62
Notes to Consolidated Financial Statements (Continued)
Note 12: Goodwill (Continued)
the fair value
of this business and ultimately wrote off $36.6 million of goodwill that we had recorded
as a result of optical component business acquisitions in prior years. During the fourth
quarter of fiscal 2002, we performed the annual goodwill impairment test and assessed the
fair value of our remaining business units to determine whether goodwill carried on our
books was impaired and the extent of such impairment. We used the income approach to
measure the fair value of goodwill using a discount rate of 21.0%. After performing this
evaluation it was evident that a significant impairment of goodwill had occurred because
of a steep decline in forecasted revenues. Accordingly, an impairment charge of $85.5
million related to our Integrated Solutions segment and $14.2 million related to our
Broadband Infrastructure and Access segment was recognized in addition to the optical
component goodwill impairment. In fiscal 2003, no impairment was noted after performing
the annual fourth quarter evaluation. At October 31, 2003 and 2002, we had $4.8 million
and $3.8 million, respectively, of goodwill related solely to our Integrated Solutions
segment on our consolidated balance sheet.
We will continue to reassess the value of our
business units and related goodwill balances at the beginning of the fourth quarter of each fiscal year or at other times if events have occurred or
circumstances exist that indicate the carrying amount of goodwill may not be recoverable.
The following table adjusts net loss for goodwill
amortization expense recognized for the years ended October 31 (in millions, except for loss per share):
|
|
|
|
2003
|
|
2002
|
|
2001
|
Reported net
loss |
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,287.7 |
) |
Add back:
Goodwill amortization, net of taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
44.9 |
|
Adjusted net
loss |
|
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
|
$ |
(1,242.8 |
) |
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net
loss |
|
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
|
$ |
(1.64 |
) |
Goodwill
amortization |
|
|
|
|
— |
|
|
|
— |
|
|
|
0.06 |
|
Adjusted loss
per share |
|
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
|
$ |
(1.58 |
) |
Note 13: Commitments and Contingencies
Vendor Financing: We
have worked with customers and third-party financiers to find a means of financing projects by negotiating financing arrangements. As of October 31,
2003 and 2002, we had commitments to extend credit of $26.5 million and $58.0 million for such arrangements, respectively. The total amount drawn and
outstanding under the commitments was approximately $23.2 million and $20.9 million, respectively, as of October 31, 2003 and 2002. The commitments to
extend credit are conditional agreements generally having fixed expiration or termination dates and specific interest rates, conditions and purposes.
These commitments may expire without being drawn. We regularly review all outstanding commitments, and the results of these reviews are considered in
assessing the overall risk for possible credit losses. At October 31, 2003, we have recorded approximately $19.4 million in loss reserves in the event
of non-performance related to these financing arrangements.
In connection with the sale of a participation
interest in a customer note receivable for $14.5 million, we guaranteed the payment obligation of the customer to the purchaser of the participation
interest. During fiscal 2003, the underlying customer defaulted on the note receivable. Therefore, we were required to pay the purchaser of the
participation interest $14.5 million, which was the outstanding principal and interest on the note receivable at the time the customer defaulted. Of
the $14.5 million payment, we used $14.3 million from our restricted cash that was previously pledged to secure our guarantee with the remainder being
paid from unrestricted cash. This note receivable is fully reserved for as part our allowance for doubtful accounts reserve. During fiscal 2002, we
financed the sale of a participation interest in one of our vendor financing notes receivable for cash equal to $10.5 million. This sale was without
any
63
Notes to Consolidated Financial Statements (Continued)
Note 13: Commitments and Contingencies (Continued)
discount to the
face amount of the receivable, was with full recourse to us, and our recourse obligation
is secured by a letter of credit. We accounted for this sale of a participation interest
as a loan, and thus recorded a $10.5 million long-term note payable.
Letters of Credit: As
of October 31, 2003, we had $18.3 million of outstanding letters of credit. These outstanding commitments are fully collateralized by restricted
cash.
Operating
Leases: Portions of our operations are conducted using leased equipment and facilities. These leases are non-cancelable and
renewable, with expiration dates ranging through the year 2017. The rental expense included in the accompanying consolidated statements of operations
was $22.3 million, $48.8 million and $49.8 million for fiscal 2003, 2002 and 2001, respectively.
We were party to an operating lease agreement
related to our world headquarters facility in Eden Prairie, Minnesota. This lease was set to expire in October of fiscal year 2006. This operating
lease, which is sometime referred to as a “synthetic lease,” contained a minimum residual value guarantee at the end of the lease term, and
also gave us a purchase option at the end of the lease term. During the third quarter of fiscal 2003, we purchased this property for an aggregate
purchase price of $46.8 million. The entire purchase price was paid out of pledged collateral that was classified as restricted cash on our
consolidated balance sheet.
In addition, during fiscal 2003, we purchased a
total of four other properties that we leased under synthetic leases. Two properties were purchased for $55.9 million and the remaining two were
purchased for $45.5 million. All of the properties were purchased using restricted cash previously pledged to secure the lease obligations. The two
properties that were purchased for $55.9 million were recorded at their fair market value of $15.7 million, which resulted in a $5.2 million impairment
charge and a $35.0 million reduction in our restructuring accrual as we previously recognized this loss in a prior fiscal year. These two properties
are currently classified as assets held for sale on our consolidated balance sheet because we intend to sell them within one year from the date of
purchase. The remaining two properties that were purchased for $45.5 million were immediately sold for total proceeds of $15.3 million. The difference
between the purchase price for these two properties of $45.5 million and the sale price of $15.3 million was previously included in the restructuring
accrual.
During the fourth quarter of fiscal 2002, we
concluded that the fair market value of our headquarters facility was significantly less than the minimum value we had guaranteed the lessor. As we
intend to occupy this facility in the long-term, we amended this lease to extend the lease term by an additional two years. In connection with this
amendment, we paid the lessor $85.5 million from our restricted cash, which was the difference between the existing purchase option price and the
current fair market value of the facility, and obtained a reduction in the purchase option price and minimum residual value guarantee. We also recorded
a non-recurring charge of $84.3 million related to this payment.
The following is a schedule of future minimum rental
payments required under non-cancelable operating leases as of October 31, 2003 (in millions):
2004 |
|
|
|
$ |
23.8 |
|
|
|
|
|
2005 |
|
|
|
|
20.8 |
|
|
|
|
|
2006 |
|
|
|
|
17.7 |
|
|
|
|
|
2007 |
|
|
|
|
9.8 |
|
|
|
|
|
2008 and
thereafter |
|
|
|
|
33.8 |
|
|
|
|
|
Total |
|
|
|
$ |
105.9 |
|
|
|
|
|
Contingencies: We are
a party to various lawsuits, proceedings and claims arising in the ordinary course of business or otherwise. The amount of monetary liability resulting
from an adverse result in many
64
Notes to Consolidated Financial Statements (Continued)
Note 13: Commitments and Contingencies (Continued)
of such
lawsuits, proceedings or claims cannot be determined at this time. As of October 31,
2003, we had recorded $9.1 million in loss reserves in the event of such adverse
outcomes in these matters. Litigation by its nature is uncertain, and we cannot predict
the ultimate outcome of these matters with certainty. However, other than with respect
to the two purported class action suits described below, and in light of the reserves we
have recorded, at this time we believe the ultimate resolution of these lawsuits,
proceedings and claims will not have a material adverse impact on our business, results
of operations or financial condition.
On March 5, 2003, we were served with a shareowner
lawsuit brought by Wanda Kinermon that has been filed in the United States District Court for the District of Minnesota. The complaint names ADC,
William J. Cadogan, our former Chairman and Chief Executive Officer, and Robert E. Switz, our Chief Executive Officer, as defendants. During the period
the lawsuit covers, Mr. Switz held the position of Executive Vice President and Chief Financial Officer. Since this lawsuit was served, we were named
as a defendant in 11 other substantially similar lawsuits. These shareowner lawsuits have been consolidated into a single lawsuit, which has been
captioned In Re ADC Telecommunications, Inc. Securities Litigation. This lawsuit purports to bring suit on behalf of a class of purchasers of
our publicly traded securities from August 17, 2000, to March 28, 2001. The complaint alleges that we violated the securities laws by making false and
misleading statements about our financial performance and business prospects during this period. On November 24, 2003, we filed a motion to dismiss
this lawsuit. This motion is pending before the court.
On May 19, 2003, we were served with a lawsuit
brought by Lorraine Osborne that has been filed in the United States District Court for the District of Minnesota. The complaint names ADC and several
of our current and former officers, employees and directors as defendants. Since this lawsuit was served, we were served with two substantially similar
lawsuits, and all three lawsuits have been consolidated into a single lawsuit, which has been captioned In Re ADC Telecommunications, Inc. ERISA
Litigation. This lawsuit has been brought by individuals who seek to represent a class of participants in our Retirement Savings Plan who purchased
our common stock as one of the investment alternatives under the plan. The lawsuit alleges a breach of fiduciary duties under the Employee Retirement
Income Security Act.
We believe that the two lawsuits described above are
without merit and intend to defend these actions vigorously. However, litigation is by its nature uncertain and unfavorable resolutions of these
lawsuits could materially adversely affect our business, results of operations or financial condition.
Change of Control: Our
board of directors has approved the extension of certain employee benefits, including salary continuation to key employees, in the event of a change of
control of ADC.
Note 14: Segment Information
We report our results in two business segments:
Broadband Infrastructure and Access, and Integrated Solutions. Broadband Infrastructure and Access products consist of:
• |
|
connectivity devices that provide the physical contact points
needed to connect different communications network elements and gain access to communications system channels; and |
• |
|
access and transport systems that provide broadband,
multiservice delivery capabilities within service provider networks. |
Connectivity devices assist in the installation,
testing, monitoring, accessing, managing, reconfiguring, splitting and multiplexing of communications systems channels within service providers’
serving offices and the last mile/kilometer portion of communications networks. These products include broadband connection and access devices for
copper, coaxial cable, fiber, wireless and broadcast communications networks. Access and transport systems deliver broadband, multiservice
communications to consumers and businesses over copper, coaxial cable and fiber networks. Broadband Infrastructure and Access products
65
Notes to Consolidated Financial Statements (Continued)
Note 14: Segment Information (Continued)
are used
throughout the world in telephone, cable television, Internet, and wireless
communications networks to deliver internet, data, video, and voice services to
businesses and consumers.
Integrated Solutions products and services consist
of systems integration services and operations support systems (OSS) software that aid communications service providers in the provisioning, delivery
and billing of broadband, multiservice communications over wireline and wireless networks. Systems integration services are used to design, equip and
build communications networks and OSS applications that deliver Internet, data, video and voice services to consumers and businesses. OSS software
includes communications billing, customer management, network performance and service-level assurance software used by service providers to operate
communications networks.
Our segments currently reflect changes made in
connection with our restructuring initiative. As a result of changes in fiscal 2001, our former Broadband Connectivity and Broadband Access and
Transport segments were consolidated into a single Broadband Infrastructure and Access segment. We made no changes to the reporting of the Integrated
Solutions segment. All prior period results have been restated to reflect these changes.
Accounting policies used by the segments are the
same as those described in Note 1 to the Consolidated Financial Statements.
Intersegment sales were not significant. The
following costs are not allocated to segment results:
• |
|
Restructuring and other disposal charges; |
• |
|
Impairment charges; and |
• |
|
Goodwill amortization resulting from acquisitions. |
Corporate assets, which are included in
“Unallocated Items,” primarily consist of cash and investments, which are managed centrally, and goodwill. Capital expenditures do not
include amounts arising from the purchase of businesses.
Sales outside of the United States to external
customers are determined on a “shipped-to” basis. No single country has property and equipment sufficiently material enough to warrant
disclosure. In fiscal 2002, sales to one customer comprised 10.6% of our net sales. No single customer accounted for more than 10% of net sales in
fiscal 2003 or 2001.
66
Notes to Consolidated Financial Statements (Continued)
Note 14: Segment Information (Continued)
The following table sets forth certain financial
information for each of our functional operating segments described above, as well as certain geographic information concerning our U.S. and foreign
sales and ownership of property and equipment:
Segment Information (in millions)
|
|
|
|
Broadband
Infrastructure
and Access
|
|
Integrated
Solutions
|
|
Unallocated
Items
|
|
Consolidated
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
$ |
486.3 |
|
|
$ |
85.4 |
|
|
$ |
— |
|
|
$ |
571.7 |
|
Services |
|
|
|
|
— |
|
|
|
201.5 |
|
|
|
— |
|
|
|
201.5 |
|
Total
external sales |
|
|
|
$ |
486.3 |
|
|
$ |
286.9 |
|
|
|
— |
|
|
$ |
773.2 |
|
Depreciation
and amortization |
|
|
|
$ |
10.0 |
|
|
$ |
3.5 |
|
|
$ |
45.7 |
|
|
$ |
59.2 |
|
Impairment,
restructuring and other disposal charges |
|
|
|
|
— |
|
|
|
— |
|
|
|
57.4 |
|
|
|
57.4 |
|
Operating
loss |
|
|
|
|
(27.8 |
) |
|
|
(1.7 |
) |
|
|
(67.2 |
) |
|
|
(96.7 |
) |
Other income
(expense), net |
|
|
|
|
— |
|
|
|
— |
|
|
|
14.6 |
|
|
|
14.6 |
|
Loss before
income taxes |
|
|
|
|
(27.8 |
) |
|
|
(1.7 |
) |
|
|
(52.6 |
) |
|
|
(82.1 |
) |
Capital
expenditures |
|
|
|
|
2.4 |
|
|
|
3.2 |
|
|
|
62.0 |
|
|
|
67.6 |
|
Assets |
|
|
|
$ |
290.5 |
|
|
$ |
208.5 |
|
|
$ |
797.9 |
|
|
$ |
1,296.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
$ |
715.1 |
|
|
$ |
94.2 |
|
|
$ |
— |
|
|
$ |
809.3 |
|
Services |
|
|
|
|
— |
|
|
|
238.4 |
|
|
|
— |
|
|
|
238.4 |
|
Total
external sales |
|
|
|
$ |
715.1 |
|
|
$ |
332.6 |
|
|
|
— |
|
|
$ |
1,047.7 |
|
Depreciation
and amortization |
|
|
|
$ |
25.1 |
|
|
$ |
10.4 |
|
|
$ |
69.2 |
|
|
$ |
104.7 |
|
Impairment,
restructuring and other disposal charges |
|
|
|
|
— |
|
|
|
— |
|
|
|
(581.1 |
) |
|
|
(581.1 |
) |
Operating
loss |
|
|
|
|
(208.7 |
) |
|
|
(32.0 |
) |
|
|
(637.5 |
) |
|
|
(878.2 |
) |
Other income
(expense), net |
|
|
|
|
— |
|
|
|
— |
|
|
|
(4.0 |
) |
|
|
(4.0 |
) |
Loss before
income taxes |
|
|
|
|
(208.7 |
) |
|
|
(32.0 |
) |
|
|
(641.5 |
) |
|
|
(882.2 |
) |
Capital
expenditures |
|
|
|
|
8.2 |
|
|
|
4.4 |
|
|
|
13.0 |
|
|
|
25.6 |
|
Assets |
|
|
|
$ |
354.7 |
|
|
$ |
269.5 |
|
|
$ |
520.0 |
|
|
$ |
1,144.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
$ |
1,810.8 |
|
|
$ |
233.7 |
|
|
$ |
— |
|
|
$ |
2,044.5 |
|
Services |
|
|
|
|
— |
|
|
|
358.3 |
|
|
|
— |
|
|
|
358.3 |
|
Total
external sales |
|
|
|
$ |
1,810.8 |
|
|
$ |
592.0 |
|
|
|
— |
|
|
$ |
2,402.8 |
|
Depreciation
and amortization |
|
|
|
$ |
101.3 |
|
|
$ |
20.6 |
|
|
$ |
75.9 |
|
|
$ |
197.8 |
|
Impairment,
restructuring and other disposal charges |
|
|
|
|
— |
|
|
|
— |
|
|
|
(777.9 |
) |
|
|
(777.9 |
) |
Operating
loss |
|
|
|
|
(99.2 |
) |
|
|
(45.3 |
) |
|
|
(886.8 |
) |
|
|
(1,031.3 |
) |
Other income
(expense), net |
|
|
|
|
— |
|
|
|
— |
|
|
|
(889.4 |
) |
|
|
(889.4 |
) |
Loss before
income taxes |
|
|
|
|
(99.2 |
) |
|
|
(45.3 |
) |
|
|
(1,776.2 |
) |
|
|
(1,920.7 |
) |
Capital
expenditures |
|
|
|
|
186.4 |
|
|
|
13.0 |
|
|
|
41.8 |
|
|
|
241.2 |
|
Assets |
|
|
|
$ |
1,517.3 |
|
|
$ |
403.7 |
|
|
$ |
578.7 |
|
|
$ |
2,499.7 |
|
67
Notes to Consolidated Financial Statements (Continued)
Note 14: Segment Information (Continued)
Geographic Information (in millions)
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the
United States |
|
|
|
$ |
280.7 |
|
|
$ |
283.6 |
|
|
$ |
692.2 |
|
|
|
|
|
Inside the
United States |
|
|
|
|
492.5 |
|
|
|
764.1 |
|
|
|
1,710.6 |
|
|
|
|
|
Total |
|
|
|
$ |
773.2 |
|
|
$ |
1,047.7 |
|
|
$ |
2,402.8 |
|
|
|
|
|
Property
and Equipment, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the
United States |
|
|
|
$ |
36.9 |
|
|
$ |
46.6 |
|
|
$ |
176.4 |
|
|
|
|
|
Inside the
United States |
|
|
|
|
155.4 |
|
|
|
160.2 |
|
|
|
437.6 |
|
|
|
|
|
Total |
|
|
|
$ |
192.3 |
|
|
$ |
206.8 |
|
|
$ |
614.0 |
|
|
|
|
|
Note 15: Quarterly Financial Data (Unaudited in millions, except earnings per
share)
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Total
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales |
|
|
|
$ |
199.9 |
|
|
$ |
191.9 |
|
|
$ |
188.5 |
|
|
$ |
192.9 |
|
|
$ |
773.2 |
|
Gross
Profit |
|
|
|
|
70.8 |
|
|
|
73.4 |
|
|
|
72.5 |
|
|
|
74.7 |
|
|
|
291.4 |
|
Income (Loss)
Before Income Taxes |
|
|
|
|
(41.5 |
) |
|
|
(29.4 |
) |
|
|
(15.1 |
) |
|
|
3.9 |
|
|
|
(82.1 |
) |
Provision
(Benefit) for Income Taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.4 |
) |
|
|
(5.4 |
) |
Net (Loss)
Income |
|
|
|
$ |
(41.5)(1 |
) |
|
$ |
(29.4)(2 |
) |
|
$ |
(15.1)(3 |
) |
|
$ |
9.3 |
(4) |
|
$ |
(76.7 |
) |
Average
Common Shares
Outstanding—Basic |
|
|
|
|
801.1 |
|
|
|
802.7 |
|
|
|
804.1 |
|
|
|
805.4 |
|
|
|
803.4 |
|
Average
Common Shares
Outstanding—Diluted |
|
|
|
|
801.1 |
|
|
|
802.7 |
|
|
|
804.1 |
|
|
|
808.5 |
|
|
|
803.4 |
|
Loss Per
Share—Basic |
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
Loss Per
Share—Diluted |
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales |
|
|
|
$ |
293.5 |
|
|
$ |
298.4 |
|
|
$ |
235.1 |
|
|
$ |
220.7 |
|
|
$ |
1,047.7 |
|
Gross
Profit |
|
|
|
|
94.8 |
|
|
|
73.7 |
|
|
|
33.0 |
|
|
|
45.0 |
|
|
|
246.5 |
|
Loss Before
Income Taxes |
|
|
|
|
(69.9 |
) |
|
|
(133.0 |
) |
|
|
(297.5 |
) |
|
|
(381.8 |
) |
|
|
(882.2 |
) |
Provision
(Benefit) for Income Taxes |
|
|
|
|
(25.1 |
) |
|
|
(43.8 |
) |
|
|
331.7 |
|
|
|
— |
|
|
|
262.8 |
|
Net
Loss |
|
|
|
$ |
(44.8)(5 |
) |
|
$ |
(89.2)(6 |
) |
|
$ |
(629.2)(7 |
) |
|
$ |
(381.8)(8 |
) |
|
$ |
(1,145.0 |
) |
Average
Common Shares
Outstanding—Basic & Diluted |
|
|
|
|
793.4 |
|
|
|
794.9 |
|
|
|
796.4 |
|
|
|
797.6 |
|
|
|
795.6 |
|
Loss Per
Share—Basic & Diluted |
|
|
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.48 |
) |
|
$ |
(1.44 |
) |
| (1) |
|
Includes $8.2 million restructuring charges; $10.3 million
impairment charges; $2.1 million net gain on sale of investments; and $2.8 million loss related to sale of divested product lines. |
| (2) |
|
Includes $12.1 million restructuring charges and $4.3 million
impairment charges. |
| (3) |
|
Includes $12.0 million restructuring charges and $0.2 million
impairment charges. |
| (4) |
|
Includes $9.5 million restructuring charges; $0.8 million
impairment charges; $1.7 million other disposal costs; $1.7 million gain on sale of investments; and $1.4 million loss related to sale of divested
product lines; and a net benefit of $14.7 million from a tax benefit and reduced legal and other accruals due to the favorable resolution of certain
outstanding matters. |
| (5) |
|
Includes $3.0 million restructuring charges; $1.9 million
impairment charges; $2.4 million loss related to write-down of investment portfolio, and $7.0 million gain on sale of investments. |
68
Notes to Consolidated Financial Statements (Continued)
Note 15: Quarterly Financial Data (Unaudited in millions, except earnings per
share) (Continued)
| (6) |
|
Includes $57.3 million restructuring and in-process research and
development charges; $16.8 million impairment charges; non-recurring non-operating gain of $26.2 million related to a patent infringement settlement;
$0.7 million loss related to the sale of a divested product lines; $19.9 million loss related to write-down of investment portfolio and $24.2 million
gain on sale of investments. |
| (7) |
|
Includes $33.1 million restructuring charges; $160.1 million
impairment charges; $4.8 million loss related to the sale of a divested product line; $21.6 million loss related to the write-down of investment
portfolio; $35.3 million gain on sale of investments; and $438.4 million charges related to deferred tax asset reserves as well as tax benefit
adjustments due to tax law changes. |
| (8) |
|
Includes $139.4 million restructuring charges; $169.5 million
impairment charges; $1.2 million loss related to sale of divested product lines; $7.0 million loss related to the write-down of investment portfolio;
and $1.3 million gain on sale of investments. |
Note 16: Subsequent Events (unaudited)
In December 2003, we entered into an agreement to
sell our BroadAccess40 product line. This transaction is expected to close by March 1, 2004. We expect this transaction to result in a loss on sale in
our income statement, which we estimate will be less than $10 million.
69
Item 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
On May 21, 2002, the Board of Directors of ADC, with
the unanimous recommendation of the Audit Committee of the Board of Directors, dismissed Arthur Andersen LLP (“Andersen”) as ADC’s
independent public accountants, effective immediately on that date.
The audit report of Andersen on the consolidated
financial statements of ADC for the fiscal year ended October 31, 2001, did not contain any adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles.
During ADC’s fiscal year ended October 31,
2001, and through the date of Andersen’s dismissal: (a) there were no disagreements with Andersen on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen’s satisfaction, would have caused
Andersen to make reference to the subject matter of such disagreement in connection with Andersen’s report on ADC’s consolidated financial
statements for such year; and (b) there were no reportable events as listed in Item 304(a)(1)(v) of Regulation S-K.
ADC provided Andersen with a copy of the foregoing
disclosures and Andersen provided us with a letter indicating their concurrence with these disclosures.
Also on May 21, 2002, the Board of Directors of ADC,
with the unanimous recommendation of the Audit Committee of the Board of Directors, appointed Ernst & Young LLP as ADC’s independent public
accountant for ADC’s fiscal year ended October 31, 2002, effective immediately. During ADC’s fiscal year 2001 and through May 21, 2002,
neither ADC nor anyone acting on its behalf consulted Ernst & Young LLP with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that might be rendered on ADC’s consolidated financial statements, or any
other matters or reportable events listed in Item 304((a)(2)(ii) of Regulation S-K.
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms. During the
period covered by this Annual Report on Form 10-K, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
70
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section of Item 1 of this Form 10-K entitled
“Executive Officers of the Registrant” is incorporated by reference into this Item 10.
The sections entitled “Election of
Directors,” “Corporate Governance and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our
definitive proxy statement for our 2004 Annual Meeting of Shareowners, which will be filed with the SEC on or before January 31, 2004 (the “Proxy
Statement”), are incorporated in this Form 10-K by reference.
We have adopted a financial code of ethics that
applies to our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and all other ADC employees. This financial code
of ethics, which is one of several policies within our Code of Business Conduct, is posted on our website. The Internet address for our website is
http://www.adc.com, and the financial code of ethics may be found as follows:
1. |
|
From our main web page, first click on “Investor
Relations.” |
2. |
|
Next, click on “Relevant Documents.” |
3. |
|
Finally, click on “Financial Code of Ethics.” |
We intend to satisfy the disclosure requirement
under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at
the address and location specified above.
Item 11. EXECUTIVE COMPENSATION
The section of the Proxy Statement entitled
“Executive Compensation” is incorporated in this Form 10-K by reference (except for the information set forth under the subcaption
“Compensation Committee Report on Executive Compensation,” which is not incorporated in this Form 10-K).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The sections of the Proxy Statement entitled
“Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” are incorporated by reference into
this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section of the Proxy Statement entitled
“Certain Relationships and Related Transactions” is incorporated by reference into this Form 10-K.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section of the Proxy Statement entitled
“Proposal to Ratify the Appointment of Auditors” is incorporated in this Form 10-K by reference.
71
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
| (a) |
|
1. Financial Statements |
The following consolidated financial statements of
ADC are filed with this report and can be found at Item 8 of this Form 10-K.
|
|
Report of Independent Auditors
Report of Independent Public
Accountants
Consolidated Statements of Operations for the years ended October 31, 2003, 2002 and 2001
Consolidated Balance Sheets as of October
31, 2002 and 2001
Consolidated Statements of Shareowners’ Investment for the years ended October 31, 2003, 2002
and 2001
Consolidated Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001
Notes to
Consolidated Financial Statements
Five-Year Selected Consolidated Financial Data for the years ended October 31, 1999 through October 31, 2003, is
located in Item 6 of this Form 10-K |
2. |
|
Financial Statement Schedules |
All schedules for which provision is made in the
applicable accounting regulations of the SEC have been omitted as not required or not applicable, or the information required has been included
elsewhere by reference in the financial statements and related notes, except for Schedule II, which are included as Exhibits 99-a and 99-b to this Form 10-K, as
filed with the SEC.
See Exhibit Index on page 74 for a description of
the documents that are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included the document. We will furnish to a security holder upon request a copy of any
Exhibit at cost.
| (b) |
|
There were no Reports on Form 8-K filed during the last quarter
of the period covered by this report. |
| (c) |
|
See Item 15(a)(3) above. |
| (d) |
|
See Item 15(a)(2) above. |
72
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
ADC
TELECOMMUNICATIONS, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: January
14, 2004 |
|
|
|
By: /s/ Robert E. Switz
Robert E. Switz
President and Chief Executive Officer |
|
|
|
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/
ROBERT E. SWITZ
Robert E. Switz |
|
|
|
President and Chief Executive Officer
(principal executive officer) |
|
Dated: January 14, 2004 |
|
|
|
|
|
|
|
|
|
|
|
/s/
GOKUL V. HEMMADY
Gokul V. Hemmady |
|
|
|
Vice President and Chief Financial Officer
(principal financial and accounting officer) |
|
Dated: January 14, 2004 |
Robert
Annunziata* |
|
|
|
Director |
John A.
Blanchard III* |
|
|
|
Director |
John J. Boyle
III* |
|
|
|
Director |
James C.
Castle* |
|
|
|
Director |
Mickey P.
Foret* |
|
|
|
Director |
B. Kristine
Johnson* |
|
|
|
Director |
Jean-Pierre
Rosso* |
|
|
|
Director |
Larry W.
Wangberg* |
|
|
|
Director |
John D.
Wunsch* |
|
|
|
Director |
Charles D.
Yost* |
|
|
|
Director |
*By: /s/ Gokul V. Hemmady
Gokul V. Hemmady
Attorney-in-Fact |
|
|
|
|
Dated: January 14, 2004 |
|
73
EXHIBIT INDEX
The following documents are filed as
Exhibits to this Annual Report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a
parenthetical reference to the SEC filing which included such document.
Exhibit
Number
|
|
|
|
Description
|
3-a |
|
|
|
Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.1 to ADC’s
Registration Statement on Form S-3 dated April 15, 1997.) |
3-b |
|
|
|
Articles of Amendment dated January 20, 2000, to Restated Articles of Incorporation of ADC Telecommunications, Inc. (Incorporated by reference
to Exhibit 4.6 to ADC’s Registration Statement on Form S-8 dated March 14, 2000.) |
3-c |
|
|
|
Articles of Amendment dated June 23, 2000, to Restated Articles of Incorporation of ADC Telecommunications, Inc. (Incorporated by reference to
Exhibit 4-g to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2000.) |
3-d |
|
|
|
Restated Bylaws of ADC Telecommunications, Inc. effective July 30, 2002. (Incorporated by reference to Exhibit 4-e to ADC’s Quarterly
Report on Form 10-Q for the quarter ended July 31, 2002.) |
4-a |
|
|
|
Form
of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a to ADC’s Quarterly Report on
Form 10-Q for the quarter ended January 31, 1996.) |
4-b |
|
|
|
Rights Agreement, as amended and restated July 30, 2003, between ADC Telecommunications, Inc. and Computershare Investor Services, LLC as
Rights Agent (Incorporated by reference to Exhibit 4-b to ADC’s Form 8-A/A filed on July 31, 2003 |
4-c |
|
|
|
Indenture dated as of June 4, 2003, between ADC Telecommunications, Inc. and U.S. Bank National Association. (Incorporated by reference to
Exhibit 4-g of ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
4-d |
|
|
|
Registration Rights Agreement dated as of June 4, 2003, between ADC Telecommunications, Inc. and Banc of America Securities LLC, Credit Suisse
First Boston LLC and Merrill Lynch Pierce Fenner & Smith Incorporated as representations of the Initial Purchase of ADC’s 1% Convertible
Subordinated Notes due 2008 and Floating Rate Convertible Subordinated Notes due 2013. (Incorporated by reference to Exhibit 4-h to ADC’s
Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
10-a* |
|
|
|
ADC
Telecommunications, Inc. Global Stock Incentive Plan, as amended and restated through March 4, 2003. (Incorporated by reference to Exhibit 10-a to
ADC’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003.) |
10-b* |
|
|
|
ADC
Telecommunications, Inc. Management Incentive Plan for Fiscal Year 2002. (Incorporated by reference to Exhibit 10-d to ADC’s Annual Report on Form
10-K for the fiscal year ended October 31, 2001.) |
10-c* |
|
|
|
ADC
Telecommunications, Inc. Management Incentive Plan for Fiscal Year 2003. (Incorporated by reference to Exhibit 10-d to ADC’s Annual Report on Form
10-K for the fiscal year ended October 31, 2002.) |
10-d* |
|
|
|
ADC
Telecommunications, Inc. Management Incentive Plan for Fiscal Year 2004. |
10-e* |
|
|
|
ADC
Telecommunications, Inc. Executive Incentive Exchange Plan, as amended and restated effective as of November 1, 2001. (Incorporated by reference to
Exhibit 10-g to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001.) |
74
Exhibit
Number
|
|
|
|
Description
|
10-f* |
|
|
|
Amendment 1 to the ADC Telecommunications, Inc. Executive Incentive Exchange Plan, effective as of November 1, 2002. (Incorporated by
reference to Exhibit 10-g to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002.) |
10-g* |
|
|
|
ADC
Telecommunications, Inc. Executive Change in Control Severance Pay Plan (2002 Restatement), effective as of January 1, 2002. (Incorporated by reference
to Exhibit 10-i to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001.) |
10-h* |
|
|
|
ADC
Telecommunications, Inc. Change in Control Severance Pay Plan (2002 Restatement), effective as of January 1, 2002. (Incorporated by reference to
Exhibit 10-b to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2002.) |
10-i* |
|
|
|
ADC
Telecommunications, Inc. 2001 Special Stock Option Plan. (Incorporated by reference to Exhibit 10-c to ADC’s Quarterly Report on Form 10-Q for the
quarter ended January 31, 2002.) |
10-j* |
|
|
|
ADC
Telecommunications, Inc. Special Incentive Plan, effective November 1, 2002. (Incorporated by reference to Exhibit 10-K to ADC’s Annual Report on
Form 10-K for the fiscal year ended October 31, 2002.) |
10-k* |
|
|
|
Compensation Plan for Non-employee Directors of ADC Telecommunications, Inc., restated as of March 1, 2002. (Incorporated by reference to
Exhibit 10-d to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2002.) |
10-l* |
|
|
|
ADC
Telecommunications, Inc. Deferred Compensation Plan (1989 Restatement), as amended and restated effective as of November 1, 1989. (Incorporated by
reference to Exhibit 10-aa to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996.) |
10-m* |
|
|
|
Second Amendment to ADC Telecommunications, Inc. Deferred Compensation Plan (1989 Restatement), effective as of March 12, 1996. (Incorporated
by reference to Exhibit 10-b to ADC’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1997.) |
10-n* |
|
|
|
ADC
Telecommunications, Inc. Pension Excess Plan (1989 Restatement), as amended and restated effective as of January 1, 1989. (Incorporated by reference to
Exhibit 10-bb to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996.) |
10-o* |
|
|
|
Second Amendment to ADC Telecommunications, Inc. Pension Excess Plan (1989 Restatement), effective as of March 12, 1996. (Incorporated by
reference to Exhibit 10-a to ADC’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1997.) |
10-p* |
|
|
|
ADC
Telecommunications, Inc. 401(k) Excess Plan (2002 Restatement), as amended and restated as of effective January 1, 2002. (Incorporated by reference to
Exhibit 10-r to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001.) |
10-q |
|
|
|
First
Amendment of ADC Telecommunications, Inc. 401(K) Excess Plan (2002 Restatement) dated as of February 26, 2002. (Incorporated by reference to Exhibit
10-a to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
10-r |
|
|
|
Second Amendment of ADC Telecommunications, Inc. 401(K) Excess Plan (2002 Restatement) dated as of April 1, 2003. (Incorporated by reference
to Exhibit 10-b to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
10-s |
|
|
|
Third
Amendment of ADC Telecommunications, Inc. 401(K) Excess Plan (2002 Restatement) dated as of January 1, 2003. (Incorporated by reference to Exhibit 10-c
to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
10-t* |
|
|
|
Employment Agreement dated January 28, 2001, between ADC Telecommunications, Inc. and Richard R. Roscitt. (Incorporated by reference to
Exhibit 10-d to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2001.) |
75
Exhibit
Number
|
|
|
|
Description
|
10-u* |
|
|
|
Amendment No. 1 dated November 27, 2002, to Employment Agreement between ADC Telecommunications, Inc. and Richard R. Roscitt. (Incorporated by
reference to Exhibit 10-s to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002.) |
10-v |
|
|
|
Executive Employment Agreement dated as of August 13, 2003, between ADC Telecommunications, Inc., and Robert E. Switz. (Incorporated by
reference to Exhibit 10-e to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
10-w* |
|
|
|
Form
of ADC Telecommunications, Inc. Nonqualified Stock Option Agreement provided to certain officers and key management employees of ADC with respect to
option grants made on November 1, 2001 (the form of incentive stock option agreement contains the same material terms). (Incorporated by reference to
Exhibit 10-f to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2002.) |
10-x* |
|
|
|
Form
of ADC Telecommunications, Inc. Restricted Stock Award Agreement utilized with respect to restricted stock grants beginning in ADC’s 2002 fiscal
year. (Incorporated by reference to Exhibit 10-g to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2002.) |
10-y* |
|
|
|
Restricted Stock Award Agreement, dated as of October 31, 2002, between ADC Telecommunications, Inc. and Jay T. Hilbert. (Incorporated by
reference to Exhibit 10-w to ADC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002.) |
10-z* |
|
|
|
Restricted Stock Award Agreement, dated as of May 31, 2001, between ADC Telecommunications, Inc. and William F. O’Brien. (Incorporated by
reference to Exhibit 10-d to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2001.) |
10-aa* |
|
|
|
ADC
Telecommunications, Inc. Executive Management Incentive Plan (Incorporated by reference to Exhibit 10-jj to ADC’s Annual Report on Form 10-K for
the fiscal year ended October 31, 2002.) |
10-bb* |
|
|
|
ADC
Executive Stock Ownership Program (January 2002). (Incorporated by reference to Exhibit 10-kk to ADC’s Annual Report on Form 10-K for the fiscal
year ended October 31, 2002.) |
10-cc* |
|
|
|
Summary of Executive Perquisite Allowances. |
12-a |
|
|
|
Computation of Ratio of Earnings to Fixed Charges. |
16-a |
|
|
|
Arthur Andersen LLP letter dated May 22, 2002 (Incorporated by reference to Exhibit 16-1 to ADC’s Form 8-K filed on May 22,
2002.) |
21-a |
|
|
|
Subsidiaries of ADC Telecommunications, Inc. |
23-a |
|
|
|
Consent of Ernst & Young LLP. |
24-a |
|
|
|
Power
of Attorney. |
31-a |
|
|
|
Certification of principal executive officer required by Exchange Act Rule 13a-14(a). |
31-b |
|
|
|
Certification of principal financial officer required by Exchange Act Rule 13a-14(a). |
32 |
|
|
|
Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99-a |
|
|
|
Report of Ernst & Young LLP and Schedule II. |
99-b |
|
|
|
Report of Arthur Andersen LLP and Schedule II. |
| * |
|
Management contract or compensatory plan or arrangement required
to be filed as an Exhibit to this Form 10-K. |
We have excluded from the exhibits filed with this
report instruments defining the rights of holders of long-term debt of ADC where the total amount of the securities authorized under such instruments
does not exceed 10% of our total assets. We hereby agree to furnish a copy of any of these instruments to the SEC upon request.
76