-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NTxNSfKpi69S/zfUwJpXgxfouOMPmOqJtfNHOhm/8JwDjqwJUX+cUiYU0xWf/H5S fCdoLVQ3hVTTALu1vWfM6Q== 0000895345-02-000132.txt : 20020415 0000895345-02-000132.hdr.sgml : 20020415 ACCESSION NUMBER: 0000895345-02-000132 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMSCOPE INC CENTRAL INDEX KEY: 0001035884 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 364135495 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12929 FILM NUMBER: 02587358 BUSINESS ADDRESS: STREET 1: 1375 LENOIR RHYNE BLVD CITY: HICKORY STATE: NC ZIP: 28602 BUSINESS PHONE: 8283242200 MAIL ADDRESS: STREET 1: 1375 LENOIR RHYNE BLVD CITY: HICKORY STATE: NC ZIP: 28602 10-K 1 lh10k_commscope.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________________________ FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number: 001-12929 CommScope, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4135495 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1100 CommScope Place, S.E. P.O. Box 339 Hickory, North Carolina 28602 (Address of principal executive offices) (Zip Code) (828) 324-2200 (Registrant's telephone number, including area code) ---------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $1.1 billion as of March 22, 2002 (based on the closing price for the Common Stock on the New York Stock Exchange on that date). For purposes of this computation, shares held by affiliates and by directors and officers of the Registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the Registrant. As of March 22, 2002 there were 61,717,159 shares of the Registrant's Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference in Part Ill hereof. PART I ITEM 1. BUSINESS Unless the context otherwise requires, references to "CommScope, Inc.," or "we," "us," or "our" are to CommScope, Inc. and its direct and indirect subsidiaries, including CommScope Inc. of North Carolina, on a consolidated basis. GENERAL We are a leading worldwide designer, manufacturer and marketer of a broad line of coaxial, fiber optic, and other high-performance electronic cable products for cable television, telephony, Internet access and wireless communications. We believe that we supplied over 50% of all coaxial cable purchased in the United States in 2001 for broadband cable networks using Hybrid Fiber Coax (HFC) architecture. We believe we are also the largest manufacturer and supplier of coaxial cable for HFC cable networks in the world. We are also a leading supplier of fiber optic cables primarily for HFC cable networks and have developed specialized, proprietary fiber optic products for telecommunications applications. We are a leading supplier of coaxial cable for telephone central office switching and transmission applications, as well as video distribution applications such as satellite television and security surveillance. In addition, we have developed an innovative line of coaxial cables for wireless communication infrastructure applications that have superior performance characteristics compared to traditional cables. We are also a leading provider of high-performance premise wiring for local area networks. We sell our products to approximately 2,100 customers in more than 85 countries. For the year ended December 31, 2001 our revenues were $738 million and our net income was $27.9 million. During this period, approximately 80% of our revenues were for HFC cable networks and other video applications, 8% were for wireless, central office and other telecommunications applications and 12% were for local area network premise wiring applications. International sales were approximately 23% of our revenues during this period. For further discussion of current and prior year domestic and international revenues, see Items 7 and 8 of this Form 10-K. We believe that we are the world's most technologically advanced, low-cost provider of coaxial cable. With our leading product offerings, cost-efficient manufacturing and economies of scale, we believe we will benefit from the convergence of video, voice and high-speed Internet access and the resulting demand for enhanced HFC broadband networks. We believe that the following industry trends will continue to drive demand for our products: o endorsement of the HFC architecture by major cable, telephone and technology companies; o increasing use of the Internet; o increasing need for additional bandwidth to accommodate new applications; o increasing maintenance requirements for HFC cable networks as operators improve reliability for telephony, data and other two-way services; o the continuing rapid deployment of wireless communications systems worldwide; o increasing demand for higher speed and bandwidth for local area networks; o regional clustering of cable systems that will facilitate the delivery of advanced services such as telephony; and o increased demand for high bandwidth optical fibers for metro and local access applications. Effective November 16, 2001, we acquired, through our indirect wholly-owned subsidiary CommScope Optical Technologies, Inc. ("CommScope Optical"), an approximate 18.4% interest in OFS BrightWave, LLC, a Delaware limited liability company ("BrightWave") formed by us and The Furukawa Electric Co., Ltd. ("Furukawa") to acquire certain fiber cable and transmission fiber assets of the Optical Fiber Solutions Group ("OFS Group") of Lucent Technologies Inc. ("Lucent"). 2 The joint venture investment will provide us with an interest in one of the world's largest producers of optical fiber and cable. We believe this investment and other arrangements with Furukawa: o Create a strategic partner in the manufacture of optical fiber and fiber optic cable o Enhance our technology platform with cross licenses for use of key intellectual property o Establish an attractive supply arrangement for optical fiber, including premium fiber o Provide an opportunity to expand our sales of fiber optic cable to cable television Multiple System Operators (MSOs) We issued 10.2 million shares of our common stock to Lucent for an aggregate amount of $203,388,000 in lieu of a portion of the cash purchase price payable by Furukawa to Lucent pursuant to an asset and stock purchase agreement entered into in connection with the acquisition of a portion of Lucent's OFS Group. Of this amount, $173,388,000 represents our capital contribution to BrightWave and the remaining $30,000,000 is in the form of a revolving loan from CommScope Optical to BrightWave. An indirect wholly-owned subsidiary of Furukawa owns the remaining 81.6% equity interest in BrightWave. BUSINESS STRATEGY We have adopted a growth strategy to expand and strengthen our current market position as the leading worldwide supplier of coaxial cable for broadband communications. The principal elements of our growth strategy are: BUILD UPON THE STRENGTHS OF BRIGHTWAVE AND ITS AFFILIATES TO EXPAND OUR PRODUCT OFFERINGS. Currently, we offer a broad range of cable products for the cable television, wireless and LAN markets, and access to the production of BrightWave and its affiliates will augment our coaxial cable product line with a full line of fiber optic cables. During 2001, we sold more than $110 million of fiber optic cable products worldwide, primarily to broadband, cable television customers. We expect the addition of a broader line of fiber optic cable products provides us an opportunity to expand our sales of fiber optic cable to these customers. BENEFIT FROM WORLDWIDE HFC PARADIGM SHIFT. A vast majority of video networks worldwide, such as cable service providers, have adopted the HFC cable network architecture for video service delivery. We believe that the HFC cable network architecture provides the most cost-effective bandwidth for multi-channel video, voice and data into homes around the world. This architecture enables both cable and other telecommunications service providers to offer new services such as high-speed Internet access, video on demand, Internet protocol telephony, high-definition television and other interactive services. Further growth is expected as companies build-out and upgrade their networks in the global marketplace. We believe our ability to offer a complete suite of cable products, including optical fiber supplied by BrightWave and its affiliates, positions us to be the "supplier of choice" to developers and operators of HFC networks. DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. We maintain an active program to identify new market opportunities and develop and commercialize products that use our core technology and manufacturing competencies. We have developed new products and entered new markets, including coaxial cable for wireless applications, satellite cables, local area network cables, specialized coaxial based telecommunication cables, broadcast audio and video cables and coaxial cables in conduit. We have developed specialized coaxial (Power Feeder(R)) and fiber optic (Fiber Feeder(TM)) cables for distribution and telephony applications in HFC cable networks and have developed Cell Reach(R), a patented copper coaxial cable solution for the wireless antenna market and UltraPipe(TM), a high-end local area network cable product targeted for high-speed local area network applications. We have also developed a number of broadband cables for other wireless applications. Our ability to offer proprietary products, which is expected to be enhanced through access to the intellectual property and research and development expertise of BrightWave and its affiliates, allows us to maintain our leadership position in our existing markets and expand to serve new markets. 3 CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. We invested approximately $250 million in the development and acquisition of state-of-the-art manufacturing facilities and new technologies during the past four fiscal years. These investments help to increase our capacity and operating efficiencies, improve management control and provide more consistent product quality. As a result, we believe we are one of the few manufacturers capable of satisfying volume production, time-to-market, and technology requirements of customers for coaxial cable in the communications industry. We believe that our breadth and scale permit us to cost-effectively invest in improving our operating efficiency through investments in engineering and cost-management programs. We intend to capture additional value in the supply chain through ongoing vertical integration projects. We have completed an aggressive three year capital expenditure program and expect future capital expenditures to be below depreciation and amortization for the next few years. EXPAND OUR GLOBAL PLATFORM. We believe that the worldwide demand for video and data services, the large number of television households outside the United States and relatively low penetration rates for cable television in most countries provide significant long-term opportunities. We have become a major supplier of coaxial cable for the cable television and broadband services industries in international markets, principally Europe, Latin America and the Pacific Rim. In 2001 we had approximately 280 international customers in more than 85 countries, representing approximately $173 million or approximately 23% of our 2001 revenue. We support our international sales efforts with sales representatives based in Europe, Latin America and the Pacific Rim. In 1999, we acquired the Alcatel Cable Benelux, S.A. coaxial cable business in Seneffe, Belgium. With this acquisition, we believe we became the largest manufacturer and supplier of coaxial cable for HFC cable networks in Europe. This acquisition strengthened our position as a supplier for the expected telecommunications upgrade and rebuild activity in Germany, Spain and other European countries. During 2001, we increased the capability and efficiency of our Belgium facility for HFC related products and established capabilities for the manufacture of products for wireless applications in late 2001. During the fourth quarter of 2001, we completed the renovation of a purchased facility in Brazil, which currently provides approximately 283,000 square feet of manufacturing and office space. This facility manufactures products for both HFC and wireless applications, primarily for sale to the Latin American market. Although there is current uncertainty in international markets, we believe that we are well positioned to benefit over the long term from future international growth opportunities. As broadband HFC networks expand globally, CommScope intends to acquire and open facilities in countries that we believe have strategic value, particularly in Asia/Pacific Rim. We believe in-country manufacturing is important because it moves us closer to international customers, it can lower taxes and tariffs and provides the opportunity to improve customer service. LEVERAGE SUPERIOR CUSTOMER SERVICE. We believe that our coaxial cable manufacturing capacity is greater than that of any other manufacturer. This enables us to provide our customers with a unique high-volume service capability. As a result of our 24-hour, seven days per week continuous manufacturing operations, we are able to offer faster order turnaround services. In addition, we believe that our ability to offer rapid delivery services, materials management and logistics services to customers through our private truck fleet is an important competitive advantage. PRODUCT GROUPS We manufacture and sell cable for three broad product groups, which are similar in nature and share similar production processes, customers, distribution channels and regulatory environments: o Broadband (cable television) and Other Video applications; o Local Area Network applications; and o Wireless and Other Telecommunications applications. DOMESTIC HFC CABLE TV MARKET. We design, manufacture and market primarily coaxial cable, most of which is used in the cable television industry. We manufacture two primary types of coaxial cable: o semi-flexible, which has an aluminum or copper outer tubular shield or outer conductor; and 4 o flexible, which is typically smaller in diameter than semi-flexible coaxial cable and has a more flexible outer conductor typically made of metallic tapes and braided fine wires. Semi-flexible coaxial cables are typically used in the trunk and feeder distribution portion of cable television systems, and flexible coaxial cables, also known as drop cables, are typically used for connecting the feeder cable to a residence or business or for some other communications applications. We also manufacture fiber optic cable for the cable television industry and others. Cable television service traditionally has been provided primarily by cable television system operators that have been awarded franchises from the municipalities they serve. In response to increasing competitive pressures and expanding revenue opportunities, cable television system operators have been expanding the variety of their service offerings not only for video, but for Internet access and telephony, which generally requires increasing amounts of cable and system bandwidth. Cable television system operators have generally adopted, and we believe that for the foreseeable future will continue to adopt, HFC cable system designs when seeking to increase system bandwidth. These systems combine the advantages of fiber optic cable in transmitting clear signals over a long distance without amplification, and the advantages of high-bandwidth coaxial cable in ease of installation, low cost and compatibility with the receiving components of the customer's communications devices. We believe that: o cable television system operators are likely to increase their use of fiber optic cable for the trunk and feeder portions of their cable systems; o there will be an ongoing need for high-capacity coaxial cable for the local distribution and street-to-the-home portions of the cable system; and o coaxial cable will remain the most cost effective means for the transmission of broadband signals to the home or business over shorter distances in cable networks. For local distribution purposes, coaxial cable has the necessary signal carrying capacity or bandwidth to handle upstream and downstream signal transmission. The construction, expansion and upgrade of cable systems require significant capital investment by cable operators. Cable television system operators have been significant borrowers from the credit and capital markets. Therefore, capital spending within the domestic cable television industry has historically been cyclical, depending to a significant degree on the availability of credit and capital. The cable television industry has also been subject to varying degrees of both national and local government regulation, most recently the Telecom Act and the 1992 Cable Act, and their implementing regulations adopted in 1993 and 1994 and thereafter. The regional Bell operating companies and other telephone service providers have generally been subject to regulatory restrictions which prevented them from offering cable television service within their franchise telephone areas. However, the Telecom Act removes or phases out many of the regulatory and sale restrictions affecting cable television system operators and telephone operating companies in the offering of video and telephone services. We believe that the Telecom Act, the implementing regulations and case-law decisions will generally encourage competition among cable television system operators, telephone operating companies and other communications companies in offering video, telephone and data services such as Internet access to consumers, and that providers of such services will upgrade their present communications delivery systems. INTERNATIONAL MARKETS. Cable system designs using HFC technology are increasingly being used in international markets with low cable television penetration. Based on industry trade publications and reports from telecommunications industry analysts, we estimate that there are more than 800 million television households worldwide, including roughly 490 million in the Asia/Pacific Rim region, roughly 250 million in Europe and nearly 100 million in the Latin America/Caribbean region, among others. This compares to approximately 100 million television households in the United States. We estimate that roughly 45% of the television households in Europe subscribe to some form of multichannel television service compared to subscription rates of nearly 85% in the United States. Based upon such sources, we estimate that subscription rates in the Asia/Pacific Rim and Latin America/Caribbean markets are even lower at roughly 35% and 20%, respectively. 5 As of December 31, 2001 we had sales in more than 95 countries. We have penetrated the international marketplace through a field sales organization and through a network of distributors and agents located in major countries where we do business. In addition to new customers developed by our network of distributors and sales representatives, many large U.S. cable television operators, with whom we have had long established business relationships, are active investors in cable television systems outside the United States. OTHER VIDEO MARKETS (NON-CABLE TELEVISION). Many specialized markets or applications are served by multiple cable media such as coaxial, twisted pair, fiber optic or combinations of each. We are a leading producer of composite cables made of flexible coaxial and twisted copper pairs for full service communications providers worldwide. In the satellite direct-to-home cable market, where specialized cables transmit satellite-delivered video signals and antenna positioning/control signals, we have developed a leading market position. We market an array of premium metallic and optical cable products directed at the broadcasting and video production studio market. WIRELESS COMMUNICATIONS MARKET. We believe that the deployment of wireless communications systems throughout the United States and the rest of the world presents a growth opportunity for us. Semi-flexible coaxial cables are used to connect the antennae located at the top of wireless antenna towers to the radios and power sources located adjacent to or near the antenna site. Over the past few years, we developed the patented Cell Reach(R) products, a line of copper shielded semi-flexible coaxial cable and related connectors and accessories to address this market. Cell Reach has been installed in thousands of wireless base stations with leading service providers such as Nextel Communications, Inc., Sprint Corporation and certain Sprint affiliates and certain AT&T affiliates. We have expanded manufacturing capacity for this product line and are in the process of establishing further international sales capabilities. During 2001, we expanded our global capacity in the wireless market and now have production capability in Latin America and Europe. CommScope also manufactures other broadband coaxial cables, fiber optic cables and twisted pair cables that are used for various wireless applications, including Third Generation Wireless (3G), Personal Communications Systems (PCS), Global System for Mobile Communications (GSM), Universal Mobile Telecommunications (UMTS), Cellular, Multichannel Multipoint Distribution Service (MMDS), Local Multipoint Distribution System (LMDS), land mobile radio, paging and in-building wireless applications. During 2001, we continued to develop specialized coaxial cables for these applications, including the ExtremeflexTM product line which are highly flexible low loss 50 ohm coaxial cables adapted from CommScope's patented, highly successful digital BroadBand QR(R) product line. In addition, we achieved TL 9000 registration for our wireless products at our Cable Technology Center in Newton, North Carolina. The TL 9000 certification is an internationally recognized quality system standard, which we believe demonstrates our quality commitment to our wireless customers. However, we expect ongoing aggressive competition from larger, well-established companies with significant financial resources, brand recognition in the cellular market and established marketing channels for coaxial cable and accessories. LOCAL AREA NETWORK MARKET. The proliferation of personal computers, and more broadly the practice of distributed computing, has created a need for products which enable users to share files, applications and peripheral equipment such as printers and data storage devices. Local area networks, typically consisting of at least one dedicated computer (a "server"), peripheral devices, network software and interconnecting cables, were developed in response to this demand. We manufacture a variety of twisted pair, coaxial and fiber optic cables to transmit data for local area network applications. The most widely used cable design for this application consists of four high-performance twisted pairs that are capable of transmitting data at rates in excess of 100 mbps. We focus our products and marketing on cables with enhanced electrical and physical performance such as our UltraPipe (TM) unshielded twisted pair. We believe that UltraPipe cable is among the highest performing unshielded twisted pair cables in the industry. During 2001, we expanded our presence as a fiber optic supplier to the LAN market. We believe that access to fiber optic products from BrightWave and its affiliates will provide us an opportunity to increase our sales of fiber optic cable to LAN customers. Copper and fiber optic composite cables are frequently combined in a single cable to reduce installation costs and support multimedia applications. 6 OTHER MARKETS. We have developed a strategy for addressing additional cable consuming markets. By combining narrowly focused product and market management with our cable manufacturing and operational skills, we are entering new markets for broadcast, home automation, telephone central office switching and transmission, and other high-performance communications applications. MANUFACTURING We employ advanced cable manufacturing processes, the most important of which are: o thermoplastic extrusion for insulating wires and cables; o high-speed welding and swaging of metallic shields or outer conductors; o braiding; o cabling; and o automated testing. Many of these processes, some of which are proprietary and/or trade secret information, are performed on equipment that has been modified for our purposes or specifically built to our specifications, often internally in our own machine shop facilities. We do not fabricate all of the raw material components used in making most of our cables, such as certain wires, tapes, tubes and similar materials. We believe, however, that fabrication, to the extent economically feasible, could be done by us instead of being outsourced. For example, during 2001 we substantially completed certain aspects of strategic vertical integration projects for bimetallic wire fabrication and fine wire drawing and currently produce a significant portion of our needs internally. The manufacturing processes of the three principal types of cable we manufacture are further described below. COAXIAL CABLES. We employ a number of advanced plastic and metal forming processes in the manufacture of coaxial cable. Three fundamental process sequences are common to almost all coaxial cables: o First, a plastic insulation material, called the dielectric, is melt extruded around a metallic wire or center conductor. Current state-of-the-art dielectrics consist of foamed plastics to enhance the electrical properties of the cable. Precise control of the foaming process is critical to achieve the mechanical and electrical performance required for broadband services and cellular communications applications. We believe that plastic foam extrusion, using proprietary materials, equipment and control systems, is one of our core competencies. o The second step involves sheathing the dielectric material with a metallic shield or outer conductor. Three basic shield designs and processes are used. For semi-flexible coaxial cables, we apply solid aluminum or copper shields over the dielectric by either pulling the dielectric insulated wire into a long, hollow metallic tube or welding the metallic tube directly over the dielectric. Welding allows the use of thinner metal, resulting in more flexible products. We use a proprietary welding process that achieves significantly higher process speeds than those achievable using other cable welding methods. The same welding process has led to extremely efficient manufacturing processes of copper shielded products for cellular communications. For both hollow and welded tubes, the cable is passed through tools that form the metallic shield tightly around the dielectric. o Flexible coaxial cables, which are usually smaller in diameter than semi-flexible coaxial cables, generally are made with the third shield design. Flexible outer shield designs typically involve laminated metallic foils and braided fine wires which are used to enhance flexibility which is more desirable for indoor wiring or for connecting subscribers in drop cable applications. 7 o The third and usually final process sequence is the melt extrusion of thermoplastic jackets to protect the coaxial cable. A large number of variations are produced during this sequence including: incorporating an integral strength member; customer specified extruded stripes and printing for identification; abrasion and crush resistant jackets; and adding moisture blocking fillers. TWISTED COPPER PAIRS. We insulate single copper wires using high-speed thermoplastic extrusion techniques. Two insulated copper singles are then twinned by twisting them into an electrically balanced pair unit in a separate process. They are then bunched or cabled by grouping two or more pair units into larger units for further processing in one or more further processes depending on the number of pairs desired within the completed cable. The cabled units are then shielded and jacketed or simply jacketed without applying a metallic shield in the jacketing process. The jacketing process involves extrusion of a plastic jacket over a shielded or unshielded cable core. The majority of sales of our twisted copper pairs come from plenum rated unshielded twisted pair cables for local area network applications. Plenum cables are cables rated under the National Electrical Code as safe for installation within the air plenum areas of office buildings due to their flame retarding and low smoke generating characteristics when heated. Plenum cables are made from more costly thermoplastic insulating materials, such as FEP. These materials have significantly higher extrusion temperature profiles that require more costly extrusion equipment than non-plenum rated cables. We believe that the processing of plenum rated materials is one of our core competencies. FIBER OPTIC CABLES. We manufacture fiber optic cables by purchasing bulk uncabled optical fiber singles and buffering them before cabling them into unjacketed core units. We then apply protective outer jackets and, sometimes, shields and jackets in a final process before testing. The manufacturing and test equipment for fiber optic cables are different from those used to manufacture coaxial and copper twisted pair cables. Most of the fiber optic cables we produce are sold to the cable television and local area network industry. Some of these fiber optic cables are produced under licenses acquired from other fiber and fiber optic cable manufacturers. COMPOSITE CABLES. We also produce cables that are combinations of some or all of coaxial cables, copper singles or twisted copper pairs and fiber optic cables within a single cable for a variety of applications. The most significant of the composite cables we manufacture are combination coaxial and copper twisted pairs within a common outer jacket which are being used by some telephone companies and cable operators to provide both cable television services and telephone services to the same households over HFC cable networks. Nearly all of our current markets have applications for composite cables which we can manufacture. BRIGHTWAVE OPTICAL FIBER AND FIBER OPTIC CABLE. Our equity-method investee, BrightWave, is one of the world's largest manufacturers of optical fiber and fiber optic cable. Brightwave produces application-specific fiber and fiber optic cable for voice, data and video transmission deployed in both long-haul and short-haul communications networks. BrightWave sells cable primarily to large telecommunications service providers including certain Regional Bell Operating Companies (RBOCs). BrightWave manufactures fiber under a contract manufacturing agreement for OFS Fitel, LLC ("Fitel") a wholly owned subsidiary of Fitel USA. Fitel USA's ultimate parent is Furukawa. BrightWave is headquartered in Norcross, Georgia and operates production facilities in the United States, Brazil and Germany. While a majority of sales are expected to be generated in North America, BrightWave markets and sells its products in Asia/Pacific Rim, Latin America, and the Europe. As a contract manufacturer to Fitel, BrightWave produces application-specific fibers, such as TrueWave, AllWave, and UltraWave, which are used in terrestrial long haul, metro and LAN applications. BrightWave has a worldwide reputation for high capacity and industry-leading fiber designs. The combined optical fiber production capabilities of BrightWave and Fitel, together, rank them as the world's second largest producer of optical fiber and cable. Manufacturing fiber optic cable consists of two basic steps: creating a rod, also called a core preform or a blank, of very pure glass and then heating the preform and drawing it into a thin fiber. After drawing, the fiber is coated with a protective jacket and wound on a spool. Individual fibers are often wrapped or packaged with other fibers to form cables consisting of up to 864 stands of fiber. After manufacturing the fiber itself, the fiber is packaged in a cable in various combinations of fiber types and quantities to form a fiber optic cable that is sold to customers. 8 BrightWave produces fiber optic cables in a broad range of fiber types, fiber bundling, fiber counts and sheath designs. These cable products provide state of the art terabit transport in configurations up to 864 fibers in ribbons for dense metro and long haul routes and smaller ribbons or loose fiber bundles for last mile applications. BrightWave's customers compete in markets characterized by rapid technological changes, decreasing product life cycles, price competition and increased user applications. These markets have experienced significant expansion in the number and types of products and services they offer to end-users, particularly in personal computing, portable access communication devices and expanded networking capability. BrightWave's primary competitors include Corning, Pirelli, Alcatel and several Japanese-based competitors. While the optical fiber industry has major barriers to entry, including capital and intellectual property, current market conditions are extremely difficult. Due primarily to the difficult market environment for certain telecommunications products and challenging global economic conditions, we expect ongoing pricing pressure and weak demand industry wide for fiber optic cable products during 2002. Based on these factors, we expect that BrightWave will incur losses for 2002. RESEARCH AND DEVELOPMENT Our research, development and engineering expenditures for the creation and application of new and improved products and processes were $7 million, $18 million and $8 million for the years ended December 31, 2001, 2000, and 1999, respectively. We focus our research and development efforts primarily on two areas: o those product areas that we believe have the potential for broad market applications and significant sales within a one-to-three year period; and o new manufacturing technologies to achieve cost reductions. During 2001, our major projects consisted primarily of research and engineering activity related to the production of copper clad metals required to advance the design of those materials and related processes to the point that they meet specific functional and economic requirements and are ready for full scale manufacturing. We have undertaken these projects in an effort to reduce materials costs and reliance on limited sources of key raw materials. In addition, we entered into cross-licensing arrangements with Furukawa in 2001, providing us with access to key technology for communications cable, especially fiber optic cable, that has taken years to develop. The widespread deployment of broadband services and HFC cable systems is expected to provide opportunities for us to enhance our coaxial cable product lines and to improve our manufacturing processes. SALES AND DISTRIBUTION We market our products worldwide through a combination of more than 140 direct sales, territory managers and manufacturers' representative personnel. We support our sales organization with regional service centers in: Alabama; Nevada; North Carolina; Puerto Rico; Australia; Belgium; Brazil and England. In addition, we utilize local inventories, sales literature, internal sales service support, design engineering services and a group of product engineers who travel with sales personnel and territory managers and assist in product application issues, and conduct technical seminars at customer locations to support our sales organization. We have expanded our global presence through our acquisition of Europe's largest manufacturer of cable television coaxial cable and our establishment of a manufacturing and distribution facility in Brazil. 9 A key aspect of our customer support and distribution chain is the use of our private truck fleet. We believe that the ability to offer rapid delivery services, materials management and logistics services to customers through our private truck fleet is an important competitive advantage. Our products are sold and used in a wide variety of applications. Our products primarily are sold directly to cable system operators, telecommunications companies, original equipment manufacturers and indirectly through distributors. There has been a trend on the part of larger customers to consolidate their lists of qualified suppliers to companies that have a global presence, can meet quality and delivery standards, have a broad product portfolio and design capability, and have competitive prices. We have concentrated our efforts on service and productivity improvements including advanced computer aided design and manufacturing systems, statistical process controls and just-in-time inventory programs to increase product quality and shorten product delivery schedules. Our strategy is to provide a broad selection of products in the areas in which we compete. We have achieved a preferred supplier designation from many of our cable television, telephone and original equipment manufacturer customers. We have also strengthened our information technology infrastructure and implemented an integrated information management system, which we believe will help us improve business practices. Cable television services in the United States are provided primarily by cable television system operators. It is estimated that the six largest cable television system operators account for more than 70% of the cable television subscribers in the United States. The major cable television system operators include such companies as AT&T, AOL Time Warner, Comcast, Charter Communications, Cox Communications and Adelphia Communications. Many of the major cable television system operators are our customers, including those listed above. During the years ended December 31, 2001 and 2000 no customer accounted for 10% or more of our net sales. During the year ended December 31, 1999, AT&T and its affiliates accounted for approximately 10% of our net sales. No other customer accounted for 10% or more of our net sales in 1999. PATENTS We pursue an active policy of seeking intellectual property protection, namely patents, for new products and designs. We hold 70 patents worldwide and have 93 pending applications. We consider our patents to be valuable assets, but no single patent is material to our operations as a whole. We intend to rely on our proprietary knowledge, trade secrets and continuing technological innovation to develop and maintain our competitive position. We have entered into cross-licensing arrangements with Furukawa in 2001, providing us with access to key technology for communications cable, especially fiber optic cable. BACKLOG At December 31, 2001, 2000, and 1999, we had an order backlog of approximately, $22 million, $156 million, and $104 million, respectively. Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Backlog includes only orders for products scheduled to be shipped within six months. In some cases, unfilled orders may be canceled prior to shipment of goods; but cancellations historically have not been material. However, our current order backlog may not be indicative of future demand. COMPETITION We encounter competition in substantially all areas of our business. We compete primarily on the basis of product specifications, quality, price, engineering, customer service and delivery time. Competitors include large, diversified companies, some of which have substantially greater assets and financial resources than we do, as well as medium to small companies. We also face competition from certain smaller companies that have concentrated their efforts in one or more areas of the coaxial cable market. We believe that we enjoy a strong competitive position in the coaxial cable market due to our position as a low-cost, high-volume coaxial cable producer and reputation as a high-quality provider of state-of-the-art cables with a strong orientation toward customer service. We also believe that we enjoy a strong competitive position in the electronic cable market due to our large direct field sales organization within the local area network group, the comprehensive nature of our product line and our long established reputation for quality. 10 RAW MATERIALS In the manufacture of coaxial and twisted pair cables, we process metal tubes, tapes and wires including bimetallic center conductors (wires made of aluminum or steel with thin outer skins of copper) that are fabricated from high-grade aluminum, copper and steel. Most of these fabricated metal components are purchased under supply arrangements with some portion of the unit pricing indexed to commodity market prices for these metals. We have adopted a hedging policy pursuant to which we may, from time to time, attempt to match futures contracts or option contracts for a specific metal with some portion of the anticipated metal purchases for the same periods. Other major raw materials we use include polyethyelenes, polyvinylchlorides, FEP and other plastic insulating materials, optical fibers, and wood and cardboard shipping and packaging materials (some of which are available only from limited sources). In 2001, approximately 7% of our raw material purchases were for bimetallic center conductors for coaxial cables, nearly all of which were purchased from Copperweld Corporation. We are working toward a long term supply arrangement with Copperweld for certain bimetallic center conductors for 2002 and 2003. If we are unable to continue to purchase the necessary quantities of bimetallic center conductors, we may be unable to obtain these raw materials on commercially acceptable terms from another source. During 2001, we produced a significant portion of our bimetallic center conductor requirements internally. However, there are few, and limited, alternative sources of supply for these raw materials. Management believes that our expected supply arrangement with Copperweld, together with our increasing internal production of bimetallic center conductors, addresses concerns regarding the continuing availability of these key materials and enhances our ability to support the demand for broadband cable. Although the parent of Copperweld has filed for Chapter 11 debtor-in-possession reorganization, management does not believe this will affect the Company's supply arrangement with Copperweld. However, the loss of Copperweld as a supplier of bimetallic center conductors, Copperweld's inability to supply, and/or our failure to manufacture or adequately expand our internal production of these products, could have a material adverse effect on our business and financial condition. In addition, we purchase fine aluminum wire from a limited number of suppliers. Fine aluminum wire is a smaller raw material purchase than bimetallic center conductors and we produced a significant portion of our requirements internally. However, neither of these major raw materials could be readily replaced in sufficient quantities if all supplies from the respective primary sources were disrupted for an extended period and we were unable to expand production of these products internally. In such event, there could be a materially adverse impact on our financial results. Additionally, FEP is the primary raw material used throughout the industry for producing flame retarding cables for local area network applications. There are few worldwide producers of FEP and market supplies have been periodically limited over the past several years. Availability of adequate supplies of FEP will be critical to future local area network cable sales growth. Optical fiber is a primary material used for making fiber optic cables. There are few worldwide suppliers of optical fiber. Availability of adequate supplies of optical fiber will be critical to future fiber optic cable sales growth. We believe that our ownership in BrightWave and the optical fiber supply arrangement with a BrightWave affiliate address concerns about continuing availability of these materials and enhances our ability to support the demand for broadband cable. Alternative sources of supply or access to alternative materials are generally available for all other major raw materials we use. We believe supplies of all other major raw materials we use are generally adequate and we expect them to remain so for the foreseeable future. ENVIRONMENT We use some hazardous substances and generate some solid and hazardous waste in the ordinary course of our business. As a result, we are subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. Because of the nature of our business, we have incurred, and will continue to incur, costs relating to compliance with these environmental laws. Although we believe that we are in substantial compliance with such environmental requirements, and we have not in the past been required to incur material costs in connection with this compliance, there can be no assurance that our cost to comply with these requirements will not increase in the future. Although we are unable to predict what legislation or regulations may be adopted in the future with respect to environmental protection and waste disposal, compliance with existing legislation and regulations has not had and is not expected to have a materially adverse effect on our operations or financial condition. 11 EMPLOYEES At December 31, 2001, we employed approximately 3,100 people. Substantially all employees are located in the United States. We also have employees in foreign countries, including those located in Belgium and Brazil. We believe that our relations with our employees are satisfactory. ITEM 2. PROPERTIES Our principal administrative, production and research and development facilities are located in the following locations: The Hickory, North Carolina facility occupies approximately 85,000 square feet under a lease expiring in 2005 with up to two additional five-year renewal terms, which may be granted at the option of the lessor. We recently consolidated our executive offices, sales office and customer service department and certain corporate and administrative functions in this new leased facility. The Catawba, North Carolina facility occupies approximately 1,000,000 square feet and is owned by us. The Catawba facility manufactures coaxial cables, is the major distribution facility for our products and houses certain administrative and engineering activities. The Claremont, North Carolina facility occupies approximately 587,500 square feet and is owned by us. The Claremont facility manufactures coaxial, copper twisted pair and fiber optic cables and houses certain of our administrative, sales and engineering activities. The Scottsboro, Alabama facility occupies approximately 150,000 square feet and is owned by us. The Scottsboro facility manufactures coaxial cables. The Statesville, North Carolina facility occupies approximately 315,000 square feet and is owned by us. The Statesville facility houses certain cable-in-conduit manufacturing, wire fabrication, recycling, research and development, and engineering activities. The Seneffe, Belgium, facility occupies approximately 134,000 square feet, including a warehouse, and is owned by us. The Seneffe facility houses certain coaxial cable manufacturing and sales activities for HFC, wireless and other applications. The Newton, North Carolina facility occupies approximately 455,000 square feet of wireless cable manufacturing, office and warehouse space and is owned by us. This facility houses some of our administrative, engineering, and research and development functions as well as manufacturing and sales activities for our wireless products group. The Sparks, Nevada facility occupies approximately 225,500 square feet under a lease expiring in 2003 with additional renewal terms available. The Sparks facility manufactures cable-in-conduit products and houses regional service and distribution activities. The Jaguariuna, Brazil facility occupies approximately 283,000 square feet of manufacturing and office space and is owned by us. The Jaguariuna facility houses certain coaxial cable manufacturing and sales activities for HFC, wireless and other applications. We own a 259,000 square-foot facility in Kings Mountain, North Carolina that we recently constructed, but are currently not using. This property is currently being offered for sale. We do not believe there is any material long-term excess capacity in our facilities, although utilization is subject to change based on customer demand. We believe that our facilities and equipment generally are well maintained, in good operating condition and suitable for our purposes and adequate for our present operations. ITEM 3. LEGAL PROCEEDINGS We are not involved in any pending legal proceedings other than various claims and lawsuits arising in the normal course of business. We do not believe that any such claims or lawsuits will have a materially adverse effect on our financial condition and results of operations. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the three months ended December 31, 2001. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the New York Stock Exchange under the symbol "CTV." The following table sets forth the high and low sale prices as reported by the New York Stock Exchange for the periods indicated. Common Stock Price Range -------------------------- High Low ----------- ----------- 2000 First Quarter $ 49.38 $ 30.75 Second Quarter $ 50.13 $ 32.63 Third Quarter $ 40.31 $ 22.63 Fourth Quarter $ 26.88 $ 15.25 2001 First Quarter $ 22.50 $ 14.75 Second Quarter $ 26.80 $ 15.00 Third Quarter $ 24.45 $ 15.66 Fourth Quarter $ 22.91 $ 16.50 As of March 22, 2002, the approximate number of registered stockholders of record of our common stock was 669. We have never declared or paid any cash dividends on our common stock. We do not currently intend to pay cash dividends in the foreseeable future, but intend to reinvest earnings in our business. Certain of our debt and lease agreements contain limits on our ability to pay cash dividends on our common stock. 14 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
Year Ended December 31, ------------------------------------------------------------- 2001 2000 1999 1998 1997 RESULTS OF OPERATIONS: Net sales $738,498 $950,026 $748,914 $571,733 $599,216 Gross profit 179,644 251,054 200,106 134,593 141,000 Operating income 62,874 146,051 117,517 72,843 79,182 Net income 27,865 84,887 68,077 39,231 37,458 Pro forma net income (1) -- -- -- -- 34,604 NET INCOME PER SHARE INFORMATION (1): Weighted average number of shares outstanding: Basic 52,692 51,142 50,669 49,221 49,107 Assuming dilution 53,500 56,047 52,050 49,521 49,238 Net income per share: Basic $ 0.53 $ 1.66 $ 1.34 $ 0.80 $ 0.70 Assuming dilution $ 0.52 $ 1.60 $ 1.31 $ 0.79 $ 0.70 BALANCE SHEET DATA: Cash and cash equivalents $ 61,929 $ 7,704 $ 30,223 $ 4,129 $ 3,330 Property, plant and equipment, net 277,169 251,356 181,488 135,082 133,235 Total assets 889,005 721,182 582,535 465,327 483,539 Working capital 199,125 209,104 146,952 93,982 112,786 Long-term debt, including current maturities 194,569 227,436 198,402 181,800 265,800 Stockholders' equity 606,514 374,520 281,344 203,972 150,032 OTHER INFORMATION: Operating cash flows $158,168 $ 44,924 $ 79,419 $ 82,971 $59,688 Depreciation and amortization 40,529 35,799 29,295 24,662 21,677 Capital expenditures 70,841 98,640 57,149 22,784 29,871 (1) We, through our wholly owned subsidiary CommScope, Inc. of North Carolina ("CommScope NC"), were formerly a wholly owned indirect subsidiary of General Instrument Corporation with no separately issued or outstanding equity securities prior to the spin-off on July 28, 1997. On the date of the spin-off, through a series of transactions and stockholder dividends initiated by General Instrument, CommScope NC became our wholly owned subsidiary. The unaudited pro forma information for 1997 has been prepared utilizing the historical consolidated statements of income of CommScope NC adjusted to reflect a net debt level of $275 million at January 1, 1997 at an assumed weighted average borrowing rate of 6.35% plus the amortization of debt issuance costs associated with the new borrowings and a total of 49.1 million common shares outstanding and 49.2 million common and potential common shares outstanding for basic and diluted earnings per share, respectively.
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY BACKGROUND CommScope, Inc., through its wholly owned subsidiaries and equity method investee, operates in the cable manufacturing business with manufacturing facilities located in the United States, Europe and Latin America. We are a leading worldwide designer, manufacturer and marketer of a wide array of broadband coaxial cables and other high-performance electronic and fiber optic cable products for cable television, telephony, Internet access and wireless communications. We believe we are the world's largest manufacturer of coaxial cable for hybrid fiber coax (HFC) broadband networks. We are also a leading supplier of coaxial, twisted pair and fiber optic cables for premise wiring (local area networks), wireless and other communication applications. Effective November 16, 2001, we acquired an 18.4% ownership interest in OFS BrightWave, LLC ("OFS BrightWave"), an optical fiber and fiber cable venture between us and The Furukawa Electric Co., Ltd. ("Furukawa"). OFS BrightWave was formed to operate a portion of the optical fiber and fiber cable business ("OFS Group") acquired from Lucent Technologies Inc. ("Lucent"). We issued 10.2 million shares of CommScope, Inc. common stock, valued at $203.4 million, to Lucent in lieu of a portion of the purchase price payable by Furukawa for the acquisition of a portion of Lucent's OFS Group. Of the amount paid by us, $173.4 million represented a capital contribution in exchange for our 18.4% equity interest in OFS BrightWave and $30 million represented a loan from one of our wholly owned subsidiaries to OFS BrightWave. The remaining 81.6% equity interest in OFS BrightWave is owned by an indirect wholly owned subsidiary of Furukawa. The businesses acquired include transmission fiber and cable manufacturing capabilities at a 2.9 million square foot facility in Norcross, Georgia, as well as facilities in Germany and Brazil and an interest in a joint venture in Carrollton, Georgia. We expect our investment in OFS BrightWave and other arrangements with Furukawa to provide access to optical fiber, including premium fiber, under a supply agreement, enhance our technology platform with access to key intellectual property, and create a strategic partner in optical fiber and fiber cable manufacturing. CRITICAL ACCOUNTING POLICIES "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes discussion and analysis of our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other 16 objective sources. Management bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary. Significant accounting estimates reflected in our financial statements include the allowance for doubtful accounts, inventory excess and obsolescence reserves, warranty and distributor price protection reserves, reserves for sales returns, discounts, allowances, and rebates, income tax valuation allowances, and impairment reviews for investments, fixed assets, goodwill and other intangibles. Although these estimates are based on management's knowledge of and experience with past and current events and on management's assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results. Management believes the following critical accounting policies require its more significant judgments and estimates used in the preparation of its consolidated financial statements. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management's evaluation of the ability of our customers to make payments, focusing on customer financial difficulties and age of receivable balances. An adverse change in financial condition of a significant customer or group of customers could materially affect management's estimates related to doubtful accounts. We record estimated reductions to revenue for customer programs and incentive offerings, such as discounts, allowances, rebates and distributor price protection programs. These estimates are based on contract terms, historical experience, inventory levels in the distributor channel, and other factors. Management believes it has sufficient historical experience to allow for reasonable and reliable estimation of these reductions to revenue. However, declining market conditions could result in increased estimates of sales returns and allowances and potential distributor price protection incentives, resulting in incremental reductions to revenue. We maintain allowances for excess and obsolete inventory. These estimates are based on management's assumptions about and analysis of relevant factors including current levels of orders and backlog, shipment experience, forecasted demand and market conditions. We do not believe our products are subject to a significant risk of obsolescence in the short term and management believes it has the ability to adjust production levels in response to declining demand. However, if actual market conditions become less favorable than anticipated by management, additional allowances for excess and obsolete inventory could be required. Management reviews goodwill, intangible assets, investments, and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. Management assesses potential impairment of the carrying values of these assets based on market prices, if available, or assumptions about and estimates of future cash flows expected to arise from these assets. Future cash flows may be adversely impacted by operating performance, market conditions, and other factors. If an impairment is indicated by this analysis, the impairment charge to be recognized, if any, would be measured as the amount by which the carrying value exceeds fair value, estimated by management based on market prices, if available, or forecasted cash flows, discounted using a discount rate commensurate with the risks involved. Assumptions related to future cash flows and discount rates involve management judgment and are subject to significant uncertainty. If future cash flows, discount rates and other assumptions used in the assessment and measurement of impairment differ from management's estimates and forecasts, additional impairment charges could be required. Discussion of 2001 impairment charges is located under the heading "Impairment charges for fixed assets and investments" within the "Comparison of results of operations for the year ended December 31, 2001 with the year ended December 31, 2000." See also discussion of new standards for testing goodwill and other identifiable intangible assets for impairment under "Newly Issued Accounting Standards." FINANCIAL HIGHLIGHTS For the three-year period 1999-2001, we reported the following results (in thousands, except per share amounts):
Year Ended December 31, -------------------------------------------------------- 2001 2000 1999 ----------------- ------------------ ------------------ Net income $ 27,865 $ 84,887 $ 68,077 Net income per share - assuming dilution 0.52 1.60 1.31
Net income for the year ended December 31, 2001 included pretax charges of $13 million, or $0.18 per diluted share, net of tax, related to impairment of certain fixed assets, including our Kings Mountain facility and an investment in a wireless infrastructure project management company, now in the process of being liquidated. The tax benefit of the capital loss arising from impairment of this investment has been offset by a valuation allowance due to uncertainty about our ability to utilize this tax deduction. These impairment charges were primarily the result of challenging industry conditions which prompted management to make certain estimates and assumptions in order to determine if the carrying values of these assets may not be fully recoverable. Also included in net income for the year ended December 31, 2001 were pretax charges of approximately $8 million, or $0.09 per diluted share, net of tax, representing financing and formation costs related to our 17 investment in OFS BrightWave. These pretax charges were incurred prior to restructuring the joint venture arrangements with Furukawa related to the acquisition of Lucent's OFS Group and are not capitalizable as part of our investment in the restructured venture. See further discussion under "Terminated acquisition costs." Net income for the year ended December 31, 2000 included a pretax gain of $517 thousand related to the final liquidation of a closed Australian joint venture. This joint venture was completely dissolved as of December 29, 2000, when the deregistration period required by Australian legal authorities expired. Our consolidated financial statements and related notes, included in Item 8, should be read as an integral part of the financial highlights and the following financial review. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 WITH THE YEAR ENDED DECEMBER 31, 2000 NET SALES Net sales for the year ended December 31, 2001 decreased $211.5 million or 22% to $738.5 million, from 2000. The decrease in net sales was mainly due to deteriorating global economic conditions which resulted in declining demand and competitive pricing pressures for some product lines both domestically and internationally. The following table presents (in millions) our revenues by broad product group as well as domestic versus international sales for the years ended December 31, 2001 and 2000:
2001 Net % of 2001 Net 2000 Net % of 2000 Sales Sales Sales Net Sales ---------------------------------------------------------- Broadband/Video Products $588.3 79.7 % $ 723.8 76.2 % LAN Products 88.3 12.0 85.3 9.0 Wireless & Other Telecom Products 61.9 8.3 140.9 14.8 ---------------------------------------------------------- Total worldwide sales $738.5 100.0 % $ 950.0 100.0 % ========================================================== Domestic sales $565.2 76.5 % $ 717.6 75.5 % International sales 173.3 23.5 232.4 24.5 ---------------------------------------------------------- Total worldwide sales $738.5 100.0 % $ 950.0 100.0 % ==========================================================
For the year ended December 31, 2001, international sales decreased $59.1 million, or 25%, to $173.3 million, from 2000, with sales down year over year in all regions primarily due to the difficult global environment. While we believe that near term international sales will be depressed until the global economy improves, we remain optimistic about the long-term global opportunities for broadband cable. During 2001, we opened a new manufacturing facility in Brazil, which we expect will enhance our competitive position in Latin America, especially when this region's economy improves. Net sales of broadband and other video distribution products ("Broadband/Video Products") for the year ended December 31, 2001 decreased $135.5 million, or 19%, to $588.3 million, from 2000. The decrease was primarily attributable to lower sales volumes, and was significantly affected by the downturn in international demand. Increases in sales to most of the large domestic broadband service providers were more than offset by substantial decreases in sales to alternate service providers and to AT&T Broadband. Domestic Broadband/Video sales decreased approximately 18 16% year over year. The decrease in Broadband/Video Products sales volume was somewhat offset by modest price increases for certain HFC products. Sales were also positively affected by a favorable shift in product mix resulting from sales of fiber optic cable, primarily for broadband applications, which represented approximately 15% of total sales in 2001. However, sales of fiber optic cable slowed during the second half of 2001 as a result of challenging market conditions and competitive pricing pressures. While we expect the market for fiber optic cable to remain difficult during 2002, we believe that our ability to offer both coaxial and fiber optic cable, as well as other types of communications cables, continues to be an important competitive advantage. We also believe that we will benefit in 2002 from the anticipated increase in infrastructure spending announced by AT&T Broadband. Net sales of local area network and other data application products ("LAN Products") for the year ended December 31, 2001 increased $3.0 million, or 4%, to $88.3 million, from 2000. The increase was primarily due to a favorable shift to more enhanced products at higher unit prices, offset by a decline in unit volume. Net pricing was not a significant factor in the year-over-year increase in sales of LAN Products. We began implementing a comprehensive performance improvement plan for our LAN Products group during the fourth quarter of 2000. This plan included, among other things, reorganizing LAN sales and operational management as well as ongoing efforts to reduce distribution channel inventory, improve efficiency, and increase the velocity of the manufacturing and distribution cycle. This reorganization resulted in growth in both sales and profitability of our LAN Products and we believe it has improved our ability to provide world-class network cabling solutions to our domestic customers. Net sales of wireless and other telecommunications products ("Wireless and Other Telecom Products") for the year ended December 31, 2001 decreased $79.0 million, or 56%, to $61.9 million, from 2000, primarily due to lower sales of Other Telecom Products related to telephone central office applications. The decrease in sales of Other Telecom Products was primarily driven by lower volumes, offset somewhat by a favorable shift in product mix. We expect ongoing softness and significant competitive pressures for these Other Telecom Products. Sales of Wireless Products were down significantly year over year primarily due to the general slowdown in telecommunications capital spending and the inability of certain customers to get financing for their projects. The decrease in sales of Wireless Products was primarily driven by lower volumes, and was impacted somewhat by an unfavorable shift in product mix. During 2001 we expanded our global capacity in the wireless market and now have production capability in Latin America and Europe. We continue to experience aggressive competition in the wireless market. GROSS PROFIT (NET SALES LESS COST OF SALES) Gross profit for the year ended December 31, 2001 was $179.6 million, compared to $251.1 million for 2000, a decrease of 28%. Gross profit margin decreased over 200 basis points to 24.3% for the year ended December 31, 2001, compared to 26.4% for 2000. The decreases in gross profit and gross profit margin were primarily due to lower sales volumes. Changes in material costs did not have a significant impact on 2001 gross profit margin. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expense for the year ended December 31, 2001 increased $2.3 million, or 3%, to $83.5 million, from 2000. The year-over-year increase in SG&A expense was primarily due to increased charges for doubtful accounts and ongoing investment in our information technology infrastructure. We recorded charges for doubtful accounts in the amount of approximately $6.5 million in 2001 compared to $4.5 million in 2000. We believe we have taken appropriate charges for doubtful accounts as a result of the difficult market environment based on our analysis of customer financial difficulties, age of receivable balances, and other relevant factors. We plan to continue investing in our information technology infrastructure in order to further differentiate our service model through technology. As a percentage of net sales, SG&A expense was 11.3% for the year ended December 31, 2001 compared to 8.5% for the year ended December 31, 2000. The increase in SG&A expense as a percentage of net sales was primarily due to sales declining faster than sales and marketing expenses, as well as the factors discussed above. We intend to continue to fund domestic and international sales and marketing efforts in order to enhance our competitive position around the world in anticipation of improving global economic conditions. 19 RESEARCH AND DEVELOPMENT Research and development expense as a percentage of net sales decreased to 1.0% for the year ended December 31, 2001, compared to 1.9% for the year ended December 31, 2000. This decrease was primarily due to the substantial completion of certain aspects of our vertical integration projects for bimetallic wire fabrication and fine wire drawing in 2001. During 2001, our major projects consisted primarily of research and engineering activity related to the production of copper clad metals required to advance the design of those materials and related processes to the point that they meet specific functional and economic requirements and are ready for full-scale manufacturing. We have undertaken these projects as part of our vertical integration strategy in an effort to reduce materials costs and reliance on limited sources of key raw materials. These projects were in process as of December 31, 2001 and are expected to continue into 2002. In addition, we entered into cross-licensing arrangements with Furukawa in 2001, providing us with access to key technology for communications cable, especially fiber optic cable, that has taken years to develop. TERMINATED ACQUISITION COSTS Our acquisition of an 18.4% ownership interest in OFS BrightWave as of November 16, 2001 was restructured from a previously contemplated joint venture arrangement announced July 24, 2001. Under the originally contemplated arrangement, we would have formed two joint ventures with Furukawa to acquire certain fiber cable and transmission fiber assets of Lucent's OFS Group. Given the uncertain economic environment and severe downturn in the telecommunications market as well as associated difficulties in the financing markets following the September 11, 2001 tragedy, we agreed with Furukawa to restructure the joint venture arrangements, resulting in a reduced ownership participation for us. As a result of the restructuring of this venture, we recorded pretax charges of approximately $8 million, or $0.09 per diluted share, net of tax, during 2001, related to financing and formation costs of the original joint venture arrangements, which are not capitalizable as part of our investment in the restructured venture. IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS During 2001, we took a number of steps to manage costs and evaluated all aspects of our business in response to challenging industry conditions. As a result of our review, we recorded pretax charges of approximately $13 million, or $0.18 per diluted share, net of tax, during the year ended December 31, 2001 related to the impairment of certain assets. Management identified specific assets that were determined to have no future use in our operations and assets whose anticipated undiscounted future cash flows were less than their carrying values. These impairment adjustments included equipment charges and a write-down of our Kings Mountain facility, which was under construction. Equipment that was intended for the Kings Mountain facility is expected to be redeployed overseas. The impairment charges also included the write-off of an investment in a wireless infrastructure project management company, now in the process of being liquidated, whose fair value was determined to be zero. The tax benefit of the capital loss arising from impairment of this investment has been offset by a valuation allowance due to uncertainty about our ability to utilize this tax deduction. 20 OTHER INCOME (EXPENSE), NET Other income (expense), net for the year ended December 31, 2000 included a pretax gain of $517 thousand related to the final liquidation of a closed Australian joint venture. This joint venture was completely dissolved as of December 29, 2000, when the deregistration period required by the Australian legal authorities expired. NET INTEREST EXPENSE Net interest expense for the year ended December 31, 2001 was $7.5 million, compared to $9.7 million for 2000. Our weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, was 4.61% as of December 31, 2001, compared to 5.14% as of December 31, 2000. The decrease in net interest expense was primarily due to lower average outstanding balances on long-term debt and lower variable interest rates. INCOME TAXES Our effective income tax rate was 37% for the year ended December 31, 2001 compared to 38% for 2000. The decrease in our effective income tax rate was primarily a result of certain tax savings strategies. The benefit of these strategies was offset by valuation allowances established for deferred tax assets related to a capital loss carryforward on an investment and a foreign net operating loss carryforward, the realization of which is considered to be uncertain. We expect the effective income tax rate for 2002 to remain at approximately 37%. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC For the six week period from November 17, 2001 to December 31, 2001, our 18.4% equity interest in the losses of OFS BrightWave was approximately $11 million, pretax. Since OFS BrightWave has elected to be taxed as a partnership, we have recorded a tax benefit of approximately $4 million related to our 18.4% equity interest in the flow-through losses. The losses of approximately $61 million incurred by OFS BrightWave during the six-week period ended December 31, 2001 were impacted by nonrecurring startup and organizational costs of approximately $15 million, related to the write-off of in-process research and development, separation from Lucent and commencement of independent operations. OFS BrightWave operates in the same markets we do and its financial results were also adversely affected by the downturn in the global economy and the telecommunications industry. In addition, OFS BrightWave is party to manufacturing and supply agreements with OFS Fitel, LLC, which is wholly owned by Furukawa. As a result of Furukawa's controlling interest in both ventures, it has significant influence over the structure and pricing of these agreements. Future changes in these terms, over which we have limited influence, could have a material impact on the profitability of OFS BrightWave and ultimately on our results of operations and financial condition. Due primarily to the difficult market environment for certain telecommunications products and challenging global economic conditions, we expect ongoing pricing pressure and weak demand industry wide for fiber optic cable products during 2002. Based on these expectations, we expect that OFS BrightWave will incur losses for 2002. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 WITH THE YEAR ENDED DECEMBER 31, 1999 NET SALES Net sales for the year ended December 31, 2000 increased $201.1 million or 27% to $950.0 million, from 1999. The increase in net sales was primarily driven by strong sales of broadband and fiber optic cable for HFC applications. Higher sales volume, combined with price increases on certain HFC products, accounted for the majority of the year-over-year sales increase. 21 The following table presents (in millions) our revenues by broad product group as well as domestic versus international sales for the years ended December 31, 2000 and 1999:
2000 Net % of 2000 Net 1999 Net % of 1999 Sales Sales Sales Net Sales ---------------------------------------------------------- Broadband/Video Products $ 723.8 76.2 % $ 557.4 74.4 % LAN Products 85.3 9.0 87.3 11.7 Wireless & Other Telecom Products 140.9 14.8 104.2 13.9 ---------------------------------------------------------- Total worldwide sales $ 950.0 100.0 % $ 748.9 100.0 % ========================================================== Domestic sales $ 717.6 75.5 % $ 571.2 76.3 % International sales 232.4 24.5 177.7 23.7 ---------------------------------------------------------- Total worldwide sales $ 950.0 100.0 % $ 748.9 100.0 % ==========================================================
For the year ended December 31, 2000, international sales increased 31% compared to 1999, mainly due to robust demand for HFC products around the world, with particular strength in the Latin American region. Net sales of Broadband/Video Products for the year ended December 31, 2000 increased $166.4 million or 30% to $723.8 million, from 1999. The increase in sales of Broadband/Video Products resulted primarily from strong sales of broadband cable to domestic telecommunications companies and cable television system operators. Most of the increase was attributable to volume with modest price increases on certain products and slight improvement in product mix. Domestic Broadband/Video sales grew approximately 29% year over year, led by strong sales of fiber optic cable. Net sales of LAN Products for the year ended December 31, 2000 decreased $2 million or 2% to $85.3 million, from 1999. The decrease in sales of LAN Products was primarily driven by declining unit volume and some decline in prices, offset partially by a favorable shift to more enhanced products with higher average selling prices. The year-over-year unit volume decline in sales of LAN Products was primarily due to a buildup of distribution channel inventory in the first half of 2000, which slowed sales in the second half of the year. We began implementing a comprehensive performance improvement plan for our LAN Products group during the fourth quarter of 2000. This plan included, among other things, reorganizing LAN sales and operational management as well as ongoing efforts to reduce distribution channel inventory, improve efficiency, and increase the velocity of the manufacturing and distribution cycle. Net sales of Wireless and Other Telecom Products for the year ended December 31, 2000 increased $36.7 million or 35% to $140.9 million, from 1999. This increase was primarily due to growth in sales of both telephone central office products and our newest-generation wireless cables. Other Telecom Products declined in terms of volume, but this decline was more than offset by improved product mix. The volume of Wireless Products sold increased year over year, but this increase was somewhat reduced by an unfavorable shift in product mix and declining prices. GROSS PROFIT (NET SALES LESS COST OF SALES) Gross profit for the year ended December 31, 2000 was $251.1 million, compared to $200.1 million for 1999, an increase of 25%. Gross profit margin decreased slightly to 26.4% for the year ended December 31, 2000, compared to gross profit margin of 26.7% for 1999. 22 While price increases for HFC products had a positive effect on gross profit margin during 2000, they were more than offset by the combination of lower prices for LAN Products, the rising cost of key materials, and reduced manufacturing efficiency resulting from capacity expansions. During 2000, supplies of key materials, such as bimetallic center conductors and optical fiber were tight. A major focus for us in 2000 was the acceleration of internal production of bimetallic center conductors for coaxial cables. While the ramp up of production progressed slower than anticipated, we made significant progress improving output in this project in the second half of 2000. SELLING, GENERAL AND ADMINISTRATIVE SG&A expense for the year ended December 31, 2000 was $81.2 million, compared to $68.9 million for 1999. As a percentage of net sales, SG&A expense was 8.5% for the year ended December 31, 2000 and 9.2% for the year ended December 31, 1999. The absolute amount of SG&A expense increased over the prior period as a result of the expansion of sales and marketing efforts to support developing products and sales growth targets. However, as a percentage of net sales, SG&A expense decreased in 2000 compared to 1999, as a result of increased sales levels and effective cost management efforts. RESEARCH AND DEVELOPMENT Research and development expense as a percentage of net sales increased to 1.9% for the year ended December 31, 2000, compared to 1.1% for the year ended December 31, 1999. This increase was primarily due to our vertical integration projects for bimetallic wire fabrication and fine wire drawing. We have undertaken these projects as part of our vertical integration strategy in an effort to reduce materials costs and reliance on limited sources of key raw materials. OTHER INCOME (EXPENSE), NET Other income (expense), net for the year ended December 31, 2000 included a pretax gain of $517 thousand related to the final liquidation of a closed Australian joint venture. This joint venture was completely dissolved as of December 29, 2000, when the deregistration period required by the Australian legal authorities expired. NET INTEREST EXPENSE Net interest expense for the year ended December 31, 2000 was $9.7 million, compared to $9.6 million for 1999. Our weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, was 5.14% as of December 31, 2000, compared to 4.82% as of December 31, 1999. INCOME TAXES Our effective income tax rate was 38% for the year ended December 31, 2000 and 37% for 1999. This slight increase was primarily due to the dilution of our foreign sales corporation tax benefit, a result of strong domestic sales and increasing sales from our Belgium facility, and higher tax rates in foreign jurisdictions, particularly Belgium. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity both on a short-term and long-term basis are cash flows provided by operations and borrowing capacity under credit facilities. Reduced sales and profitability could reduce the availability of cash provided by operations. In addition, increases in sales and accounts receivable could reduce our operating cash flows in the short term until cash collections catch up to the higher level of billings. 23 Cash provided by operations increased $113.2 million, or 252%, to $158.2 million for the year ended December 31, 2001, from 2000. This increase in operating cash flow was primarily due to reduced working capital on lower sales. The most significant impact on operating cash flow during 2001 was derived from collections of accounts receivable in excess of billings. Working capital decreased 5% to $199.1 million at December 31, 2001, from $209.1 million at December 31, 2000. The decrease in working capital was primarily due to lower accounts receivable, resulting from collections in excess of billings due to declining sales. Lower inventory levels resulting from reduced demand for our products also contributed to reduced working capital. The decrease in other accrued liabilities in 2001, which increased working capital, was primarily due to lower accrued compensation costs related to employee incentive plans. During the year ended December 31, 2001, we invested $70.8 million in equipment and facilities compared to $98.6 million in 2000. The capital spending during 2001 and 2000 was primarily for projects related to vertical integration, capacity expansion, and equipment upgrades. We have completed an aggressive three-year capacity expansion program that increased our overall production capability in order to position ourselves to meet anticipated worldwide demand for HFC products. While we may place additional production capability in important international markets, we expect capital expenditures to remain at a level below depreciation and amortization expense for the next several years. We currently expect capital expenditures to be in the range of $25 to $30 million in 2002, primarily for global capacity expansion and information technology initiatives, depending upon business conditions. As of December 31, 2001, we had committed funds of approximately $3.1 million under purchase orders and contracts related to vertical integration projects and equipment and capacity upgrades to meet current and anticipated future business demands. During the fourth quarter of 2001, we made a strategic investment by joining with Furukawa to acquire an interest in a portion of the optical fiber and fiber cable business of Lucent's OFS Group. We acquired an 18.4% ownership interest, valued at $173.4 million in OFS BrightWave, which includes transmission fiber and fiber cable manufacturing capabilities at a 2.9 million square foot facility in Norcross, Georgia, as well as facilities in Germany and Brazil and an interest in a joint venture in Carrollton, Georgia. The acquisition of our $173.4 million ownership interest and a $30 million note receivable was financed in a noncash transaction by issuing 10.2 million shares of CommScope, Inc. common stock valued at $203.4 million to Lucent. We also incurred direct costs of acquisition of $4.8 million in 2001, which were capitalized in our investment balance as of December 31, 2001. Although we are not required to make any additional cash investments in the form of loans or capital contributions to OFS BrightWave, our failure to do so could result in the dilution of our ownership percentage. In addition, we have a contractual right to sell our ownership interest to Furukawa in 2004 for a cash payment to us of our original $173.4 million capital investment and an acceleration of repayment of the note receivable. OFS BrightWave is party to manufacturing and supply agreements with OFS Fitel, LLC, which is wholly owned by Furukawa. As a result of Furukawa's controlling interest in both ventures, it has significant influence over the structure and pricing of these agreements. Future changes in these terms, over which we have limited influence, could have a material impact on the profitability of OFS BrightWave and ultimately on the results of our operations and financial condition. In addition, we are party to an optical fiber supply agreement with OFS Fitel, LLC which provides us with another source for our optical fiber requirements. The pricing under this arrangement is based on market prices, adjusted periodically as agreed upon by the parties. We made no purchases under this supply agreement during 2001. During 2000, we made an investment of approximately $3.8 million in a wireless infrastructure project management company. Our investment in this company, now in the process of being liquidated, was determined to have no realizable value by the end of 2001, and was completely written off as an impaired asset. Our revolving credit agreement, which expires in December 2002, provides a total of $350 million in revolving credit commitments in the form of loans and letters of credit. Our available borrowing capacity under the revolving credit agreement, determined on a quarterly basis, is based on certain financial ratios which are affected by the level of long-term debt outstanding and our profitability. As of December 31, 2001, we had no outstanding indebtedness under this revolving credit agreement and our available borrowing capacity was approximately $269 million. We owed total long-term debt of $194.6 million, or 24% of our book capital structure, defined as long-term debt and total stockholders' equity, as of December 31, 2001, compared to $227.4 million, or 38% of our book capital structure, as of December 31, 2000. The decrease in long-term debt during 2001 was primarily due to the repayment of $30 million under our revolving credit agreement, in addition to repayments of $2 million and favorable foreign currency transaction gains on our Eurodollar Credit Agreement of approximately $1 million, which were recorded to accumulated other comprehensive loss. 24 Our revolving credit agreement contains covenants requiring us to maintain a total debt to EBITDA ratio, a net worth maintenance ratio, and an interest expense ratio. Our performance under these covenants could impact our cost of funds and our noncompliance with these covenants could negatively impact our access to funds available under that facility. We were in compliance with these covenants as of December 31, 2001. However, we expect the market for fiber optic cable to remain difficult during 2002, and if our share of losses in OFS BrightWave is significant, we may be at risk of noncompliance with these covenants. This revolving credit agreement expires in December 2002 and we do not currently anticipate difficulty securing new financing on acceptable terms. MARKET RISK We have established a risk management strategy that includes the reasonable use of derivative and nonderivative financial instruments primarily to manage our exposure to market risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. Derivative financial instruments which may be used by us, include commodity pricing contracts, foreign currency exchange contracts, and contracts hedging exposure to interest rates. Our policy is to designate all derivatives as hedges. We do not use derivative financial instruments for trading purposes, nor do we engage in speculation. Materials, in their finished form, account for a large portion of our cost of sales. These materials, such as fabricated aluminum, plastics, bimetals, copper and optical fiber, are subject to changes in market price as they are linked to the commodity markets. Management attempts to mitigate these risks through effective requirements planning and by working closely with our key suppliers to obtain the best possible pricing and delivery terms. However, increases in the prices of certain commodity products could result in higher overall production costs. Approximately 23% of our 2001 sales were to customers located outside the United States. Although we primarily bill customers in foreign countries in US dollars, a portion of our sales are denominated in currencies other than the US dollar, particularly sales from our foreign subsidiaries. Significant changes in foreign currency exchange rates could adversely affect our international sales levels and the related collection of amounts due. In addition, a significant decline in the value of currencies used in certain regions of the world as compared to the US dollar could adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. The 1999 acquisition of our Belgian subsidiary created a specific market risk that a decline in the value of the euro compared to the US dollar could adversely affect our net investment in that subsidiary. Our Eurodollar Credit Agreement, which is denominated in euros, serves as a partial hedge of our net investment in the Belgian subsidiary. Our investment in Brazil during 2000 created a new foreign subsidiary and a specific market risk that a decline in the value of the Brazilian real compared to the US dollar could adversely affect our net investment in that subsidiary. We continue to evaluate alternatives to help us reasonably manage the market risk of our net investment in the Brazilian subsidiary. 25 As of December 31, 2001 and 2000, the only derivative financial instrument outstanding was an interest rate swap agreement that serves as a fixed-rate hedge of the variable-rate borrowings under our Eurodollar Credit Agreement, as required under the covenants of this term loan. The fair value of the interest rate swap agreement outstanding at December 31, 2001 and 2000 was not material to our financial position. At December 31, 2001, we were continuing to evaluate hedging alternatives related to foreign currency exposures. In addition, we evaluated our commodity pricing exposures and concluded that it was not currently practical to use derivative financial instruments to hedge our current commodity price risks. Our nonderivative financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, and debt instruments. At December 31, 2001 and 2000, the carrying values of each of the financial instruments recorded on our balance sheet were considered representative of their respective fair values due to their variable interest rates and / or short terms to maturity, with the exception of our convertible debt, which was recorded in the financial statements at $172.5 million, but had a fair value of $136.7 million at December 31, 2001 and $122.5 million at December 31, 2000. Fair value of our debt is estimated using discounted cash flow analysis, based on our current incremental borrowing rates for similar types of arrangements, or quoted market prices whenever available. The following tables summarize our market risks associated with long-term debt and foreign currency exposure as of December 31, 2001 and 2000. The tables present principal and interest cash outflows and related interest rates by year of maturity. Variable interest rates for each year represent the interest rate effective for the related loan as of December 31, 2001 for the first table and as of December 31, 2000 for the second table. However, the interest rate on the Eurodollar Credit Agreement for both years is fixed at 4.53%, since we have designated an interest rate swap agreement as a fixed-rate hedge of the variable rate borrowings under this agreement, as required by its terms. The interest cash outflows for the Eurodollar Credit Agreement, disclosed below, include the effect of the interest rate swap agreement, which effectively converts the variable interest payments to a fixed-rate basis. In addition, foreign currency exchange rates on our Eurodollar Credit Agreement, for both principal and interest payments, are based on the exchange rate as of December 31, 2001 for the first table and as of December 31, 2000 for the second table. The tables assume payments will be made in accordance with due dates in the respective agreements and no prepayment of any amounts due, with the exception of the prepayment of $30 million under our revolving credit agreement in early 2001. 26 The tabular format used below does not reflect our option to redeem all or a portion of the $172.5 million convertible notes at any time on or after December 15, 2002 at redemption prices specified in the indenture, or our option to prepay the Eurodollar Credit Agreement in whole or in part at any time prior to the due date of March 1, 2006. Long-term Debt Principal and Interest Payments by Year ($ in millions) As of December 31, 2001
2002 2003 2004 2005 2006 There- Total Fair after Value ----------------------------------------------------------------------------------- Fixed rate ($US) $ 6.9 $ 6.9 $ 6.9 $ 6.9 $179.4 $ -- $207.0 $136.7 Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% -- Variable rate ($US) $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 12.4 $13.4 $10.8 Average interest rate 2.13% 2.13% 2.13% 2.13% 2.13% 2.13% Fixed rate (EUR) $ 3.1 $ 3.0 $ 2.9 $ 2.7 $ 0.7 $ -- $12.4 $11.3 Average interest rate 4.53% 4.53% 4.53% 4.53% 4.53% -- As of December 31, 2000 2001 2002 2003 2004 2005 There- Total Fair after Value ----------------------------------------------------------------------------------- Fixed rate ($US) $ 6.9 $ 6.9 $ 6.9 $ 6.9 $ 6.9 $ 179.4 $213.9 $122.5 Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Variable rate ($US) $30.2 $ -- $ -- $ -- $ -- $ -- $ 30.2 $ 30.0 Average interest rate 7.02% -- -- -- -- -- Variable rate ($US) $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 17.3 $ 20.8 $ 10.8 Average interest rate 6.66% 6.66% 6.66% 6.66% 6.66% 6.66% Fixed rate (EUR) $ 2.7 $ 3.2 $ 3.2 $ 3.1 $ 2.9 $ 0.7 $ 15.8 $ 14.1 Average interest rate 4.53% 4.53% 4.53% 4.53% 4.53% 4.53%
27 CONTRACTUAL OBLIGATIONS The following table summarizes our significant contractual obligations as of December 31, 2001 (in millions):
Amount of Payments Due per Period ----------------------------------------- Contractual Obligations Total Less than 1-3 years 4-5 years After 5 Payments Due 1 year years ------------------------------------------------------- Long-term debt $ 194.6 $ 2.7 $ 5.4 $ 175.7 $ 10.8 Operating leases (a) 29.1 3.9 6.1 3.8 15.3 ------------------------------------------------------- Total contractual cash obligations $ 223.7 $ 6.6 $ 11.5 $ 179.5 $ 26.1 =======================================================
(a) The contractual obligations related to operating leases include payments due under a five-year tax-advantaged operating lease for our corporate office building. At the end of the initial lease term, or renewal term(s) if renewed, if we should decide not to purchase the facility for the total construction cost of $12.8 million, we are obligated to pay a final lease payment of approximately $11 million and to market the facility on behalf of the lessor. Any proceeds received from the sale of the facility would first be used to reimburse the lessor for the difference between the total construction cost of the facility and the final lease payment. Any remaining sales proceeds would be retained by us. EFFECTS OF INFLATION We continually attempt to minimize any effect of inflation on earnings by controlling our operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material impact on our results of operations. The principal raw materials purchased by us (fabricated aluminum, plastics, bimetals, copper and optical fiber) are subject to changes in market price as these materials are linked to the commodity markets. To the extent that we are unable to pass on cost increases to customers, the cost increases could have a significant impact on the results of our operations. OTHER We are either a plaintiff or a defendant in pending legal matters in the normal course of business; however, we believe none of these legal matters will have a materially adverse effect on our financial statements upon final disposition. In addition, we are subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. Our manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on our financial statements. NEWLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Both statements are effective for us on January 1, 2002. SFAS No. 141 28 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangible assets with indefinite useful lives and also requires at least an annual assessment for impairment by applying a fair-value-based test. Intangible assets with definite useful lives will continue to be amortized over their useful lives. The adoption of these statements will have a material impact on our results of operations and financial position after December 31, 2001 when goodwill will no longer be amortized. The pretax impact on our results of operations and financial position of adopting a nonamortization approach to accounting for goodwill under SFAS No. 142 is expected to be approximately $5.4 million per year. We are currently assessing the impact of the other provisions of these two statements, which will be adopted in 2002. In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if we are legally obligated to perform retirement activities at the end of the related asset's life. We are currently assessing the impact of this statement, which will be effective for us on January 1, 2003. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No.144 is effective for us on January 1, 2002. The initial adoption is not expected to have a material impact on our financial statements. EUROPEAN MONETARY UNION -- EURO Effective January 1, 1999, 12 member countries of the European Monetary Union established fixed conversion rates between their existing sovereign currencies, and adopted the euro as their new common legal currency. As of that date, the euro began trading on currency exchanges. The legacy currencies of the participating countries remained legal tender for a transition period between January 1, 1999 and January 1, 2002. We conduct business in member countries. During the transition period, cashless payments (for example, wire transfers) could be made in the euro, and parties to individual transactions could elect to pay for goods and services using either the euro or the legacy currency. Between January 1, 2002 and February 28, 2002, the participating countries introduced euro notes and coins and will eventually withdraw all legacy currencies so that they will no longer be available. European legislation provides that, unless otherwise agreed, the introduction of the euro will not, by itself, give any party to a contract the right to terminate the contract, or to demand renegotiation of the terms. As of December 31, 2001, we believe we have adequately addressed the issues involved with the introduction of the euro. Among the issues which we faced were the assessment and conversion of information technology systems to allow for transactions to take place in both the legacy currencies and the euro and the eventual elimination of legacy currencies. We have also modified certain existing contracts, if required, and have revised our pricing/marketing strategies in the affected European markets to the extent necessary for the introduction of the euro. In addition, our Belgian subsidiary successfully completed the conversion of its financial systems and share capital to the euro. We do not believe the euro conversion has had or will have a materially adverse effect on our business, results of operations, cash flows or financial condition. FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K that are other than historical facts are intended to be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws and include but are not limited to those 29 statements relating to sales and earnings expectations, expected demand, cost and availability of key raw materials, internal production capacity and expansion, competitive pricing, relative market position and outlook. While we believe such statements are reasonable, the actual results and effects could differ materially from those currently anticipated. These forward-looking statements are identified, including, without limitation, by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "think," "thinks" and "scheduled" and similar expressions. These statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, industry excess capacity, financial performance of OFS BrightWave, pricing and acceptance of our products, ability of our customers to secure adequate financing or to pay, global economic conditions, expected demand from AT&T Broadband and others, cost and availability of key raw materials (including without limitation bimetallic center conductors, optical fibers, fine aluminum wire and fluorinated-ethylene-propylene which are available only from limited sources), successful operation of bimetal manufacturing and other vertical integration activities, successful expansion and related operation of our facilities, margin improvement, developments in technology, industry competition, achievement of sales, growth, and earnings goals, ability to obtain financing and capital on commercially reasonable terms, regulatory changes affecting our business, foreign currency fluctuations, technological obsolescence, the ability to achieve reductions in costs, the ability to integrate acquisitions, our participation in joint ventures, international economic and political uncertainties, possible disruption due to terrorist activity or armed conflict and other factors discussed. Actual results may also differ due to changes in communications industry capital spending, which is affected by a variety of factors, including, without limitation, general economic conditions, acquisitions of communications companies by others, consolidation within the communications industry, the financial condition of communications companies and their access to financing, competition among communications companies, technological developments, and new legislation and regulation of communications companies. These and other factors are discussed in greater detail in Exhibit 99.1 to this Form 10-K. The information contained in this Form 10-K represents our best judgment at the date of this report based on information currently available. However, we do not intend, and are not undertaking any duty or obligation, to update this information to reflect developments or information obtained after the date of this report. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE # Independent Auditors' Report........................................................32 Consolidated Statements of Income for the Years ended December 31, 2001, 2000 and 1999.............................................33 Consolidated Balance Sheets as of December 31, 2001 and 2000........................34 Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999.............................................35 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years ended December 31, 2001, 2000 and 1999..................36 Notes to Consolidated Financial Statements..........................................37 - 59 Schedule II - Valuation and Qualifying Accounts.....................................60
31 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of CommScope, Inc. We have audited the accompanying consolidated balance sheets of CommScope, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of OFS BrightWave, LLC, the Company's investment in which is accounted for by use of the equity method. The Company's equity of $161,640 thousand in OFS BrightWave, LLC's net assets at December 31, 2001 and of $6,922 thousand in that company's net loss for the period from November 17, 2001 through December 31, 2001 are included in the accompanying consolidated financial statements. The financial statements of OFS BrightWave, LLC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such company, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of CommScope, Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, 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. /s/ Deloitte & Touche LLP March 18, 2002 32 COMMSCOPE, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31, ------------------------------------------------------- 2001 2000 1999 ---------------- ----------------- ------------------ Net sales (Note 17) $ 738,498 $ 950,026 $ 748,914 ---------------- ----------------- ------------------ Operating costs and expenses: Cost of sales (Note 17) 558,854 698,972 548,808 Selling, general and administrative 83,523 81,217 68,869 Research and development 7,117 18,419 8,332 Amortization of goodwill 5,365 5,367 5,388 Terminated acquisition costs (Notes 3 and 17) 7,963 - - Impairment charges for fixed assets and investments (Note 5) 12,802 - - ---------------- ----------------- ------------------ Total operating costs and expenses 675,624 803,975 631,397 ---------------- ----------------- ------------------ Operating income 62,874 146,051 117,517 Other income (expense), net (Note 4) (191) 484 736 Interest expense (8,497) (10,214) (10,230) Interest income (Note 17) 1,027 559 604 ---------------- ----------------- ------------------ Income before income taxes and equity in losses of OFS BrightWave, LLC 55,213 136,880 108,627 Provision for income taxes (20,426) (51,993) (40,550) ---------------- ----------------- ------------------ Income before equity in losses of OFS BrightWave, LLC 34,787 84,887 68,077 Equity in losses of OFS BrightWave, LLC (Note 3) (6,922) - - ---------------- ----------------- ------------------ Net income $ 27,865 $ 84,887 $ 68,077 ================ ================= ================== Net income per share (Note 2): Basic $ 0.53 $ 1.66 $ 1.34 Assuming dilution $ 0.52 $ 1.60 $ 1.31 Weighted average shares outstanding (Note 2): Basic 52,692 51,142 50,669 Assuming dilution 53,500 56,047 52,050 See notes to consolidated financial statements.
33 COMMSCOPE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As of December 31, ------------------------------------- 2001 2000 ----------------- ----------------- ASSETS Cash and cash equivalents $ 61,929 $ 7,704 Accounts receivable, less allowance for doubtful accounts of $12,599 and $9,187, respectively 105,402 197,536 Inventories (Note 6) 47,670 63,763 Prepaid expenses and other current assets (Notes 5 and 17) 12,724 3,364 Deferred income taxes (Note 12) 18,143 17,296 ----------------- ----------------- Total current assets 245,868 289,663 Property, plant and equipment, net (Notes 5, 7 and 17) 277,169 251,356 Goodwill, net of accumulated amortization of $59,493 and $54,140, respectively 151,307 156,685 Other intangibles, net of accumulated amortization of $37,421 and $34,796, respectively 11,344 13,969 Investment in and advances to OFS BrightWave, LLC (Notes 3, 7 and 18) 196,860 -- Other assets (Notes 5, 9 and 10) 6,457 9,509 ----------------- ----------------- Total Assets $ 889,005 $ 721,182 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 16,339 $ 39,958 Other accrued liabilities (Note 8) 27,753 38,481 Current portion of long-term debt (Note 9) 2,651 2,120 ----------------- ----------------- Total current liabilities 46,743 80,559 Long-term debt, less current portion (Note 9) 191,918 225,316 Deferred income taxes (Note 12) 22,899 24,006 Other noncurrent liabilities (Note 11) 20,931 16,781 ----------------- ----------------- Total Liabilities 282,491 346,662 Commitments and contingencies (Note 16) Stockholders' Equity (Notes 13 and 14): Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at December 31, 2001 and 2000 -- -- Common stock, $.01 par value; Authorized shares: 300,000,000; Issued and outstanding shares: 61,688,256 at December 31, 2001; 51,263,703 at December 31, 2000 (Note 3) 617 513 Additional paid-in capital (Note 3) 381,823 175,803 Retained earnings 228,667 200,802 Accumulated other comprehensive loss (Notes 10 and 12) (4,593) (2,598) ----------------- ----------------- Total Stockholders' Equity 606,514 374,520 ----------------- ----------------- Total Liabilities and Stockholders' Equity $ 889,005 $ 721,182 ================= ================= See notes to consolidated financial statements.
34 COMMSCOPE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 ---------------- ---------------- --------------- OPERATING ACTIVITIES: Net income $ 27,865 $ 84,887 $ 68,077 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 40,529 35,799 29,295 Impairment charges for fixed assets and investments 12,802 -- -- Equity in losses of OFS BrightWave, LLC 11,290 -- -- Deferred income taxes (2,262) 1,350 (98) Tax benefit from stock option exercises 672 4,195 3,201 Changes in assets and liabilities: Accounts receivable 91,173 (70,450) (37,367) Inventories 16,157 (23,912) (5,340) Prepaid expenses and other current assets (8,669) (971) 1,356 Accounts payable and other accrued liabilities (34,872) 10,428 18,167 Other noncurrent liabilities 4,165 2,565 2,633 Other (682) 1,033 (505) ---------------- ---------------- --------------- Net cash provided by operating activities 158,168 44,924 79,419 INVESTING ACTIVITIES: Additions to property, plant and equipment (70,841) (98,640) (57,149) Acquisition of business in Belgium -- -- (17,023) Acquisition costs related to investment in OFS BrightWave, LLC (4,763) -- -- Investment in unconsolidated affiliate -- (3,750) -- Proceeds from disposal of fixed assets 1,071 504 314 ---------------- ---------------- --------------- Net cash used in investing activities (74,533) (101,886) (73,858) FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facility (30,000) 30,000 (171,000) Principal payments on long-term debt (1,996) -- -- Proceeds from term loan facility for acquisition of business in Belgium -- -- 16,353 Proceeds from issuance of convertible notes -- -- 172,500 Debt issuance costs -- -- (5,084) Proceeds from exercise of stock options 2,914 4,737 8,030 ---------------- ---------------- --------------- Net cash provided by (used in) financing activities (29,082) 34,737 20,799 Effect of exchange rate changes on cash (328) (294) (266) ---------------- ---------------- --------------- Change in cash and cash equivalents 54,225 (22,519) 26,094 Cash and cash equivalents, beginning of year 7,704 30,223 4,129 ---------------- ---------------- --------------- Cash and cash equivalents, end of year $ 61,929 $ 7,704 $ 30,223 ================ ================ =============== See notes to consolidated financial statements.
35 COMMSCOPE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Year Ended December 31, ------------------------------------------------------- 2001 2000 1999 ----------------- ----------------- ----------------- Number of common shares outstanding: Balance at beginning of year 51,263,703 50,889,208 50,254,467 Issuance of shares to Lucent (Note 3) 10,200,000 - - Issuance of shares for stock option exercises 224,553 374,495 633,741 Issuance of shares to outside director -- -- 1,000 ----------------- ----------------- ----------------- Balance at end of year 61,688,256 51,263,703 50,889,208 ----------------- ----------------- ----------------- Common stock: Balance at beginning of year $ 513 $ 509 $ 503 Issuance of shares to Lucent (Note 3) 102 - - Issuance of shares for stock option exercises 2 4 6 ----------------- ----------------- ----------------- Balance at end of year $ 617 $ 513 $ 509 ----------------- ----------------- ----------------- Additional paid-in capital: Balance at beginning of year $ 175,803 $ 166,875 $ 155,631 Issuance of shares to Lucent (Note 3) 202,436 - - Issuance of shares for stock option exercises 2,912 4,733 8,024 Tax benefit from stock option exercises 672 4,195 3,201 Issuance of shares to outside director -- -- 19 ----------------- ----------------- ----------------- Balance at end of year $ 381,823 $ 175,803 $ 166,875 ----------------- ----------------- ----------------- Retained earnings: Balance at beginning of year $ 200,802 $ 115,915 $ 47,838 Net income 27,865 84,887 68,077 ----------------- ----------------- ----------------- Balance at end of year $ 228,667 $ 200,802 $ 115,915 ----------------- ----------------- ----------------- Accumulated other comprehensive loss: Balance at beginning of year $ (2,598) $ (1,955) $ - Other comprehensive loss (1,995) (643) (1,955) ----------------- ----------------- ----------------- Balance at end of year $ (4,593) $ (2,598) $ (1,955) ----------------- ----------------- ----------------- Total stockholders' equity $ 606,514 $ 374,520 $ 281,344 ================= ================= ================= Comprehensive income: Net income $ 27,865 $ 84,887 $ 68,077 Other comprehensive loss, net of tax: Foreign currency translation loss - foreign subsidiaries (761) (458) (1,411) Foreign currency transaction loss on long-term intercompany loans - foreign subsidiaries (1,832) (780) (1,323) Hedging gain on nonderivative instrument (Notes 10 and 12) 571 595 779 Effect of adopting SFAS No. 133 (Notes 10 and 12) 229 -- -- Loss on derivative financial instrument designated as a cash flow hedge (Notes 10 and 12) (202) -- -- ----------------- ----------------- ----------------- Total other comprehensive loss, net of tax (1,995) (643) (1,955) ----------------- ----------------- ----------------- Total comprehensive income $ 25,870 $ 84,244 $ 66,122 ================= ================= ================= See notes to consolidated financial statements.
36 COMMSCOPE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, UNLESS OTHERWISE NOTED) 1. BACKGROUND AND DESCRIPTION OF THE BUSINESS CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned subsidiaries and equity method investee, operates in the cable manufacturing business, with manufacturing facilities located in the United States, Europe and Latin America. CommScope, Inc. was incorporated in Delaware in January 1997. CommScope is a leading worldwide designer, manufacturer and marketer of a wide array of broadband coaxial cables and other high-performance electronic and fiber optic cable products for cable television, telephony, Internet access and wireless communications. Management believes CommScope is the world's largest manufacturer of coaxial cable for hybrid fiber coax (HFC) broadband networks. CommScope is also a leading supplier of coaxial, twisted pair, and fiber optic cables for premise wiring (local area networks), wireless and other communication applications. In late 2001, CommScope acquired an equity interest in an optical fiber and fiber cable manufacturing business (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The accompanying consolidated financial statements include CommScope, its wholly owned subsidiaries, and its equity-method investee. All material intercompany accounts and transactions are eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent amounts on deposit in banks and cash invested temporarily in various instruments with a maturity of three months or less at the time of purchase. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out ("FIFO") basis, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, including interest costs associated with qualifying capital additions. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line and accelerated methods. Average useful lives are 10 to 35 years for buildings and improvements and three to 10 years for machinery and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. GOODWILL, OTHER INTANGIBLES AND OTHER LONG-LIVED ASSETS Through December 31, 2001, goodwill was being amortized on a straight-line basis over 30 to 40 years. Other intangibles consist of patents and customer lists, which were being amortized on a straight-line basis over approximately 17 years. Effective January 1, 2002, the Company revised its amortization policies to comply with the relevant provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which prohibits amortization of goodwill and provides new guidance on the amortization of intangible assets. See further discussion below under "Impact of Newly Issued Accounting Standards." 37 When events or changes in circumstances, such as significant forecasted operating losses or a significant adverse change in legal factors or business climate, indicate that the carrying amount of goodwill may not be recoverable, the asset is reviewed by management for impairment. An impairment loss would be recognized if the carrying value exceeds the forecasted, undiscounted operating cash flows of the operating assets related to the goodwill being evaluated. The impairment loss to be recognized, if any, would be measured as the amount by which the carrying value exceeds fair value, estimated based on forecasted operating cash flows, discounted using a discount rate commensurate with the risks involved. If an impairment loss is recognized, the reduced carrying amount would be accounted for as the new cost and amortized over the remaining useful life, which would also be revised, if appropriate. Management believes there were no events or changes in circumstances during the year ended December 31, 2001 that would indicate that the carrying amount of goodwill may not be recoverable. Effective January 1, 2002, the Company revised its goodwill impairment assessment policy to comply with the relevant provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which provides new guidance on the evaluation of impairment of goodwill. See further discussion below under "Impact of Newly Issued Accounting Standards." Management continually reassesses the appropriateness of both the carrying value and remaining life of intangibles and other long-lived assets by assessing recoverability based on forecasted operating cash flows, on an undiscounted basis, and other factors. Management believes that, as of December 31, 2001, the carrying value and remaining life of intangibles and other long-lived assets is appropriate. See further discussion below under "Impact of Newly Issued Accounting Standards" and Note 5 for discussion of impairment charges for fixed assets and investments. LONG-TERM INVESTMENTS The Company occasionally makes strategic investments in companies that complement CommScope's business in order to gain operational and other synergies. Investments in corporate entities with less than a 20% voting interest are generally accounted for using the cost method. The Company uses the equity method to account for investments in corporate entities in which it has a voting interest of 20% to 50% and an other than minor to 50% ownership interest in partnerships and limited liability companies, or in which it otherwise has the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company's share of net earnings or losses of the investee, limited to the extent of the Company's investment in and advances to the investee, in addition to financial guarantees that create additional basis in the investee. The Company regularly monitors and evaluates the realizable value of its investments. If events and circumstances indicate that a decline in the value of an investment has occurred and is other than temporary, the Company reduces the carrying amount of the investment to fair value (see Note 5 for discussion of impairment charges for fixed assets and investments). INCOME TAXES Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax bases of assets and liabilities. Investment tax credits are recorded using the flow-through method. The Company records a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized. No provision is made for income taxes which may be payable if undistributed earnings of foreign subsidiaries were to be paid as dividends to CommScope. CommScope currently intends that such earnings will continue to be invested in those foreign subsidiaries. In addition, the Company does not provide for taxes related to the foreign currency transaction gains and losses on its long-term intercompany loans with foreign subsidiaries. These loans are not expected to be repaid in the foreseeable future and the foreign currency gains and losses are therefore recorded pretax to accumulated other comprehensive income or loss on the balance sheet. 38 STOCK OPTIONS Compensation cost for stock options is measured using the intrinsic value method of accounting. All stock options granted by the Company have option prices at least equal to the fair market value of the common stock at the date of grant, resulting in an intrinsic value of zero at the date of grant, and therefore no related compensation cost is recorded in the financial statements. REVENUE RECOGNITION The Company's primary source of revenues is from product sales to cable television system operators, telecommunications service providers, original equipment manufacturers and distributors. Service revenue from delivery of products shipped by Company owned trucks was not material to the Company's reported sales during 2001, 2000 or 1999. Revenue from sales of the Company's products shipped by nonaffiliated carriers is recognized at the time the goods are delivered and title passes, provided the earnings process is complete and revenue is measurable. Delivery is determined by the Company's shipping terms, which are primarily FOB shipping point. The Company recognizes revenue from sales of the Company's products shipped by Company owned trucks at the time the goods are delivered to the customer, regardless of the shipping terms. For all arrangements, revenue is recorded at the net amount to be received after deductions for estimated discounts, allowances, returns, and rebates. In addition, accruals are established for warranties and price protection programs with distributors at the time the related revenue is recognized. These estimates and reserves are adjusted as needed based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. SHIPPING AND HANDLING COSTS Amounts billed to a customer in a sale transaction related to shipping costs are included in net sales. All shipping costs incurred to transport products to the customer are recorded in cost of sales. Internal handling costs, which relate to activities to prepare goods for shipment, are recorded in selling, general and administrative expense and were approximately $3.2 million in 2001, $2.4 million in 2000 and $1.8 million in 1999. ADVERTISING COSTS Advertising costs are expensed in the period in which they are incurred. Advertising expense was $1.0 million in 2001, $1.4 million in 2000, and $1.1 million in 1999. RESEARCH AND DEVELOPMENT COSTS Research and development (R&D) costs are expensed in the period in which they are incurred. R&D costs include materials, equipment and facilities that have no alternative future use, depreciation on equipment and facilities currently used for R&D purposes, personnel costs, contract services, and reasonable allocations of indirect costs, if clearly related to an R&D activity. Expenditures in the pre-production phase of an R&D project are recorded in the income statement as research and development expense. However, costs incurred in the pre-production phase that are associated with output actually used in production are recorded in cost of sales. A project is considered finished with pre-production efforts when management determines that it has achieved acceptable levels of scrap and yield, which vary by project. Expenditures related to ongoing production are recorded in cost of sales. 39 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES CommScope is exposed to various risks resulting from adverse fluctuations in commodity prices, interest rates, and foreign currency exchange rates. CommScope's risk management strategy includes the use of derivative and nonderivative financial instruments primarily as hedges of these risks, whenever management determines their use to be reasonable and practical. This strategy does not permit the use of derivative financial instruments for trading purposes, nor does it allow for speculation. A hedging instrument may be designated as a fair value hedge to manage exposure to risks related to a firm commitment for the purchase of raw materials or a foreign-currency-denominated firm commitment for the purchase of equipment, or it may be designated as a cash flow hedge to manage exposure to risks related to a forecasted purchase of raw materials, variable interest rate payments, or a forecasted foreign-currency-denominated sale of product. In addition, the use of nonderivative financial instruments is limited to hedging fair value risk related to a foreign-currency-denominated firm commitment or a net investment in a foreign subsidiary. The Company's risk management strategy permits the reasonable and practical use of derivative hedging instruments such as forward contracts, options, cross currency swaps, certain interest rate swaps, caps and floors, and nonderivative hedging instruments such as foreign-currency-denominated loans. The Company recognizes all derivative financial instruments as assets and liabilities and measures them at fair value. All hedging instruments are designated and documented as either a fair value hedge, a cash flow hedge or a net investment hedge at inception. For fair value hedges, the change in fair value of the derivative instrument is recognized currently in earnings. To the extent the fair value hedging relationship is effective, the change in fair value on the hedged item is recorded as an adjustment to the carrying amount of the hedged item and recognized currently in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is recorded in accumulated other comprehensive income or loss, net of tax, and is recognized in the income statement when the hedged item affects earnings. Any ineffectiveness of a cash flow hedge is recognized currently in earnings. For net investment hedges, the effective portion of the change in carrying amount of the nonderivative instrument is recorded in accumulated other comprehensive income or loss, net of tax, and is recognized in the income statement only if there is a substantially complete liquidation of the investment in the foreign subsidiary. Any ineffectiveness of a net investment hedge is recognized currently in earnings. The effectiveness of designated hedging relationships is tested and documented on at least a quarterly basis. At December 31, 2001 and 2000, the Company had two hedges, one of which involved the use of a derivative financial instrument (see Note 10). The Company has elected and documented the use of the normal purchases and sales exception for normal purchases and sales contracts that meet the definition of a derivative financial instrument. FOREIGN CURRENCY TRANSLATION Approximately 23% of the Company's 2001 sales were to customers located outside of the United States. A portion of these sales were denominated in currencies other than the US dollar, particularly sales from the Company's foreign subsidiaries. The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities of these subsidiaries have been translated at the rates of exchange as of the balance sheet date. Translation gains and losses are recorded to accumulated other comprehensive income or loss. Aggregate foreign currency transaction gains and losses of the Company and its subsidiaries, such as those resulting from the settlement of foreign receivables or payables and short-term intercompany advances, were recorded to other income (expense), net in the statement of income and were not material to the results of the Company's operations during 2001, 2000, or 1999. Foreign currency transaction gains and losses related to long-term intercompany loans which are not expected to be settled in the foreseeable future are recorded to accumulated other comprehensive income or loss. 40 The Eurodollar Credit Agreement (see Note 9), which is designated and effective as a partial hedge of the Company's net investment in its Belgian subsidiary, is translated at the rate of exchange as of the balance sheet date. The transaction gains or losses on this loan are recorded, net of tax, to accumulated other comprehensive income or loss. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the applicable periods. Diluted net income per share is based on net income adjusted for after-tax interest and amortization of debt issuance costs related to convertible debt, if dilutive, divided by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options and convertible securities. Below is a reconciliation of weighted average common shares outstanding for basic net income per share to weighted average common and potential common shares outstanding for diluted net income per share:
Year Ended December 31, ------------------------------------- 2001 2000 1999 ------------ ----------- ------------ Numerator: Net income for basic net income per share $27,865 $84,887 $68,077 Convertible debt interest and amortization, net of tax (A) -- 4,714 -- ------------ ----------- ------------ Net income available to common stockholders for diluted net income per share $27,865 $89,601 $68,077 ============ =========== ============ Denominator: Weighted average number of common shares outstanding for basic net income per share 52,692 51,142 50,669 Effect of dilutive securities: Convertible debt (A) -- 3,580 -- Employee stock options (B) 808 1,325 1,381 ------------ ----------- ------------ Weighted average number of common and potential common shares outstanding for diluted net income per share 53,500 56,047 52,050 ============ =========== ============ (A) On December 15, 1999, the Company issued $172.5 million in convertible notes, which are convertible into shares of common stock at a conversion rate of 20.7512 shares per $1,000 principal amount. The effect of the assumed conversion of these notes is included in the calculation of net income per share, assuming dilution, for the year ended December 31, 2000 because it is dilutive. The effect of the assumed conversion of these notes was excluded from the computation of net income per share, assuming dilution, for the years ended December 31, 2001 and 1999 because it would have been antidilutive. For the year ended December 31, 2000, the dilutive effect of convertible debt on net income represents after-tax interest expense and amortization of deferred financing fees associated with this convertible debt. The dilutive effect of convertible debt on weighted average shares reflects the number of shares issuable upon conversion, assuming 100% conversion of all convertible notes as of the beginning of the year. See Note 9 for further discussion of convertible notes. (B) Options to purchase approximately 705 thousand common shares at prices ranging from $20.55 to $47.06 per share, were excluded from the computation of net income per share, assuming dilution, for the year ended December 31, 2001 because the options' exercise prices were greater than the average market price of the common shares. These options, which expire on various dates from 2009 through 2011, were still outstanding as of December 31, 2001. There were approximately 708 thousand common shares at prices ranging from $33.56 to $47.06 per share excluded from the computation of net income per share, assuming dilution, for the year ended December 31, 2000. There were no common shares excluded from the computation of net income per share, assuming dilution, for the year ended December, 31, 1999. For additional information regarding employee stock options, see Note 13.
41 USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. The Company bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary. Significant accounting estimates reflected in the Company's financial statements include the allowance for doubtful accounts, inventory excess and obsolescence reserves, warranty and distributor price protection reserves, reserves for sales returns, discounts, allowances, and rebates, income tax valuation allowances, and impairment reviews for investments, fixed assets, goodwill and other intangibles. Although these estimates are based on management's knowledge of and experience with past and current events and on management's assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results. CONCENTRATIONS OF RISK Nonderivative financial instruments used by the Company in the normal course of business include letters of credit and commitments to extend credit, primarily accounts receivable. These financial instruments involve risk, including the credit risk of nonperformance by the counterparties to those instruments, and the maximum potential loss may exceed the reserves provided in the Company's balance sheet. The Company manages its exposures to credit risk associated with financial instruments through credit approvals, credit limits and monitoring procedures. Although the Company sells to a wide variety of customers dispersed across many different geographic areas, sales to the largest domestic broadband service providers represented approximately 40% of net sales during 2001. At December 31, 2001, the Company's two largest customer receivable balances comprised approximately 26% of the Company's total trade accounts receivable. The Company estimates the allowance for doubtful accounts based on the actual payment history and individual circumstances of significant customers as well as the age of receivables. In management's opinion, the Company did not have significant unreserved risk of credit loss due to the nonperformance of customers or other counterparties related to amounts receivable. However, an adverse change in financial condition of a significant customer or group of customers or in the telecommunications industry could materially affect the Company's estimates related to doubtful accounts. The principal raw materials purchased by CommScope (fabricated aluminum, plastics, bimetals, copper and optical fiber) are subject to changes in market price as these materials are linked to the commodity markets. The Company attempts to mitigate these risks through effective requirements planning and by working closely with its key suppliers to obtain the best possible pricing and delivery terms. To the extent that CommScope is unable to pass on cost increases to customers, the cost increases could have a significant impact on the results of operations of CommScope. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2001 presentation. 42 IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Both statements are effective for the Company on January 1, 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangible assets with indefinite useful lives and also requires at least an annual assessment for impairment by applying a fair-value-based test. Intangible assets with definite useful lives will continue to be amortized over their useful lives. The adoption of these statements will have a material impact on the Company's results of operations and financial position after December 31, 2001 when goodwill will no longer be amortized. The pretax impact on the Company's results of operations and financial position of adopting a nonamortization approach to accounting for goodwill under SFAS No. 142 is expected to be approximately $5.4 million per year. The Company is currently assessing the impact of the other provisions of these two statements, which will be adopted in 2002. In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the Company is legally obligated to perform retirement activities at the end of the related asset's life. The Company is currently assessing the impact of this statement, which will be effective for the Company on January 1, 2003. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No.144 is effective for the Company on January 1, 2002. The initial adoption is not expected to have a material impact of the Company's financial statements. 3. ACQUISITION OF EQUITY INTEREST IN OFS BRIGHTWAVE, LLC Effective November 16, 2001, CommScope acquired an approximate 18.4% ownership interest in OFS BrightWave, LLC (OFS BrightWave), an optical fiber and fiber cable venture between CommScope and The Furukawa Electric Co., Ltd. of Japan ("Furukawa"). OFS BrightWave was formed to operate a portion of the optical fiber and fiber cable business ("OFS Group") acquired from Lucent Technologies Inc. ("Lucent"). The businesses acquired include transmission fiber and cable manufacturing capabilities at a facility in Norcross, Georgia, as well as facilities in Germany and Brazil and an interest in a joint venture in Carrollton, Georgia. CommScope expects its arrangements with Furukawa and its subsidiaries, including its investment in OFS BrightWave, to provide access to optical fiber, including premium fiber, under a supply agreement, enhance its technology platform with access to key intellectual property, and create a strategic partner in optical fiber and fiber cable manufacturing. CommScope issued 10.2 million unregistered shares of its common stock, valued at $19.94 per share, to Lucent to fund the acquisition of CommScope's interest in OFS BrightWave. The total proceeds of $203.4 million were used to acquire CommScope's 18.4% ownership interest in OFS BrightWave, valued at $173.4 million, and to purchase a $30 million interest bearing note receivable of the venture. The cost of initially issuing the shares to Lucent and an estimate of costs related to future registration of the shares, which totaled $850, have been recognized as a reduction of the total proceeds in additional paid-in capital. CommScope has a contractual right to sell its ownership interest to Furukawa within a limited period of time in 2004, for a cash payment to CommScope of CommScope's original $173.4 million capital investment and an acceleration of repayment of the note receivable. Although the Company's ownership interest in OFS BrightWave is less than 20%, the investment has been accounted for using the equity method since OFS BrightWave is organized as a limited liability company with characteristics of a partnership. CommScope capitalized $4.8 million of direct acquisition costs as part of its investment in OFS BrightWave. 43 CommScope's portion of the losses of OFS BrightWave for the period from November 17, 2001 through December 31, 2001 has been included in the consolidated financial statements of CommScope, Inc. for the year ended December 31, 2001. These results are net of elimination of intercompany profit in the amount of $191, net of tax, related to interest payments on the $30 million note receivable and reimbursement of acquisition-related expenses by OFS BrightWave (see Note 17). OFS BrightWave has elected to be taxed as a partnership, therefore the Company's income tax benefit from flow through losses has been recorded based on the Company's tax rates. The following table provides summary financial information for OFS BrightWave as of and for the six week period ended December 31, 2001: Income Statement Data: Net revenues $ 29,340 Gross profit (36,611) Loss from continuing operations (61,253) Net loss (61,253) Balance Sheet Data: Current assets $ 315,626 Noncurrent assets 921,647 Current liabilities 114,319 Other noncurrent liabilities 193,611 Minority interests 52,400 The reconciliation of CommScope's investment in and advances to OFS BrightWave compared to CommScope's equity interest in the net assets of OFS BrightWave as of December 31, 2001 was as follows: Net assets of OFS BrightWave, LLC $876,943 CommScope ownership percentage 18.43225 % -------------------- CommScope equity in net assets of OFS BrightWave, LLC 161,640 Plus: Advances 30,000 Direct costs of acquisition 4,763 Pushdown and other adjustments by majority member in OFS BrightWave, LLC 457 -------------------- Investment in and advances to OFS BrightWave, LLC $196,860 ==================== The Company's ownership interest in OFS BrightWave was restructured from a previously contemplated joint venture arrangement announced on July 24, 2001. Under the originally contemplated arrangement, CommScope and Furukawa would have formed two joint ventures to acquire certain fiber cable and transmission fiber assets of Lucent's OFS Group. Given the uncertain economic environment and severe downturn in the telecommunications market as well as associated difficulties in the financing markets following the September 11, 2001 tragedy, CommScope and Furukawa agreed to restructure the joint venture arrangement, resulting in a lower ownership participation for CommScope. As a result of the restructuring, the Company recorded pretax charges of approximately $8 million, or approximately $0.09 per diluted share, net of tax, during 2001, related to financing and formation costs of the original joint venture arrangement, which are not capitalizable as part of CommScope's investment in the restructured venture. 4. OTHER ACQUISITIONS AND DIVESTITURES Effective January 1, 1999, in a transaction with Alcatel Cable Benelux, S.A. ("Alcatel"), the Company acquired certain assets and assumed certain liabilities of Alcatel's coaxial cable business in Belgium. The 44 acquisition provides the Company with a European base of operations, access to established distribution channels and complementary coaxial cable technologies. The Belgium acquisition was accounted for using the purchase method and, accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair value at the date of the acquisition of approximately $20 million, including $3.5 million of goodwill, which was amortized in 1999, 2000, and 2001 based on a 30 year period (see Note 2 for "Impact of Newly Issued Accounting Standards"). Payment for the acquired business was financed primarily by borrowings under the Eurodollar Credit Agreement (see Note 9). In 1995, CommScope entered into a joint venture agreement with Pacific Dunlop Ltd. to produce cable in Australia, acquiring a 49% ownership interest. Due to certain governmental regulation changes and other events affecting the market for cable products in Australia in and around 1997, manufacturing operations of the joint venture were suspended and formally discontinued by decision of the joint venture's directors in 1997. In 1998, a formal termination and dissolution agreement for the joint venture was completed. Final dissolution of this joint venture was completed in accordance with Australian legal requirements as of December 29, 2000. A pretax gain of $517 related to the final liquidation of this joint venture was recognized in other income during the year ended December 31, 2000. The Company anticipates no third party claims and no additional gains or losses related to this closed joint venture. 5. IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS The Company has taken a number of steps to manage costs and has been evaluating all aspects of its business in response to challenging industry conditions. As a result of its review, the Company recorded pretax impairment charges totaling $12.8 million during 2001. Included in these impairment charges was approximately $3.8 million related to an investment in an unconsolidated affiliate, $4.4 million related to fixed assets identified as held for disposal and $4.6 million related to fixed assets to be held and used. Management determined that the Company's investment in a wireless infrastructure project management company, which was included in other assets, and which was accounted for using the cost method, should be completely written off in 2001. This determination was based on financial information indicating severe cash flow shortages. The affiliate's board of directors made the decision to cease operations and began the process of liquidating the business during 2001. In late 2001, the majority common stockholder and remaining management indicated that there would be no funds available for the return of CommScope's investment. Management currently believes CommScope has no material legal or contractual obligation for the remaining liabilities of this investee and anticipates no further impact to CommScope's financial position or results from the liquidation of its assets. The assets held for disposal consist of machinery and equipment used or purchased for use in production. Management identified specific assets that were determined to have no future use to the Company and developed a plan of disposal for each of the assets. The assets held for disposal had a carrying value of $1.6 million at the impairment date, after the second quarter impairment charges including costs of disposal. Assets valued at $1.1 million were sold during 2001 at amounts approximating the reduced carrying values, leaving a remaining carrying value of approximately $500, which was included in other current assets as of December 31, 2001. The assets to be held and used consist of our newly constructed Kings Mountain facility and other machinery and equipment whose anticipated future cash flows have been affected by challenging industry conditions. Equipment that was intended for the Kings Mountain facility is expected to be redeployed overseas. The Company did not classify this facility as held for disposal at December 31, 2001 because management had not committed to a plan to actively sell the facility. However, subsequent to December 31, 2001, management has committed to a plan to sell this facility and has begun an active program to complete the sale within a reasonable period of time. Management believes the current carrying amount of this facility approximates its fair market value at December 31, 2001. The fair values of the assets to be held and used were determined using appraisals or present value techniques. 45 6. INVENTORIES December 31, ------------------------ 2001 2000 ------------ ----------- Raw materials $23,037 $28,382 Work in process 9,688 11,124 Finished goods 14,945 24,257 ------------ ----------- $47,670 $63,763 ============ =========== 7. PROPERTY, PLANT AND EQUIPMENT December 31, --------------------------- 2001 2000 ------------- ------------- $ $ Land and land improvements 6,742 9,701 Buildings and improvements 74,101 63,429 Machinery and equipment 306,570 275,406 Construction in progress 41,721 27,546 ------------- ------------- 429,134 376,082 Accumulated depreciation ( 151,965) ( 124,726) ------------- ------------- $277,169 $251,356 ============= ============= Depreciation expense was $31,681, $26,631, and $20,778 for the years ended December 31, 2001, 2000, and 1999, respectively. The Company capitalized interest of $405 and $176 for the years ended December 31, 2001 and 2000, respectively. No interest was capitalized for the year ended December 31, 1999. 8. OTHER ACCRUED LIABILITIES December 31, ------------------------ 2001 2000 ------------ ----------- Salaries and compensation liabilities $11,136 $18,775 Retirement savings plan liabilities 6,819 11,308 Warranty reserves 1,326 1,672 Interest 371 463 Other 8,101 6,263 ------------ ----------- $27,753 $38,481 ============ =========== 9. LONG-TERM DEBT December 31, -------------------------- 2001 2000 ------------ ------------ Credit Agreement $ -- $30,000 Convertible Notes 172,500 172,500 Eurodollar Credit Agreement 11,269 14,136 IDA Notes 10,800 10,800 ------------ ------------ 194,569 227,436 Less current portion ( 2,651) (2.120) ------------ ------------ $191,918 $225,316 ============ ============ 46 CREDIT AGREEMENT In July 1997 the Company entered into an unsecured $350 million revolving credit agreement with a group of banks (as amended, the "Credit Agreement"). The Company utilizes the Credit Agreement for, among other things, general working capital needs, financing capital expenditures and other general corporate purposes. The Credit Agreement provides a total of $350 million in available revolving credit commitments through (i) loans available at various interest rates and interest maturity periods (collectively, the Revolving Credit Loans) and (ii) the issuance of standby or commercial letters of credit (Letters of Credit) of up to $50 million. The Company's available borrowing capacity under the Credit Agreement, determined on a quarterly basis, is based on certain financial ratios, which are affected by the level of long-term debt outstanding and the Company's profitability. As of December 31, 2001, the Company had no outstanding indebtedness under the Credit Agreement and its available borrowing capacity under the Credit Agreement was approximately $269 million. The Credit Agreement expires on December 31, 2002. At the Company's option, advances under the Revolving Credit Loans are available by choosing from one of the following types of loans, which primarily are differentiated by the interest rates available: (i) an ABR Loan (as defined in the Credit Agreement), with interest based on the highest of the prime rate of JP Morgan Chase Bank, the Base CD Rate (as defined in the Credit Agreement) plus 1%, or the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%; (ii) a Eurodollar Loan (as defined in the Credit Agreement), with interest based on the Eurodollar Rate (LIBOR) plus a margin that will vary based on the Company's performance with respect to certain calculated financial ratios as defined in the Credit Agreement; (iii) an Absolute Rate Bid Loan (as defined in the Credit Agreement), with interest determined through competitive bid procedures among qualified lenders under the Credit Agreement; and (iv) a Swing Line Loan (as defined in the Credit Agreement) for up to an aggregate amount of $30 million, with interest based on a money market rate, the ABR Loan rate, or a combination thereof. Interest on the Revolving Credit Loans generally is payable quarterly in arrears or, for a Eurodollar Loan, at the end of an interest period date that is specified at the time funds are advanced to the Company, not to exceed three months. A facility fee based on the total commitment under the Credit Agreement and a fee for outstanding letters of credit are payable quarterly. The Credit Agreement contains certain financial and operating covenants, including restrictions on incurring indebtedness and liens, entering into transactions to acquire or merge with any entity, making certain other fundamental changes, selling assets, paying dividends, and maintaining certain levels of consolidated net worth, leverage ratio and interest coverage ratio. The Company was in compliance with these covenants at December 31, 2001. CONVERTIBLE NOTES In December 1999, the Company issued $172.5 million of 4% convertible subordinated notes due December 15, 2006. These notes are convertible at any time into shares of CommScope common stock at a conversion price of $48.19 per share, which is subject to adjustment under certain circumstances, as provided in the Indenture. The Company may redeem some or all of these notes at any time on or after December 15, 2002 at redemption prices specified in the Indenture. In connection with the issuance of the convertible notes, the Company incurred costs of approximately $4.9 million, which have been capitalized as other assets and are being amortized over the term of the notes. The net proceeds of $167.6 million from this convertible debt offering were used primarily to repay outstanding indebtedness under the Credit Agreement in addition to funding capital expenditures and other general corporate activities. 47 EURODOLLAR CREDIT AGREEMENT In February 1999, the Company entered into an unsecured term loan agreement for 15 million euros ($16.4 million at the date of borrowing) that matures on March 1, 2006 (as amended, the "Eurodollar Credit Agreement"). The proceeds of the Eurodollar Credit Agreement were used to fund a portion of the acquisition costs and initial working capital needs of the Company's manufacturing facility in Belgium. Borrowings under this loan agreement bear interest at a variable rate equal to the Euro LIBOR Market Rate plus an applicable margin, payable quarterly. The interest rate in effect at December 31, 2001 was 4.12%. Principal payments on this loan are due in 20 equal quarterly installments of 750 thousand euros beginning June 1, 2001. As of December 31, 2001, the Company was party to an interest rate swap agreement, as required by the terms of the Eurodollar Credit Agreement, to effectively convert the variable-rate loan to a fixed-rate basis. The notional amount is equal to the outstanding principal balance of the Eurodollar Credit Agreement and decreases in tandem with principal repayments, which began June 1, 2001. Under the agreement, interest settlement payments are made quarterly based upon the spread between the Euro LIBOR Market Rate, as adjusted quarterly, and a fixed rate of 4.53% (see Note 10). IDA NOTES In January 1995, CommScope entered into a $10.8 million unsecured loan agreement in connection with the issuance of notes by the Alabama State Industrial Development Authority (the "IDA Notes"). Borrowings under the IDA Notes bear interest at variable rates based upon current market conditions for short-term financing. The interest rate in effect at December 31, 2001 was 2.13%. All outstanding borrowings under the IDA Notes are due on January 1, 2015. OTHER MATTERS Maturities of long-term debt for the next five years are as follows: $2,651 in 2002; $2,651 in 2003; $2,651 in 2004, $2,651 in 2005, and $173,165 in 2006. The weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, under the above debt instruments was 4.61% at December 31, 2001, and 5.14% at December 31, 2000. 10. DERIVATIVES AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date for FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other host contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standards require an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The only derivative instrument identified in the implementation of SFAS No. 133 and outstanding for the year ended December 31, 2001 was an interest rate swap, which effectively converts the variable-rate Eurodollar Credit Agreement to a fixed-rate basis. The notional amount of the swap is equal to the outstanding principal balance of the Eurodollar Credit Agreement and decreases in tandem with principal repayments, which began June 1, 2001. As of January 1, 2001, this interest rate swap was designated and documented as a cash flow hedge of the risk of changes in the cash flows attributable to fluctuations in the variable benchmark interest rate associated with the underlying debt being hedged. This hedging instrument was effective at the transition date to SFAS No. 133, and at the balance 48 sheet date, and is expected to continue to be effective for the duration of the swap contract, resulting in no anticipated hedge ineffectiveness. During the year ended December 31, 2001, the Company reclassified approximately $200 from accumulated other comprehensive income to reduce interest expense. The Company does not anticipate any material reclassifications from accumulated other comprehensive income or loss to interest expense during the next twelve months. The transition adjustment as of January 1, 2001 was recorded as a change in accounting principle to accumulated other comprehensive income and other assets on the balance sheet and did not have a material impact on the Company's consolidated results of operations, financial position, and cash flows. The fair value of this derivative instrument, reflected in other assets, was approximately $42 as of December 31, 2001. Also, as of January 1, 2001, the Eurodollar Credit Agreement was designated and effective as a partial hedge of the Company's net investment in its Belgian subsidiary. There was no adjustment required under SFAS No. 133 as of January 1, 2001 related to this net investment hedge. This hedging instrument was effective at the SFAS No. 133 transition date, and at the balance sheet date, and is expected to continue to be effective for the duration of the loan agreement, resulting in no anticipated reclassifications from accumulated other comprehensive income or loss to earnings. Activity in the accumulated net gain on derivative instruments included in accumulated other comprehensive loss for the year ended December 31, 2001 consisted of the following: Accumulated net gain on derivative instrument, beginning of year $ -- Net effect of adopting SFAS No. 133 229 Net loss on derivative financial instrument designated as a cash flow hedge (202) --------- Accumulated net gain on derivative instrument, end of year $ 27 =========
11. EMPLOYEE BENEFIT PLANS The Company sponsors the CommScope, Inc. of North Carolina Employees Retirement Savings Plan (the "Employees Retirement Savings Plan"). The majority of the Company's contributions to the Employees Retirement Savings Plan are made at the discretion of the Company's Board of Directors. In addition, eligible employees may elect to contribute up to 10% of their base salaries, limited to the maximum contribution amount allowed by the Internal Revenue Service. The Company contributes an amount equal to 50% of the first 4% of the employee's salary that the employee contributes. The Company contributed $9.3 million in 2001, $8.3 million in 2000, and $6.5 million in 1999 to the Employees Retirement Savings Plan, of which $7.5 million, $6.4 million and $5.0 million each year was discretionary. The Company sponsors a self-funded welfare plan (the "Plan") that provides medical, dental, and short-term disability benefits to eligible employees. Enrollment in the plan is optional, with the cost of the premiums being shared by both the employee and the Company. The Company established a Voluntary Employees' Benefit Association Trust ("VEBA Trust") to provide for the payment of benefits under the Plan. The Company is required to make cash contributions to the VEBA Trust from time to time in amounts which, when added to participant premiums, are sufficient to fund the benefits for participants and their beneficiaries under the Plan. The Company made cash contributions to the VEBA Trust of $13.6 million in 2001, $11.4 million in 2000, and $7.7 million in 1999. The Company also sponsors an unfunded postretirement group medical and dental plan (the "Postretirement Health Plan") that provides benefits to full-time employees who retire from the Company at age 65 or greater with a minimum of 10 years of active service. The Postretirement Health Plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance, with Medicare as the primary provider of health care benefits for eligible retirees. The accounting for the Postretirement Health Plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to maintain a consistent level of cost sharing with retirees. The Company recognizes the cost of providing and maintaining postretirement benefits during employees' active service periods. Additionally, the Company currently sponsors two defined benefit pension plans (the "Defined Benefit Pension Plans"). The first defined benefit plan is a nonqualified unfunded supplemental executive retirement 49 plan that provides defined pension benefits to certain key executives who retired prior to December 31, 2000. The defined benefits under this plan are paid from Company contributions. Prior to January 1, 2001, this plan also covered certain active key executives who had not yet retired. All active participants' balances were settled as of January 1, 2001, resulting in a gain in this plan of $4.7 million, and a new defined contribution pension plan was established in its place for those active participants, as described below. The second defined benefit pension plan is a nonqualified pension plan, which provides pension benefits for certain international management-level employees. This plan is funded by Company and employee contributions. Effective January 1, 2001, the Company amended and restated its nonqualified unfunded supplemental executive retirement plan that previously provided defined pension benefits to certain active and retired key executives. As a result of this amendment and restatement, the benefits provided under the plan for all participants, other than those who retired prior to December 31, 2000, are now governed by the amended and restated plan (the "Restated Plan"). Under the Restated Plan, which is a noncontributory unfunded defined contribution pension plan, the Company will credit each participant's account with contributions and earnings on the accumulated balance thereof, as outlined in the plan, but the Company is not required to make any payments until the participant is eligible to receive retirement benefits under the plan. As of January 1, 2001, the Company credited each participant's account under the Restated Plan with an amount equal to the actuarially determined accumulated benefit obligation for each participant under the terms of the original nonqualified unfunded supplemental executive retirement plan. The total amount established by CommScope as of January 1, 2001, and recognized as an expense of the Restated Plan in 2001, was $4.1 million. The Company recognized additional cost of $546 representing contributions and earnings under this plan for the year ended December 31, 2001. The establishment of opening participant balances and the additional cost recognized resulted in an accrued liability for the Restated Plan of $4.6 million as of December 31, 2001. The amendment and restatement of this plan had no material effect on the consolidated financial statements of the Company upon adoption. 50 Amounts accrued under the Postretirement Health Plan, the Defined Benefit Pension Plans, and the Restated Plan are included in other noncurrent liabilities. The following table summarizes information for the Defined Benefit Pension Plans and the Postretirement Health Plan:
Other Pension Benefits Postretirement Benefits ---------------------------------------------- 2001 2000 2001 2000 ----------- ---------- ------------ ---------- Change in benefit obligation: Postretirement benefit obligation, beginning of year $6,377 $5,965 $17,522 $12,957 Service cost 74 104 1,819 1,237 Interest cost 109 432 1,353 1,001 Plan participants' contributions 13 11 19 15 Actuarial loss 77 44 5,133 2,374 Settlement of benefits ( 4,690) -- -- -- Benefits paid ( 108) ( 119) ( 43) ( 62) Translation gain and other ( 52) ( 60) -- -- ----------- ----------- ---------- ---------- Postretirement benefit obligation, end of year $1,800 $6,377 $25,803 $17,522 ----------- ----------- ---------- ---------- Change in plan assets: Fair value of plan assets, beginning of year $ 501 $ 418 $ -- $ -- Employer and plan participant contributions 231 206 43 62 Return on plan assets 30 23 -- -- Benefits paid ( 108) ( 119) ( 43) ( 62) Translation loss and other ( 24) ( 27) -- -- ----------- ----------- ---------- ---------- Fair value of plan assets, end of year $ 630 $ 501 $ -- $ -- ----------- ----------- ---------- ---------- Funded status (postretirement benefit obligation in excess of fair value of plan assets): $1,170 $5,876 $25,803 $17,522 Unrecognized net actuarial loss ( 78) ( 240) ( 11,902) ( 7,008) Unrecognized net transition amount ( 377) ( 435) -- -- ----------- ----------- ---------- ---------- Accrued benefit cost, end of year $ 715 $5,201 $13,901 $10,514 =========== =========== ========== ========== Discount rate 6.40% 7.75% 7.00% 7.75% Rate of return on plan assets 5.50% 5.50% -- -- Rate of compensation increase 3.50% 4.75% -- -- Net periodic benefit cost (credit) for the Defined Benefit Pension Plans and the Postretirement Health Plan consisted of the following components: Other Pension Benefits Postretirement Benefits ------------------------------ ------------------------------- 2001 2000 1999 2001 2000 1999 --------- ---------- --------- ---------- ---------- --------- Service cost $ 74 $ 104 $-- $1,819 $1,237 $1,021 Interest cost 109 432 362 1,353 1,001 682 Recognized actuarial loss -- 44 36 239 159 121 Amortization of transition obligation 29 29 -- -- -- -- Settlement gain (4,690) -- -- Return on plan assets (30) (23) -- -- -- -- --------- ---------- --------- ---------- ---------- --------- Net periodic benefit cost (credit) $(4,508) $ 586 $ 398 $3,411 $2,397 $1,824 ==================== ========= ========== ========== =========
For measurement purposes, a 13% annual rate of increase in health care costs was assumed for 2002 and is assumed to decrease gradually to 4.25% for 2014 and remain at that level thereafter. The increase in the postretirement benefit obligation in 2001 is due to a decrease in the discount rate and 51 increases in the claims cost and health care trend rate assumptions, and was partially offset by a gain from demographic changes related to reduced headcount. Assumed health care cost trend rates can have a significant effect on the amounts reported for the Postretirement Health Plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2001:
1-Percentage- 1-Percentage- Point Increase Point Decrease ---------------- ---------------- Effect on total of service and interest cost components of net periodic benefit cost $ 905 $ (669) Effect on postretirement benefit obligation 4,668 (5,955)
12. INCOME TAXES The components of the provision for income taxes for the years ended December 31, 2001, 2000, and 1999 were as follows:
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ----------- ----------- Current: Federal $17,842 $46,723 $37,404 State 781 3,920 3,244 ------------ ----------- ----------- Current income tax provision 18,623 50,643 40,648 ------------ ----------- ----------- Deferred: Federal (1,611) 1,244 (90) State (651) 106 (8) ------------ ----------- ----------- Deferred income tax provision (benefit) (2,262) 1,350 (98) ------------ ----------- ----------- Total provision for income taxes $16,361 $51,993 $40,550 ============ =========== ===========
The total provision for income taxes for the year ended December 31, 2001 included a current federal income tax benefit of $4.1 million reflected in equity in losses of OFS BrightWave, LLC. The reconciliation of the statutory U.S. federal income tax rate to the Company's effective income tax rate for the years ended December 31, 2001, 2000, and 1999 was as follows: Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 0.2 1.9 1.9 Foreign sales corporation benefit ( 2.9) ( 1.1) ( 1.4) Permanent items and other ( 2.8) 2.2 1.8 Establishment of valuation allowances for net operating loss and capital loss carryforwards 7.5 -- -- ------------ ----------- ----------- Effective income tax rate 37.0% 38.0% 37.3% ============ =========== ===========
During 2001, the Company established a valuation allowance of $2,020 against a deferred tax asset arising from a foreign net operating loss carryforward of approximately $6 million. The loss carryforward has no expiration date, but is subject to local restrictions limiting its deductibility. The Company also has a foreign net operating loss carryforward of approximately $2 million, with no expiration date, which it considers more likely than not to be realized based on a positive earnings history. The Company also established a valuation allowance of $1,388 during 2001 against a deferred tax asset arising from the impairment charge for an investment in a wireless infrastructure project management company, now in the process of being liquidated (see Note 5), which creates a capital loss for tax purposes. The Company 52 considers it more likely than not that this capital loss carryforward will expire unused due to uncertainty about the creation of future capital gains. The components of deferred income tax assets and liabilities and the classification of deferred tax balances on the balance sheet were as follows: December 31, ------------------------ 2001 2000 ------------ ----------- Deferred tax assets: Accounts receivable and inventory reserves $11,957 $11,276 Warranty reserves 491 635 Employee benefits 3,515 3,709 Postretirement benefits 7,125 5,969 Foreign net operating losses 2,813 185 Investment in unconsolidated affiliate 1,388 -- Investment in OFS BrightWave, LLC 1,118 -- Other 2,433 1,676 ------------ ----------- Total deferred tax assets 30,840 23,450 Valuation allowance ( 3,408) -- ------------ ----------- ------------ ----------- Net deferred tax assets 27,432 23,450 Deferred tax liabilities: Property, plant and equipment ( 26,867) ( 25,040) Goodwill and intangibles ( 4,178) ( 4,277) Hedging gain ( 1,143) ( 843) ------------ ----------- Total deferred tax liabilities ( 32,188) ( 30,160) ------------ ----------- Net deferred tax liability $( 4,756) $( 6,710) ============ =========== Deferred taxes as recorded on the balance sheet: Current deferred tax asset $18,143 $17,296 Noncurrent deferred tax liability ( 22,899) ( 24,006) ------------ ----------- Net deferred tax liability $( 4,756) $( 6,710) ============ =========== At December 31, 2001 the Company had approximately $9.8 million in state investment tax credits that could be utilized to reduce state income tax liabilities for future tax years through 2007. The cumulative amount of undistributed earnings from foreign subsidiaries amounted to approximately $2.9 million at December 31, 2001. Although the Company does not currently intend to repatriate earnings from foreign subsidiaries, foreign tax credits may be available as a reduction of United States income taxes in the event of such distributions. 53 Income tax (expense) benefit for components of other comprehensive loss for the years ended December 31, 2001, 2000, and 1999 was as follows:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- ---------- Hedging gain on nonderivative instrument $ (300) $ (368) $ (472) Effect of adopting SFAS No. 133 (135) -- -- Loss on derivative instrument designated as a cash flow hedge 120 -- -- ----------- ----------- ---------- Total income tax expense for components of other comprehensive loss $ (315) $ (368) $ (472) =========== =========== ==========
13. STOCK COMPENSATION PLANS In 1997, the Company adopted the Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan (the "CommScope Incentive Plan"), which was formally approved by the Company's stockholders in 1998. The CommScope Incentive Plan provides for the granting of stock options, restricted stock, performance units, performance shares and phantom shares to employees of the Company and its subsidiaries and the granting of stock and stock options to nonemployee directors of the Company. A total of 8.7 million shares have been authorized for issuance under the CommScope Incentive Plan through December 31, 2001. Stock options generally expire 10 years from the date they are granted. Options vest over service periods that generally range from two to four years. Upon initial election to the Company's board of directors, a non-employee director is granted 1,000 shares of stock, which are fully vested and transferable upon issuance, and an option to purchase 20,000 shares of stock, which vest over a three-year period. If a director remains in office, a similar option is granted every three years. The following tables summarize the Company's stock option activity and information about stock options outstanding at December 31, 2001:
Weighted Average Shares Exercise Price (in thousands) Per Share ----------------- ----------------- Stock options outstanding at December 31, 1998 4,532 $13.25 Granted 690 37.08 Cancelled ( 84) 14.29 Exercised ( 634) 12.72 ----------------- ----------------- Stock options outstanding at December 31, 1999 4,504 16.96 Granted 1,446 18.81 Cancelled ( 123) 21.67 Exercised ( 375) 12.57 ----------------- ----------------- Stock options outstanding at December 31, 2000 5,452 17.64 Granted 294 21.90 Cancelled ( 432) 22.40 Exercised ( 225) 13.00 ----------------- ----------------- Stock options outstanding at December 31, 2001 5,089 $17.69 ================= ================= Stock options exercisable at December 31, 1999 2,068 $12.99 Stock options exercisable at December 31, 2000 2,747 $15.04 Stock options exercisable at December 31, 2001 3,703 $16.50 Shares reserved for future issuance at December 31, 2001 2,327
54
Options Outstanding Options Exercisable ----------------------------------------------------- ------------------------------------ Weighted Average Weighted Range of Remaining Weighted Average Average Exercise Shares Contractual Life Exercise Price Shares Exercise Price Prices (in thousands) (in Years) Per Share (in thousands) Per Share ------------- ----------------------------------------------------- ------------------------------------ $8 to $20 4,379 6.3 $14.55 3,288 $13.80 20 to 30 32 7.8 23.28 4 24.22 30 to 40 669 7.7 37.61 407 37.94 40 to 48 9 8.2 44.53 4 44.24 ----------------------------------------------------- ------------------------------------ $8 to $48 5,089 6.5 $17.69 3,703 $16.50 ===================================================== ====================================
The Company has elected to account for stock options using the intrinsic value method. The weighted average fair value per option, disclosed below, has been estimated using the Black-Scholes option pricing model. Pro forma information, disclosed below, presents net income and net income per share as if compensation expense had been recorded using the fair value based method. These pro forma assumptions and disclosures were as follows:
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ----------- ------------ ------------ Valuation assumptions: Expected option term (years) 3.5 3.5 3.5 Expected volatility 50.0% 50.0% 50.0% Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 4.0% 5.0% 6.0% Weighted average fair value per option $ 9.05 $ 7.76 $15.87 Pro forma: Net income (in thousands) $20,788 $78,734 $64,020 Net income per share - basic 0.39 1.54 1.26 Net income per share - assuming dilution 0.39 1.49 1.23
14. STOCKHOLDER RIGHTS PLAN On June 10, 1997, the Board of Directors adopted a stockholder rights plan designed to protect stockholders from various abusive takeover tactics, including attempts to acquire control of the Company at an inadequate price. Under the rights plan, each stockholder received a dividend of one right for each outstanding share of common stock, which was distributed on July 29, 1997. The rights are attached to, and presently only trade with, the common stock and currently are not exercisable. Except as specified below, upon becoming exercisable, all rights holders will be entitled to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock ("Participating Preferred Stock") for each right held at a price of $60. The rights become exercisable and will begin to trade separately from the common stock upon the earlier of (i) the first date of public announcement that a person or group (other than pursuant to a Permitted Offer or Lucent, its Subsidiaries, Affiliates, or Associates pursuant to the Financing Agreement, each as defined) has acquired beneficial ownership of 15% or more of the outstanding common stock; or (ii) 10 business days (or such later date as the Board of Directors of the Company may determine) following a person's or group's commencement of, or announcement of and intention to commence, a tender or exchange offer, the consummation of which would result in beneficial ownership of 15% or more of the common stock. The rights will entitle holders (other than an Acquiring Person, as defined) to purchase common stock having a market value (immediately prior to such acquisition) of twice the exercise price of the right. If the Company is acquired through a merger or other business combination transaction (other than a Permitted Offer, as defined), each right will entitle the holder to purchase $120 55 worth of the surviving company's common stock for $60. The Company may redeem the rights for $0.01 each at any time prior to such acquisitions. The rights will expire on June 12, 2007. In connection with the rights plan, the Board of Directors approved the creation of (out of the authorized but unissued shares of preferred stock of the Company) participating preferred stock, consisting of 0.4 million shares with a par value of $0.01 per share. The holders of the participating preferred stock are entitled to receive dividends, if declared by the Board of Directors, from funds legally available. Each share of participating preferred stock is entitled to one thousand votes on all matters submitted to stockholder vote. The shares of participating preferred stock are not redeemable by the Company nor convertible into common stock or any other security of the Company. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments and an interest rate swap contract (see Note 10). For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments are considered representative of their fair values due to their short terms to maturity. Fair values for the Company's debt instruments with no quoted market prices are estimated using a discounted cash flow analysis, based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. With respect to the Company's convertible notes (see Note 9), fair value is based on quoted market prices. The fair value of the Company's interest rate swap contract is based on the net present value of the expected future contractual cash flows. The carrying amounts and estimated fair values of the Company's convertible notes and interest rate swap contract at December 31, 2001 and 2000, are summarized as follows:
December 31, ------------------------------------------------------ 2001 2000 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------ Convertible notes $172,500 $136,700 $172,500 $122,500 Interest rate swap 42 42 (a) 364 (a) The interest rate swap contract was not required to be recorded in the Company's financial statements until January 1, 2001 when the Company adopted SFAS No. 133 (see Note 10).
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect these fair value estimates, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein. 16. COMMITMENTS AND CONTINGENCIES CommScope leases certain equipment and facilities under operating leases expiring at various dates through the year 2011. Rent expense was $7.6 million in 2001, $7.8 million in 2000, and $5.4 million in 1999. Future minimum rental payments required under operating leases with initial terms of one year or more as of December 31, 2001 are: $3.9 million in 2002; $3.2 million in 2003; $2.9 million in 2004; $2.2 million in 2005, $1.6 million in 2006 and $15.3 million thereafter. These future minimum lease payments include payments under a five-year tax-advantaged operating lease with Wachovia Capital Investments, Inc. ("Wachovia") for the Company's recently constructed corporate office building. The Company moved into the corporate office building in January 2002 under an arrangement whereby Wachovia retains legal title and ownership of the facility, but CommScope, rather than Wachovia, is allowed to claim a deduction for the tax depreciation on the assets. The lease 56 payments are variable, based on three-month Libor plus a credit spread determined from a pricing grid, which is based on CommScope's senior unsecured credit rating as determined by Moody's or S&P. CommScope has the option at any time to purchase the facility for the total construction amount funded by Wachovia of approximately $12.8 million. However, up to two additional five-year renewals may be granted at the option of the lessor. At the end of the initial lease term, or renewal term(s) if renewed, if CommScope should decide not to purchase the facility, CommScope is obligated to pay Wachovia a final lease payment of approximately $11 million, and to market the facility on Wachovia's behalf. Any proceeds received from the sale of the facility would first be used to reimburse Wachovia for the difference between the total cost of the facility and CommScope's final lease payment. Any remaining sales proceeds would be retained by CommScope. The Wachovia lease agreement also contains certain financial covenants including a leverage ratio, a net worth maintenance test, and an interest coverage ratio. The lease agreement also contains certain cross-default provisions related to CommScope's other credit facilities. The Company was in compliance with these covenants as of December 31, 2001. As of December 31, 2001, the Company had committed funds of approximately $3.1 million under purchase orders and contracts related to vertical integration projects and equipment and capacity upgrades to meet current and anticipated future business demands. CommScope is either a plaintiff or a defendant in pending legal matters in the normal course of business; however, management believes none of these legal matters will have a materially adverse effect on the Company's financial statements upon final disposition. In addition, CommScope is subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company's financial statements. 17. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND GEOGRAPHIC INFORMATION The Company's operations are conducted within one business segment that designs, manufactures and markets coaxial, fiber optic and high performance electronic cables primarily used in communications applications. The Company's primary source of revenues is from product sales to cable television system operators, telecommunications service providers, original equipment manufacturers and distributors. Service revenue from delivery of products shipped by Company owned trucks is not material to the Company's reported sales. The Company aggregates and reports its results in one reportable segment based on the similarity of its products, production processes, distribution methods, and regulatory environment. Sales of coaxial cable products to a major customer and its affiliates were approximately 10% of net sales in 1999, and less than 10% of net sales in 2001 and 2000. No other customer accounted for 10% or more of net sales during any of the three fiscal years in the period ended December 31, 2001. Sales to related parties were less than 2% of net sales in 2001 and 2000, and less than 2.5% of net sales in 1999. Trade accounts receivable from related parties were less than 1% of the Company's total trade accounts receivable balance as of December 31, 2001 and less than 2% as of December 31, 2000. Purchases from related parties were less than 1% of cost of sales and operating expenses in 2001, 2000 and 1999. As of December 31, 2001, the Company held a $30 million note receivable from OFS BrightWave, in which CommScope owns an 18.4% equity interest. The Company recognized interest income of $125 on this note during the six weeks ended December 31, 2001, of which $23 was eliminated in consolidation. In addition, CommScope had a $1.5 million receivable from OFS BrightWave, included in other current assets, for an expected reimbursement of costs incurred by CommScope on behalf of OFS BrightWave related to the formation of OFS BrightWave with Furukawa. The income statement benefit related to this $1.5 million reimbursement, of which $280 was eliminated in consolidation, was recorded to terminated acquisition costs in the fourth quarter of 2001. 57 Sales to customers located outside of the United States ("international sales") comprised approximately 23% of net sales in 2001, and 24% of net sales in 2000 and 1999. International sales by geographic region, based on the destination of product shipments, and worldwide sales by broad product group were as follows (in millions):
Year Ended December 31, -------------------------------- 2001 2000 1999 -------------------------------- Latin America $64.5 $67.5 $43.0 Asia / Pacific Rim 26.2 58.9 47.6 Europe 64.9 77.4 65.4 Canada 16.3 23.1 18.3 Other 1.4 5.5 3.4 -------------------------------- Total international sales $173.3 $232.4 $177.7 ================================ Year Ended December 31, -------------------------------- 2001 2000 1999 -------------------------------- Broadband and other video application products $588.3 $723.8 $557.4 Local area network products 88.3 85.3 87.3 Wireless and other telecommunications products 61.9 140.9 104.2 -------------------------------- Total worldwide sales by broad product group $738.5 $950.0 $748.9 ================================ Net property, plant and equipment by geographic area was as follows (in millions): December 31, ---------------------- 2001 2000 ---------------------- United States $238.6 $231.7 Belgium 10.3 10.2 Brazil 28.3 9.5 ---------------------- Total net property, plant and equipment $277.2 $251.4 ======================
58 18. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ---------------------------------------- Cash paid during the year for: Taxes $ 23,655 $ 47,268 $ 37,112 Interest (net of capitalized amounts) 7,732 9,467 10,304 Noncash investing and financing activities: Acquisition of interest in OFS BrightWave $ (173,388) -- -- Purchase of note of OFS BrightWave (30,000) -- -- Issuance of common stock to Lucent 203,388 -- --
19. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------ Fiscal 2001: Net sales $217,360 $199,899 $177,702 $143,537 Gross profit 52,794 48,310 43,947 34,593 Operating income 28,006 11,630 12,460 10,778 Net income (loss) 16,579 5,978 6,345 (1,037) Net income (loss) per share, basic 0.32 0.12 0.12 (0.02) Net income (loss) per share, diluted 0.32 0.11 0.12 (0.02) Fiscal 2000: Net sales $203,939 $241,244 $256,873 $247,970 Gross profit 52,353 64,381 66,265 68,055 Operating income 28,975 38,004 39,661 39,411 Net income 16,727 22,293 22,988 22,879 Net income per share, basic 0.33 0.44 0.45 0.45 Net income per share, diluted 0.32 0.42 0.43 0.43
59
COMMSCOPE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Additions ---------------------------- Charged to Balanmce at Charged to Other Deductions Balance at Beginning Costs and Accounts (Describe) End of Description of Period Expenses (Describe) (1) Period - ---------------------------------------------------------------------------------------------------------- Deducted from assets: Allowance for doubtful accounts Year ended December 31, 2001 $9,187 $6,565 $-- $3,153 $12,599 Year ended December 31, 2000 $4,838 $4,519 $-- $ 170 $9,187 Year ended December 31, 1999 $4,126 $1,602 $-- $ 890 $4,838 (1) Uncollectible customer accounts written off, net of recoveries of previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item is contained in the sections captioned "Management of the Company--Board of Directors of the Company", "Management of the Company--Committees of the Board of Directors--Board Meetings", and "Management of the Company--Section 16(a) Beneficial Ownership Reporting Compliance" included in our Proxy Statement for the 2002 Annual Meeting of Stockholders ("2002 Proxy Statement"), which sections are incorporated herein by reference. EXECUTIVE OFFICERS Set forth below is certain information with respect to the executive officers of the Company as of March 22, 2002. Name and Title Age Business Experience - -------------- --- ------------------- Frank M. Drendel 57 Frank M. Drendel has been our Chairman and Chief Chairman and Chief Executive Officer Executive Officer since the spin-off. He has served as Chairman and President of CommScope NC, currently our wholly-owned subsidiary, from 1986 to the spin-off and has served as Chief Executive Officer of CommScope NC since 1976. Mr. Drendel is a director of Nextel Communications, Inc., Corvis Corporation, C-SPAN and the National Cable Television Association. Prior to that time, Mr. Drendel has held various positions with CommScope NC since 1971. Brian D. Garrett 53 Brian D. Garrett has been President President and Chief and Chief Operating Officer of Operating Officer CommScope and CommScope NC since 1997. He was our Executive Vice President, Operations from the spin-off until 1997. From 1996 to 1997, he was Executive Vice President and General Manager of the Network Cable Division of CommScope NC and Vice President and General Manager of the Network Cable Division of CommScope NC from 1986 to 1996. Prior to that time, Mr. Garrett has held various positions with CommScope, NC since 1980. Jearld L. Leonhardt 53 Jearld L. Leonhardt has been our Executive Vice President Executive Vice President and Chief and Chief Financial Officer Financial Officer since 1999. He has served as our Executive Vice President, Finance and Administration from the spin-off until 1999. He was our Treasurer from the spin-off until 1997. He has served as Executive Vice President and Chief Financial Officer of CommScope NC since 1999. He has served as Executive Vice President, Finance and Administration of CommScope NC from 1983 until 1999 and Treasurer of CommScope NC from 1983 until 1997. Prior to that time, Mr. Leonhardt has held various positions with CommScope NC since 1970. 61 Randall W. Crenshaw 45 Randall W. Crenshaw has been Executive Vice President, Executive Vice President, Procurement, and General Procurement, and General Manager, Manager, Network Network, of CommScope and CommScope NC since 2000. From the spin-off until 2000, he was Executive Vice President, Procurement of CommScope and CommScope NC. From 1994 to 1997, Mr. Crenshaw was Vice President Operations for the Network Cable Division of CommScope NC. Prior to that time, Mr. Crenshaw has held various positions with CommScope NC since 1985. William R. Gooden 60 William R. Gooden has been our Senior Senior Vice President Vice President and Controller since and Controller the spin-off. He has served as Senior Vice President and Controller of CommScope NC since 1996 and was Vice President and Controller from 1991 to 1996. Prior to that time, Mr. Gooden has held various positions with CommScope NC since 1978. Larry W. Nelson 59 Larry W. Nelson has been our Executive Vice President, Executive Vice President, Business Business Development Development, since the spin-off. He has served as Executive Vice President, Business Development, of CommScope NC since 1997. From 1988 to 1997, he was Executive Vice President and General Manager, CATV, of CommScope NC. Prior to that time, Mr. Nelson has held various positions with CommScope NC since 1968. Christopher A. Story 42 Christopher A. Story has been Executive Vice President, Executive Vice President, Global Global Broadband Operations Broadband Operations, of CommScope and CommScope NC since 2000. From 1998 until 2000, he was Senior Vice President, CATV Operations, of CommScope NC. From 1996 to 1998, he was Vice President, CATV Operations, of CommScope NC. Prior to that time, Mr. Story has held various positions with CommScope NC since 1989. Gene W. Swithenbank 62 Gene W. Swithenbank has been our Executive Vice President, Executive Vice-President, Global Global Broadband Sales Broadband Sales and Marketing since and Marketing July 2001. Prior to that he was Executive Vice President, CATV Sales and Marketing, since the spin-off. He has served as Executive Vice President, CATV Sales and Marketing, of CommScope NC since 1996. From 1992 to 1996, Mr. Swithenbank was Senior Vice President, CATV Sales and Marketing, of CommScope NC. Prior to that time, Mr. Swithenbank has held various positions with CommScope NC since 1970. Frank B. Wyatt, II 39 Frank B. Wyatt, II has been Senior Senior Vice President, General Vice President, General Counsel and Counsel and Secretary Secretary of CommScope and CommScope NC since 2000. He was Vice President, General Counsel and Secretary of CommScope and CommScope NC from the spin-off until 2000. He has served as General Counsel and Secretary of CommScope NC since 1996. Prior to that time, Mr. Wyatt was an attorney in private law firm practice since 1987. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is contained in the section captioned "Management of the Company" in our 2002 Proxy Statement and is incorporated by reference herein. The sections captioned 62 "Management of the Company--Compensation Committee Report on Compensation of Executive Officers" and "Performance Graph" in our 2002 Proxy Statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is contained in the sections captioned "Beneficial Ownership of Common Stock" and "Management of the Company--Stock Options" in our 2002 Proxy Statement, which sections are incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is contained in the section captioned "Management of the Company--Certain Relationships and Related Transactions" in our 2002 Proxy Statement and is incorporated by reference herein. 63 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report: 1. Financial Statements. The following consolidated financial statements of CommScope, Inc. are included under Part II, Item 8: Independent Auditors' Report. Consolidated Statements of Income for the Years ended December 31, 2001, 2000 and 1999. Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts. Included under Part II, Item 8. Certain schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. List of Exhibits. See Index of Exhibits included on page E-1. (b) Reports on Form 8-K: On October 25, 2001 we filed a current report on Form 8-K announcing our financial results for the third quarter ended September 30, 2001. On November 26, 2001 we filed a current report on Form 8-K announcing formation of the BrightWave joint venture to acquire certain fiber optic assets. On December 26, 2001 we filed an amended current report on Form 8-K/A to file certain financial information related to the BrightWave joint venture. 64 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CommScope, Inc. Date: March 22, 2002 By:/s/ Frank M. Drendel ------------------------------------- Frank M. Drendel Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Frank M. Drendel Chairman of the Board and Chief March 22, 2002 - ------------------------------- Executive Officer Frank M. Drendel /s/ Jearld L. Leonhardt Executive Vice President and Chief March 22, 2002 - ------------------------------- Financial Officer (Principal financial Jearld L. Leonhardt officer) /s/ William R. Gooden Senior Vice President and Controller March 22, 2002 - ------------------------------- (Principal accounting officer) William R. Gooden /s/ Edward D. Breen Director March 22, 2002 - ------------------------------- Edward D. Breen /s/ Duncan M. Faircloth Director March 22, 2002 - ------------------------------- Duncan M. Faircloth /s/ Boyd L. George Director March 22, 2002 - ------------------------------- Boyd L. George /s/ George N. Hutton, Jr. Director March 22, 2002 - ------------------------------- George N. Hutton, Jr. /s/ June E. Travis Director March 22, 2002 - ------------------------------- June E. Travis /s/ James N. Whitson Director March 22, 2002 - ------------------------------- James N. Whitson
65 INDEX OF EXHIBITS ----------------- Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 3.2 Amended and Restated By-Laws of CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 4.1 Rights Agreement, dated June 12, 1997, between CommScope, Inc. and ChaseMellon Shareholder Services, L.L.C. (Incorporated herein by reference from the Registration Statement on Form 8-A filed June 30, 1997 (File No. 1-12929)). 4.1.1 Amendment No. 1 to Rights Agreement, dated as of June 14, 1999, between CommScope, Inc. and ChaseMellon Shareholder Services. (Incorporated by reference from the Amendment to Registration Statement on Form 8-A/A filed June 14, 1999 (File No. 1-12929)). 4.1.2 Amendment No. 2 to Rights Agreement, dated as of November 15, 2001 between CommScope, Inc. and Mellon Investor Services LLC. (Incorporated by reference from the Amendment to Registration Statement on Form 8-A/A filed November 19, 2001 (File no. 1-12929)). 10.1 Employee Benefits Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.2 Debt and Cash Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.3 Insurance Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.4 Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.5 Trademark License Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.6 Transition Services Agreement, dated as of July 25, 1997, between NextLevel Systems, Inc. and CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.7 Credit Agreement, dated as of July 23, 1997, among CommScope, Inc. of North Carolina, Certain Banks, The Chase Manhattan Bank, as Administrative Agent and The Chase Manhattan Bank, Bank of America National Trust and Savings Association, BankBoston , N.A., Bank of Tokyo-Mitsubishi Trust Company, CIBC, Inc., Credit Lyonnais Atlanta Agency, First Union National Bank, The Fuji Bank, Limited, Atlanta Agency, NationsBank, N.A., Toronto Dominion (New York), Inc. and Wachovia Bank, N.A. as Co-Agents. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)). 10.7.1 First Amendment to the Credit Agreement, dated as of December 7, 1999 to the Credit Agreement dated as of July 23, 1997, among CommScope, Inc. of North Carolina, The Chase Manhattan Bank, as Administrative Agent, and the Banks from time to time parties thereto, and the financial institutions named therein as co-agents for the Banks. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12929)). 10.7.2 Second Amendment to the Credit Agreement, dated as of April 27, 2000 to the Credit Agreement dated as of July 23, 1997, among CommScope, Inc. of North Carolina, The Chase Manhattan Bank, as Administrative Agent, and the Banks from time to time parties thereto, and the financial institutions named therein as co-agents for the Banks. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File no. 1-12929)). 10.8+ Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan, as amended through December 14, 2000. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2000. (File No. 1-12929)). 10.9+ Form of Severance Protection Agreement between the Company and certain executive officers. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12929)). 10.9.1+ Form of Amendment to Severance Protection Agreement between the Company and certain Executive Officers. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999 (File No. 1-12929)). 10.10+ Employment Agreement between Frank Drendel, General Instrument Corporation and CommScope, Inc. of North Carolina, the Letter Agreement related thereto dated May 20, 1993 and Amendment to Employment Agreement dated July 25, 1997. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12929)). 10.11 Credit Agreement, dated February 26, 1999, between First Union National Bank and CommScope, Inc. of North Carolina. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12929)). 10.11.1 First Amendment to the Credit Agreement, dated as of December 7, 1999 between First Union National Bank and CommScope Inc. of North Carolina. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (file No. 1-12929)). 10.11.2 Second Amendment to the Credit Agreement, dated as of June 28, 2000 to the Credit Agreement dated as of February 26, 1999, between the First Union National Bank and CommScope, Inc. of North Carolina. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File no. 1-12929)). 10.12+ The CommScope, Inc. Annual Incentive Plan, as amended through June 9, 1999. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (file No. 1-12929)). 10.13 Indenture dated as of December 15, 1999 between CommScope, Inc. and First Union National Bank, as Trustee (Incorporated by reference from the Company's Registration Statement on form S-3 dated January 14, 2000 (File No. 333-94691)). 10.14 Registration Rights Agreement, dated December 15, 1999 between CommScope Inc. and the Initial Purchasers (Incorporated by reference from the Company's Registration Statement on form S-3 dated January 14, 2000 (File No. 333-94691)). 10.15 Amended and Restated Memorandum of Understanding, dated as of November 15, 2001, by and between The Furukawa Electric Co., Ltd. and CommScope, Inc. (Incorporated by reference from the Company's Current Report on Form 8-K dated November 26, 2001 (file no. 1-12929)). 10.16 Registration Rights Agreement, dated as of November 16, 2001, by and between CommScope, Inc. and Lucent Technologies Inc. (Incorporated by reference from the Company's Current Report on Form 8-K dated November 26, 2001 (file no. 1-12929)). 10.17 Financing Agreement, dated July 24, 2001 among CommScope, Inc., The Furukawa Electric Co., Ltd. and Lucent Technologies Inc. (Incorporated by reference from the Company's Current Report on Form 8-K dated November 26, 2001 (file no. 1-12929)). 10.18 Financing Agreement Supplement, dated November 9, 2001 among CommScope, Inc., The Furukawa Electric Co., Ltd. and Lucent Technologies Inc. (Incorporated by reference from the Company's Current Report on Form 8-K dated November 26, 2001 (file no. 1-12929)). 10.19 Revolving Credit Agreement, dated as of November 16, 2001, by and between CommScope Optical Technologies, Inc. and OFS BrightWave, LLC. 10.20 Amended and Restated Limited Liability Company Agreement of OFS BrightWave, LLC, dated November 16, 2001, by and among OFS BrightWave, LLC, Fitel USA Corp. and CommScope Optical Technologies, Inc. 12. Statements re: Computation of Ratios. 21. Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of PriceWaterhouseCoopers, LLC. 99.1 Forward-Looking Information. 99.2 OFS BrightWave, LLC Consolidated Financial Statements. - -------------------------------------------- + Management Compensation. EX-10.19 3 credit.txt CREDIT.TXT Exhibit 10.19 REVOLVING CREDIT AGREEMENT Dated as of November 16, 2001 by and between COMMSCOPE OPTICAL TECHNOLOGIES, INC. and OFS BRIGHTWAVE, LLC Table of Contents ----------------- Page ---- Section 1. Definition and Principles of Construction.......................1 1.1 Defined Terms..............................................1 1.2 Principles of Construction.................................3 Section 2. Amount and Terms of Credit......................................4 2.1 Commitment to Lend.........................................4 2.2 Interest...................................................4 2.3 Revolving Note.............................................4 2.4 Minimum Amount of Each Borrowing...........................4 2.5 Notice of Borrowing........................................4 2.6 Disbursement of Funds......................................5 2.7 Furukawa Commitment........................................5 Section 3. Prepayments; Payments...........................................5 3.1 Optional Prepayments.......................................5 3.2 Mandatory Prepayment.......................................5 3.3 Payment at Maturity........................................5 3.4 Method and Place of Payment................................5 3.5 Pro Rata Treatment with Furukawa...........................6 Section 4. Conditions Precedent............................................6 4.1 Each Borrowing.............................................6 Section 5. Covenants.......................................................6 5.1 Affirmative Covenants......................................6 5.2 Borrower Setoff Right......................................7 Section 6. Events of Default...............................................7 6.1 Payments...................................................7 6.2 Covenants..................................................7 6.3 Bankruptcy, Etc............................................7 Section 7. Miscellaneous...................................................8 7.1 Notices....................................................8 7.2 Benefit of Agreement.......................................9 7.3 No Waiver; Remedies Cumulative.............................9 7.4 Calculations; Computations.................................9 7.5 Governing Law; Submission to Jurisdiction; Venue; Jury Trial Waiver..........................................9 7.6 Counterparts..............................................10 7.7 Effectiveness.............................................10 7.8 Headings Descriptive......................................10 7.9 Amendment or Waiver.......................................10 i REVOLVING CREDIT AGREEMENT This Revolving Credit Agreement ("Agreement") dated as of November 16, 2001 is entered into by and between CommScope Optical Technologies, Inc., a Delaware corporation ("CommScope Optical") and OFS BrightWave, LLC, a Delaware limited liability company (the "Borrower"). WITNESSETH WHEREAS, The Furukawa Electric Co., Ltd., a corporation organized under the laws of Japan ("Furukawa"), and CommScope, Inc., a Delaware corporation and the ultimate parent company of CommScope Optical ("CommScope"), have entered into a Memorandum of Understanding, dated as of July 24, 2001, as amended and restated by the Amended and Restated Memorandum of Understanding, dated as of November 15, 2001 (as amended, the "MOU"), pursuant to which Furukawa and CommScope agreed that the Borrower shall acquire the optical cable related assets and fiber manufacturing facilities of Lucent Technologies Inc.'s ("Lucent") Optical Fiber Solutions business; WHEREAS, CommScope, Lucent and Furukawa are parties to a Financing Agreement, dated as of July 24, 2001, as amended and supplemented November 9, 2001 (the "Financing Agreement"), pursuant to which CommScope has agreed to issue to Lucent 10,200,000 shares of CommScope common stock, par value $.01 per share (the "Common Stock") at $19.94 per share of Common Stock, for an aggregate amount of $203,388,000 (the "CommScope Payment"), in lieu of a portion of the cash purchase price payable by Furukawa to Lucent pursuant to the Asset and Stock Purchase Agreement, dated as of July 24, 2001, as amended by Amendment No. 1 to the Asset and Stock Purchase Agreement, dated as of November 15, 2001, by and between Lucent and Furukawa; and WHEREAS, $30,000,000 of the CommScope Payment is deemed to be a Borrowing (as defined below) hereunder, and the balance of the CommScope Payment is deemed to be a capital contribution by CommScope Optical to the Borrower. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Definition and Principles of Construction. ----------------------------------------- 1.1 Defined Terms. For purposes of this Agreement, the following term shall have the following meanings: "Affiliate" of any Person means any Person that controls, is controlled by, or is under common control with such Person. As used herein, the term "control" (including the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction 1 of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract or otherwise. "Agreement" has the meaning set forth in the preamble. "Borrower" has the meaning set forth in the preamble. "Borrowing" means a disbursement by Lender to the Borrower of the proceeds of a Revolving Loan. "Business Day" means any day except Saturday, Sunday and any day that is a legal holiday in New York, New York, or a day on which banking institutions in New York, New York are authorized or required by law or other government action to close. "Commitment" means Thirty Million Dollars ($30,000,000.00), subject to the provisions of Section 3.2. "Default" means any event, act or condition which, with notice or the lapse of time, or both, would constitute an Event of Default. "Dollars" and the sign "$" each mean freely transferable lawful money of the United States. "Eurodollar Business Day" means any day on which banks in the City of London are generally open for interbank or foreign exchange transactions. "Event of Default" has the meaning specified in Section 6. "Indebtedness" means, as to any Person, without duplication, the principal of, and any interest, fees or charges in respect of, (i) indebtedness of such Person for money borrowed; (ii) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is liable; and (iii) any guarantee of the foregoing. "Lender" means CommScope Optical or any person to whom CommScope Optical, rights and obligations hereunder are assigned. "Maturity Date" means November 16, 2006. "Notice of Borrowing" has the meaning specified in Section 2.5. "Obligations" means all amounts owing to Lender pursuant to this Agreement. 2 "Person" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise, or any government or political subdivision or any agency, department or instrumentality thereof. "Revolving Loan" means the extensions of credit by Lender to the Borrower from time to time pursuant to Section 2.1. "Revolving Note" has the meaning specified in Section 2.3. "Subsidiary" means, as to any Person (i) any corporation more than fifty percent (50%) of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a fifty percent (50%) equity interest at the time. "Three-month LIBOR" means the rate (rounded upward to the nearest one-sixteenth of one percent) for a designated maturity of three (3) months determined on the basis of the offered rate for deposits in U.S. Dollars which appear on the Reuters Screen LIBO Page as of 11:00 a.m. London time on the second (2nd) full Eurodollar Business Day next preceding the first day of each calendar quarter with respect to which interest is payable (unless such date is not a Business Day, in which event the next succeeding Eurodollar Business Day which is also a Business Day will be used). If the Reuters Screen LIBO Page (i) publishes more than one (1) such LIBOR rate, the average of such rates shall apply, or (ii) ceases to publish such LIBOR rate, then Three-month LIBOR shall be determined from such substitute financial reporting service as Borrower, in its reasonable discretion, shall determine. "United States" and "U.S." each mean the United States of America. 1.2 Principles of Construction. -------------------------- (a) All references in this Agreement to Sections, schedules and exhibits are to Sections, schedules and exhibits in or to this Agreement unless otherwise specified. The captions of the sections of this Agreement are for convenience only and do not define or limit any terms or provisions. (b) When used in this Agreement, the words "hereof," "herein" and "hereunder" and words of similar import shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The word "include(s)" means "include(s), without limitation," and the word "including" means "including, but not limited to." 3 Section 2. Amount and Terms of Credit. -------------------------- 2.1 Commitment to Lend. On the terms and subject to the conditions set forth in this Agreement, Lender agrees to make loans to the Borrower at any time and from time to time on or before the Maturity Date (but not more frequently than once per month) in an aggregate amount at any time outstanding not to exceed the Commitment. Subject to the other terms and conditions of this Agreement, the Borrower may borrow under this Section 2.1, repay under Section 3 and reborrow under this Section 2.1. As of the closing of the transactions contemplated by the MOU, the Borrower shall be deemed to have made a Borrowing in the principal amount of $30,000,000 pursuant to the terms hereof. 2.2 Interest. -------- (a) Revolving Loan. Interest on the principal amount of any Revolving Loan outstanding and unpaid from time to time shall accrue at a rate per annum equal to Three-month LIBOR plus 1.75%, computed on the basis of a 360 day year of twelve 30-day months. In the event of partial months, the actual number of days elapsed will be used to calculate the interest due. Accrued interest on the Revolving Loan shall be payable quarterly in arrears on the last Business Day of each quarter, commencing with the quarter ending on December 31, 2001. (b) Default Interest Rate. Notwithstanding any contrary provision of this Section 2.2, upon the occurrence and during the continuance of an Event of Default, interest on the principal amount of any Revolving Loan outstanding and unpaid from time to time shall accrue at a rate per annum equal to 1% above the rate at which interest would otherwise accrue on such amounts pursuant to Section 2.2(a). 2.3 Revolving Note. The Borrower's obligation to repay any Revolving Loan shall be evidenced by its promissory note payable to the order of CommScope Optical Technologies, Inc. (the "Revolving Note") in substantially the form of Exhibit A attached hereto, appropriately completed. The Revolving Note shall be dated the date of this Agreement, and the outstanding principal amount of any Revolving Loan shall be repaid in full on the Maturity Date. 2.4 Minimum Amount of Each Borrowing. The aggregate principal amount of each Borrowing under the Revolving Loan shall be not less than $750,000 or any multiple of $100,000 in excess thereof. 2.5 Notice of Borrowing. Whenever the Borrower desires to make a Borrowing under the Revolving Loan it shall give Lender at least five (5) Business Days' prior written notice of such requested Borrowing at its address for notices pursuant to Section 7.1, provided that any such notice shall be deemed to have been given on a certain day only if given before 12:00 noon (New York time) on such day. Each such 4 notice (each a "Notice of Borrowing") shall be in the form of Exhibit B, appropriately completed in each case to specify the aggregate principal amount of the requested Borrowing and the date of such Borrowing (which shall be a Business Day). 2.6 Disbursement of Funds. Not later than 12:00 noon (New York time) on the date specified in the Notice of Borrowing, Lender will make available to the Borrower, by wire transfer to the Borrower's account, in Dollars and in immediately available funds, the amount specified in the Notice of Borrowing. 2.7 Furukawa Commitment. The Borrower agrees that to the extent it incurs Indebtedness from Furukawa or its Affiliates in an amount of $120,000,000 or less, such Indebtedness will be incurred on terms and conditions that with respect to interest, repayment, prepayment, Events of Default, priority and security are no more favorable to Furukawa and its Affiliates than provided herein to Lender. Section 3. Prepayments; Payments. --------------------- 3.1 Optional Prepayments. The Borrower shall have the right to prepay the Revolving Loan from time to time in whole or in part in minimum amounts of $500,000 or any multiple of $100,000.00 in excess thereof. 3.2 Mandatory Prepayment. The Borrower shall prepay the outstanding principal amount of the Revolving Loan together with any accrued interest thereon within (x) 100 calendar days of (i) CommScope or its Affiliates exercising the right to sell Membership Interests (as defined in the MOU) in the Borrower held by CommScope and its Affiliates pursuant to Section 5.6 of the MOU; or (ii) Furukawa, the Borrower or any of their respective Affiliates acquiring all, but not less than all, of CommScope's and its Affiliates' Membership Interests (as defined in the MOU); or (y) CommScope or its Affiliates being required to sell their Membership Interests (as defined in the MOU) pursuant to Section 6.4 of the Amended and Restated Limited Liability Company Agreement of the Borrower, dated as of November 16, 2001 (the "Amended LLC Agreement"). The Commitment shall terminate and no further Borrowings shall be permitted after the date upon which the 100 calendar day period referred to in this Section 3.2 begins to run. 3.3 Payment at Maturity. The outstanding principal amount of the Revolving Loan, together with all unpaid interest thereon, shall be due and payable on the Maturity Date or upon the earlier termination of the Revolving Note. 3.4 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement or the Revolving Note shall be made to Lender not later than 12:00 noon (New York time) on the date when due and shall be made in Dollars and in immediately available funds. Whenever any payment to be made hereunder or under the Revolving Note is stated to be due on a day that is not a Business 5 Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. 3.5 Pro Rata Treatment with Furukawa. If Borrower, or any of its Subsidiaries, makes a payment or prepayment of principal on any Indebtedness owed to Furukawa or any of its Affiliates, the Borrower or its Subsidiaries, shall simultaneously prepay any amounts outstanding hereunder or under the Revolving Note in an amount proportionate to such payment or prepayment to Furukawa or any of its Affiliates, based on the relative amount of Indebtedness owed by the Borrower and its Subsidiaries to CommScope and its Affiliates, and Furukawa and its Affiliates, respectively; provided, however, if the Borrower incurs Indebtedness from Furukawa and its Affiliates in excess of $120,000,000, such excess may be repaid to Furukawa and its Affiliates before any payment or prepayment to CommScope and its Affiliates as contemplated by this Section 3.5. Section 4. Conditions Precedent. -------------------- 4.1 Each Borrowing. Lender's obligation to disburse the proceeds of any Borrowing to the Borrower is subject, at the time of each Borrowing (except as hereinafter indicated), to the satisfaction of all of the following conditions: (a) Notice of Borrowing. Lender shall have received a Notice of Borrowing meeting the requirements of Sections 2.4 and 2.5 with respect to such Borrowing. (b) No Default. At the time of such Borrowing and also after giving effect thereto there shall exist no Default or Event of Default. Section 5. Covenants. --------- 5.1 Affirmative Covenants. The Borrower covenants and agrees with Lender that, so long as this Agreement shall remain in effect, or the principal of or interest on any Borrowing payable hereunder shall be unpaid, the Borrower will (a) use its reasonable best efforts to arrange a working capital facility with a third party lender so that any principal amounts outstanding hereto, together with interest thereon are repaid to Lender, and this Agreement and Revolving Note are terminated; it being understood and agreed that the Borrower shall not be obligated to enter into a working capital facility which is not on commercially reasonable terms, without regard to the terms of this Agreement; and (b) be organized in the United States (or any political subdivision thereof) or in any jurisdiction that does not impose any withholding taxes on payments hereunder by Borrower to a lender organized in the United States (or any political subdivision thereof). 6 5.2 Borrower Setoff Right. Borrower shall be entitled to setoff any amounts due and payable under the Optical Fiber Supply Agreement between CommScope, Inc. of North Carolina and OFS Fitel, LLC, dated as of November 16, 2001, other than any such amount being contested in good faith, against any amount of principal due and payable hereunder. Section 6. Events of Default. If any of the following specified events (each an "Event of Default") occurs: 6.1 Payments. The Borrower (i) defaults in the payment when due of any interest on the Revolving Loan or the Revolving Note or any other amounts owing hereunder or under the Revolving Note and such default continues unremedied for five (5) or more days, or (ii) defaults in the payment when due of any principal of the Revolving Loan or the Revolving Note; 6.2 Covenants. The Borrower defaults in the due observance or performance, or breach of any term, covenant or agreement contained in this Agreement and such default continues unremedied for a period of 10 days after written notice to the Borrower by Lender; or 6.3 Bankruptcy, Etc. The Borrower commences a voluntary case under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower and the petition is not controverted within ten (10) days, or is not dismissed within ninety (90) days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower, or the Borrower commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation or similar law of any jurisdiction, whether now or hereafter in effect, or there is commenced against the Borrower any such proceeding which remains undismissed for a period of ninety (90) days; or the Borrower is adjudicated insolvent or bankrupt; or any order for relief or other order approving any such case or proceeding is entered; or the Borrower suffers the appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of ninety (90) days; or the Borrower makes a general assignment for the benefit of creditors; or the Borrower takes any corporate action for the purpose of effecting any of the foregoing. Upon the occurrence of any Event of Default specified in this Section 6, Lender may (i) by written notice to the Borrower declare the Commitment to be terminated whereupon the Commitment shall be immediately terminated; and (ii) declare all sums then owing by Borrower hereunder and under the Revolving Note to be immediately due and payable, whereupon all such sums shall become and be immediately due and payable without presentment, demand or protest or other notice of any kind, all of which are hereby expressly waived by Borrower. In case of any occurrence of any 7 Event of Default described in Section 6.3, the outstanding principal balance of the Revolving Note, together with accrued interest thereon, shall become due and payable immediately without the requirement of any such acceleration or request, and without presentment, demand, protest or other notice of any kind, all of which are expressly waived by Borrower, any provisions of this Agreement or the Revolving Note to the contrary notwithstanding, and other amounts payable by Borrower hereunder shall become immediately due and payable all without notice of any kind. Section 7. Miscellaneous. ------------- 7.1 Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission and by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: If to Borrower: OFS BrightWave, LLC c/o The Furukawa Electric Co., Ltd. 6-1, Marunouchi, 2 chome Chioda Ku Tokyo 100-8322 Attention: Mr. Koichi Nakamura Facsimile: 011-81-3-3286-3919 with a copy to: Masuda & Ejiri 399 Park Avenue, 18th Floor New York, New York 10022 United States of America Attention: Junji Masuda Facsimile: (212) 486-2614 If to CommScope: CommScope, Inc. Lenior-Rhyne boulevard, SE Hickory, North Carolina 28603 United States of America Attention: Frank B. Wyatt, II Facsimile: (828) 431-2520 with a copy to: 8 Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 United States of America Attention: Christopher Ewan, Esq. Facsimile: (212) 859-8588 or to such other address as any party or other addressee shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. 7.2 Benefit of Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of CommScope. This Agreement and Revolving Note shall be assignable by Lender to (i) any of its wholly-owned Subsidiaries; or (ii) any Person who directly purchases Membership Interests (as defined in the MOU) from CommScope or its Affiliates in accordance with the terms and conditions of the Amended LLC Agreement. 7.3 No Waiver; Remedies Cumulative. No failure or delay on the part of CommScope or the holder of the Revolving Note in exercising any right, power or privilege hereunder and no course of dealing between the Borrower and CommScope or the holder of the Revolving Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein expressly provided are cumulative and not exclusive of any rights, powers or remedies which CommScope or the holder of the Revolving Note would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of CommScope or the holder of the Revolving Note to any other or further action in any circumstances without notice or demand. 7.4 Calculations; Computations. All computations of interest hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. 7.5 Governing Law; Submission to Jurisdiction; Venue; Jury Trial Waiver. (a) This Agreement and the rights and obligations of the parties hereunder and thereunder shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law. Any 9 legal action or proceeding against the Borrower with respect to this Agreement shall be brought in the courts of the State of New York, in the County of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid court. (b) Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable laws, any and all rights to trial by jury in connection with any legal action or proceeding with respect to this Agreement. 7.6 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be provided to the Borrower and CommScope. 7.7 Effectiveness. This Agreement shall become effective on the date hereof. 7.8 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 7.9 Amendment or Waiver. Neither this Agreement nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing and signed by CommScope and the Borrower. [Signatures begin on the next page] 10 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. OFS BRIGHTWAVE, LLC By: /s/ Osamu Sato ---------------------------------- Name: Osamu Sato Title: Executive Vice-President COMMSCOPE OPTICAL TECHNOLOGIES, INC. By: /s/ Jearld L. Leonhardt ---------------------------------- Name: Jearld L. Leonhardt Title: Vice-President 11 EXHIBIT A REVOLVING NOTE -------------- U.S. $30,000,000.00 New York, New York Dated as of November 16, 2001 FOR VALUE RECEIVED, OFS BRIGHTWAVE, LLC, a Delaware limited liability company (the "Borrower"), hereby promises to pay to the order of CommScope Optical Technologies, Inc., a corporation organized and existing under the laws of Delaware (the "CommScope"), in lawful money of the United States of America and in immediately available funds the principal sum of THIRTY MILLION DOLLARS (U.S. $30,000,000.00) or, if less, the unpaid principal amount of the Revolving Loan (as defined in the Agreement referred to herein) made by CommScope pursuant to Section 2.1 of the Agreement. The Borrower promises to pay principal in like money at said office at the times and in the amounts provided in the Agreement (as defined herein). The Borrower also promises to pay interest on the unpaid principal amount in like money at said office from the date such Loan is made until paid at the rates and at the times provided in the Agreement (as defined herein). This Note is the Revolving Note referred to in the Revolving Credit Agreement dated as of November 16, 2001, between the Borrower and CommScope (as from time to time in effect, the "Agreement"), and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to optional prepayment at the times and on the terms set forth in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. All payments to be made by the Borrower under or relating to this Note shall be made without set off or deduction of any nature, except as required by law or expressly provided in the Agreement. The Borrower hereby waives presentment, demand, protest and notice of any kind in connection with this Note. This Note shall be governed by and construed in accordance with the internal laws (and not the laws of conflicts) of the State of New York. 1 IN WITNESS WHEREOF, the Borrower has caused its duly authorized officer(s) to execute and deliver this Note as of the date first above written. OFS BRIGHTWAVE, LLC By: /s/ Osamu Sato ---------------------------------- Name: Osamu Sato Title: Executive Vice-President 2 EXHIBIT B NOTICE OF BORROWING ------------------- _______________, 200_ CommScope Optical Technologies, Inc. Lenoir-Rhyne Boulevard, SE Hickory, North Carolina 28603-0339 Attention: Jearld L. Leonhardt Gentlemen: The undersigned, OFS BrightWave, LLC, refers to that certain Revolving Credit Agreement dated as of November 16, 2001 (as amended from time to time, the "Agreement"; the terms defined therein being used herein as therein defined), between the undersigned and you, and hereby gives you irrevocable notice pursuant to Section 2.5 of the Agreement that the undersigned requests a Borrowing under Section 2.1 of the Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.5 of the Agreement: (i) The Business Day of the Proposed Borrowing is _______, 200_; and (ii) The aggregate principal amount of the Proposed Borrowing is $___________. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing that no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. Very truly yours, OFS BRIGHTWAVE, LLC By: ---------------------------------- Name: Title: 1 ADVANCES AND PAYMENTS OF PRINCIPAL ================================================================================ AMOUNT OF UNPAID AMOUNT OF PRINCIPAL PAID PRINCIPAL NOTATION DATE ADVANCE OR PREPAID BALANCE MADE BY ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EX-10.20 4 limited.txt LIMITED.TXT Exhibit 10.20 EXECUTION COPY -------------- =========================================================================== AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF OFS BRIGHTWAVE, LLC (A DELAWARE LIMITED LIABILITY COMPANY) BY AND AMONG OFS BRIGHTWAVE, LLC, FITEL USA CORP. AND COMMSCOPE OPTICAL TECHNOLOGIES, INC. DATED NOVEMBER 16, 2001 =========================================================================== TABLE OF CONTENTS ----------------- PAGE ---- ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS..........................2 1.1 Definitions....................................................2 ----------- 1.2 Accounting Terms and Determinations...........................11 ----------------------------------- 1.3 Additional Defined Terms......................................11 ------------------------ ARTICLE 2. GENERAL PROVISIONS.......................................11 2.1 Formation of Company..........................................11 -------------------- 2.2 Name of Company...............................................11 --------------- 2.3 Place of Business.............................................11 ----------------- 2.4 Registered Office and Registered Agent........................11 -------------------------------------- 2.5 Term..........................................................11 ---- ARTICLE 3. PURPOSES AND POWERS......................................11 3.1 Purposes......................................................11 -------- 3.2 Powers........................................................11 ------ ARTICLE 4. MANAGEMENT OF THE COMPANY................................12 4.1 Management of Company.........................................12 --------------------- 4.2 Board of Managers; Number and Selection.......................12 --------------------------------------- 4.3 General Powers of the Board of Managers.......................12 --------------------------------------- 4.4 Voting........................................................13 ------ 4.5 Quorum........................................................13 ------ 4.6 Regular Meetings..............................................13 ---------------- 4.7 Special Meetings..............................................13 ---------------- 4.8 Presence at Meetings..........................................13 -------------------- 4.9 Written Consent...............................................13 --------------- 4.10 Removal of Managers...........................................14 ------------------- 4.11 Resignation of Managers.......................................14 ----------------------- 4.12 Delegation of Manager's Powers; Officers......................14 ---------------------------------------- 4.13 Resignation and Removal of Officers...........................14 ----------------------------------- 4.14 Chief Executive Officer.......................................14 ----------------------- 4.15 Other Officers................................................15 -------------- 4.16 Limitations on Power of Board of Managers.....................15 ----------------------------------------- 4.17 Subsidiaries..................................................15 ------------ 4.18 Standard of Care; Fiduciary Duty..............................15 -------------------------------- 4.19 CommScope Optical Designees...................................16 --------------------------- ARTICLE 5. MEMBERS..................................................17 5.1 Liability of Members..........................................17 -------------------- 5.2 Authority of Members..........................................17 -------------------- 5.3 Voting........................................................17 ------ 5.4 Preemptive Rights.............................................17 ----------------- i ARTICLE 6. TRANSFERS AND REPURCHASES OF MEMBERSHIP INTERESTS........17 6.1 Transfer Restrictions.........................................17 --------------------- 6.2 Right of First Refusal........................................18 ---------------------- 6.3 Tag-Along Rights..............................................19 ---------------- 6.4 Take-Along Rights.............................................20 ----------------- 6.5 Assignment Binding on Company.................................21 ----------------------------- 6.6 Substituted Members...........................................21 ------------------- 6.7 Acceptance of Prior Acts......................................21 ------------------------ 6.8 Admission of Transferees to the Company.......................21 --------------------------------------- 6.9 Right to Call Membership Interests............................21 ---------------------------------- 6.10 Right to Put Membership Interests.............................23 --------------------------------- 6.11 Securities Laws...............................................24 --------------- ARTICLE 7. CAPITAL CONTRIBUTIONS, ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS........................................24 7.1 Initial Capitalization........................................24 ---------------------- 7.2 Capital Accounts..............................................25 ---------------- 7.3 Distributions.................................................25 ------------- 7.4 Tax Distributions.............................................25 ----------------- 7.5 Allocation of Net Profit or Net Loss..........................25 ------------------------------------ 7.6 Allocations of Nonrecourse Deductions; Minimum Gain --------------------------------------------------- Chargeback; Special Allocations and Rules.....................25 ----------------------------------------- 7.7 Section 704(c) Allocations....................................26 -------------------------- 7.8 No Restoration of Negative Capital Accounts...................27 ------------------------------------------- ARTICLE 8. INDEMNITIES..............................................27 8.1 Indemnities...................................................27 ----------- 8.2 Insurance.....................................................28 --------- ARTICLE 9. DURATION, DISSOLUTION AND LIQUIDATION....................28 9.1 Duration; Events Causing Dissolution..........................28 ------------------------------------ 9.2 Cancellation of Certificate...................................28 --------------------------- 9.3 Distributions Upon Dissolution................................28 ------------------------------ 9.4 Reasonable Time for Winding Up................................29 ------------------------------ ARTICLE 10. BOOKS OF ACCOUNT; REPORTS; TAXES.........................29 10.1 Books of Account..............................................29 ---------------- 10.2 Financial Statements and Information..........................29 ------------------------------------ 10.3 Tax Returns...................................................29 ----------- 10.4 Tax Matters Partner...........................................29 ------------------- 10.5 Fiscal Year...................................................29 ----------- 10.6 Tax Elections.................................................29 ------------- ARTICLE 11. REPRESENTATIONS AND WARRANTIES...........................30 11.1 Representations and Warranties................................30 ------------------------------ 11.2 Representations Regarding Purchase of Interests...............30 ----------------------------------------------- 11.3 Wholly-Owned Subsidiaries.....................................30 ------------------------- ii ARTICLE 12. OTHER AGREEMENTS AND MISCELLANEOUS PROVISIONS............31 12.1 Compliance with LLC Act.......................................31 ----------------------- 12.2 Additional Actions and Documents..............................31 -------------------------------- 12.3 Access to Information.........................................31 --------------------- 12.4 Confidentiality...............................................31 --------------- 12.5 Survival......................................................31 -------- 12.6 Amendments; Waivers...........................................31 ------------------- 12.7 Exercise of Rights............................................31 ------------------ 12.8 Assignment; Binding Effect; Benefit...........................32 ----------------------------------- 12.9 Entire Agreement..............................................32 ---------------- 12.10 Severability..................................................32 ------------ 12.11 Headings......................................................32 -------- 12.12 Governing Law.................................................32 ------------- 12.13 Partition.....................................................32 --------- 12.14 No Brokers....................................................32 ---------- 12.15 Counterparts..................................................32 ------------ 12.16 Enforcement Agreement.........................................32 --------------------- 12.17 Effect of Initial Public Offering.............................33 --------------------------------- 12.18 Notices.......................................................33 ------- 12.19 Consent to Jurisdiction.......................................34 ----------------------- 12.20 Waiver of Jury Trial..........................................34 -------------------- iii AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF OFS BRIGHTWAVE, LLC (A DELAWARE LIMITED LIABILITY COMPANY) This Amended and Restated Limited Liability Company Agreement (the "AGREEMENT") of OFS BrightWave, LLC, a Delaware limited liability company (the "COMPANY"), is adopted and entered into as of November 16, 2001 by and among the Company, Fitel USA Corp., a Delaware corporation ("FITEL USA"), CommScope Optical Technologies, Inc., a Delaware corporation ("COMMSCOPE OPTICAL"), and any Persons hereafter admitted pursuant to the terms hereof as Members of the Company. R E C I T A L S --------------- WHEREAS, on August 6, 2001 the Certificate of Formation of the Company was filed with the Secretary of State of the State of Delaware (as amended by the Amendment to the Certificate of Formation, as filed with the Secretary of State of the State of Delaware on September 20, 2001, the "CERTIFICATE"); WHEREAS, Fitel USA entered into a limited liability company agreement of the Company, as the sole Member of the Company, on October 11, 2001; WHEREAS, The Furukawa Electric Co., Ltd., a corporation organized under the laws of Japan ("FURUKAWA"), and Lucent Technologies Inc., a Delaware corporation ("LUCENT"), have entered into an Asset and Stock Purchase Agreement, dated as of July 24, 2001, as amended by Amendment No. 1 to the Asset and Stock Purchase Agreement, dated as of November 15, 2001 (as amended, the "PURCHASE AGREEMENT"), pursuant to which, among other things, Furukawa agreed to purchase substantially all of Lucent's Optical Fiber Solutions business other than Lucent's interest in two joint ventures in China ("OFS"), including the Business (as defined herein), subject to the terms and conditions set forth in the Purchase Agreement; WHEREAS, Furukawa and CommScope, Inc., a Delaware corporation ("COMMSCOPE") have entered into a Memorandum of Understanding, dated as of July 24, 2001, as amended and restated by the Amended and Restated Memorandum of Understanding, dated as of November 15, 2001 (as amended and restated, the "MOU"), pursuant to which Furukawa and CommScope agreed that the Company shall acquire the Business from Lucent pursuant to the Purchase Agreement; WHEREAS, concurrently with the execution and delivery of this Agreement, the Company and Lucent have entered into a Bill of Sale, Assumption and Assignment Agreement, dated as of the date hereof, pursuant to which the Company has acquired the Business from Lucent pursuant to the Purchase Agreement; WHEREAS, pursuant to the MOU, the Members desire to enter into this Agreement to amend and restate the limited liability company agreement of the Company in its entirety; and WHEREAS, the consummation of the other transactions contemplated by the MOU and the Purchase Agreement are taking place simultaneously with the execution and delivery of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements and promises contained herein, and intending to be legally bound hereby, the parties hereto agree to amend and restate the limited liability company agreement of the Company in its entirety as follows: ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS 1.1 Definitions. Unless otherwise specified, all references herein to Articles or Sections are to Articles or Sections of this Agreement. As used herein, the following terms shall have the meanings set forth below: "AFFILIATE" shall mean with respect to a specified Person, any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. As used in this definition, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, as trustee or executor, by contract or otherwise. "AGREEMENT" shall have the meaning set forth in the preamble. "APPENDIX A TRANSACTION" shall have the meaning set forth in Section 6.9(c). "ASSUMED TAX RATE" shall have the meaning set forth in Section 7.4. "BANKRUPTCY CODE" shall mean Title 11 of the United States Code, 11 U.S.C. Sections 101 et seq., as amended. "BANKRUPTCY EVENT" shall mean to institute proceedings to adjudicate a company, or any Subsidiary of such company, as bankrupt, or consent to the filing of a bankruptcy proceeding against a company or any Subsidiary of such company, or file a petition or answer or consent seeking reorganization of a company or any Subsidiary of such company under the Bankruptcy Code or any other similar applicable federal, state or foreign law, or consent to the filing of any such petition against a company or any Subsidiary of such company, or consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of a company or any Subsidiary of such company, or make an assignment for the benefit of creditors of a company or any Subsidiary of such company or admit in writing a 2 company's or any Subsidiary of such company's inability to pay its debts generally as they become due. "BOARD OF MANAGERS" shall have the meaning set forth in Section 4.1. "BUSINESS" shall mean the Cable Business as defined by the MOU or such other business as may be determined by the Board of Managers or conducted by the Company. "BUSINESS COMBINATION" shall have the meaning set forth in the definition of "Change of Control of CommScope". "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which banks in New York or Tokyo are required or permitted to be closed. "CALL TRANSACTION" shall have the meaning set forth in Section 6.9(b). "CALL TRANSACTION MEMBER" shall have the meaning set forth in Section 6.9(b). "CALL TRANSACTION NOTICE" shall have the meaning set forth in Section 6.9(b). "CAPITAL ACCOUNT" shall mean, with respect to any Member, the capital account of such Member maintained pursuant to Article 7, including all additions and subtractions thereto. "CAPITAL CONTRIBUTION" shall mean a capital contribution (other than any loan) by a Member to the Company. "CERTIFICATE" shall have the meaning set forth in the recitals. "CHANGE OF CONTROL OF COMMSCOPE" shall mean, with respect to CommScope or any entity resulting from a Change of Control of CommScope: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (A) the then outstanding shares of common stock (the "OUTSTANDING STOCK") of such company or (B) the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or managers (the "OUTSTANDING VOTING SECURITIES") of such company; provided that, for purposes of this clause (i), any acquisition by such company shall not constitute a Change of Control of such company; (ii) individuals who, as of the date hereof, constitute the board of directors (the "INCUMBENT BOARD") of such company cease for any reason to constitute at least 50% of the board of directors of such 3 company; provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by such company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a individual, entity or group (as defined above) other than the board of directors of such company) shall be considered a member of the Incumbent Board; (iii) the consummation of a reorganization, recapitalization, liquidation, dissolution, share exchange, merger or consolidation, or sale or other disposition of all or substantially all of the assets (a "BUSINESS COMBINATION") of such company, in each case, unless (A) following such Business Combination, the individuals and entities who were the beneficial owners, respectively, of the Outstanding Stock and Outstanding Voting Securities of such company immediately prior to such Business Combination (the "CONTINUING STOCKHOLDERS") beneficially own, directly or indirectly, 50% or more of the combined voting power of the Outstanding Stock or the Outstanding Voting Securities of, as the case may be, the corporation or other entity resulting from such Business Combination or (B) if the Continuing Stockholders own, directly or indirectly, less than 50% of the combined voting power of the Outstanding Stock or the Outstanding Voting Securities of, as the case may be, the corporation or other entity resulting from such Business Combination, (x) no individual, entity or group (excluding any corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the Outstanding Stock or the Outstanding Voting Securities of the corporation or other entity resulting from such Business Combination, (y) at least 50% of the members of the board of directors of corporation or other entity resulting from such Business Combination and the ultimate corporate parent of such corporation or other entity, if any, were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the board of directors of such company, providing for such Business Combination and (z) Frank M. Drendel, or his successor elected or appointed by a majority of the members of the Incumbent Board, is the chairman of the board of directors and the chief executive officer of the corporation or other entity resulting from such Business Combination and the ultimate corporate parent of such corporation or other entity, if any; 4 (iv) (A) there shall have occurred the entry by a court of competent jurisdiction of (x) a decree or order for relief in respect of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, in an involuntary case or proceeding under the Bankruptcy Code or any other applicable federal or state law or (y) a decree or order adjudging such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, bankrupt or insolvent, or seeking reorganization, of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, under any applicable federal or state law, or appointing a receiver, liquidator, assignee or trustee, of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, and, in each case, any such decree or order shall be unstayed and in effect, for a period of 90 consecutive days, or (B) such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, (x) commences a voluntary case or proceeding under the Bankruptcy Code or any other case or proceeding to be adjudicated bankrupt or insolvent, (y) consents to the filing of a bankruptcy proceeding against such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, (c) files a petition or answer or consent seeking reorganization of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, or relief under the Bankruptcy Code or any other similar applicable federal state law or foreign law, or consents to the filing of such petition against such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, or the appointment of, or taking possession by, a receiver, liquidator, assignee, or trustee in bankruptcy or insolvency of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, (d) makes an assignment for the benefit of creditors of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, or (e) admits in writing the inability of such company or any Subsidiary of such company that owns, directly or indirectly through its Subsidiaries, a Membership Interest, to pay its debts generally as they become due; or (v) such company shall have agreed to do any of the foregoing. 5 "CHANGE OF CONTROL OF FITEL USA" shall mean, with respect to Fitel USA or any entity resulting from a Change of Control of Fitel USA: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (A) the Outstanding Stock of such company or (B) the Outstanding Voting Securities of such company; provided that, for purposes of this clause (i), any acquisition by such company shall not constitute a Change of Control of such company; (ii) the consummation of Business Combination of such company unless following such Business Combination the Continuing Stockholders of such company beneficially own, directly or indirectly, 50% or more of the combined voting power of the Outstanding Stock or the Outstanding Voting Securities of, as the case may be, the corporation or other entity resulting from such Business Combination; or (iii) such company shall have agreed to do any of the foregoing. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMSCOPE" shall have the meaning set forth in the recitals. "COMMSCOPE ENTITIES" shall have the meaning set forth in Section 4.19(a). "COMMSCOPE OPTICAL" shall have the meaning set forth in the preamble. "COMMSCOPE OPTICAL DESIGNEE" shall have the meaning set forth in Section 4.2(a)(i). "COMPANY" shall have the meaning set forth in the preamble. "COMPANY SECURITY" shall have the meaning set forth in Section 5.4. "CONTINUING STOCKHOLDERS" shall have the meaning set forth in the definition of "Change of Control of CommScope". "CORNING" means Corning Incorporated, a New York corporation. "CORNING PATENT LICENSE" shall mean the Patent License Agreement, dated as of November 16, 2001, between Fitel USA and Corning relating to optical fiber. "CORNING DEFINED CONTROL" shall mean "CONTROL" as defined by the Corning Patent License. 6 "CTV MEMBER TRANSFER" shall mean (i) a sale of stock, merger, consolidation, share exchange, liquidation, dissolution, recapitalization or any other transaction (other than the issuance of director qualifying shares) pursuant to which any direct or indirect wholly owned Subsidiary of CommScope (or any successor of CommScope or entity resulting from a Change of Control of CommScope) which holds a Membership Interest ceases to be a direct or indirect wholly owned Subsidiary of CommScope (or any successor of CommScope or other entity resulting from a Change of Control of CommScope) or (ii) the transfer, sale or disposition of any right to receive a share of profits, losses or other allocations or distribution of the Company (other than any such transfer, sale or disposition that is a Direct Transfer or that is to a wholly owned Subsidiary of CommScope) by any Subsidiary of CommScope (or any successor of CommScope or other entity resulting from a Change of Control of CommScope) that owns, directly or indirectly through its Subsidiaries, a Membership Interest. "DIRECT TRANSFER" shall mean any transfer, sale, assignment, pledge, encumbrance, offer or other disposition of all or any portion of a Membership Interest by any Member. "DISSOLUTION DATE" shall have the meaning set forth in Section 9.1. "ELECTING MEMBER" shall have the meaning set forth in Section 6.2(d). "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXEMPT ISSUANCE" shall mean an issuance of any Company Security (i) to employees or Managers of, or to consultants or advisors to, the Company or any Subsidiary thereof pursuant to any bona fide equity purchase or option plan or other incentive compensation arrangements; (ii) to financial institutions or lessors (other than, in each case, Affiliates of the Company) in connection with commercial credit arrangements, in an amount not to exceed, in the aggregate for all such lenders, 10% of the fully-diluted equity interests in the Company then outstanding; (iii) in connection with any acquisition of another company or business by the Company or any Subsidiary of the Company, or any merger, consolidation, strategic joint venture or other business combination involving the Company or any Subsidiary of the Company other than, in each case, a transaction between Company or any Subsidiary of the Company and an Affiliate of the Company; or (iv) any Company Security issued in respect of goods or services provided to the Company or its Subsidiaries in a commercial transaction other than, in each case, a transaction between Company or any Subsidiary of the Company and an Affiliate of the Company, in an amount not to exceed, in the aggregate for all such Persons, 10% of the fully-diluted equity interests in the Company then outstanding. "EXERCISE NOTICE" shall have the meaning set forth in Section 6.9(c). "EXIT TRANSACTION" shall have the meaning set forth in Section 6.10. "EXIT TRANSACTION NOTICE" shall have the meaning set forth in Section 6.10. "EXIT PAYMENT DATE" shall have the meaning set forth in Section 6.10. 7 "FAIR MARKET VALUE" shall mean fair market value as determined by an independent investment banking firm selected by the unanimous approval of each Member proposing to purchase or sell a Membership Interest, whose decision shall be final, binding and conclusive upon each such Member, and its fees, costs and expenses shall be shared equally by, such Members. In the event that the Members are unable to agree on an independent investment banking firm within 14 calendar days of the event giving rise to the need to appoint the independent investment banker, each Member referred to above shall appoint an independent appointee within seven calendar days, and such appointees shall select an independent investment banking firm to determine Fair Market Value in accordance herewith. The appointed investment banking firm shall be instructed to determine Fair Market Value within 30 calendar days of appointment. "FINAL DISTRIBUTION" shall have the meaning set forth in Section 7.4. "FISCAL YEAR" shall mean each of the taxable years of the Company, as determined by the Board of Managers. "FITEL USA" shall have the meaning set forth in the preamble. "FITEL USA DESIGNEE" shall have the meaning set forth in Section 4.2(a)(ii). "FURUKAWA" shall have the meaning set forth in the recitals. "GAAP" shall mean United States generally accepted accounting principles. "INDEMNIFIED PERSON" shall have the meaning set forth in Section 8.1(a). "LLC ACT" shall mean the Delaware Limited Liability Company Act, as amended. "LOSSES AND EXPENSES" shall have the meaning set forth in Section 8.1(a). "LUCENT" shall have the meaning set forth in the recitals. "MAJOR DECISIONS" shall have the meaning set forth in Section 4.16. "MAJORITY MEMBER" shall mean a Member that, together with its Affiliates, has the right to designate a majority of the Managers on the Board of Managers. "MANAGER" shall have the meaning set forth in Section 4.2(a). "MEMBER" shall mean each of CommScope Optical and Fitel USA and any Substitute Member that, in each case, has not withdrawn, or, if other than an individual, dissolved. "MEMBERSHIP INTEREST" shall mean, with respect to any Member, such Member's limited liability company interest in the Company at any time, which shall equal a fraction (a) the numerator of which shall be the number of Membership Units (or other ownership units 8 or interests) of the Company owned (directly or indirectly) by such Member at such time and (b) the denominator of which shall be the number of fully-diluted Membership Units (or other ownership units or interests, or interests in the Company's profits pursuant to any other arrangement) of the Company then outstanding. "MEMBERSHIP UNITS" means nominal units used for the purpose of determining relative or percentage Membership Interests. On the date of this Agreement, the number of Membership Units held by each of the Members is as set forth on the Schedule of Interests attached hereto as Schedule A. "MINORITY MEMBER" shall mean a Member that, together with its Affiliates, does not have the right to designate a majority of the Managers on the Board of Managers. "MOU" shall have the meaning set forth in the recitals. "NON-TRANSFERRING MEMBERS" shall have the meaning set forth in Section 6.2(a). "OFFICERS" shall mean each of the individuals appointed by the Board of Managers to serve as Officers of the Company in accordance with Article 4. "OFS" shall have the meaning set forth in the recitals. "OUTSTANDING STOCK" shall have the meaning set forth in the definition of "Change of Control of CommScope". "OUTSTANDING VOTING SECURITIES" shall have the meaning set forth in the definition of "Change of Control of CommScope". "PAYMENT DATE" shall have the meaning set forth in Section 6.9(b). "PERSON" shall mean any natural person, corporation, company, partnership, limited liability company, firm, association, trust, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity. "PREEMPTION NOTICE" shall have the meaning set forth in Section 5.4. "PREEMPTION NOTICE TRANSACTION" shall have the meaning set forth in Section 5.4. "PURCHASE AGREEMENT" shall have the meaning set forth in the recitals. "QUARTERLY DISTRIBUTION" shall have the meaning set forth in Section 7.4. "RESTRICTED TRANSFEREE" shall have the meaning set forth in Section 6.1(b). "RESTRICTION PERIOD" shall have the meaning set forth in Section 6.1(a). "SCHEDULE OF INTERESTS" means Schedule A attached hereto, as the same will be amended from time to time to reflect any addition or withdrawal of Members, Direct Transfers of 9 Membership Interests or changes in any Member's Membership Interest in accordance with the provisions of this Agreement. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SUBSIDIARIES" of any Person shall mean any corporation or other legal entity of which such Person (either alone or through or together with any other Subsidiary) owns, directly or indirectly, more than 50% of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. "SUBSIDIARY TRANSFER" shall have the meaning set forth in 6.1(a). "SUBSTITUTE MEMBER" shall have the meaning set forth in Section 6.4. "SUSPENDED MEMBER" shall have the meaning set forth in Section 6.1(c). "SUSPENSION TRANSACTION" shall have the meaning set forth in Section 6.1(c). "TAG-ALONG INITIATOR" shall have the meaning set forth in Section 6.3(a). "TAG-ALONG INTERESTS" shall have the meaning set forth in Section 6.3(a). "TAG-ALONG NOTICE" shall have the meaning set forth in Section 6.3(a). "TAG-ALONG OFFEREE" shall have the meaning set forth in Section 6.3(a). "TAG-ALONG TRANSFER" shall have the meaning set forth in Section 6.3(a). "TAKE-ALONG INITIATOR" shall have the meaning set forth in Section 6.4(a). "TAKE-ALONG NOTICE" shall have the meaning set forth in Section 6.4(a). "TAKE-ALONG OFFEREE" shall have the meaning set forth in Section 6.4(a). "TAX AMOUNT" shall have the meaning set forth in Section 7.4. "TRANSFER" shall mean any CTV Member Transfer or Direct Transfer. "TRANSFER NOTICE" shall have the meaning set forth in Section 6.2(a). "TRANSFERRED INTEREST" shall have the meaning set forth in Section 6.2(a). "TRANSFERRING MEMBER" shall have the meaning set forth in Section 6.2(a). "TREASURY REGULATIONS" or "TREAS. REG." shall mean the regulations issued by the United States Department of the Treasury under the Code as now in effect and as may be amended from time to time, and any successor regulations. 10 1.2 Accounting Terms and Determinations. All accounting terms used herein and not otherwise defined shall have the meanings accorded to them in accordance with GAAP, and, except as expressly provided herein, all accounting determinations shall be made in accordance with GAAP, consistently applied. 1.3 Additional Defined Terms. Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the MOU. ARTICLE 2. GENERAL PROVISIONS 2.1 Formation of Company. The Members hereby (a) acknowledge the formation of the Company as a limited liability company pursuant to the LLC Act by virtue of the filing of the Certificate; (b) confirm and agree to their status as Members of the Company; and (c) execute this Agreement for the purpose of continuing the existence of the Company and establishing the rights, duties, and relationship of the Members, which shall be the limited liability company agreement of the Company under Section 18-101(7) of the LLC Act. 2.2 Name of Company. The name under which the Company shall conduct its business is OFS BrightWave, LLC or such other name as the Board of Managers shall determine from time to time provided that the name will not include any Member's name (or derivation thereof) without that Member's consent. 2.3 Place of Business. The principal place of business of the Company shall be at 2000 N.E. Expressway, Norcross, Georgia 30071 or at such other place as the Board of Managers shall determine from time to time. The Board of Managers may establish and maintain such other offices and additional places of business of the Company, either within or without the State of Delaware, as they from time to time deem appropriate. 2.4 Registered Office and Registered Agent. The street address of the initial registered office of the Company shall be 1209 Orange Street, Wilmington, Delaware, 19801. The Company's registered agent at such address shall be The Corporation Trust Company. 2.5 Term. The Company shall have perpetual existence unless earlier dissolved and terminated pursuant to Section 9.1 hereof. ARTICLE 3. PURPOSES AND POWERS 3.1 Purposes. The purposes of the Company shall be to own and operate the Business and any development thereof. Subject to the terms and conditions of this Agreement, the Company may engage in any and all other activities and transactions reasonably necessary or incidental to any of the foregoing and such other business and other activities as may be agreed upon by the Members or the Board of Managers. 3.2 Powers. Subject to the terms and conditions of this Agreement, the Company shall have the power to do any and all acts and things necessary, appropriate, advisable, or convenient for the furtherance and accomplishment of the purposes of the Company, including, 11 without limitation, to engage in any kind of activity and to enter into and perform obligations of any kind necessary to, or in connection with, or incidental to, the accomplishment of the purposes of the Company, as long as the activities and obligations may be lawfully engaged in or performed by a limited liability company under the LLC Act. ARTICLE 4. MANAGEMENT OF THE COMPANY 4.1 Management of Company. Except as otherwise expressly provided in this Agreement, the powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, a Board of Managers (the "BOARD OF MANAGERS") as described herein. 4.2 Board of Managers; Number and Selection. (a) The number of managers (each a "MANAGER") on the Board of Managers shall be not more than six (6) unless agreed otherwise by the Members representing a majority of the outstanding Membership Interests, and shall be selected as follows: (i) CommScope Optical (or an Affiliate of CommScope Optical to whom CommScope Optical has Direct Transferred all, but not less than all, of its Membership Interest) shall be entitled to designate a number of Managers on the Board of Managers in proportion to its Membership Interest, rounded down to the nearest whole number of Managers, provided that such number shall not be less than one for so long as CommScope Optical's Membership Interest (together with the Membership Interest of its Affiliates) exceeds 5% (each such Manager, a "COMMSCOPE OPTICAL DESIGNEE"); and (ii) Fitel USA shall be entitled to designate the remaining Managers on the Board of Managers (each such Manager, a "FITEL USA DESIGNEE"). (b) Each Member shall designate Managers it is entitled to designate by delivering to the Company and the other Members written notice designating each Manager and setting forth such Manager's business address and telephone number. Each Manager shall serve until such Manager submits his or her written resignation to the Board of Managers, until removed by the Member who shall have designated him or her to the Board of Managers, or until the dissolution or termination of the Company in accordance with Section 9.1. In the event that a Manager is removed, resigns, or is otherwise unable to serve on the Board of Managers, the Member who designated such Manager shall have the right to designate his or her successor. 4.3 General Powers of the Board of Managers. Except as may otherwise be expressly provided in this Agreement, the Board of Managers shall manage and control the business and affairs of the Company. The Board of Managers shall possess all power, on behalf of the Company, to do or authorize the Company or to direct the Officers of the Company, on behalf of the Company, to do all things necessary or convenient to carry out the business and affairs of the Company. 12 4.4 Voting. Except as otherwise provided in this Agreement, the Board of Managers shall act by the affirmative vote of a majority of the Managers. Each Manager shall have one (1) vote on all matters that arise before the Board of Managers. 4.5 Quorum. At any meeting of the Board of Managers, a quorum shall be three (3) or more Managers unless agreed otherwise by the Members representing a majority of the outstanding Membership Interests. A Manager expecting to be absent from a meeting shall be entitled to designate in writing (or orally provided such oral designation is later confirmed in writing) a proxy to act in his or her stead with respect to such meeting. 4.6 Regular Meetings. The Board of Managers shall hold regular meetings at least once each fiscal quarter, at the principal offices of the Company or at such other place as may be determined by the Chief Executive Officer. The Board of Managers shall establish meeting times, dates and places and requisite notice requirements and adopt rules or procedures consistent with the terms of this Agreement. Notice of each such regular meeting shall be given to each Manager by telecopy or similar method or sent by reputable overnight delivery service, in each case at least five Business Days before the meeting, unless a longer notice period is established by the Board of Managers. Any Manager may waive notice of, or the taking of any action at, any meeting in writing before, at, or after such meeting. The attendance of a Manager at a meeting shall constitute a waiver of notice of such meeting, except when a Manager attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not properly called. 4.7 Special Meetings. Special meetings of the Board of Managers may be called by any two Managers. The call shall be in writing and shall state the location of the meeting and the nature of the business to be transacted. Notice of each such meeting shall be given to each Manager by telecopy or similar method or sent by reputable overnight delivery service, in each case at least three calendar days before the meeting, unless a longer notice period is established by the Board of Managers. Any Manager may waive notice of, or the taking of any action at, any meeting in writing before, at, or after such meeting. The attendance of a Manager at a meeting shall constitute a waiver of notice of such meeting, except when a Manager attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not properly called. 4.8 Presence at Meetings. Any action required to be taken at a meeting of the Board of Managers, or any action that may be taken at a meeting of the Board of Managers, may be taken at a meeting held by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at such meeting. The Company shall permit any Manager or proxy of any Manager to participate by conference telephone. 4.9 Written Consent. Notwithstanding anything to the contrary in this Agreement, the Board of Managers may without a meeting take any action that may be taken by the Board of Managers under this Agreement if such action is approved by the written consent of that number of Managers otherwise required for action by the Board of Managers (but not less than the number of Managers as shall equal a quorum) and prior written notice of such action is given to each of the Members (or waived in writing by each Member). Notice of such action shall be 13 given to each Manager by telecopy or similar method or sent by reputable overnight delivery service. 4.10 Removal of Managers. A Manager may be removed at any time, with or without cause, by the written notice of the Member that designated such Manager, delivered to the Company and the other Members, demanding such removal. Upon the Company's receipt of such written notice, such Manager shall be automatically removed without further action. The Member that removed such Manager shall promptly designate a successor to such Manager; provided that its failure to do so shall not affect any removal effected thereunder or the ability of the Board of Managers to meet or take any action. If at any time a Member ceases to be a Member (or becomes a Suspended Member), any Manager designated by such Member shall be automatically removed without further action. 4.11 Resignation of Managers. Any Manager may resign at any time by giving written notice of his resignation to the Company. Such resignation shall take effect at the time specified therein, or if no time is specified, at the time of its receipt by the Company. In the event any Manager resigns or is unable to serve on the Board of Managers, the Member that designated such Manager shall promptly designate a successor to such Manager (subject to Section 4.19(c)); provided that its failure to do so shall not affect any resignation effected thereunder or the ability of the Board of Managers to meet or take any action. 4.12 Delegation of Manager's Powers; Officers. The Board of Managers shall have the right to delegate its authority by the same vote of the Board of Managers as would be required for the Board of Managers to take such action, to the extent provided in this Agreement, to Officers of the Company, to assist with the management of the business affairs of the Company. The Officers of the Company shall consist of a Chief Executive Officer, a Chief Financial Officer, a Secretary and one or more Vice Presidents. Any two or more offices may be held by the same person. The Officers of the Company shall report to the Chief Executive Officer unless the Board of Managers directs an Officer to report directly to the Board of Managers. 4.13 Resignation and Removal of Officers. An Officer may resign at any time by giving written notice to the Board of Managers or the Chief Executive Officer. A resignation is effective when it is received unless it specifies a later date. Officers may be removed at any time, with or without cause, by the Board of Managers. In the event any Officer resigns, is removed or is unable to serve as an Officer, the Board of Managers shall promptly designate a successor to such Officer. 4.14 Chief Executive Officer. The Chief Executive Officer of the Company shall have the powers and duties of supervision and management usually vested in the chief executive officer of a company. The Chief Executive Officer may sign, alone or with any of the Vice-Presidents or any other proper Officer of the Company thereunto authorized by the Board of Managers, any deeds, mortgages, bonds, contracts or other instruments which the Board of Managers has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Managers or by this Agreement to some other Officer or agent of the Company, or shall be required by law to be otherwise signed or executed, 14 and in general he or she shall perform all duties incident to the office of the Chief Executive Officer and other duties from time to time may be prescribed by the Board of Managers. 4.15 Other Officers. The other Officers of the Company shall have such powers and duties as may be delegated to such Officers by the Board of Managers. 4.16 Limitations on Power of Board of Managers. The enumeration of powers in this Agreement shall not limit the general or implied powers of the Board of Managers or any additional powers provided by law. Notwithstanding the foregoing and any other provision contained in this Agreement to the contrary, the Company shall not, and shall not permit its Subsidiaries to (the "MAJOR DECISIONS"): (a) take any action in contravention of, amend, modify or waive, the provisions of this Agreement or the Certificate in a manner (i) adverse to any Member's rights under this Agreement or the Certificate without the consent of any such Member then owning (together with its Affiliates) 10% or more of the fully-diluted Membership Interests then outstanding or (ii) materially adverse to any Member's rights under this Agreement or the Certificate without the consent of any such Member then owning (together with its Affiliates) 5% or more of the fully-diluted Membership Interests then outstanding; or (b) take any action that would constitute a Bankruptcy Event with respect to the Company without the consent of each Member then owning (together with its Affiliates) 10% or more of the fully-diluted Membership Interests then outstanding, or if CommScope and its Affiliates own less than 10% of the fully-diluted Membership Interests then outstanding, take any action that would constitute a Bankruptcy Event with respect to the Company without the consent of CommScope Optical if such action would cause CommScope's right to sell the Membership Interests held by it and its Affiliates under Section 5.6 of the MOU to become unenforceable or incapable of being exercised. 4.17 Subsidiaries. The provisions of this Agreement relating to the management and control of the business and affairs of the Company, and the respective rights and duties of, and restrictions on, the Board of Managers, Officers and the other Members, shall also be construed to be fully applicable to the management and control of any Subsidiary of the Company. In illustration and not in limitation of the foregoing, with respect to any such Subsidiary of the Company, the provisions of this Agreement relating to the respective rights and duties of, and restrictions on, the Board of Managers, the Officers and the other Members with respect to the management and control of the Company and its business shall be equally applicable to the management and control of such Subsidiary. 4.18 Standard of Care; Fiduciary Duty. No Member or Manager of the Company shall owe any fiduciary duty, other than the duty of a Manager to act with the care of a reasonably prudent person, to the Company, any Affiliate of the Company, any Member or any Affiliate of any of the foregoing. No Member shall have any claim against any other Member, any Manager or any Affiliate of any of the foregoing, based upon or arising from a claimed breach of a fiduciary duty, duty of loyalty, corporate opportunity doctrine, conflict of interest or any similar 15 basis, and each Member hereby waives any such claim on behalf of itself and its Subsidiaries and Affiliates. In taking any action, making any decision or exercising any discretion with respect to the Company or its Subsidiaries, a Manager or Member shall be entitled to consider such interests and factors as it desires, including its own interests or those of its Affiliates, and shall have no duty or obligation (a) to give any consideration to the interest of or factors affecting the Company or any other Person or (b) to abstain from participating in any vote or other action of the Company, any Subsidiary or Affiliate of the Company, the Board of Managers, or any board of directors or similar governing body of any of the foregoing. Nothing contained in this Section 4.18 shall constitute a waiver of any claim for breach of this Agreement by any Member. 4.19 CommScope Optical Designees. (a) CommScope Optical shall, and shall ensure that CommScope Optical's Affiliates, implement measures to prevent the CommScope Optical Designees (i) from receiving from CommScope Optical or any Affiliate of CommScope Optical (collectively the "COMMSCOPE ENTITIES") and (ii) from providing to any of the CommScope Entities, any information that may be competitively sensitive with respect to any competition between any of the CommScope Entities and the Company, including without limitation any information containing pricing, markets, customers, prospects, strategic planning, methods of operations, or employees of any of the CommScope Entities with respect to areas where any of the CommScope Entities competes with the Company; provided, however, that nothing in this Section 4.19 is intended to limit any right of CommScope set forth herein to obtain information necessary to protect and evaluate CommScope's investment in the Company. (b) CommScope Optical shall indemnify and hold harmless the Company, each Member and any Affiliate of any Member from any Losses and Expenses arising from (i) CommScope Optical's breach of this Section 4.19 or (ii) any federal, state or foreign antitrust law resulting from the participation of any CommScope Optical Designee in the affairs of the Company or any Subsidiary of the Company. (c) Notwithstanding anything contained herein to the contrary, the Majority Member shall have the right to (i) consent to the designation of the person designated as the CommScope Optical Designee or (ii) to remove as a Manager, at any time, the person designated as the CommScope Optical Designee, in each case, if the Majority Member determines, after consultation with counsel, that the identity of such person could create a risk of non-compliance with any antitrust or competition law. No person designated by CommScope Optical shall become a Manager of the Company prior to the receipt by the Company and CommScope Optical of the Majority Member's written notice of consent to the designation of such person as a CommScope Optical Designee pursuant to clause (i) above. If the written notice of consent is not delivered to CommScope Optical within ten Business Days of CommScope Optical's written notice to the Majority Member of the identity of its designee, the Majority Member shall be deemed to have consented to such person for purposes of clause (i) above. Upon the delivery of a written notice of removal, pursuant to clause (ii) above, to the Company or CommScope Optical with respect to any person designated as a CommScope Optical Designee, such person shall automatically cease to be a Manager without further action and CommScope Optical shall promptly designate a replacement Manager (subject to clause (i) above). 16 ARTICLE 5. MEMBERS 5.1 Liability of Members. Subject to the provisions of the LLC Act, the debts, obligations and liabilities of the Company shall be solely the debts, obligations and liabilities of the Company, and the Members shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member. The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under the LLC Act or this Agreement shall not be grounds for imposing personal liability on a Member for any liabilities of the Company. 5.2 Authority of Members. Except as set forth in Section 4.16 hereof, the Members shall not have any right or power to take part in the management or control of the Company or its business and affairs or to act for or bind the Company in any way. Notwithstanding the foregoing, the Members have all the rights and powers specifically set forth in this Agreement and, to the extent not inconsistent with this Agreement, in the LLC Act. 5.3 Voting. No Member has any voting right except with respect to those matters specifically set forth in this Agreement and as required in the LLC Act. 5.4 Preemptive Rights. If the Company proposes to issue any Membership Interest, warrants, options or rights to purchase any Membership Interest, any security which is or may be convertible into a Membership Interest or any other equity security of the Company or calls for additional Capital Contributions, regardless of form (each a "COMPANY SECURITY"), other than an Exempt Issuance, the Company shall, prior to such issuance, deliver to each Member a written notice (the "PREEMPTION NOTICE") thereof describing the terms and conditions of such issuance (the "PREEMPTION NOTICE TRANSACTION"). Such Members, by giving written notice to the Company not later than five (5) Business Days following the giving of the Preemption Notice, may participate as purchasers in the Preemptive Notice Transaction on a pro rata basis based on the proportion of such Member's Membership Interest relative to the amount of outstanding Membership Interests on a fully-diluted basis. The participating Members shall participate as a purchaser in such Preemption Notice Transaction for a price per Company Security equal to the price per Company Security being paid to the Company in such issuance and on the same terms and conditions as those applicable to the proposed purchaser in such Preemption Notice Transaction. The number of Company Securities to be issued by the Company to the proposed purchaser in such issuance shall be reduced by the number of Company Securities that the participating Members purchase pursuant to this Section 5.4. To the extent that any Member receiving the Preemption Notice does not accept the offer to participate in the Preemption Notice Transaction, the Company may issue such Company Securities to another Person on terms no less favorable to the Company than the terms set forth in such Preemption Notice. The right of Members to participate in the Preemption Notice Transaction is conditioned on the consummation of such Preemption Notice Transaction. ARTICLE 6. TRANSFERS AND REPURCHASES OF MEMBERSHIP INTERESTS 6.1 Transfer Restrictions. (a) For three years from the date hereof (the "RESTRICTION PERIOD"), no Direct Transfer shall be effected without the prior consent of the Board of 17 Managers (other than, in the case of CommScope Optical or its Affiliates, a Direct Transfer to Furukawa or its Affiliates; provided that a Member may Direct Transfer all or part of its Membership Interest to one or more of its wholly owned Subsidiaries at any time (a "SUBSIDIARY TRANSFER"). (b) At no time may any Direct Transfer of any Membership Interest be made to any Person (i) then listed in Appendix A to the Corning Patent License or (ii) engaged in the cable and/or fiber optics business (other than Furukawa or any Subsidiary of Furukawa) and headquartered in Japan (any such person described in clauses (i) or (ii), a "RESTRICTED TRANSFEREE") without the consent of the Board of Managers. (c) In the event that, without the prior approval of the Board of Manager, (i) a CTV Member Transfer is effected prior to the expiration of the Restriction Period or (ii) any CTV Member Transfer is entered into with a Restricted Transferee (any transaction described in clause (i) or (ii), a "SUSPENSION TRANSACTION"), the Member who engaged, or whose Affiliate engaged, in such transaction (the "SUSPENDED MEMBER") shall not be permitted to exercise any rights or privileges hereunder, all rights and privileges hereunder of such Suspended Member with respect to its Membership Interest shall be unenforceable and any Manager designated by such Suspended Member shall be automatically removed from the Board of Managers without any further action; provided that such Suspended Member shall not be relieved of any of its obligations arising under this Agreement; provided, further, that such Suspended Member shall be permitted to receive, subject to applicable antitrust and other competition laws and to the confidentiality provisions set forth in Section 12.4, such information as is necessary for such Suspended Member to monitor any determination of the Fair Market Value of such Suspended Member's Membership Interest hereunder. A Suspended Member shall cease to be a Suspended Member, and thereafter all rights and privileges of such Suspended Member as a Member shall be restored, upon the rescission, unwinding or undoing of the transaction that resulted in such Member becoming a Suspended Member. (d) All Direct Transfers, other than Subsidiary Transfers, must be made for cash and in compliance with all applicable securities laws. Any purported Direct Transfer in violation of applicable securities laws or this Article 6 shall be void ab initio, and shall not bind the Company, and the Member making such purported Direct Transfer shall indemnify and hold the Company and the other Members harmless from and against any federal, state, or local income taxes, or transfer taxes, including transfer gains taxes, and any other liability arising as a result of, or caused directly or indirectly by, such purported Direct Transfer. A Member shall not be relieved of any of its obligations arising under this Agreement prior to any Direct Transfer effected by such Member, and such Member and any transferee shall execute such documents as the Company and/or such other Members shall reasonably request to evidence the Transfer and the assumption and continuing obligations under this Agreement. 6.2 Right of First Refusal. (a) In the event that following the Restriction Period any Minority Member or Affiliate thereof (collectively, the "TRANSFERRING MEMBER") has received a bona fide written offer from a Person other than a Restricted Transferee, which such Transferring Member is willing to accept, for the Transferring Member to Direct Transfer all, but not less than all, of its Membership Interest (the "TRANSFERRED INTEREST"), such Transferring Member shall deliver a written notice (the "TRANSFER NOTICE") to all of the other Members (the "NON- 18 TRANSFERRING MEMBERS") stating the Transferring Member's intent to Direct Transfer the Transferred Interest pursuant to such bona fide offer. The Transfer Notice shall (i) specify the purchase price for and other material terms with respect to the Direct Transfer, (ii) identify the proposed purchaser of the Transferred Interest and (iii) specify the date scheduled for the Direct Transfer. (b) The Non-Transferring Members shall have the exclusive option to purchase all, but not less than all, of the Transferred Interest on terms and conditions substantially the same in all material respects as set forth in the written offer delivered pursuant to subsection (a) above, but at a price no less than that specified in the Transfer Notice; provided that no Non-Transferring Member shall be required to pay more than Fair Market Value for such Transferred Interest. The Non-Transferring Members shall notify the Company and the Transferring Member of their intention to exercise or not to exercise the right of first refusal hereunder within forty-five (45) calendar days of receipt by the Non-Transferring Member of a Transfer Notice. (c) In the event that a Non-Transferring Member elects to purchase the Transferred Interest (an "ELECTING MEMBER"), the Electing Member and the Transferring Member shall diligently pursue obtaining all regulatory approvals and use reasonable best efforts to consummate the closing of the purchase of the Transferred Interest as soon as practicable and in any event within 100 calendar days from receipt of the Transfer Notice; provided that, if such closing does not occur within such 100 calendar day period due to the failure to obtain any required regulatory approvals, the Electing Member's right to close such sale may be extended at the option of the Electing Member, until such regulatory approvals are obtained, but in no event for a period of greater than 100 additional calendar days. In the event of a failure of the Non-Transferring Member to elect to purchase all of the Transferred Interest or a failure of the Electing Member to consummate such purchase in accordance herewith, the Transferring Member will be free, at any time within 120 calendar days from the date all Non-Transferring Members elect not to exercise their purchase rights hereunder or from the date the time periods specified in this section for such election have expired, subject, in each case, to extension for up to an additional 120 calendar days to the extent necessary to achieve any required regulatory approvals, to consummate the sale of the Transferred Interest to the purchaser at a price and upon terms and conditions no more favorable to the purchaser than those specified in the Transfer Notice; provided that such Direct Transfer shall remain otherwise subject to the provisions of this Article 6. (d) At the closing of any proposed Transfer in respect of which a Transfer Notice has been delivered, the Transferring Member shall deliver, free and clear of all liens (other than this Agreement), to the Electing Members the Membership Interests elected to be purchased by such Electing Members and shall receive in exchange therefor the consideration to be paid or delivered by such Electing Members in respect of such Membership Interests as described in the Transfer Notice. 6.3 Tag-Along Rights. (a) In the event that (i) Majority Member desires to Direct Transfer any Membership Interest or (ii) an Affiliate of the Majority Member desires to transfer, sell, assign or offer 10% or more of the voting stock of (x) any Person whose assets consist exclusively or substantially in their entirety of Membership Interests or (y) any Person whose 19 assets consist exclusively or substantially in their entirety of any Person described in clause (x) above (any transaction described in clause (i) or (ii) above, a "TAG-ALONG Transfer"), the Majority Member or Affiliate of the Majority Member proposing to effect the Tag-Along Transfer (the "TAG-ALONG INITIATOR") shall give written notice of such intended Tag-Along Transfer to each other Member (each, a "TAG-ALONG OFFEREE") and to the Company. Such notice (the "TAG-ALONG NOTICE") shall set forth the terms and conditions of such proposed Tag-Along Transfer, including the name of the proposed transferee, the amount of Membership Interests proposed to be Tag-Along Transferred by the Tag-Along Initiator (the "TAG-ALONG INTERESTS"), the purchase price of Membership Interests proposed to be paid therefor or allocated thereto in good faith and the payment terms and type of Tag-Along Transfer to be effectuated. Each Tag-Along Offeree shall, by written notice to the Tag-Along Initiator and the Company delivered no later than 14 calendar days after delivery of the Tag-Along Notice by the Tag-Along Initiator to each Tag-Along Offeree and the Company, have the opportunity and right to sell to the transferee in such proposed Tag-Along Transfer (upon the same terms and conditions, or, in the case of a Tag-Along Transfer that is not a Direct Transfer, on substantially equivalent terms and conditions, as the Tag-Along Initiator) up to that amount of Membership Interests owned by the Tag-Along Offeree equal to the product of (x) a fraction, the numerator of which is the number of Membership Units owned as of such date by that Tag-Along Offeree and the denominator of which is the aggregate number of Membership Units owned as of such date by the Tag-Along Initiator and each Tag-Along Offeree that has accepted the opportunity to participate and (y) the aggregate number of Tag-Along Interests. The amount of Tag-Along Interests to be sold by any Tag-Along Initiator shall be proportionately reduced to the extent necessary to provide for such sales of Membership Interests hereunder by Tag-Along Offerees. Notwithstanding anything contained herein to the contrary, no Member that is not a Tag-Along Offeree shall have any rights under this Section 6.3. (b) At the closing of any proposed Transfer in respect of which a Tag-Along Notice has been delivered, the Tag-Along Initiator together with all Tag-Along Offerees electing to sell Membership Interests, shall deliver, free and clear of all liens (other than this Agreement), to the proposed transferee the Membership Interests to be sold and shall receive in exchange therefor the consideration to be paid or delivered by the proposed transferee in respect of such Membership Interests as described in the Tag-Along Notice. 6.4 Take-Along Rights. A Majority Member desiring to Direct Transfer (other than in a Subsidiary Transfer or a Direct Transfer to an Affiliate of the Majority Member) all, but not less than all, of the Membership Interests owned by it and its Affiliates (the "TAKE-ALONG INITIATOR") shall give written notice of such intended Transfer to each other Member (each, a "TAKE-ALONG OFFEREE") and to the Company. Such notice (the "TAKE-ALONG NOTICE") shall set forth the terms and conditions of such proposed Transfer, including the name of the proposed transferee, the purchase price proposed to be paid for such Membership Interests and the payment terms and type of Transfer to be effectuated. The Take-Along Initiator shall have the right, exercisable not later than 14 calendar days after delivery of the Take-Along Notice, to require each Take-Along Offeree to sell to the transferee in such proposed Transfer (upon the same terms and conditions as the Take-Along Initiator, including with respect to price and form of consideration) all of such Take-Along Offeree's Membership Interests. 20 (b) At the closing of any proposed Transfer in respect of which a Take-Along Notice has been delivered, the Take-Along Initiator together with all Take-Along Offerees electing to sell Membership Interests, shall deliver, free and clear of all liens (other than this Agreement), to the proposed transferee the Membership Interests to be sold and shall receive in exchange therefor the consideration to be paid or delivered by the proposed transferee in respect of such Membership Interests as described in the Take-Along Notice. 6.5 Assignment Binding on Company. No Direct Transfer of all or any part of the Membership Interest of a Member permitted to be made under this Agreement shall be binding upon the Company unless and until a duplicate original of such instrument of Direct Transfer, duly executed and acknowledged by the assignor or transferor and assignee or transferee (the "SUBSTITUTE MEMBER"), has been delivered to the Company, and such instrument evidences (i) the written acceptance by each Substitute Member of all of the terms and provisions of this Agreement and (ii) each Substitute Member's representation that such Direct Transfer was made in accordance with all applicable laws and regulations and the terms and provisions of this Agreement. 6.6 Substituted Members. Members who Direct Transfer all their Membership Interests pursuant to a Direct Transfer permitted under this Agreement shall cease to be Members of the Company except that unless and until a Substituted Member is admitted in its stead, the Direct Transferring Member shall not cease to be a Member of the Company under the LLC Act and hereunder. Notwithstanding Section 6.5, any Person who is an assignee or transferee of any Membership Interest of a Member and who has satisfied the requirements of Article 6 shall become a Substituted Member only when (i) the Board of Managers has entered such Person as a Member on the books and records of the Company, which the Board of Managers is hereby directed to do upon satisfaction of such requirements, and (ii) such Person shall have paid all reasonable legal fees and filing costs in connection with the substitution as a Member. 6.7 Acceptance of Prior Acts. Any person who becomes a Member, by becoming a Member, accepts, ratifies and agrees to be bound by all actions duly taken pursuant to the terms and provisions of this Agreement by the Company prior to the date it became a Member and, without limiting the generality of the foregoing, specifically ratifies and approves all agreements and other instruments as may have been executed and delivered on behalf of the Company and which were in force and effect prior to the date it became a Member. 6.8 Admission of Transferees to the Company. If the foregoing provisions of this Article 6 have been observed, an assignee or transferee of Membership Interests shall be admitted to the Company and shall have all other rights and obligations of a Member hereunder. 6.9 Right to Call Membership Interests (a) In the event that any Member (together with its Affiliates) owns 5% or less than the fully-diluted Membership Interests then outstanding, the Company shall have the right to purchase by written notice to the Member all, but not less than all, of such Member's (and its Affiliates') Membership Interest for an amount in cash equal to the Fair Market Value of such Membership Interest at the time notice of such exercise is given, and such notice, once given, shall be irrevocable; provided that the Company shall not exercise such right to purchase any 21 Membership Interest held by CommScope Optical or its Affiliates prior to the expiration of the Exercise Period and, in any event, only if CommScope does not timely exercise the right to sell Membership Interests in accordance with Section 5.6 of the MOU. (b) In the event of any CTV Member Transfer or Change of Control of CommScope (each, a "CALL TRANSACTION"), the Company shall have the right to purchase all, but not less than all, of the Membership Interest of any Member whose Affiliate entered into the Call Transaction (each, a "CALL TRANSACTION MEMBER"). Upon the execution of any agreement by any Affiliate of a Member to enter into a Call Transaction, each Call Transaction Member shall deliver prompt written notice to the Company that it has entered into a Call Transaction (a "CALL TRANSACTION NOTICE"). The Call Transaction Notice shall (i) specify the type of transaction proposed to be effected by the Call Transaction, (ii) identify the proposed parties to such Call Transaction and (iii) specify the date scheduled to effect the Call Transaction. The Company shall have the option (subject to consummation of the Call Transaction in the event of a Change of Control of CommScope) to purchase all, but not less than all, of the Call Transaction Member's (and its Affiliates') Membership Interest for an amount in cash equal to the then Fair Market Value of such Membership Interest. The Company shall exercise its option to purchase such Membership Interests by delivering a notice of exercise to the Call Transaction Member within forty-five (45) calendar days of receipt by the Company of a Call Transaction Notice. In the event that the Company elects to exercise its option to purchase the Membership Interest of the Call Transaction Member, (i) the Company shall deliver to the Call Transaction Member the purchase price for such Membership Interests within 100 calendar days of the determination of the Fair Market Value for such Membership Interests (such date, the "PAYMENT DATE") and (ii) during the period, if any, commencing on the consummation of the Call Transaction and ending on the earlier of (A) the consummation of the purchase by the Company of the Call Transaction Member's Membership Interest and (B) the Payment Date, the Call Transaction Member shall be deemed to be a Suspended Member. (c) In addition to, and not in limitation of, Section 6.9(b), if, at any time that CommScope and its Affiliates own 15% or more of the Membership Interests (whether calculated on a then actually outstanding or a fully-diluted basis), any entity listed on Appendix A to the Corning Patent License either (i) acquires, directly or indirectly, a 20% or greater equity interest in CommScope, or (ii) acquires, directly or indirectly, Corning Defined Control of CommScope (an "APPENDIX A TRANSACTION") then the Company (or the Majority Member or an Affiliate of the Majority Member) shall have the right, by notice to CommScope Optical (an "EXERCISE NOTICE"), to purchase from any CommScope Entity then owning Membership Interests, that amount of Membership Interests sufficient to reduce the CommScope Entities' collective ownership to 14.9% of the Membership Interests then actually outstanding or on a fully-diluted basis (whichever method would result in the CommScope Entities having the smaller aggregate ownership interest in the Company and its Subsidiaries), for a purchase price equal to 80% of the then Fair Market Value of such Membership Interests. The CommScope Entities shall give prompt written notice (but in no event later than one calendar day after the event giving rise to the obligation to give such notice) to the Company and the Majority Member (i) of an agreement with respect to an Appendix A Transaction, or, if no such agreement is entered into, upon consummation of an Appendix A Transaction or (ii) of any public filing with the U.S. Securities and Exchange Commission by any Person indicating the intention of such Person to commence or consummate an Appendix A Transaction. If the Company (or the 22 Majority Member or an Affiliate of the Majority Member) delivers an Exercise Notice, the Company (or the Majority Member or an Affiliate of the Majority Member) and the CommScope Entities shall consummate the purchase of CommScope Entity Membership Interests contemplated by this Section 6.9(c) within the time period set forth in Section 2.04 of the Corning Patent License within which Corning may not exercise its right to terminate the licenses to Fitel USA and/or its Affiliates thereunder. The Company (or the Majority Member or an Affiliate of the Majority Member) and the CommScope Entities agree that, to the extent that such purchase cannot be consummated within the time period set forth above, the parties shall enter into such escrow, trust or other arrangements as are necessary to avoid, pending consummation of such purchase, Corning's termination right under Section 2.04 of the Corning Patent License. Fitel USA shall give CommScope Optical and its Affiliates prompt notice of any amendment, modification or waiver of the Corning Patent License, including Appendix A thereto, that could reasonably affect CommScope Optical's and its Affiliates' obligations hereunder. (d) Upon the consummation of a purchase by the Company of any Membership Interest pursuant to this Section 6.9, the Member Direct Transferring such Membership Interests shall deliver, free and clear of all liens (other than this Agreement), to the Company the Membership Interests elected to be purchased by Company and shall receive in exchange therefor the consideration to be paid or delivered by the Company in respect of such Membership Interests as described above. 6.10 Right to Put Membership Interests. In the event of any Change of Control of Fitel USA (an "EXIT TRANSACTION"), each Minority Member shall have the right to sell all, but not less than all, of such Minority Member's Membership Interest to the Company. Upon the execution of any agreement by the Majority Member to enter into an Exit Transaction, the Majority Member shall deliver prompt written notice to the Company and each Minority Member that it has entered into an Exit Transaction (an "EXIT TRANSACTION NOTICE"). The Exit Transaction Notice shall (i) specify the type of transaction proposed to be effected by the Exit Transaction, (ii) identify the proposed parties to such Exit Transaction and (iii) specify the date scheduled to effect the Exit Transaction. Each Minority Member shall have the option (subject to consummation of the Exit Transaction) to sell all, but not less than all, of the Minority Member's Membership Interest to the Company for an amount in cash equal to the then Fair Market Value of such Membership Interest. A Minority Member shall exercise its option to sell such Membership Interests by delivering a notice of exercise to the Company within forty-five (45) calendar days of receipt by the Majority Member of an Exit Transaction Notice. In the event that a Minority Member elects to exercise its option to sell its Membership Interest to the Company, (i) the Company shall deliver to such Minority Member the purchase price for such Membership Interests within 100 calendar days of the determination of the Fair Market Value for such Membership Interests (such date, the "EXIT PAYMENT DATE") and (ii) during the period, if any, commencing on the consummation of the Exit Transaction and ending on the earlier of (A) the consummation of the purchase by the Company of such exercising Minority Member's Membership Interest and (B) the Exit Payment Date, such Minority Member shall be deemed to be a Suspended Member. Upon the consummation of a purchase by the Company of any Membership Interest pursuant to this Section 6.10, the Minority Member Direct Transferring such Membership Interests to the Company shall deliver, free and clear of all liens (other than this Agreement), to the Company the Membership Interests purchased by the Company and shall 23 receive in exchange therefor the consideration to be paid or delivered by the Company in respect of such Membership Interests as described above. 6.11 Securities Laws. The Membership Units have not been registered under the Securities Act, and, therefore, in addition to the other restrictions on transfer contained in this Agreement, no Membership Units or Membership Interest may be sold unless registered under the Securities Act or an exemption from such registration is then available. Any certificate (if any) evidencing Membership Units or any Membership Interest and each certificate issued in exchange for or upon the Transfer of any Membership Units or Membership Interest shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON NOVEMBER __, 2001 AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND THE ISSUER (THE "COMPANY") HAS NOT BEEN REGISTERED UNDER THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT COMPANY ACT"). THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED (X) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN THE ABSENCE OF AN EXEMPTION FROM REGISTRATION THEREUNDER, OR (Y) IF SUCH SALE OR TRANSFER CANNOT BE EFFECTED WITHOUT THE LOSS BY THE COMPANY OF ANY APPLICABLE INVESTMENT COMPANY ACT EXEMPTION. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER SPECIFIED IN THE LIMITED LIABILITY COMPANY AGREEMENT, DATED AS OF NOVEMBER __, 2001, AS AMENDED AND MODIFIED FROM TIME TO TIME. THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE." The legend set forth above shall be removed from the certificates (if any) evidencing any Membership Units or any Membership Interest which ceases to be a Membership Unit or Membership Interest in accordance with the definitions thereof. ARTICLE 7. CAPITAL CONTRIBUTIONS, ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS 7.1 Initial Capitalization. Concurrently with the execution of this Agreement, each Member shall (a) be deemed to have made a Capital Contribution in the amounts set forth in Schedule 7.1(a) and (b) make a loan to the Company in the amounts set forth in Schedule 7.1(b). 24 7.2 Capital Accounts. A separate Capital Account shall be established and maintained for each Member in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv). 7.3 Distributions. Except as set forth in Section 7.4, distributions, including the amount and timing thereof, shall be determined by the Board of Managers. Except as provided in Section 9.3(b), all distributions shall be distributed among the Members in the proportion that the number of Membership Units held by a Member bears to the total number of Membership Units held by all of the Members. 7.4 Tax Distributions. Unless prohibited by applicable law, the Board of Managers shall cause the Company to distribute, at the end of each quarterly accounting period of the Company an amount equal to the Tax Amount for such quarterly accounting period (each a "QUARTERLY DISTRIBUTION") and, within 60 calendar days after the end of each Fiscal Year, an amount equal to the excess (if any) of (a) the Tax Amount for such Fiscal Year over (b) the sum of all Quarterly Distributions previously made pursuant to this Section 7.4 for such Fiscal Year (each a "FINAL DISTRIBUTION"). The "TAX AMOUNT" for a Quarterly Distribution means the product of (x) the Assumed Tax Rate and (y) the estimated taxable income of the Company for the relevant quarterly accounting period, and for a Final Distribution means the product of (i) the Assumed Tax Rate and (ii) the taxable income of the Company for such Fiscal Year. The "ASSUMED TAX RATE" means, for any period, the marginal tax rate of a corporation subject to U.S. federal income tax at the highest applicable marginal tax rate in effect for such period plus 5%. Quarterly Distributions made pursuant to this Section 7.4 shall be made in a manner consistent with the estimated annual tax items of the Company, and each Quarterly Distribution shall be adjusted to the extent Quarterly Distributions for prior quarterly accounting periods did not correctly estimate such items. If the taxable income for a Fiscal Year has not been determined within 60 calendar days after the end of a Fiscal Year the Board of Managers shall make the Final Distributions called for by this Section 7.4 (if any) on an estimated basis and in the event that the taxable income exceeds the amount used in the estimate shall make additional distributions pursuant to this Section 7.4 in respect of such excess when the taxable income for the Fiscal Year is finally determined. 7.5 Allocation of Net Profit or Net Loss. Except as provided in Section 7.6, all items of profit, loss, deduction and credit for each Fiscal Year (or portion thereof) shall be allocated among the Members (and credited or debited to their Capital Accounts as provided in Treas. Reg. ss. 1.704-1(b)(2)(iv)) in the proportion that the number of Membership Units held by a Member bears to the total number of Membership Units held by all of the Members. 7.6 Allocations of Nonrecourse Deductions; Minimum Gain Chargeback; Special Allocations and Rules. (a) Notwithstanding any other provision of this Agreement, (i) "partner nonrecourse deductions" (as defined in Treas. Reg. Section 1.704-2(i)), if any, of the Company shall be allocated to the Member that bears the economic risk of loss within the meaning of Treas. Reg. Section 1.704-2(i), and (ii) "nonrecourse deductions" (as defined in Treas. Reg. Section 1.704-2(b)), if any, of the Company with respect to each period shall be allocated in the same proportion that the number of Membership Units held by a Member bears to the total number of Membership Units held by all of the Members. 25 (b) This Agreement shall be deemed to include "qualified income offset," "minimum gain chargeback" and "partner nonrecourse debt minimum gain chargeback" provisions within the meaning of Treasury Regulations under Section 704(b) of the Code. Accordingly, notwithstanding any other provision of this Agreement, items of gross income shall be allocated to the Members on a priority basis to the extent and in the manner required by such provisions. (c) Any special allocation of items pursuant to the above provisions of this Section 7.6 shall be taken into account in computing subsequent allocations pursuant to Section 7.5 so that the cumulative net amount of all items allocated to each Member shall, to the extent possible, be equal to the amount that would have been allocated to such Member if there had never been any special allocation pursuant to this Section 7.6. (d) Losses allocated to any Member with respect to any Fiscal Year shall not exceed the maximum amount of losses that can be so allocated without causing or increasing a deficit balance in a Member's Capital Account as of the end of the partnership taxable year to which such allocation relates (in excess of deficit amounts the Member is deemed obligated to restore and for other adjustments as provided in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)). If some but not all of the Members would have adjusted Capital Account deficits as a consequence of an allocation of losses pursuant to the immediately preceding sentence, the limitation set forth in such sentence shall be applied on a Member-by-Member basis and any such losses not allocable to a Member as a result of such limitation shall be allocated to the other Members in accordance with their positive Capital Account balances so as to allocate the maximum possible losses to each Member under Treas. Reg. Section 1.704-1(b)(2)(ii)(d). (e) For purposes of determining the profits, losses, or any other items allocable to any period, profits, losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Board of Managers under any permissible method under Code Section 706 and the Treasury Regulations thereunder. (f) The Capital Accounts of the Members shall be increased or decreased to reflect a revaluation of Company property at such time as the Board of Managers shall determine consistent with Treasury Regulation Section 1.704-1(b). (g) The provisions of this Article 7 are intended to comply with Code Section 704(b) and the Treasury Regulations thereunder and shall be interpreted consistent therewith. 7.7 Section 704(c) Allocations. (a) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial gross asset value using any reasonable method determined by the Board of Managers. (b) In the event that the gross asset value of any Company property is adjusted pursuant to Section 7.6(f) above, subsequent allocations of income, gain, loss, and deduction 26 with respect to such property shall take account of any variation between the adjusted basis of such property for federal income tax purposes and its gross asset value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. (c) Allocations pursuant to this Section 7.7 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of profits, losses, other items, or distributions pursuant to any provision of this Agreement. 7.8 No Restoration of Negative Capital Accounts. At no time shall a Member with a negative balance in its Capital Account have any obligation to the Company or to any other Member to restore such negative balance. ARTICLE 8. INDEMNITIES 8.1 Indemnities. (a) The Company shall indemnify and hold harmless (each an "INDEMNIFIED PERSON") (i) each Member and each Manager, (ii) each Affiliate of each Member, (iii) each of the foregoing's respective directors, officers, employees and agents and (iv) each of the heirs, executors, successors and assigns of any of the foregoing, from and against any and all damages, claims, losses, expenses, costs, obligations and liabilities including reasonable attorneys' fees and expenses incurred to enforce the terms of this Section 8.1 (collectively, "LOSSES AND EXPENSES") suffered or incurred by any such Indemnified Person arising from, relating to or otherwise in respect of, (A) any liability of the Company or (B) any act or omission performed or omitted by such Indemnified Person in its capacity as a Member or Manager (or as an Affiliate, director, officer, employee, agent, heir, executor, successor or assign of such Member or Manager or Affiliate) except for acts or omissions constituting gross negligence, bad faith, fraud or willful misconduct or breach of this Agreement. (b) If a claim by a Third Party is made against an Indemnified Person hereunder, and if such Indemnified Person intends to seek indemnity with respect thereto under this Section 8.1, such Indemnified Person shall promptly notify the Company in writing of such claims setting forth such claims in reasonable detail, provided that failure of such Indemnified Person to give prompt notice as provided herein shall not relieve the Company of any of its obligations hereunder, except to the extent that the Company is materially prejudiced by such failure. The Company shall have twenty (20) calendar days after receipt of such notice to undertake, through counsel of its own choosing, subject to the reasonable approval of such Indemnified Person, and at its own expense, the settlement or defense thereof, and the Indemnified Person shall cooperate with it in connection therewith; provided, however, that the Indemnified Person may participate in such settlement or defense through counsel chosen by such Indemnified Person, provided that the fees and expenses of such counsel shall be borne by such Indemnified Person. If the Company shall assume the defense of a claim, it shall not settle such claim without the prior written consent of the Indemnified Person, (i) unless such settlement includes as a term thereof the giving by the claimant of an unconditional release of the Indemnified Person from all liability with respect to such claim or (ii) if such settlement involves the imposition of equitable remedies or the imposition of any material obligations on such Indemnified Person other than financial obligations for which such Indemnified Person will be 27 indemnified hereunder. If the Company shall assume the defense of a claim, the fees of any separate counsel retained by the Indemnified Person shall be borne by such Indemnified Person unless and to the extent there exists a conflict between them as to their respective legal defenses (other than one that is of a monetary nature), in which case the Indemnified Person shall be entitled to retain separate counsel, the reasonable fees and expenses of which shall be reimbursed by the Company. If the Company does not notify the Indemnified Person within twenty (20) calendar days after the receipt of the Indemnified Person's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Person shall have the right to contest, settle or compromise the claim but shall not thereby be deemed to have waived any right to indemnity therefor pursuant to this Agreement. (c) No Member shall have any obligation or liability to any other Member arising out of or relating to any liability of the Company. 8.2 Insurance. The Company may purchase and maintain insurance, on behalf of the such Persons as the Board of Managers shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Persons in connection with the business or activities of the Company, regardless of whether the Company would have the power to indemnify such Persons against such liability under the provisions of this Agreement. ARTICLE 9. DURATION, DISSOLUTION AND LIQUIDATION 9.1 Duration; Events Causing Dissolution. The Company shall continue until the earlier of: (a) the unanimous vote of the Board of Managers; or (b) the entry of a decree of judicial dissolution under Section 18-802 of the LLC Act. The date of such dissolution is herein called the "DISSOLUTION DATE." 9.2 Cancellation of Certificate. Upon the dissolution of the Company, the Certificate shall be cancelled in accordance with the provisions of Section 18-203 of the LLC Act by the Board of Managers or any Member, trustee or liquidator designated by the Board of Managers who is responsible for winding up the affairs of the Company. 9.3 Distributions Upon Dissolution. (a) Upon the occurrence of the Dissolution Date, the Board of Managers shall designate a Member, trustee or liquidator to, without any unnecessary delay, sell or otherwise liquidate the assets of the Company and pay or make due provision for the payment of all debts, liabilities and obligations of the Company. (b) Such Member, trustee or liquidator shall distribute the net liquidation proceeds and any other liquid assets of the Company, after the payment of all debts, liabilities and obligations of the Company (including, without limitation, all amounts owing to a Member under this Agreement or under any agreement between the Company and the Member entered into by the Member other than in its capacity as a Member in the Company), the payment of expenses of liquidation of the Company, and the establishment of a reasonable reserve in an 28 amount estimated by the Member, or such trustee or liquidator to be sufficient to pay any amounts reasonably anticipated to be required to be paid by the Company, to the Members in the proportion that the number of Membership Units held by a Member bears to the total number of Membership Units held by all of the Members. 9.4 Reasonable Time for Winding Up. A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Company and the liquidation of its assets in order to minimize any losses otherwise attendant upon such a winding up. ARTICLE 10. BOOKS OF ACCOUNT; REPORTS; TAXES 10.1 Books of Account. The Company shall keep, accurate and complete records and books of account of all transactions of the Company. Such books and records shall be kept in accordance with GAAP applicable thereto, shall be maintained at the principal office of the Company and shall be available for inspection and examination by any Member, or its respective designee, at any reasonable time during regular business hours. The Company shall provide to each Member all such information and financial statements of the Company as such Member may reasonably request. All such information and financial statements shall be used for Company purposes only. 10.2 Financial Statements and Information. Any Member may request from the Company audited financial statements of the Company for a prior Fiscal Year to be presented no later than 45 calendar days after the end of each Fiscal Year. 10.3 Tax Returns. Fitel USA shall cause to be prepared, at the cost of the Company, and shall make available (at least 30 calendar days prior to the relevant due date (including extensions)) for review and comment by each of the Members, all necessary federal, state and local tax returns (including quarterly estimated tax information) of the Company. Fitel USA shall cause all such returns to be timely filed. 10.4 Tax Matters Partner. Fitel USA is hereby designated as the "tax matters partner" (as defined in the Code) of the Company and is authorized and required to represent the Company (at the expense of the Company) in connection with all examinations of the affairs of the Company by any federal, state, or local tax authorities, including any resulting administrative and judicial proceedings, and to expend funds of the Company for professional services and costs associated therewith; provided that Fitel USA shall provide CommScope Optical with prompt notice of the commencement of any such examination or other proceeding and shall keep CommScope Optical reasonably informed with respect to such examination or other proceeding. Expenses of administrative proceedings relating to the determination of Company items at the Company level undertaken by the "tax matters partner" will be deemed to be Company expenses. 10.5 Fiscal Year. The Fiscal Year of the Company for financial, accounting and federal, state and local income tax purposes shall be determined by the Board of Managers and shall initially be the calendar year. 10.6 Tax Elections. The Company intends to be treated as a partnership for U.S. federal income tax purposes. The Members agree that no election shall be made, and no action 29 shall be taken, to treat the Company as anything other than a partnership for U.S. federal income tax purposes. At the request of any Member (but subject to the consent (which shall not be unreasonably withheld) of the other Members), the Company shall make an election under Section 754 and the Treasury Regulations thereunder to adjust the basis of the assets of the Company pursuant to Section 734 and 743 of the Code. ARTICLE 11. REPRESENTATIONS AND WARRANTIES 11.1 Representations and Warranties. Each Member hereby represents and warrants to the Company and the other Members as follows: (a) (i) the execution and delivery of this Agreement by such Member, the performance by such Member of its obligations hereunder, and the consummation by such Member of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of such Member and (ii) this Agreement has been duly executed and delivered by such Member and, assuming the due execution and delivery by such Member, constitutes a legal, valid and binding obligation of such Member enforceable against it in accordance with its terms; (b) there is no action, suit or proceeding pending against such Member or, to such Member's knowledge, threatened in any court or by or before any other governmental agency or instrumentality which would prohibit such Member from entering into, or that could have a material adverse effect on such Member's ability to perform its obligations under, this Agreement; and (c) no consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required to be obtained by such Member that has not been obtained in connection with the execution, delivery and performance of this Agreement by such Member or the consummation by such Member of the transactions contemplated hereby. The execution, delivery and performance of this Agreement by such Member and the consummation of the transactions contemplated hereby by such Member does not conflict with, or result in a breach of, any law or regulation of any governmental authority applicable to such Member or any material agreement to which such Member is a party. 11.2 Representations Regarding Purchase of Interests. Each Member represents and warrants that it is purchasing the Membership Interest that it purchases pursuant to this Agreement for investment purposes only and not with a view to the resale of such Membership Interest (or any part thereof or interest therein) in violation of any applicable securities laws. 11.3 Wholly-Owned Subsidiaries. Fitel USA represents and warrants to CommScope Optical that it is an indirect wholly owned Subsidiary of Furukawa. CommScope Optical represents and warrants to Fitel USA that it is an indirect wholly owned Subsidiary of CommScope. 30 ARTICLE 12. OTHER AGREEMENTS AND MISCELLANEOUS PROVISIONS 12.1 Compliance with LLC Act. Each Member agrees not to take any action or fail to take any action which, considered alone or in the aggregate with other actions or events, would result in the dissolution or termination of the Company under the LLC Act. 12.2 Additional Actions and Documents. Each Member agrees to take or cause to be taken such further actions, to execute, acknowledge, deliver and file or cause to be executed, acknowledged, delivered and filed such further documents and instruments, and to use reasonable best efforts to obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. 12.3 Access to Information. Each Member shall provide to each other Member and their employees, counsel, auditors and representatives access, during normal business hours, information and assistance as is reasonably necessary for the Members to verify any amount allocated to the Company pursuant to this Agreement or for any other reason reasonably requested by the other party in connection with this Agreement. Each party shall reimburse the other for reasonable out-of-pocket costs and expenses incurred in assisting the other pursuant to this Section 12.3. 12.4 Confidentiality. Each Member shall comply with the terms and conditions of Section 6.2 of the MOU with respect to Confidential Information relating to the Company and its Subsidiaries as if such Member were bound thereby. 12.5 Survival. It is the express intention and agreement of the Members that all covenants, agreements, statements, representations, warranties and indemnities made in this Agreement shall survive the execution and delivery of this Agreement. 12.6 Amendments; Waivers. (a) Subject to Section 4.16(a), this Agreement and/or the Certificate may be amended, modified or waived by an instrument in writing signed by Members of the Company representing a majority of the Membership Interests. (b) Neither the waiver by a Member of a breach of, or a default under, any of the provisions of this Agreement, nor the failure of a Member, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right, remedy or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights, remedies or privileges hereunder. 12.7 Exercise of Rights. No failure or delay on the part of a Member or the Company in exercising any right, power or privilege hereunder and no course of dealing among the Members or between a Member and the Company shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative (except as expressly provided herein) and not exclusive of any other rights or remedies which a Member or the Company would otherwise have at law or in equity or otherwise. 31 12.8 Assignment; Binding Effect; Benefit. Except as expressly contemplated herein, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, provided that no such assignment will relieve the assigning party of any of its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 12.9 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements, written or oral, with respect to the matters provided for herein. 12.10 Severability. If any provision of this Agreement, or any application thereof to any circumstances, is invalid, in whole or in part, such provision or application shall to that extent be severable and shall not affect other provisions or applications of this Agreement. 12.11 Headings. The section and other headings of this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 12.12 Governing Law. This Agreement shall be governed by and construed both as to validity and enforceability in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions thereof. 12.13 Partition. The Members hereby agree that no Member nor any Substitute Member shall have the right, while this Agreement remains in effect, to have the property of the Company partitioned, or to file a complaint or institute any proceeding at law or in equity to have the property of the Company partitioned, and each Member, on behalf of itself, its successors, representatives and assigns, hereby waives any such right. 12.14 No Brokers. Each of the parties hereto warrants to each other that there are no brokerage commissions or finders' fees (or any basis therefor) resulting from any action taken by such party or any Person acting or purporting to act on its behalf in connection with entering into this Agreement. Each Member agrees to indemnify and hold harmless each other Member for all costs, damages or other expenses arising out of any misrepresentation made in this Section 12.14. 12.15 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which shall be deemed to be one and the same agreement. 12.16 Enforcement Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of Articles 4 or 6, or Section 12.4, of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of Articles 4 or 6, or Section 12.4, of this Agreement and to enforce specifically the 32 terms and provisions of Articles 4 or 6, or Section 12.4, of this Agreement in any court of competent jurisdiction, this being in addition to any other remedy to which they may be entitled at law or in equity. 12.17 Effect of Initial Public Offering. Effective immediately prior to an initial public offering of any Membership Interests or other Company Securities, (a) Section 4.16, Section 4.18, Section 5.4, Section 6.1, Section 6.2, Section 6.3, Section 6.4, Section 6.9 and Section 6.10 shall become null and void and have no effect and (b) notwithstanding the provisions of Section 4.2(a)(i), CommScope Optical shall not be entitled to designate any Managers on the Board of Managers; provided that, notwithstanding anything in this agreement to the contrary, no Member shall be relieved or released from any liabilities or damages arising out of such Member's breach of any provision of this Agreement. Notwithstanding anything contained herein to the contrary, nothing herein shall require the Company, or the Board of Managers or any Member to cause the Company, to engage in an initial public offering of Membership Interests or other equity securities of the Company or any Subsidiary of the Company, or otherwise to offer or sell any securities of the Company or any Subsidiary of the Company in any public offering or otherwise. 12.18 Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission and by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: If to Fitel USA: If to CommScope Optical: Fitel USA Corp. CommScope, Inc. c/o The Furukawa Electric Co., Ltd. Lenoir-Rhyne Boulevard, SE 6-1, Marunouchi, 2 chome Hickory, North Carolina 28603-2520 Chioda Ku United States of America Tokyo 100-8322 Attention: Frank B. Wyatt, II Attention: Mr. Koichi Nakamura Facsimile: 828-431-2520 Facsimile: 011-81-3-3286-3919 with a copy to: with a copy to: Masuda & Ejiri Fried, Frank, Harris, Shriver & Jacobson 399 Park Avenue, 18th Floor 1 New York Plaza New York, New York 10022 New York, New York 10004 United States of America United States of America Attention: Junji Masuda Attention: Christopher Ewan Facsimile: (212) 486-2614 Facsimile: (212) 859-8588 or to such other address as any party or other addressee shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. 33 12.19 Consent to Jurisdiction. The Company and each Member irrevocably submits, and agrees to cause their Subsidiaries and Affiliates to irrevocably submit to, the exclusive jurisdiction of the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby (and each agrees that no such action, suit or proceeding relating to this Agreement or any transaction contemplated hereby shall be brought by it or any of its Subsidiaries or Affiliates except in such court). The Company and each Member further agrees, and agrees to cause their Subsidiaries and Affiliates to agree, that service of any process, summons, notice or document by U.S. registered mail to such person's respective address set forth above shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. The Company and each Member irrevocably and unconditionally waives (and agrees not to plead or claim), and agrees to cause its Subsidiaries and Affiliates to irrevocably and unconditionally waive (and not to plead or claim), any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in the United States District Court for the Southern District of New York or that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. 12.20 Waiver of Jury Trial. The Company and each Member hereby waives, and agrees to cause each of its Subsidiaries and Affiliates to waive, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. The Company and each Member (a) certifies that no representative of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 12.20. 34 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. OFS BRIGHTWAVE, LLC By: /s/ Akira Wada -------------------------------------- Its: Akira Wada Attorney-in-fact -------------------------------------- FITEL USA CORP. By: /s/ Osamu Sato -------------------------------------- Its: Osamu Sato President & CEO -------------------------------------- COMMSCOPE OPTICAL TECHNOLOGIES, INC. By: /s/ Frank B. Wyatt, II -------------------------------------- Its: Frank B. Wyatt, II Vice-President -------------------------------------- SCHEDULE A ----------- Membership Interests -------------------- Name and Address Initial Initial of Member Membership Units Membership Interest ---------------------- ---------------------- ------------------------- Fitel USA 8,156,775 81.56775% CommScope Optical 1,843,225 18.43225% SCHEDULE 7.1(A) INITIAL CAPITAL CONTRIBUTIONS ----------------------------- FITEL USA INITIAL CAPITAL CONTRIBUTION $767,289,227.72 COMMSCOPE OPTICAL INITIAL CAPITAL CONTRIBUTION $173,388,000.00 i SCHEDULE 7.1(B) INITIAL LOANS ------------- COMMSCOPE OPTICAL INITIAL LOAN TO THE COMPANY $30 million EX-12 5 ex12.txt EXHIBIT 12 EXHIBIT 12
COMMSCOPE, INC. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT RATIOS) Year Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------- -------------- ------------- -------------- ------------- Income before income taxes and equity in losses of OFS BrightWave, LLC $ 55,213 $ 136,880 $ 108,627 $ 60,214 $ 61,514 Add: fixed charges 8,902 10,390 10,230 15,448 13,685 Less: capitalized interest (405) (176) - - - ------------- -------------- ------------- -------------- ------------- Total earnings as defined $ 63,710 $ 147,094 $ 118,857 $ 75,662 $ 75,199 Fixed charges: Interest expense $ 7,637 $ 9,354 $ 10,043 $ 15,298 $ 13,615 Capitalized interest 405 176 - - - Amortization of deferred financing fees 860 860 187 150 70 ------------- -------------- ------------- -------------- ------------- Total fixed charges as defined $ 8,902 $ 10,390 $ 10,230 $ 15,448 $ 13,685 ------------- -------------- ------------- -------------- ------------- RATIO OF EARNINGS TO FIXED CHARGES 7.16 14.16 11.62 4.90 5.49 ============= ============== ============= ============== =============
EX-21 6 ex_21.txt EXHIBIT 21 EXHIBIT 21 COMMSCOPE, INC. SUBSIDIARIES CommScope, Inc. of North Carolina Incorporated: North Carolina CommScope Nevada LLC Organized: Nevada CommScope Optical Technologies, Inc. Incorporated: Delaware CommScope International Holdings, Inc. Incorporated: Delaware CommScope Foreign Sales, Inc. Incorporated: Barbados EX-23.1 7 ex23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-30972, 333-54017, 333-33555 and 333-29725 on Forms S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 333-94691 on Form S-3 of CommScope, Inc. and subsidiaries of our report dated March 18, 2002 , appearing in this Annual Report on Form 10-K of CommScope, Inc. and subsidiaries for the year ended December 31, 2001, and to the reference to us under the heading "Experts" in the Prospectus, which is part of Registration Statement No. 333-94691. /s/ Deloitte & Touche LLP Hickory, North Carolina March 26, 2002 EX-23.2 8 ex23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statements No. 333-30972, 333-54017, 333-33555 and 333-29725 on Forms S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 333-94691 on Form S-3 of CommScope, Inc. and subsidiaries of our report dated March 11, 2002, which appears in this Annual Report on Form 10-K of CommScope, Inc. and subsidiaries for the year ended December 31, 2001. /s/ PricewaterhouseCoopers LLP Atlanta, Georgia March 25, 2002 EX-99.1 9 ex99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 COMMSCOPE, INC. EXHIBIT 99.1 - FORWARD-LOOKING INFORMATION The Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws provide a "safe harbor" for forward-looking statements. Our Form 10-K for the year ended December 31, 2000, our Annual Report to Stockholders, any Form 10-Q or Form 8-K of ours, or any other oral or written statements made by us or on our behalf, may include forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are identified, including without limitation, by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "think," "thinks," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We do not intend to update any forward-looking statements to reflect developments or information obtained after the date of this Exhibit 99.1 and are not undertaking any duty or obligation to do so. Our actual results may differ significantly from the results discussed in forward-looking statements. Factors that might cause such a difference include, but are not limited to, (a) the general political, economic and competitive conditions in the United States and other markets where we operate; (b) changes in capital availability or costs, such as changes in interest rates, market perceptions of the industry in which we operate, or security ratings; (c) employee workforce factors; (d) authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission; (e) significant joint ventures and acquisitions and the factors set forth below. OUR SALES AND PROFITABILITY MAY BE ADVERSELY AFFECTED BY CHANGES IN CABLE TELEVISION CAPITAL SPENDING. Most of our revenues come from sales to the cable television industry. Demand for our products depends primarily on capital spending by cable television operators for maintaining, constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore, our sales and profitability, will be affected by a variety of factors, including, without limitation: o general economic conditions; o acquisitions of cable television operators by non-cable television operators; o cable system consolidation within the industry; o the financial condition of domestic cable television operators and their access to financing; o competition from satellite and wireless television providers and telephone companies; o technological developments; and o new legislation and regulation of cable television operators. During 2001 cable television capital spending decreased significantly from recent historical levels. Our sales were negatively impacted by a significant slowdown in spending by AT&T as well as a slowdown in spending by our alternate service provider customers and our international customers. We cannot assure you that cable television capital spending will not continue to decrease in the future or when, if at all, it will increase. In addition, if we are unable to adequately manage our costs in response to reduced demand for our products, there could be a material adverse effect on our profitability. In recent years, cable television capital spending has been affected by new legislation and regulation, on the federal, state and local level. Many aspects of government regulation are currently the subject of judicial proceedings and administrative or legislative proposals. The Federal Communications Commission is continuing its implementation of the Telecommunications Act of 1996 (the "Telecom Act") 1 which, when fully implemented, may significantly impact the communications industry and alter federal, state and local laws and regulations regarding the provision of cable, internet and telephony services. The Telecom Act eliminates substantially all restrictions on the entry of telephone companies and certain public utilities into the cable television business. Telephone companies may now enter the cable television business as traditional cable operators, as common carrier conduits for programming supplied by others, as operators of wireless distribution systems, or as hybrid common carrier/cable operator providers of programming on so-called "open video systems." The economic impact of the Telecom Act, ongoing litigation in this regard, other federal legislation, and the rules implementing these laws on the cable television industry and our business is still uncertain. THE LOSS OF SOME OF OUR PRINCIPAL CABLE TELEVISION CUSTOMERS COULD MATERIALLY ADVERSELY AFFECT US. Although the domestic cable television industry is comprised of thousands of cable systems, a small number of cable television operators own a majority of cable television systems and account for a majority of the capital expenditures made by cable television operators. The loss of some or all of our principal cable television customers could have a material adverse effect on our business and financial condition. AT&T is the largest domestic multiple system operator and is one of our significant customers. We cannot assure you that the pending AT&T - Comcast merger, or subsequent potential regional clustering of cable systems and subscriber trades will not delay expected cable spending. THE INABILITY OF OUR CUSTOMERS TO OBTAIN ADEQUATE FINANCING TO FUND THEIR INFRASTRUCTURE PROJECTS COULD MATERIALLY ADVERSELY AFFECT US. Demand for our products depends primarily on cable system operators, wireless service providers, alternate service providers, and other customers and third parties continuing to construct, maintain, rebuild, and upgrade their wired and wireless communication infrastructure. The inability of our customers to obtain adequate financing to fund their infrastructure projects could have a material adverse effect on our business and financial condition. OUR FAILURE TO INTRODUCE NEW PRODUCTS SUCCESSFULLY, AND CHANGES IN TECHNOLOGY, COULD ADVERSELY AFFECT US. Many of our markets are characterized by advances in information processing and communications capabilities which require increased transmission speeds and greater capacity, or "bandwidth," for carrying information. These advances require ongoing improvements in the capabilities of wire and cable products. We believe that our future success will depend in part upon our ability to enhance existing products and to develop and manufacture new products that meet or anticipate these changes. The failure to introduce successful new or enhanced products on a timely and cost-competitive basis could adversely affect our business and financial condition. Fiber optic technology presents a potential substitute for the products that comprise most of our sales. Fiber optic cables have penetrated the cable television and local area network markets we serve in high-bandwidth point-to-point and trunking applications. Fiber optic cables have not significantly penetrated the local distribution and residential application markets we serve because of the high relative cost of electro-optic interfaces and the high cost of fiber termination and connection. At the same time, advances in data transmission equipment and copper cable technologies have increased the relative performance of copper-based cables which are our principal products. However, a significant decrease in the cost of fiber optic systems could make these systems superior on a price/performance basis to copper systems. While we are a fiber optic cable manufacturer and supplier to a small portion of the cable television market and certain specialty markets, a significant decrease in the cost of fiber optic systems would likely have an adverse effect on our coaxial cable sales. OUR INDUSTRY IS HIGHLY COMPETITIVE AND RAPID TECHNOLOGICAL CHANGE MAY LEAD TO FURTHER COMPETITION. Our coaxial, fiber optic and electronic cable products compete with those of a substantial number of foreign and domestic companies, some of which have greater resources, financial or otherwise, than 2 we have. The rapid technological changes occurring in the telecommunications industry could lead to the entry of new competitors. Existing competitors' actions and new entrants may have an adverse impact on our sales and profitability. We believe that we enjoy a strong competitive position in the coaxial cable market because of our position as a low-cost, high-volume coaxial cable producer and our reputation as a high-quality provider of state-of-the-art cables, along with our strong orientation toward customer service. However, we cannot assure you that we will continue to compete successfully with our existing competitors or that we will be able to compete successfully with new competitors. OUR DEPENDENCE ON COMMODITIES SUBJECTS US TO PRICE FLUCTUATIONS WHICH COULD ADVERSELY AFFECT US. The principal raw materials we purchase are fabricated aluminum, plastics, bimetals, copper and optical fiber. Our profitability may be affected by changes in the market price of these materials, which are linked to the commodity markets. Although we have generally been able to pass on increases in the price of these materials to our customers, we cannot assure you that we will be able to do so in the future. Additionally, significant increases in the price of our products due to increases in the cost of raw materials could have a negative effect on demand for our products. DIFFICULTIES WITH OUR KEY SUPPLIERS COULD ADVERSELY AFFECT US. A portion of our raw material purchases are bimetallic center conductors for coaxial cables. Management believes that our internal production of certain bimetallic center conductors, together with our current supply arrangement with Copperweld, addresses concerns regarding the continuing availability of these key materials and enhances our ability to support the demand for broadband cable. If we are unable to continue to purchase the necessary quantities of bimetallic center conductors from Copperweld, we may be unable to obtain these raw materials on commercially acceptable terms from another source. There are few, and limited, alternative sources of supply for these raw materials. We produce a substantial portion of our bimetallic center conductor requirements. Although the parent of Copperweld has filed for Chapter 11 debtor-in-possession reorganization, management does not believe this will affect our supply arrangement with Copperweld. However, the loss of Copperweld as a supplier of bimetallic center conductors, Copperweld's inability to supply, and/or our failure to manufacture or adequately expand our internal production of these products, could have a material adverse effect on our business and financial condition. In addition, we purchase fine aluminum wire from a limited number of suppliers. Fine aluminum wire is a smaller raw material purchase than bimetallic center conductors and we produce a significant portion of our demand internally. However, neither of these major raw materials could be readily replaced in sufficient quantities if all supplies from the respective primary sources were disrupted for an extended period and we were unable to continue to vertically integrate the production of these products. In such event, there could be a materially adverse impact on our financial results. Additionally, fluorinated-ethylene-propylene (FEP) is the primary raw material used throughout the industry for producing flame retarding cables for local area network applications. There are few worldwide producers of FEP and market supplies have been periodically limited over the past several years. Availability of adequate supplies of FEP will be critical to future local area network cable sales growth. Optical fiber is a primary material used for making fiber optic cables. There are few worldwide suppliers of optical fiber and market supplies have been tight in the past. Availability of adequate supplies of optical fiber will be critical to future fiber optic cable sales growth. We are also a large consumer of electricity and natural gas. Unforeseen increases in the cost of electricity or natural gas or interruptions or reductions in our current supply of electricity or natural gas could materially affect our ability to manufacture products in a cost-effective or timely manner. OUR BUSINESS IS SUBJECT TO THE ECONOMIC UNCERTAINTIES AND POLITICAL RISKS OF MAKING AND SELLING OUR PRODUCTS IN FOREIGN COUNTRIES. We believe that growth in international markets, including the developing markets in Asia, the Middle East and Latin America, and the expected privatization of the telecommunications structure in 3 many European countries, represents significant future opportunities for us. However, we cannot predict with certainty the outlook for international sales in the short-term due to political and economic uncertainties. We have increased our international manufacturing capabilities. Our international operations are subject to the usual risks inherent in operating abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions by foreign governments, nationalizations, the laws and policies of the U.S. affecting trade, foreign investment and loans, foreign tax laws and compliance with local laws and regulations. POTENTIAL ENVIRONMENTAL LIABILITIES MAY ARISE IN THE FUTURE AND ADVERSELY IMPACT OUR FINANCIAL POSITION. We are subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. We believe that our manufacturing facilities are in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on our financial condition. Our present and past facilities have been in operation for many years, and over that time in the course of those operations, these facilities have used substances which are or might be considered hazardous, and we have generated and disposed of wastes which are or might be considered hazardous. Therefore, it is possible that environmental issues may arise in the future which we cannot now predict. OUR INDEBTEDNESS COULD RESTRICT OUR OPERATIONS, MAKE US MORE VULNERABLE TO ADVERSE ECONOMIC CONDITIONS AND MAKE IT MORE DIFFICULT FOR US TO MAKE PAYMENTS ON OUR EXISTING DEBT. Our current and future indebtedness could have important consequences to you. For example, it could: o impair our ability to obtain additional financing in the future; o reduce funds available to us for other purposes, including working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes; o restrict our ability to introduce new products or exploit business opportunities; o increase our vulnerability to economic downturns and competitive pressures in the industry we operate in; o increase our vulnerability to interest rate increases to the extent variable-rate debt is not effectively hedged; o limit, along with the financial and other restrictive covenants in our indebtedness, our ability to dispose of assets or borrow additional funds; o make it more difficult for us to satisfy our obligations with respect to our existing debt; and o place us at a competitive disadvantage. THE RESTRICTIONS IMPOSED BY OUR EXISTING DEBT COULD NEGATIVELY AFFECT OUR BUSINESS AND OUR FAILURE TO COMPLY WITH THESE RESTRICTIONS COULD RESULT IN A DEFAULT UNDER OUR DEBT INSTRUMENTS. Our existing debt agreements contain covenants that restrict our ability and our subsidiaries' ability to: o dispose of assets; o incur additional indebtedness; o incur liens on property or assets; o repay other indebtedness; o pay dividends; 4 o enter into certain investments or transactions; o repurchase or redeem capital stock; o engage in mergers or consolidations; or o engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, our existing debt agreements contain financial covenants, including: o a total debt to EBITDA ratio; o a net worth maintenance; and o an interest expense coverage ratio. Our compliance with our covenants in the future may be affected by events beyond our control. Our breach of or failure to comply with any of the covenants could result in a default under our debt agreements. WE MAY EXPERIENCE DIFFICULTIES IN OBTAINING OR PROTECTING INTELLECTUAL PROPERTY. We may encounter difficulties, costs or risks in protecting our intellectual property rights or obtaining rights to additional intellectual property rights to additional intellectual property to permit us to continue or expand our business. Other companies, including some of our largest competitors, hold intellectual property rights in our industry and the intellectual property rights of others could inhibit our ability to introduce new products in our field of operations unless we secure licenses on commercially reasonable terms. OUR ACQUISITION OF AN EQUITY INTEREST IN OFS BRIGHTWAVE, LLC EXPOSES US TO RISKS OF LIMITED CONTROL AS WELL AS OTHER RISKS WHICH, AMONG OTHER THINGS, MAY MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. We have not previously participated in a venture with Furukawa and our acquisition of an equity interest in OFS BrightWave, LLC exposes us to risks of limited control. Additional potential risks and uncertainties include, but are not limited to, the ability to successfully manage BrightWave's operations and related technologies effectively, the ability of BrightWave to maintain Lucent's customer base, the ability of BrightWave to recruit and retain qualified employees, telecommunications industry capital spending and expected demand from AT&T and others. Actions by Furukawa or BrightWave, or the inability of BrightWave to operate according to its business plans, may adversely affect our results of operations. In addition, BrightWave may incur substantial losses that could adversely affect our results. 5 EX-99.2 10 ex99_2.txt EXHIBIT 99.2 Exhibit 99.2 OFS BRIGHTWAVE, LLC CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 2001) TO DECEMBER 31, 2001 OFS BRIGHTWAVE, LLC CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS - ------------------------------------------------------------------------------- FINANCIAL STATEMENTS: PAGE(S) Report of Independent Accountants 1 Consolidated Statement of Financial Position as of December 31, 2001 2 Consolidated Statement of Operations and Comprehensive Income for the period from inception (November 17, 2001) to December 31, 2001 3 Consolidated Statement of Changes in Members' Interest for the period from inception (November 17, 2001) to December 31, 2001 4 Consolidated Statement of Cash Flows for the period from inception (November 17, 2001) to December 31, 2001 5 Notes to the Consolidated Financial Statements 6-19 FINANCIAL STATEMENT SCHEDULES: Schedule II - Valuation and Qualifying Accounts For the period from inception (November 17, 2001) to December 31, 2001 20 All other schedules are omitted as they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of OFS BrightWave, LLC: In our opinion, the accompanying consolidated statement of financial position and the related consolidated statement of operations and comprehensive income, of changes in members' interest, and of cash flows present fairly, in all material respects, the financial position of OFS BrightWave, LLC ("the Company") at December 31, 2001, and the results of its operations and its cash flows for the period from inception (November 17, 2001) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1 and Note 3, the Company is a majority owned subsidiary of Fitel USA. Fitel USA also owns OFS Fitel and the two enterprises (the Company and OFS Fitel) have a supply agreement and contract manufacturing agreement with each other. The results of operations or financial position of the Company could differ from those that would have been obtained if the enterprises were autonomous. /s/ PricewaterhouseCoopers LLP March 11, 2002 Atlanta, Georgia OFS BRIGHTWAVE, LLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- ASSETS DECEMBER 31, 2001 Current assets Cash and cash equivalents $ 171,421 Accounts receivables 39,770 Receivable from affiliates 25,506 Inventories 61,354 Other receivable 7,508 Other current assets 10,067 ---------------- Total current assets 315,626 Property, plant and equipment, net 618,424 Amounts due from affiliates related to pension and other postretirement benefits 3,497 Identified intangible assets, net 170,855 Goodwill 128,833 Other assets 38 ---------------- Total assets $ 1,237,273 ================ LIABILITIES, MINORITY INTEREST AND MEMBERS' INTEREST Current liabilities Accounts payable $ 22,589 Payable to affiliates 24,191 Payroll and benefits liabilities 5,715 Acquisition related reimbursements to members 22,954 Acquisition related liabilities 25,938 Obligations under capital leases, current 1,481 Other current liabilities and accrued expenses 11,451 ---------------- Total current liabilities 114,319 Notes payable to members 150,000 Pension obligation and other postretirement benefits 3,791 Obligations under capital lease 4,163 Deferred income taxes 32,058 Other liabilities 3,599 Minority interest in equity of affiliates 52,400 ---------------- 360,330 ---------------- Members' interest 876,943 ---------------- Total liabilities, minority interest and members' interest $ 1,237,273 ================ The accompanying notes are an integral part of these financial statements. OFS BRIGHTWAVE, LLC CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 2001) TO DECEMBER 31, 2001 Revenues $ 29,340 Cost of revenues 65,951 ----------------- Gross margin (36,61l) ----------------- Operating expenses Research and development 794 In process research and development 13,000 Marketing and sales 3,823 General and administrative 7,004 Amortization of intangible assets 2,145 ----------------- Total operating expenses 26,766 ----------------- Operating loss (63,377) Interest expense, net (622) Other income from affiliates 1,431 Minority interest 1,315 ----------------- Loss before income taxes (61,253) Provision for income taxes ------------------ Net loss (61,253) Other comprehensive loss Foreign currency translation adjustments 2 ----------------- Comprehensive loss $ (61,251) ================== The accompanying notes are an integral part of these financial statements. OFS BRIGHTWAVE, LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- Balance at November 17, 2001 $ 938,194 Net loss for the period from inception (November 17, 2001) (61,253) to December 31, 2001 Effect of foreign currency translation 2 -------------- Balance at December 31, 2001 $ 876,943 ============== The accompanying notes are an integral part of these financial statements. OFS BRIGHTWAVE, LLC CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 2001) TO DECEMBER 31, 2001 Net cash provided (used) by operating activities Net loss $ (61,253) Adjustments to reconcile net income to net cash used in operations Depreciation of property, plant and equipment 7,542 Amortization and in-process research and development charge 15,145 Minority interest in equity of affiliates (1,315) Changes in assets and liabilities Accounts receivable (21,755) Receivable from affiliates (25,506) Inventories 16,144 Accounts payable 14,751 Payable to affiliates 24,191 Payroll and benefits liabilities 4,963 Change in pension assets and liabilities 490 Acquisition related reimbursements to members 2,947 Acquisition related liabilities (459) Other, net 5,551 ------------------- Net cash used in operating activities (18,564) ------------------- Cash flow from investing activities Cash expenditures for property and equipment (4,201) ------------------- Net cash used in investing activities (4,201) ------------------- Cash flow from financing activities Issuance of debt to members 150,000 Repayment of obligations under capital leases (124) ------------------- Net cash provided by financing activities 149,876 ------------------- Net (decrease) increase in cash 127,112 Cash and cash equivalents at beginning of period 44,309 ------------------- Cash and cash equivalents at end of period $ 171,421 =================== The accompanying notes are an integral part of these financial statements. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 1. BACKGROUND AND BASIS OF PRESENTATION The accompanying consolidated financial statements present the financial position, results of operations and cash flows of OFS BrightWave, LLC, a Delaware limited liability company ("the Company"), a majority owned subsidiary of Fitel USA Corporation, a Delaware corporation ("Fitel USA"). Fitel USA's ultimate parent is The Furukawa Electric Co., ltd. ("Furukawa") of Japan. The Company is a designer, manufacturer and supplier of leading edge optical fiber cable for high speed optical networks. The Company has facilities located in the United States, Brazil and Germany. The Company also manufactures fiber under a contract manufacturing agreement for OFS Fitel, LLC ("Fitel"), a wholly owned subsidiary of Fitel USA. These financial statements have been prepared in United States dollars and in accordance with generally accepted accounting principles in the United States of America ("GAAP"), using the push down accounting basis to record the acquisition described in Note 2. As described in Note 2, BrightWave is owned 81.6% by Fitel USA and 18.4% by CommScope Optical Technologies, Inc., a wholly-owned subsidiary of CommScope Inc. ("CommScope"). In addition, income and loss is allocated to the members proportionately according to their respective ownership interest in the Company. Fitel and Fitel USA are considered affiliates of the Company. 2. FORMATION OF COMPANY On November 17, 2001, the inception of the Company, Furukawa purchased Lucent Technologies' optical fiber solutions business for $2,300 million. The business operations were separated into two entities, Fitel and BrightWave. Fitel is comprised of the Optical Components Business ("Components"), the Specialty Photonics Business ("Specialty") and Optical Fiber ("Fiber"). BrightWave is comprised of the Fiber Optic Cable Business ("FOC") assets that provide contract- manufacturing services to Fiber and the manufacturing of fiber optic cable. CommScope, Inc. ("CommScope"), purchased an 18.4% interest in BrightWave for approximately $173 million at the time of Fitel USA's purchase of BrightWave. Approximately $1,359 million of the $2,300 million purchase price was allocated to Fitel and the balance, $941 million to BrightWave based on the relative fair value of the businesses. Certain joint ventures included in the purchase and valued at $7,000 are subject to the approval of the other partners in the respective joint ventures. Amounts to be paid for these joint ventures have not been paid by the members. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- The purchase price allocated to the Company was allocated to the tangible and intangible assets and liabilities and in-process research and development ("IPR&D") based upon their fair values at the date of the acquisition. The excess of the purchase price allocated to the Company over the fair value of the net assets and in-process research and development has been recorded as goodwill. The amount of the purchase price allocated to BrightWave was allocated as follows: Consideration paid by members $ 940,677 Less: Joint venture companies not included at closing and certain foreign representative offices (7,076) Costs incurred by members in formation of the Company, net of reimbursements 4,593 ------------- 938,194 Fair value of tangible assets at inception Cash 44,309 Trade receivables 18,015 Receivable due from Lucent 7,508 Inventory 77,497 Amounts due from affiliates related to pension and other postretirement benefits 3,733 Fixed assets 621,765 Other assets 10.233 ------------- 783,060 ------------- Fair value of liabilities at inception Acquisition related reimbursements to members (20,007) Acquisition related liabilities (26,397) Deferred tax liability (32,058) Other liabilities (23,986) Pension obligations (3,536) Minority interest (53,715) ------------- (159,699) ------------- Identifiable specified intangible assets 173,000 In process research and development 13,000 Goodwill 128,833 ------------- Total $ 938,194 ============= Acquisition reimbursements to members represents legal and severance benefit costs incurred by the respective members on behalf of the Company. Through a Memorandum of Understanding, the members agreed on amounts to be reimbursed upon formation of the Company. Acquisition related liabilities represents involuntary employee termination benefits and other costs that qualify for recognition under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- A charge of $13 million for IPR&D was recorded in the results from operations for the period ended December 31, 2001. The IPR&D product process technology includes proprietary technology that is currently under development to support future products. Specifically, projects to develop next generation optical fiber and cable designs were assessed in this analysis. An independent appraisal firm employed the royalty savings method to identify the fair value of the IPR&D and other identifiable intangibles. Discounted cash flow methods were employed to evaluate existing product process technology and incomplete technology. Future revenue projections were allocated for all existing technology and current IPR&D projects. All current IPR&D projects are expected to be released by late 2003. For both existing product process technology and IPR&D product process technology, initially allocated percentages of revenue are reduced over time. The pattern of reduction is intended to reflect the anticipated life cycle of the assets and the re-engineering of the assets over that life cycle. A discount rate of 15%, representing the required rate of return for the asset, was used in the determination of the fair value of the IPR&D process technology. 3. RELATED PARTY TRANSACTIONS INCLUDING DEBT DUE TO MEMBERS CONTRACT MANUFACTURING AND FIBER SUPPLY AGREEMENTS WITH OFS FITEL, LLC The Company entered into a 3-year renewable manufacturing agreement with Fitel. OFS BrightWave earns gross margin on the production and sale of fiber to Fitel as a contract manufacturer. The sales price of fiber to Fitel is based upon transfer prices established by the Board of Managers of the Company and Fitel. Under the agreement, the Company agrees to purchase all raw materials for fiber production from Fitel or a supplier designated by Fitel and be Fitel's contract manufacturer in conjunction with Fitel's own fiber making capacity. There were no purchases of raw materials from Fitel during the period from inception (November 17, 2001) to December 31, 2001. Concurrently, the Company entered into a 3-year renewable sale supply agreement with Fitel to purchase all of the necessary fiber used in the manufacturing of the Company's cable products. Fitel earns gross margin on the sale of fiber to the Company based upon transfer prices established by the Board of Managers of the Company and Fitel. For financial reporting purposes, no revenues are recognized on the sale of fiber to Fitel. The revenues and gross margin earned on the revenues is deferred until the fiber is sold to an external third party of Fitel or is sold as fiber optic cable to an external third party customer by the Company. Under the supply agreement, Fitel sold $12,590 of fiber to the Company during the period from inception (November 17, 2001) to December 31, 2001. The Board of Managers of the Company and Fitel are controlled by Fitel USA. NOTES PAYABLE TO MEMBERS On November 16, 2001 and in connection with CommScope's acquisition of an 18.4% interest in the Company, the Company entered into a credit facility with CommScope. The Agreement provides for a $30 million revolving credit facility maturing on November 16, 2006. The Company has drawn the full amount under the credit agreement as of December 31, 2001. Accrued interest is payable in quarterly installments. The revolving credit facility bears an interest rate determined by the 3-month London Interbank Offered Rate ("LIBOR") plus an applicable margin of 1.75%. The LIBOR rate was 1.82% at December 31, 2001. In OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- addition, the credit agreement contains certain covenants and restrictions that restrict or limit the incurrence of indebtedness. As of December 31, 2001, the Company is in compliance with these covenants and restrictions. On November 19, 2001, the Company entered into a revolving credit facility with Fitel USA. The agreement provides a $120 million revolving credit facility to the Company maturing on November 16, 2006. The Company has drawn the full amount under the credit agreement as of December 31, 2001. Accrued interest is payable in quarterly installments. The revolving credit facility bears an interest rate determined by the 3-month London Interbank Offered Rate ("LIBOR") plus an applicable margin of 1.75%. The LIBOR was 1.82% at December 31, 2001. In addition, the credit agreement contains certain covenants and restrictions, which restrict or limit the incurrence of indebtedness. As of December 31, 2001, the Company is in compliance with these covenants and indebtedness. Accrued interest payable at December 31, 2001 was approximately $49. SUPPORT FROM FURUKAWA Furukawa will provide the necessary funds to allow the Company to continue its operations through March 31, 2003. Hence, the Company's financial statements have been presented on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. OTHER The Company paid management fees to Fitel USA in the amount of $135 for the period from November 17 to December 31, 2001. The fee represents reimbursable costs incurred by Fitel USA for operating costs of the holding company. The Company recorded rental income in other income of $1.4 million from Fitel for its use of space at the Company's Norcross, Georgia facility. Transition from Lucent required the Company and Fitel to enter into certain transition service agreements with Lucent. Lucent charges the Company and Fitel for specific usage of their services including certain electronic data interfacing, payroll and benefits processing and information systems resources. The charges are allocated between the Company and Fitel based on headcount and percentage of revenue. For the period from inception (November 17, 2001) to December 31, 2001, the results from operations include $5.3 million for transition service agreements. The Company shares certain management and overhead services with Fitel, a wholly owned subsidiary of Fitel USA. These shared services consist of managerial resources, information technology, risk management, and human resources functions. The costs for these shared services are allocated between the Company and Fitel based on expected usage for these services. Management believes this provides a reasonable allocation of the charges. For the period from inception (November 17, 2001) to December 31, 2001, the results from operation include $4.5 million of allocated shared services charges. As part of the purchase of the interest in BrightWave, Furukawa granted CommScope a put for the amount of their investment interest in the Company of approximately $173 million. The put gives CommScope the right to sell to Furukawa all of the membership interest owned by CommScope and its Affiliates. The put is exercisable by CommScope OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- on the earlier of May 1, 2004 or the date BrightWave delivers audited financial statements for the fiscal year ended December 31, 2003 and ending on the date that is three months after such date. The put is an obligation of Furukawa and does not represent a liability of BrightWave. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The Company consolidates companies in which it exercises control. The results of subsidiaries are included in the consolidated financial statements from the effective date of acquisition. The Company eliminates all significant intercompany balances and transactions in consolidation. USE OF ESTIMATES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Significant estimates include the allowance for doubtful accounts, useful lives of fixed assets and identifiable intangible assets, and inventory reserves. Actual results could differ from those estimates. FOREIGN CURRENCY For operations outside of the United States that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are included in the consolidated statement of operations and comprehensive income. REVENUE RECOGNITION Revenue is generally recognized when all significant contractual obligations have been satisfied, collection of the fixed and determinable receivable is reasonably assured, and the product is delivered to a non-related third party customer. SHIPPING AND HANDLING COSTS Shipping and handling fees related to sales transactions are billed to customers and recorded as revenue. Shipping and handling costs incurred are recorded in cost of revenues. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash and cash equivalents represent bank deposits and certain short-term investments. All highly liquid investments with maturities of three months or less are considered to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (determined principally on a first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is determined using a straight-line method over the estimated useful lives of the various asset classes. Estimated lives range from three to twelve years for machinery, electronic and other equipment, and twenty-five years for buildings. Major renewals and improvements are capitalized and minor replacements, maintenance and repairs are charged to operations as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is reflected in the consolidated statements of operations. INTERNAL USE SOFTWARE Certain costs of computer software developed or obtained for internal use are capitalized and amortized on a straight-line basis over three years. Costs for general and administrative overhead, maintenance and training, as well as the cost of software that does not add functionality to the existing system, are expensed as incurred. GOODWILL AND OTHER ACQUIRED INTANGIBLES In accordance with SFAS 142, `Goodwill and Other Intangible Assets," goodwill is no longer amortized. Other intangible assets are amortized on a straight-line basis over the useful life of the asset, which is the period the asset is expected to contribute directly or indirectly to future cash flows. A range of 7 to 17 years has been used for amortization of specific intangible assets. IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS In accordance with SFAS 142, "Goodwill and Other Intangible Assets", goodwill will be reviewed for impairment on an annual basis. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets, other long-lived assets will be reviewed for impairment when factors indicate that a potential impairment may have occurred. Impairment occurs when the carrying amount of the asset exceeds its implied fair value. When the carrying amount of the asset exceeds the fair value, the Company recognizes an impairment loss in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the asset becomes its new accounting basis. ACCRUED PRODUCT WARRANTY COSTS The Company offers a wide variety of warranty terms for its products. Warranty accruals are determined based on historical results of the previous owner. All warranty obligations anticipated to be fulfilled beyond one year are classified as noncurrent liabilities. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- PENSION ASSETS AND BENEFIT OBLIGATION The pension and benefits asset information represents the Company's sponsored plans and its allocated share of Fitel's non-contributory pensions, health and welfare and life plan in which the Company participates. The allocation from plans participated in by the Company is based on the headcount and salary levels associated with the Company's employees for the period presented. Benefit obligations primarily consist of the Company's post retirement plan liability and are not based on allocation. INCOME TAXES The Company is organized as a limited liability company and is treated as a partnership for income tax purposes. Fitel USA and CommScope are responsible for the payment of taxes due on the earnings of the Company. The consolidated financial statements of the Company include wholly-owned corporations that are responsible for paying taxes as a corporation. For these corporations, the asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are recorded when necessary to reduce deferred tax assets to the realizable amounts. CONCENTRATION OF CREDIT RISK The Company expects a significant portion of its future revenues to continue to be generated by a limited number of customers. The loss of any of these customers or any substantial reduction in orders by any of these customers could materially and adversely affect the Company's operating results. RISKS AND UNCERTAINTIES The Company operates in several foreign jurisdictions, which present certain macroeconomic and regulatory risks and uncertainties. Areas of uncertainty include the likely future direction of economic and regulatory policy, as well as political developments. In certain instances, commercial and tax legislation contains provisions allowing for more than one interpretation. Accordingly, management's judgement concerning certain business transactions may not coincide with the interpretation of the same activities by the tax authorities. Additionally, the telecommunications industry remains highly regulated and restrictions in certain foreign countries may limit the degree in which foreign-owned entities may operate. Management of BrightWave is unable to predict what changes in conditions may occur and what the effects of such changes may have on the financial position and results of operations of the Company.
OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------------------------- 5. INTANGIBLE ASSETS AS OF DECEMBER 31. 2001 ------------------------------------ GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION ---------------- ---------------- Amortized intangible assets Trademark $ 21,000 $ (328) Existing Core Process Technology 57,000 (509) Existing Product Process Technology 58,000 (1,036) Customer Relationships 37,000 (272) ---------------- ---------------- Total $ 173,000 $ (2,145) ================ ================ Unamortized intangible assets Goodwill $ 128,833 --------------- Aggreoate Amortization Expense - ------------------------------- For period from inception (November 17, 2001) to December 31, 2001 including IPR&D charge $ 15,145 Estimated Amortization Expense For year ended 12/31/02 $ 17,159 For year ended 12/31/03 $ 17,159 For year ended 12/31/04 $ 17,159 For year ended 12/31/05 $ 17,159 For year ended 12/31/06 $ 17,159
The fair values of the acquired intangible assets were estimated using the expected present value of future cash flows. Amortization expense is calculated on a straight-line basis over a period ranging from 7 to 17 years. Trademarks are deemed to have a useful life of 8 years and will cease amortizing on November 17, 2009. Existing core process technology has a useful life of 14 years and will cease amortizing on November 17, 2015. The existing product process technology has a useful life of 7 years and will cease amortization on November 17, 2008. Customer relationships are amortized over a 17-year period. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 6. SUPPLEMENTAL INFORMATION DECEMBER 31, 2001 Inventories Raw materials $ 22,906 Work-in-process 29,936 Finished goods 8,512 ----------------- Total inventories $ 61,354 ================ Property, plant and equipment, net Land and improvements $ 29,351 Buildings and improvements 197,105 Machinery, electronic and other equipment 338,400 Construction-in-progress 61,110 ---------------- Total property, plant and equipment 625,966 Less: accumulated depreciation (7,542) ---------------- Property, plant and equipment, net $ 618,424 ================ DECEMBER 31, 2001 Depreciation of property, plant and equipment $ 7,542 7. COMMITMENTS AND CONTINGENCIES The Company has from time to time been involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of all current proceedings, claims and litigation will not materially affect the Company's combined financial position. The Company has five supply agreements in place with key suppliers that extend beyond fiscal 2001. The agreements commit the Company to purchases of $150 million and are effective through 2005. Penalty clauses are also included in the agreements and are based on the failure of the Company to purchase agreed upon volumes. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 8. LEASES The Company leases land, building and equipment under agreements that expire in various years. Rental expense under operating leases was $1,491 for the period from November 17 to December 31, 2001. The table below shows the future minimum lease payments due under non-cancelable operating leases at December 31, 2001: CAPITAL OPERATING LEASES LEASE 2002 $ 1,790 $ 10,712 2003 1,790 8,733 2004 1,790 7,846 2005 895 7,464 2006 - 6,239 Thereafter - 61,622 ----------- ------------- Total minimum obligations $ 6,265 $ 102,616 ============ Less interest on capital leases 621 ----------- Present value of net minimum obligation 5,644 Less: current portion 1,481 ----------- Long-term obligations at December 31, 2001 $ 4,163 =========== OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS OFS BrightWave sponsors a defined benefit pension plan, and a retiree healthcare plan and participates in a defined benefit pension a retiree healthcare plan and a retiree life insurance plan. Substantially all of the hourly employees are covered by these plans. The amounts shown in the following tables include an allocation of the components of net periodic benefit cost for the plans in which OFS Brightwave participates. The value of plan assets for the pension and other benefits include amounts that are anticipated to be transferred from Lucent's pension and other trusts to trusts established to pay these benefits. The following tables summarize benefit costs, as well as the assumptions, benefit obligations, changes in plan assets and funded status at or for the period from inception (November 17, 2001) through December 31.
PENSION OTHER BENEFITS BENEFITS 2001 2001 TOTAL ------------- --------------- ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 76,056 $ 30,869 Service cost 424 140 Interest cost 634 256 Actuarial (gain) or loss (3) - Benefits paid (156) (29) ----------- ------------- Benefit obligation at end of year 76,955 31,236 =========== ============= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 91,189 15,297 Actual return on plan assets 942 159 Employer contribution 495 2 Benefits paid (156) (29) ----------- ------------- Fair value of plan assets at end of year 92,470 15,429 ----------- ------------- Funded status 15,516 (15,807) Unamorized net (gain) or loss (3) - ----------- ------------- Prepaid (accrued) benefit cost $ 15,513 $ (15,807) =========== ============= Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 17,265 $ - Accrued benefit cost (1,752) (15,807) ----------- ------------- Net amount recognized $ 15,513 $ (15,807) ----------- ------------- Amounts due from (owed to) Fitel for plans which Brightwave participates $ 17,242 $ (13,745) $ 3,497 ----------- ------------- ------------ Pension obligations for plans which Brightwave sponsors $ (1,729) $ (2,062) $ (3,791) =========== ============= ============ WEIGHTED-AVERAGE ASSUMPTIONS AS DECEMBER 31 Discount rate 7.25% 7.25% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 4.50% N/A
OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- For measurement purposes, a 10 percent annual rate of increase in the per capita cost of covered health care benefits for participants under age 65 was assumed for 2002. The rate was assumed to decrease gradually to 5 percent for 2009 and remain at that level thereafter. A 12 percent annual rate of increase in the per capita cost of covered health care benefits for participants age 65 and over was assumed for 2002. The rate was assumed to decrease gradually to 5 percent for 2012 and remain at that level thereafter. PENSION OTHER BENEFITS BENEFITS 2001 2001 ------------- -------------- COMPONENT OF NET PERIODIC BENEFIT COST Service cost $ 424 $ 140 Interest cost 634 256 Expected return on plan asset (944) (159) ------------- --------------- Total net periodic benefit cost $ 114 $ 237 ============= =============== The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligation in excess of plan assets were $2,288, $1,519, and $561, respectively as of December 31, 2001. The Company has multiple non-pension postretirement benefit plans. The health care plans are contributory, with participants' contributions adjusted annually; the life insurance plan is noncontributory. The accounting for the health care plans anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to cap its portion of the cost. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the health care cost trend rates would have the following effects: 1% 1% INCREASE DECREASE Effect on total of service and interest cost components $ 16 $ (12) Effect on postretirement benefit obligation $ 632 $ (528) 10. INCOME TAXES The Company is a partnership for federal and state income tax purposes. Any taxes of the Company are the responsibility of the partners. The Company's foreign and domestic corporate subsidiaries file separate tax returns. The Company has not recorded an income tax provision as there was no material income subject to tax in its corporate subsidiaries. As of December 31, 2001, BrightWave's corporate subsidiaries have U.S. and Non-U.S. net operating loss carryforwards of approximately $7,400, which begin expiring at varying times. OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- The components of deferred tax assets and liabilities at December 31, 2001, for BrightWave's corporate subsidiaries subject to income tax, as are follows: DECEMBER 31, 2001 Deferred income tax assets Reserves and allowances $ 18 Net operating loss/credit carryforwards 2,769 ------------ Total deferred tax assets 2,787 Valuation allowance 740 ------------ Net deferred tax assets 2,047 Deferred income tax liabilities Property, plant and equipments (34,077) Intangibles (28) ------------- (34,105) ------------- Net deferred tax liability $ (32,058) ============= 11. SEGMENT REPORTING The Company has identified the following geographic reportable segments: North America, Europe/Middle East/Africa, and Other. Other includes Central America, Latin America, China, and Asia Pacific. The chief operating decision-makers of the Company evaluate the business on a global basis with consideration of resource allocation on a geographic basis. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on operating income. Revenues for each segment are based on the location of the third-party customer. All intercompany transactions between segments have been eliminated. Segment results for the period from November 17 to December 31, 2001 as follows:
EUROPE/ MIDDLE NORTH EAST/ COMBINED AMERICA AFRICA OTHER TOTAL ------------- ------------- ----------- --------------- FOR THE PERIOD FROM NOVEMBER 17 TO DECEMBER 31, 2001 Total revenues $ 25,377 $ 3,906 $ 57 $ 29,340 Depreciation and amortization 22,502 110 75 22,687 operating loss (60,892) (1,644) (841) (63,377) Long-lived assets 603,286 8,259 6,879 618,424 Capital expenditures 3,621 12 568 4,201
OFS BRIGHTWAVE, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 12. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligation." SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. OFS BRIGHTWAVE, LLC VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II (U.S. DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------
ADDITIONS BEGINNING ------------------------------ BALANCE OF PERIOD CHARGED CHARGE TO AS OF (NOVEMBER 17, TO OTHER DECEMBER 31, DESCRIPTION 2001) EXPENSES ACCOUNTS DEDUCTIONS 2001 ----------- -------------- ------------ ------------- -------------- ---------------- Allowance for uncollectible accounts $ - $ - $ - $ - $ - Allowance for deferred tax assets - - 740 - 740
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