-----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, Q6y/eibnKe8Hh3sNHaGDTZNxurRAXPnHAiEPsp/J69TkebJ0xVBBAj/Jzibw1gjo RVDCCEer/33wsDwFHXudmw== 0000895345-03-000535.txt : 20030811 0000895345-03-000535.hdr.sgml : 20030811 20030811153101 ACCESSION NUMBER: 0000895345-03-000535 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12929 FILM NUMBER: 03834435 BUSINESS ADDRESS: STREET 1: 1100 COMMSCOPE PLACE SE CITY: HICKORY STATE: NC ZIP: 28602 BUSINESS PHONE: 8283242200 MAIL ADDRESS: STREET 1: 1100 COMMSCOPE PLACE SE CITY: HICKORY STATE: NC ZIP: 28602 10-Q 1 lh10q_commscope.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 001-12929 COMMSCOPE, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-4135495 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1100 COMMSCOPE PLACE, SE P.O. BOX 339 HICKORY, NORTH CAROLINA (Address of principal executive offices) 28602 (Zip Code) (828) 324-2200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ---- ---- As of July 31, 2003 there were 59,219,567 shares of Common Stock outstanding. COMMSCOPE, INC. FORM 10-Q JUNE 30, 2003 TABLE OF CONTENTS Page No. ----------- Part I - Financial Information (Unaudited): Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Loss 6 Notes to Condensed Consolidated Financial Statements 7 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 Item 4. Controls and Procedures 20 Part II - Other Information: Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 2
COMMSCOPE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Net sales $ 141,422 $ 155,014 $ 270,790 $ 314,765 ------------- ------------- ------------- ------------- Operating costs and expenses: Cost of sales 112,623 123,291 217,874 247,617 Selling, general and administrative 21,811 41,060 41,881 62,293 Research and development 1,455 1,783 3,044 3,778 Impairment charges for fixed assets 31,728 - 31,728 - ------------- ------------- ------------- ------------- Total operating costs and expenses 167,617 166,134 294,527 313,688 ------------- ------------- ------------- ------------- Operating income (loss) (26,195) (11,120) (23,737) 1,077 Other income (expense), net (4) 746 205 359 Interest expense (2,183) (2,259) (4,341) (4,441) Interest income 715 566 1,332 1,006 ------------- ------------- ------------- ------------- Loss before income taxes and equity in losses of OFS BrightWave, LLC (27,667) (12,067) (26,541) (1,999) Provision for income tax benefit 10,237 4,465 9,820 740 ------------- ------------- ------------- ------------- Loss before equity in losses of OFS BrightWave, LLC (17,430) (7,602) (16,721) (1,259) Equity in losses of OFS BrightWave, LLC (33,945) (34,889) (37,727) (42,880) ------------- ------------- ------------- ------------- Net loss $ (51,375) $ (42,491) $ (54,448) $ (44,139) ============= ============= ============= ============= Net loss per share: Basic $ (0.87) $ (0.69) $ (0.92) $ (0.71) Assuming dilution $ (0.87) $ (0.69) $ (0.92) $ (0.71) Weighted average shares outstanding: Basic 59,220 61,758 59,220 61,737 Assuming dilution 59,220 61,758 59,220 61,737
See notes to condensed consolidated financial statements. 3
COMMSCOPE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (Unaudited) June 30, December 31, 2003 2002 -------------- ------------- ASSETS Cash and cash equivalents $ 140,281 $ 120,102 Accounts receivable, less allowance for doubtful accounts of $14,605 and $11,811, respectively 71,471 64,787 Inventories 37,437 36,254 Prepaid expenses and other current assets 25,979 20,737 Deferred income taxes 15,464 16,579 -------------- -------------- Total current assets 290,632 258,459 Property, plant and equipment, net 189,690 229,515 Goodwill, net of accumulated amortization of $59,561 and $59,520, respectively 151,349 151,334 Other intangibles, net of accumulated amortization of $41,182 and $39,930, respectively 7,583 8,835 Deferred income taxes 33,282 3,572 Investment in and advances to OFS BrightWave, LLC 51,574 111,528 Other assets 8,860 9,425 -------------- -------------- Total Assets $ 732,970 $ 772,668 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 18,122 $ 18,483 Other accrued liabilities 29,088 26,005 -------------- -------------- Total current liabilities 47,210 44,488 Long-term debt 183,300 183,300 Other noncurrent liabilities 32,506 27,345 -------------- -------------- Total Liabilities 263,016 255,133 Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at June 30, 2003 and December 31, 2002 -- -- Common stock, $.01 par value; Authorized shares: 300,000,000; Issued shares, including treasury stock: 61,762,667 at June 30, 2003 and December 31, 2002; Issued and outstanding shares: 59,219,567 at June 30, 2003 and December 31, 2002 618 618 Additional paid-in capital 383,541 383,541 Retained earnings 107,067 161,515 Accumulated other comprehensive loss (8,048) (14,915) Treasury stock, at cost: 2,543,100 shares at June 30, 2003 and December 31, 2002 (13,224) (13,224) -------------- -------------- Total Stockholders' Equity 469,954 517,535 -------------- -------------- Total Liabilities and Stockholders' Equity $ 732,970 $ 772,668 ============== ============== See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED -- IN THOUSANDS) Six Months Ended June 30, ---------------------------- 2003 2002 ------------- ------------ OPERATING ACTIVITIES: Net loss $ (54,448) $ (44,139) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 17,433 18,279 Equity in losses of OFS BrightWave, LLC, pretax 59,970 68,146 Impairment charges for fixed assets 31,728 -- Deferred income taxes (27,463) (20,688) Tax benefit from stock option exercises -- 128 Changes in assets and liabilities: Accounts receivable (5,750) 17,061 Inventories (338) (2,105) Prepaid expenses and other current assets (4,584) (1,880) Accounts payable and other accrued liabilities 2,965 7,719 Other noncurrent liabilities 2,609 2,659 Other 478 112 ------------- ------------ Net cash provided by operating activities 22,600 45,292 INVESTING ACTIVITIES: Additions to property, plant and equipment (2,512) (5,439) Proceeds from repayment of advance to OFS BrightWave, LLC -- 12,646 Proceeds from disposal of fixed assets 75 164 ------------- ------------ Net cash (used in) provided by investing activities (2,437) 7,371 FINANCING ACTIVITIES: Principal payments on long-term debt -- (1,371) Long-term financing costs (1,195) (336) Proceeds from exercise of stock options -- 1,029 ------------- ------------ Net cash used in financing activities (1,195) (678) Effect of exchange rate changes on cash 1,211 1,058 ------------- ------------ Change in cash and cash equivalents 20,179 53,043 Cash and cash equivalents, beginning of period 120,102 61,929 ------------- ------------ Cash and cash equivalents, end of period $ 140,281 $ 114,972 ============= ============ See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (UNAUDITED -- IN THOUSANDS, EXCEPT SHARE AMOUNTS) Six Months Ended June 30, -------------------------- 2003 2002 ------------ ------------- Number of common shares outstanding: Balance at beginning of period 59,219,567 61,688,256 Issuance of shares to nonemployee director - 1,000 Issuance of shares for stock option exercises - 73,411 ----------- ------------- Balance at end of period 59,219,567 61,762,667 ----------- ------------- Common stock: Balance at beginning of period $ 618 $ 617 Issuance of shares for stock option exercises - 1 ----------- ------------- Balance at end of period $ 618 $ 618 ----------- ------------- Additional paid-in capital: Balance at beginning of period $ 383,541 $ 381,823 Issuance of shares to nonemployee director - 16 Issuance of shares for stock option exercises - 1,028 Tax benefit from stock option exercises - 128 ----------- ------------- Balance at end of period $ 383,541 $ 382,995 ------------ ------------- Retained earnings: Balance at beginning of period $ 161,515 $ 228,667 Net loss (54,448) (44,139) ------------ ------------- Balance at end of period $ 107,067 $ 184,528 ------------ ------------- Accumulated other comprehensive loss: Balance at beginning of period $ (14,915) $ (4,593) Other comprehensive income (loss) 6,867 (4,734) ------------ ------------- Balance at end of period $ (8,048) $ (9,327) ------------ ------------- Treasury stock, at cost: Balance at beginning of period $ (13,224) $ - Treasury shares repurchased - - ------------ ------------- Balance at end of period $ (13,224) $ - ------------ ------------- Total stockholders' equity $ 469,954 $ 558,814 ============ =============
Three Months Ended Six Months Ended June 30, June 30, ------------------------- --------------------------- 2003 2002 2003 2002 ------------ ----------- ------------ ------------- Comprehensive loss: Net loss $(51,375) $(42,491) $ (54,448) $ (44,139) Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) - foreign subsidiaries (552) 2,119 (621) 2,136 Foreign currency transaction gain (loss) on long-term intercompany loans - foreign subsidiaries 6,953 (5,841) 9,149 (6,092) Hedging loss on nonderivative instrument - (887) - (791) Gain (loss) on derivative financial instrument designated as a cash flow hedge - (47) - 13 Loss on derivative financial instrument designated as a net investment hedge (850) - (1,661) - ------------ ----------- ------------ ------------- Total other comprehensive income (loss), net of tax 5,551 (4,656) 6,867 (4,734) ------------ ----------- ------------ ------------- Total comprehensive loss $(45,824) $(47,147) $ (47,581) $ (48,873) ============ =========== ============ ============= See notes to condensed consolidated financial statements.
6 COMMSCOPE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) 1. BACKGROUND AND BASIS OF PRESENTATION BACKGROUND CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned subsidiaries and equity method investee, operates in the cable manufacturing business, with manufacturing facilities located in the United States, Europe and Latin America. CommScope, Inc. was incorporated in Delaware in January 1997. CommScope is a leading worldwide designer, manufacturer and marketer of a wide array of broadband coaxial cables and other high-performance electronic and fiber optic cable products for cable television, telephony, Internet access, wireless communications and other broadband services. Management believes CommScope is the world's largest manufacturer of coaxial cable for hybrid fiber coaxial (HFC) broadband networks. CommScope is also a leading supplier of coaxial, twisted pair, and fiber optic cables for premise wiring (local area networks), wireless and other communication applications. In late 2001, CommScope acquired an equity interest in an optical fiber and fiber optic cable manufacturing business (see Note 5). BASIS OF PRESENTATION The condensed consolidated balance sheet as of June 30, 2003, and the condensed consolidated statements of operations, cash flows, stockholders' equity and comprehensive loss for the three and six month periods ended June 30, 2003 and 2002 are unaudited and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The unaudited interim condensed consolidated financial statements of CommScope have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the Company's December 31, 2002 audited consolidated financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-K. CONCENTRATIONS OF RISK Net sales to Comcast Corporation ("Comcast"), which merged with AT&T Broadband in November 2002, accounted for 17% and 20% of the Company's total net sales during the three and six months ended June 30, 2003, respectively. During the three and six months ended June 30, 2002, net sales to Comcast, as if combined with AT&T Broadband during the period, accounted for 16% of the Company's total net sales. No other customer accounted for 10% or more of the Company's total net sales for the three and six months ended June 30, 2003 and 2002. Accounts receivable from Comcast comprised approximately 17% of the Company's net accounts receivable as of June 30, 2003, compared to 23% as of December 31, 2002. Accounts receivable from another customer represented approximately 11% of net accounts receivable as of June 30, 2003, compared to 14% as of December 31, 2002. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED GOODWILL AND OTHER INTANGIBLE ASSETS The carrying value of other intangible assets as of June 30, 2003 in the amount of $7.6 million, net of accumulated amortization of $41.2 million, represents patented technology, with a carrying value of $0.1 million, and customer relationship assets, with a carrying value of $7.5 million. Amortization expense associated with these intangible assets was $0.6 million and $1.3 million for the three and six months ended June 30, 2003 and $0.6 million and $1.3 million for the three and six months ended June 30, 2002. Annual amortization expense for these other intangible assets is expected to be $2.5 million in 2003, $2.4 million in 2004, $2.4 million in 2005 and $1.5 million in 2006. The slight change in goodwill from December 31, 2002 to June 30, 2003 was due to the impact of translating the euro-denominated goodwill on the balance sheet of the Company's Belgian subsidiary into CommScope's US dollar reporting currency. STOCK OPTIONS As of June 30, 2003, the Company had one stock-based employee compensation plan, the Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan. The Company accounts for this plan under the intrinsic value method recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation using the Black-Scholes option pricing model:
Three Months Six Months Ended Ended June 30, June 30, -------------------- --------------------- 2003 2002 2003 2002 --------- ---------- ---------- ----------- Net loss, as reported $( 51,375) $( 42,491) $( 54,448) $( 44,139) Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 1,718 2,069 3,439 3,784 -------------------- ---------- ---------- Pro forma net loss $( 53,093) $( 44,560) $( 57,887) $( 47,923) ========== ========== ========== ========= Net loss per share: Basic--as reported $( 0.87) $( 0.69) $( 0.92) $( 0.71) Basic--pro forma $( 0.90) $( 0.72) $( 0.98) $( 0.78) Diluted--as reported $( 0.87) $( 0.69) $( 0.92) $( 0.71) Diluted--pro forma $( 0.90) $( 0.72) $( 0.98) $( 0.78)
RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to 2003 presentation. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide three alternative methods of transition for an entity that voluntarily adopts the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The provisions related to the alternative transition methods and the new disclosure requirements were effective for the Company as of December 31, 2002. There was no impact on the Company's financial condition or results of operations as a result of the adoption of SFAS No. 148, but the Company's disclosures related to stock-based compensation have been modified in accordance with the new requirements. The interim reporting provisions of SFAS No. 148 were effective for the Company as of March 31, 2003, and management has modified the Company's quarterly disclosures in accordance with the new requirements. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which is an interpretation of ARB No. 51, "Consolidated Financial Statements." FIN 46 addresses how to identify a variable interest entity and provides guidance on when such an entity should be consolidated by an enterprise. The Company does not currently hold an interest in a variable interest entity, thus the initial application of this Interpretation did not affect the Company's results of operations, financial position or disclosures. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the conditions under which a contract with an initial net investment meets the characteristic of a derivative; clarifies when a derivative contains a financing component; amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others;" and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified by the Company after June 30, 2003 and for hedging relationships designated by the Company after June 30, 2003. All provisions of this Statement will be applied prospectively. The application of this Statement is not expected to have a material effect on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It clarifies when an issuer must classify certain financial instruments as liabilities (or as assets, in some circumstances), rather than including them within stockholders' equity or separately classifying them as mezzanine equity. This Statement was effective for CommScope for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company in the third quarter of 2003. The Company has not issued any financial instruments within the scope of SFAS No. 150; therefore, the application of SFAS No. 150 is not expected to affect the Company's results of operations, financial position or disclosures. 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) 2. INVENTORIES June 30, December 31, 2003 2002 --------------- -------------- Raw materials $ 11,654 $ 12,402 Work in process 10,733 11,160 Finished goods 15,050 12,692 --------------- -------------- $ 37,437 $ 36,254 =============== ============== 3. LONG-TERM DEBT June 30, December 31, 2003 2002 --------------- -------------- Convertible Notes $ 172,500 $ 172,500 IDA Notes 10,800 10,800 --------------- -------------- $ 183,300 $ 183,300 =============== ============== The Company entered into a $100 million senior secured revolving credit facility, which closed January 10, 2003. The facility, which was established for future liquidity, working capital needs and other general corporate purposes, was not drawn at closing and has not been drawn in any amount from that date through June 30, 2003. The facility is secured by substantially all of the Company's domestic assets and can have a maximum availability of up to $100 million over its three and a half year expected term, subject to certain covenants and conditions contained in the agreement. As of June 30, 2003, the Company had availability of approximately $70 million and no outstanding borrowings under this senior secured revolving credit facility. 4. NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the applicable periods. Diluted net loss per share is based on net loss adjusted for after-tax interest and amortization of debt issuance costs related to convertible debt, if dilutive, divided by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options and convertible securities. On December 15, 1999, the Company issued $172.5 million in convertible notes, which are convertible into shares of common stock at a conversion rate of 20.7512 shares per $1,000 principal amount. The effect of the assumed conversion of these notes was excluded from the calculation of net loss per share, assuming dilution, for the three and six month periods ended June 30, 2003 and 2002 because it would have been antidilutive in all periods. Additionally, options to purchase approximately 6 million common shares were excluded from the computation of net loss per share, assuming dilution, for the three and six months ended June 30, 2003 because they would have been antidilutive in both periods. Options to purchase approximately 3.5 million and 2 million common shares were excluded from the computation of net loss per share, assuming dilution, for the three and six months ended June 30, 2002, respectively, because they would have been antidilutive in both periods. 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) 5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC Effective November 16, 2001, CommScope acquired an approximate 18.4% ownership interest in OFS BrightWave, LLC ("OFS BrightWave"), an optical fiber and fiber cable venture between CommScope and The Furukawa Electric Co., Ltd. of Japan. CommScope's portion of the losses of OFS BrightWave for the three and six month periods ended June 30, 2003 and 2002 has been included in the condensed consolidated financial statements of CommScope for the respective periods. These results are net of elimination of intercompany profit in the amount of $27 and $54, net of tax, for the three and six month periods ended June 30, 2003, respectively, and $21 and $52, net of tax, for the three and six month periods ended June 30, 2002, respectively, related to interest payments received from OFS BrightWave under a $30 million revolving note. OFS BrightWave has elected to be taxed as a partnership, therefore, the Company's income tax benefit from flow through losses has been recorded based on the Company's tax rates. Income tax expense or benefit provided by OFS BrightWave for income or losses generated by its c-corporation subsidiary does not flow through to CommScope and, therefore, does not impact CommScope's income tax benefit from flow-through losses of OFS BrightWave. However, the income tax expense or benefit provided for the income or loss generated by OFS BrightWave's c-corporation subsidiary does impact CommScope's equity in the net assets of OFS BrightWave, as shown in the reconciliation below. OFS BrightWave incurred significant charges during the three months ended June 30, 2003 primarily related to fixed asset impairment, restructuring and cost reduction efforts. The total of these charges recognized by OFS BrightWave in the second quarter of 2003 was $257.9 million. CommScope's equity method share of these charges resulted in an increase of $17.3 million in CommScope's noncurrent deferred tax asset during the three months ended June 30, 2003. OFS BrightWave also incurred charges of $211.0 million in the second quarter of 2002, primarily for the write off of goodwill and certain fixed assets, in addition to restructuring and cost reduction efforts. The following table provides summary financial information for OFS BrightWave for the three and six month periods ended June 30, 2003 and 2002 and as of June 30, 2003 and December 31, 2002:
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Income Statement Data: Net revenues $ 21,781 $ 22,039 $ 50,046 $ 48,836 Gross profit ( 41,839 ) ( 63,378 ) ( 62,392 ) ( 111,811 ) Loss from continuing operations ( 292,553 ) ( 269,560 ) ( 325,357 ) ( 338,643 ) Net loss ( 292,553 ) ( 269,560 ) ( 325,357 ) ( 338,643 )
As of ------------------------- December June 30, 31, 2003 2002 ------------ ------------ Balance Sheet Data: Current assets $79,113 $83,876 Noncurrent assets 385,962 655,265 Current liabilities 69,372 57,353 Other noncurrent liabilities 225,222 182,297 Minority interests 41,595 45,338 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) The reconciliation of CommScope's investment in and advances to OFS BrightWave compared to CommScope's equity in the net assets of OFS BrightWave as of June 30, 2003 and December 31, 2002 was as follows:
As of ------------------------------ June 30, December 31, 2003 2002 ------------ -------------- Net assets of OFS BrightWave, LLC $128,886 $454,153 CommScope ownership percentage 18.43225 % 18.43225 % ------------ ------------- CommScope equity in net assets of OFS BrightWave, LLC 23,757 83,711 Plus: Notes receivable from OFS BrightWave, LLC 30,000 30,000 Direct costs of acquisition 4,763 4,763 Pushdown and other adjustments by majority member in OFS BrightWave, LLC ( 1,036 ) ( 1,036 ) Less: Income tax benefit related to CommScope's share of losses generated by OFS BrightWave, LLC's domestic c-corporation subsidiary ( 5,910 ) ( 5,910 ) ------------- ------------- Investment in and advances to OFS BrightWave, LLC $ 51,574 $111,528 ============= =============
6. IMPAIRMENT CHARGES FOR FIXED ASSETS During the three months ended June 30, 2003, management concluded that certain manufacturing assets had no future use to the Company and initiated a formal impairment review of these assets based on this change in circumstances. Most of these assets were used in or acquired for use in the manufacture of the Company's broadband and video distribution products ("Broadband/Video Products"), which have been adversely affected by the difficult global business environment in telecommunications and an ongoing decline in demand both domestically and internationally. These assets were either uninstalled, underutilized, or idle, generating no current operating cash flows. In addition, based on management's conclusion that these assets had no future use to the Company, there were no expected future operating cash flows for these assets. This absence of operating cash flows indicated that the carrying amounts of these assets may not be recoverable as of June 30, 2003. Accordingly, management obtained third party appraisals of the majority of these specifically-identified assets to determine their fair values and the resulting amount of impairment losses to be recognized. Based on these appraisals, CommScope recognized pretax impairment charges in the amount of $23 million, or $0.25 per share, net of tax, related to these specifically-identified assets. Management had not made a final decision as to the disposition of these assets as of June 30, 2003, and therefore, they have been classified as assets to be held and used, as required by SFAS. No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In addition, the Company's Brazilian operation, which primarily manufactures Broadband/Video Products, has experienced declining local demand in addition to reduced export sales and profitability resulting from pricing and competitive pressures primarily due to the recent impact of unfavorable local currency fluctuations. As a result of this change in circumstances, management performed a test of recoverability for the Brazilian manufacturing assets during the second quarter of 2003. The Company's long-term undiscounted cash flow forecasts for its Brazilian 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) operation indicated that the carrying amounts of the manufacturing assets at this facility may not be recoverable as of June 30, 2003. Accordingly, management obtained third party appraisals of the Brazilian manufacturing assets to determine their fair values and the resulting amount of impairment losses to be recognized. Based on these appraisals, CommScope recognized pretax impairment charges in the amount of $8.7 million, or $0.09 per share, net of tax, of which $6.4 million were related to broadband cable manufacturing assets and $2.3 million were related to wireless cable manufacturing assets. Management intended to continue to use these assets in production as of June 30, 2003, and therefore, they have been classified as assets to be held and used. The Company recognized total pretax impairment charges for fixed assets in the amount of $31.7 million, or $0.34 per share, net of tax, during the three months ended June 30, 2003. These impairment charges resulted in an increase of $8.5 million in CommScope's noncurrent deferred tax asset during the three months ended June 30, 2003. The breakdown of these impairment charges was as follows (in millions): Domestic broadband cable manufacturing assets $ 21.4 Brazilian manufacturing assets 8.7 Other domestic manufacturing assets 1.6 ---------- Total impairment charges $ 31.7 ========== 7. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME/LOSS
Three Months Six Months Ended Ended June 30, June 30, ---------------- ----------------- 2003 2002 2003 2002 ------- ------- -------- -------- Income tax benefit for components of other comprehensive income/loss: Hedging loss on nonderivative instrument $ - $ 521 $ - $ 464 Gain/loss on derivative financial instrument designated as a cash flow hedge - 28 - ( 7 ) Loss on derivative instrument designated as a net investment hedge 499 - 976 - -------- ------- -------- -------- Total income tax benefit for components of other comprehensive income/loss $ 499 $ 549 $ 976 $ 457 ======== ======= ======== ========
8. DERIVATIVES AND HEDGING ACTIVITIES As of June 30, 2003, the only derivative financial instrument outstanding was a cross currency swap, which was designated and documented at inception as a net investment hedge of a portion of the Company's net investment in its Belgian subsidiary. The notional amount of this derivative financial instrument, which is a cross currency swap of US dollars for euros, was $20 million at inception of the hedging relationship and as of June 30, 2003. This hedging instrument was effective at inception of the hedging relationship and at June 30, 2003 and is expected to continue to be effective for the duration of the agreement, resulting in no anticipated hedge ineffectiveness. The fair value of this derivative instrument, reflected in other noncurrent liabilities, was approximately $3.7 million as of June 30, 2003, compared to $1.3 million as of December 31, 2002. 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED) The only derivative instrument outstanding for the three months ended June 30, 2002 was an interest rate swap, which effectively converted the variable-rate Eurodollar Credit Agreement to a fixed-rate basis. As of December 2, 2002, the Company terminated both the Eurodollar Credit Agreement and the related interest rate swap agreement, which were both scheduled to expire on March 1, 2006. This interest rate swap was designated and documented as a cash flow hedge of the changes in the cash flows attributable to fluctuations in the variable benchmark interest rate associated with the underlying debt being hedged. There were no material reclassifications from other comprehensive income (loss) to earnings during the three and six month periods ending June 30, 2003 and 2002. Activity in the accumulated net gain (loss) on derivative instruments included in accumulated other comprehensive loss for the three and six month periods ended June 30, 2003 and 2002 consisted of the following:
Three Months Six Months Ended Ended June 30, June 30, ------------------ ------------------ 2003 2002 2003 2002 -------- -------- -------- -------- Accumulated net gain (loss) on derivative instruments, beginning of period $(1,613) $87 $ (802) $27 Net gain (loss) on derivative financial instrument designated as a cash flow hedge - (47) - 13 Net loss on derivative financial instrument designated as a net investment hedge (850) - (1,661) - ------- -------- -------- -------- Accumulated net gain (loss) on derivative instruments, end of period $(2,463) $40 $(2,463) $40 ======== ======== ======== ========
9. SUPPLEMENTAL CASH FLOW INFORMATION Six Months Ended June 30, ----------------------- 2003 2002 ----------------------- Cash paid during the period for: Income taxes $ 355 $ 454 Interest (net of capitalized amounts) 3,612 4,143 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this document as well as the audited consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations, including management's discussion and analysis about the application of critical accounting policies, for the year ended December 31, 2002 included in our 2002 Annual Report on Form 10-K. HIGHLIGHTS For the quarter ended June 30, 2003, we incurred a net loss of $51.4 million, or $0.87 per share, compared to a net loss of $42.5 million, or $0.69 per share, for the quarter ended June 30, 2002. Included in these net losses were after-tax equity method losses in OFS BrightWave, LLC ("OFS BrightWave") of $33.9 million, or $0.57 per share, during the three months ended June 30, 2003, compared to $34.9 million, or $0.56 per share, during the three months ended June 30, 2002. The net loss for the quarter ended June 30, 2003 also reflected after-tax impairment charges of $20.0 million, or $0.34 per share, primarily related to our broadband cable manufacturing assets. In addition, the net loss for the quarter ended June 30, 2002 included after-tax charges of $12.9 million, or $0.21 per share, related to the write off of Adelphia Communications Corporation ("Adelphia") receivables. For the six months ended June 30, 2003, we incurred a net loss of $54.4 million, or $0.92 per share, compared to a net loss of $44.1 million, or $0.71 per share, for the six months ended June 30, 2002. Included in these net losses were after-tax equity method losses in OFS BrightWave of $37.7 million, or $0.62 per share, during the six months ended June 30, 2003, compared to $42.9 million, or $0.69 per share, during the six months ended June 30, 2002. The net loss for the six months ended June 30, 2003 also reflected after-tax impairment charges of $20.0 million, or $0.34 per share, primarily related to our broadband cable manufacturing assets. In addition, the net loss for the six months ended June 30, 2002 included after-tax charges of $13.5 million, or $0.22 per share, related to the write off of Adelphia receivables. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 WITH THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 Net sales Net sales for the quarter ended June 30, 2003 decreased $13.6 million, or 8.8%, to $141.4 million, compared to the quarter ended June 30, 2002. Net sales for the six months ended June 30, 2003 decreased $44.0 million, or 14.0%, to $270.8 million, compared to the six months ended June 30, 2002. The decrease in net sales was due to lower sales of broadband and other video distribution products ("Broadband/Video Products"). Domestic sales decreased 5.7% to $114.2 million in the second quarter of 2003 and 14.7% to $218.4 million in the six months ended June 30, 2003 compared to the same periods in 2002. The decrease was due to lower Broadband/Video Product sales. International sales decreased 19.8% to $27.2 million in the second quarter of 2003 and 11.0% to $52.4 million in the six months ended June 30, 2003 compared to the same periods in 2002. Net sales of Broadband/Video Products for the second quarter of 2003 decreased $16.7 million, or 13.3%, to $108.5 million, compared to the same period in 2002. This decrease primarily resulted from a lower 15 year-over-year volume of sales to Charter Communications, Inc. ("Charter"), volume and pricing declines in fiber optic cable sales and a decline in international sales volumes. For the six months ended June 30, 2003, net sales of Broadband/Video Products decreased $48.5 million, or 18.8% to $209.8 million, compared to the same period in 2002. This decrease primarily resulted from a lower year-over-year volume of sales to Charter and Adelphia, in addition to a decline in international sales volumes. Despite lower sales to Comcast Corporation ("Comcast"), net sales of Broadband/Video Products increased by $7.2 million, or 7.1%, from the first quarter to the second quarter of 2003, primarily due to stronger sales to other domestic broadband service providers. Sales to Comcast declined $6 million from the first quarter to the second quarter of 2003 and declined from 23% of total quarterly net sales in the first quarter of 2003 to 17% in the second quarter. Sales to Comcast were materially unchanged in the second quarter of 2003, compared to the same period in 2002. Pricing for coaxial cable remained relatively stable during the three and six months ended June 30, 2003, compared to the same periods last year. In contrast, sales of fiber optic cable, which represented more than 10% of total net sales during the three and six month periods ended June 30, 2003 and 2002, continued to experience significant pricing pressure. Fiber optic cable sales declined by more than 20% year over year in the three and six month periods ended June 30, 2003 compared to the same periods in 2002. We expect ongoing pricing pressure and weak demand industry wide for fiber optic cable products at least through 2003. Net sales of local area network and other data applications products ("LAN Products") for the second quarter of 2003 increased by $1.7 million, or 7.4%, to $24.6 million, compared to the same period in 2002. For the six months ended June 30, 2003, sales of LAN Products increased $4.7 million, or 11.0%, to $47.6 million compared to the same period in 2002. In addition, LAN Product sales increased $1.6 million, or 7.0%, in the second quarter, compared to the first quarter of 2003. Sales of LAN Products benefited from strengthening project business and increasing fiber optic cable and apparatus sales volumes. Net sales of wireless and other telecommunications products ("Wireless and Other Telecom Products") for the second quarter of 2003 increased by $1.4 million, or 20.3%, to $8.3 million, compared to the same period in 2002. For the six months ended June 30, 2003, sales of Wireless and Other Telecom Products were stable as compared to the same period last year with sales of $13.4 million and $13.6 million, respectively. We expect ongoing aggressive competition for Wireless and Other Telecom Products. Although wireless telecommunications capital spending remains weak, we believe that we have made steady progress communicating the Cell Reach(R) value proposition to customers and remain optimistic about long-term wireless opportunities. Gross profit (net sales less cost of sales) Gross profit for the second quarter ended June 30, 2003 decreased to $28.8 million, compared to second quarter 2002 gross profit of $31.7 million. Second quarter 2003 gross profit margin declined only slightly to 20.4% from 20.5% in the second quarter of 2002. For the six months ended June 30, 2003, gross profit decreased to $52.9 million, compared to $67.1 million for the same period in 2002, with gross profit margins of 19.5% and 21.3%, respectively. The decreases in gross profit and gross profit margin were primarily due to competitive pricing pressure primarily for fiber optic cable products, in addition to lower Broadband/Video Product sales volume. The combined impact of price decreases and lower sales volumes, which resulted in lower overhead absorption rates for many products, more than offset the year-over-year gross profit improvement resulting from workforce reductions and asset impairments. Additionally, we continue to experience rising costs of certain raw materials, primarily polyethylene and other plastics, and expect these cost increases to pressure our gross profit margin in the near term. Selling, general and administrative Selling, general and administrative ("SG&A") expense for the second quarter ended June 30, 2003 was $21.8 million, or 15.4% of net sales, compared to $41.1 million, or 26.5% of net sales, for the same period in 2002. For the six months ended June 30, 2003, SG&A expense was $41.9 million, or 15.5% of net sales, compared to $62.3 million or 19.8% of net sales in the same period last year. The year-over-year decreases in SG&A expense were primarily due to the bad debt expense related to the write off of Adelphia receivables in 2002, which totaled $20.5 million in the second quarter of 2002 and $21.4 million for the six months ended June 30, 2002. 16 Excluding the Adelphia write off, SG&A expense was $20.6 million, or 13.3% of net sales, for the three months ended June 30, 2002 and $40.9 million, or 13.0% of net sales, for the six months ended June 30, 2002. The year-over-year increases in SG&A expense and SG&A expense as a percentage of net sales, excluding the Adelphia write off, were primarily due to an increase in bad debt expense. We believe we have taken appropriate charges for doubtful accounts as a result of the difficult market environment based on our analysis of customer financial difficulties, age of receivable balances and other relevant factors. Research and development Research and development ("R&D") expense decreased to $1.5 million, or 1% of net sales, for the second quarter ended June 30, 2003 from $1.8 million, or 1.1% of net sales, for the same period in 2002. For the six months ended June 30, 2003, R&D expense decreased to $3.0 million, or 1.1% of net sales, compared with $3.8 million, or 1.2% of net sales, for the same period in 2002. We expect R&D expense to remain at approximately 1% of net sales in the near term. Impairment charges for fixed assets We recognized total pretax impairment charges for fixed assets in the amount of $31.7 million, or $0.34 per share, net of tax, during the three months ended June 30, 2003. The breakdown of these impairment charges was as follows (in millions): Domestic broadband cable manufacturing assets $ 21.4 Brazilian manufacturing assets 8.7 Other domestic manufacturing assets 1.6 ---------- Total impairment charges $ 31.7 ========== During the three months ended June 30, 2003, we concluded that certain manufacturing assets had no future use to us and initiated a formal impairment review of these assets. Most of these assets were used in or acquired for use in the manufacture of our Broadband/Video Products, which have been adversely affected by the difficult global business environment in telecommunications and an ongoing decline in demand both domestically and internationally. Based primarily on third party appraisals, we recognized pretax impairment charges in the amount of $23 million, or $0.25 per share, net of tax, related to these specifically-identified assets. In addition, our Brazilian operation, which primarily manufactures Broadband/Video Products, has experienced declining local demand in addition to reduced export sales and profitability resulting from pricing and competitive pressures primarily due to the recent impact of unfavorable local currency fluctuations. As a result, we performed a test of recoverability for the Brazilian manufacturing assets during the second quarter of 2003. Based on third party appraisals, we recognized pretax impairment charges in the amount of $8.7 million, or $0.09 per share, net of tax, related to Brazilian manufacturing assets. Net interest expense Net interest expense for the quarter ended June 30, 2003 was $1.5 million, compared to $1.7 million for the same period in 2002. For the six months ended June 30, 2003, net interest expense decreased to $3.0 million compared with $3.4 million for the same period in 2002. The decrease in net interest expense was primarily due to an increase in interest income earned on a higher level of cash and cash equivalents. 17 Income taxes Our effective income tax rate was 37% for the three and six months ended June 30, 2003 and 2002. Equity in losses of OFS BrightWave, LLC For the three months ended June 30, 2003 and 2002, our 18.4% equity interest in the losses of OFS BrightWave was approximately $53.9 million and $55.4 million, pretax, respectively. For the six months ended June 30, 2003 and 2002 our 18.4% equity interest in the losses of OFS BrightWave was approximately $60.0 million and $68.2 million, pretax, respectively. Since OFS BrightWave has elected to be taxed as a partnership, we recorded a tax benefit related to our 18.4% equity interest in the flow-through losses of approximately $20.0 million and $20.5 million for the three months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 and 2002 we recorded a tax benefit related the flow-through losses of approximately $22.2 million and $25.2 million, respectively. OFS BrightWave operates in some of the same markets we do and its financial results were also adversely affected by the difficult market environment in telecommunications and the challenging global business environment. Due to these conditions, OFS BrightWave incurred significant charges during the second quarter of 2003 primarily related to fixed asset impairments, restructuring and cost reduction efforts. The total of these charges recognized by OFS BrightWave in the second quarter of 2003 was $257.9 million. OFS BrightWave also incurred charges of $211.0 million in the second quarter of 2002, primarily for the write off of goodwill and certain fixed assets, in addition to restructuring and cost reduction efforts. We expect ongoing pricing pressure and weak demand industry wide for fiber optic cable products at least through 2003. Therefore, we believe OFS BrightWave will incur losses at least through 2003, and as a result we will continue to recognize noncash equity method losses from our investment in OFS BrightWave. Liquidity and capital resources Our principal sources of liquidity both on a short-term and long-term basis are cash and cash equivalents, cash flows provided by operations and availability under our senior secured revolving credit facility ("secured credit facility"). Reduced sales and profitability could reduce cash provided by operations and limit availability under the secured credit facility. In addition, increases in working capital, due to seasonal fluctuations in sales and collections, among other things, could reduce our operating cash flows in the short term. Cash provided by operating activities was $22.6 million for the six months ended June 30, 2003, compared to $45.3 million for the same period in 2002. This year-over-year decrease in operating cash flow primarily resulted from lower sales and profitability. Excluding the write off of Adelphia receivables in 2002, the change in accounts receivable for the six months ended June 30 was consistent year over year. Working capital was $240.1 million at June 30, 2003, compared to $214.0 million at December 31, 2002. This increase in working capital during the six months ended June 30, 2003 primarily related to an increase in cash of $20.2 million over the same period to $140.3 million as of June 30, 2003. An increase in accounts receivable, driven by increasing sequential sales, also impacted working capital by $6.7 million during the six months ended June 30, 2003. During the six months ended June 30, 2003, we invested $2.5 million in property, plant and equipment compared to $5.4 million during the same period in 2002. While we may place additional production capability in certain international markets, we expect capital expenditures to remain at a level below depreciation and amortization expense for the next several years. We currently expect capital expenditures to be approximately $10 million in 2003, primarily for cost reduction efforts and information technology initiatives, depending upon business conditions. 18 We owed total long-term debt of $183.3 million, or 28% of our book capital structure, defined as long-term debt and total stockholders' equity, as of June 30, 2003, compared to $183.3 million, or 26% of our book capital structure as of December 31, 2002. We entered into a $100 million senior secured revolving credit facility, which closed January 10, 2003. The facility, which was established for future liquidity, working capital needs and other general corporate purposes, was not drawn at closing and has not been drawn in any amount from that date through June 30, 2003. The facility is secured by substantially all of our domestic assets and can have a maximum availability of up to $100 million over its three and a half year expected term, subject to certain covenants and conditions contained in the agreement. As of June 30, 2003, we had availability of approximately $70 million and no outstanding borrowings under this secured credit facility. In April 2003, Standard & Poor's Rating Services ("S&P") announced that it lowered its corporate credit rating on CommScope to "BB" from "BB+" and its subordinated debt rating to "B+" from "BB-." Although S&P indicated that the outlook for CommScope is stable, the downgrade was mainly based on reduced sales and profitability forecasts. The lower ratings do not affect interest rates or covenant compliance under the Company's existing debt agreements. As a result, we believe the lower ratings do not have a material impact on our financial position, cash flows or results of operations. Forward-looking Statements Certain statements in this Form 10-Q that are other than historical facts are intended to be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws and include but are not limited to those statements relating to sales and earnings expectations, expected demand, cost and availability of key raw materials, internal production capacity and expansion, competitive pricing, relative market position 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, expected demand from Comcast Corporation and other major domestic MSOs; ability of our customers to secure adequate financing to fund their infrastructure projects or to pay us; product demand and industry excess capacity; changes or fluctuations in global business conditions; financial performance of OFS BrightWave; competitive pricing and acceptance of our products; changes in cost and availability of key raw materials (including without limitation polyethylene and other plastics, bimetallic center conductors, optical fibers, fine aluminum wire and fluorinated-ethylene-propylene which are available only from limited sources); our ability to recover higher material and transportation costs from our customers through price increases; possible future impairment charges for goodwill and other long-lived assets; industry competition and our ability to retain customers and negotiate contract renewals on acceptable terms; possible disruption due to customer or supplier bankruptcy, reorganization, restructuring or consolidation; our ability to obtain financing and capital on commercially reasonable terms; covenant restrictions and our ability to comply with covenants in our debt agreements; successful operation of bimetal manufacturing and other vertical integration activities; successful expansion and related operation of our facilities; achievement of sales, growth, and earnings goals; our ability to achieve reductions in costs; margin improvement; our ability to retain and attract key personnel; developments in technology; intellectual property protection; product or raw material performance issues; adequacy and availability of insurance; litigation or regulatory developments, including future or pending tax legislation; stock price fluctuations; foreign currency fluctuations; technological obsolescence; acquisition and divestiture activities and our ability to integrate acquisitions; environmental issues; our participation in joint ventures; international economic and political uncertainties; possible disruption due to terrorist activity or armed conflict; political 19 instability; major health concerns and other factors discussed. Actual results may also differ due to changes in telecommunications industry capital spending, which is affected by a variety of factors, including, without limitation, general business conditions; acquisitions of telecommunications companies by others; consolidation within the telecommunications industry; the financial condition of telecommunications companies and their access to financing; competition among telecommunications companies; technological developments and new legislation and regulation of telecommunications companies. These and other factors are discussed in greater detail in Exhibit 99.1 to this Form 10-Q. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. However, we do not intend, and are not undertaking any duty or obligation, to update this information to reflect developments or information obtained after the date of this report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002, our major market risk exposure relates to adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. We have established a risk management strategy that includes the reasonable use of derivative and nonderivative financial instruments primarily to manage our exposure to these market risks. We believe our exposure associated with these market risks has not materially changed since December 31, 2002. We have not acquired any new derivative financial instruments since December 31, 2002 or terminated any derivative financial instruments that existed at that date. ITEM 4. CONTROLS AND PROCEDURES Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and our Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and have concluded that the disclosure controls and procedures are effective. 20 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders (the "Meeting") on May 2, 2003. Proxies for the Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. A total of 59,219,567 shares of Common Stock with one vote each were entitled to vote at the Meeting and holders of 54,599,750 shares voted in person or by proxy, constituting a quorum. At the Meeting, two of the Company's directors were elected for three-year terms ending at the 2006 Annual Meeting of Stockholders by the vote set forth below: Name of Director Votes For Votes Withheld Frank M. Drendel 53,084,600 1,515,150 Duncan M. Faircloth 52,050,972 2,548,778 The Company's other four directors, whose terms of office continue after the Meeting with terms expiring at the annual meetings in parentheses after their names, are Boyd L. George (2004), George N. Hutton (2004), James N. Whitson (2005) and June E. Travis (2005). A proposal to ratify the appointment by the board of directors of the Company of Deloitte & Touche LLP as independent auditors for the Company for the 2003 fiscal year was approved by 52,502,188 votes cast in favor, 1,972,664 votes cast against and 124,898 votes abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a). 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32)(ii) of Regulation S-K). 99.1 Forward-Looking Information (b) Reports on Form 8-K filed during the three months ended June 30, 2003: On April 29, 2003, we filed a current report on Form 8-K announcing our financial results for the first quarter of 2003. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMSCOPE, INC. August 11, 2003 /s/ Jearld L. Leonhardt - --------------- ----------------------------- Date Jearld L. Leonhardt Executive Vice President and Chief Financial Officer signing both in his capacity as Executive Vice President on behalf of the Registrant and as Chief Financial Officer of the Registrant 22 EX-31.1 3 lhex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Frank M. Drendel, certify that: 1. I have reviewed this report on Form 10-Q of CommScope, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release No. 33-8238.]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 --------------- By: /s/ Frank M. Drendel -------------------- Frank M. Drendel Chairman and Chief Executive Officer EX-31.2 4 lhex31-2.txt EXHIBIT 31.2 CERTIFICATIONS I, Jearld L. Leonhardt, certify that: 1. I have reviewed this report on Form 10-Q of CommScope, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release No. 33-8238.]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 ----------------------- By: /s/ Jearld L. Leonhardt ----------------------- Jearld L. Leonhardt Executive Vice President and Chief Financial Officer EX-32 5 lhex32.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CommScope, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Frank M. Drendel -------------------------- Frank M. Drendel Chairman and Chief Executive Officer Date: August 11, 2003 By: /s/ Jearld L. Leonhardt -------------------------- Jearld L. Leonhardt Executive Vice President and Chief Financial Officer Date: August 11, 2003 EX-99.1 6 lhexh99_1.txt EXHIBIT 99.1 COMMSCOPE, INC. 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, 2002, 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, and are not undertaking any duty or obligation, to update any forward-looking statements to reflect developments or information obtained after the date of this Exhibit 99.1. 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, military, 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, security ratings or general stock market fluctuations; (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) the impact of corporate governance, accounting and securities law reforms by the United States Congress, the Securities and Exchange Commission and the New York Stock Exchange; (f) significant joint ventures and acquisitions and the factors set forth below. OUR SALES AND PROFITABILITY HAVE BEEN ADVERSELY AFFECTED BY A REDUCTION IN SPENDING IN THE CABLE TELEVISION AND COMMUNICATIONS INDUSTRIES. 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. Capital spending in the cable television and communications industries is cyclical. 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 availability and cost of capital; o changes in ownership of cable television operators; o cable system consolidation within the industry; o the financial condition of domestic and international cable television operators and their access to financing; o competition from satellite and wireless television providers and telephone companies; o technological developments; o new legislation and regulation of cable television operators; and o government investigations into industry practices. During 2002 and the first half of 2003, cable television capital spending decreased significantly and we expect ongoing volatility in the near term. Our sales were negatively impacted by a significant slowdown in spending by our international customers, substantially lower sales of fiber optic cable and a major slowdown in spending by Adelphia Communications Corporation, referred to herein as Adelphia, primarily as a result of its Chapter 11 bankruptcy filing. We also experienced a significant slowdown in spending by Charter Communications, Inc. in the second half of 2002 and the first half of 2003. A shift away from rebuilding or upgrading activities has negatively impacted our profit margins. 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. 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 ongoing global economic downturn and market volatility has limited our customers' ability to access the capital markets. 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 CUSTOMERS ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION THAT COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. 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, referred to herein as the "Telecom Act" 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 recent federal legislation, and the rules implementing these laws on the cable television industry and our business is still uncertain. THE LOSS OF ONE OR MORE OF OUR PRINCIPAL 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. Although we sell to a wide variety of customers dispersed across many different geographic areas, sales to the five largest domestic broadband service providers represented approximately 48% of our net sales during 2002 and 42% in the six months ended June 30, 2003. In addition, 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. Accordingly, the loss of one or more of our principal customers could have a material adverse effect on our business and financial condition. CONSOLIDATION AMONG OUR MAJOR CUSTOMERS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. The telecommunications industry has experienced the consolidation of many industry participants and this trend is expected to continue. We and one or more of our competitors may each supply product to businesses that have merged or will merge in the future. Consolidations could result in delays in purchasing decisions by the merged businesses, and we could play either a greater or lesser role in supplying products to the merged entity. These purchasing decisions of the merged companies could have a material adverse effect on our business. In November 2002, AT&T Broadband, the largest domestic multiple system operator and one of our significant customers, merged with Comcast Corporation to form a new company named Comcast Corporation, referred to herein as Comcast, creating a significant concentration of credit risk in the new merged entity. For the six months ended June 30, 2003, Comcast represented approximately 20% of our net sales. We cannot determine whether the AT&T Broadband-Comcast merger, or subsequent potential regional clustering of cable systems and subscriber trades, will delay expected cable spending or negatively impact our sales volumes or profits. THE FINANCIAL CONDITION OF SOME OF OUR MAJOR CUSTOMERS HAS WORSENED, WHICH HAS RESULTED IN WRITE-OFFS AND INCREASED OUR CREDIT RISK. One of our significant customers, Adelphia, filed for Chapter 11 debtor-in-possession reorganization on June 25, 2002. During 2002, we wrote-off $21.4 million of Adelphia receivables. We have reached an agreement with Adelphia on the terms under which we will continue to do business with Adelphia during its Chapter 11 reorganization but we do not expect a significant recovery of business with Adelphia in the near term. Other customers of ours are or may become subject to government investigation, file with the courts seeking protection under the applicable bankruptcy or reorganization laws or experience financial difficulties. Upon the financial failure of a customer, we may experience losses as a result of our inability to collect, in a timely manner or at all, the accounts receivable outstanding to such customer, as well as the loss of such customer's ongoing business. If our customers fail to meet their payment obligations to us, we could experience reduced cash flows and losses in excess of amounts reserved. Accounts receivable from Comcast, comprised approximately 17% of our net accounts receivable as of June 30, 2003. Accounts receivable from another customer comprised approximately 11% of our net accounts receivable as of June 30, 2003. An adverse change in the financial condition of a significant customer or group of customers could result in increased credit risk. If we are unable to collect the related accounts receivable, it could have a materially adverse impact on our results of operations and financial condition. THOUGH OFS BRIGHTWAVE, LLC'S COST STRUCTURE HAS IMPROVED, WE EXPECT IT TO CONTINUE TO INCUR LOSSES THAT COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS. OFS BrightWave, LLC, referred to herein as OFS BrightWave, incurred substantial losses for the year ended December 31, 2002 and the six months ended June 30, 2003 primarily due to the weak demand for optical fiber and fiber optic cable and the impact of significant charges primarily related to the write-off of goodwill and certain fixed assets, restructuring and employee separation costs and other cost reduction activities. 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 at least through 2003. Furukawa previously announced a major global review of its optical fiber and fiber optic cable operations that could result in additional restructuring, special charges, and employee separation costs to OFS BrightWave that would increase the equity method losses incurred by CommScope. While we believe that OFS BrightWave has taken significant steps to reduce their cost structure, we believe that OFS BrightWave will continue to incur losses in the near term. As a result, we expect to recognize noncash equity method losses at least through 2003 from our investment in OFS BrightWave, which could materially adversely affect our results of operations. At June 30, 2003 OFS BrightWave owed $30 million to us under a $30 million revolving note agreement. We are not required to make any additional investments in the form of loans or capital contributions to OFS BrightWave; however, our failure to do so could result in the dilution of our ownership percentage. OUR OWNERSHIP OF A MINORITY EQUITY INTEREST IN OFS BRIGHTWAVE EXPOSES US TO RISKS OF LIMITED CONTROL AS WELL AS OTHER RISKS WHICH, AMONG OTHER THINGS, MAY MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our ownership of a minority equity interest in OFS BrightWave exposes us to risks of limited control. We may not be able to influence operational decisions, such as restructuring of business lines, that we do not believe to be in the best interests of CommScope as part owner of OFS BrightWave. Additional potential risks and uncertainties include, but are not limited to, the ability of OFS BrightWave to successfully manage its operations and related technologies effectively, the ability of OFS BrightWave to maintain Lucent's customer base, the ability of OFS BrightWave to recruit and retain qualified employees, pricing and acceptance of OFS BrightWave's products, OFS BrightWave intellectual property rights and telecommunications industry capital spending. The inability of OFS BrightWave to operate successfully in the current difficult global business environment may materially adversely affect our results of operations. OFS BrightWave is party to manufacturing and supply agreements with OFS Fitel, LLC, which is wholly owned indirectly by The Furukawa Electric Co., Ltd., referred to herein as 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. On October 9, 2002, in conjunction with Furukawa's purchase of 7.7 million shares of our common stock, we and Furukawa agreed to change from 2004 to 2006 the date when we could first exercise our contractual right to sell our ownership interest in OFS BrightWave to Furukawa for a cash payment equal to our original investment in and advances to OFS BrightWave. The inability to exercise our contractual right to sell to Furukawa, or to monetize, our ownership interest in OFS BrightWave could negatively impact the value of our investment in and advances to OFS BrightWave, which could materially adversely affect our results of operations and financial condition. THE RESTRICTIONS IMPOSED BY NEW SENIOR SECURED REVOLVING CREDIT FACILITY COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND OUR FAILURE TO COMPLY WITH THESE RESTRICTIONS COULD RESULT IN A DEFAULT. Our $100 million senior secured revolving credit facility contains 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; o enter into certain investments or transactions; o repurchase or redeem capital stock; o engage in mergers or consolidations; o engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities; o guarantee the obligations of others; or o make additional investments in or loans to OFS BrightWave. Our compliance with these covenants in the future may be affected by events beyond our control. Our noncompliance with these covenants could create a default under our new senior secured revolving credit facility. Moreover, this credit facility is secured by substantially all of our domestic assets. Accordingly, in the event of a default by us under this facility, the lenders would have a first priority secured claim on these assets. This may limit our ability to obtain additional financing from other sources in the future. ALTHOUGH WE BELIEVE THAT OUR EXISTING GOODWILL AND OTHER INTANGIBLE ASSETS ARE NOT CURRENTLY IMPAIRED, WE MAY INCUR IMPAIRMENT CHARGES RELATED TO THESE ASSETS IN THE FUTURE. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangible assets with indefinite lives and also requires at least an annual assessment for impairment by applying a fair-value-based test. We do not currently have any intangible assets, other than goodwill, with indefinite lives. We completed the process of performing the transitional goodwill impairment test, as prescribed by SFAS No. 142, as of January 1, 2002. As a result of the test performed, we believe that goodwill was not impaired as of January 1, 2002. SFAS No.142 also requires that goodwill be tested for impairment annually at the same time each year and on an interim basis when events or circumstances change. We elected to perform our annual goodwill impairment test as of August 31. We completed the annual goodwill impairment test as of August 31, 2002 and believe that goodwill was not impaired as of this date. Existing goodwill, which totaled $151 million as of December 31, 2002, arose from previous acquisitions accounted for under the purchase method of accounting. If the current weakness in the telecommunications industry is prolonged or further deteriorates, we cannot assure you that future tests will not result in impairment of existing goodwill and that potential future goodwill impairment will not materially adversely affect our results of operations. WE HAVE RECOGNIZED IMPAIRMENT CHARGES FOR FIXED ASSETS AND MAY NEED TO DO SO AGAIN IN THE FUTURE. Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for 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. Long-lived assets must be tested for impairment in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Due to the difficult business environment in telecommunications and the continuing decline in demand for our products, we recognized impairment charges of $31.7 million during the three months ended June 30, 2003 primarily related to our broadband cable manufacturing assets. We previously recognized impairment charges of $25.1 million during the three months ended September 30, 2002 primarily related to fixed assets used in the manufacture of our wireless, fiber optic cable and other telecom products. These impairment charges represented approximately 14% and 10% of our total net property, plant and equipment as of June 30, 2003 and September 30, 2002, respectively. Utilization in our facilities is subject to change based on customer demand. Although we have no current plans to significantly reduce capacity in our facilities, we can give no assurances that we will not continue to have excess manufacturing capacity over the long-term. If the current weakness in the telecommunications industry is prolonged or further deteriorates, we cannot assure you that future tests will not result in additional impairment of long-lived assets and that potential future impairment of long-lived assets will not materially adversely affect our results of operations. OUR FAILURE TO INTRODUCE NEW PRODUCTS SUCCESSFULLY, AND CHANGES IN TECHNOLOGY, COULD MATERIALLY 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 or the inability to continue to market existing products on a cost-competitive basis could materially 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. A significant decrease in the cost of fiber optic systems would likely have a materially adverse effect on our coaxial cable sales. OUR INDUSTRY IS HIGHLY COMPETITIVE GLOBALLY 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 we have. The rapid technological changes occurring in the telecommunications industry could lead to the entry of new competitors. Existing competitors' actions, such as price reductions, use of internet auctions or introduction of new innovative products, and new entrants may have a materially adverse impact on our sales and profitability. 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. The global market for fiber optic cable products continues to be affected by weak demand and significant pricing pressure, which has had an impact on our sales and profitability. Ongoing weak demand and pricing pressure for fiber optic cable products could have a materially adverse impact on our sales and profitability. OUR DEPENDENCE ON COMMODITIES SUBJECTS US TO PRICE FLUCTUATIONS WHICH COULD MATERIALLY ADVERSELY AFFECT US. The principal raw materials we purchase are fabricated aluminum, plastics and polymers, bimetals, optical fiber and copper. Our profitability may be affected by changes in the market price of these materials, most of 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 materially adverse effect on demand for our products. THE LIMITATION OR INTERRUPTION OF SUPPLY AND THE INABILITY TO RECOVER RISING COSTS OF PLASTICS AND POLYMERS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. Plastics and polymers, which are used to insulate and protect cables, accounted for roughly 25% of our raw material purchases for the six months ended June 30, 2003. Certain polymers such as polyethylene are derived from oil and natural gas and have been under significant pricing pressure as a result of the political and economic instability in the Middle East and South America. The limitation or interruption in supply of these materials could have a material adverse effect on our operations and financial condition. In addition, while we generally have been able to pass along certain cost increases to customers, we cannot assure you that we will be able to pass along increases in the cost of plastics and polymers. Our inability to pass along cost increases to our customers could materially adversely affect our results of operations. DIFFICULTIES WITH OUR KEY SUPPLIERS COULD MATERIALLY ADVERSELY AFFECT US. A portion of our raw material purchases are bimetallic center conductors for coaxial cables. During the six months ended June 30, 2003, we produced some of our requirements internally and purchased the remaining amount from Copperweld Corporation, referred to herein as Copperweld. Purchases from Copperweld totaled less than 5% of our total raw material purchases for that period. We are currently capable of internally producing essentially all of our requirements for bimetallic center conductors. Management believes that our internal production of these products will be sufficient to meet nearly all of our requirements for the remainder of 2003. However, the loss of our ability to produce bimetallic center conductors would likely require the purchase of bimetallic center conductors from Copperweld or other sources, which are limited. 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. Copperweld's inability to supply, and/or our failure to manufacture or adequately expand our internal production of these products, could have a materially adverse effect on our business and financial condition. In addition, we internally produce a significant portion of our requirements for fine aluminum wire, which is available externally from only a limited number of suppliers. Although this is a smaller raw material purchase than bimetallic center conductors, our failure to manufacture or adequately expand our internal production of fine aluminum wire, and/or our inability to obtain these materials from other sources in adequate quantities on acceptable terms, could have a materially adverse effect on our business and financial condition. 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. Optical fibers that are capable of transmitting light over a wide spectrum (e.g., greater bandwidth) are becoming increasingly important to the cable television and other local access telecommunication markets. There are few worldwide suppliers of these premium optical fibers. Availability of adequate supplies of premium optical fibers will be critical to future fiber optic cable sales growth. We believe that our equity investment in OFS BrightWave and our optical fiber supply arrangement (which does not contain minimum volume requirements or specific pricing) with an OFS BrightWave affiliate address concerns about the continuing availability of these materials to us, although there can be no assurance of this. At certain of our facilities, we are also a large consumer of electricity, water, gas and other resources. Unforeseen increases in the cost of these resources or interruptions or reductions in our current supply of these resources could materially adversely affect our ability to manufacture products in a cost-effective or timely manner. CHANGES IN OUR KEY SUPPLIERS COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE PRODUCTS IN A COST-EFFECTIVE OR TIMELY MANNER. The current industry and economic downturn could cause our key suppliers to experience financial difficulties including bankruptcy, reorganization or insolvency or cause consolidation through mergers among our key suppliers. Upon the financial failure or consolidation of a key supplier, our business may be disrupted as we find alternative sources of supply. Interruption of supplies from our key suppliers could disrupt production or impact our ability to increase production and sales. Our inability to quickly find alternative sources of supply on reasonable terms or to successfully transition from one supplier to another could materially adversely affect our ability to manufacture products in a cost-effective and timely manner. BECAUSE OF OUR VERTICAL INTEGRATION OF SUPPLY AND PRODUCTION OF SOME PRODUCTS, A DISRUPTION OR FAILURE AT ONE OF OUR MANUFACTURING FACILITIES COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE PRODUCTS AT OTHER MANUFACTURING FACILITIES IN A COST-EFFECTIVE AND TIMELY MANNER. We internally produce a significant portion of some of the components used in our finished products, including bimetallic center conductors and fine aluminum wire, at certain of our manufacturing facilities. Disruption at these facilities due to failure of our technology, fire, electrical outage, natural disaster, acts of terrorism or some other catastrophic event could materially adversely affect our ability to manufacture products at our other manufacturing facilities in a cost-effective and timely manner. IF OUR PRODUCTS OR COMPONENTS PURCHASED FROM OUR SUPPLIERS EXPERIENCE PERFORMANCE ISSUES, OUR BUSINESS WILL SUFFER. Our business depends on our producing excellent products of consistently high quality. To this end, our products, including components and raw materials purchased from our suppliers, are rigorously tested for quality both by us and our customers. Nevertheless, our products are highly complex and our customers' testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems unforeseeable in testing), our products and components and raw materials purchased from our suppliers may fail to perform as expected. Performance issues could result from faulty design or problems in manufacturing. We have experienced such performance issues in the past and remain exposed to such performance issues. In some cases, recall of some or all affected products, product redesigns or additional capital equipment may be required to correct a defect. In addition, we warrant or indemnify certain products over varying periods of time. Although historical warranty and indemnity claims have not been significant, we cannot assure you that future claims will not have a materially adverse affect on our results of operations. Any significant or systemic product failure could also result in lost future sales of the affected product and other products, as well as result in customer relations problems. 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 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 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 United States affecting trade, foreign investment and loans, foreign tax laws, compliance with local laws and regulations, armed conflict, war, terrorism and major health concerns (such as SARS). POTENTIAL ENVIRONMENTAL LIABILITIES MAY ARISE IN THE FUTURE AND MATERIALLY 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. ALTHOUGH WE BELIEVE CASH FROM OPERATIONS AND AVAILABILITY UNDER OUR SENIOR SECURED REVOLVING CREDIT FACILITY PROVIDE ADEQUATE RESOURCES TO FUND ONGOING OPERATING REQUIREMENTS, WE MAY BE LIMITED IN OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL ON COMMERCIALLY REASONABLE TERMS. Although we believe cash from operations and availability under our senior secured revolving credit facility provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively. Our public debt ratings affect our ability to raise capital and the cost of that capital. Downgrades of our debt ratings may increase our borrowing costs and affect our ability to access the equity capital markets on terms and in amounts that would be satisfactory to us. 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 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, as such is needed. 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. A SIGNIFICANT UNINSURED LOSS OR A LOSS IN EXCESS OF OUR INSURANCE COVERAGE COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION. We maintain insurance covering normal business operations, including fire, property and casualty protection that we believe is adequate. We do not generally carry insurance covering wars, acts of terrorism, earthquakes or other similar catastrophic events. Because insurance has generally become more expensive, we may not be able to obtain adequate insurance coverage on financially reasonable terms. A significant uninsured loss or a loss in excess of our insurance coverage could materially adversely affect our financial condition. WE HAVE REDUCED THE SIZE OF OUR WORKFORCE AND MAY NEED TO DO SO AGAIN IN THE FUTURE. Primarily in response to our current level of business and outlook for future business, we have been reducing the size of our workforce. During the third quarter of 2002, we reduced our workforce by approximately 200 employees and incurred pretax charges for employee termination benefits of $1.3 million in connection with this reduction. Since the beginning of 2001, our number of employees has declined from approximately 4,000 to approximately 2,600 as of June 30, 2003. If we reduce our expectations for future business we may further reduce our workforce and incur restructuring costs or impairment charges if we adopt a restructuring plan in response to changing business conditions. THE MARKET PRICE OF OUR COMMON STOCK MAY BE MATERIALLY ADVERSELY AFFECTED BY MARKET VOLATILITY. The market price of our common stock has been, and is expected to continue to be, highly volatile, both because of actual and perceived changes in our financial results and prospects and because of general volatility in the stock market. The factors that could cause fluctuations in our stock price may include, among other factors discussed in this section, the following: o actual or anticipated variations in sales or quarterly operating results; o changes in financial estimates by research analysts; o actual or anticipated changes in the United States economy; o armed conflict, war or terrorism; o a prolonged downturn in the telecommunications industry; o changes in the market valuations of other cable manufacturers; o announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; and o actual or anticipated sales of common stock by existing stockholders, whether in the market or in subsequent public offerings. -----END PRIVACY-ENHANCED MESSAGE-----