based services all the way or almost all the way
to end user premises’. In turn, several RBOCs have stated their intention to increase capital spending on fiber-to-the-x
initiatives.
Future regulatory changes affecting the
communications industry are anticipated both in the United States and internationally. These changes could affect our customers and alter demand for
our products. Recently announced or future changes could also come under legal challenge and be altered, thereby reversing the effect the initial
announcement of changes was expected to have on our business. 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
communications 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 communications
equipment and related services industry and the United States and global economy, it is possible that customers from whom we expect to derive
substantial 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, 2004, we had loaned $17.7 million, and we have recorded $17.5 million in loss reserves
in the event of non-performance related to these financing arrangements. We have not closed on a transaction where new financing was made available
to a customer since 2003.
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 40.4%, 26.0% and 20.2% of our net sales in fiscal 2004, 2003 and 2002, respectively. We expect non-United States sales to remain a
significant percentage of net sales in the future. In fact, absent additional acquisitions or divestitures, we expect our acquisition of KRONE to cause
our non-United States sales to represent approximately one-half our net sales. In addition to sales and distribution in numerous countries, we own or
lease operations located in Austria, Australia, Belgium, Brazil, Canada, Chile, China, France, Germany, Hungary, India, Indonesia, Italy, Japan,
Malaysia, Mexico, New Zealand, Norway, Philippines, Puerto Rico, Russia, Singapore, South Africa, South Korea, Spain, Taiwan, Thailand, the United Arab
Emirates, the United Kingdom, the United States, Venezuela and Vietnam. 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 foreign currency exchange rates; |
15
• |
|
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 and
environmental risks, such as terrorism, political and economic instability, changes in diplomatic or trade relationships and natural disasters. 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, which we
believe is most likely to occur in the Middle East, Asia and Latin America, could have a negative impact on our business, financial condition and
operating results. The wars in Afghanistan and Iraq and other turmoil in the Middle East and the global war on terror 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 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
us.
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.
16
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.
Internal Controls under Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of
2002, we will be required, beginning with our fiscal year ending October 31, 2005, to include in our annual report our assessment of the effectiveness
of our internal control over financial reporting as of the end of fiscal 2005. Furthermore, our independent registered public accounting firm will be
required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material
respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as
of October 31, 2005. We presently are implementing a plan designed to assure compliance with these new requirements, but we have not yet completed our
assessment of the effectiveness of our internal control. If we fail to timely complete this assessment, or if our independent registered public
accounting firm cannot timely attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal
control. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our regulatory reporting obligations timely.
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 correct them; |
• |
|
damage to our reputation and our customer
relationships; |
• |
|
delayed recognition of sales or reduced sales; and |
• |
|
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 global market demands.
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 purchasing 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 significant reliance on
contract manufacturers to make certain of our products on our behalf. If these contract manufacturers do not fulfill their obligations to us, or if we
do not properly
17
manage these relationships, our existing customer relationships may suffer. We may 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. Although the court
granted our motion to dismiss this lawsuit, the plaintiffs have appealed this decision.
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. 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, 2004, we had recorded approximately $5.2 million in loss reserves for these matters. Because of the uncertainty
inhere n t in litigation, it is possible that unfavorable resolutio n s 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 currency 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 currency exchange rates. From time to time, we hedge our foreign currency exchange risk. 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 currency 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. As a result of our increased international exposure due to the KRONE acquisition, we may hedge foreign currency exposures in the
future. At October 31, 2004, we did not hedge any foreign currency exchange exposures.
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; |
18
• |
|
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 the U.S. or
internationally. |
In addition, stocks of companies in our industry 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.
Item 2. PROPERTIES
Our corporate headquarters are located in Eden
Prairie, Minnesota. Our corporate headquarters comprise approximately 500,000 sq. ft., and we own this facility.
In addition to our headquarters facility, our
principal facilities as of October 31, 2004, 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 global connectivity products; |
• |
|
Juarez and Delicias, Mexico—approximately 273,000 and
139,000 sq. ft., respectively, owned facilities; manufacturing facilities used for our global connectivity products; |
• |
|
Berlin, Germany—approximately 619,000 sq. ft., leased
facility; general purpose facility used for engineering, manufacturing, and general support of our global connectivity products; |
• |
|
Berkely Vale, Australia—approximately 98,000 sq. ft., owned
facility; general purpose facility for engineering, manufacturing, and general support of our global connectivity products; |
• |
|
Bangalore, India—approximately 88,000 sq. ft., owned
facility; manufacturing facility used for our global connectivity products; |
19
• |
|
Raleigh, North Carolina—approximately 40,000 sq. ft.,
leased facility; general purpose facility used for engineering, testing and general support for our wireline products; |
• |
|
Glenrothes, Scotland—approximately 60,000 sq. ft., owned
facility; manufacturing facility used for our global connectivity 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 110 other
facilities in the following locations: Austria, Australia, Belgium, Brazil, Canada, Chile, China, France, Germany, Hungary, India, Indonesia, Italy,
Japan, Malaysia, Mexico, New Zealand, Norway, Philippines, Puerto Rico, Russia, Singapore, South Africa, South Korea, Spain, Taiwan, Thailand, the
United Arab Emirates, the United Kingdom, the United States, Venezuela and Vietnam.
We believe that the facilities used in our
operations are suitable for their respective uses and adequate to meet our current needs. During fiscal 2004, we added several facilities as a result
of our acquisition of KRONE. At the same time, we continued to take steps to reduce and consolidate our facilities in response to the downturn in the
communications equipment industry that began in our fiscal 2001. At the end of fiscal 2003, we had active space and irrevocable commitments to activate
space totaling approximately 2.3 million square feet. Through the acquisition of KRONE, divestiture of certain business units, sale or subleasing of
facilities, and termination of certain leases, we presently maintain approximately 4.1 million square feet of active space. We presently are subleasing
or are attempting to sell or sublease a total of approximately 1.6 million square feet of space at locations around the world.
Item 3. LEGAL PROCEEDINGS
On March 5, 2003, we were served with a shareowner
lawsuit brought by Wanda Kinermon that was filed in the United States District Court for the District of Minnesota. The complaint named ADC, William J.
Cadogan, our former Chairman and Chief Executive Officer, and Robert E. Switz, our Chief Executive Officer and former Chief Financial Officer, as
defendants. After this lawsuit was served, we were named as a defendant in 11 other substantially similar lawsuits. These shareowner lawsuits were
consolidated into a single lawsuit, that is 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 alleged 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, and the court granted our motion and dismissed the case with prejudice on May 17, 2004.
The plaintiffs have appealed this decision to the Eighth Circuit Court of Appeals and that appeal is pending.
On May 19, 2003, we were served with a lawsuit
brought by Lorraine Osborne that was 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. After this lawsuit was served, we were served with two substantially similar
lawsuits. All three of these lawsuits were then consolidated into a single lawsuit that is 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 from February 2000 to present. The lawsuit alleges a breach of fiduciary duties
under the Employee Retirement Income Security Act. On February 2, 2004, we filed a motion to dismiss this lawsuit, which was denied by the court. This
case is now in the discovery phase.
We are a party to various other lawsuits,
proceedings and claims arising in the ordinary course of business or otherwise. 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, 2004, we had recorded approximately $5.2 million in loss reserves for these matters. Because of the uncertainty inhere n t
in litigation, it is possible that unfavorable resolutio n s 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.
20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
| Item 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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, 2004 and 2003, as reported on that market.
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
Quarter |
|
|
|
$ |
3.85 |
|
|
$ |
2.32 |
|
|
$ |
3.15 |
|
|
$ |
1.51 |
|
Second
Quarter |
|
|
|
|
3.61 |
|
|
|
2.32 |
|
|
|
2.73 |
|
|
|
2.05 |
|
Third
Quarter |
|
|
|
|
2.85 |
|
|
|
2.10 |
|
|
|
3.21 |
|
|
|
1.96 |
|
Fourth
Quarter |
|
|
|
|
2.44 |
|
|
|
1.75 |
|
|
|
2.90 |
|
|
|
2.10 |
|
As of January 12 , 2005, there were 12,611
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. We did not repurchase any equity securities in fiscal 2004.
Item 6. SELECTED FINANCIAL DATA
The following table presents our selected financial
data. The data included in the following table has been restated to reflect the assets, liabilities and results of operations of certain businesses
that have met the criteria for treatment as discontinued operations. For additional information, refer to Item 8—Note 4 to the Consolidated
Financial Statements. 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)
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
Income Statement Data from Continuing Operations
|
Net
sales |
|
|
|
$ |
784.3 |
|
|
$ |
589.4 |
|
|
$ |
819.5 |
|
|
$ |
2,141.3 |
|
|
$ |
3,012.0 |
|
Gross
profit |
|
|
|
|
301.9 |
|
|
|
207.1 |
|
|
|
163.2 |
|
|
|
635.9 |
|
|
|
1,478.1 |
|
Research and
development expense |
|
|
|
|
59.1 |
|
|
|
59.9 |
|
|
|
106.8 |
|
|
|
201.9 |
|
|
|
261.9 |
|
Selling and
administration expense |
|
|
|
|
206.3 |
|
|
|
160.4 |
|
|
|
251.6 |
|
|
|
569.9 |
|
|
|
556.3 |
|
Operating
(loss) income |
|
|
|
|
22.5 |
|
|
|
(56.9 |
) |
|
|
(738.3 |
) |
|
|
(854.8 |
) |
|
|
493.8 |
|
Income (loss)
before income taxes |
|
|
|
|
33.2 |
|
|
|
(47.9 |
) |
|
|
(731.9 |
) |
|
|
(1,728.3 |
) |
|
|
1,588.8 |
|
Provision
(benefit) for income taxes |
|
|
|
|
1.9 |
|
|
|
(5.3 |
) |
|
|
248.3 |
|
|
|
(576.9 |
) |
|
|
615.7 |
|
Income (loss)
from continuing operations |
|
|
|
|
31.3 |
|
|
|
(42.6 |
) |
|
|
(980.2 |
) |
|
|
(1,151.4 |
) |
|
|
973.1 |
|
Earnings
(loss) per diluted share from continuing operations |
|
|
|
|
0.04 |
|
|
|
(0.06 |
) |
|
|
(1.23 |
) |
|
|
(1.46 |
) |
|
|
1.26 |
|
Balance Sheet Data
|
Current
assets |
|
|
|
|
835.6 |
|
|
|
1,032.2 |
|
|
|
717.9 |
|
|
|
1,389.4 |
|
|
|
2,716.2 |
|
Current
liabilities |
|
|
|
|
302.0 |
|
|
|
266.8 |
|
|
|
405.8 |
|
|
|
604.2 |
|
|
|
1,068.5 |
|
Total
assets |
|
|
|
|
1,428.1 |
|
|
|
1,296.9 |
|
|
|
1,144.2 |
|
|
|
2,499.7 |
|
|
|
3,970.5 |
|
Long-term
notes payable |
|
|
|
|
400.0 |
|
|
|
400.0 |
|
|
|
10.5 |
|
|
|
2.1 |
|
|
|
13.5 |
|
Total
long-term obligations |
|
|
|
|
466.8 |
|
|
|
402.4 |
|
|
|
11.7 |
|
|
|
2.1 |
|
|
|
13.5 |
|
Shareowners’ investment |
|
|
|
|
659.3 |
|
|
|
627.7 |
|
|
|
732.2 |
|
|
|
1,893.4 |
|
|
|
2,912.7 |
|
22
| Item 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION |
Marketplace Conditions
Our operating results for fiscal 2004 continued to
stabilize, a trend that began in fiscal 2003. However, overall spending on communications equipment and services remains at significantly lower levels
compared to pre-2001 levels. Although there have been increases in capital investment in selected areas (including fiber-to-the-X initiatives by
several communications service providers, a general increase in wireless spending and some signs of growth in enterprise spending), our industry
continues to see deferred capital spending for communications equipment. In addition, there are indications that customers who are initiating new
spending on fiber-to-the-X may reduce their spending levels on non-fiber products. Our industry also continues to experience intense competition and
increased pricing pressures from customers.
While we expect the overall market for communication
equipment and services to grow slowly in the near term, we believe that we are positioned to grow our sales better than the overall market in our
fiscal year 2005. We believe we can achieve this sales growth by focusing on:
• |
|
New product offerings for the fiber-to-the-X initiative being
pursued by several communication service providers and the growing acceptance of our Digivance wireless coverage solution and our TrueNet® and
CopperTen™ enterprise solutions; |
• |
|
Opportunities to cross-sell products among the traditional KRONE
and ADC customer bases, of which there is very little overlap; and |
• |
|
Taking market share from our competitors as we have recently
done with respect to some of our product lines. |
Although we anticipate revenue growth in 2005, no
assurance can be given that we will be successful in achieving this goal.
We continue to be dependent on telecommunications
service providers for a majority of our revenues, with the four major U.S. incumbent local exchange carriers (Verizon, Bellsouth, SBC and Qwest)
accounting for approximately 30.4%, 33.4% and 36.5% of our revenues for fiscal 2004, 2003 and 2002, respectively. In addition, our top ten customers
accounted for approximately 46.3%, 55.3% and 54.1% of our revenues for fiscal 2004, 2003 and 2002, respectively. The decline in these customer
concentration levels from 2003 to 2004 is largely due to the KRONE acquisition, which has given us a more diversified customer base throughout the
world. This increased diversification may be offset by mergers among our customers, like those recently announced between Cingular and AT&T
Wireless and between Sprint and Nextel. The long-term impact these types of mergers may have on our business is difficult to predict. Further, in the
shorter-term we believe parties to these types of mergers may be inclined to defer spending decisions while they are attempting to integrate their
operations, which may have an adverse impact on our business. Consolidation among our competitors or our vendors could also cause changes to our
business that are not readily predictable.
When the downturn in communications equipment
spending first became evident in fiscal 2001, we implemented a cost restructuring plan to reduce operating expenses and capital spending. As it became
evident in 2002 and 2003 that our industry was experiencing a more pronounced and prolonged economic downturn, we took additional cost restructuring
measures to realize further cost savings. Although much of our restructuring activity has been completed, we continue to look for ways to conduct our
operations more efficiently and to reduce costs. For example, the integration of the KRONE acquisition has presented opportunities to reduce costs
through eliminating duplicative facilities, processes and general and administration functions. Accordingly, we anticipate incurring additional
restructuring charges in future periods.
Historically, 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 initiatives) and weaker demand for our products during our first fiscal quarter ending January 31
(primarily as a result of the number of holidays in that quarter, our customers’ development of annual capital budgets during that period and a
general industry slowdown during that
23
period). This historical seasonality trend in
our business returned in fiscal 2004 and we presently expect it to exist in fiscal 2005. 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 Item 1 under the caption “Risk
Factors.”
During fiscal 2004, we took several significant
steps to further our strategic business initiative to be a global leader in communications network infrastructure solutions and services. First, we
completed the acquisition of KRONE. Secondly, we completed the divestitures of our BroadAccess40™ business, Cuda cable modem termination system
and FastFlow® Broadband Provisioning Manager businesses, Singl.eView® software business and announced the sale of our Metrica™ service
assurance software business. The Metrica divestiture was completed shortly after the end of the fiscal year. These actions will enable us to focus on
our strategy of providing products and services that connect every type of communications network over copper, fiber, coaxial and wireless
media.
As discussed in Part I of this Form 10-K, the KRONE
acquisition has several significant strategic elements which we believe will benefit ADC in the long-term. Since the closing of the KRONE acquisition
in May, we have been working diligently to integrate the operations of the two companies and execute on the opportunities that this acquisition
provides.
We intend to continue to explore additional product
line or business acquisitions that are complimentary to our communications infrastructure business. We expect to fund any potential acquisition with
existing cash resources, the issuance of shares of common or preferred stock, the issuance of debt or equity-linked securities or through some
combination of these alternatives.
Results of Operations
The following table contains information regarding
the percentage of net sales of certain income and expense items from continuing operations for the three fiscal years ended October 31, 2004, 2003, and
2002 and the percentage changes in these income and expense items from year to year:
|
|
|
|
Percentage of Net Sales
|
|
Percentage
Increase (Decrease)
Between Periods
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004 vs. 2003
|
|
2003 vs. 2002
|
Net sales
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
33.1 |
% |
|
|
(28.1 |
)% |
Cost of
sales |
|
|
|
|
(61.5 |
) |
|
|
(64.9 |
) |
|
|
(80.1 |
) |
|
|
26.2 |
|
|
|
(41.7 |
) |
Gross
profit |
|
|
|
|
38.5 |
|
|
|
35.1 |
|
|
|
19.9 |
|
|
|
45.8 |
|
|
|
26.9 |
|
Operating expenses:
|
Research and
development |
|
|
|
|
(7.5 |
) |
|
|
(10.2 |
) |
|
|
(13.0 |
) |
|
|
(1.3 |
) |
|
|
(43.9 |
) |
Selling and
administration |
|
|
|
|
(26.3 |
) |
|
|
(27.2 |
) |
|
|
(30.7 |
) |
|
|
28.6 |
|
|
|
(36.2 |
) |
Impairment
charges |
|
|
|
|
(0.2 |
) |
|
|
(2.6 |
) |
|
|
(41.6 |
) |
|
|
(89.1 |
) |
|
|
(95.4 |
) |
Restructuring
charges |
|
|
|
|
(1.6 |
) |
|
|
(4.8 |
) |
|
|
(24.7 |
) |
|
|
(56.2 |
) |
|
|
(86.1 |
) |
Operating
income (loss) |
|
|
|
|
2.9 |
|
|
|
(9.7 |
) |
|
|
(90.1 |
) |
|
|
139.5 |
|
|
|
92.3 |
|
Other income (expense), net:
|
Interest
income (expense), net |
|
|
|
|
0.5 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
(39.3 |
) |
|
|
(29.1 |
) |
Other,
net |
|
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
(0.3 |
) |
|
|
141.4 |
|
|
|
231.8 |
|
Income
(loss) before income taxes |
|
|
|
|
4.2 |
|
|
|
(8.2 |
) |
|
|
(89.3 |
) |
|
|
169.3 |
|
|
|
93.5 |
|
(Provision) benefit for income taxes |
|
|
|
|
(0.2 |
) |
|
|
0.9 |
|
|
|
(30.3 |
) |
|
|
(135.8 |
) |
|
|
(102.1 |
) |
Income
(loss) from continuing operations |
|
|
|
|
4.0 |
% |
|
|
(7.3 |
)% |
|
|
(119.6 |
)% |
|
|
173.5 |
% |
|
|
95.7 |
% |
The table below sets forth our net sales from
continuing operations for the three fiscal years ended October 31, 2004, for each of our reportable segments described in Item 1 of this Form 10-K (in
millions).
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Operating Segment
|
|
|
|
Net Sales
|
|
%
|
|
Net Sales
|
|
%
|
|
Net Sales
|
%
|
|
Broadband
Infrastructure and Access |
|
|
|
$ |
601.7 |
|
|
|
76.7 |
% |
|
$ |
426.0 |
|
|
|
72.3 |
% |
|
$ |
630.3 |
|
|
76.9 |
% |
Professional Services |
|
|
|
|
182.6 |
|
|
|
23.3 |
|
|
|
163.4 |
|
|
|
27.7 |
|
|
|
189.2 |
|
|
23.1 |
|
Total
|
|
|
|
$ |
784.3 |
|
|
|
100.0 |
% |
|
$ |
589.4 |
|
|
|
100.0 |
% |
|
$ |
819.5 |
|
|
100.0 |
% |
24
Overview
During fiscal 2004, we sold our BroadAccess40
business, the business related to our Cuda cable modem termination system product line and related FastFlow Broadband Provisioning Manager software and
the business related to our Singl.eView product line. We also entered into an agreement to sell the business related to our Metrica service assurance
software group. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, these businesses were classified as discontinued operations in fiscal 2004 and the financial results are
reported separately as discontinued operations for all periods presented.
On May 18, 2004, we completed the acquisition of
KRONE, a global supplier of connectivity solutions and cabling products used in public access and enterprise networks, from GenTek, Inc. This
acquisition increased our network infrastructure business and expanded our presence in the international marketplace. The results of KRONE subsequent
to May 18, 2004 are included in our results of operations.
Net Sales
Fiscal 2004 vs. Fiscal
2003
Net sales were $784.3 million and $589.4 million for
fiscal 2004 and 2003, respectively, which was a 33.1% increase. International net sales were 40.4% and 26.0% of our net sales in fiscal 2004 and 2003,
respectively.
During fiscal 2004, net sales of Broadband
Infrastructure and Access products increased by 41.2% compared to fiscal 2003. Our Broadband Infrastructure and Access segment includes infrastructure
(Connectivity) and access (Wireless and Wireline) products. The inclusion of sales by the KRONE Group beginning on May 18, 2004, accounts for 84.9% of
the increase for fiscal 2004 with the remaining increase being accounted for primarily through increased sales of Connectivity and Wireless
products.
For fiscal 2004, sales of our Connectivity and
Wireless increased 67.1% and 98.7%, respectively, compared to fiscal 2003. The inclusion of $149.2 million in sales by KRONE beginning on May 18, 2004,
as well as fiber-to-the-X sales, accounted for 87.8% of the increase in Connectivity product sales for fiscal 2004. The remaining increase in
Connectivity sales was attributable primarily to increased spending by our customers in the core central office space. Wireless sales increased
primarily due to growing acceptance of our Digivance product.
For fiscal 2004, net sales of our Wireline products
decreased by 21.5% over the comparable 2003 period. The decrease in Wireline product sales was caused by a combination of decreased volumes and price
reductions resulting from decreased demand for certain types of products within the industry generally and competitive pressures.
Net sales of our Professional Services segment
increased by 11.8% from $163.4 million in fiscal 2003 to $182.6 million in fiscal 2004. The inclusion of KRONE’s professional services business
(“KRONE Services”) resulted in a $22.1 million increase in net sales in fiscal 2004. This increase, however, was partially offset by a 1.8%
decline in sales of ADC’s historical professional services. Excluding KRONE Services, a significant customer of our Professional Services segment
represented 9.3% of revenue in fiscal 2004 compared to 25.4% in fiscal 2003. The decreased spending by this customer, however, was largely offset by
market share gains with other customers.
Fiscal 2003 vs. Fiscal
2002
Net sales were $589.4 million and $819.5 million for
fiscal 2003 and 2002, respectively, reflecting a 28.1% decrease. International net sales comprised 26.0% and 20.2% of our net sales in fiscal 2003 and
2002, respectively.
The 28.1% decrease in net sales was attributable
largely 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.
25
Gross Profit
Fiscal 2004 vs. Fiscal
2003
Gross profit percentages were 38.5% and 35.1% during
fiscal 2004 and 2003, respectively. The increase in gross profit percentage was due to a more favorable sales mix toward higher margin products and a
reduction in our fixed costs of sales as a result of our restructuring activities.
We also benefited from production efficiencies and
reduced production costs resulting from more favorable supplier pricing derived from better purchasing power due to the KRONE acquisition 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 significant sales
transactions and manufacturing volume.
Fiscal 2003 vs. Fiscal
2002
During fiscal 2003 and 2002, gross profit
percentages were 35.1% and 19.9%, respectively. 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 professional services projects and a reduction in our fixed costs of sales as a result of
our restructuring activities.
Operating Expenses
Fiscal 2004 vs. Fiscal
2003
Total operating expenses for fiscal 2004 and 2003
were $279.4 million and $264.0 million, respectively. Included in these operating expenses were restructuring charges of $12.3 million and $28.1
million, respectively, and impairment charges of $1.7 million and $15.6 million, respectively. KRONE operating expenses were $47. 7 million in
fiscal 2004. Excluding KRONE, operating expenses decreased 12.2% in fiscal 2004. 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 $59.1 million for fiscal 2004 compared to $59.9 million for fiscal 2003,
which represents a decrease of 1.3%. KRONE represented 5.8% of the fiscal 2004 expense. 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 increased 28.6% from $160.4 million in fiscal 2003 to $206.3 million in
fiscal 2004. KRONE was 94.3% of the increase in fiscal 2004. The remaining increase is due to $3.8 million of KRONE integration costs and $6.6 million
of increased incentive accruals, which were partially offset by $4.4 million of decreased occupancy costs resulting from ongoing
restructuring.
Note that in 2005 we expect to incur significant
administrative expense associated with our efforts to comply with Section 404 of the Sarbanes-Oxley Act. This section of the Act will require us to
conduct a thorough evaluation of our internal controls and we will be working with independent advisors in this process.
Impairment
charges: Impairment charges represent a write-down of the carrying value of fixed assets to their estimated fair market
value. These charges declined in fiscal 2004 compared to fiscal 2003 ($1.7 million compared to $15.6 million). In fiscal 2004, we recorded an
impairment charge for a building included in assets held for sale when it was determined the carrying value exceeded market value. The fair market
value was determined based on an examination of sales prices for similar properties.
The fiscal 2003 impairment charges consisted solely
of property and equipment impairments, which impacted both the Broadband Infrastructure and Access segment and the Professional Services
segment,
26
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.
Restructuring
charges: Restructuring charges represent the direct costs of certain leased facilities and severance costs for workforce
reductions. Our restructuring charges also declined significantly in fiscal 2004 compared to fiscal 2003 ($12.3 million compared to $28.1 million). The
fiscal 2004 restructuring charges consisted of $9.7 million of employee severance for workforce reductions and $2.6 million of facility consolidation
charges. The employee terminations affected both the Broadband Infrastructure and Access segment and the Professional Services
segment.
The $28.1 million of restructuring charges in fiscal
2003 related to our actions to downsize our business in response to declining sales. The fiscal 2003 restructuring charges include $24.0 million of
employee severance and $4.1 million of facility consolidation charges.
See Note 16 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for a further discussion of our impairment and restructuring charges.
Fiscal 2003 vs. Fiscal
2002
Total operating expenses for fiscal 2003 and 2002
were $264.0 million and $901.5 million, representing 44.8% and 110.0% of net sales, respectively. Included in these operating expenses were
restructuring charges of $28.1 million and $202.0 million and impairment charges of $15.6 million and $341.1 million in fiscal 2003 and 2002,
respectively. In addition to the lower aggregate amount of impairment, restructuring and other disposal charges in fiscal 2003, 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 $59.9 million for fiscal 2003, representing a 43.9% decrease from $106.8
million for fiscal 2002. This decrease reflected our efforts to control expenses.
Selling and
administration: Selling and administration expenses were $160.4 million for fiscal 2003, representing a decrease of 36.2%
from $251.6 million for fiscal 2002. This decrease reflects the benefits realized from our restructuring efforts. Also included in the fiscal 2003 and
2002 amounts were $0.0 million and $ (4.4) 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.
Impairment
charges: Impairment charges decreased significantly in fiscal 2003 compared to fiscal 2002 ($15.6 million compared to $341.1
million). The fiscal 2003 impairment charges consisted solely of property and equipment impairments, which impacted both the Broadband Infrastructure
and Access and Professional Services 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 $130.3 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 $210.8 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 our optical components and certain other product lines.
Restructuring
charges: Restructuring charges were significantly different in fiscal 2003 than in fiscal 2002 ($28.1 million compared to
$202.0 million). The $28.1 million of restructuring charges in fiscal 2003 related to our actions to further downsize our business in response to
declining sales.
The fiscal 2002 restructuring charges consisted
principally of $153.6 million related to the consolidation of facilities and $45.1 million for employee severance costs related to our workforce reduction . Of the $153.6 million facilities consolidation costs, $84.3 million related to our decision to
27
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.
Interest
The net interest income (expense) category
represents net interest on cash and cash equivalents as well as debt.
Interest income was $12.5 million, $9.7 million and
$11.0 million in fiscal 2004, 2003 and 2002, respectively. Interest income increased in fiscal 2004 due to higher average cash balances maintained
during the first half of fiscal 2004 and higher yields on our short-term investments. 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.
Interest expense was $8.8 million, $3.6 million and
$2.4 million in fiscal 2004, 2003 and 2002, respectively. Interest expense increased in fiscal 2004 due to inclusion of interest expense for the
convertible notes for a full year. Interest expense increased in fiscal 2003 due to the $2.1 million of additional interest expense relating to the
convertible notes we issued in June 2003, partially offset by a general decline in interest rates. See “Liquidity and Capital Resources”
below for a discussion of cash and debt levels.
Write-down, sale or conversion of
investments
During fiscal 2004 and 2003, we sold common stock of
certain companies in our portfolio and two investments in non-publicly traded securities for an aggregate gain of $4.8 million and $0.9 million,
respectively.
During fiscal 2002, we sold common stock of certain
companies in our investment portfolio and settled related hedging arrangements for a gain of $67.6 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.
Acquisitions
On May 18, 2004, we completed the acquisition of
KRONE from GenTek, Inc. This acquisition increased our network infrastructure business and expanded our presence in the international marketplace. The
results of KRONE subsequent to May 18, 2004 are included in our results of operations.
In this transaction, we acquired all of the
outstanding capital stock of KRONE in exchange for cash paid of $294.4 million in cash (net of cash acquired) and assumed certain liabilities of KRONE.
We acquired $78.1 million of intangible assets (see Note 7 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion
of intangible assets). No amounts were allocated to in-process research and development, because KRONE did not have any new products in development at
the time of the acquisition. Goodwill of $180.1 million was recorded in the transaction and assigned to our Broadband Infrastructure and Access
segment. Substantially all of this goodwill is not deductible for tax purposes.
No businesses were acquired during fiscal 2003 or
fiscal 2002.
Discontinued
operations
BroadAccess40
During the first quarter of fiscal 2004, we entered
into an agreement to sell our BroadAccess40 business, which was included in our Broadband Infrastructure and Access segment. This transaction closed on
February 24, 2004. We recorded the loss on the sale of the business of $3.8 million based on the value of the business’ assets and liabilities as
of January 31, 2004. Subsequent to January 31, 2004, adjustments of $3.0 million were made to increase the loss recorded.
28
The purchasers of the BroadAccess40 business
acquired all of the capital stock of our subsidiary that operated this business and assumed substantially all liabilities associated with this
business, with the exception of a $7.5 million note payable that was paid in full by us prior to the closing of the transaction. The purchasers issued
a promissory note to us for $3.8 million that is payable within two years of the closing.
Cuda/FastFlow
During the third quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Cuda cable modem termination system product line and related FastFlow Broadband Provisioning
Manager software, to BigBand Networks, Inc (“BigBand”). In consideration for this sale, we were issued a non-voting minority interest in
BigBand, which was accounted for under the cost method and has a nominal value. We also provided BigBand with a non-revolving credit facility of up to
$12.0 million with a term of three years. This transaction closed on June 29, 2004. As of October 31, 2004, $7.0 million was drawn on the credit
facility. We classified this business as a discontinued operation beginning in the third quarter of fiscal 2004, and recorded a loss on sale of $2.6
million. In the fourth quarter, adjustments of $2.3 million were made to increase the total loss to $4.9 million.
Singl.eView
During the third quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Singl.eView product line to Intec Telecom Systems PLC for a cash purchase price of $74.5 million,
subject to purchase price adjustments. This business had been included in our Professional Services segment. We also agreed to provide Intec with a
$6.0 million non-revolving credit facility with a term of 18 months. As of October 31, 2004, $4.0 million was drawn on the credit facility. The
transaction closed on August 27, 2004. We classified this business as a discontinued operation in the third quarter of fiscal 2004. In the fourth
quarter of fiscal 2004, we recognized a gain on sale of $61.7 million.
Metrica
During the fourth quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Metrica service assurance software group to WatchMark Corporation (“WatchMark”) for a
cash purchase price of $35 million, subject to purchase price adjustments, and a $3.9 million equity interest in WatchMark. The equity interest
constitutes less than a five percent ownership in WatchMark. This business had been included in our Professional Services segment. We classified this
business as a discontinued operation in the fourth quarter of fiscal 2004. The transaction closed on November 19, 2004, and will result in a
gain in the first quarter of fiscal 2005 .
No businesses were discontinued during fiscal 2003
or fiscal 2002.
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.
Other, net
Other, net primarily represents the gain or loss on
foreign currency exchange transactions, investment gains or losses, loss on sale-leaseback transactions and investment writedowns. Other net income
(expense) was $10.7 million, $9.0 million and $6.4 million in fiscal 2004, 2003 and 2002, respectively.
Income Taxes
Fiscal 2004 vs. Fiscal 2003 vs. Fiscal
2002
Note 10 to the Consolidated Financial Statements in
Item 8 of this Form 10-K describes the items which have impacted our effective income tax rate for fiscal 2004, 2003 and 2002. Significant items
include the deductibility of impairment charges and expiration of foreign tax credit carryovers.
29
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 nearly
full valuation allowance against our net deferred tax assets. See Note 10 to the Consolidated Financial Statements in Item 8 of this Form 10-K for
further information regarding the valuation allowance.
We recorded an income tax provision totaling $1.9
million for fiscal 2004 primarily attributable to our foreign operations. The income tax provision attributable to our U.S. operations is minimal since
the tax on this income is offset with the realization of deferred tax assets, which have a full valuation allowance.
In fiscal 2003, we recorded an income tax benefit
totaling $5.3 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.
Income (Loss) from Continuing Operations
Income from continuing operations was $31.3 million
(or $0.04 per diluted share) for fiscal 2004, compared to loss from continuing operations of $42.6 million (or $0.06 per diluted share) for fiscal
2003. Loss from continuing operations was $980.2 million (or $1.23 per diluted share) for fiscal 2002.
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,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Operating
income (loss) (1) |
|
|
|
|
83.1 |
|
|
|
22.6 |
|
|
|
(130.4 |
) |
Depreciation
and amortization |
|
|
|
|
11.4 |
|
|
|
5.8 |
|
|
|
9.7 |
|
Capital
expenditures |
|
|
|
|
4.3 |
|
|
|
0.8 |
|
|
|
8.2 |
|
|
|
|
|
At October 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Assets |
|
|
|
$ |
327.2 |
|
|
$ |
224.3 |
|
|
$ |
247.2 |
|
| (1) |
|
Operating loss excludes certain charges and expenses not
allocated to the segments as described in Note 15 to the Consolidated Financial Statements in Item 8 of this Form 10-K. |
During fiscal 2004, operating income for the
Broadband Infrastructure and Access segment increased by 267.7% to $83.1 million compared to $22.6 million in fiscal 2003. The inclusion of operating
income by KRONE beginning on May 18, 2004, accounts for 23.3% of the increase in operating income for fiscal 2004. The remaining increase in operating
income for the Broadband Infrastructure and Access segment resulted from increased Connectivity sales which was attributable primarily to increased
sales to our customers for products used in the core central office space and fiber-to-the-X networks.
During fiscal 2003, operating income for the
Broadband Infrastructure and Access segment was $22.6 million, a $153.0 million, or 117.3%, increase over operating loss of $130.4 million incurred
during fiscal 2002. This improvement was 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.
Depreciation and amortization increased $5.6
million, or 96.6%, and decreased $3.9 million, or 40.2%, in fiscal 2004 and 2003, respectively. The increase in fiscal 2004 is attributable to our
acquisition of
30
KRONE. The decrease in fiscal 2003 is the result
of our restructuring efforts, which led to a reduction in our property, plant and equipment balances.
Capital expenditures increased $ 3.5
million, or 437.5 %, and decreased $ 7.4 million, or 90.2 %, in fiscal 2004 and 2003, respectively. The increase in fiscal
2004 was the result of our growth. The decrease in fiscal 2003 was a result of our company-wide efforts to limit capital expenditures in light of
the industry downturn.
Professional Services
Segment
Detailed information regarding our Professional
Services segment is provided in the following table:
|
|
|
|
(Dollars in millions)
For the years ended October 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Operating
loss(1) |
|
|
|
|
(2.3 |
) |
|
|
(0.5 |
) |
|
|
(28.6 |
) |
Depreciation
and amortization |
|
|
|
|
2.8 |
|
|
|
2.9 |
|
|
|
4.3 |
|
Capital
expenditures |
|
|
|
|
6.0 |
|
|
|
0.9 |
|
|
|
4.4 |
|
|
|
|
|
At October 31,
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
Assets |
|
|
|
$ |
75.4 |
|
|
$ |
89.9 |
|
|
$ |
78.1 |
|
| (1) |
|
Operating loss excludes certain charges and expenses not
allocated to the segments as described in Note 15 to the Consolidated Financial Statements in Item 8 of this Form 10-K. |
During fiscal 2004, the operating loss of the
Professional Services segment increased $1.8 million compared to 2003. The addition of KRONE was offset by reductions in customer
spending.
During fiscal 2003, operating loss for the
Professional Services segment decreased $28.1 million compared to fiscal 2002. The decrease in operating loss was primarily due to cost savings
achieved as a result of our restructuring initiatives in fiscal 2003.
Depreciation and amortization decreased by $0.1
million in fiscal 2004 compared to fiscal 2003, and decreased by $1.4 million in fiscal 2003, compared to fiscal 2002. The fiscal 2003
decrease is the result of our restructuring efforts, which reduced the amount of property plant and equipment.
Capital expenditures increased $ 5.1
million, or 566.7 %, and decreased $ 3.5 million, or 79.5 %, in fiscal 2004 and 2003, respectively. The increase in fiscal
2004 was the result of our growth. The decrease in fiscal 2003 was 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 in
Item 8 of this Form 10-K 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 we believe 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
31
changes as well as longer than previously
expected usage periods for previously sold equipment. We have 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 will 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, 2004 and 2003, we had $42.0 million and $32.2 million, respectively, reserved against our inventories,
which represents 30.0% and 36.1%, respectively, of total inventory on-hand.
Restructuring
Accrual: During fiscal 2004 and 2003, we recorded restructuring charges representing the direct costs of exiting leased
facilities and employee severance costs. 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 recorded restructuring charges based on that standard. Restructuring charges
represent our best estimate of our liability at the date the charges were taken. Significant judgment is required in estimating the costs of leased
facilities. For example, in estimating the restructuring costs for leased facilities, we make certain assumptions with respect to when a facility will
be subleased and the amount of sublease income. 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.
Revenue
Recognition: We recognize revenue, net of discounts, 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 generally recognized
upon shipment of the product to the customer in accordance with the terms of the sales agreement. Revenue from services consists of fees for systems
requirements, system design and analysis, customization and installation services, ongoing system management, system enhancements and maintenance. We
primarily apply the percentage-of-completion method to these contracts for revenue recognition.
The assessment of collectibility is particularly
critical in determining whether 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 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 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
32
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 will 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, 2004 and 2003,
we had $15.9 million and $20.4 million, respectively, reserved against our accounts receivable, which represents 9.1% and 19.4%, respectively, of total
accounts receivable. The decrease in allowance for uncollectible accounts from 2003 to 2004 is due to improved collections.
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 will be required to record additional warranty reserves.
Alternatively, if we provide more reserves than we need, we will 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, 2004 and 2003, we reserved $14.4 and $10.4 million, respectively, related to future
estimated warranty costs.
Income Taxes and Deferred
Taxes: We currently have significant deferred tax assets (primarily in the United States) 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 net 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 nearly full valuation allowance against all future tax
benefits produced by our operating results. We expect to continue to provide a nearly 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, 2004, our net deferred tax assets
were $1,067.4 million with a related valuation allowance of $1,068.9 million. As of October 31, 2003, our net deferred tax assets were $751.0 million
with a related valuation allowance of $751.0 million. See Note 10 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further
discussion of the accounting treatment for income taxes.
Litigation
Reserves: As of October 31, 2004 and 2003, we had recorded approximately $5.2 million and $9.1 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 14 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. The required reserves may change in the future
due to new matters, developments in existing matters or if we determine to change our strategy with respect to any particular matter.
Pensions: We acquired
KRONE, which maintains a defined benefit pension for a portion of its German workforce. A participating individual’s post-retirement pension
benefit is based primarily on the individual’s years of service and earnings. The plan is accounted for in accordance with SFAS 87, which requires
that amounts recognized in the financial statements be determined on an actuarial basis. That measurement includes estimates relating to the discount
rate used to measure plan liabilities. The discount rate reflects the current rate at which the pension liability could effectively be settled at the
end of the year. In estimating this discount rate, we considered rates of return on high-grade fixed-income investments with similar duration to the
plan liability. We used a discount rate of 5.25% at October 31, 2004. A quarter
33
percentage point increase (decrease) in the assumed discount rate would
increase (decrease) the postretirement benefit obligation by $1.9 million and $(1.9) million, respectively.
Recently Issued Accounting Pronouncements
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. The adoption of this interpretation did not have a
material impact on our consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123R,
“Share-Based Payment: an amendment of FASB Statements No. 123 and 95”, which requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees. The provisions of the interpretation are effective
for financial statements issued for periods that begin after June 15, 2005, which will be our fourth quarter beginning August 1, 2005. We will use the
modified prospective transition method. Under the modified prospective method, awards that are granted, modified or settled after the date of adoption
will be measured and accounted for in accordance with SFAS 123R. Compensation cost for awards granted prior to, but not vested as of the date
SFAS 123R is adopted would be based on the grant date, fair value and attributes originally used to value those awards.
We expect the adoption of this standard will reduce
fourth quarter 2005 net income by approximately $9.2 million. This estimate is based on the number of options currently outstanding and exercisable and
could change based on the number of options granted or forfeited in fiscal 2005.
Liquidity and Capital Resources
Cash
Cash and cash equivalents, consisting primarily of
short-term money market instruments with maturities of three months or less, had a balance of $494.3 million at October 31, 2004, which is a decrease
of $224.4 million compared to October 31, 2003. The major uses of cash during fiscal 2004 were $295.2 million of acquisition costs primarily related to
KRONE. This use of cash was partially offset by $74.5 million proceeds for the sale of Singl.eView product line.
As of October 31, 2004, we had restricted cash of
$21.9 million compared to $15.6 million of restricted cash as of October 31, 2003, an increase of $6.3 million. Our restricted cash increased due to
the additions of KRONE balances and the statutory requirements related to a tender offer for a portion of a minority ownership interest.
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 $718.7 million as of
October 31, 2003, which was an increase of $441.0 million compared to 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.
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
34
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 interest rate on the variable rate notes was 1.605% and 2.235% for the period s ending June 15 and December 15,
2004 , respectively . The interest rate on the variable rate notes is 3.065% for the current period ending June 15, 2005. 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 rate
notes, which is a maximum of 99.7 million shares. We also have the option to settle the call options with the counterparty through 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 have used and 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.
In connection with our issuance of the fixed rate
and variable rate notes, we are required under a reg istration rights agreement to maintain an active registration statement with respect to the
fixed and variable rate notes (and the shares of our common stock that would be issued upon a conversion of those notes) for a period of up to
two years from the date the notes were issued. We presently have an effective registration statement on Form S-3 with
respect to these securities on file with the SEC (the “Registration Statement”). Because we were unable to timely file a current
report on Form 8-K in August, 2004, we have lost our ability to rely on Form S-3 registration statements until August, 2005, and as a
result, upon the filing of this report on Form 10-K, the Registration Statement will cease to be effective. We intend to file a post-effective
amendment to the Registration Statement on a Form S-1. That post-effective amendment on Form S-1 will need to be declared effective by the
SEC before it can be utilized. Under the terms of the registration rights agreement, if we fail to keep the Registration Statement effective,
the interest rate on those notes that remain held by their initial holders will be increased by 0.25% for 90 days and thereafter will be increased
by another 0.25%. This increase in the interest rate will
remain in effect for so long as the Registration Statement remains ineffective and could last until as late as June 4, 2005. If the
Registration Statement was to remain ineffective through June 4, 2005, the increase in the interest rate on the affected notes would result
in additional interest payments of no more than approximately $335,000.
35
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.
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
were sold in fiscal 2004. 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 reduced our restructuring accrual.
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, 2004, 2003 and 2002, we had commitments to
extend credit of $17.7 million, $26.5 million and $58.0 million for such arrangements, respectively. The total amount drawn and outstanding under the
commitments was approximately $17.7 million, $23.2 million and $20.9 million, respectively, as of October 31, 2004, 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, 2004, we have recorded approximately $17.5 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 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 2005. 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
$38.4 million as of October 31, 2004, will have to be paid from our unrestricted cash (shown as cash and cash equivalents on our balance sheet) as
follows:
• |
|
$9.7 million for employee severance will be paid in fiscal
2005; |
• |
|
$9.1 million for facilities consolidation costs, which relate
principally to excess leased facilities, will be paid in fiscal 2005; and |
• |
|
the remainder of $19.6 million, which also relates to excess
leased facilities, will be paid over the respective lease terms ending through 2015. |
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
36
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, preferred stock or warrants to purchase stock, any of which would be dilutive to existing shareholders.
Contractual Obligations and Commercial
Commitments
As of October 31, 2004, the following table
summarizes our commitments (in millions) to make long-term debt and lease payments and certain other contractual obligations.
|
|
|
|
Payments Due by Period
|
|
Category
|
|
|
|
Total
|
|
Less
Than
1 Year
|
|
1 – 3
Years
|
|
3 – 5
Years
|
|
More Than
5 Years
|
Long-Term
Debt Obligations |
|
|
|
$ |
400.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
200.0 |
|
|
$ |
200.0 |
|
Operating
Lease Obligations |
|
|
|
|
103.8 |
|
|
|
24.9 |
|
|
|
34.6 |
|
|
|
18.0 |
|
|
|
26.3 |
|
Purchase
Obligations (1) |
|
|
|
|
5.8 |
|
|
|
4.6 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
Minimum
Pension Obligations |
|
|
|
|
62.8 |
|
|
|
3.5 |
|
|
|
7.3 |
|
|
|
7.6 |
|
|
|
44.4 |
|
Total |
|
|
|
$ |
572.4 |
|
|
$ |
33.0 |
|
|
$ |
43.1 |
|
|
$ |
225.6 |
|
|
$ |
270.7 |
|
| (1) |
|
Amounts represent non-cancelable commitments to purchase goods
and services, including items such as inventory and information technology support. |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to market risk from changes in
security prices, foreign currency 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. The interest rate for the six-month period ending December 15, 2004 was 2.235%. The
interest rate on the variable rate notes is 3.065% for the current six-month period ending June 15, 2005. 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.
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, 2004,
our outstanding deferred compensation obligation related to the 401(k) excess plan was $4.8 million, of which approximately $0.9 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 $1.0 million, $2.4 million and $4.8 million, respectively, and we would
incur an expense of a like amount.
We also are exposed to market risk from changes in
foreign currency exchange rates. Our primary risk is the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency
denominated operating revenues and expenses. Our largest exposure comes from the e uro. The result of a 10% strengthening in the U.S. dollar to
our e uro denominated revenues and expenses would result in a decrease
37
of operating income of $0.4 million for the year ended October 31, 2004.
We are also exposed to foreign currency exposure as a result of changes in intercompany balance sheet balances and other balance sheet items. At
October 31, 2004, we did not hedge any foreign currency exposures; however, from time to time we may implement certain risk management
strategies that include the use of derivative instruments. These strategies include:
• |
|
The use of foreign currency forwards and options to hedge a
portion of anticipated future sales denominated in foreign currencies, principally the euro, British pound and Australian dollar, in order to
offset the effect of changes in exchange rates. |
• |
|
The use of foreign currency forwards and options to hedge
certain foreign currency denominated intercompany receivables, primarily in the euro, British pound, Australian dollar and Canadian dollar, to
offset the effect on earnings of changes in exchange rates until these receivables are collected. |
See Note 1 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for information about our foreign currency exchange hedging program.
38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003, and the related consolidated statements of operations, shareowners’
investment, and cash flows for each of the three years in the period ended October 31, 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2004, in conformity with U.S.
generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
December 13, 2004
39
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of
Operations
(in millions, except earnings per share)
|
|
|
|
For the years ended October 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Net Sales:
|
Products |
|
|
|
$ |
659.9 |
|
|
$ |
484.7 |
|
|
$ |
693.3 |
|
Services |
|
|
|
|
124.4 |
|
|
|
104.7 |
|
|
|
126.2 |
|
Total net
sales |
|
|
|
|
784.3 |
|
|
|
589.4 |
|
|
|
819.5 |
|
|
Cost of Sales:
|
Products |
|
|
|
|
365.1 |
|
|
|
280.5 |
|
|
|
517.3 |
|
Services |
|
|
|
|
117.3 |
|
|
|
101.8 |
|
|
|
139.0 |
|
Total cost of
sales |
|
|
|
|
482.4 |
|
|
|
382.3 |
|
|
|
656.3 |
|
Gross
Profit |
|
|
|
|
301.9 |
|
|
|
207.1 |
|
|
|
163.2 |
|
|
Operating Expenses:
|
Research and
development |
|
|
|
|
59.1 |
|
|
|
59.9 |
|
|
|
106.8 |
|
Selling and
administration |
|
|
|
|
206.3 |
|
|
|
160.4 |
|
|
|
251.6 |
|
Impairment
charges |
|
|
|
|
1.7 |
|
|
|
15.6 |
|
|
|
341.1 |
|
Restructuring
charges |
|
|
|
|
12.3 |
|
|
|
28.1 |
|
|
|
202.0 |
|
Total
operating expenses |
|
|
|
|
279.4 |
|
|
|
264.0 |
|
|
|
901.5 |
|
Operating
Income (Loss) |
|
|
|
|
22.5 |
|
|
|
(56.9 |
) |
|
|
(738.3 |
) |
|
Other
Income, Net |
|
|
|
|
10.7 |
|
|
|
9.0 |
|
|
|
6.4 |
|
Income (Loss)
Before Income Taxes |
|
|
|
|
33.2 |
|
|
|
(47.9 |
) |
|
|
(731.9 |
) |
Provision
(Benefit) for Income Taxes |
|
|
|
|
1.9 |
|
|
|
(5.3 |
) |
|
|
248.3 |
|
Income (Loss)
From Continuing Operations |
|
|
|
|
31.3 |
|
|
|
(42.6 |
) |
|
|
(980.2 |
) |
|
Discontinued Operations, Net of Tax:
|
Loss from
discontinued operations |
|
|
|
|
(64.9 |
) |
|
|
(34.1 |
) |
|
|
(164.8 |
) |
Gain on sale
of discontinued operations, net |
|
|
|
|
50.0 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(14.9 |
) |
|
|
(34.1 |
) |
|
|
(164.8 |
) |
Net Income
(Loss) |
|
|
|
$ |
16.4 |
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
Weighted
Average Common Shares Outstanding (Basic) |
|
|
|
|
808.3 |
|
|
|
803.4 |
|
|
|
795.6 |
|
Weighted
Average Common Shares Outstanding (Diluted) |
|
|
|
|
812.1 |
|
|
|
803.4 |
|
|
|
795.6 |
|
Basic and Diluted Income (Loss) Per Share:
|
Continuing
operations |
|
|
|
$ |
0.04 |
|
|
$ |
(0.06 |
) |
|
$ |
(1.23 |
) |
Discontinued
operations |
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.21 |
) |
Net income
(loss) |
|
|
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Balance
Sheets
(in millions)
|
|
|
|
October 31,
2004
|
|
October 31,
2003
|
ASSETS
|
Current Assets:
|
Cash and cash
equivalents |
|
|
|
$ |
494.3 |
|
|
$ |
718.7 |
|
Available-for-sale securities |
|
|
|
|
7.3 |
|
|
|
26.7 |
|
Accounts
receivable, net of reserves of $15.9 and $20.4 |
|
|
|
|
158.0 |
|
|
|
85.0 |
|
Unbilled
revenues |
|
|
|
|
36.5 |
|
|
|
27.9 |
|
Inventories,
net reserves of $42.0 and $32.2 |
|
|
|
|
97.8 |
|
|
|
57.1 |
|
Assets of
discontinued operations |
|
|
|
|
16.6 |
|
|
|
74.1 |
|
Prepaid and
other current assets |
|
|
|
|
25.1 |
|
|
|
42.7 |
|
Total current
assets |
|
|
|
|
835.6 |
|
|
|
1,032.2 |
|
Property
and equipment, net of accumulated depreciation of $316.0 and $294.9 |
|
|
|
|
233.0 |
|
|
|
175.3 |
|
Assets
Held for Sale |
|
|
|
|
6.6 |
|
|
|
25.1 |
|
Restricted
Cash |
|
|
|
|
21.9 |
|
|
|
15.6 |
|
Goodwill
|
|
|
|
|
180.1 |
|
|
|
— |
|
Intangibles, net of accumulated amortization of $13.9 and $6.8 |
|
|
|
|
93.0 |
|
|
|
12.8 |
|
Available-for-sale securities |
|
|
|
|
26.8 |
|
|
|
19.5 |
|
Other
Assets |
|
|
|
|
31.1 |
|
|
|
16.4 |
|
Total
assets |
|
|
|
$ |
1,428.1 |
|
|
$ |
1,296.9 |
|
LIABILITIES AND SHAREOWNERS’ INVESTMENT
|
Current Liabilities:
|
Accounts
payable |
|
|
|
$ |
72.8 |
|
|
$ |
43.9 |
|
Accrued
compensation and benefits |
|
|
|
|
65.9 |
|
|
|
43.7 |
|
Other accrued
liabilities |
|
|
|
|
81.4 |
|
|
|
55.5 |
|
Income taxes
payable |
|
|
|
|
27.6 |
|
|
|
19.3 |
|
Restructuring
accrual |
|
|
|
|
38.4 |
|
|
|
29.1 |
|
Liabilities
of discontinued operations |
|
|
|
|
15.6 |
|
|
|
67.3 |
|
Notes
payable |
|
|
|
|
0.3 |
|
|
|
8.0 |
|
Total current
liabilities |
|
|
|
|
302.0 |
|
|
|
266.8 |
|
Pension
Obligations and other long-term liabilities |
|
|
|
|
66.8 |
|
|
|
2.4 |
|
Long-Term
Notes Payable |
|
|
|
|
400.0 |
|
|
|
400.0 |
|
Total
liabilities |
|
|
|
|
768.8 |
|
|
|
669.2 |
|
Shareowners’ Investment:
|
Preferred
stock, $0.00 par value; authorized 10.0 shares; issued and outstanding 0.0 and 0.0 shares |
|
|
|
|
— |
|
|
|
— |
|
Common stock,
$0.20 par value; authorized 1,200.0 shares; issued and outstanding 810.1 and 806.6 shares |
|
|
|
|
162.0 |
|
|
|
161.3 |
|
Paid-in
capital |
|
|
|
|
1,250.8 |
|
|
|
1,246.9 |
|
Accumulated
deficit |
|
|
|
|
(733.6 |
) |
|
|
(750.0 |
) |
Deferred
compensation |
|
|
|
|
(6.4 |
) |
|
|
(9.3 |
) |
Accumulated
other comprehensive loss |
|
|
|
|
(13.5 |
) |
|
|
(21.2 |
) |
Total
shareowners’ investment |
|
|
|
|
659.3 |
|
|
|
627.7 |
|
Total
liabilities and shareowners’ investment |
|
|
|
$ |
1,428.1 |
|
|
$ |
1,296.9 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
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, 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 loss, 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 |
) |
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 loss, net of tax:
|
Translation
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10.7 |
) |
|
|
(10.7 |
) |
Unrealized
gain on securities, net of taxes of $0.0 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.2 |
|
|
|
4.2 |
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
Net
income |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16.4 |
|
|
|
— |
|
|
|
— |
|
|
|
16.4 |
|
Other comprehensive income, net of tax:
|
Translation
gain |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.3 |
|
|
|
12.3 |
|
Unrealized
loss on securities, net of taxes of $0.0 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Adjustment for
sale of securities, net of taxes $0.0 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4.2 |
) |
|
|
(4.2 |
) |
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.1 |
|
Exercise of
common stock options |
|
|
|
|
2.0 |
|
|
|
0.4 |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.6 |
|
Reduction of
deferred compensation |
|
|
|
|
1.5 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
— |
|
|
|
2.9 |
|
|
|
— |
|
|
|
4.9 |
|
Balance,
October 31, 2004 |
|
|
|
|
810.1 |
|
|
$ |
162.0 |
|
|
$ |
1,250.8 |
|
|
$ |
(733.6 |
) |
|
$ |
(6.4 |
) |
|
$ |
(13.5 |
) |
|
$ |
659.3 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of
Cash Flows
(in millions)
|
|
|
|
For the years ended October 31,
|
|
|
|
|
|
200 4
|
|
200 3
|
|
200 2
|
Operating Activities:
|
Net income
(loss) from continuing operations |
|
|
|
$ |
31.3 |
|
|
$ |
(42.6 |
) |
|
$ |
(980.2 |
) |
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities from
continuing
operations—
|
Inventory and
fixed asset write-offs |
|
|
|
|
1.7 |
|
|
|
15.6 |
|
|
|
348.2 |
|
Depreciation
and amortization |
|
|
|
|
41.7 |
|
|
|
53.8 |
|
|
|
100.8 |
|
Change in bad
debt reserves |
|
|
|
|
(2.9 |
) |
|
|
4.3 |
|
|
|
22.0 |
|
Change in
inventory reserves |
|
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
48.3 |
|
Purchased
in-process research and development |
|
|
|
|
— |
|
|
|
— |
|
|
|
10.5 |
|
Non-cash
stock compensation |
|
|
|
|
2.9 |
|
|
|
4.4 |
|
|
|
14.3 |
|
Change in
deferred income taxes |
|
|
|
|
1.5 |
|
|
|
— |
|
|
|
498.1 |
|
(Gain) loss
on sale of investments |
|
|
|
|
(4.8 |
) |
|
|
(0.9 |
) |
|
|
(67. 6 |
) |
Loss on
write-down of investments |
|
|
|
|
— |
|
|
|
— |
|
|
|
50.9 |
|
(Gain) loss
on sale of property and equipment |
|
|
|
|
(0.5 |
) |
|
|
1.0 |
|
|
|
14.8 |
|
(Gain) loss
on sale of business |
|
|
|
|
(2.8 |
) |
|
|
1.4 |
|
|
|
6.7 |
|
Other,
net |
|
|
|
|
(1.8 |
) |
|
|
(1.0 |
) |
|
|
(0.3 |
) |
Changes in operating assets and liabilities, net of acquisitions
and divestitures:
|
Accounts
receivable and unbilled revenues |
|
|
|
|
(9.7 |
) |
|
|
2.4 |
|
|
|
106.0 |
|
Inventories |
|
|
|
|
(5.3 |
) |
|
|
9.6 |
|
|
|
80.6 |
|
Prepaid and
other assets |
|
|
|
|
19.2 |
|
|
|
140.7 |
|
|
|
11.0 |
|
Accounts
payable |
|
|
|
|
1.8 |
|
|
|
(29.3 |
) |
|
|
(77.1 |
) |
Accrued
liabilities |
|
|
|
|
0.5 |
|
|
|
(123.6 |
) |
|
|
(115.3 |
) |
Total cash
provided by operating activities from continuing operations |
|
|
|
|
72.4 |
|
|
|
35.8 |
|
|
|
71.7 |
|
Total cash
used by operating activities from discontinued operations |
|
|
|
|
(69.3 |
) |
|
|
(1.6 |
) |
|
|
(12.0 |
) |
Total cash
provided by operating activities |
|
|
|
|
3.1 |
|
|
|
34.2 |
|
|
|
59.7 |
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired |
|
|
|
|
(295.2 |
) |
|
|
— |
|
|
|
(4.2 |
) |
Divestitures,
net of cash disposed |
|
|
|
|
67.9 |
|
|
|
1.9 |
|
|
|
2.3 |
|
Property and
equipment additions |
|
|
|
|
(10.3 |
) |
|
|
(69.5 |
) |
|
|
(25.6 |
) |
Proceeds from
disposal of property and equipment |
|
|
|
|
11.2 |
|
|
|
1.9 |
|
|
|
— |
|
(Increase)
decrease in restricted cash |
|
|
|
|
(6.3 |
) |
|
|
161.4 |
|
|
|
(177.0 |
) |
Purchase of
available-for-sale securities |
|
|
|
|
19.7 |
|
|
|
(57.0 |
) |
|
|
— |
|
Sale of
available-for-sale securities |
|
|
|
|
(7.3 |
) |
|
|
21.9 |
|
|
|
70.9 |
|
Total cash
(used for) provided by investing activities |
|
|
|
|
(220.3 |
) |
|
|
60.6 |
|
|
|
(133.6 |
) |
Financing Activities:
|
(Repayments)
Issuance of debt |
|
|
|
|
(10.7 |
) |
|
|
371. 7 |
|
|
|
(5.2 |
) |
Purchase of
call spread option |
|
|
|
|
— |
|
|
|
(34.5 |
) |
|
|
— |
|
Common stock
issued |
|
|
|
|
3.7 |
|
|
|
8.2 |
|
|
|
9.1 |
|
Total cash
(used for) provided by financing activities |
|
|
|
|
(7.0 |
) |
|
|
345. 4 |
|
|
|
3.9 |
|
Effect of
Exchange Rate Changes on Cash |
|
|
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
0.2 |
|
(Decrease)
Increase in Cash and Cash Equivalents |
|
|
|
|
(224.4 |
) |
|
|
441.0 |
|
|
|
(69.8 |
) |
Cash and Cash
Equivalents, Beginning of Year |
|
|
|
|
718.7 |
|
|
|
277.7 |
|
|
|
347.5 |
|
Cash and Cash
Equivalents, End of Year |
|
|
|
$ |
494.3 |
|
|
$ |
718.7 |
|
|
$ |
277.7 |
|
The accompanying notes are an integral part of these Consolidated Financial
Statements.
43
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Business: We are a
leading global supplier of communications infrastructure solutions and services. Our products and services connect every type of communications network
over copper, fiber, coaxial and wireless media and enable high-speed Internet, data, video, and voice services to residences, businesses and mobile
communications subscribers. These products and services include fiber optic, copper and coaxial based frames, cabinets, cables, connectors, cards and
other physical components essential to enable the delivery of communications for wireline, wireless, cable, broadcast and enterprise networks. Our
products also include network access devices such as high-bit-rate digital subscriber line and wireless coverage solutions. We also design, equip and
build networks through the provision of professional services, which compliments our hardware business by planning, deploying and maintaining
communications networks. For management purposes, we are organized into two reportable segments: the Broadband Infrastructure and Access segment and
the Professional Services segment, previously known as 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.
Basis of
Presentation: During fiscal 2004, we sold our BroadAccess40 business, the business related to our Cuda cable modem
termination system product line and related FastFlow Broadband Provisioning Manager software and the business related to our Singl.eView product line.
We also entered into an agreement to sell the business related to our Metrica service assurance software group. In accordance with SFAS No. 144, these
businesses were classified as discontinued operations in fiscal 2004 and the financial results are reported separately as discontinued operations for
all periods presented.
Cash and Cash
Equivalents: Cash equivalents represent short-term investments in money market instruments 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, 2004, the
majority of our cash equivalents were spread between four major financial institutions to avoid any significant concentration
risk.
Available for Sale
Securities: We classify debt securities with maturities of more than three months but less than one year and
equity securities in publicly held companies as current available for sale securities. Debt securities with a 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
44
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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 16 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.” Under the standard, goodwill is no longer amortized but will be reviewed annually for
impairment. Our other intangible assets (consisting primarily of technology, trademarks, distributor network and patents) will continue to be amortized
over their useful lives, which are from one to 20 years. Refer to Note 7 for details of our goodwill and intangible assets.
Research and Development Costs: Our policy is to expense all research and development costs in the period incurred.
Revenue Recognition: We recognize revenue, net of discounts, 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 generally recognized upon shipment of the product to the customer in accordance with the terms of the sales agreement.
Revenue from services consists of fees for systems requirements, system design and analysis, customization and installation services, ongoing system
management, system enhancements and maintenance. We primarily apply the percentage-of-completion method to these contracts for revenue recognition.
We record provisions against our gross revenue for estimated product returns and allowances in the period when the related revenue is recorded.
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 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 nearly full valuation allowance on any future tax benefits
until we can sustain a level of profitability that demonstrates our ability to utilize these assets.
45
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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 currency 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 e uro, 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 currency 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.
At October 31, 2004, we did not have any hedges for foreign currency exposures.
Stock-Based Compensation: We recognize and measure our stock option compensation by the intrinsic value method in accordance with APB Opinion
25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation cost for employee stock options is measured
as the excess, if any, of the quoted market price of our common stock at the date of the grant over the amount that the employee is required to pay for
the stock. No compensation expense was recognized for options issued in fiscal 2004, 2003 and 2002 as all stock options were issued at fair market
value on the date of grant. We have also issued restricted stock in the form of restricted stock awards and of restricted stock units (hereafter
sometimes collectively called “restricted stock”). The fair market value of the restricted stock is amortized over the projected remaining
vesting period.
We adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation.” SFAS No. 148 requires disclosure of
how stock compensation expense would be computed under SFAS No. 123, “Accounting for Stock-Based Compensation,” using the fair value
method. We estimated the fair value using the Black-Scholes option-pricing model. 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 for per share amounts):
|
|
|
|
2004
|
|
2003
|
|
2002
|
Net income
(loss) as reported |
|
|
|
$ |
16.4 |
|
|
$ |
(76.7 |
) |
|
$ |
(1,145.0 |
) |
Plus:
Stock-based employee compensation expense included in reported income (loss) |
|
|
|
|
2.9 |
|
|
|
4.4 |
|
|
|
14.3 |
|
Less: Stock
compensation expense—fair value based method |
|
|
|
|
(36.6 |
) |
|
|
(46.7 |
) |
|
|
(128.7 |
) |
Pro Forma
Loss |
|
|
|
|
(17.3 |
) |
|
|
(119.0 |
) |
|
|
(1,259.4 |
) |
Income (Loss) Per Share—Basic and Diluted
|
As
reported |
|
|
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
$ |
(1.44 |
) |
Pro
forma |
|
|
|
$ |
(0.0 2 |
) |
|
$ |
(0.15 |
) |
|
$ |
(1.58 |
) |
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. This exercise price 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, the
unrecognized
46
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
compensation cost of the cancelled options and the incremental fair value of the replacement options are being amortized over a 30-month period,
consisting 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.
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.
Dividends: No cash dividends have been declared or paid during the past three years.
Recently Issued Accounting Pronouncements: 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. Interpretation No. 46
is applicable for all variable interests created after January 31, 2003. For all variable interest entities created before February 1, 2003, the
provisions of this interpretation were effective in the first fiscal year or interim period beginning after December 15, 2003 (our first quarter of
fiscal 2004). The adoption of this interpretation did not have a material impact on our financial statements.
Share Based Payments: In December 2004, the FASB issued SFAS 123R, “Share-Based Payment: an amendment of FASB
Statements No. 123 and 95”, which requires companies to recognize in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. The provisions of the interpretation are effective for financial statements issued for periods that
begin after June 15, 2005, which will be our fourth quarter beginning August 1, 2005. We will use the modified prospective transition method. Under the
modified prospective method, awards that are granted, modified or settled after the date of adoption will be measured and accounted for in
accordance with SFAS 123R. Compensation cost for awards granted prior to, but not vested as of the date SFAS 123R is adopted would be based
on the grant date, fair value and attributes originally used to value those awards.
We expect the adoption of this standard will reduce fourth quarter 2005 net income by approximately $9.2 million. This estimate is based on the
number of options currently outstanding and exercisable and could change based on the number of options granted or forfeited in fiscal
2005.
47
Notes to Consolidated Financial Statements (Continued)
Note 2: Other Financial Statement Data (in millions)
Other Income (Expense), Net:
|
|
|
|
2004
|
|
2003
|
|
2002
|
Interest
income |
|
|
|
$ |
12.5 |
|
|
$ |
9.7 |
|
|
$ |
11.0 |
|
Interest
expense |
|
|
|
|
(8.8 |
) |
|
|
(3.6 |
) |
|
|
(2.4 |
) |
Interest
income, net |
|
|
|
|
3.7 |
|
|
|
6.1 |
|
|
|
8.6 |
|
Foreign
exchange (loss) income |
|
|
|
|
(0.9 |
) |
|
|
5.8 |
|
|
|
(11.7 |
) |
Loss on lease
termination |
|
|
|
|
— |
|
|
|
— |
|
|
|
(8.2 |
) |
Gain (loss)
on divested product lines |
|
|
|
|
3.5 |
|
|
|
(1.4 |
) |
|
|
(6.7 |
) |
Gain on
investments |
|
|
|
|
4.8 |
|
|
|
0.9 |
|
|
|
16.7 |
|
Gain (loss)
on sale of fixed assets |
|
|
|
|
0.5 |
|
|
|
(0.8 |
) |
|
|
(11.5 |
) |
Gain on
patent infringement |
|
|
|
|
— |
|
|
|
— |
|
|
|
26.2 |
|
Other |
|
|
|
|
(0. 9 |
) |
|
|
(1.6 |
) |
|
|
(7.0 |
) |
Other,
net |
|
|
|
|
7.0 |
|
|
|
2.9 |
|
|
|
(2.2 |
) |
Total other
income (expense), net |
|
|
|
$ |
10.7 |
|
|
$ |
9.0 |
|
|
$ |
6.4 |
|
Supplemental Cash Flow
Information:
|
|
|
|
2004
|
|
2003
|
|
2002
|
Income taxes
paid (refunds received) |
|
|
|
$ |
1.2 |
|
|
$ |
(142.7 |
) |
|
$ |
(259.4 |
) |
Interest
paid |
|
|
|
$ |
8.5 |
|
|
$ |
1.5 |
|
|
$ |
3.8 |
|
Supplemental Schedule of Investing
Activities:
|
|
|
|
2004
|
|
2003
|
|
2002
|
Acquisitions:
|
Fair value of
assets acquired |
|
|
|
$ |
454.9 |
|
|
$ |
— |
|
|
$ |
20.8 |
|
Less:
Liabilities assumed |
|
|
|
|
(148.8 |
) |
|
|
— |
|
|
|
(16.5 |
) |
Acquisition
costs |
|
|
|
|
5.6 |
|
|
|
— |
|
|
|
— |
|
Cash
acquired |
|
|
|
|
(16.5 |
) |
|
|
— |
|
|
|
(0.1 |
) |
Acquisitions,
net of cash acquired |
|
|
|
$ |
295.2 |
|
|
$ |
— |
|
|
$ |
4.2 |
|
Divestitures:
|
Proceeds from
divestitures |
|
|
|
$ |
78.9 |
|
|
$ |
— |
|
|
$ |
— |
|
Carrying
value of assets disposed |
|
|
|
|
— |
|
|
|
2.6 |
|
|
|
22.4 |
|
Less:
Liabilities disposed |
|
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
(20.1 |
) |
Cash
disposed |
|
|
|
|
(11.0 |
) |
|
|
— |
|
|
|
— |
|
Divestitures,
net of cash disposed |
|
|
|
$ |
67.9 |
|
|
$ |
1.9 |
|
|
$ |
2.3 |
|
48
Notes to Consolidated Financial Statements (Continued)
Note 2: Other Financial Statement Data (in millions)
(Continued)
Consolidated Balance Sheet
Information:
|
|
|
|
2004
|
|
2003
|
Inventories:
|
Purchased
materials and manufactured products |
|
|
|
$ |
132.1 |
|
|
$ |
88.4 |
|
Work-in-process |
|
|
|
|
7.7 |
|
|
|
0.9 |
|
Less:
Inventory reserve |
|
|
|
|
(42.0 |
) |
|
|
(32.2 |
) |
Total |
|
|
|
$ |
97.8 |
|
|
$ |
57.1 |
|
Property and Equipment:
|
|
|
Land and
buildings |
|
|
|
$ |
135.7 |
|
|
$ |
119.9 |
|
Machinery and
equipment |
|
|
|
|
364.1 |
|
|
|
316.3 |
|
Furniture and
fixtures |
|
|
|
|
38.2 |
|
|
|
31.2 |
|
Less
accumulated depreciation |
|
|
|
|
(316.0 |
) |
|
|
(294.9 |
) |
Total |
|
|
|
|
222.0 |
|
|
|
172.5 |
|
Construction-in-process |
|
|
|
|
11.0 |
|
|
|
2.8 |
|
Total,
net |
|
|
|
$ |
233.0 |
|
|
$ |
175.3 |
|
Other Assets:
|
|
|
Notes
receivable, net |
|
|
|
$ |
22.6 |
|
|
$ |
7.2 |
|
Deferred
financing costs |
|
|
|
|
6.9 |
|
|
|
8.1 |
|
Other |
|
|
|
|
1.6 |
|
|
|
1.1 |
|
Total |
|
|
|
$ |
31.1 |
|
|
$ |
16.4 |
|
Other Accrued Liabilities:
|
|
|
Deferred
Revenue |
|
|
|
$ |
4.5 |
|
|
$ |
6.8 |
|
Warranty
reserve |
|
|
|
|
14.4 |
|
|
|
10.4 |
|
Accrued taxes
(non-income) |
|
|
|
|
15.7 |
|
|
|
18.8 |
|
Non-trade
payables |
|
|
|
|
31.8 |
|
|
|
18.7 |
|
Other |
|
|
|
|
15.0 |
|
|
|
0.8 |
|
Total |
|
|
|
$ |
81.4 |
|
|
$ |
55.5 |
|
Note 3: Acquisition
On May 18, 2004, we completed the acquisition of
KRONE from GenTek, Inc. This acquisition increases our network infrastructure business and expands our presence in the international marketplace. The
results of KRONE subsequent to May 18, 2004 are included in our results of operations.
In this transaction, we acquired all of the
outstanding capital stock of KRONE in exchange for cash paid of $294.4 million in cash (net of cash acquired) and assumed certain liabilities of KRONE.
We acquired $78.1 million of intangible assets principally consisting of technology, trademarks and distributor network (see Note 7 for further
discussion of intangible assets). No amounts were allocated to in-process research and development, because KRONE did not have any new products in
development at the time of the acquisition. Goodwill of $180.1 million was recorded in the transaction and assigned to our Broadband Infrastructure and
Access segment. Substantially all of this goodwill is not deductible for tax purposes.
49
Notes to Consolidated Financial Statements (Continued)
Note 3: Acquisition (Continued)
The following table summarizes the allocation of the
purchase price to the fair values of the assets acquired and liabilities assumed at the date of the acquisition (in millions):
|
|
|
|
May 18, 2004
|
|
Current
assets |
|
|
|
$ |
116.6 |
|
|
|
|
|
Intangible
assets |
|
|
|
|
78.1 |
|
|
|
|
|
Goodwill |
|
|
|
|
180.1 |
|
|
|
|
|
Other
long-term assets |
|
|
|
|
81.2 |
|
|
|
|
|
Total
assets acquired |
|
|
|
|
456.0 |
|
|
|
|
|
Current
liabilities |
|
|
|
|
81.0 |
|
|
|
|
|
Long-term
liabilities |
|
|
|
|
64.1 |
|
|
|
|
|
Total
liabilities assumed |
|
|
|
|
145.1 |
|
|
|
|
|
Net
assets acquired |
|
|
|
|
310.9 |
|
|
|
|
|
Less
cash acquired |
|
|
|
|
16.5 |
|
|
|
|
|
|
Net
cash paid |
|
|
|
$ |
294.4 |
|
|
|
|
|
Unaudited pro forma consolidated results of
continuing operations, as though the acquisition of KRONE had taken place at the beginning of the periods presented, are as follows (in millions,
except per share data):
|
|
|
|
2004
|
|
2003
|
Revenue |
|
|
|
$ |
971.9 |
|
|
$ |
893.0 |
|
Income (loss)
from continuing operations (1) |
|
|
|
$ |
26.0 |
|
|
$ |
(53.0 |
) |
Net income
(loss) per share—basic and diluted |
|
|
|
$ |
0.03 |
|
|
$ |
(0.07 |
) |
| (1) |
|
Includes restructuring and impairment charges of $12.3 million
and $1.7 million, respectively, for the year ended October 31, 2004, and $28.1 million and $15.6 million, respectively, for the year ended October 31,
2003, for the ADC stand-alone business. Includes restructuring charges of $2.4 million for the year ended October 31, 2004, and $4.3 million for the
year ended October 31, 2003, for the KRONE stand-alone business. See Note 16 for discussion of the nature of these charges. |
The unaudited pro forma results of operations are
for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the
periods presented or the results which may occur in the future.
Note 4: Discontinued Operations
BroadAccess40
During the first quarter of fiscal 2004, we entered
into an agreement to sell our BroadAccess40 business, which was included in our Broadband Infrastructure and Access segment. This transaction closed on
February 24, 2004. We recorded the loss on the sale of the business of $3.8 million based on the value of the business’ assets and liabilities as
of January 31, 2004. Subsequent to January 31, 2004, adjustments of $3.0 million were made to increase the previous loss
recorded.
The purchasers of the BroadAccess40 business
acquired all of the stock of our subsidiary that operated this business and assumed substantially all liabilities associated with this business, with
the exception of a $7.5 million note payable that was paid in full by us prior to the closing of the transaction. The purchasers issued a promissory
note to us for $3.8 million that is payable within two years of the closing.
50
Notes to Consolidated Financial Statements (Continued)
Note 4: Discontinued Operations (Continued)
Cuda/FastFlow
During the third quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Cuda cable modem termination system product line and related FastFlow Broadband Provisioning
Manager software, to BigBand Networks, Inc (“BigBand”). In consideration for this sale, we were issued a non-voting minority interest in
BigBand, which was accounted for under the cost method and has a nominal value. We also provided BigBand with a non-revolving credit facility of up to
$12.0 million with a term of three years. This transaction closed on June 29, 2004. As of October 31, 2004, $7.0 million was drawn on the credit
facility. We classified this business as a discontinued operation beginning in the third quarter of fiscal 2004, and recorded a loss on sale of $2.6
million. In the fourth quarter, adjustments of $2.3 million were made to increase the total loss to $4.9 million.
Singl.eView
During the third quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Singl.eView product line to Intec Telecom Systems PLC for a cash purchase price of $74.5 million,
subject to purchase price adjustments. This business had been included in our Professional Services segment. We also agreed to provide Intec with a
$6.0 million non-revolving credit facility with a term of 18 months. As of October 31, 2004, $4.0 million was drawn on the credit facility. The
transaction closed on August 27, 2004. We classified this business as a discontinued operation in the third quarter of fiscal 2004. In the fourth
quarter of fiscal 2004, we recognized a gain on sale of $61.7 million.
Metrica
During the fourth quarter of fiscal 2004, we entered
into an agreement to sell the business related to our Metrica service assurance software group to WatchMark Corporation for a cash purchase price of
$35 million, subject to purchase price adjustments, and a $3.9 million equity interest in WatchMark. The equity interest constitutes less than a five
percent ownership in WatchMark. This business had been included in our Professional Services segment. We classified this business as a discontinued
operation in the fourth quarter of fiscal 2004. The transaction closed on November 19, 2004 and will result in a gain in the first quarter of
fiscal 2005 .
The financial results of our BroadAccess40,
Cuda/FastFlow, Singl.eView and Metrica businesses included in discontinued operations are as follows (in millions):
|
|
|
|
2004
|
|
2003
|
|
2002
|
Revenue |
|
|
|
$ |
102.1 |
|
|
$ |
183.9 |
|
|
$ |
228.2 |
|
Loss from
discontinued operations, net of tax |
|
|
|
$ |
(64.9 |
) |
|
$ |
(34.1 |
) |
|
$ |
(164.8 |
) |
Gain on sale
of discontinued operations, net |
|
|
|
|
50.0 |
|
|
|
— |
|
|
|
— |
|
Loss from
discontinued operations |
|
|
|
$ |
(14.9 |
) |
|
$ |
(34.1 |
) |
|
$ |
(164.8 |
) |
51
Notes to Consolidated Financial Statements (Continued)
Note 5: Net Income (Loss) from Continuing Operations Per Share
The following table presents a reconciliation of the
numerators and denominators of basic and diluted income (loss) per share from continuing operations (in millions, except for per share
amounts):
|
|
|
|
2004
|
|
2003
|
|
2002
|
Numerator:
|
Net income
(loss) from continuing operations |
|
|
|
$ |
31.3 |
|
|
$ |
(42.6 |
) |
|
$ |
(980.2 |
) |
Denominator:
|
Weighted
average common shares outstanding |
|
|
|
|
808.3 |
|
|
|
803.4 |
|
|
|
795.6 |
|
Employee
options and other |
|
|
|
|
3.8 |
|
|
|
— |
|
|
|
— |
|
Weighted
average common shares outstanding |
|
|
|
|
812.1 |
|
|
|
803.4 |
|
|
|
795.6 |
|
Basic and
diluted income (loss) per share from
continuing operations |
|
|
|
$ |
0.04 |
|
|
$ |
(0.06 |
) |
|
$ |
(1.23 |
) |
Excluded from the dilutive securities described
above are employee stock options to acquire 45.9 million, 41.2 million and 110.8 million shares as of fiscal 2004, 2003 and 2002, respectively. These
exclusions were made either because the exercise prices of these options were greater than the average market price of the common stock for the period,
or because of our net losses, both of which would have had an anti-dilutive effect.
Warrants to acquire 99.7 million shares issued in
connection with our convertible notes were excluded from the dilutive securities described above for fiscal 2004 and 2003, respectively, because the
exercise price of these warrants was greater than the average market price of our common stock.
All shares reserved for issuance upon conversion of
our convertible notes were excluded for fiscal 2004 and 2003, respectively, because of their anti-dilutive effect. Upon achieving positive net income
in a reporting period, our 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 add back the net-of-tax interest expense on the
convertible notes to net income and then divide this amount by outstanding shares, including all 99.7 million shares reserved for issuance upon
conversion of the notes. If this calculation results in further dilution of 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 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. In fiscal 2004 and 2003, the calculation was anti-dilutive.
Note 6: Investments
As of October 31, 2004 and 2003, our
available-for-sale securities consisted of the following (in millions):
|
|
|
|
Cost
Basis (1)
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
2004
|
U.S. Treasury
and other U.S. government agencies |
|
|
|
$ |
25.7 |
|
|
$ |
— |
|
|
$ |
0.1 |
|
|
$ |
25.6 |
|
Corporate
bonds |
|
|
|
|
8.3 |
|
|
|
— |
|
|
|
— |
|
|
|
8.3 |
|
Equity
securities |
|
|
|
|
0.5 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.2 |
|
Total
available-for-sale securities |
|
|
|
$ |
34.5 |
|
|
$ |
— |
|
|
$ |
0.4 |
|
|
$ |
34.1 |
|
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 |
|
| (1) |
|
As adjusted for the write-down of certain available-for-sale
securities to a lower-of-cost-or-market basis. |
52
Notes to Consolidated Financial Statements (Continued)
Note 6: Investments (Continued)
The fair value of investments in debt securities at
October 31, 2004 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 |
|
|
|
$ |
7.1 |
|
|
|
|
|
Due in one
year through five years |
|
|
|
|
26.8 |
|
|
|
|
|
Total |
|
|
|
$ |
33.9 |
|
|
|
|
|
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, $0.0 million and $5.7
million on a lower-of-cost-or-market write-down on certain available-for-sale securities during fiscal 2004, 2003 and 2002, respectively. We also
recorded a write-down of approximately $0.0 million, $0.0 million and $45.2 million for certain investments in non-publicly traded securities in fiscal
2004, 2003 and 2002, 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 2004 and fiscal 2003, we sold common stock
of certain companies in our investment portfolio for gains of $4.8 million and $0.9 million, respectively. During fiscal 2002, we sold holdings of ONI
Systems and completely settled a related hedging arrangement for an aggregate gain of $66.6 million. In addition we liquidated our investment in
Northstar Photonics, a non-marketable security, for a gain of $1.0 million.
Note 7: Goodwill and Intangible Assets
We recorded $180.1 million in goodwill in connection
with our acquisition of KRONE. It is our practice to assess goodwill impairment under the annual requirement of SFAS 142, “Goodwill and Other
Intangible Assets”, or when impairment indicators arise. No goodwill impairment indicators existed as of October 31, 2004.
We recorded intangible assets of $78.1 million in
connection with the acquisition of KRONE, consisting principally of trademarks, technology and a distributor network, and $4.6 million related to
contract assets purchased from Stationary Power Systems that are used in our Professional Services segment.
The following table represents intangible assets by
category and accumulated amortization as of October 31, 2004 (in millions):
|
|
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
|
|
Estimated
Life Range
(in years)
|
Technology |
|
|
|
$ |
28.9 |
|
|
$ |
2.3 |
|
|
$ |
26.6 |
|
|
|
5–7 |
|
Trade
name/trademarks |
|
|
|
|
25.3 |
|
|
|
0.6 |
|
|
|
24.7 |
|
|
|
5–20 |
|
Distributor
network |
|
|
|
|
10.1 |
|
|
|
0.5 |
|
|
|
9.6 |
|
|
|
10 |
|
Customer
list |
|
|
|
|
4.5 |
|
|
|
0.5 |
|
|
|
4.0 |
|
|
|
2 |
|
Patents |
|
|
|
|
19.8 |
|
|
|
7.9 |
|
|
|
11.9 |
|
|
|
3–7 |
|
Other |
|
|
|
|
18.3 |
|
|
|
2.1 |
|
|
|
16.2 |
|
|
|
1–13 |
|
|
|
|
|
$ |
106.9 |
|
|
$ |
13.9 |
|
|
$ |
93.0 |
|
|
|
|
|
53
Notes to Consolidated Financial Statements (Continued)
Note 7: Goodwill and Intangible Assets (Continued)
Amortization expense was $ 7.1 million for the
period ended October 31, 2004, which included $4.4 million of acquired intangible amortization. The estimated amortization expense for identified
intangible assets is as follows for the periods indicated (in millions):
2005 |
|
|
|
$ |
14.6 |
|
|
|
|
|
2006 |
|
|
|
|
13.9 |
|
|
|
|
|
2007 |
|
|
|
|
11.2 |
|
|
|
|
|
2008 |
|
|
|
|
10.9 |
|
|
|
|
|
2009 |
|
|
|
|
8.7 |
|
|
|
|
|
Five Years
Thereafter |
|
|
|
|
33.7 |
|
|
|
|
|
Total |
|
|
|
$ |
93.0 |
|
|
|
|
|
Note 8: 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 interest rate on the variable rate notes was 1.605% and 2.235% for the periods ending June 15, and December 15, 2004, respectively. The
interest rate on the variable rate notes is 3.065% for the current period ending June 15, 2005. 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 rate
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
warrants are subject to early expiration upon conversion of the notes. The net effect of the call options and
54
Notes to Consolidated Financial Statements (Continued)
Note 8: Notes Payable (Continued)
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 have used and 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.
In connection with our issuance of the fixed rate
and variable rate notes, we are required under a reg istration rights agreement to maintain an active registration statement with respect to the
fixed and variable rate notes (and the shares of our common stock that would be issued upon a conversion of those notes) for a period of up to
two years from the date the notes were issued. We presently have an effective registration statement on Form S-3 with
respect to these securities on file with the SEC (the “Registration Statement”). Because we were unable to timely file a current
report on Form 8-K in August, 2004, we have lost our ability to rely on Form S-3 registration statements until August, 2005, and as a
result, upon the filing of our annual report on Form 10-K for fiscal 2004, the Registration Statement will cease to be effective. We intend to file a post-effective
amendment to the Registration Statement on a Form S-1. That post-effective amendment on Form S-1 will need to be declared effective by the
SEC before it can be utilized. Under the terms of the registration rights agreement, if we fail to keep the Registration Statement effective,
the interest rate on those notes that remain held by their initial holders will be increased by 0.25% for 90 days and thereafter will be increased
by another 0.25%. This increase in the interest rate will
remain in effect for so long as the Registration Statement remains ineffective and could last until as late as June 4, 2005. If the
Registration Statement was to remain ineffective through June 4, 2005, the increase in the interest rate on the affected notes would result
in additional interest payments of no more than approximately $335,000.
Note 9: 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.
Note 10: Income Taxes
The components of the income (loss) from continuing
operations before income taxes are (in millions):
|
|
|
|
2004
|
|
2003
|
|
2002
|
United
States |
|
|
|
$ |
29.0 |
|
|
$ |
(12.3 |
) |
|
$ |
(568.6 |
) |
Foreign |
|
|
|
|
4.2 |
|
|
|
(35.6 |
) |
|
|
(163.3 |
) |
Total income
(loss) before income taxes |
|
|
|
|
33.2 |
|
|
|
(47.9 |
) |
|
|
(731.9 |
) |
55
Notes to Consolidated Financial Statements (Continued)
Note 10: Income Taxes (Continued)
The components of the (benefit) provision for income
taxes from continuing operations are (in millions):
|
|
|
|
2004
|
|
2003
|
|
2002
|
Current taxes:
|
Federal |
|
|
|
$ |
— |
|
|
$ |
(1.0 |
) |
|
$ |
(233.4 |
) |
Foreign |
|
|
|
|
2.6 |
|
|
|
(0.3 |
) |
|
|
1.4 |
|
State |
|
|
|
|
(0.7 |
) |
|
|
(4.0 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
1.9 |
|
|
|
(5.3 |
) |
|
|
(232.5 |
) |
Deferred
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
— |
|
|
|
— |
|
|
|
430.6 |
|
Foreign |
|
|
|
|
— |
|
|
|
— |
|
|
|
27.7 |
|
State |
|
|
|
|
— |
|
|
|
— |
|
|
|
22.5 |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
480.8 |
|
Total
(benefit) provision |
|
|
|
$ |
1.9 |
|
|
$ |
(5.3 |
) |
|
$ |
248.3 |
|
The effective income tax rate differs from the
federal statutory rate from continuing operations as follows:
|
|
|
|
2004
|
|
2003
|
|
2002
|
Federal
statutory rate |
|
|
|
|
35 |
% |
|
|
(35 |
%) |
|
|
(35 |
%) |
Impairment
charges |
|
|
|
|
— |
|
|
|
(20 |
) |
|
|
(5 |
) |
Research and
development tax credits |
|
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
Deferred tax
asset valuation allowance |
|
|
|
|
(8 |
) |
|
|
58 |
|
|
|
78 |
|
State income
taxes, net |
|
|
|
|
(2 |
) |
|
|
(36 |
) |
|
|
— |
|
Interest
expense on convertible debt |
|
|
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
Foreign
income taxes |
|
|
|
|
(4 |
) |
|
|
32 |
|
|
|
— |
|
Other,
net |
|
|
|
|
1 |
|
|
|
(8 |
) |
|
|
(2 |
) |
Effective
income tax rate |
|
|
|
|
6 |
% |
|
|
(11 |
)% |
|
|
34 |
% |
Deferred tax assets (liabilities) as of October 31,
2004 and 2003 are composed of the following (in millions):
|
|
|
|
2004
|
|
2003
|
Current deferred tax assets:
|
Asset
valuation reserves |
|
|
|
$ |
20.6 |
|
|
$ |
25.6 |
|
Accrued
liabilities |
|
|
|
|
22.7 |
|
|
|
28.0 |
|
Other |
|
|
|
|
— |
|
|
|
5.9 |
|
Subtotal |
|
|
|
|
43.3 |
|
|
|
59.5 |
|
Non-current deferred tax assets:
|
Intangible
assets |
|
|
|
$ |
316.7 |
|
|
$ |
321.6 |
|
Depreciation |
|
|
|
|
12.3 |
|
|
|
9.4 |
|
Net operating
loss and tax credit carryover |
|
|
|
|
468.0 |
|
|
|
327.4 |
|
Capital loss
carryover |
|
|
|
|
226.7 |
|
|
|
— |
|
Restructuring
charges and other |
|
|
|
|
42.2 |
|
|
|
39.9 |
|
|
|
|
|
|
1,065.9 |
|
|
|
698.3 |
|
Total
deferred tax assets |
|
|
|
$ |
1,109.2 |
|
|
$ |
757.8 |
|
56
Notes to Consolidated Financial Statements (Continued)
Note 10: Income Taxes (Continued)
|
|
|
|
2004
|
|
2003
|
Current deferred tax liabilities:
|
Accrued
liabilities |
|
|
|
$ |
(4.7 |
) |
|
$ |
(0.7 |
) |
Other |
|
|
|
|
— |
|
|
|
(6.1 |
) |
Subtotal |
|
|
|
|
(4.7 |
) |
|
|
(6.8 |
) |
Non-current deferred tax liabilities:
|
Intangible
assets |
|
|
|
$ |
(29.0 |
) |
|
$ |
— |
|
Restructuring
charges and other |
|
|
|
|
(8.1 |
) |
|
|
— |
|
Subtotal |
|
|
|
|
(37.1 |
) |
|
|
— |
|
Total
deferred tax liabilities |
|
|
|
$ |
(41.8 |
) |
|
$ |
(6.8 |
) |
Net deferred
tax assets |
|
|
|
$ |
1,067.4 |
|
|
$ |
751.0 |
|
Deferred tax
asset valuation allowance |
|
|
|
|
(1,068.9 |
) |
|
|
(751.0 |
) |
Net deferred
tax liabilities |
|
|
|
$ |
(1.5 |
) |
|
$ |
— |
|
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 represents future tax benefits to be received
when certain expenses and losses previously recognized in our 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. SFAS 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 provision (benefit)
relating to discontinued operations of $0.2 million, $(0.1) million and $14.5 million during fiscal 2004, 2003 and 2002, respectively.
The U.S. Internal Revenue Service has completed its
examination of our federal income tax return for all years prior to fiscal 2003. In addition, we are subject to examinations in several states and
foreign jurisdictions.
Federal and state net operating loss carryforwards
for tax purposes, available to offset future income, were approximately $993.0 million at October 31, 2004. The federal operating loss carryforwards
expire between fiscal 2016 and fiscal 2024, and the state operating loss carryforwards expire between fiscal 2007 and fiscal 2019. Federal capital loss
carryforwards were approximately $610.0 million at October 31, 2004, most of which expire in fiscal 2009. Federal credit carryforwards were
approximately $69.1 million at October 31, 2004, of which $30.2 million expire between fiscal 2009 and fiscal 2014, and $38.9 million expire between
fiscal 2018 and fiscal 2023. Foreign operating loss carryforwards were approximately $84 million at October 31, 2004, most of which are available for
indefinite carryforward periods.
Deferred federal income taxes are not provided on
the undistributed cumulative earnings of foreign subsidiaries because such earnings are considered to be invested permanently in those operations. At
October 31, 2004, such earnings were approximately $39.0 million. In connection with our acquisition of KRONE, we presently are evaluating whether to
make a U.S. income tax election which would have the effect of reducing the amount of undistributed cumulative earnings of foreign subsidiaries to
$14.0 million. The amount of unrecognized deferred tax liability on such earnings was approximately $3.0 million regardless if the above tax election
is made.
57
Notes to Consolidated Financial Statements (Continued)
Note 10: Income Taxes (Continued)
In connection with our acquisition of KRONE, we
recorded $5.9 million of income taxes payable, $62.3 million of deferred tax assets, $38.2 million of deferred tax liabilities and a valuation
allowance of $26.0 million. Goodwill in the KRONE acquisition will be reduced in the future as this valuation allowance is utilized or restored to the
balance sheet. During fiscal 2004, goodwill was reduced $0.6 million as a result of utilization of a portion of this valuation
allowance.
During fiscal 2004, our valuation allowance
increased from $751.0 million to $1,068.9 million. The increase is comprised of $26.0 million recorded in connection with our acquisition of KRONE,
$2.7 million related to continuing operations and $289.2 million related to discontinued operations and the disposition transactions of which $225.7
million is attributable to capital loss carryovers that can be utilized only against realized capital gains through fiscal 2009.
Note 11: Employee Benefit Plans
Retirement Saving
Plans: U.S. employees and employees in many other countries 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 ($1.00 for every dollar contributed) 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 $5.5 million, $6.1 million and $15.3 million during fiscal 2004,
2003 and 2002, 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 $4.0 million, $2.6 million and $3.4 million to our global (non-U.S.) retirement savings plans in fiscal 2004, 2003
and 2002, respectively.
Global Employee Stock Purchase
Plan: We have a global employee stock purchase plan that is available to a majority of 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 1.8 million, 3.4 million
and 4.8 million shares of common stock pursuant to this plan during fiscal 2004, 2003 and 2002, respectively. Our Board of Directors has elected to
discontinue the Global Employee Stock Purchase Plan at the end of March 2005.
Pension Benefits: With
our acquisition of KRONE, we assumed certain pension obligations of KRONE related to its German workforce. Prior to the KRONE acquisition, we did not
have any defined benefit pension plans. The KRONE pension plan is an unfunded general obligation of our German subsidiary (which is a common
arrangement for German pension plans) and, as part of the acquisition, we recorded a liability of $62.8 million for this obligation as of October 31,
2004. The plan was closed to employees hired after 1994 and thus covers only current retirees and those hired prior to 1995. Pension payments will be
made to eligible individuals upon reaching eligible retirement age, and the cash payments are expected to roughly equal the net periodic benefit
cost.
58
Notes to Consolidated Financial Statements (Continued)
Note 11: Employee Benefit Plans (Continued)
The following provides reconciliations of benefit
obligations, plan assets and funded status of the plan.
|
|
|
|
Pension Benefits
|
|
|
|
|
|
October 31, 2004
|
|
Reconciliation of projected benefit obligation
|
|
|
|
Beginning
balance |
|
|
|
$ |
— |
|
|
|
|
|
Amount
assumed in the KRONE acquisition |
|
|
|
|
63.9 |
|
|
|
|
|
Service
cost |
|
|
|
|
0.2 |
|
|
|
|
|
Interest
cost |
|
|
|
|
1.5 |
|
|
|
|
|
Actuarial
(gain) loss |
|
|
|
|
(1.1 |
) |
|
|
|
|
Benefit
payments |
|
|
|
|
(1.7 |
) |
|
|
|
|
Ending
Balance |
|
|
|
$ |
62.8 |
|
|
|
|
|
Funded
status of the plan
|
|
|
|
|
|
|
|
|
|
|
Plan assets
at fair value less than benefit obligation |
|
|
|
$ |
— |
|
|
|
|
|
Unrecognized
net actuarial (gain) loss |
|
|
|
|
— |
|
|
|
|
|
Net amount
recognized |
|
|
|
$ |
— |
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet as of October 31,
|
|
|
|
Prepaid
benefit cost |
|
|
|
$ |
— |
|
|
|
|
|
Accrued
liabilities |
|
|
|
|
62.8 |
|
|
|
|
|
Intangible
assets |
|
|
|
|
— |
|
|
|
|
|
Accumulated
other comprehensive income, pre-tax |
|
|
|
|
— |
|
|
|
|
|
Net amount
recognized |
|
|
|
$ |
62.8 |
|
|
|
|
|
Net periodic pension cost includes the following
components:
|
|
|
|
Pension Benefits
|
|
|
|
|
|
October 31, 2004
|
|
Service
cost |
|
|
|
$ |
0.2 |
|
|
|
|
|
Interest
cost |
|
|
|
|
1.5 |
|
|
|
|
|
Net periodic
benefit cost |
|
|
|
$ |
1.7 |
|
|
|
|
|
The following assumptions were used to determine the
plan’s benefit obligations as of the end of the plan year and the plan’s net periodic pension cost:
|
|
|
|
Pension Benefits
|
|
|
|
|
|
October 31, 2004
|
|
Weighted average assumptions used to determine benefit obligations
|
|
|
|
Discount
rate |
|
|
|
|
5.25 |
% |
|
|
|
|
Compensation
rate increase |
|
|
|
|
2.50 |
% |
|
|
|
|
Weighted average assumptions used to determine net cost for the years ended
|
|
|
|
Discount
rate |
|
|
|
|
5.25 |
% |
|
|
|
|
Compensation
rate increase |
|
|
|
|
2.50 |
% |
|
|
|
|
Since the plan is an unfunded general obligation, we
do not expect to contribute to the plan in fiscal 2005 except to make benefit payments below described.
59
Notes to Consolidated Financial Statements (Continued)
Note 11: Employee Benefit Plans (Continued)
Expected benefit payments for fiscal years 2005,
2006, 2007, 2008, 2009 and the five years thereafter are (in millions):
2005 |
|
|
|
$ |
3.5 |
|
|
|
|
|
2006 |
|
|
|
|
3.6 |
|
|
|
|
|
2007 |
|
|
|
|
3.7 |
|
|
|
|
|
2008 |
|
|
|
|
3.8 |
|
|
|
|
|
2009 |
|
|
|
|
3.8 |
|
|
|
|
|
Five
Y ears T hereafter |
|
|
|
$ |
20.5 |
|
|
|
|
|
Note 12: Stock Option 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 149.3 million stock awards can be granted under this plan. Restricted stock awards, restricted stock units, and performance awards are limited to 30
million shares. As of October 31, 2004, 90.4 million shares were available for stock awards, inclusive of a maximum of 26.1 million shares available
for issuance as restricted stock awards, restricted stock units and performance awards. All options granted under this plan were made at fair market
value.
60
Notes to Consolidated Financial Statements (Continued)
Note 12: Stock Option 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, 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 |
|
Granted |
|
|
|
|
24.3 |
|
|
|
3.19 |
|
|
|
0.1 |
|
Exercised |
|
|
|
|
(2.0 |
) |
|
|
1.57 |
|
|
|
— |
|
Restrictions
lapsed |
|
|
|
|
— |
|
|
|
— |
|
|
|
(0.9 |
) |
Canceled |
|
|
|
|
(38.9 |
) |
|
|
7.11 |
|
|
|
(0.1 |
) |
Outstanding at October 31, 2004 |
|
|
|
|
57.9 |
|
|
$ |
5.14 |
|
|
|
1.3 |
|
Exercisable at October 31, 2004 |
|
|
|
|
34.4 |
|
|
$ |
4.82 |
|
|
|
— |
|
The following table contains details of our
outstanding stock options as of October 31, 2004:
Range of Exercise
Prices Between
|
|
Number
Outstanding
(in millions)
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average Exercise
Price
|
|
Number
Exercisable
(in millions)
|
|
Weighted
Average
Exercise Price
|
|
| $1.15 |
|
|
|
$ |
2.18 |
|
|
|
3.2 |
|
|
|
8.33 |
|
|
$ |
1.77 |
|
|
|
2.0 |
|
|
$ |
1.69 |
|
| 2.24 |
|
|
|
|
2.26 |
|
|
|
10.0 |
|
|
|
8.08 |
|
|
|
2.26 |
|
|
|
9.0 |
|
|
|
2.26 |
|
| 2.29 |
|
|
|
|
2.81 |
|
|
|
6.4 |
|
|
|
9.09 |
|
|
|
2.49 |
|
|
|
1.3 |
|
|
|
2.39 |
|
| 2.83 |
|
|
|
|
2.83 |
|
|
|
6.9 |
|
|
|
6.16 |
|
|
|
2.83 |
|
|
|
2.3 |
|
|
|
2.83 |
|
| 2.86 |
|
|
|
|
2.92 |
|
|
|
5.8 |
|
|
|
9.34 |
|
|
|
2.92 |
|
|
|
— |
|
|
|
— |
|
| 2.94 |
|
|
|
|
3.89 |
|
|
|
2.7 |
|
|
|
6.14 |
|
|
|
3.50 |
|
|
|
2.3 |
|
|
|
3.53 |
|
| 4.02 |
|
|
|
|
4.37 |
|
|
|
6.9 |
|
|
|
6.92 |
|
|
|
4.36 |
|
|
|
6.7 |
|
|
|
4.36 |
|
| 4.44 |
|
|
|
|
7.03 |
|
|
|
5.6 |
|
|
|
5.96 |
|
|
|
5.50 |
|
|
|
5.4 |
|
|
|
5.49 |
|
| 7.05 |
|
|
|
|
40.94 |
|
|
|
10.3 |
|
|
|
4.89 |
|
|
|
11.82 |
|
|
|
5.3 |
|
|
|
11.82 |
|
| 41.94 |
|
|
|
|
41.94 |
|
|
|
0.1 |
|
|
|
5.68 |
|
|
|
41.94 |
|
|
|
0.1 |
|
|
|
41.94 |
|
| |
|
|
|
|
|
|
|
|
57.9 |
|
|
|
7.35 |
|
|
|
5.14 |
|
|
|
34.4 |
|
|
|
4.82 |
|
61
Notes to Consolidated Financial Statements (Continued)
Note 12: Stock Option Plans (Continued)
The weighted average fair value per option at the
date of grant for options granted in fiscal 2004, 2003 and 2002 was $1.48, $1.13 and $2.27 per share, respectively. The fair value was estimated using
the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
2004
|
|
2003
|
|
2002
|
Risk-free
interest rate |
|
|
|
|
3.13 |
% |
|
|
2.62 |
% |
|
|
2.43 |
% |
Expected
dividend |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected
volatility factor |
|
|
|
|
59.4 |
% |
|
|
66.9 |
% |
|
|
67.0 |
% |
Expected
option term |
|
|
|
4.6
years |
|
3.2
years |
|
4.3
years |
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.
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 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 $0.0 million, $0.9 million and $10.4 million was recognized in fiscal 2004, 2003 and 2002, 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. Such amounts are reflected in
research and development and selling and administration expense in the consolidated statements of operations.
In addition, we incurred $2.9 million, $3.5 million
and $3.9 million of deferred compensation expense in fiscal 2004, 2003 and 2002, respectively, related to restricted stock issued as part of employee
incentive plans and such expense was included in research and development and selling and administration expenses.
62
Notes to Consolidated Financial Statements (Continued)
Note 13: Accumulated Other Comprehensive Loss
Accumulated other comprehensive income (loss) has no
impact on our net income (loss) but is reflected in our balance sheet through adjustments to shareowners’ investment. We specifically identify the
amount of unrealized gain (loss) recognized in other comprehensive income for each available-for-sale (“AFS”) security. When an AFS security
is sold or impaired, we remove the security’s cumulative unrealized gain (loss), net of tax, from accumulated other comprehensive loss. The
components of accumulated other comprehensive loss are as follows (in millions):
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Unrealized
Gain (Loss)
On AFS
Securities, net
|
|
Total
|
Balance,
October 31, 2001 |
|
|
|
$ |
(17.0 |
) |
|
$ |
40.9 |
|
|
$ |
23.9 |
|
Translation
gain |
|
|
|
|
2.3 |
|
|
|
— |
|
|
|
2.3 |
|
Unrealized
gain (loss) |
|
|
|
|
— |
|
|
|
(40.9 |
) |
|
|
(40.9 |
) |
Balance,
October 31, 2002 |
|
|
|
|
(14.7 |
) |
|
|
— |
|
|
|
(14.7 |
) |
Translation
loss |
|
|
|
|
(10.7 |
) |
|
|
— |
|
|
|
(10.7 |
) |
Unrealized
gain (loss) |
|
|
|
|
— |
|
|
|
4.2 |
|
|
|
4.2 |
|
Balance,
October 31, 2003 |
|
|
|
|
(25.4 |
) |
|
|
4.2 |
|
|
|
(21.2 |
) |
Translation
gain |
|
|
|
|
12.3 |
|
|
|
— |
|
|
|
12.3 |
|
Unrealized
gain (loss) |
|
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Adjustment
for sale of securities |
|
|
|
|
— |
|
|
|
(4.2 |
) |
|
|
(4.2 |
) |
Balance,
October 31, 2004 |
|
|
|
$ |
(13.1 |
) |
|
$ |
(0.4 |
) |
|
$ |
(13.5 |
) |
Note 14: 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,
2004 and 2003, we had commitments to extend credit of $17.7 million and $26.5 million for such arrangements, respectively. The total amount drawn and
outstanding under the commitments was approximately $17.7 million and $23.2 million, respectively, as of October 31, 2004 and 2003. 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, 2004, we have recorded approximately $17.5 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 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, 2004, we had $14.7 million of outstanding letters of credit. These outstanding commitments are fully collateralized by restricted
cash.
63
Notes to Consolidated Financial Statements (Continued)
Note 14: Commitments and Contingencies (Continued)
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 $14.3 million, $18.2 million and $27.2 million for fiscal 2004, 2003 and 2002, 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 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 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 an aggregate of $55.9 million and the remaining two
were purchased for an aggregate of $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 were sold in fiscal 2004. 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
reduced 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, 2004 (in millions):
2005 |
|
|
|
$ |
24.9 |
|
|
|
|
|
2006 |
|
|
|
|
20.5 |
|
|
|
|
|
2007 |
|
|
|
|
14.0 |
|
|
|
|
|
2008 |
|
|
|
|
10.2 |
|
|
|
|
|
2009 |
|
|
|
|
7.8 |
|
|
|
|
|
Thereafter |
|
|
|
|
26.4 |
|
|
|
|
|
Total |
|
|
|
$ |
103.8 |
|
|
|
|
|
The aggregate amount of future minimum rentals to be
received under noncancelable subleases as of October 31, 2004 is $12.4 million.
Legal
Contingencies: On March 5, 2003, we were served with a shareowner lawsuit brought by Wanda Kinermon that was filed in the
United States District Court for the District of Minnesota. The complaint named ADC, William J. Cadogan, our former Chairman and Chief Executive
Officer, and Robert E. Switz, our Chief Executive Officer and former Chief Financial Officer, as defendants. After this lawsuit was served, we were
named as a defendant in 11 other substantially similar lawsuits. These shareowner lawsuits were consolidated into a single lawsuit, that is captioned
In Re ADC
64
Notes to Consolidated Financial Statements (Continued)
Note 14: Commitments and Contingencies (Continued)
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 alleged 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, and the court granted our motion and dismissed the case with
prejudice on May 17, 2004. The plaintiffs have appealed this decision to the Eighth Circuit Court of Appeals and that appeal is
pending.
On May 19, 2003, we were served with a lawsuit
brought by Lorraine Osborne that was 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. After this lawsuit was served, we were served with two substantially similar
lawsuits. All three of these lawsuits were then consolidated into a single lawsuit that is 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 from February 2000 to present. The lawsuit alleges a breach of fiduciary duties
under the Employee Retirement Income Security Act. On February 2, 2004, we filed a motion to dismiss this lawsuit, which was denied by the court. This
case is now in the discovery phase.
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 of such
lawsuits, proceedings or claims cannot be determined at this time. As of October 31, 2004, we had recorded $5.2 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 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.
Income Tax
Contingencies: Our effective tax rate is impacted by reserve provisions and changes to reserves which we consider
appropriate. We establish reserves when, despite our belief that our tax returns reflect the proper treatment of all matters, we believe that the
treatment of certain tax matters is likely to be challenged and that we may not ultimately be successful.
Significant judgment is require to evaluate and
adjust the reserves in light of changing facts and circumstances, such as the progress of a tax audit. Further, a number of years may lapse before a
particular matter for which we have established a reserve is audited and finally resolved. While it is difficult to predict the final outcome or the
timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax
contingencies.
Other
Contingencies: As a result of the divestitures discussed in Note 4, we may incur charges related to obligations retained
based on the sale agreement. At this time, none of those obligations are probable or estimable.
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 15: Segment and Geographic Information
Segment Information
We have two reportable segments: the Broadband
Infrastructure and Access segment and the Professional Services segment. Broadband Infrastructure and Access products consist of:
• |
|
connectivity systems and components that provide the
infrastructure to wireline, wireless, cable, broadcast and enterprise networks to connect Internet, data, video and voice services to the network over
copper, coaxial and fiber-optic cables, and |
65
Notes to Consolidated Financial Statements (Continued)
Note 15: Segment and Geographic Information (Continued)
• |
|
access systems used in the last mile/kilometer of wireline and
wireless networks to deliver high-speed Internet, data and voice services. |
Professional Services provide integration services
for broadband, multiservice communications over wireline, wireless, cable and enterprise networks. Professional services are used to plan, deploy and
maintain communications networks that deliver Internet, data, video and voice services.
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
depreciation and amortization , and impairment and restructuring cha r ges in unallocated results relate to corporate. Other income (expense), net includes
interest income and expense, investment gains and losses are not allocated to segment results.
Corporate assets, which are included in
“Unallocated Items,” primarily consist of cash and investments, which are managed centrally , and property and equipment. 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. One customer accounted for 13.3%, 12.6%, and 13.6% of our sales in fiscal 2004,2003, and 2002. In fiscal 2002, sales to one customer
comprised 11.2% of our net sales.
The following table sets forth net sales information
for each of our functional operating segments described above (in millions):
|
|
|
|
2004
|
|
2003
|
|
2002
|
Infrastructure Products (Connectivity) |
|
|
|
$ |
472.8 |
|
|
$ |
283.0 |
|
|
$ |
355.8 |
|
Access
Products (Wireline and Wireless) |
|
|
|
|
151.0 |
|
|
|
161.3 |
|
|
|
266.0 |
|
Eliminations
and Other |
|
|
|
|
(22.1 |
) |
|
|
(18.3 |
) |
|
|
8.5 |
|
Broadband
Infrastructure and Access |
|
|
|
|
601.7 |
|
|
|
426.0 |
|
|
|
630.3 |
|
Professional Services |
|
|
|
|
182.6 |
|
|
|
163.4 |
|
|
|
189.2 |
|
Total |
|
|
|
$ |
784.3 |
|
|
$ |
589.4 |
|
|
$ |
819.5 |
|
66
Notes to Consolidated Financial Statements (Continued)
Note 15: Segment and Geographic Information (Continued)
The following table sets forth certain financial
information for each of our functional operating segments described above (in millions):
Segment Information (in millions)
|
|
|
|
Broadband
Infrastructure
and Access
|
|
Professional
Solutions
|
|
Unallocated
Items
|
|
Consolidated
|
2004
|
External sales:
|
Products |
|
|
|
$ |
601.7 |
|
|
$ |
58.2 |
|
|
|
— |
|
|
$ |
659.9 |
|
Services |
|
|
|
|
— |
|
|
|
124.4 |
|
|
|
— |
|
|
|
124.4 |
|
Total
external sales |
|
|
|
$ |
601.7 |
|
|
$ |
182.6 |
|
|
|
— |
|
|
$ |
784.3 |
|
Depreciation
and amortization |
|
|
|
$ |
11.4 |
|
|
$ |
2.8 |
|
|
$ |
27.5 |
|
|
$ |
41.7 |
|
Impairment
and restructuring |
|
|
|
$ |
0.5 |
|
|
$ |
0.7 |
|
|
$ |
12.8 |
|
|
$ |
14.0 |
|
Operating
income (loss) |
|
|
|
$ |
83.1 |
|
|
$ |
(2.3 |
) |
|
$ |
(58.3 |
) |
|
$ |
22.5 |
|
Other income
(expense), net |
|
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
9.2 |
|
|
|
10.7 |
|
Income (loss)
from continuing operations before income taxes |
|
|
|
$ |
84.0 |
|
|
$ |
(1.7 |
) |
|
$ |
(49.1 |
) |
|
$ |
33.2 |
|
Capital
expenditures |
|
|
|
|
4.3 |
|
|
|
6.0 |
|
|
|
— |
|
|
|
10.3 |
|
Assets |
|
|
|
$ |
327.2 |
|
|
$ |
75.4 |
|
|
$ |
1,025.5 |
|
|
$ |
1,428.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
External sales:
|
Products |
|
|
|
$ |
426.0 |
|
|
$ |
58.7 |
|
|
|
— |
|
|
$ |
484.7 |
|
Services |
|
|
|
|
— |
|
|
|
104.7 |
|
|
|
— |
|
|
|
104.7 |
|
Total
external sales |
|
|
|
$ |
426.0 |
|
|
$ |
163.4 |
|
|
|
— |
|
|
$ |
589.4 |
|
Depreciation
and amortization |
|
|
|
$ |
5.8 |
|
|
$ |
2.9 |
|
|
$ |
45.1 |
|
|
$ |
53.8 |
|
Impairment
and restructuring |
|
|
|
$ |
5.5 |
|
|
$ |
7.7 |
|
|
$ |
30.5 |
|
|
$ |
43.7 |
|
Operating
income (loss) |
|
|
|
$ |
22.6 |
|
|
$ |
(0.5 |
) |
|
$ |
(79.0 |
) |
|
$ |
(56.9 |
) |
Other income
(expense), net |
|
|
|
|
9.1 |
|
|
|
(0.8 |
) |
|
|
0.7 |
|
|
|
9.0 |
|
Income (loss)
from continuing operations before income taxes |
|
|
|
$ |
31.7 |
|
|
$ |
(1.3 |
) |
|
$ |
(78.3 |
) |
|
$ |
(47.9 |
) |
Capital
expenditures |
|
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
67.8 |
|
|
|
69.5 |
|
Assets |
|
|
|
$ |
224. 3 |
|
|
$ |
89.9 |
|
|
$ |
982. 7 |
|
|
$ |
1,296.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
External sales:
|
Products |
|
|
|
$ |
630.3 |
|
|
$ |
63.0 |
|
|
|
— |
|
|
$ |
693.3 |
|
Services |
|
|
|
|
— |
|
|
|
126.2 |
|
|
|
— |
|
|
|
126.2 |
|
Total
external sales |
|
|
|
$ |
630.3 |
|
|
$ |
189.2 |
|
|
|
— |
|
|
$ |
819.5 |
|
Depreciation
and amortization |
|
|
|
$ |
9.7 |
|
|
$ |
4.3 |
|
|
$ |
86.8 |
|
|
$ |
100.8 |
|
Impairment
and restructuring |
|
|
|
$ |
84.3 |
|
|
$ |
5.4 |
|
|
$ |
453.4 |
|
|
$ |
543.1 |
|
Operating
loss |
|
|
|
$ |
(130.4 |
) |
|
$ |
(28.6 |
) |
|
$ |
(579.3 |
) |
|
$ |
(738.3 |
) |
Other income
(expense), net |
|
|
|
|
(5.8 |
) |
|
|
(3.6 |
) |
|
|
15.8 |
|
|
|
6.4 |
|
Loss from
continuing operations before income taxes |
|
|
|
$ |
(136.2 |
) |
|
$ |
(32.2 |
) |
|
$ |
(563.5 |
) |
|
$ |
(731.9 |
) |
Capital
expenditures |
|
|
|
|
8.2 |
|
|
|
4.4 |
|
|
|
13.0 |
|
|
|
25.6 |
|
Assets |
|
|
|
$ |
247.2 |
|
|
$ |
78.1 |
|
|
$ |
818.9 |
|
|
$ |
1,144.2 |
|
67
Notes to Consolidated Financial Statements (Continued)
Note 15: Segment and Geographic Information (Continued)
Geographic Information
The following table sets forth certain geographic
information concerning our U.S. and foreign sales and ownership of property and equipment (in millions):
Geographic Information (in millions)
|
|
|
|
2004
|
|
2003
|
|
2002
|
Sales:
|
Inside the
United States |
|
|
|
$ |
467.5 |
|
|
$ |
436.5 |
|
|
$ |
654.0 |
|
Outside the
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia (China,
Hong Kong, and Korea) |
|
|
|
|
27.1 |
|
|
|
16.3 |
|
|
|
18.8 |
|
Indo Pacific
(Australia, India, Japan, and Southeast Asia) |
|
|
|
|
25.8 |
|
|
|
— |
|
|
|
— |
|
EMEA (Europe
(Excluding Germany), Middle East,
and Africa) |
|
|
|
|
133.1 |
|
|
|
91.7 |
|
|
|
94.7 |
|
Germany |
|
|
|
|
63.1 |
|
|
|
— |
|
|
|
— |
|
Americas
(Canada, Central and South America) |
|
|
|
|
67.7 |
|
|
|
44.9 |
|
|
|
52.0 |
|
Total |
|
|
|
$ |
784.3 |
|
|
$ |
589.4 |
|
|
$ |
819.5 |
|
Property and Equipment, Net:
|
Inside the
United States |
|
|
|
$ |
144.1 |
|
|
$ |
145.4 |
|
|
$ |
143.6 |
|
Outside the
United States |
|
|
|
|
88.9 |
|
|
|
29.9 |
|
|
|
41.1 |
|
Total |
|
|
|
$ |
233.0 |
|
|
$ |
175.3 |
|
|
$ |
184.7 |
|
Note 16: Impairment, Restructuring, and Other Disposal Charges
During 2004, 2003 and 2002, we continued our plan to
improve operating performance by restructuring and streamlining our operations. As a result, we incurred impairment charges related to the disposal of
excess equipment, restructuring charges associated with workforce reductions as well as the consolidation of excess facilities, and other disposal
charges associated with inventory write-offs and certain administrative charges related to product line divestitures. The impairment, restructuring and
other disposal charges resulting from our actions, by category of expenditures, adjusted to exclude those activities specifically related to
discontinued operations, are as follows for 2004, 2003 and 2002, respectively (in millions):
Fiscal 2004
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Total
|
Employee
severance costs |
|
|
|
$ |
— |
|
|
$ |
9.7 |
|
|
$ |
9.7 |
|
Facilities
consolidation and lease termination |
|
|
|
|
— |
|
|
|
2.6 |
|
|
|
2.6 |
|
Fixed asset
write-downs |
|
|
|
|
1.7 |
|
|
|
— |
|
|
|
1.7 |
|
Total |
|
|
|
$ |
1.7 |
|
|
$ |
12.3 |
|
|
$ |
14.0 |
|
Fiscal 2003
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Total
|
Employee
severance costs |
|
|
|
$ |
— |
|
|
$ |
24.0 |
|
|
$ |
24.0 |
|
Facilities
consolidation and lease termination |
|
|
|
|
— |
|
|
|
4.1 |
|
|
|
4.1 |
|
Fixed asset
write-downs |
|
|
|
|
15.6 |
|
|
|
— |
|
|
|
15.6 |
|
Total |
|
|
|
$ |
15.6 |
|
|
$ |
28.1 |
|
|
$ |
43.7 |
|
68
Notes to Consolidated Financial Statements (Continued)
Note 16: Impairment, Restructuring, and Other Disposal Charges
(Continued)
Fiscal 2002
|
|
|
|
Impairment
Charges
|
|
Restructuring
Charges
|
|
Cost of
Sales
|
|
Selling and
Administrative
Charges
|
|
Total
|
Employee
severance costs |
|
|
|
$ |
— |
|
|
$ |
45.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45.1 |
|
Facilities
consolidation and lease termination |
|
|
|
|
— |
|
|
|
153.6 |
|
|
|
— |
|
|
|
— |
|
|
|
153.6 |
|
Fixed asset
write-downs |
|
|
|
|
210.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
210.8 |
|
Goodwill
write-downs |
|
|
|
|
130.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
130.3 |
|
Inventory
write-offs |
|
|
|
|
— |
|
|
|
— |
|
|
|
7.1 |
|
|
|
— |
|
|
|
7.1 |
|
Other |
|
|
|
|
— |
|
|
|
3.3 |
|
|
|
— |
|
|
|
(4.4 |
) |
|
|
(1.1 |
) |
Total |
|
|
|
$ |
341.1 |
|
|
$ |
202.0 |
|
|
$ |
7.1 |
|
|
$ |
(4.4 |
) |
|
$ |
545.8 |
|
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.” As a
result of applying SFAS No. 121 and 144 to our property and equipment, a non-cash impairment charge was required. For fiscal 2004, 2003 and 2002, we
recorded impairment charges of $1.7 million, $15.6 million and $ 341.1 million, respectively.
Restructuring Charges: Employee severance
costs relate to headcount reductions resulting from the closure of facilities and general terminations attributed to reduced sales forecasts. During
fiscal 2004, 2003 and 2002, we terminated the employment of approximately 200, 1,300 and 2,700 employees, respectively, through reductions in force.
The costs of these reductions have been and will be funded through cash from operations. These reductions have impacted both of our 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.
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.
The following table provides detail on the activity
and our remaining restructuring accrual balance by category as of 2004, 2003 and 2002 (in millions):
Type of Charge
|
|
|
|
Accrual
October 31,
2003
|
|
Discontinued
Operations
Net Additions
|
|
Continuing
Operations
Net Additions
|
|
Cash
Charges
|
|
Accrual
October 31,
2004
|
Employee
severance costs |
|
|
|
$ |
3.0 |
|
|
$ |
4.1 |
|
|
$ |
9.7 |
|
|
$ |
11.5 |
|
|
$ |
5.3 |
|
Facilities
consolidation |
|
|
|
|
26.1 |
|
|
|
13.4 |
|
|
|
2.6 |
|
|
|
13.4 |
|
|
|
28.7 |
|
Total |
|
|
|
$ |
29.1 |
|
|
$ |
17.5 |
|
|
$ |
12.3 |
|
|
$ |
24.9 |
|
|
$ |
34.0 |
|
Type of Charge
|
|
|
|
Accrual
October 31,
2002
|
|
Discontinued
Operations
Net Additions
|
|
Continuing
Operations
Net Additions
|
|
Cash
Charges
|
|
Accrual
October 31,
2003
|
Employee
severance costs |
|
|
|
$ |
14.1 |
|
|
$ |
6.2 |
|
|
$ |
24.0 |
|
|
$ |
41.3 |
|
|
$ |
3.0 |
|
Facilities
consolidation |
|
|
|
|
110.0 |
|
|
|
7.5 |
|
|
|
4.1 |
|
|
|
95.5 |
|
|
|
26.1 |
|
Committed
sales contract—administrative |
|
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
Total |
|
|
|
$ |
125.7 |
|
|
$ |
13.7 |
|
|
$ |
28.1 |
|
|
$ |
138.4 |
|
|
$ |
29.1 |
|
69
Notes to Consolidated Financial Statements (Continued)
Note 16: Impairment, Restructuring, and Other Disposal Charges
(Continued)
The accrued restructuring amount in the fiscal 2004
table excludes $4.4 million in reserves acquired with the KRONE acquisition.
The total adjustment made to the restructuring
accrual for changes in assumptions was an increase of $16.0 million and a decrease of $5.9 million for fiscal 2004 and 2003, respectively. The
adjustment was primarily related to changes in the assumptions primarily due to continued softening of real estate markets which resulted in lower
sublease income.
We expect that substantially all of the remaining
$5.3 million of cash expenditures relating to employee severance costs incurred through October 31, 2004 will be paid by the end of fiscal 2005. Of the
$28.7 million to be paid for the consolidation of facilities, we expect that approximately $9.1 million will be paid from unrestricted cash in fiscal
2005, and that the balance will be paid from unrestricted cash over the respective lease terms of the facilities through 2015. Based on our intention
to continue to consolidate and close duplicative or excess manufacturing operations in order to reduce our cost structure, we may incur additional
restructuring charges (both cash and non-cash) in future periods. These restructuring charges may have a material effect on our operating
results.
In addition to the restructuring accrual mentioned
above, we have $6.6 million of assets held for sale (all of which was not allocated to either of our segments) at October 31, 2004. 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 2005.
Note 17: Quarterly Financial Data (Unaudited in millions, except earnings per
share)
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Total
|
2004
|
Net
Sales |
|
|
|
$ |
136.7 |
|
|
$ |
153.6 |
|
|
$ |
227.7 |
|
|
$ |
266.3 |
|
|
$ |
784.3 |
|
Gross
Profit |
|
|
|
|
53.9 |
|
|
|
62.6 |
|
|
|
85.6 |
|
|
|
99.8 |
|
|
|
301.9 |
|
Income (Loss)
Before Income Taxes |
|
|
|
|
16.2 |
|
|
|
(2.6 |
) |
|
|
3.5 |
|
|
|
16.1 |
|
|
|
33.2 |
|
Provision
(Benefit) for Income Taxes |
|
|
|
|
(0.1 |
) |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
1.2 |
|
|
|
1.9 |
|
Income (Loss)
From Continuing Operations |
|
|
|
|
16.3 |
|
|
|
(3.1 |
) |
|
|
3.2 |
|
|
|
14.9 |
|
|
|
31.3 |
|
Discontinued
Operations, Net of Tax |
|
|
|
|
(18.7 |
) |
|
|
(23.5 |
) |
|
|
(17.5 |
) |
|
|
44.8 |
|
|
|
(14.9 |
) |
Net Income
(Loss) |
|
|
|
$ |
(2.4) (1 |
) |
|
$ |
(26.6) (2 |
) |
|
$ |
(14.3) (3 |
) |
|
$ |
59.7 (4 |
) |
|
$ |
16.4 |
|
Average
Common Shares Outstanding—Basic |
|
|
|
|
806.8 |
|
|
|
808.1 |
|
|
|
808.9 |
|
|
|
809.3 |
|
|
|
808.3 |
|
Average
Common Shares Outstanding—Diluted |
|
|
|
|
911.9 |
|
|
|
808.1 |
|
|
|
811.7 |
|
|
|
909.7 |
|
|
|
812.1 |
|
Net
Income (loss) Per Share—Basic |
|
|
|
$ |
(0.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.07 |
|
|
$ |
0.02 |
|
Net
Income (loss) Per Share—Diluted |
|
|
|
$ |
(0.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.07 |
|
|
$ |
0.02 |
|
70
Notes to Consolidated Financial Statements (Continued)
Note 17: Quarterly Financial Data (Unaudited in millions, except earnings per
share) (Continued)
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Total
|
2003
|
Net
Sales |
|
|
|
$ |
141.9 |
|
|
$ |
149.9 |
|
|
$ |
143.1 |
|
|
$ |
154.5 |
|
|
$ |
589.4 |
|
Gross
Profit |
|
|
|
|
41.5 |
|
|
|
56.4 |
|
|
|
50.6 |
|
|
|
58.6 |
|
|
|
207.1 |
|
Income (Loss)
Before Income Taxes |
|
|
|
|
(42.1 |
) |
|
|
(14.3 |
) |
|
|
(3.8 |
) |
|
|
12.3 |
|
|
|
(47.9 |
) |
Provision
(Benefit) for Income Taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
Income (Loss)
From Continuing Operations |
|
|
|
|
(42.1 |
) |
|
|
(14.3 |
) |
|
|
(3.8 |
) |
|
|
17.6 |
|
|
|
(42.6 |
) |
Discontinued
Operations, Net of Tax |
|
|
|
|
0.6 |
|
|
|
(15.1 |
) |
|
|
(11.3 |
) |
|
|
(8.3 |
) |
|
|
(34.1 |
) |
Net Income
(Loss) |
|
|
|
$ |
(41.5 |
) (5) |
|
$ |
(29.4 |
) (6) |
|
$ |
(15.1 |
)(7) |
|
$ |
9.3 |
(8) |
|
$ |
(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 |
|
|
|
908.2 |
|
|
|
803.4 |
|
Net
Income (loss) Per Share—Basic |
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
Net
Income (loss) Per Share—Diluted |
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
| (1) |
|
Including $1.8 million restructuring charges; $4.4 million
nonoperating gain on sale of investments; and $3.8 million net nonoperating gain for divested product lines. |
| (2) |
|
Including $10.1 million restructuring charges and $1.5 million
impairment charges. |
| (3) |
|
Including $0.6 million restructuring charges. |
| (4) |
|
Including $(0.3) million restructuring charges and $0.2 million
impairment charges. |
| (5) |
|
Including $8.2 million restructuring charges; $10.3 million
impairment; $1.0 million nonoperating loss on sale of investments; and $2.8 million nonoperating net loss related to sale of divested product
lines. |
| (6) |
|
Including $8.1 million restructuring charges; $4.3 million
impairment; $1.3 million loss for inventory restructuring; and $0.2 million nonoperating net gain related to sale of divested product
lines. |
| (7) |
|
Including $3.5 million restructuring charges; $0.2 million
impairment; and $1.3 million loss for inventory restructuring. |
| (8) |
|
Including $8.4 million restructuring charges; $0.8 million
impairment; $1.7 million loss for inventory restructuring; $1.7 million nonoperating gain on sale of investments; $1.4 million nonoperating net gain
related to sale of divested product lines; and $2.3 million nonoperating gain related to other divested activities. |
71
| Item 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None
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
last quarter of fiscal 2004, 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.
Item 9B. OTHER INFORMATION
In October 2004 we approved our Management Incentive
Plan for fiscal year 2005 (the “MIP”). The MIP is our principal annual incentive program for management level employees of the company
and for fiscal 2005 became effective on November 1, 2005. A copy of the MIP is included as Exhibit 10-d to this Report on Form
10-K.
72
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 2005 Annual Meeting of Shareowners, which will be filed with the SEC on or before January 31, 2005 (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 “Corporate Governance.” |
3. |
|
Next, click on “Relevant Documents.” |
4. |
|
Finally, click on “Financial Code of
Ethics.” |
We intend to satisfy the disclosure requirement
under Item 5.05 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 sections of the Proxy Statement entitled
“Compensation of Directors” and “Executive Compensation” are 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
AND RELATED STOCKHOLDER MATTERS |
The section of the Proxy Statement entitled
“Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference into this Form 10-K.
The following table summarizes share and exercise
price information about our equity compensation plans as of October 31, 2004:
Equity Compensation Plan Information
Plan Category
|
|
|
|
Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
|
|
Weighted-average
exercise price of
outstanding
options,
warrants
and rights
|
|
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected
in the second column)
|
Equity
compensation plans approved by security holders (1) |
|
|
|
|
53,508,245 |
|
|
$ |
4.7663 |
|
|
|
97,995,040 |
|
Equity
compensation plans not approved by security holders (2) |
|
|
|
|
4,402,539 |
|
|
$ |
7.9602 |
|
|
|
0 |
|
Total |
|
|
|
|
57,910,784 |
|
|
$ |
5.1426 |
|
|
|
97,995,040 |
|
| (1) |
|
Includes shares available for issuance under our Global Employee
Stock Purchase Plan as well as options and rights granted and shares that may become subject of future awards under our Global Stock Incentive Plan.
Specifically, 7,659,813 shares remain available for issuance under our Global |
73
| |
|
Employee Stock Purchase Plan as of October 31, 2004. Under our Global Stock
Incentive Plan, 90,335,227 shares may become the subject of future awards as of October 31, 2004. |
| (2) |
|
Includes options granted under the following plans that have not
been approved by our shareowners: (a) the 2001 Special Stock Option Plan (the “2001 Special Plan”) as described below and (b) plans
established by us in connection with our acquisitions of each of the following companies: CommTech Corporation in fiscal 2001; PairGain Technologies,
Inc. in fiscal 2000; and Saville Systems Plc and Teledata Communications Ltd. in fiscal 1999 (collectively, the “Acquisition Plans”). In
certain instances the plans of the acquired companies that the Acquisition Plans replaced were approved by the shareowners of the acquired companies.
Each Acquisition Plan was established by us to preserve the benefit of the outstanding options of the company we were acquiring on the same general
terms and conditions under which these options were initially granted. At the time we completed an acquisition, the options then outstanding under the
acquired company’s option plan were converted into options to purchase ADC common stock using an agreed conversion ratio into options to acquire
shares of our common stock under the applicable Acquisition Plan. No future options will be issued under any of the Acquisition Plans. As of October
31, 2004, options to purchase an aggregate of 1,670,113 shares of common stock at a weighted average price of $11.9002 and an average remaining term of
approximately 3.22 years were outstanding under the Acquisition Plans. |
The following is a summary of our 2001 Special Plan
that was not approved by our shareowners:
The 2001 Special Plan was adopted by our Board of Directors to address acute retention and compensation
considerations associated with the economic downturn in the telecommunications industry that began in 2001. The 2001 Special Plan was designed to
assist us in retaining and incenting our non-executive employees. Officers and directors of ADC were not eligible to receive awards under this plan.
Under this plan, we made a one-time grant of options to purchase an aggregate of 9,523,500 shares on December 7, 2001, to non-executive employees.
These options were all granted with an exercise price equal to the fair market value of our shares on the date of grant. As of October 31, 2004,
options to purchase 2,732,426 shares of common stock with a weighted average exercise price of $5.42 were outstanding under the plan.
The terms and conditions of awards under the 2001
Special Plan were consistent with the terms and conditions of options granted under our shareowner-approved Global Stock Incentive Plan. All options
granted under the 2001 Special Plan vested with respect to one-third of the grant on the first anniversary of the grant date, with the remaining
options vesting in 12.5% increments on the last day of each successive three-month period as long as the employee was employed by us as of those dates.
The options became fully vested as of December 7, 2004, and have a ten-year term.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section of the Proxy Statement entitled
“Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm” is incorporated in this Form 10-K by
reference.
74
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Listing of 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:
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Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended October 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of October 31, 2004 and
2003
Consolidated Statements of Shareowners’ Investment for the years ended October 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended October 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Five-Year
Selected Consolidated Financial Data for the years ended October 31, 2000 through October 31, 2004, is located in Item 6 of
this Form 10-K |
Listing of Financial Statement Schedules
The following schedules are filed with this report
and can be found starting on page 7 7 of this
form 10-K:
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Report of Independent Registered Public Accounting Firm
Schedule II— Valuation of Qualifying Accounts and Reserves
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Schedules not included have been omitted because
they are not applicable or because the required information is included in the consolidated financial statements or notes thereto.
Listing of Exhibits
See Exhibit Index on page 7 9 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 a
copy of any Exhibit to a security holder upon request , at cost.
75
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.
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ADC
TELECOMMUNICATIONS, INC. |
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Dated: January
14, 2005 |
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By: /s/ Robert E. Switz
Robert E. Switz
President and Chief Executive Officer |
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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 |
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President and Chief Executive Officer
(principal executive officer) |
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Dated: January 14, 2005 |
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/s/
GOKUL V. HEMMADY
Gokul V. Hemmady |
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Vice President and Chief Financial Officer
(principal financial accounting officer) |
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Dated: January 14, 2005 |
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/s/
WILLIAM T. PIEPER
William T. Pieper |
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Vice President and Controller
(principal accounting officer) |
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Dated: January 14, 2005 |
John A.
Blanchard III* |
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Director |
John J. Boyle
III* |
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Director |
James C.
Castle* |
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Director |
Mickey P.
Foret* |
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Director |
J. Kevin
Gilligan* |
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Director |
B. Kristine
Johnson* |
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Director |
Lois M.
Martin* |
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Director |
William
Spivey* |
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Director |
Jean-Pierre
Rosso* |
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Director |
John
Rehfeld* |
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Director |
Larry W.
Wangberg* |
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Director |
John D.
Wunsch* |
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Director |
*By: /s/ Gokul V. Hemmady
Gokul V. Hemmady
Attorney-in-Fact |
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Dated: January 14, 2005 |
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76
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareowners
ADC Telecommunications, Inc.
We have audited the consolidated financial statements of ADC Telecommunications,
Inc. and subsidiaries as of October 31, 2004 and 2003 and for each of the three years in the period ended October 31, 2004, and have issued our report
thereon dated December 13, 2004 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule for each of the three
years in the period ended October 31, 2004, listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Minneapolis, Minnesota
December 13, 2004
77
ADC TELECOMMUNICATIONS
SCHEDULE II—VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In
Millions)
Fiscal 2004
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Balance at
Beginning
of Year
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Acquisition
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Charged to
Costs and
Expenses
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Deductions
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Balance at
End of
Year
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Allowance for
doubtful accounts & notes receivable |
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$ 48.6 |
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$ 7.5 |
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$(2.9 |
) |
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$10.6 |
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$ 42.6 |
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Inventory
reserve |
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32.2 |
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16.9 |
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(0.4 |
) |
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6.7 |
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42.0 |
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Warranty
accrual |
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10.4 |
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5.3 |
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4.0 |
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5.3 |
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14.4 |
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Fiscal 2003
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Balance at
Beginning
of Year
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Acquisition
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Charged to
Costs and
Expenses
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Deductions
(Reclassifications)
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Balance at
End of
Year
|
Allowance for
doubtful accounts & notes receivable |
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$ 35.8 |
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$ — |
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$4.3 |
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$(8.5 |
) |
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$ 48.6 |
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Inventory
reserve |
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81.9 |
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— |
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— |
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49.7 |
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32.2 |
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Warranty
accrual |
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10.5 |
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— |
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5.7 |
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5.8 |
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10.4 |
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Fiscal 2002
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Balance at
Beginning
of Year
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Acquisition
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|
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance at
End of
Year
|
Allowance for
doubtful accounts & notes receivable |
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$ 87.1 |
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$ — |
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$22.0 |
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$73.3 |
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$ 35.8 |
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Inventory
reserve |
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89.5 |
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— |
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48.3 |
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55.9 |
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81.9 |
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Warranty
accrual |
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29.4 |
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— |
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3.1 |
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22.0 |
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10.5 |
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78
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
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Description
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2.1 |
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Share Purchase Agreement, dated March 25, 2004 among ADC Telecommunications, Inc., KRONE International Holding, Inc., KRONE Digital
Communications Inc., GenTek Holding Corporation and GenTek Inc. (Incorporated by reference to Exhibit 2.1 to ADC’s Current Report on Form 8-K
dated June 2, 2004.) |
2.2 |
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First Amendment to Share Purchase Agreement, dated May 18, 2004 among ADC Telecommunications, Inc., KRONE International Holding, Inc., KRONE
Digital Communications Inc., GenTek Holding Corporation and GenTek Inc. (Incorporated by reference to Exhibit 2.2 to ADC’s Current Report on Form
8-K dated June 2, 2004.) |
2.3 |
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Acquisition Agreement, dated May 24, 2004 among ADC Telecommunications, Inc., BigBand Networks, Inc. and ADC Broadband Access Systems, Inc.
(Incorporated by reference to Exhibit 2.1 to ADC’s Current Report on Form 8-K dated July 13, 2004.) |
2.4 |
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Acquisition Agreement, dated June 3, 2004 among ADC Telecommunications, Inc., ADC Irish Holdings IA, LLC, ADC Irish Holdings IIA, LLC, ADC
Telecommunications Sales, Inc. and Intec Telecom Systems PLC (Incorporated by reference to Exhibit 2.1 to ADC’s Current Report on Form 8-K dated
September 2, 2004.) |
2.5 |
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First Amendment to the Acquisition Agreement, dated August 27, 2004 among ADC Telecommunications, Inc., ADC Irish Holdings IA, LLC, ADC Irish
Holdings IIA, LLC, ADC Telecommunications Sales, Inc. and Intec Telecom Systems PLC (Incorporated by reference to Exhibit 2.2 to ADC’s Current
Report on Form 8-K dated September 2, 2004.) |
2.6 |
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Acquisition Agreement, dated October 22, 2004 between ADC Telecommunications, Inc. and WatchMark Corp. (Incorporated by reference to Exhibit
2.1 to ADC’s Current Report on Form 8-K dated November 26, 2004.) |
2.7 |
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Amendment No. 1 to Acquisition Agreement, dated November 19, 2004 between ADC Telecommunications, Inc. and WatchMark Corp. (Incorporated by
reference to Exhibit 2.2 to ADC’s Current Report on Form 8-K dated November 26, 2004.) |
3-a |
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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 |
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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 |
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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 |
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Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc., dated March 9, 2004. (Incorporated by reference
to Exhibit 4-e to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
3-e |
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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.) |
79
Exhibit
Number
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Description
|
4-a |
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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 |
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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 |
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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 |
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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* |
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ADC
Telecommunications, Inc. Global Stock Incentive Plan, as amended and restated through March 2, 2004. (Incorporated by reference to Exhibit 10-a to
ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
10-b* |
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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-c* |
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|
ADC
Telecommunications, Inc. Management Incentive Plan for Fiscal Year 2004. (Incorporated by reference to Exhibit 10-d to ADC’s Annual Report on Form
10-K for the fiscal year ended October 31, 2003.) |
10-d* |
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|
ADC
Telecommunications, Inc. Management Incentive Plan for Fiscal Year 2005. |
10-e* |
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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.) |
10-f* |
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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* |
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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* |
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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* |
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|
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* |
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|
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* |
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|
Compensation Plan for Non-employee Directors of ADC Telecommunications, Inc., restated as of January 1, 2004. (Incorporated by reference to
Exhibit 10-b to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
10-l* |
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|
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.) |
80
Exhibit
Number
|
|
|
|
Description
|
10-m* |
|
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|
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* |
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|
Third Amendment to ADC Telecommunications, Inc. Deferred Compensation Plan (1989 Restatement), effective as of December 9, 2003. (Incorporated
by reference to Exhibit 10-d to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
10-o* |
|
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|
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-p* |
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|
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-q* |
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|
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-r * |
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|
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-s * |
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|
|
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-t * |
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|
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-u* |
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|
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-v* |
|
|
|
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-w* |
|
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|
ADC
Telecommunications, Inc. Executive Stock Ownership Policy for Section 16 Officers, effective as of January 1, 2004. (Incorporated by reference to
Exhibit 10-h to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
10-x* |
|
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|
Summary of Executive Perquisite Allowances. (Incorporated by reference to Exhibit 10-cc to ADC’s Annual Report on Form 10-K for the
fiscal year ended October 31, 2003.) |
10-y* |
|
|
|
Letter Agreement of employment between ADC Telecommunications, Inc. and Michael K. Pratt dated April 25, 2002, that includes
severance arrangements. |
10-z* |
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|
Letter Agreement of employment between ADC Telecommunications, Inc. and Ronald A. Lowy dated March 24, 2004. (Incorporated by reference to
Exhibit 10-a to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
10-aa* |
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|
KRONE Acquisition Key Employee Retention Plan. (Incorporated by reference to Exhibit 10-b to ADC’s Quarterly Report on Form 10-Q for the
quarter ended July 31, 2004.) |
10-bb* |
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|
Terms of Ronald A. Lowy Individual Award Letter under the KRONE Acquisition Key Employee Retention Plan. (Incorporated by reference to Exhibit
10-c to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
81
Exhibit
Number
|
|
|
|
Description
|
10-cc* |
|
|
|
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-dd* |
|
|
|
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-ee* |
|
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|
Form
of Restricted Stock Unit Award Agreement used for grants to employee under the Global Stock Incentive Plan. (Incorporated by reference to Exhibit 10-d
to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
10-ff* |
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|
Form
of Restricted Stock Unit Award Agreement used for non-employee directors under the Global Stock Incentive Plan. (Incorporated by reference to Exhibit
10-e to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
10-gg* |
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|
|
Form
of ADC Telecommunications, Inc. Incentive Stock Option Agreement provided to employees with respect to option grants made under the ADC
Telecommunications, Inc. Global Stock Incentive Plan. (Incorporated by reference to Exhibit 10-f to ADC’s Quarterly Report on Form 10-Q for the
quarter ended January 31, 2004.) |
10-hh* |
|
|
|
Form
of ADC Telecommunications, Inc. Non-qualified Stock Option Agreement provided to employees with respect to option grants made under the ADC
Telecommunications, Inc. Global Stock Incentive Plan. (Incorporated by reference to Exhibit 10-g to ADC’s Quarterly Report on Form 10-Q for the
quarter ended January 31, 2004.) |
10-ii* |
|
|
|
Form
of Nonqualified Stock Option Agreement used for non-employee directors under the Global Stock Incentive Plan. (Incorporated by reference to Exhibit
10-f to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
10-jj* |
|
|
|
Form
of Nonqualified Stock Option Agreement used for non-employee directors under the Compensation Plan for Non-Employee Directors. (Incorporated by
reference to Exhibit 10-g to ADC’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.) |
10-kk* |
|
|
|
Form
of ADC Telecommunications, Inc. Restricted Stock Unit Award Agreement provided to non-employee Directors of ADC with respect to Restricted Stock Unit
awards made under the Compensation Plan for non-employee directors of ADC Telecommunications, Inc., restated as of January 1, 2004. (Incorporated by
reference to Exhibit 10-c to ADC’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.) |
10-ll* |
|
|
|
Severance Agreement and General Release, dated November 5, 2004 between ADC Telecommunications, Inc., GenTek Inc. and Ron
Lowy. |
10-mm* |
|
|
|
Confidential Separation Agreement and General Release, dated December 2, 2004 between ADC Telecommunications, Inc. and Jeff
Quiram. |
12-a |
|
|
|
Computation of Ratio of Earnings to Fixed Charges. |
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. |
82
| * |
|
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.
83
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