EX-99.1 2 f00358exv99w1.htm EXHIBIT 99.1 exv99w1
 

(AFC LOGO AND NEWS RELEASE)

EXHIBIT 99.1

     
(THE ACRONYM FOR ACCESS (TM)
  CONTACT:
 Jeff Finn, AFC
(707) 794-7555
(888) 875-7555
investor.relations@afc.com
www.afc.com

FOR IMMEDIATE RELEASE

AFC Reports Second Quarter 2004 Financial Results

PETALUMA, Calif., July 20, 2004—AFC® (Nasdaq: AFCI), The Acronym for AccessSM, today reported financial results for the second quarter ended June 30, 2004.

Revenues for the second quarter of 2004 were $118.6 million on a generally accepted accounting principles (GAAP) basis. Revenues in the first quarter of 2004 were $92.8 million. Revenues for the second quarter of 2003 were $83.0 million. Net income for the second quarter of 2004 was $0.9 million, or $0.01 per share. The second quarter of 2004 included amortization of acquired intangibles, costs associated with the proposed merger with Tellabs, Inc. and leased facility write-offs, partially offset by an arbitration award. Net loss for the first quarter of 2004 was $2.7 million, or $.03 loss per share. The first quarter of 2004 included costs associated with acquiring North American Access (NAA), a business unit of Marconi Communications, Inc. Net income for the second quarter of 2003 was $3.3 million, or $0.04 per share.

Revenues for the first half of 2004 were $211.4 million compared with $163.5 million for the first half of 2003. Net loss for the first half of 2004 was $1.8 million, or $0.02 loss per share. The first half of 2004 included costs related to the write-off of in-process research and development costs arising form the NAA acquisition, amortization of acquired intangibles, the proposed merger with Tellabs and leased facility write-offs, partially offset by an arbitration award. Net income for the first half of 2003 was $11.7 million, or $0.14 per share.

Net income for the core business, which excludes certain merger and acquisition-related items, amortization of intangibles, leased facilities write-offs and an arbitration award, was $5.4 million, or $0.06 per share, for the second quarter of 2004, compared with $8.5 million, or $0.09 per share, for the first



 

 

quarter of 2004. Core business net income for the second quarter of 2003 was $7.9 million, or $0.09 per share. Core business net income for the first half of 2004 was $13.8 million, or $0.15 per share. Core business net income for the first half of 2003 was $15.8 million, or $0.18 per share.

Reconciliations between GAAP and core business results are provided immediately following the condensed consolidated statements of cash flows. The reconciling items between GAAP results and core business results in the first half of 2004 were related to the write-off of in-process research and development costs arising from the NAA acquisition, amortization of intangible assets from the NAA acquisition and AccessLan Communications, Inc. acquisition in 2002, costs associated with the proposed merger with Tellabs, leased facility write-offs and an arbitration award. These core business measures are not in accordance with, or alternatives to, GAAP, and may be different from measures used by other companies. We believe core business results help investors better understand the financial performance of our core business. We also believe core business results provide a more consistent and useful basis for comparison between periods and for making projections. AFC management primarily uses core business results for budgeting purposes, reviewing business performance and making investment decisions.

“Our revenues came in somewhat lighter than we had anticipated,” said John Schofield, chairman, president and chief executive officer at AFC. “This was primarily due to a supply constraint of a key component that impacted FTTP shipments which we expect to be resolved in the current quarter, a large customer’s work force issue that limited the flow of orders from that customer and the timing of certain international orders in the quarter. On a positive note we had three customers contribute over 10% of revenues during the quarter: BellSouth, Sprint and Verizon. I believe this development signals our progress in becoming a leading supplier of access equipment to large carriers, our stated goal for some time.

“Order flow across our customer base remained solid throughout the quarter, with strong interest in FTTP, which resulted in a book to bill ratio greater than one. Of course, the most

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important news of the quarter was our announcement in May of our proposed merger with Tellabs. We anticipate closing the merger before the end of October of this year.”

In addition to the business results discussed above, an income tax receivable of $210 million is reported on the balance sheet based on the receipt of a Private Letter Ruling from the Internal Revenue Service. This ruling addressed the tax treatment of settling with borrowed shares the two hedge contracts on 10.6 million Cisco Systems, Inc. shares that matured in 2003. The cash proceeds received from the settlement were approximately $690 million. Because AFC used borrowed shares rather than its existing Cisco shares to settle the hedge contracts, AFC believes that current law allows the deferral of taxes on the gain attributable to the hedge contracts until the new Cisco stock loan is settled. The total tax liability related to the gain on the Cisco stock and hedge contracts assuming no deferral would be approximately $265 million. During 2003, estimated federal and state taxes net of applicable credits were paid on the full amount of the gain because of concern that the tax authorities could challenge the tax deferral position, and payment of these taxes were accounted for on the balance sheet. In response to AFC’s request, the Internal Revenue Service issued a Private Letter Ruling that was favorable to deferring taxes on the settlement of the hedge contracts with borrowed shares. Although a Private Letter Ruling from the Internal Revenue Service is not conclusive of all issues, based upon the strength of the ruling, AFC will file federal and state income tax returns requesting refunds that total $210 million. In addition to the income tax receivable, a deferred tax liability of $210 million has been recorded. Taxes will be due on the gain from the hedge contracts upon termination of the Cisco share loan. AFC intends to maintain the stock loan for an extended period of time, however, there is no assurance that AFC will be able to do so.

Today’s Earnings Conference Call and Webcast
 AFC will discuss its second quarter 2004 results on a conference call and audio webcast scheduled today, July 20, at approximately 1:30 p.m. Pacific time. U.S. callers can access the conference call at (800) 243-6403 and international callers may dial (312) 461-0285. The audio webcast will be simultaneously available online at: http://www.afc.com/investors/investors.asp.

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The conference call replay will be available for approximately 72 hours following the call. U.S. callers can access the replay by dialing (800) 839-6713 and entering pass code 6449849. International callers may dial (402) 220-2306 and enter pass code 6449849. An audio webcast replay will also be available at http://www.afc.com/investors/investors.asp for approximately 12 months following the original call.

# # #

About AFC
 Headquartered in Petaluma, Calif., AFC is a leading provider of broadband access solutions for the global telecommunications industry. With a customer base of more than 800 service providers worldwide, AFC continues to build and support the world’s evolving broadband access network architecture. Advanced Fibre Communications, Inc., AFC, and the AFC logo are registered trademarks of Advanced Fibre Communications, Inc. The Acronym for Access is a service mark of Advanced Fibre Communications, Inc. Copyright 2004. All rights reserved. Any other trademarks are the property of their respective owners. For more information, visit AFC online at www.afc.com or call 1-(800) 690-AFCI.

Forward-Looking Statements
 Except for historical information contained in this press release, the foregoing contains forward-looking statements, including statements concerning our ability to remain a leading supplier of access equipment to large carriers and the strength of our order flow and book to bill ratio. These statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements based on a variety of risks and uncertainties, including the risks and uncertainties relating to growth in demand for broadband services; the potential for business disruption and other risks associated with AFC’s pending merger with Tellabs, Inc.; AFC’s ability to sustain its tax position with respect to deferral of gain on the Cisco hedge contracts; AFC’s ability to remedy the supply constraint issues relating to a key component for FTTP products; and AFC’s expanded product offering and the potential for increased competition related thereto. Information about potential factors that could affect AFC’s financial results is included in AFC’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which have been filed with the Securities and Exchange Commission. We undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events.

Additional Information and Where to Find it

This communication is not a solicitation of a proxy from any security holder of Tellabs, Inc. or Advanced Fibre Communications, Inc. Tellabs, Inc. has filed with the Securities and Exchange Commission a Registration Statement on Form S-4 (File No. 333-116794), which contains a Preliminary Joint Proxy Statement/Prospectus. Tellabs, Inc. and Advanced Fibre Communications, Inc. expect to mail a Definitive Joint Proxy Statement/Prospectus to their respective stockholders concerning the proposed merger of Advanced Fibre Communications, Inc. with a subsidiary of Tellabs, Inc. WE URGE

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INVESTORS AND SECURITY HOLDERS TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders will be able to obtain the documents free of charge at the SEC’s website, www.sec.gov. In addition, documents filed with the SEC by Tellabs, Inc. will be available free of charge from Tellabs Investor Relations, 1415 West Diehl Road, Naperville, IL 60563, 630-798-8800. Documents filed with the SEC by Advanced Fibre Communications, Inc. will be available free of charge from Advanced Fibre Communications Investor Relations, 1465 North McDowell Blvd., Petaluma, CA, USA 94954, 707-792-3500.

Interest of Certain Persons in the Merger
 Tellabs, Inc. and Advanced Fibre Communications, Inc., and their respective directors and executive officers and other members of their management and employees, may be deemed to be participants in the solicitation of proxies from the stockholders of Tellabs, Inc. and Advanced Fibre Communications, Inc. in connection with the merger. The directors and executive officers of Tellabs, Inc. and Advanced Fibre Communications, Inc. have interests in the merger, some of which may differ from, or may be in addition to, those of the respective stockholders of Tellabs, Inc. and Advanced Fibre Communications, Inc. generally. Those interests will be described in greater detail in the Definitive Joint Proxy Statement/Prospectus with respect to the merger, which may include potential membership on the Tellabs, Inc. Board of Directors, option and stock holdings and indemnification. Information about the directors and executive officers of Tellabs, Inc. and their ownership of Tellabs, Inc. stock is set forth in the proxy statement for Tellabs, Inc.’s 2004 annual meeting of stockholders. Information about the directors and executive officers of Advanced Fibre Communications, Inc. and their ownership of Advanced Fibre Communications, Inc. stock is set forth in the proxy statement for Advanced Fibre Communications, Inc.’s 2004 annual meeting of stockholders. Investors may obtain additional information regarding the interests of the participants by reading the joint proxy statement/prospectus.

5

 

ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

                                 
    Three Months Ended   Six Months Ended
    June 30,
   June 30,
    2004
   2003
   2004
   2003
Revenues
   $ 118,591     $ 83,038     $ 211,375     $ 163,490  
Cost of revenues
     70,397       41,914       115,901       82,767  
 
    
 		      
 		      
 		      
 		  
Gross profit
     48,194       41,124       95,474       80,723  
 
    
 		      
 		      
 		      
 		  
Operating expenses:
                                
Research and development
     22,772       19,392       40,397       35,336  
Sales and marketing
     13,319       11,065       24,457       20,841  
General and administrative
     13,202       8,875       21,265       14,815  
Amortization of acquired intangibles
     4,357       651       6,306       1,444  
Integration costs
     1,438       —       2,551       —  
Securities litigation settlement costs
     (5,787 )     —       (5,787 )     —  
In-process research and development
     —       —       14,000       —  
 
    
 		      
 		      
 		      
 		  
Total operating expenses
     49,301       39,983       103,189       72,436  
 
    
 		      
 		      
 		      
 		  
Operating income (loss)
     (1,107 )     1,141       (7,715 )     8,287  
Other income:
                                
Interest income, net
     1,834       3,311       4,750       5,862  
Unrealized gains on Cisco investment
     —       30       —       1,386  
Other
     59       (36 )     73       4  
 
    
 		      
 		      
 		      
 		  
Total other income, net
     1,893       3,305       4,823       7,252  
 
    
 		      
 		      
 		      
 		  
Income (loss) before income taxes
     786       4,446       (2,892 )     15,539  
Income taxes (benefit)
     (135 )     1,112       (1,128 )     3,885  
 
    
 		      
 		      
 		      
 		  
Net income (loss)
   $ 921     $ 3,334     $ (1,764 )   $ 11,654  
 
    
 		      
 		      
 		      
 		  
Basic net income (loss) per share
   $ 0.01     $ 0.04     $ (0.02 )   $ 0.14  
 
    
 		      
 		      
 		      
 		  
Shares used in basic per share computations
     88,125       85,287       87,876       85,094  
 
    
 		      
 		      
 		      
 		  
Diluted net income (loss) per share
   $ 0.01     $ 0.04     $ (0.02 )   $ 0.14  
 
    
 		      
 		      
 		      
 		  
Shares used in diluted per share computations
     89,405       86,388       87,876       86,280  
 
    
 		      
 		      
 		      
 		  

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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

                 
    June 30,   December 31,
    2004
   2003
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 134,607     $ 246,552  
Cisco marketable securities
     247,407       250,786  
Other marketable securities
     478,316       594,230  
Accounts receivable, net
     68,436       54,464  
Income taxes receivable
     210,100       —  
Inventories, net
     44,714       18,959  
Other current assets
     5,538       27,026  
 
    
 		      
 		  
Total current assets
     1,189,118       1,192,017  
Property and equipment, net
     58,457       43,762  
Goodwill
     189,612       55,883  
Other acquired intangible assets, net
     77,552       1,639  
Other assets
     29,549       24,415  
 
    
 		      
 		  
Total assets
   $ 1,544,288     $ 1,317,716  
 
    
 		      
 		  
Liabilities & stockholders’ equity
                
Current liabilities:
                
Accounts payable
   $ 22,410     $ 11,112  
Accrued liabilities
     56,925       39,605  
Cisco securities loans payable
     247,407       250,786  
Current taxes payable
     34,621       26,989  
Deferred tax liabilities
     174,457       —  
 
    
 		      
 		  
Total current liabilities
     535,820       328,492  
Long-term liabilities
     5,112       4,068  
Commitments and contingencies
                
Stockholders’ equity:
                
Preferred stock
     —       —  
Common stock
     883       871  
Additional paid-in capital
     398,054       376,394  
Deferred compensation
     (11 )     (29 )
Accumulated other comprehensive income
     (166 )     1,560  
Retained earnings
     605,436       607,200  
Treasury stock
     (840 )     (840 )
 
    
 		      
 		  
Total stockholders’ equity
     1,003,356       985,156  
 
    
 		      
 		  
Total liabilities and stockholders’ equity
   $ 1,544,288     $ 1,317,716  
 
    
 		      
 		  

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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

                 
    Six Months Ended
    June 30
    2004
   2003
Cash flows from operating activities:
                
Net income (loss)
   $ (1,764 )   $ 11,654  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Current income taxes
     (202,468 )     105,905  
Deferred income taxes
     197,367       (239,119 )
Depreciation and amortization
     15,944       10,026  
In-process research and development
     14,000       —  
Increase in reserve for returns, rebates and credits
     4,654       324  
Tax benefit from option exercises
     3,905       3,850  
Interest receivable
     983       (3,512 )
Reduction in reserve for purchase commitments
     (836 )     (2,196 )
Increase in reserve for write-down of inventories
     635       2,432  
Allowance for doubtful accounts
     16       350  
Other non-cash adjustments to operating income
     6       2,881  
Cash proceeds from settlement of Cisco hedge contracts
     —       690,226  
Unrealized gains on Cisco investment
     —       (1,386 )
Changes in operating assets and liabilities:
                
Accounts receivable
     (1,570 )     (19,038 )
Inventories
     (13,291 )     5,490  
Other current assets
     221       19,358  
Other assets
     8       61  
Accounts payable
     (5,142 )     2,983  
Accrued and other liabilities
     3,358       (6,161 )
 
    
 		      
 		  
Net cash provided by operating activities
     16,026       584,128  
 
    
 		      
 		  
Cash flows from investing activities:
                
Purchases of other marketable securities
     (1,971,694 )     (1,875,903 )
Sales of other marketable securities
     1,712,121       1,514,662  
Maturities of other marketable securities
     371,646       31,007  
Payment for purchase of business
     (245,746 )     —  
Purchases of property and equipment
     (7,015 )     (5,874 )
Restricted investment
     (3,050 )     —  
Investment in privately-held company
     (2,000 )     —  
 
    
 		      
 		  
Net cash used in investing activities
     (145,738 )     (336,108 )
 
    
 		      
 		  
Cash flows from financing activities:
                
Proceeds from common stock issuances
     17,767       10,827  
Purchase of treasury stock
     —       (701 )
 
    
 		      
 		  
Net cash provided by financing activities
     17,767       10,126  
 
    
 		      
 		  
Increase (decrease) in cash and cash equivalents
     (111,945 )     258,146  
Cash and cash equivalents, beginning of period
     246,552       94,754  
 
    
 		      
 		  
Cash and cash equivalents, end of period
   $ 134,607     $ 352,900  
 
    
 		      
 		  

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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS
(In thousands, except per share data)
(Unaudited)

                         
    For the Three Months Ended June 30, 2004
            Adjustments    
            from GAAP   Core Business
    GAAP Results
   to Core Results
   Results
Revenues
   $ 118,591             $ 118,591  
Cost of revenues
     70,397               70,397  
 
    
 		      
 		      
 		  
Gross profit
     48,194               48,194  
 
    
 		      
 		      
 		  
Operating expenses:
                        
Research and development
     22,772       (293 )1     22,479  
Sales and marketing
     13,319       (42 )2     13,277  
General and administrative
     13,202       (4,917 )2,3     8,285  
Amortization of acquired intangibles
     4,357       (4,357 )4     —  
Integration costs
     1,438               1,438  
Securities litigation settlement costs
     (5,787 )     5,787 5     —  
 
    
 		      
 		      
 		  
Total operating expenses
     49,301       (3,822 )     45,479  
 
    
 		      
 		      
 		  
Operating income (loss)
     (1,107 )     3,822       2,715  
Other income:
                        
Interest income, net
     1,834               1,834  
Other
     59               59  
 
    
 		      
 		      
 		  
Total other income, net
     1,893               1,893  
 
    
 		      
 		      
 		  
Income before income taxes
     786       3,822       4,608  
Income taxes (benefit)
     (135 )     (631 )     (766 )
 
    
 		      
 		      
 		  
Net income
   $ 921       4,453     $ 5,374  
 
    
 		      
 		      
 		  
Basic net income per share
   $ 0.01             $ 0.06  
 
    
 		              
 		  
Shares used in basic per share computations
     88,125               88,125  
 
    
 		              
 		  
Diluted net income per share
   $ 0.01             $ 0.06  
 
    
 		              
 		  
Shares used in diluted per share computations
     89,405               89,405  
 
    
 		              
 		  

Notes:

1)   Adjustments arose from a leased facility write-off.
 
2)   Adjustments arose from additional leased facility write-offs stemming from a workforce reduction initiated in 2003.
 
3)   Adjustment of $3,510 for Tellabs merger-related costs.
 
4)   Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions.
 
5)   Adjustment for an arbitration award for compensatory damages and interest from a former insurer.

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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS
(In thousands, except per share data)
(Unaudited)

                         
    For the Three Months Ended March 31, 2004
    
            Adjustments    
            from GAAP   Core Business
    GAAP Results
   to Core Results
   Results
Revenues
   $ 92,784             $ 92,784  
Cost of revenues
     45,504               45,504  
 
    
 		      
 		      
 		  
Gross profit
     47,280               47,280  
 
    
 		      
 		      
 		  
Operating expenses:
                        
Research and development
     17,625               17,625  
Sales and marketing
     11,138               11,138  
General and administrative
     8,063               8,063  
In-process research and development
     14,000       (14,000 )1     —  
Amortization of acquired intangibles
     1,949       (1,949 )2     —  
Integration costs
     1,113               1,113  
 
    
 		      
 		      
 		  
Total operating expenses
     53,888       (15,949 )     37,939  
 
    
 		      
 		      
 		  
Operating income (loss)
     (6,608 )     15,949       9,341  
Other income (expense):
                        
Interest income, net
     2,916               2,916  
Other
     14               14  
 
    
 		      
 		      
 		  
Total other income
     2,930               2,930  
 
    
 		      
 		      
 		  
Income (loss) before income taxes
     (3,678 )     15,949       12,271  
Income taxes (benefit)
     (993 )     4,797       3,804  
 
    
 		      
 		      
 		  
Net income (loss)
   $ (2,685 )     11,152     $ 8,467  
 
    
 		      
 		      
 		  
Basic net income (loss) per share
   $ (0.03 )           $ 0.10  
 
    
 		              
 		  
Shares used in basic per share computations
     87,628               87,628  
 
    
 		              
 		  
Diluted net income (loss) per share
   $ (0.03 )           $ 0.09  
 
    
 		              
 		  
Shares used in diluted per share computations
     87,628               90,156  
 
    
 		              
 		  

Notes:

1)   Adjustment arose from the write-off of in-process research and development costs upon acquisition of NAA in February 2004.
 
2)   Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions.

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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS
(In thousands, except per share data)
(Unaudited)

                         
    For the Three Months Ended June 30, 2003
            Adjustments    
            from GAAP   Core Business
    GAAP Results
   to Core Results
   Results
Revenues
   $ 83,038             $ 83,038  
Cost of revenues
     41,914       (778 )1     41,136  
 
    
 		      
 		      
 		  
Gross profit
     41,124       778       41,902  
 
    
 		      
 		      
 		  
Operating expenses:
                        
Research and development
     19,392       (1,887 )1,2     17,505  
Sales and marketing
     11,065       (471 )1     10,594  
General and administrative
     8,875       (2,338 )1     6,537  
Amortization of acquired intangibles
     651       (651 )3     —  
 
    
 		      
 		      
 		  
Total operating expenses
     39,983       (5,347 )     34,636  
 
    
 		      
 		      
 		  
Operating income
     1,141       6,125       7,266  
Other income:
                        
Interest income, net
     3,311               3,311  
Unrealized gains on Cisco investment
     30       (30 )4     —  
Other
     (36 )             (36 )
 
    
 		      
 		      
 		  
Total other income
     3,305       (30 )     3,275  
 
    
 		      
 		      
 		  
Income before income taxes
     4,446       6,095       10,541  
Income taxes
     1,112       1,524       2,636  
 
    
 		      
 		      
 		  
Net income
   $ 3,334       4,571     $ 7,905  
 
    
 		      
 		      
 		  
Basic net income per share
   $ 0.04             $ 0.09  
 
    
 		              
 		  
Shares used in basic per share computations
     85,287               85,287  
 
    
 		              
 		  
Diluted net income per share
   $ 0.04             $ 0.09  
 
    
 		              
 		  
Shares used in diluted per share computations
     86,388               86,388  
 
    
 		              
 		  

Notes:

1)   Adjustments related to severance and leased facility write-offs resulting from a workforce reduction initiated in 2003.
 
2)   Adjustment for $292 arose from a leased facility write-off.
 
3)   Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002.
 
4)   Adjustment arose from income generated by the Cisco securities holdings and related hedge contract.

11

 

ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS
(In thousands, except per share data)
(Unaudited)

                         
    For the Six Months Ended June 30, 2004
            Adjustments    
            from GAAP   Core Business
    GAAP Results
   to Core Results
   Results
Revenues
   $ 211,375             $ 211,375  
Cost of revenues
     115,901               115,901  
 
    
 		      
 		      
 		  
Gross profit
     95,474               95,474  
 
    
 		      
 		      
 		  
Operating expenses:
                        
Research and development
     40,397       (293 )1     40,104  
Sales and marketing
     24,457       (42 )2     24,415  
General and administrative
     21,265       (4,917 )2, 3     16,348  
In-process research and development
     14,000       (14,000 )4     —  
Amortization of acquired intangibles
     6,306       (6,306 )5     —  
Integration costs
     2,551               2,551  
Securities litigation settlement costs
     (5,787 )     5,787 6     —  
 
    
 		      
 		      
 		  
Total operating expenses
     103,189       (19,771 )     83,418  
 
    
 		      
 		      
 		  
Operating income (loss)
     (7,715 )     19,771       12,056  
Other income:
                        
Interest income, net
     4,750               4,750  
Other
     73               73  
 
    
 		      
 		      
 		  
Total other income, net
     4,823               4,823  
 
    
 		      
 		      
 		  
Income (loss) before income taxes
     (2,892 )     19,771       16,879  
Income taxes (benefit)
     (1,128 )     4,166       3,038  
 
    
 		      
 		      
 		  
Net income (loss)
   $ (1,764 )     15,605     $ 13,841  
 
    
 		      
 		      
 		  
Basic net income (loss) per share
   $ (0.02 )           $ 0.16  
 
    
 		              
 		  
Shares used in basic per share computations
     87,876               87,876  
 
    
 		              
 		  
Diluted net income (loss) per share
                        
 
   $ (0.02 )           $ 0.15  
 
    
 		              
 		  
Shares used in diluted per share computations
                        
 
     87,876               89,784  
 
    
 		              
 		  

Notes:

1)   Adjustment arose from a leased facility write-off.
 
2)   Adjustments arose from additional leased facility write-offs stemming from a workforce reduction initiated in 2003.
 
3)   Adjustment of $3,510 for Tellabs merger-related costs.
 
4)   Adjustment arose from the write-off of in-process research and development costs upon acquisition of NAA in February 2004.
 
5)   Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions.
 
6)   Adjustment for an arbitration award for compensatory damages and interest from a former insurer.

12

 

ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS
(In thousands, except per share data)
(Unaudited)

                         
    For the Six Months Ended June 30, 2003
            Adjustments    
            from GAAP   Core Business
    GAAP Results
   to Core Results
   Results
Revenues
   $ 163,490             $ 163,490  
Cost of revenues
     82,767       (778 )1     81,989  
 
    
 		      
 		      
 		  
Gross profit
     80,723       778       81,501  
 
    
 		      
 		      
 		  
Operating expenses:
                        
Research and development
     35,336       (1,887 )1, 2     33,449  
Sales and marketing
     20,841       (471 )1     20,370  
General and administrative
     14,815       (2,338 )1     12,477  
Amortization of acquired intangibles
     1,444       (1,444 )3     —  
 
    
 		      
 		      
 		  
Total operating expenses
     72,436       (6,140 )     66,296  
 
    
 		      
 		      
 		  
Operating income
     8,287       6,918       15,205  
Other income:
                        
Interest income, net
     5,862               5,862  
Unrealized gains on Cisco investment
     1,386       (1,386 )4     —  
Other
     4               4  
 
    
 		      
 		      
 		  
Total other income
     7,252       (1,386 )     5,866  
 
    
 		      
 		      
 		  
Income before income taxes
     15,539       5,532       21,071  
Income taxes
     3,885       1,383       5,268  
 
    
 		      
 		      
 		  
Net income
   $ 11,654     $ 4,149     $ 15,803  
 
    
 		      
 		      
 		  
Basic net income per share
   $ 0.14             $ 0.19  
 
    
 		              
 		  
Shares used in basic per share computations
     85,094               85,094  
 
    
 		              
 		  
Diluted net income per share
   $ 0.14             $ 0.18  
 
    
 		              
 		  
Shares used in diluted per share computations
     86,280               86,280  
 
    
 		              
 		  

Notes:

1)   Adjustments related to severance and leased facility write-offs resulting from a workforce reduction initiated in 2003.
 
2)   Adjustment for $292 arose from a leased facility write-off.
 
3)   Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002.
 
4)   Adjustment arose from income generated by the Cisco securities holdings and related hedge contract.

13