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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4135495
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1100 COMMSCOPE PLACE, S.E.
P.O. BOX 339
HICKORY, NORTH CAROLINA 28602
(Address of principal executive (Zip Code)
offices)
(828) 324-2200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
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registered
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant was approximately $638 million as of June
28, 2002 (based on the closing price for the Common Stock on the New York
Stock Exchange on that date). For purposes of this computation, shares held
by affiliates and by directors and officers of the Registrant have been
excluded.
As of March 14, 2003 there were 59,219,567 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2003 ANNUAL MEETING
OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
TABLE OF CONTENTS Page
Part I
Item 1. Business.........................................................1
Item 2. Properties......................................................12
Item 3. Legal Proceedings...............................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.........................................................14
Item 6. Selected Financial Data.........................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......28
Item 8. Financial Statements and Supplementary Data.....................32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................64
Part III
Item 10. Directors and Executive Officers of the Registrant..............65
Item 11. Executive Compensation..........................................67
Item 12. Security Ownership of Certain Beneficial Owners and Management..67
Item 13. Certain Relationships and Related Transactions..................67
Part IV
Item 14. Controls and Procedures.........................................68
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
Signatures......................................................69
Certifications..................................................70
i
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references to "CommScope,
Inc.," or "we," "us," or "our" are to CommScope, Inc. and its direct and
indirect subsidiaries, including CommScope Inc. of North Carolina, on a
consolidated basis.
GENERAL
We are a leading worldwide designer, manufacturer and marketer of a
broad line of coaxial, fiber optic, and other high-performance electronic
cable products for cable television, telephony, Internet access, wireless
communications and other broadband services. We believe that we supplied
over 50% of all coaxial cable purchased in the United States in 2002 for
broadband cable networks using Hybrid Fiber Coaxial (HFC) architecture. We
believe we are also the largest manufacturer and supplier of coaxial cable
for HFC cable networks in the world. We are also a leading supplier of
fiber optic cables primarily for HFC cable networks and have developed
specialized, proprietary fiber optic products for telecommunications
applications. We are a leading supplier of coaxial cable for telephone
central office switching and transmission applications, as well as video
distribution applications such as satellite television and security
surveillance. In addition, we have developed an innovative line of coaxial
cables for wireless communication infrastructure applications that have
superior performance characteristics compared to traditional cables. We are
also a leading provider of high-performance premise wiring for local area
networks. During 2002, we sold our products to approximately 1,800
customers in more than 85 countries.
CommScope, Inc. was incorporated in Delaware on January 28, 1997. Our
principal executive offices are located at 1100 CommScope Place, SE,
Hickory, North Carolina 28602. Our telephone number is (828) 324-2200.
For the year ended December 31, 2002, our revenues were $598 million
and our net loss was $67 million. During this period, approximately 83% of
our revenues were for HFC cable networks and other video applications, 14%
were for local area network premise wiring applications and 3% were for
wireless, central office and other telecommunications applications.
International sales were approximately 19% of our revenues during this
period. For further discussion of current and prior year domestic and
international revenues, see Items 7 and 8 of this Form 10-K.
We believe that we are the world's most technologically advanced,
low-cost provider of coaxial cable. With our leading product offerings,
cost-efficient manufacturing and economies of scale, we believe we will
benefit from the convergence of video, voice and high-speed Internet access
and the resulting demand for enhanced HFC broadband networks.
Although the industries we serve are currently in a period of lower
capital spending, in the long-term, we believe that the following industry
trends will drive demand for our products:
o continuing upgrades and increasing maintenance requirements for
HFC cable networks as operators improve reliability for digital
cable, telephony, data and other two-way services;
o ongoing deployment of the HFC architecture by major cable
television and other broadband service providers throughout the
world;
o growing use of the Internet;
o increasing need for additional bandwidth to accommodate new
applications;
o continuing deployment of wireless communications systems
worldwide;
o growing demand for higher speed and bandwidth for local area
networks;
o regional clustering of cable systems that will facilitate the
delivery of advanced services such as telephony; and
o increasing demand for high bandwidth optical fibers for metro and
local access applications.
1
OUR INVESTMENT IN OFS BRIGHTWAVE
Effective November 16, 2001, we acquired, through our indirect
wholly-owned subsidiary CommScope Optical Technologies, Inc., referred to
herein as CommScope Optical, an approximate 18.4% interest in OFS
BrightWave, LLC, a Delaware limited liability company, referred to herein
as OFS BrightWave, formed by us and The Furukawa Electric Co., Ltd.,
referred to herein as Furukawa, to operate certain fiber optic cable and
transmission fiber assets of the Optical Fiber Solutions Group, referred to
herein as OFS Group, acquired from Lucent Technologies Inc., referred to
herein as Lucent.
The equity investment provides us with an interest in one of the
world's largest producers of optical fiber and cable. We believe this
investment and other arrangements with Furukawa:
o create a strategic partner in the manufacture of optical fiber
and fiber optic cable;
o enhance our technology platform with cross licenses for use of
key intellectual property;
o provide access to a broad array of technologically advanced
optical fibers; and
o provide an opportunity to expand our sales of fiber optic cable
to cable television Multiple System Operators (MSOs).
We issued 10.2 million shares of our common stock to Lucent, valued at
$203.4 million in aggregate, in lieu of a portion of the cash purchase
price payable by Furukawa to Lucent pursuant to an asset and stock purchase
agreement entered into in connection with the acquisition of a portion of
Lucent's OFS Group. Of the amount paid by us, $173.4 million represented
our capital contribution to OFS BrightWave and the remaining $30.0 million
represented a revolving loan from CommScope Optical to OFS BrightWave. An
indirect wholly-owned subsidiary of Furukawa owns the remaining 81.6%
equity interest in OFS BrightWave. As of October 9, 2002, we and Furukawa
purchased 10.2 million shares of our common stock from Lucent for
$53,040,000 ($5.20 per share). Of the total 10.2 million shares of our
common stock purchased from Lucent, Furukawa purchased approximately 7.7
million shares for $40 million and we purchased approximately 2.5 million
shares for $13 million. As of December 31, 2002, OFS BrightWave owed us $30
million under the fully-drawn revolving loan facility.
BUSINESS STRATEGY
We have adopted a strategy to expand and strengthen our current market
position as the leading worldwide supplier of coaxial cable for broadband
communications. The principal elements of our growth strategy are:
BENEFIT FROM ADOPTION OF WORLDWIDE HFC ARCHITECTURE. A vast majority
of video networks worldwide, such as cable service providers, have adopted
the HFC cable network architecture for video service delivery.
We believe that the HFC cable network architecture provides the most
cost-effective bandwidth for multi-channel video, voice and data into homes
around the world. This architecture enables both cable and other
telecommunications service providers to offer new services such as
high-speed Internet access, video on demand, Internet protocol telephony,
high-definition television and other interactive services. Sales
opportunities are created as companies build-out and upgrade their networks
in the global marketplace. We believe our ability to offer a complete suite
of cable products, including optical fiber supplied by OFS BrightWave and
its affiliates, positions us to be the "supplier of choice" to developers
and operators of HFC networks.
DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. We
maintain an active program to identify new market opportunities and develop
and commercialize products that use our core technology and manufacturing
competencies. We continue to develop new products and enter new markets,
including coaxial cable for wireless applications, satellite cables, local
area network cables, specialized coaxial based telecommunication cables,
broadcast audio and video cables and coaxial cables in conduit.
2
We have developed Power Feeder(R), a specialized coaxial cable, and
Fiber Feeder(R), a fiber optic cable, for HFC cable networks, and Cell
Reach(R), a patented copper and aluminum coaxial cable solution for the
wireless market, and UltraPipe(R) and LaserCore(R), high-end local area
network cable products targeted for high-speed local area network
applications. We have also developed a number of broadband cables for other
wireless applications. Our ability to offer proprietary products, which is
expected to be enhanced through access to the intellectual property and
research and development expertise of OFS BrightWave and its affiliates,
allows us to maintain a leadership position in our existing markets and
expand to serve new markets. A recent example of this is the LightScope
ZWP(TM) brand of fiber optic cables, which we began marketing in 2002.
Cables produced with LightScope ZWP(TM) are capable of transmitting light
in a broader usable spectrum than standard single mode fibers and can
utilize lower cost electro-optic components. Therefore, we believe that
LightScope ZWP(TM) can provide users with greater bandwidth in their fiber
optic networks at lower overall cost than standard single mode fiber optic
cable products. We currently purchase the optical fibers for our LightScope
ZWP(TM) cable from an affiliate of OFS BrightWave.
CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. We invested approximately
$250 million in the global development and acquisition of state-of-the-art
manufacturing facilities and new technologies during the past four fiscal
years. These investments help to increase our capacity and operating
efficiencies, improve management control and provide more consistent
product quality as well as provide regional services and manufacturing
capability. As a result, we believe we are one of the few manufacturers
capable of satisfying volume production, time-to-market, and technology
requirements of customers for coaxial cable in the communications industry.
We believe that our breadth and scale permit us to cost-effectively invest
in improving our operating efficiency through investments in engineering
and cost-management programs. In 2001, we completed an aggressive three
year capital expenditure program and expect future capital expenditures to
be below depreciation and amortization for the next few years.
EXPAND OUR GLOBAL PLATFORM. We believe that the worldwide demand for
video, data and other broadband services, the large number of television
households and relatively low penetration rates for cable television in
most countries outside the United States provide significant long-term
opportunities. We have become a major supplier of coaxial cable for the
cable television and broadband services industries in international
markets, principally Europe, Latin America and Asia/Pacific Rim. During
2002 we had approximately 250 international customers in more than 85
countries, representing approximately $112 million or approximately 19% of
our net sales. We support our international sales efforts with sales
representatives based in Europe, Latin America, Asia/Pacific Rim and other
regions throughout the world. In 1999, we acquired the Alcatel Cable
Benelux, S.A. coaxial cable business in Seneffe, Belgium. With this
acquisition, we believe we became the largest manufacturer and supplier of
coaxial cable for HFC cable networks in Europe. This acquisition
strengthened our position as a supplier for the expected telecommunications
upgrade and rebuild activity in Germany, Spain and other European
countries. In 2001, we opened a facility in Jaguariuna, Brazil to
manufacture and distribute products for HFC and wireless applications. We
have also increased the capability and efficiency of our Belgium and Brazil
facilities for HFC related products and established capabilities for the
manufacture of products for wireless applications.
Although there is current uncertainty in international markets, we
believe that we are well positioned to benefit over the long term from
future international growth opportunities. While we intend to expand
utilization of existing international manufacturing facilities, as
broadband HFC networks expand globally, we also intend to evaluate the need
for facilities in other countries that we believe have strategic value,
particularly in Asia/Pacific Rim. We believe in-country or in-region
manufacturing is important because it moves us closer to international
customers, it can lower transportation costs, taxes and tariffs and
provides the opportunity to improve regional customer service.
LEVERAGE SUPERIOR CUSTOMER SERVICE. We believe that our coaxial cable
manufacturing capacity is greater than that of any other manufacturer of
HFC cable products. This enables us to provide our customers with a unique
high-volume service capability. As a result of our 24-hour, seven days per
week continuous manufacturing capability, we are able to offer fast order
turnaround services. In addition, we believe that our ability to offer
rapid delivery services, materials management and logistics services to
customers through our private truck fleet is an important competitive
advantage.
3
BUILD UPON THE STRENGTHS OF OFS BRIGHTWAVE AND ITS AFFILIATES TO
EXPAND OUR PRODUCT OFFERINGS. Currently, we offer a broad range of cable
products for the cable television, wireless and LAN markets, and our
relationship with OFS BrightWave and its affiliates will augment our
coaxial cable product line with a broader line of fiber optic cables.
During 2002, we believe that we enhanced our fiber optic cable market
position for HFC applications despite lower overall sales and ongoing
pricing pressure. We believe that this progress primarily resulted from our
strong service model and our new LightScope ZWP(TM) fiber optic cables,
which are based upon technologically advanced optical fibers from OFS
BrightWave. Sales of fiber optic cable, primarily for broadband
applications, represented more than 10% of our total sales during 2002.
PRODUCT GROUPS
We manufacture and sell a variety of communications cables which we
summarize into three broad product groups by application. These products
are similar in nature and share similar production processes, customers,
distribution channels and regulatory environments:
o Broadband (cable television) and Other Video applications;
o Local Area Network applications; and
o Wireless and Other Telecommunications applications.
DOMESTIC HFC CABLE TV MARKET. We design, manufacture and market
primarily coaxial cable, most of which is used in the cable television
industry. We manufacture two primary types of coaxial cable:
o semi-flexible, which has an aluminum or copper outer tubular
shield or outer conductor; and
o flexible, which is typically smaller in diameter than
semi-flexible coaxial cable and has a more flexible outer
conductor typically made of metallic tapes and braided fine
wires.
Semi-flexible coaxial cables are typically used in the trunk and
feeder distribution portion of cable television systems, and flexible
coaxial cables, also known as drop cables, are typically used for
connecting the feeder cable to a residence or business or for some other
communications applications. We also manufacture fiber optic cable for the
cable television industry and others.
Cable television service traditionally has been provided primarily by
cable television system operators that have been awarded franchises from
the municipalities or local governments they serve. In response to
increasing competitive pressures and expanding revenue opportunities, cable
television system operators have been expanding the variety of their
service offerings not only for video, but also for Internet access, other
broadband services and telephony, which generally requires increasing
amounts of cable and system bandwidth. Cable television system operators
have generally adopted, and we believe that for the foreseeable future will
continue to adopt, HFC cable system designs when seeking to increase system
bandwidth. These systems combine the advantages of fiber optic cable in
transmitting clear signals over a long distance without amplification, and
the advantages of high-bandwidth coaxial cable in ease of installation, low
cost and compatibility with the receiving components of the customer's
communications devices. We believe that:
o cable television system operators are likely to increase their
use of fiber optic cable for the trunk and feeder portions of
their cable systems;
o there will be an ongoing need for high-capacity coaxial cable for
the local distribution and street-to-the-home portions of the
cable system;
o coaxial cable will remain the most cost effective means for the
transmission of broadband signals to the home or business over
shorter distances in cable networks; and
o there will be increasing maintenance requirements for cable
television system operators as they improve reliability for
digital cable, telephony, data and other two way services.
For local distribution purposes, coaxial cable has the necessary
signal carrying capacity, or bandwidth, to handle upstream and downstream
signal transmission.
4
The construction, expansion and upgrade of cable systems require
significant capital investment by cable television system operators. Cable
television system operators have been significant borrowers from the credit
and capital markets. Therefore, capital spending within the domestic cable
television industry has historically been cyclical, depending to a
significant degree on the availability of credit and capital. The cable
television industry has also been subject to varying degrees of both
national and local government regulation, including the Telecommunications
Act of 1996, referred to herein as the Telecom Act, and the 1992 Cable Act,
and their implementing regulations adopted in 1993 and 1994 and thereafter,
as well as other recent regulations in this regard. The regional Bell
operating companies and other telephone service providers have generally
been subject to regulatory restrictions which prevented them from offering
cable television service within their franchise telephone areas. However,
the Telecom Act removes or phases out many of the regulatory and sale
restrictions affecting cable television system operators and telephone
operating companies in the offering of video and telephone services. We
believe that the Telecom Act, the implementing regulations and case-law
decisions will generally encourage competition among cable television
system operators, telephone operating companies and other communications
companies in offering video, telephone and data services such as Internet
access to consumers. We also believe that providers of such services will
upgrade their present communications delivery systems in order to compete
effectively.
INTERNATIONAL MARKETS. Cable system designs using HFC technology are
increasingly being used in international markets with low cable television
penetration. Based on industry trade publications and reports from
telecommunications industry analysts, we estimate that there are more than
800 million television households outside the United States, including
roughly 500 million in the Asia/Pacific Rim region, roughly 250 million in
Europe and approximately 100 million in the Latin America/Caribbean region,
among others. This compares to approximately 105 million television
households in the United States. We estimate that roughly 50% of the
television households in Europe subscribe to some form of multichannel
television service compared to subscription rates of nearly 85% in the
United States. Based upon such sources, we estimate that subscription rates
in the Asia/Pacific Rim and Latin America/Caribbean markets are even lower
at roughly 35% and 20%, respectively.
As of December 31, 2002, we had sales in more than 85 countries. We
have penetrated the international marketplace through a field sales
organization and through a network of distributors and agents located in
major countries where we do business. In addition to new customers
developed by our network of distributors and sales representatives, many
large U.S. cable television operators, with whom we have had long
established business relationships, are active investors in cable
television systems outside the United States.
OTHER VIDEO MARKETS (NON-CABLE TELEVISION). Many specialized markets or
applications are served by multiple cable media such as coaxial, twisted
pair, fiber optic or combinations of each. We are a leading producer of
composite cables made of flexible coaxial and twisted copper pairs for full
service communications providers worldwide. In the satellite direct-to-home
cable market, where specialized cables transmit satellite-delivered video
signals and antenna positioning/control signals, we have developed a leading
market position. We also market an array of premium metallic and optical
cable products directed at the broadcasting and video production studio
market.
WIRELESS COMMUNICATIONS MARKET. We believe that the deployment of
wireless communications systems throughout the United States and the rest of
the world presents a growth opportunity for us. Semi-flexible coaxial cables
are used to connect the antennae located at the top of wireless antenna
towers to the radios and power sources located adjacent to or near the
antenna site. Over the past few years, we developed and patented Cell
Reach(R), a line of copper or aluminum shielded semi-flexible coaxial cables
and related connectors and accessories to address this market. Cell Reach(R)
has been installed in thousands of wireless base stations with leading
service providers such as Nextel Communications, Inc., Sprint Corporation,
certain Sprint affiliates and certain AT&T affiliates.
We have expanded manufacturing capacity for this product line and have
established international sales capabilities. During 2002, we expanded our
global capacity in the wireless market and have production capability in
Latin America and Europe.
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We also manufacture other broadband coaxial cables, fiber optic cables
and twisted pair cables that are used for various wireless applications,
including Third Generation Wireless (3G), Personal Communications Systems
(PCS), Global System for Mobile Communications (GSM), Universal Mobile
Telecommunications (UMTS), Cellular, Multichannel Multipoint Distribution
Service (MMDS), Local Multipoint Distribution System (LMDS), land mobile
radio, paging and in-building wireless applications. During 2002, we
continued to develop specialized coaxial cables for these applications,
including the Extreme FlexTM product line which are highly flexible low
loss 50 ohm coaxial cables adapted from our highly successful proprietary
QR(R) product line. In addition, we achieved TL 9000 registration for our
wireless products at our Cable Technology Center in Newton, North Carolina.
The TL 9000 certification is an internationally recognized quality system
standard, which we believe demonstrates our quality commitment to our
wireless customers.
However, we expect ongoing aggressive competition from larger,
well-established companies with significant financial resources, brand
recognition in the cellular market and established marketing channels for
coaxial cable and accessories.
LOCAL AREA NETWORK MARKET. The proliferation of personal computers,
and more broadly the practice of distributed computing, has created a need
for products which enable users to share files, applications and peripheral
equipment such as printers and data storage devices. Local area networks,
typically consisting of at least one dedicated computer (a "server"),
peripheral devices, network software and interconnecting cables, were
developed in response to this demand. We manufacture a variety of twisted
pair, coaxial and fiber optic cables to transmit data for local area
network applications. The most widely used cable design for this
application consists of four high-performance twisted pairs that are
capable of transmitting data at rates in excess of 1 Gbps. We focus our
products and marketing on cables with enhanced electrical and physical
performance such as our UltraPipe(R) unshielded twisted pair. We believe
that UltraPipe(R) cable is among the highest performing unshielded twisted
pair cables in the industry. We have also expanded our presence as a fiber
optic supplier to the LAN market and, during 2002, introduced LaserCore(R),
the newest 50 MICRON fiber optic cable designed for 10 gigabit Ethernet
applications. We believe that access to fiber optic products from OFS
BrightWave and its affiliates will provide us an opportunity to increase
our sales of fiber optic cables to LAN customers. Copper and fiber optic
composite cables are frequently combined in a single cable to reduce
installation costs and support multimedia applications. Generally, our LAN
sales to the end user are fulfilled through distributors. We believe that
we have strong brand recognition and one of the largest domestic sales
forces in the LAN market; however, essentially all of our LAN sales to the
end user are fulfilled through distributors. While we lost Graybar Electric
Company, Inc. as a primary distribution channel during 2002, we believe
that we were able to offset the majority of those sales by redirecting
project business to other established distribution channels.
OTHER MARKETS. By combining narrowly focused product and market
management with our cable manufacturing, operational and sales and
marketing skills, we address other markets for high performance
communications cable applications such as broadcast, home automation,
telephone central office switching and transmission, and other
high-performance communications applications. For example, UltraHome(R) is
a customized combination of easy-to-install coaxial, twisted pair and fiber
optic cables that provide residential customers with a simple structure for
computer networking, whole house entertainment, energy management,
telephone systems, cable television and intercom systems applications.
MANUFACTURING
We employ advanced cable manufacturing processes, the most important
of which are:
o bimetallic wire fabrication;
o fine wire drawing;
o thermoplastic extrusion for insulating wires and cables;
o high-speed welding and swaging of metallic shields or outer
conductors;
o braiding;
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o cabling and stranding; and
o automated testing.
Many of these processes, some of which are proprietary and/or trade
secret information, are performed on equipment that has been modified for
our purposes or specifically built to our specifications, often internally
in our own machine shop facilities. We do not fabricate all of the raw
material components used in making most of our cables, such as certain
wires, tapes, tubes and similar materials. We believe, however, that
fabrication, to the extent economically feasible, could be done by us
instead of being outsourced.
For example, during 2002 we substantially completed certain aspects of
strategic vertical integration projects for bimetallic wire fabrication and
fine wire drawing and currently produce a significant portion of our needs
internally.
BIMETALLIC WIRE FABRICATION. We currently produce essentially all of
our bimetallic center conductor requirements internally using
state-of-the-art equipment. Copper Clad Aluminum (CCA) and Copper Clad
Steel (CCS) center conductors are a fundamental component of coaxial cables
and are fabricated by metallurgically bonding metals using heat and
pressure. CCA is substantially lighter than copper and is well suited for
larger broadband trunk and distribution applications. CCS is lighter and
stronger than copper and is the center conductor used for drop cable
applications.
FINE WIRE DRAWING. We also produce essentially all of our aluminum
fine wire requirements, which are used as part of the flexible outer shield
of drop cables. Utilizing proprietary equipment and processes, we reduce
aluminum alloy rod from finger size, 3/8" diameter, to human hair size,
..0063" diameter wire.
We believe that bimetallic and aluminum fine wire fabrication, using
proprietary equipment and processes, is one of our core competencies.
The manufacturing processes of the three principal types of cable we
manufacture are further described below.
COAXIAL CABLES. We employ a number of advanced plastic and metal
forming processes in the manufacture of coaxial cable. Three fundamental
process sequences are common to almost all coaxial cables:
o First, a plastic insulation material, called the dielectric, is
melt extruded around a metallic wire or center conductor. Current
state-of-the-art dielectrics consist of foamed plastics to
enhance the electrical properties of the cable. Precise control
of the foaming process is critical to achieve the mechanical and
electrical performance required for broadband services and
cellular communications applications. We believe that plastic
foam extrusion, using proprietary materials, equipment and
control systems, is one of our core competencies.
o The second step involves sheathing the dielectric material with a
metallic shield or outer conductor. Three basic shield designs
and processes are used. For semi-flexible coaxial cables, we
apply solid aluminum or copper shields over the dielectric by
either pulling the dielectric insulated wire into a long, hollow
metallic tube or welding the metallic tube directly over the
dielectric. Welding allows the use of thinner metal, resulting in
more flexible products. We use a proprietary welding process that
achieves significantly higher process speeds than those
achievable using other cable welding methods. The same welding
process has led to extremely efficient manufacturing processes of
copper shielded products for cellular communications. For both
hollow and welded tubes, the cable is passed through tools that
form the metallic shield tightly around the dielectric.
o Flexible coaxial cables, which are usually smaller in diameter
than semi-flexible coaxial cables, generally are made with the
third shield design. Flexible outer shield designs typically
involve laminated metallic foils and braided fine wires which are
used to enhance flexibility which is more desirable for indoor
wiring or for connecting subscribers in drop cable applications.
7
o The third and usually final process sequence is the melt
extrusion of thermoplastic jackets to protect the coaxial cable.
A large number of variations are produced during this sequence
including: incorporating an integral strength member; customer
specified extruded stripes and printing for identification;
abrasion and crush resistant jackets; and adding moisture
blocking fillers.
TWISTED COPPER PAIRS. We insulate single copper wires using high-speed
thermoplastic extrusion techniques. Two insulated copper singles are then
twinned by twisting them into an electrically balanced pair unit in a
separate process. They are then bunched or cabled by grouping two or more
pair units into larger units for further processing in one or more further
processes depending on the number of pairs desired within the completed
cable. The cabled units are then shielded and jacketed or simply jacketed
without applying a metallic shield in the jacketing process. The jacketing
process involves extrusion of a plastic jacket over a shielded or
unshielded cable core. The majority of sales of our twisted copper pairs
come from plenum rated unshielded twisted pair cables for local area
network applications. Plenum cables are cables rated under the National
Electrical Code as safe for installation within the air plenum areas of
office buildings due to their flame retarding and low smoke generating
characteristics when heated. Plenum cables are made from more costly
thermoplastic insulating materials, such as flourinated ethylene propylene
(FEP). These materials have significantly higher extrusion temperature
profiles that require more costly extrusion equipment than non-plenum rated
cables. We believe that the processing of plenum rated materials is one of
our core competencies.
FIBER OPTIC CABLES. We manufacture fiber optic cables by purchasing
bulk uncabled optical fiber singles and buffering them before cabling them
into unjacketed core units. We then apply protective outer jackets and,
sometimes, steel armor and jackets in a final process before testing. The
manufacturing and test equipment for fiber optic cables are different from
those used to manufacture coaxial and copper twisted pair cables. Most of
the fiber optic cables we produce are sold to the cable television and
local area network industry. Some of these fiber optic cables are produced
under licenses acquired from other fiber and fiber optic cable
manufacturers.
COMPOSITE CABLES. We also produce cables that are combinations of some
or all of coaxial cables, copper singles or twisted copper pairs and fiber
optic cables within a single cable for a variety of applications. The most
significant of the composite cables we manufacture are combination coaxial
and copper twisted pairs within a common outer jacket which are being used
by some telephone companies and cable operators to provide both cable
television services and telephone services to the same households over HFC
cable networks. Nearly all of our current markets have applications for
composite cables which we can manufacture.
OFS BRIGHTWAVE OPTICAL FIBER AND FIBER OPTIC CABLE. Our equity-method
investee, OFS BrightWave, is one of the world's largest manufacturers of
optical fiber and fiber optic cable. OFS BrightWave produces
application-specific fiber and fiber optic cable for voice, data and video
transmission deployed in both long-haul and short-haul communications
networks. OFS BrightWave sells fiber optic cable primarily to large
telecommunications service providers including certain Regional Bell
Operating Companies (RBOCs). OFS BrightWave manufactures optical fiber
under a contract manufacturing agreement for OFS Fitel, LLC, referred to
herein as OFS Fitel, a wholly owned subsidiary of Fitel USA. Fitel USA's
ultimate parent is Furukawa.
OFS BrightWave is headquartered in Norcross, Georgia and operates
production facilities in the United States, Brazil, Germany and Russia.
While a majority of sales are expected to be generated in North America,
OFS BrightWave markets and sells its products in Asia/Pacific Rim, Latin
America, Europe and other regions throughout the world.
As a contract manufacturer to OFS Fitel, OFS BrightWave produces
application-specific fibers, such as AllWave(R), which is used in metro
applications. OFS BrightWave has a worldwide reputation for high capacity
and industry-leading fiber designs. The combined optical fiber production
capabilities of OFS BrightWave and OFS Fitel, together, rank them as one of
the world's largest producers of optical fiber and fiber optic cables.
8
Manufacturing fiber optic cable consists of two basic steps: creating
a rod, also called a core preform or a blank, of very pure glass and then
heating the preform and drawing it into a thin fiber. After drawing, the
fiber is coated with a protective jacket and wound on a spool. Individual
fibers are often wrapped or packaged with other fibers to form cables
consisting of up to 864 strands of fiber. After manufacturing the fiber
itself, the fiber is packaged in a cable in various combinations of fiber
types and quantities to form a fiber optic cable that is sold to customers.
OFS BrightWave produces fiber optic cables in a broad range of fiber
types, fiber bundling, fiber counts and sheath designs. These cable
products provide state of the art terabit transport in configurations up to
864 fibers in ribbons for dense metro and long haul routes and smaller
ribbons or loose fiber bundles for last mile applications.
OFS BrightWave's customers compete in markets characterized by rapid
technological changes, decreasing product life cycles, global price
competition and increased user applications. These markets have experienced
significant expansion in the number and types of products and services they
offer to end-users, particularly in personal computing, portable access
communication devices and expanded networking capability.
OFS BrightWave's primary competitors include Corning, Pirelli, Alcatel
and several internationally-based competitors. While the optical fiber
industry has major barriers to entry, including capital and intellectual
property, current market conditions are extremely difficult. Due primarily
to the difficult market environment for certain telecommunications products
and challenging global economic conditions, we expect ongoing pricing
pressure and weak demand industry wide for fiber optic cable products
during 2003. We believe that OFS BrightWave has taken significant steps to
reduce its cost structure. However, based on the ongoing difficult market
conditions, we expect that OFS BrightWave will incur losses through 2003.
RESEARCH AND DEVELOPMENT
Our research, development and engineering expenditures for the
creation and application of new and improved products and processes were $6
million, $7 million and $18 million for the years ended December 31, 2002,
2001 and 2000, respectively. We focus our research and development efforts
primarily on two areas:
o those product areas that we believe have the potential for broad
market applications and significant sales within a one-to-three
year period; and
o new manufacturing technologies to achieve cost reductions.
During 2002, our major projects consisted of research and engineering
activities related to developing new and more cost effective cable designs.
Also, we continued research and engineering activities related to the
production of certain copper clad metals in order to advance the design of
those materials and related processes to the point that they meet specific
functional and economic requirements. We undertook this project in an
effort to reduce material costs and reliance on limited sources of key raw
materials and incorporated the new designs and related processes into
production during the third quarter of 2002.
SALES AND DISTRIBUTION
We market our products worldwide through a combination of more than
140 direct sales, territory managers and manufacturers' representative
personnel. We support our sales organization with regional service centers
in: Alabama; Nevada; North Carolina; Puerto Rico; Australia; Belgium;
Brazil; Spain and England. In addition, we utilize local inventories, sales
literature, internal sales service support, design engineering services and
a group of product engineers who travel with sales personnel and territory
managers and assist in product application issues, and conduct technical
seminars at customer locations to support our sales organization. We have
expanded our global presence through our acquisition of Europe's largest
manufacturer of cable television coaxial cable and our establishment of a
manufacturing and distribution facility in Brazil.
9
A key aspect of our customer support and distribution chain is the use
of our private truck fleet. We believe that our ability to offer rapid
delivery services, materials management and logistics services to customers
through our private truck fleet is an important competitive advantage.
Our products are sold and used in a wide variety of applications. Our
products primarily are sold directly to cable system operators,
telecommunications companies, original equipment manufacturers and
indirectly through distributors. There has been a trend on the part of
larger customers to consolidate their lists of qualified suppliers to
companies that have a global presence, can meet quality and delivery
standards, have a broad product portfolio and design capability, and have
competitive prices. We have concentrated our efforts on service and
productivity improvements including advanced computer aided design and
manufacturing systems, statistical process controls and just-in-time
inventory programs to increase product quality and shorten product delivery
schedules. Our strategy is to provide a broad selection of products in the
areas in which we compete. We have achieved a preferred supplier
designation from many of our cable television, telephone and original
equipment manufacturer customers. We continue to strengthen our information
technology infrastructure, which we believe will help us continue to
improve business practices.
Cable television services in the United States are provided primarily
by cable television system operators. It is estimated that the five largest
cable television system operators account for more than 70% of the cable
television subscribers in the United States. The major cable television
system operators include such companies as Comcast (which merged with AT&T
Broadband in November 2002), AOL Time Warner, Charter Communications, Cox
Communications and Adelphia Communications. Many of the major cable
television system operators are our customers, including those listed
above. During the year ended December 31, 2002, Comcast, as if combined
with AT&T Broadband for the full year, accounted for approximately 20% of
our net sales, compared to approximately 10% of our net sales as if they
were combined for the full years ended December 31, 2001 and 2000. No other
customer accounted for 10% or more of our net sales during 2002, 2001 or
2000.
PATENTS AND TRADEMARKS
We pursue an active policy of seeking intellectual property
protection, namely patents and registered trademarks, for new products and
designs. On a worldwide basis, we hold 71 patents and have 121 pending
applications. We also have 134 registered trademarks and 100 pending
trademark applications worldwide. We consider our patents and trademarks to
be valuable assets, but no single patent or trademark is material to our
operations as a whole. We intend to rely on our intellectual property
rights including our proprietary knowledge, trade secrets and continuing
technological innovation to develop and maintain our competitive position.
We have entered into cross-licensing arrangements with Furukawa,
providing us with access to key technology for communications cables,
especially fiber optic cables.
BACKLOG
At December 31, 2002, 2001 and 2000, we had an order backlog of
approximately $26 million, $22 million and $156 million, respectively.
Orders typically fluctuate from quarter to quarter based on customer demand
and general business conditions. Backlog includes only orders for products
scheduled to be shipped within six months. In some cases, unfilled orders
may be canceled prior to shipment of goods; but cancellations historically
have not been material. However, our current order backlog may not be
indicative of future demand.
COMPETITION
We encounter competition in substantially all areas of our business.
We compete primarily on the basis of product specifications, quality,
price, engineering, customer service and delivery time. Competitors include
large, diversified companies, some of which have substantially greater
assets and financial resources than we do, as well as medium to small
companies. We also face competition from certain smaller companies that
have concentrated their efforts in one or more areas of the coaxial cable
market. We believe that we enjoy a strong competitive position in the
coaxial cable market due to our position as a low-cost, high-volume coaxial
cable producer and reputation as a high-quality provider of
10
state-of-the-art cables with a strong orientation toward customer service.
We also believe that we enjoy a strong competitive position in the
electronic cable market due to our large direct field sales organization
within the local area network group, the comprehensive nature of our
product line and our long established reputation for quality.
RAW MATERIALS
In the manufacture of coaxial and twisted pair cables, we process
metal tubes, tapes and wires including bimetallic center conductors (wires
made of aluminum or steel with thin outer skins of copper) that are
fabricated from high-grade aluminum, copper and steel. Most of these
fabricated metal components are purchased under supply arrangements with
some portion of the unit pricing indexed to commodity market prices for
these metals. We have adopted a hedging policy pursuant to which we may,
from time to time, attempt to match futures contracts or option contracts
for a specific metal with some portion of the anticipated metal purchases
for the same periods. Other major raw materials we use include
polyethylenes, polyvinylchlorides, FEP and other plastic insulating
materials, optical fibers, and wood and cardboard shipping and packaging
materials (some of which are available only from limited sources).
Over the past twelve months, we have increased internal production of
bimetallic center conductors, which are a fundamental component of coaxial
cables. During 2002, we produced roughly half 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 the year. Management
believes that our internal production of bimetallic center conductors will
be sufficient to meet nearly all of our requirements for 2003. However, the
loss of our ability to produce these conductors would likely require the
purchase of bimetallic center conductors from Copperweld. Copperweld's
inability to supply, and/or our failure to manufacture or adequately expand
our internal production of these products, could have a material adverse
effect on our business and financial condition.
In addition, we 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.
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 wider
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 fiber 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 continuing
availability of these materials and enhance our ability to support the
demand for fiber optic cable.
Plastics and polymers, which are used to insulate and protect cables,
accounted for roughly 25% of our raw material purchases during 2002.
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. We
do not expect the availability of polyethylene to be interrupted; however,
if supplies become limited and prices rise significantly, it could have a
materially adverse impact on our results of operations.
Alternative sources of supply or access to alternative materials are
generally available for all other major raw materials we use. We believe
supplies of all other major raw materials we use are generally adequate and
we expect them to remain so for the foreseeable future. However, further
11
supplier consolidations, bankruptcies or insolvencies could materially
adversely affect our ability to obtain adequate supplies of raw materials
on acceptable terms.
ENVIRONMENT
We use some hazardous substances and generate some solid and hazardous
waste in the ordinary course of our business. As a result, we are subject
to various federal, state, local and foreign laws and regulations governing
the use, discharge and disposal of hazardous materials. Because of the
nature of our business, we have incurred, and will continue to incur, costs
relating to compliance with these environmental laws. Although we believe
that we are in substantial compliance with such environmental requirements,
and we have not in the past been required to incur material costs in
connection with this compliance, there can be no assurance that our costs
to comply with these requirements will not increase in the future. Although
we are unable to predict what legislation or regulations may be adopted in
the future with respect to environmental protection and waste disposal,
compliance with existing legislation and regulations has not had and is not
expected to have a materially adverse effect on our operations or financial
condition.
EMPLOYEES
At December 31, 2002, we employed approximately 2,800 people.
Substantially all employees are located in the United States. We also have
employees in foreign countries, including those located in Belgium and
Brazil. We believe that our relations with our employees are satisfactory.
AVAILABLE INFORMATION
Our website can be found on the Internet at www.commscope.com. This
website contains frequently updated information about us and our
operations. Copies of each of our filings with the Securities and Exchange
Commission on Form 10-K, Form 10-Q and Form 8-K and all amendments to those
reports can be viewed and downloaded free of charge as soon as reasonably
practicable after the reports and amendments are electronically filed with
or furnished to the SEC by accessing www.commscope.com and clicking on
Investor Relations/News and then clicking on SEC Filings.
Our website also contains a copy of our Code of Ethics and Business
Conduct that can be downloaded free of charge.
Our Code of Ethics and Business Conduct and any of our reports on Form
10-K, Form 10-Q and Form 8-K and all amendments to those reports, can also
be obtained in print by any stockholder who requests them from our Investor
Relations Department:
Investor Relations
CommScope, Inc.
1100 CommScope Place, SE
P.O. Box 339
Hickory, North Carolina 28602
U.S.A.
Phone: +1 828 324 2200
Fax: +1 828 982 1708
E-mail: [email protected]
ITEM 2. PROPERTIES
Our principal administrative, production and research and development
facilities are located in the following locations:
The Hickory, North Carolina facility occupies approximately 84,000
square feet and is owned by us. The Hickory facility houses our executive
offices, sales office and customer service department and certain corporate
and administrative functions.
12
The Catawba, North Carolina facility occupies approximately 1,000,000
square feet and is owned by us. The Catawba facility manufactures coaxial
cables, is the major distribution facility for our products and houses
certain administrative and engineering activities, as well as our private
truck fleet.
The Claremont, North Carolina facility occupies approximately 587,500
square feet and is owned by us. The Claremont facility manufactures
coaxial, copper twisted pair and fiber optic cables and houses certain of
our administrative, sales and engineering activities.
The Scottsboro, Alabama facility occupies approximately 150,000 square
feet and is owned by us. The Scottsboro facility manufactures coaxial
cables.
The Statesville, North Carolina facility occupies approximately
315,000 square feet and is owned by us. The Statesville facility houses
certain cable-in-conduit manufacturing, wire fabrication, recycling,
research and development, and engineering activities.
The Seneffe, Belgium facility occupies approximately 134,000 square
feet, including a warehouse, and is owned by us. The Seneffe facility
houses certain coaxial cable manufacturing and sales activities for HFC,
wireless and other applications.
The Newton, North Carolina facility occupies approximately 455,000
square feet of wireless cable manufacturing, office and warehouse space and
is owned by us. This facility houses some of our administrative,
engineering, and research and development functions as well as
manufacturing and sales activities for our wireless products group.
The Sparks, Nevada facility occupies approximately 225,500 square feet
under a lease expiring in 2006 with additional renewal terms available. The
Sparks facility manufactures cable-in-conduit products and houses regional
service and distribution activities.
The Jaguariuna, Brazil facility occupies approximately 283,000 square
feet of manufacturing and office space and is owned by us. The Jaguariuna
facility houses certain coaxial cable manufacturing and sales activities
for HFC, wireless and other applications.
We own a 259,000 square-foot facility in Kings Mountain, North
Carolina that we constructed in the past few years, but are currently not
using. This property is currently being marketed and offered for sale.
We believe that our facilities and equipment generally are well
maintained, in good operating condition and suitable for our purposes and
adequate for our present operations. While we currently have excess
manufacturing capacity in our facilities, utilization 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.
ITEM 3. LEGAL PROCEEDINGS
We are either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, management believes none of these
legal matters will have a materially adverse effect on our business or
financial condition upon their final disposition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
three months ended December 31, 2002.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the New York Stock Exchange under the
symbol "CTV." The following table sets forth the high and low sale prices
as reported by the New York Stock Exchange for the periods indicated.
COMMON STOCK
PRICE RANGE
---------------
HIGH LOW
------- ------
2001
First Quarter $ 22.50 $ 14.75
Second Quarter $ 26.80 $ 15.00
Third Quarter $ 24.45 $ 15.66
Fourth Quarter $ 22.91 $ 16.50
2002
First Quarter $ 23.65 $ 14.40
Second Quarter $ 18.40 $ 10.75
Third Quarter $ 12.52 $ 6.12
Fourth Quarter $ 9.77 $ 6.45
As of March 14, 2003, the approximate number of registered
stockholders of record of our common stock was 654.
We have never declared or paid any cash dividends on our common stock.
We do not currently intend to pay cash dividends in the foreseeable future,
but intend to reinvest earnings in our business. Certain of our debt
agreements contain limits on our ability to pay cash dividends on our
common stock.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our historical selected financial data as
of the dates and for the periods indicated. The data for each of the years
presented are derived from our audited consolidated financial statements.
The information set forth below should be read in conjunction with our
audited consolidated financial statements, our audited consolidated
financial statements, our unaudited condensed consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- ---------
RESULTS OF OPERATIONS:
Net sales $598,467 $738,498 $950,026 $748,914 $571,733
Gross profit 120,555 179,644 251,054 200,106 134,593
Operating income (loss) (15,410) 62,874 146,051 117,517 72,843
Equity in losses of OFS
BrightWave, LLC (53,722) (6,922) -- -- --
Net income (loss) (67,152) 27,865 84,887 68,077 39,231
NET INCOME (LOSS) PER SHARE
INFORMATION:
Weighted average number of
shares outstanding:
Basic 61,171 52,692 51,142 50,669 49,221
Assuming dilution 61,171 53,500 56,047 52,050 49,521
Net income (loss) per share:
Basic $ (1.10) $ 0.53 $ 1.66 $ 1.34 $ 0.80
Assuming dilution $ (1.10) $ 0.52 $ 1.60 $ 1.31 $ 0.79
OTHER INFORMATION:
Net cash provided by
operating activities $103,825 $158,168 $ 44,924 $ 79,419 $ 82,971
Depreciation and amortization 36,916 40,529 35,799 29,295 24,662
Additions to property, plant
and equipment 22,616 70,841 98,640 57,149 22,784
AS OF DECEMBER 31,
---------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- --------
BALANCE SHEET DATA:
Cash and cash equivalents $120,102 $61,929 $ 7,704 $30,223 $ 4,129
Property, plant and
equipment, net 229,515 277,169 251,356 181,488 135,082
Total assets 772,668 889,005 721,182 582,535 465,327
Working capital 213,971 199,125 209,104 146,952 93,982
Long-term debt, including
current maturities 183,300 194,569 227,436 198,402 181,800
Stockholders' equity 517,535 606,514 374,520 281,344 203,972
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY BACKGROUND
CommScope, Inc., through its wholly owned subsidiaries and equity
method investee, operates in the cable manufacturing business with
manufacturing facilities located in the United States, Europe and Latin
America. We are a leading worldwide designer, manufacturer and marketer of
a wide array of broadband coaxial cables and other high-performance
electronic and fiber optic cable products for cable television, telephony,
Internet access, wireless communications and other broadband services. We
believe we are the world's largest manufacturer of coaxial cable for hybrid
fiber coaxial (HFC) broadband networks. We are also a leading supplier of
coaxial, twisted pair and fiber optic cables for premise wiring (local area
networks), wireless and other communication applications.
Effective November 16, 2001, we acquired, through our indirect
wholly-owned subsidiary CommScope Optical, an approximate 18.4% interest in
OFS BrightWave, a Delaware limited liability company, formed by us and
Furukawa to operate certain fiber optic cable and transmission fiber assets
of the OFS Group acquired from Lucent. We issued 10.2 million shares of our
common stock to Lucent, valued at $203.4 million in aggregate, in lieu of a
portion of the cash purchase price payable by Furukawa to Lucent pursuant
to an asset and stock purchase agreement entered into in connection with
the acquisition of a portion of Lucent's OFS Group. Of the amount paid by
us, $173.4 million represented our capital contribution to OFS BrightWave
and the remaining $30.0 million represented a revolving loan from CommScope
Optical to OFS BrightWave. An indirect wholly-owned subsidiary of Furukawa
owns the remaining 81.6% equity interest in OFS BrightWave. The businesses
acquired include transmission fiber and cable manufacturing capabilities at
a 2.9 million square foot facility in Norcross, Georgia, as well as
facilities in Germany and Brazil, an interest in a joint venture in
Carrollton, Georgia and an interest in a joint venture in Russia. We expect
our investment in OFS BrightWave and other arrangements with Furukawa and
its subsidiaries to provide access to optical fiber, including premium
fiber, under a supply agreement, enhance our technology platform with
access to key intellectual property, and create a strategic partner in
optical fiber and fiber optic cable manufacturing.
As of October 9, 2002, we and Furukawa purchased 10.2 million shares
of our common stock from Lucent for $53,040,000, or $5.20 per share. Of the
total 10.2 million shares of our common stock purchased from Lucent,
Furukawa purchased approximately 7.7 million shares for $40 million and we
purchased approximately 2.5 million shares for $13 million.
CRITICAL ACCOUNTING POLICIES
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes discussion and analysis of our consolidated
financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates and their underlying
assumptions form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
objective sources. Management bases its estimates on historical experience
and on assumptions that are believed to be reasonable under the
circumstances and revises its estimates, as appropriate, when changes in
events or circumstances indicate that revisions may be necessary.
Significant accounting estimates reflected in our financial statements
include the allowance for doubtful accounts, inventory excess and
obsolescence reserves, distributor price protection reserves, reserves for
sales returns, discounts, allowances, and rebates, income tax valuation
allowances, and impairment reviews for investments, fixed assets, goodwill
and other intangibles. Although these estimates are based on management's
knowledge of and experience with past and current events and on
management's assumptions about future events, it is at least reasonably
possible that they may ultimately differ materially from actual results.
16
Management believes the following critical accounting policies require
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. We maintain allowances for doubtful
accounts for estimated losses expected to result from the inability of our
customers to make required payments. These estimates are based on
management's evaluation of the ability of our customers to make payments,
focusing on customer financial difficulties and age of receivable balances.
An adverse change in financial condition of a significant customer or group
of customers could materially affect management's estimates related to
doubtful accounts. We record estimated reductions to revenue for customer
programs and incentive offerings, such as discounts, allowances, rebates
and distributor price protection programs. These estimates are based on
contract terms, historical experience, inventory levels in the distributor
channel, and other factors. Management believes it has sufficient
historical experience to allow for reasonable and reliable estimation of
these reductions to revenue. However, declining market conditions could
result in increased estimates of sales returns and allowances and potential
distributor price protection incentives, resulting in incremental
reductions to revenue. We maintain allowances for excess and obsolete
inventory. These estimates are based on management's assumptions about and
analysis of relevant factors including current levels of orders and
backlog, shipment experience, forecasted demand and market conditions. We
do not believe our products are subject to a significant risk of
obsolescence in the short term and management believes it has the ability
to adjust production levels in response to declining demand. However, if
actual market conditions become less favorable than anticipated by
management, additional allowances for excess and obsolete inventory could
be required. Management reviews intangible assets, investments, and other
long-lived assets for impairment when events or changes in circumstances
indicate that their carrying values may not be fully recoverable. Goodwill
is tested for impairment annually as of August 31 and on an interim basis
when events or circumstances change. Management assesses potential
impairment of the carrying values of these assets based on market prices,
if available, or assumptions about and estimates of future cash flows
expected to arise from these assets. Future cash flows may be adversely
impacted by operating performance, market conditions, and other factors. If
an impairment is indicated by this analysis, the impairment charge to be
recognized, if any, would be measured as the amount by which the carrying
value exceeds fair value, estimated by management based on market prices,
if available, or forecasted cash flows, discounted using a discount rate
commensurate with the risks involved. Assumptions related to future cash
flows and discount rates involve management judgment and are subject to
significant uncertainty. If actual future cash flows, discount rates and
other assumptions used in the assessment and measurement of impairment
differ from management's estimates and forecasts, additional impairment
charges could be required. Discussion of 2002 impairment charges is located
under the heading "Impairment charges for fixed assets and investments"
within the "Comparison of results of operations for the year ended December
31, 2002 with the year ended December 31, 2001." The results of our
transitional goodwill impairment test and our first annual goodwill
impairment test are discussed in the "Notes to Consolidated Financial
Statements" included in Item 8 of this Form 10-K.
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
------------- ------------ -----------
Net income (loss) $ (67,152) $ 27,865 $ 84,887
Net income (loss) per share - assuming
dilution (1.10) 0.52 1.60
17
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 WITH
THE YEAR ENDED DECEMBER 31, 2001
NET SALES
Net sales for the year ended December 31, 2002 decreased $140.0
million or 19% to $598.5 million, from 2001. The decrease in net sales was
mainly due to the challenging global business environment in
telecommunications, which continues to result in reduced demand for many
product lines both domestically and internationally. Additionally, net
sales were impacted by reduced shipments to Adelphia Communications
Corporation, referred to herein as Adelphia, and ongoing competitive
pricing pressures for fiber optic cable, wireless and other
telecommunications products.
The following table presents (in millions) our revenues by broad
product group as well as domestic versus international sales for the years
ended December 31, 2002 and 2001:
2002 % of 2001 % of
Net 2002 Net Net 2001 Net
Sales Sales Sales Sales
----------------------------------------
Broadband/Video Products $496.5 83.0% $588.3 79.7%
LAN Products 81.2 13.6 88.3 12.0
Wireless & Other Telecom 20.8 3.4 61.9 8.3
Products
----------------------------------------
Total worldwide sales $598.5 100.0% $738.5 100.0%
========================================
Domestic sales $487.0 81.4% $565.2 76.5%
International sales 111.5 18.6 173.3 23.5
----------------------------------------
Total worldwide sales $598.5 100.0% $738.5 100.0%
========================================
For the year ended December 31, 2002, international sales decreased
$61.8 million, or 36%, to $111.5 million, from 2001, with sales down year
over year in nearly all regions primarily due to the difficult global
business environment. While we believe that near term international sales
will be depressed until the global economy improves, we remain optimistic
about the long-term global opportunities for broadband cable.
Net sales of broadband and other video distribution products, referred
to herein as Broadband/Video Products, for the year ended December 31, 2002
decreased $91.8 million, or 16%, to $496.5 million, from 2001. The decrease
was primarily attributable to lower sales volumes, and was significantly
affected by the downturn in international demand. Comcast Corporation
merged with AT&T Broadband in November 2002, to create a new company named
Comcast Corporation, referred to herein as Comcast. During the year ended
December 31, 2002, Comcast, as if combined with AT&T Broadband for the full
year, accounted for approximately 20% of our net sales, compared to
approximately 10% of our net sales as if they were combined for the full
year ended December 31, 2001. The impact of increased sales to Comcast, on
a pro forma basis for the full year, was more than offset by lower
shipments to Adelphia and Charter Communications, Inc., referred to herein
as Charter, in addition to lower sales of fiber optic cable. Domestic
Broadband/Video sales decreased approximately 7% year over year. The
decrease in domestic sales of Broadband/Video Products was driven primarily
by reduced shipments to Adelphia and Charter and significant pricing
pressures for fiber optic cable. Sales of fiber optic cable, primarily for
broadband applications, represented more than 10% of total sales in 2002.
During 2002, we enhanced our fiber optic market position for HFC
applications despite lower overall sales and significant pricing pressure.
While we expect the market for fiber optic cable to remain difficult during
2003, we believe that our ability to offer both coaxial and fiber optic
cable, as well as other types of communications cables, continues to be an
important competitive advantage.
Net sales of local area network and other data application products,
referred to herein as LAN Products, for the year ended December 31, 2002
decreased $7.1 million, or 8%, to $81.2 million, from 2001. The decrease
was primarily driven by lower volume resulting from year-end inventory
reductions by distributors and pricing pressure due to difficult market
conditions. Although our sales were impacted by the loss of Graybar
Electric Company, Inc., previously one of our leading distribution channels
18
for LAN and other video-related products, we believe that we were able to
offset the lost sales in LAN Products by redirecting project business and
utilizing our strong brand recognition.
Net sales of wireless and other telecommunications products, referred
to herein as Wireless and Other Telecom Products, for the year ended
December 31, 2002 decreased $41.1 million, or 66%, to $20.8 million, from
2001, primarily due to the combination of lower volume and pricing
pressure. We expect ongoing softness and significant competitive pressures
for our Wireless and Other Telecom Products. The general slowdown in
telecommunications capital spending and the inability of certain customers
to get financing for their projects has had a significant impact on sales
of our Wireless Products, and we continue to experience aggressive
competition in the wireless market.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 2002 was $120.6 million,
compared to $179.6 million for 2001, a decrease of 33%. Gross profit margin
decreased over 400 basis points to 20.1% for the year ended December 31,
2002, compared to 24.3% for 2001. The decreases in gross profit and gross
profit margin were primarily due to lower sales volumes and competitive
pricing pressure for certain products, including fiber optic cable and LAN
products. Management expects the rising cost of raw materials such as
plastics and polymers, which are derived from oil and natural gas, to
result in increased cost of sales. Although the Company expects to recover
these costs by raising prices of certain products, the inability to do so
could result in lower gross profit and gross profit margin.
We reduced our workforce by approximately 200 employees, or 8%, during
the third quarter of 2002. In December 2002, we announced an additional
reduction of our workforce of approximately 150 employees, or 5%, that was
effective in January 2003. The reductions were primarily in response to the
challenging global business environment. We recorded total pretax charges
related to these workforce reductions of approximately $2.2 million in cost
of sales for employee termination benefits during 2002. We intend to
continue evaluating all aspects of our business and to take appropriate
action to position us for long-term success and strong competitiveness.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative, referred to herein as SG&A,
expense for the year ended December 31, 2002 increased $21.2 million, or
25%, to $104.7 million, from 2001. The increase in SG&A expense was
primarily due to the increase in bad debt expense related to the write-off
of Adelphia receivables in 2002, which totaled $21.4 million. Excluding the
Adelphia write-off, SG&A expense declined slightly for the year ended
December 31, 2002 compared to the year ended December 31, 2001. 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.
For the year ended December 31, 2002, SG&A expense as a percentage of
net sales was 17.5%, or 13.9% excluding the write-off of Adelphia
receivables, compared to 11.3% for the year ended December 31, 2001. The
increase in SG&A expense as a percentage of net sales, excluding the
write-off of Adelphia receivables in 2002, was primarily due to sales
declining faster than sales and marketing expenses, as well as our ongoing
investment in our information technology infrastructure. We plan to
continue investing in our information technology infrastructure in order to
further differentiate our service model through technology. We also intend
to continue to fund domestic and international sales and marketing efforts
in order to enhance our competitive position around the world in
anticipation of improving global economic conditions.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained
stable at 1.0% for the year ended December 31, 2002 compared to the year
ended December 31, 2001. During 2002, our major projects consisted of
research and engineering activities related to developing new and more cost
effective cable designs. Also, we continued research and engineering
activities related to the production of certain copper clad metals in order
to advance the design of those materials and related processes to the point
that they meet specific functional and economic requirements. We undertook
19
this project in an effort to reduce material costs and reliance on limited
sources of key raw materials and incorporated the new designs and related
processes into production during the third quarter of 2002. We expect
research and development expense to remain at approximately 1% of net sales
in the near term.
TERMINATED ACQUISITION COSTS
Our acquisition of an 18.4% ownership interest in OFS BrightWave as of
November 16, 2001 was restructured from a previously contemplated joint
venture arrangement announced July 24, 2001. Under the originally
contemplated arrangement, we would have formed two joint ventures with
Furukawa to acquire certain fiber optic cable and transmission fiber assets
of Lucent's OFS Group. Given the uncertain economic environment and severe
downturn in the telecommunications market as well as associated
difficulties in the financing markets following the September 11, 2001
tragedy, we agreed with Furukawa to restructure the joint venture
arrangements, resulting in a reduced ownership participation for us. As a
result of the restructuring of this venture, we recorded pretax charges of
approximately $8.0 million, or $0.09 per diluted share, net of tax, during
2001, related to financing and formation costs of the original joint
venture arrangements, which are not capitalizable as part of our investment
in the restructured venture.
IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards (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 performed a test of recoverability for our long-lived assets
during the third quarter of 2002. As a result of this impairment test, we
recognized pretax impairment charges for fixed assets in the amount of
$25.1 million, or $0.26 per share, net of tax, during 2002. The break-down
of these impairment charges was as follows (in millions):
Wireless cable manufacturing assets $ 15.1
Fiber optic cable manufacturing assets 5.3
Other telecommunications cable
manufacturing assets 3.0
Other manufacturing assets 1.7
---------
Total impairment charges $ 25.1
=========
Our long-term undiscounted cash flow forecasts indicated that the
carrying amounts of fixed assets used to manufacture our wireless, fiber
optic cable and other telecom products may not be recoverable as of
September 30, 2002. In addition, our quarterly review of idle and obsolete
fixed assets indicated additional impairment for specifically identified
manufacturing equipment. The impairment loss recognized in the third
quarter of 2002 was measured as the amount by which the carrying values of
the impaired assets exceeded their respective fair values. Fair values were
determined using the best available information, including independent
appraisal, third-party and internal market value estimates, and discounted
cash flows.
During 2001 we recorded pretax charges of approximately $12.8 million,
or $0.18 per diluted share, net of tax, related to the impairment of
certain assets. Management identified specific assets that were determined
to have no future use in our operations and assets whose anticipated
undiscounted future cash flows were less than their carrying values. These
impairment adjustments included equipment charges and a write-down of our
Kings Mountain facility, which was under construction. Equipment that was
intended for the Kings Mountain facility is being held for possible
deployment internationally. The impairment charges also included the
write-off of an investment in a wireless infrastructure project management
company, now in the process of being liquidated, whose fair value was
determined to be zero. The tax benefit of the capital loss arising from
impairment of this investment has been offset by a valuation allowance due
to uncertainty about our ability to utilize this tax deduction.
20
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 2002 was $6.7
million, compared to $7.5 million for 2001. Our weighted average effective
interest rate on outstanding borrowings, including amortization of
associated loan fees, was 4.29% as of December 31, 2002, compared to 4.61%
as of December 31, 2001. The decrease in net interest expense was primarily
due to lower average outstanding balances on long-term debt and lower
variable interest rates. We expect net interest expense to remain
relatively stable in 2003, as compared to 2002.
INCOME TAXES
Our effective income tax rate was 37% for the years ended December 31,
2002 and 2001. We expect the effective income tax rate for 2003 to remain
at approximately 37%.
EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
For the year ended December 31, 2002, our 18.4% equity interest in the
losses of OFS BrightWave was approximately $85.4 million, pretax. For the
six week period from November 17, 2001 to December 31, 2001, our 18.4%
equity interest in the losses of OFS BrightWave was approximately $11.3
million, pretax. 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 $31.5 million for the year
ended December 31, 2002 and approximately $4.2 million for the six week
period ended December 31, 2001. Although OFS BrightWave benefited from
revenue expansion and cost reduction efforts during 2002, OFS BrightWave
operates in some of the same markets we do and its financial results were
also adversely affected by the downturn in the global economy and the
telecommunications industry. Due primarily to these conditions, OFS
BrightWave incurred losses of $464 million during the year ended December
31, 2002, nearly half of which resulted from charges for the write-off of
goodwill and certain fixed assets, restructuring and employee separation
costs and other cost reduction activities. The total of these charges
recognized by OFS BrightWave during 2002 was $217 million, net of a $32
million tax benefit from losses generated by a domestic c-corporation
subsidiary of OFS BrightWave. The losses of approximately $61 million
incurred by OFS BrightWave during the six-week period ended December 31,
2001 were impacted by nonrecurring startup and organizational costs of
approximately $15 million, related to the write-off of in-process research
and development, separation from Lucent and commencement of independent
operations.
In addition, OFS BrightWave is party to manufacturing and supply
agreements with OFS Fitel, an indirect, wholly-owned subsidiary of
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. Due primarily to
the difficult market environment for certain telecommunications products
and challenging global economic conditions, we expect ongoing pricing
pressure and weak demand industry wide for fiber optic cable products
during 2003. Based on these expectations, we believe that OFS BrightWave
will incur losses in the near term, and that as a result we will continue
to recognize noncash equity method losses from our investment in OFS
BrightWave. Despite these recent losses, we believe our investment in OFS
BrightWave and our strategic relationship with Furukawa have enhanced our
competitive position with the domestic broadband and LAN service providers.
21
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 WITH
THE YEAR ENDED DECEMBER 31, 2000
NET SALES
Net sales for the year ended December 31, 2001 decreased $211.5
million or 22% to $738.5 million, from 2000. The decrease in net sales was
mainly due to deteriorating global economic conditions which resulted in
declining demand and competitive pricing pressures for some product lines
both domestically and internationally.
The following table presents (in millions) our revenues by broad
product group as well as domestic versus international sales for the years
ended December 31, 2001 and 2000:
2001 % of 2000 % of
Net 2001 Net Net 2000 Net
Sales Sales Sales Sales
----------------------------------------
Broadband/Video Products $588.3 79.7% $723.8 76.2%
LAN Products 88.3 12.0 85.3 9.0
Wireless & OtherTelecom 61.9 8.3 140.9 14.8
Products
----------------------------------------
Total worldwide sales $738.5 100.0% $950.0 100.0%
========================================
Domestic sales $565.2 76.5% $717.6 75.5%
International sales 173.3 23.5 232.4 24.5
----------------------------------------
Total worldwide sales $738.5 100.0% $950.0 100.0%
========================================
For the year ended December 31, 2001, international sales decreased
$59.1 million, or 25%, to $173.3 million, from 2000, with sales down year
over year in all regions primarily due to the difficult global environment.
During 2001, we opened a new manufacturing facility in Brazil, which we
expect will enhance our competitive position in Latin America, especially
when this region's economy improves.
Net sales of Broadband/Video Products for the year ended December 31,
2001 decreased $135.5 million, or 19%, to $588.3 million, from 2000. The
decrease was primarily attributable to lower sales volumes, and was
significantly affected by the downturn in international demand. Increases
in sales to most of the large domestic broadband service providers were
more than offset by substantial decreases in sales to alternate service
providers and to AT&T Broadband. Domestic Broadband/Video sales decreased
approximately 16% year over year. The decrease in Broadband/Video Products
sales volume was somewhat offset by modest price increases for certain HFC
products. Sales were also positively affected by a favorable shift in
product mix resulting from sales of fiber optic cable, primarily for
broadband applications, which represented approximately 15% of total sales
in 2001. However, sales of fiber optic cable slowed during the second half
of 2001 as a result of challenging market conditions and competitive
pricing pressures.
Net sales of LAN Products for the year ended December 31, 2001
increased $3.0 million, or 4%, to $88.3 million, from 2000. The increase
was primarily due to a favorable shift to more enhanced products at higher
unit prices, offset by a decline in unit volume. Net pricing was not a
significant factor in the year-over-year increase in sales of LAN Products.
We began implementing a comprehensive performance improvement plan for our
LAN Products group during the fourth quarter of 2000. This plan included,
among other things, reorganizing LAN sales and operational management as
well as ongoing efforts to reduce distribution channel inventory, improve
efficiency, and increase the velocity of the manufacturing and distribution
cycle. This reorganization resulted in growth in both sales and
profitability of our LAN Products and we believe it has improved our
ability to provide world-class network cabling solutions to our domestic
customers.
Net sales of Wireless and Other Telecom Products for the year ended
December 31, 2001 decreased $79.0 million, or 56%, to $61.9 million, from
2000, primarily due to lower sales of Other Telecom Products related to
telephone central office applications. The decrease in sales of Other
Telecom Products was primarily driven by lower volumes, offset somewhat by
a favorable shift in product mix. Sales of Wireless Products were down
22
significantly year over year primarily due to the general slowdown in
telecommunications capital spending and the inability of certain customers
to get financing for their projects. The decrease in sales of Wireless
Products was primarily driven by lower volumes, and was impacted somewhat
by an unfavorable shift in product mix. During 2001 we expanded our global
capacity in the wireless market and now have production capability in Latin
America and Europe.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 2001 was $179.6 million,
compared to $251.1 million for 2000, a decrease of 28%. Gross profit margin
decreased over 200 basis points to 24.3% for the year ended December 31,
2001, compared to 26.4% for 2000. The decreases in gross profit and gross
profit margin were primarily due to lower sales volumes. Changes in
material costs did not have a significant impact on 2001 gross profit
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense for the year ended December 31, 2001 increased $2.3
million, or 3%, to $83.5 million, from 2000. The year-over-year increase in
SG&A expense was primarily due to increased charges for doubtful accounts
and ongoing investment in our information technology infrastructure. We
recorded charges for doubtful accounts in the amount of approximately $6.5
million in 2001 compared to $4.5 million in 2000. We believe we have taken
appropriate charges for doubtful accounts as a result of the difficult
market environment based on our analysis of customer financial
difficulties, age of receivable balances, and other relevant factors.
As a percentage of net sales, SG&A, expense was 11.3% for the year
ended December 31, 2001 compared to 8.5% for the year ended December 31,
2000. The increase in SG&A expense as a percentage of net sales was
primarily due to sales declining faster than sales and marketing expenses,
as well as the factors discussed above.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales
decreased to 1.0% for the year ended December 31, 2001, compared to 1.9%
for the year ended December 31, 2000. This decrease was primarily due to
the substantial completion of certain aspects of our vertical integration
projects for bimetallic wire fabrication and fine wire drawing in 2001.
During 2001, our major projects consisted primarily of research and
engineering activity related to the production of copper clad metals
required to advance the design of those materials and related processes to
the point that they meet specific functional and economic requirements and
are ready for full-scale manufacturing. We have undertaken these projects
as part of our vertical integration strategy in an effort to reduce
materials costs and reliance on limited sources of key raw materials.
TERMINATED ACQUISITION COSTS
Our acquisition of an 18.4% ownership interest in OFS BrightWave as of
November 16, 2001 was restructured from a previously contemplated joint
venture arrangement announced July 24, 2001. Under the originally
contemplated arrangement, we would have formed two joint ventures with
Furukawa to acquire certain fiber optic cable and transmission fiber assets
of Lucent's OFS Group. Given the uncertain economic environment and severe
downturn in the telecommunications market as well as associated
difficulties in the financing markets following the September 11, 2001
tragedy, we agreed with Furukawa to restructure the joint venture
arrangements, resulting in a reduced ownership participation for us. As a
result of the restructuring of this venture, we recorded pretax charges of
approximately $8.0 million, or $0.09 per diluted share, net of tax, during
2001, related to financing and formation costs of the original joint
venture arrangements, which are not capitalizable as part of our investment
in the restructured venture.
IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
During 2001, we took a number of steps to manage costs and evaluated
all aspects of our business in response to challenging industry conditions.
As a result of our review, we recorded pretax charges of approximately
23
$12.8 million, or $0.18 per diluted share, net of tax, during the year
ended December 31, 2001 related to the impairment of certain assets.
Management identified specific assets that were determined to have no
future use in our operations and assets whose anticipated undiscounted
future cash flows were less than their carrying values. These impairment
adjustments included equipment charges and a write-down of our Kings
Mountain facility, which was under construction. Equipment that was
intended for the Kings Mountain facility is being held for possible
deployment internationally. The impairment charges also included the
write-off of an investment in a wireless infrastructure project management
company, now in the process of being liquidated, whose fair value was
determined to be zero. The tax benefit of the capital loss arising from
impairment of this investment has been offset by a valuation allowance due
to uncertainty about our ability to utilize this tax deduction.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the year ended December 31, 2000
included a pretax gain of $517 thousand related to the final liquidation of
a closed Australian joint venture. This joint venture was completely
dissolved as of December 29, 2000, when the deregistration period required
by the Australian legal authorities expired.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 2001 was $7.5
million, compared to $9.7 million for 2000. Our weighted average effective
interest rate on outstanding borrowings, including amortization of
associated loan fees, was 4.61% as of December 31, 2001, compared to 5.14%
as of December 31, 2000. The decrease in net interest expense was primarily
due to lower average outstanding balances on long-term debt and lower
variable interest rates.
INCOME TAXES
Our effective income tax rate was 37% for the year ended December 31,
2001 compared to 38% for 2000. The decrease in our effective income tax
rate was primarily a result of certain tax savings strategies. The benefit
of these strategies was offset by valuation allowances established for
deferred tax assets related to a capital loss carryforward on an investment
and a foreign net operating loss carryforward, the realization of which is
considered to be uncertain.
EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
For the six week period from November 17, 2001 to December 31, 2001,
our 18.4% equity interest in the losses of OFS BrightWave was approximately
$11.3 million, pretax. Since OFS BrightWave has elected to be taxed as a
partnership, we have recorded a tax benefit of approximately $4.2 million
related to our 18.4% equity interest in the flow-through losses. The losses
of approximately $61 million incurred by OFS BrightWave during the six-week
period ended December 31, 2001 were impacted by nonrecurring startup and
organizational costs of approximately $15 million, related to the write-off
of in-process research and development, separation from Lucent and
commencement of independent operations. OFS BrightWave operates in the same
markets we do and its financial results were also adversely affected by the
downturn in the global economy and the telecommunications industry.
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, referred
to herein as 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, excluding cash
and cash equivalents, related to increasing sales could reduce our
operating cash flows in the short term until cash collections of accounts
receivable catch up to the higher level of billings.
Cash provided by operating activities was $103.8 million for the year
ended December 31, 2002, compared to $158.2 million for the year ended
December 31, 2001. This year-over-year decrease in operating cash flow was
primarily due to a smaller reduction in working capital in 2002, compared
24
to 2001, primarily due to lower sales. The year-over-year decrease in
income before noncash charges for depreciation, amortization, asset
impairment, and equity method losses also contributed to the decrease in
operating cash flow in 2002, compared to 2001.
Working capital increased 7% to $214.0 million at December 31, 2002,
from $199.1 million at December 31, 2001. The increase in working capital
was primarily due to the increase in our cash balance of $58.2 million to
$120.1 as of December 31, 2002. Excluding cash and cash equivalents,
working capital decreased by 32% primarily due to a decline in sales which
resulted in reduced accounts receivable and inventory. However, we reduced
the number of days outstanding in our accounts receivable during 2002 and
our inventory turnover also improved as a result of our efforts to improve
production efficiency.
During the year ended December 31, 2002, we invested $22.6 million in
equipment and facilities compared to $70.8 million in 2001. Capital
expenditures in 2002 included the acquisition of a previously leased
corporate office building for $12.8 million. The additional capital
spending during 2002 and 2001 was primarily for projects related to
vertical integration, capacity expansion, and equipment upgrades. In 2001,
we completed an aggressive three-year capacity expansion program that
increased our overall production capability in order to position ourselves
to meet anticipated worldwide demand for HFC products. While we may place
additional production capability in important international markets, we
expect capital expenditures to remain at a level below depreciation and
amortization expense for the next several years. We currently expect
capital expenditures to be in the range of $12 to $15 million in 2003,
primarily for cost reduction efforts and information technology
initiatives, depending upon business conditions.
We owed total long-term debt of $183.3 million, or 26% of our book
capital structure, defined as long-term debt, including current portion,
and total stockholders' equity, as of December 31, 2002, compared to $194.6
million, including current portion, or 24% of our book capital structure as
of December 31, 2001. The decrease in long-term debt was due to principal
repayments under our eurodollar credit agreement, which was terminated by
us on December 2, 2002. Quarterly principal payments of $2.1 million and
the final principal repayment of $10.4 million were offset by the
realization of a foreign currency gain of $1.2 million, included in
accumulated other comprehensive loss, on this foreign-currency denominated
debt. We also terminated the interest rate swap agreement that served as a
fixed-rate hedge of the variable-rate borrowings under our eurodollar
credit agreement effective as of December 2, 2002, resulting in an
immaterial after-tax loss.
As of November 4, 2002, we terminated our amended $250 million
revolving credit agreement, which was scheduled to expire on December 31,
2002. We entered into a new $100 million secured credit facility which
closed January 10, 2003. The facility, which was not drawn at closing, was
established for future liquidity, working capital needs and other general
corporate purposes. The facility is secured by substantially all of our
assets and can have a maximum availability of up to $100 million over its
three and a half year expected term. We had initial availability of
approximately $67 million at closing.
During the fourth quarter of 2001, we made a strategic investment by
joining with Furukawa to acquire an interest in a portion of the optical
fiber and fiber optic cable business of Lucent's OFS Group. We acquired an
18.4% ownership interest, valued at $173.4 million, in OFS BrightWave,
which includes transmission fiber and fiber optic cable manufacturing
capabilities at a 2.9 million square foot facility in Norcross, Georgia, as
well as facilities in Germany and Brazil, an interest in a joint venture in
Carrollton, Georgia and an interest in a joint venture in Russia. The
acquisition of our $173.4 million ownership interest and a $30 million note
receivable was financed in a noncash transaction by issuing 10.2 million
shares of CommScope, Inc. common stock valued at $203.4 million, or $19.94
per share, to Lucent.
As of October 9, 2002, we, together with Furukawa, purchased these
10.2 million shares of our common stock from Lucent. The total purchase
price paid to Lucent by us and Furukawa on October 9, 2002 for the 10.2
million shares was approximately $53.0 million, or $5.20 per share. Of the
total 10.2 million shares of our common stock purchased from Lucent,
Furukawa purchased approximately 7.7 million shares, which we understand it
plans to hold for investment purposes. We repurchased the remaining
approximately 2.5 million shares, which are currently classified as
treasury stock. We funded our $13.2 million repurchase using existing cash
balances. As of December 31, 2002, Furukawa owned approximately 13% of our
25
outstanding common stock. In conjunction with this stock purchase, we also
entered into agreements with Furukawa which outline various investment
terms, including resale restrictions, registration rights, standstill
provisions, as well as call and limited put rights related to our shares
held by Furukawa. Additionally, we agreed with Furukawa to change from 2004
to 2006 the date when we could first exercise our contractual right to sell
our investment in OFS BrightWave to Furukawa for a cash payment equal to
our original investment in and advances to OFS BrightWave.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations
as of December 31, 2002 (in millions):
AMOUNT OF PAYMENTS DUE PER PERIOD
---------------------------------------------
CONTRACTUAL
OBLIGATIONS TOTAL
PAYMENTS LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5
DUE 1 YEAR YEARS
--------------------------------------------------------
Long-term debt $ 183.3 $ - $ - $ 172.5 $10.8
Operating leases 14.1 3.3 5.0 3.0 2.8
--------------------------------------------------------
Total contractual
cash obligations $ 197.4 $ 3.3 $ 5.0 $ 175.5 $13.6
========================================================
EFFECTS OF INFLATION
We continually attempt to minimize any effect of inflation on earnings
by controlling our operating costs and selling prices. During the past few
years, the rate of inflation has been low and has not had a material impact
on our results of operations.
The principal raw materials purchased by us (fabricated aluminum,
plastics and polymers, bimetals, copper and optical fiber) are subject to
changes in market price as these materials are linked to the commodity
markets. To the extent that we are unable to pass on cost increases to
customers, the cost increases could have a significant impact on the
results of our operations.
OTHER
We are either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, we believe none of these legal
matters will have a materially adverse effect on our financial statements
upon final disposition. In addition, we are subject to various federal,
state, local and foreign laws and regulations governing the use, discharge
and disposal of hazardous materials. Our manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Compliance with current laws and regulations has not had, and is not
expected to have, a materially adverse effect on our financial statements.
NEWLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued (SFAS) No. 143, "Accounting for Obligations Associated with the
Retirement of Long-Lived Assets." SFAS No. 143 requires the accrual, at
fair value, of the estimated retirement obligation for tangible long-lived
assets if we are legally obligated to perform retirement activities at the
end of the related asset's life. SFAS No. 143 was effective for us on
January 1, 2003. There was no material impact on us upon the adoption of
SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." First, SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." Because of the rescission of SFAS No. 4, the
gains and losses from the extinguishment of debt are no longer required to
be classified as extraordinary items. SFAS No. 64 amended SFAS No. 4 and is
no longer needed because SFAS No. 4 is rescinded. Second, SFAS No. 145
rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement was originally issued to establish accounting requirements
for the effects of transition to the provisions of the Motor Carrier Act of
26
1980. As those transitions are complete, SFAS No. 44 is no longer needed.
Third, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to require
sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The
amendment of SFAS No. 13 was effective for transactions occurring after May
15, 2002. There was no material impact on us as a result of the amendment
of SFAS No. 13. Last, SFAS No. 145 makes various technical corrections to
existing pronouncements that are not substantive in nature. There was no
material impact on us as a result of the rescission of SFAS No. 4, 44 and
64 and the other technical corrections prescribed by SFAS No. 145, which
was effective for us on January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. We adopted SFAS No. 146
as of the effective date, January 1, 2003, and it had no material impact on
our financial condition or results of operations.
In November 2002 the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the existing disclosure requirements for most guarantees and clarifies
that at the time a guarantee is issued, a liability must be recognized for
the fair value of the obligations assumed under that guarantee and this
information must be disclosed in the interim and annual financial
statements. This guidance does not apply to certain guarantee contracts,
such as those issued by insurance companies or for a lessee's residual
value guarantee embedded in a capital lease. The provisions related to
recognizing a liability at the inception of the guarantee for the fair
value of the guarantor's obligations would not apply to product warranties
or to guarantees accounted for as derivatives. FIN 45 was effective for any
guarantees issued or modified after December 31, 2002 and its disclosure
requirements were effective for us as of December 31, 2002. There was no
material impact on us upon adoption of FIN 45.
In December 2002, the 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 us as of
December 31, 2002. There was no impact on our financial condition or
results of operations as a result of the adoption of SFAS No. 148, but our
disclosures related to stock-based compensation have been modified in
accordance with the new requirements. The interim reporting provisions of
SFAS No. 148 are effective for us as of March 31, 2003, and we expect to
modify our future 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, referred to herein as a VIE, and
provides guidance on when a VIE should be consolidated by an enterprise. If
the enterprise is the primary beneficiary, which is defined as the party
that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both, as a result of holding variable
interest in the entity, then the enterprise must consolidate the VIE. FIN
46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders of a VIE. The consolidation
requirements apply immediately to all VIEs created after January 31, 2003.
Public companies must apply the consolidation requirements to VIEs that
existed prior to February 1, 2003 and remain in existence as of the
beginning of annual or interim periods beginning after June 15, 2003. If it
is reasonably possible that a company will have a significant variable
interest in a VIE at the date the Interpretation's consolidation
27
requirements become effective, the company must make certain disclosures
about the VIE in financial statements issued after January 31, 2003. The
application of this Interpretation did not have a material effect on our
disclosures and is not expected to have a material effect on our results of
operations or financial position.
EUROPEAN MONETARY UNION -- EURO
Effective January 1, 1999, 12 member countries of the European
Monetary Union established fixed conversion rates between their existing
sovereign currencies, and adopted the euro as their new common legal
currency. As of that date, the euro began trading on currency exchanges.
The legacy currencies of the participating countries remained legal tender
for a transition period between January 1, 1999 and January 1, 2002. We
conduct business in member countries.
During the transition period, cashless payments (for example, wire
transfers) could be made in the euro, and parties to individual
transactions could elect to pay for goods and services using either the
euro or the legacy currency. Between January 1, 2002 and February 28, 2002,
the participating countries introduced euro notes and coins and will
eventually withdraw all legacy currencies so that they will no longer be
available. European legislation provides that, unless otherwise agreed, the
introduction of the euro will not, by itself, give any party to a contract
the right to terminate the contract, or to demand renegotiation of the
terms.
As of December 31, 2002, we believe we have adequately addressed the
issues involved with the introduction of the euro. Among the issues which
we faced were the assessment and conversion of information technology
systems to allow for transactions to take place in both the legacy
currencies and the euro and the eventual elimination of legacy currencies.
We have also modified certain existing contracts, if required, and have
revised our pricing/marketing strategies in the affected European markets
to the extent necessary for the introduction of the euro. In addition, our
Belgian subsidiary successfully completed the conversion of its financial
systems and share capital to the euro. We do not believe the euro
conversion has had or will have a materially adverse effect on our
business, results of operations, cash flows or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have established a risk management strategy that includes the
reasonable use of derivative and non-derivative financial instruments
primarily to manage our exposure to market risks resulting from adverse
fluctuations in commodity prices, interest rates and foreign currency
exchange rates. Derivative financial instruments which may be used by us,
include commodity pricing contracts, foreign currency exchange contracts,
and contracts hedging exposure to interest rates. We do not use derivative
financial instruments for trading purposes, nor do we engage in
speculation.
Materials, in their finished form, account for a large portion of our
cost of sales. These materials, such as fabricated aluminum, plastics and
polymers, bimetals, copper and optical fiber, are subject to changes in
market price as they are linked to the commodity markets. Management
attempts to mitigate these risks through effective requirements planning
and by working closely with our key suppliers to obtain the best possible
pricing and delivery terms. However, increases in the prices of certain
commodity products could result in higher overall production costs.
Approximately 18.6% of our 2002 sales were to customers located
outside the United States, compared to 23.5% in 2001. Although we primarily
bill customers in foreign countries in US dollars, a portion of our sales
are denominated in currencies other than the US dollar, particularly sales
from our foreign subsidiaries. Significant changes in foreign currency
exchange rates could adversely affect our international sales levels and
the related collection of amounts due. In addition, a significant decline
in the value of currencies used in certain regions of the world as compared
to the US dollar could adversely affect product sales in those regions
because our products may become more expensive for those customers to pay
for in their local currency. The 1999 acquisition of our Belgian subsidiary
created a specific market risk that a decline in the value of the euro
compared to the US dollar could adversely affect our net investment in that
subsidiary. Prior to its termination, our eurodollar credit agreement
served as a hedge of a portion of our net investment in our Belgian
subsidiary. On December 2, 2002, we terminated this hedging relationship
and entered into a cross currency rate and forward foreign exchange
28
agreement, which we designated as a new hedge of a portion of our net
investment in our Belgian subsidiary. Our investment in Brazil during 2000
created a new foreign subsidiary and a specific market risk that a decline
in the value of the Brazilian real compared to the US dollar could
adversely affect our net investment in that subsidiary. We continue to
evaluate alternatives to help us reasonably manage the market risk of our
net investment in the Brazilian subsidiary.
As of December 31, 2002, the only derivative financial instrument
outstanding was a cross currency rate and forward foreign exchange
agreement, which serves as a hedge of a portion of our net investment in
our Belgian subsidiary. The fair value of this net investment hedging
instrument as of December 31, 2002 was a loss of $0.8 million, net of tax,
included in accumulated other comprehensive loss. As of December 31, 2001,
the only derivative financial instrument outstanding was an interest rate
swap agreement that served as a fixed-rate hedge of the variable-rate
borrowings under our eurodollar credit agreement, as required under the
covenants of this term loan. The fair value of the interest rate swap
agreement outstanding at December 31, 2001 was not material to our
financial position. At December 31, 2002, we were continuing to evaluate
hedging alternatives related to foreign currency exposures. In addition, we
evaluated our commodity pricing exposures and concluded that it was not
currently practical to use derivative financial instruments to hedge our
current commodity price risks.
Our non-derivative financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables, and debt instruments.
At December 31, 2002 and 2001, the carrying values of each of the financial
instruments recorded on our balance sheet were considered representative of
their respective fair values due to their variable interest rates and / or
short terms to maturity, with the exception of our convertible debt, which
was recorded in the financial statements at $172.5 million, but had a fair
value of $140.6 million at December 31, 2002 and $136.7 million at December
31, 2001. Fair value of our debt is estimated using discounted cash flow
analysis, based on our current incremental borrowing rates for similar
types of arrangements, or quoted market prices whenever available.
The following tables summarize our market risks associated with
long-term debt and foreign currency exposure as of December 31, 2002 and
2001. The tables present principal and interest cash outflows and related
interest rates by year of maturity. Variable interest rates for each year
represent the interest rate effective for the related loan as of December
31, 2002 for the first table and as of December 31, 2001 for the second
table. However, the interest rate on the eurodollar credit agreement is
fixed at 4.53% in the 2001 table, since we had designated an interest rate
swap agreement as a fixed-rate hedge of the variable rate borrowings under
this agreement, as required by its terms. The interest cash outflows for
the eurodollar credit agreement, disclosed below, include the effect of the
interest rate swap agreement, which effectively converts the variable
interest payments to a fixed-rate basis. The 2001 table shows the actual
prepayment of the eurodollar credit agreement in December 2002. The foreign
currency exchange rates used to translate the euro-denominated principal
and interest payments into US dollars are based on the actual exchange
rates on the dates of the payments in 2002. In addition, the foreign
currency exchange rate used to disclose the net interest payments under the
cross currency swap agreement was based on the USD/EUR exchange rate as of
December 31, 2002. The tables assume payments will be made in accordance
with due dates in the respective agreements and no prepayment of any
amounts due, with the exception of the prepayment of $10.4 million under
our eurodollar credit agreement in late 2002 and $30 million under our
revolving credit agreement in early 2001.
29
The tabular format used below does not reflect our option to redeem
all or a portion of the $172.5 million convertible notes at any time on or
after December 15, 2002 at redemption prices specified in the indenture.
LONG-TERM DEBT AND FOREIGN CURRENCY DERIVATIVE
PRINCIPAL AND INTEREST PAYMENTS BY YEAR
($ IN MILLIONS)
AS OF DECEMBER 31, 2002
THERE- FAIR
2003 2004 2005 2006 2007 AFTER TOTAL VALUE
-------------------------------------------------------
LONG-TERM DEBT:
- --------------
Fixed rate (USD) $ 6.9 $ 6.9 $ 6.9 $179.4 $ -- $ -- $200.1 $140.6
Average interest rate 4.00% 4.00% 4.00% 4.00% -- --
Variable rate (USD) $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 12.0 $ 13.0 $ 10.8
Average interest rate 1.59% 1.59% 1.59% 1.59% 1.59% 1.59%
FOREIGN CURRENCY
DERIVATIVE:
- ----------
USD functional currency -
Cross currency swap $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.4 $ 1.4 $1.3
(Receive USD / Pay EUR)
Contract amount (USD) $-- $-- $-- $-- $-- $20.0 $20.0
Average receive rate
(USD) 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Average pay rate
(EUR) 4.54% 4.54% 4.54% 4.54% 4.54% 4.54%
AS OF DECEMBER 31, 2001
THERE- FAIR
2002 2003 2004 2005 2006 AFTER TOTAL VALUE
-------------------------------------------------------
LONG-TERM DEBT:
- --------------
Fixed rate (USD) $ 6.9 $ 6.9 $ 6.9 $ 6.9 $179.4 $ -- $207.0 $136.7
Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% --
Variable rate (USD) $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $12.4 $ 13.4 $ 10.8
Average interest rate 2.13% 2.13% 2.13% 2.13% 2.13% 2.13%
Fixed rate (EUR) $13.0 $ -- $ -- $ -- $ -- $ -- $ 13.0 $ 11.3
Average interest rate 4.53% -- -- -- -- --
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K that are other than historical
facts are intended to be "forward-looking statements" within the meaning of
the Securities Exchange Act of 1934, the Private Securities Litigation
Reform Act of 1995 and other related laws and include but are not limited
to those 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
30
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, financial
performance of OFS BrightWave, product demand and industry excess capacity,
competitive pricing and acceptance of our products, changes or fluctuations
in global business conditions, expected demand from Comcast Corporation and
other major domestic MSOs, cost and availability of key raw materials
(including without limitation bimetallic center conductors, optical fibers,
fine aluminum wire and fluorinated-ethylene-propylene which are available
only from limited sources), ability to recover higher material and
transportation costs from our customers through price increases, successful
operation of bimetal manufacturing and other vertical integration
activities, successful expansion and related operation of our facilities,
margin improvement, developments in technology, industry competition and
ability to retain customers, achievement of sales, growth, and earnings
goals, ability of our customers to secure adequate financing to fund their
infrastructure projects or to pay us, regulatory changes affecting our
business, possible disruption of our business due to customer or supplier
bankruptcy, reorganization or restructuring, ability to obtain financing
and capital on commercially reasonable terms, ability to comply with
covenants in debt agreements, possible future impairment charges for
goodwill and other long-lived assets, foreign currency fluctuations,
technological obsolescence, ability to achieve reductions in costs, ability
to integrate acquisitions, our participation in joint ventures,
intellectual property protection, international economic and political
uncertainties, possible disruption due to terrorist activity, armed
conflict or war 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-K. The information contained in this Form 10-K represents our best
judgment at the date of this report based on information currently
available. However, we do not intend, and are not undertaking any duty or
obligation, to update this information to reflect developments or
information obtained after the date of this report.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE #
- --------------------------------------------------------------------------
Independent Auditors' Report..................................33
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000..........................34
Consolidated Balance Sheets as of December 31, 2002 and 2001..35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000..........................36
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 2002, 2001 and 2000..........................37
Notes to Consolidated Financial Statements....................38
Schedule II - Valuation and Qualifying Accounts...............64
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CommScope, Inc.:
We have audited the accompanying consolidated balance sheets of
CommScope, Inc. and subsidiaries (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of operations,
stockholders' equity, comprehensive income (loss) and cash flows for each
of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of
OFS BrightWave, LLC, the Company's investment in which is accounted for by
use of the equity method. The Company's equity of $83.711 million and
$161.640 million in OFS BrightWave, LLC's net assets at December 31, 2002
and 2001, respectively, and of $53.722 million and $6.922 million in that
company's net loss for the year ended December 31, 2002 and the period from
November 17, 2001 through December 31, 2001, respectively, are included in
the accompanying consolidated financial statements. The financial
statements of OFS BrightWave, LLC were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for such company, is based solely on the report of
such other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in all
material respects, the financial position of CommScope, Inc. and
subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," as of January 1,
2002.
/s/ Deloitte & Touche LLP
March 12, 2003
33
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- ----------- -----------
Net sales $ 598,467 $ 738,498 $ 950,026
---------- ----------- -----------
Operating costs and expenses:
Cost of sales 477,912 558,854 698,972
Selling, general and administrative 104,716 83,523 81,217
Research and development 6,153 7,117 18,419
Amortization of goodwill - 5,365 5,367
Terminated acquisition costs - 7,963 -
Impairment charges for fixed assets
and investments 25,096 12,802 -
---------- ----------- -----------
Total operating costs and expenses 613,877 675,624 803,975
---------- ----------- -----------
Operating income (loss) (15,410) 62,874 146,051
Other income (expense), net 861 (191) 484
Interest expense (9,214) (8,497) (10,214)
Interest income 2,475 1,027 559
---------- ----------- -----------
Income (loss) before income taxes and equity
in losses of OFS BrightWave, LLC (21,288) 55,213 136,880
Provision for income tax benefit (expense) 7,858 (20,426) (51,993)
---------- ----------- -----------
Income (loss) before equity in losses of
OFS BrightWave, LLC (13,430) 34,787 84,887
Equity in losses of OFS BrightWave, LLC (53,722) (6,922) -
---------- ----------- -----------
Net income (loss) $ (67,152) $ 27,865 $ 84,887
========== =========== ===========
Net income (loss) per share:
Basic $ (1.10) $ 0.53 $ 1.66
Assuming dilution $ (1.10) $ 0.52 $ 1.60
Weighted average shares outstanding:
Basic 61,171 52,692 51,142
Assuming dilution 61,171 53,500 56,047
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
COMMSCOPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
--------------------------
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 120,102 $ 61,929
Accounts receivable, less allowance for doubtful
accounts of $11,811 and $12,599, respectively 64,787 105,402
Inventories 36,254 47,670
Prepaid expenses and other current assets 20,737 12,724
Deferred income taxes 16,579 18,143
------------ ------------
Total current assets 258,459 245,868
Property, plant and equipment, net 229,515 277,169
Goodwill, net of accumulated amortization of
$59,520 and $59,493, respectively 151,334 151,307
Other intangibles, net of accumulated amortization of
$39,930 and $37,421, respectively 8,835 11,344
Deferred income taxes 3,572 --
Investment in and advances to OFS BrightWave, LLC 111,528 196,860
Other assets 9,425 6,457
------------ ------------
Total Assets $ 772,668 $ 889,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 18,483 $ 16,339
Other accrued liabilities 26,005 27,753
Current portion of long-term debt -- 2,651
------------ ------------
Total current liabilities 44,488 46,743
Long-term debt, less current portion 183,300 191,918
Deferred income taxes -- 22,899
Other noncurrent liabilities 27,345 20,931
------------ ------------
Total Liabilities 255,133 282,491
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized
shares: 20,000,000; Issued and outstanding
shares: None at December 31, 2002 and 2001 -- --
Common stock, $.01 par value; Authorized
shares: 300,000,000; Issued shares,
including treasury stock: 61,762,667 at
December 31, 2002; 61,688,256 at December
31, 2001; Issued and outstanding shares:
59,219,567 at December 31, 2002; 61,688,256
at December 31, 2001 618 617
Additional paid-in capital 383,541 381,823
Retained earnings 161,515 228,667
Accumulated other comprehensive loss (14,915) (4,593)
Treasury stock, at cost: 2,543,100 shares at
December 31, 2002 (13,224) --
------------ ------------
Total Stockholders' Equity 517,535 606,514
------------ ------------
Total Liabilities and Stockholders' Equity $ 772,668 $ 889,005
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------
2002 2001 2000
----------- ---------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ (67,152) $ 27,865 $ 84,887
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 36,916 40,529 35,799
Equity in losses of OFS BrightWave, LLC 85,445 11,290 --
Impairment charges for fixed assets and investments 25,096 12,802 --
Deferred income taxes (23,973) (2,262) 1,350
Tax benefit from stock option exercises 128 672 4,195
Changes in assets and liabilities:
Accounts receivable 40,655 91,173 (70,450)
Inventories 10,732 16,157 (23,912)
Prepaid expenses and other current assets (8,935) (8,669) (971)
Accounts payable and other accrued liabilities (697) (34,872) 10,428
Other noncurrent liabilities 6,292 4,165 2,565
Other (682) (682) 1,033
----------- ---------- -----------
Net cash provided by operating activities 103,825 158,168 44,924
INVESTING ACTIVITIES:
Additions to property, plant and equipment (22,616) (70,841) (98,640)
Acquisition costs related to investment in OFS
BrightWave, LLC -- (4,763) --
Investment in unconsolidated affiliate -- -- (3,750)
Proceeds from disposal of fixed assets 413 1,071 504
----------- ---------- -----------
Net cash used in investing activities (22,203) (74,533) (101,886)
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit
facility -- (30,000) 30,000
Principal payments on long-term debt (12,476) (1,996) --
Cost of treasury stock repurchase (13,224) -- --
Debt issuance costs (416) -- --
Proceeds from exercise of stock options 1,029 2,914 4,737
----------- ---------- -----------
Net cash provided by (used in) financing activities (25,087) (29,082) 34,737
Effect of exchange rate changes on cash 1,638 (328) (294)
----------- ---------- -----------
Change in cash and cash equivalents 58,173 54,225 (22,519)
Cash and cash equivalents, beginning of year 61,929 7,704 30,223
----------- ---------- -----------
Cash and cash equivalents, end of year $ 120,102 $ 61,929 $ 7,704
=========== ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- --------- --------
Number of common shares outstanding:
Balance at beginning of year 61,688,256 51,263,703 50,889,208
Issuance of shares to Lucent - 10,200,000 -
Treasury shares repurchased from Lucent (2,543,100) - -
Issuance of shares to nonemployee director 1,000 - -
Issuance of shares for stock option exercises 73,411 224,553 374,495
----------- ----------- ----------
Balance at end of year 59,219,567 61,688,256 51,263,703
----------- ----------- ----------
Common stock:
Balance at beginning of year $ 617 $ 513 $ 509
Issuance of shares to Lucent - 102 -
Issuance of shares for stock option exercises 1 2 4
----------- ----------- ----------
Balance at end of year $ 618 $ 617 $ 513
----------- ----------- ----------
Additional paid-in capital:
Balance at beginning of year $ 381,823 $ 175,803 $ 166,875
Issuance of shares to Lucent 546 202,436 -
Issuance of shares to nonemployee director 16 - -
Issuance of shares for stock option exercises 1,028 2,912 4,733
Tax benefit from stock option exercises 128 672 4,195
----------- ----------- ----------
Balance at end of year $ 383,541 $ 381,823 $ 175,803
----------- ----------- ----------
Retained earnings:
Balance at beginning of year $ 228,667 $ 200,802 $ 115,915
Net income (loss) (67,152) 27,865 84,887
----------- ----------- ----------
Balance at end of year $ 161,515 $ 228,667 $ 200,802
----------- ----------- ----------
Accumulated other comprehensive loss:
Balance at beginning of year $ (4,593) $ (2,598) $ (1,955)
Other comprehensive loss (10,322) (1,995) (643)
----------- ----------- ----------
Balance at end of year $ (14,915) $ (4,593) $ (2,598)
----------- ----------- ----------
Treasury stock, at cost:
Balance at beginning of year $ - $ - $ -
Treasury shares repurchased from Lucent (13,224) - -
----------- ----------- ----------
Balance at end of year $ (13,224) $ - $ -
----------- ----------- ----------
Total stockholders' equity $ 517,535 $ 606,514 $ 374,520
=========== =========== ==========
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- ----------
Comprehensive income (loss):
Net income (loss) $ (67,152) $ 27,865 $ 84,887
Other comprehensive loss, net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries 3,623 (761) (458)
Foreign currency transaction loss on
long-term intercompany loans - foreign
subsidiaries (12,355) (1,832) (780)
Hedging gain (loss) on nonderivative instrument (761) 571 595
Effect of adopting SFAS No. 133 - 229 -
Loss on derivative financial instrument
designated as a cash flow hedge (27) (202) -
Loss on derivative financial instrument
designated as a net investment hedge (802) - -
----------- ----------- ----------
Total other comprehensive loss, net of tax (10,322) (1,995) (643)
----------- ----------- ----------
Total comprehensive income (loss) $ (77,474) $ 25,870 $ 84,244
=========== =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
COMMSCOPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
CommScope, Inc. ("CommScope" or the "Company"), through its wholly
owned subsidiaries and equity method investee, operates in the cable
manufacturing business, with manufacturing facilities located in the United
States, Europe and Latin America. CommScope, Inc. was incorporated in
Delaware in January 1997. CommScope is a leading worldwide designer,
manufacturer and marketer of a wide array of broadband coaxial cables and
other high-performance electronic and fiber optic cable products for cable
television, telephony, Internet access, 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 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include CommScope,
its wholly owned subsidiaries, and its equity-method investee. All material
intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent amounts on deposit in banks and
cash invested temporarily in various instruments with a maturity of three
months or less at the time of purchase.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out ("FIFO") basis for the Company's
domestic inventories and on an average cost basis for the Company's foreign
inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including interest
costs associated with qualifying capital additions. Provisions for
depreciation are based on estimated useful lives of the assets using the
straight-line and accelerated methods. Average useful lives are 10 to 35
years for buildings and improvements and three to 10 years for machinery
and equipment. Expenditures for repairs and maintenance are charged to
expense as incurred.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," but retains many of its fundamental provisions.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include more disposal transactions. The initial adoption of SFAS No. 144
did not have a material impact on the Company's financial statements.
However, CommScope did reclassify the $4.3 million carrying value of its
idle Kings Mountain facility from property, plant and equipment to other
assets during 2002. Although this facility does not meet the requirements
under SFAS No. 144 for classification as held for sale, it has been
reclassified to other assets since it is not currently being, and has not
been, used in the Company's operations and is currently being actively
marketed for sale. In addition, CommScope reclassified $550 from other
current assets to property, plant and equipment during 2002 relating to
assets previously classified as held for sale under SFAS No. 121, but which
do not meet the criteria for classification as held for sale under SFAS No.
144. See Note 5 for further discussion of impairment charges for fixed
assets and investments.
38
GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires the use of the purchase accounting method for
business combinations and broadens the criteria for recording intangible
assets separate from goodwill. SFAS No. 142 uses a non-amortization
approach to account for purchased goodwill and certain intangible assets
with indefinite useful lives and also requires at least an annual
assessment for impairment by applying a fair-value-based test. Intangible
assets with finite useful lives will continue to be amortized over their
useful lives.
Under SFAS No. 142, goodwill must be tested for impairment as of the
beginning of the year in which the statement is adopted in its entirety.
SFAS No. 142 allowed six months from the date the statement was initially
applied to complete the transitional goodwill impairment test. CommScope
completed the process of performing the transitional goodwill impairment
test as of January 1, 2002 in the second quarter of 2002, and as a result
of the test performed, management believes 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. The Company elected to perform its annual goodwill
impairment test as of August 31. Management completed the first annual
goodwill impairment test as of August 31, 2002 and believes that goodwill
was not impaired as of this date. Subsequent impairment losses, if any,
will be reflected in operating income in the statement of operations.
The carrying value of other intangible assets as of December 31, 2002
in the amount of $8.8 million, net of accumulated amortization of $39.9
million, represents patented technology, with a carrying value of $0.1
million, and customer relationship assets, with a carrying value of $8.7
million. These intangible assets were determined by management to meet the
criterion for recognition apart from goodwill and to have finite lives.
CommScope did not have any indefinite-lived intangible assets, other than
goodwill, as of the January 1, 2002 transition date or the December 31,
2002 balance sheet date. Based on management's analysis of all pertinent
factors, no adjustments were necessary to the remaining useful lives of
these assets, which will continue to be amortized on a straight-line basis
through 2006. Amortization expense associated with these intangible assets
was $2.5 million and $2.6 million for the years ended December 31, 2002 and
2001, respectively. Annual amortization expense for these 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 for the year ended December 31, 2002 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.
The adoption of SFAS No. 142 effective January 1, 2002 resulted in the
elimination of pretax goodwill amortization expense in the amount of $5.3
million for the year ended December 31, 2002. The following table provides
a reconciliation of net income (loss) and net income (loss) per share,
reflecting the impact of the adoption of SFAS No. 142 on a pro forma basis
for the years ended December 31, 2001 and 2000:
YEAR ENDED DECEMBER 31,
--------- --------- ----------
2002 2001 2000
--------- --------- ----------
Net income (loss) $(67,152) $ 27,865 $ 84,887
Elimination of goodwill amortization
expense, net of tax effects -- 3,380 3,328
--------- --------- ----------
Net income (loss) - pro forma for 2001
and 2000 $(67,152) $ 31,245 $ 88,215
========= ========= ==========
Net income (loss) per share, basic -
pro forma for 2001 and 2000 $ (1.10) $ 0.59 $ 1.72
Net income (loss) per share, assuming
dilution - pro forma for 2001 and
2000 $ (1.10) $ 0.58 $ 1.66
39
LONG-TERM INVESTMENTS
The Company occasionally makes strategic investments in companies that
complement CommScope's business in order to gain operational and other
synergies. Investments in corporate entities with less than a 20% voting
interest are generally accounted for using the cost method. The Company
uses the equity method to account for investments in corporate entities in
which it has a voting interest of 20% to 50% and an other than minor to 50%
ownership interest in partnerships and limited liability companies, or in
which it otherwise has the ability to exercise significant influence. Under
the equity method, the investment is originally recorded at cost and
adjusted to recognize the Company's share of net earnings or losses of the
investee, limited to the extent of the Company's investment in and advances
to the investee, in addition to financial guarantees that create additional
basis in the investee. The Company regularly monitors and evaluates the
realizable value of its investments. If events and circumstances indicate
that a decline in the value of an investment has occurred and is other than
temporary, the Company will reduce the carrying amount of the investment to
fair value (see Note 5 for discussion of impairment charges for fixed
assets and investments).
INCOME TAXES
Deferred income taxes reflect the future tax consequences of
differences between the financial reporting and tax bases of assets and
liabilities. Investment tax credits are recorded using the flow-through
method. The Company records a valuation allowance, when appropriate, to
reduce deferred tax assets to an amount that is more likely than not to be
realized.
No provision is made for income taxes which may be payable if
undistributed earnings of foreign subsidiaries were to be paid as dividends
to CommScope. CommScope currently intends that such earnings will continue
to be invested in those foreign subsidiaries. In addition, the Company does
not provide for taxes related to the foreign currency transaction gains and
losses on its long-term intercompany loans with foreign subsidiaries. These
loans are not expected to be repaid in the foreseeable future and the
foreign currency gains and losses are therefore recorded on a pretax basis
to accumulated other comprehensive loss on the balance sheet.
STOCK OPTIONS
As of December 31, 2002, the Company had one stock-based employee
compensation plan, which is described more fully in Note 15. The Company
accounts for this plan under the intrinsic value method recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations. No stock-based employee
compensation cost is reflected in net income (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 income (loss) and net income (loss) per share
if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
YEAR ENDED DECEMBER 31,
--------------------------
2002 2001 2000
--------------------------
Net income (loss), as reported $(67,152) $27,865 $84,887
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 7,840 7,077 6,153
--------------------------
Pro forma net income (loss) $(74,992) $20,788 $78,734
==========================
Net income (loss) per share:
Basic--as reported $ (1.10) $ 0.53 $ 1.66
Basic--pro forma $ (1.23) $ 0.39 $ 1.54
Diluted--as reported $ (1.10) $ 0.52 $ 1.60
Diluted--pro forma $ (1.23) $ 0.39 $ 1.49
40
REVENUE RECOGNITION
The Company's primary source of revenues is from product sales to
cable television system operators, telecommunications service providers,
original equipment manufacturers and distributors. Service revenue from
delivery of products shipped by Company owned trucks was not material to
the Company's reported sales during 2002, 2001 or 2000.
Revenue from sales of the Company's products shipped by nonaffiliated
carriers is recognized at the time the goods are delivered and title
passes, provided the earnings process is complete and revenue is
measurable. Delivery is determined by the Company's shipping terms, which
are primarily FOB shipping point. The Company recognizes revenue from sales
of the Company's products shipped by Company owned trucks at the time the
goods are delivered to the customer, regardless of the shipping terms.
For all arrangements, revenue is recorded at the net amount to be
received after deductions for estimated discounts, allowances, returns, and
rebates. In addition, accruals are established for warranties and price
protection programs with distributors at the time the related revenue is
recognized. These estimates and reserves are determined and adjusted as
needed based upon historical experience, contract terms, inventory levels
in the distributor channel and other related factors. Historical warranty
reserves and claims have not been significant to the Company's results of
operations or financial condition.
SHIPPING AND HANDLING COSTS
Amounts billed to a customer in a sale transaction related to shipping
costs are included in net sales. All shipping costs incurred to transport
products to the customer are recorded in cost of sales. Internal handling
costs, which relate to activities to prepare goods for shipment, are
recorded in selling, general and administrative expense and were
approximately $3.4 million in 2002, $3.2 million in 2001 and $2.4 million
in 2000.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are
incurred. Advertising expense was $0.5 million in 2002, $1.0 million in
2001, and $1.4 million in 2000.
RESEARCH AND DEVELOPMENT COSTS
Research and development (R&D) costs are expensed in the period in
which they are incurred. R&D costs include materials, equipment and
facilities that have no alternative future use, depreciation on equipment
and facilities currently used for R&D purposes, personnel costs, contract
services, and reasonable allocations of indirect costs, if clearly related
to an R&D activity. Expenditures in the pre-production phase of an R&D
project are recorded in the income statement as research and development
expense. However, costs incurred in the pre-production phase that are
associated with output actually used in production are recorded in cost of
sales. A project is considered finished with pre-production efforts when
management determines that it has achieved acceptable levels of scrap and
yield, which vary by project. Expenditures related to ongoing production
are recorded in cost of sales.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
CommScope is exposed to various risks resulting from adverse
fluctuations in commodity prices, interest rates, and foreign currency
exchange rates. CommScope's risk management strategy includes the use of
derivative and non-derivative financial instruments primarily as hedges of
these risks, whenever management determines their use to be reasonable and
practical. This strategy does not permit the use of derivative financial
instruments for trading purposes, nor does it allow for speculation. A
hedging instrument may be designated as a net investment hedge to manage
exposure to foreign currency risks related to an investment in a foreign
subsidiary, a fair value hedge to manage exposure to risks related to a
firm commitment for the purchase of raw materials or a
foreign-currency-denominated firm commitment for the purchase of equipment,
or a cash flow hedge to manage exposure to risks related to a forecasted
purchase of raw materials, variable interest rate payments, or a forecasted
foreign-currency-denominated sale of product. The use of non-derivative
financial instruments in hedging activities is limited to hedging fair
41
value risk related to a foreign-currency-denominated firm commitment or a
foreign currency risk related to a net investment in a foreign subsidiary.
The Company's risk management strategy permits the reasonable and
practical use of derivative hedging instruments such as forward contracts,
options, cross currency swaps, certain interest rate swaps, caps and
floors, and non-derivative hedging instruments such as
foreign-currency-denominated loans. The Company recognizes all derivative
financial instruments as assets and liabilities and measures them at fair
value. All hedging instruments are designated and documented as either a
fair value hedge, a cash flow hedge or a net investment hedge at inception.
For fair value hedges, the change in fair value of the derivative
instrument is recognized currently in earnings. To the extent the fair
value hedging relationship is effective, the change in fair value on the
hedged item is recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings. For cash flow hedges, the
effective portion of the change in fair value of the derivative instrument
is recorded in accumulated other comprehensive income or loss, net of tax,
and is recognized in the income statement when the hedged item affects
earnings. Any ineffectiveness of a cash flow hedge is recognized currently
in earnings. For net investment hedges, the effective portion of the change
in fair value of a derivative instrument, or the change in carrying amount
of a non-derivative instrument, is recorded in accumulated other
comprehensive income or loss, net of tax, and is recognized in the income
statement only if there is a substantially complete liquidation of the
investment in the foreign subsidiary. Any ineffectiveness of a net
investment hedge is recognized currently in earnings. The effectiveness of
designated hedging relationships is tested and documented on at least a
quarterly basis. At December 31, 2002, the Company had one hedging
relationship, which involved the use of a derivative financial instrument.
At December 31, 2001, the Company had two hedging relationships, one of
which involved the use of a derivative financial instrument. See Note 12
for further disclosure related to derivative instruments and hedging
activities.
The Company has elected and documented the use of the normal purchases
and sales exception for normal purchase and sales contracts that meet the
definition of a derivative financial instrument.
FOREIGN CURRENCY TRANSLATION
Approximately 19% of the Company's 2002 sales were to customers
located outside the United States. Although the Company primarily bills
customers in foreign countries in US dollars, a portion of these sales were
denominated in currencies other than the US dollar, particularly sales from
the Company's foreign subsidiaries. The financial position and results of
operations of the Company's foreign subsidiaries are measured using the
local currency as the functional currency. Revenues and expenses of these
subsidiaries have been translated into US dollars at average exchange rates
prevailing during the period. Assets and liabilities of these subsidiaries
have been translated at the rates of exchange as of the balance sheet date.
Translation gains and losses are recorded to accumulated other
comprehensive loss.
Aggregate foreign currency transaction gains and losses of the Company
and its subsidiaries, such as those resulting from the settlement of
foreign receivables or payables and short-term intercompany advances, were
recorded to other income (expense), net in the statement of operations and
were not material to the results of the Company's operations during 2002,
2001, or 2000. Foreign currency transaction gains and losses related to
long-term intercompany loans which are not expected to be settled in the
foreseeable future are recorded to accumulated other comprehensive loss.
The Eurodollar Credit Agreement (see Note 11), which was designated
and effective as a partial hedge of the Company's net investment in its
Belgian subsidiary prior to its termination on December 2, 2002, was
translated at the rate of exchange as of the termination date. The
transaction gains and losses recognized during the term of this loan, and
on the termination date, were recorded, net of tax, to accumulated other
comprehensive loss.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the applicable periods. Diluted net income (loss) per share is based on net
income (loss) adjusted for after-tax interest and amortization of debt
42
issuance costs related to convertible debt, if dilutive, divided by the
weighted average number of common shares outstanding adjusted for the
dilutive effect of stock options and convertible securities.
Below is a reconciliation of weighted average common shares
outstanding for basic net income (loss) per share to weighted average
common and potential common shares outstanding for diluted net income
(loss) per share:
YEAR ENDED DECEMBER 31,
----------- ---------- -----------
2002 2001 2000
----------- ---------- -----------
Numerator:
Net income (loss) for basic net income
(loss) per share $(67,152) $ 27,865 $ 84,887
Convertible debt interest and
amortization, net of tax (a) -- -- 4,714
----------- ---------- -----------
Net income (loss) available to common
stockholders for diluted net income
(loss) per share $(67,152) $ 27,865 $ 89,601
=========== ========== ===========
Denominator:
Weighted average number of common shares
outstanding for basic net income (loss)
per share 61,171 52,692 51,142
Effect of dilutive securities:
Convertible debt (a) -- -- 3,580
Employee stock options (b) -- 808 1,325
----------- ---------- -----------
Weighted average number of common
and potential common shares
outstanding for diluted net income
(loss) per share 61,171 53,500 56,047
=========== ========== ===========
- ----------------------------
(a) On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a
conversion rate of 20.7512 shares per $1,000 principal amount. The
effect of the assumed conversion of these notes was included in the
calculation of net income per share, assuming dilution, for the year
ended December 31, 2000 because it was dilutive. The effect of the
assumed conversion of these notes was excluded from the computation of
net income (loss) per share, assuming dilution, for the years ended
December 31, 2002 and 2001 because it would have been antidilutive.
For the year ended December 31, 2000, the dilutive effect of
convertible debt on net income represented after-tax interest expense
and amortization of deferred financing fees associated with this
convertible debt. The dilutive effect of convertible debt on weighted
average shares reflected the number of shares issuable upon
conversion, assuming 100% conversion of all convertible notes as of
the beginning of the year. See Note 11 for further discussion of
convertible notes.
(b) Options to purchase approximately 5 million common shares were
excluded from the computation of net loss per share, assuming
dilution, for the year ended December 31, 2002 because they would have
been antidilutive. Options to purchase approximately 705 thousand
common shares at prices ranging from $20.55 to $47.06 per share, were
excluded from the computation of net income per share, assuming
dilution, for the year ended December 31, 2001 because the options'
exercise prices were greater than the average market price of the
common shares. There were approximately 708 thousand common shares at
prices ranging from $33.56 to $47.06 per share excluded from the
computation of net income per share, assuming dilution, for the year
ended December 31, 2000. For additional information regarding employee
stock options, see Note 15.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. These estimates and their underlying assumptions form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other objective sources. The
Company bases its estimates on historical experience and on assumptions
that are believed to be reasonable under the circumstances and revises its
estimates, as appropriate, when events or changes in circumstances indicate
that revisions may be necessary. Significant accounting estimates reflected
in the Company's financial statements include the allowance for doubtful
accounts, inventory excess and obsolescence reserves, distributor price
protection reserves, reserves for sales returns, discounts, allowances, and
rebates, income tax valuation allowances, and impairment reviews for
investments, fixed assets, goodwill and other intangibles. Although these
estimates are based on management's knowledge of and experience with past
and current events and on management's assumptions about future events, it
is at least reasonably possible that they may ultimately differ materially
from actual results.
43
CONCENTRATIONS OF RISK
Non-derivative financial instruments used by the Company in the normal
course of business include letters of credit and commitments to extend
credit, primarily accounts receivable. These financial instruments involve
risk, including the credit risk of nonperformance by the counterparties to
those instruments, and the maximum potential loss may exceed the reserves
provided in the Company's balance sheet. Although the Company sells 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 net sales during 2002. Additionally, AT&T Broadband
merged with Comcast Corporation in November 2002, to form a new company
named Comcast Corporation ("Comcast"), creating a significant concentration
of credit risk in the new merged entity. During the year ended December 31,
2002, Comcast, as if combined with AT&T Broadband for the full year,
accounted for approximately 20% of the Company's net sales, compared to
approximately 10% of the Company's net sales as if they were combined for
the full year ended December 31, 2001. Accounts receivable from Comcast,
combined with AT&T Broadband, comprised approximately 19% of the Company's
gross accounts receivable as of December 31, 2002, compared to 8%, on a pro
forma combined basis, as of December 31, 2001. Accounts receivable from
another customer comprised approximately 12% of the Company's gross
accounts receivable as of December 31, 2002.
The Company manages its exposures to credit risk associated with
financial instruments through credit approvals, credit limits and
monitoring procedures. CommScope estimates the allowance for doubtful
accounts based on the actual payment history and individual circumstances
of significant customers as well as the age of receivables. In management's
opinion, the Company did not have significant unreserved risk of credit
loss due to the nonperformance of customers or other counterparties related
to amounts receivable. However, an adverse change in financial condition of
a significant customer or group of customers or in the telecommunications
industry could materially affect the Company's estimates related to
doubtful accounts.
The principal raw materials purchased by CommScope (fabricated
aluminum, plastics and polymers, bimetals, copper and optical fiber) are
subject to changes in market price as these materials are linked to the
commodity markets. The Company attempts to mitigate these risks through
effective requirements planning and by working closely with its key
suppliers to obtain the best possible pricing and delivery terms.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
2002 presentation.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Obligations Associated with the
Retirement of Long-Lived Assets." SFAS No. 143 requires the accrual, at
fair value, of the estimated retirement obligation for tangible long-lived
assets if the Company is legally obligated to perform retirement activities
at the end of the related asset's life. SFAS No. 143 was effective for the
Company on January 1, 2003. There was no material impact on the Company
upon the adoption of SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." First, SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." Because of the rescission of SFAS No. 4, the
gains and losses from the extinguishment of debt are no longer required to
be classified as extraordinary items. SFAS No. 64 amended SFAS No. 4 and is
no longer needed because SFAS No. 4 is rescinded. Second, SFAS No. 145
rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement was originally issued to establish accounting requirements
for the effects of transition to the provisions of the Motor Carrier Act of
1980. As those transitions are complete, SFAS No. 44 is no longer needed.
Third, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to require
sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The
amendment of SFAS No. 13 is effective for transactions occurring after May
44
15, 2002. There was no impact on the Company as a result of the amendment
of SFAS No. 13. Last, SFAS No. 145 makes various technical corrections to
existing pronouncements that are not substantive in nature. There was no
material impact on the Company as a result of the rescission of SFAS No. 4,
44 and 64 and the other technical corrections prescribed by the SFAS No.
145, which was effective for the Company on January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. CommScope adopted SFAS
No. 146 as of the effective date, January 1, 2003, and it had no material
impact on the Company's financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the existing disclosure requirements for most guarantees and clarifies
that at the time a company issues a guarantee, the company must recognize
an initial liability for the fair value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. This guidance does not apply to certain guarantee
contracts, such as those issued by insurance companies or for a lessee's
residual value guarantee embedded in a capital lease. The provisions
related to recognizing a liability at inception of the guarantee for the
fair value of the guarantor's obligations would not apply to product
warranties or to guarantees accounted for as derivatives. FIN 45 was
effective for any guarantees issued or modified after December 31, 2002 and
its disclosure requirements were effective for the Company as of December
31, 2002. There was no material impact on the Company upon adoption of FIN
45.
In December 2002, the 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 are effective for the Company as of
March 31, 2003, and management expects to modify the Company's future
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, referred to herein as a VIE, and
provides guidance on when a VIE should be consolidated by an enterprise. If
the enterprise is the primary beneficiary, which is defined as the party
that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both, as a result of holding variable
interests in the entity, then the enterprise must consolidate the VIE. FIN
46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders of a VIE. The consolidation
requirements apply immediately to all VIEs created after January 31, 2003.
Public companies must apply the consolidation requirements to VIEs that
existed prior to February 1, 2003 and remain in existence as of the
beginning of annual or interim periods beginning after June 15, 2003. If it
is reasonably possible that a company will have a significant variable
interest in a VIE at the date the Interpretation's consolidation
requirements become effective, the company must make certain disclosures
about the VIE in financial statements issued after January 31, 2003. The
45
application of this Interpretation did not have a material effect on the
Company's disclosures and is not expected to have a material effect on the
Company's results of operations or financial position.
3. ACQUISITION OF EQUITY INTEREST IN OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an 18.4% ownership
interest in OFS BrightWave, LLC (OFS BrightWave), an optical fiber and
fiber optic cable venture between CommScope and The Furukawa Electric Co.,
Ltd. of Japan ("Furukawa"). OFS BrightWave was formed to operate a portion
of the optical fiber and fiber optic cable business ("OFS Group") acquired
from Lucent Technologies Inc. ("Lucent"). CommScope issued 10.2 million
unregistered shares of its common stock, valued at $203.4 million, or
$19.94 per share, to Lucent in lieu of a portion of the purchase price
payable by Furukawa for the acquisition of a portion of Lucent's OFS Group.
Of the amount paid by CommScope, $173.4 million represented a capital
contribution in exchange for CommScope's 18.4% equity interest in OFS
BrightWave and $30 million represented a loan from one of CommScope's
wholly owned subsidiaries to OFS BrightWave. The remaining 81.6% equity
interest in OFS BrightWave is owned by an indirect wholly owned subsidiary
of Furukawa. The businesses acquired include transmission fiber and cable
manufacturing capabilities at a facility in Norcross, Georgia, as well as
facilities in Germany and Brazil, an interest in a joint venture in
Carrollton, Georgia and an interest in a joint venture in Russia.
On October 9, 2002, the Company and Furukawa purchased 10.2 million
shares of CommScope common stock from Lucent for $53 million, or $5.20 per
share. Of the total 10.2 million shares of the Company's common stock
purchased from Lucent, Furukawa purchased approximately 7.7 million shares,
which management understands it plans to hold for investment purposes, for
approximately $40 million. The Company repurchased the remaining
approximately 2.5 million shares, which are currently classified as
treasury stock, for approximately $13 million. As of December 31, 2002,
Furukawa was CommScope's largest stockholder, with approximately 13% of the
Company's outstanding shares. The Company funded its treasury stock
repurchase using existing cash balances. The cost of issuing the CommScope
shares to Lucent in 2001 and an estimate of costs related to a potential
future registration of the shares pursuant to registration rights held by
Lucent, in the amount of $850, were initially recognized as a reduction of
the total proceeds in additional paid-in capital. Since a registration of
the Company's shares held by Lucent was not required, CommScope wrote off
the costs of registration, net of the costs of completing the treasury
stock repurchase, for a net increase in additional paid-in capital of $546
during the year ended December 31, 2002.
In conjunction with this stock purchase, CommScope and Furukawa also
entered into agreements which outline various investment terms, including
resale restrictions, registration rights, standstill provisions, as well as
call and limited put rights related to the CommScope shares held by
Furukawa. Additionally, CommScope and Furukawa agreed to change from 2004
to 2006 the date when CommScope could first exercise its contractual right
to sell its ownership interest in OFS BrightWave to Furukawa for a cash
payment equal to CommScope's original investment in and advances to OFS
BrightWave.
Although the Company's ownership interest in OFS BrightWave is less
than 20%, the investment has been accounted for using the equity method
since OFS BrightWave is organized as a limited liability company with
characteristics of a partnership. CommScope capitalized $4.8 million of
direct acquisition costs as part of its investment in OFS BrightWave.
CommScope's portion of the losses of OFS BrightWave for the year ended
December 31, 2002 was included in the consolidated financial statements of
CommScope for the year ended December 31, 2002. The consolidated financial
statements of CommScope for the year ended December 31, 2001 included
CommScope's portion of the losses of OFS BrightWave only for the period
from November 17, 2001 through December 31, 2001. These results were net of
the elimination of after-tax intercompany profit in the amount of $109 for
the year ended December 31, 2002 and $191 for the six week period ended
December 31, 2001, related to interest payments on the $30 million note
receivable and reimbursement of acquisition-related expenses by OFS
BrightWave (see Note 19 for additional discussion of related party
transactions). 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.
46
The following table provides summary financial information for OFS
BrightWave as of and for the year ended December 31, 2002 and the six week
period ended December 31, 2001:
SIX WEEK
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- --------------
Income Statement Data:
Net revenues $ 97,098 $ 29,340
Gross profit (144,472) (36,611)
Loss from continuing operations (431,506) (61,253)
Net loss (431,506) (61,253)
AS OF DECEMBER 31,
------------------------------
2002 2001
-------------- ---------------
Balance Sheet Data:
Current assets $ 83,876 $ 315,626
Noncurrent assets 655,265 921,647
Current liabilities 57,353 114,319
Other noncurrent liabilities 182,297 193,611
Minority interests 45,338 52,400
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity interest in the net assets of OFS
BrightWave as of December 31, 2002 and 2001 was as follows:
AS OF DECEMBER 31,
--------------------------
2002 2001
------------ -----------
Net assets of OFS BrightWave, LLC $454,153 $876,943
CommScope ownership percentage 18.43225 % 18.43225%
------------ -----------
CommScope equity in net assets of OFS
BrightWave, LLC 83,711 161,640
Plus:
Notes receivable from OFS BrightWave, LLC 30,000 30,000
Direct costs of acquisition 4,763 4,763
Nonproportionate equity adjustments by
majority member in OFS BrightWave, LLC (1,036) 457
Less:
Income tax benefit related to losses
generated by OFS BrightWave LLC's domestic
c-corporation subsidiary (5,910) --
------------ -----------
Investment in and advances to
OFS BrightWave, LLC $111,528 $196,860
============ ===========
The Company's ownership interest in OFS BrightWave was restructured
from a previously contemplated joint venture arrangement announced on July
24, 2001. Under the originally contemplated arrangement, CommScope and
Furukawa would have formed two joint ventures to acquire certain fiber
optic cable and transmission fiber assets of Lucent's OFS Group. Given the
uncertain economic environment and severe downturn in the
telecommunications market as well as associated difficulties in the
financing markets following the September 11, 2001 tragedy, CommScope and
Furukawa agreed to restructure the joint venture arrangement, resulting in
a lower ownership participation for CommScope. As a result of the
restructuring, the Company recorded pretax charges of approximately $8
million, or approximately $0.09 per diluted share, net of tax, during 2001,
related to financing and formation costs of the original joint venture
arrangement, which were not capitalizable as part of CommScope's investment
in the restructured venture.
47
4. OTHER ACQUISITIONS AND DIVESTITURES
Effective January 1, 1999, in a transaction with Alcatel Cable
Benelux, S.A. ("Alcatel"), the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Belgium. The
acquisition provided the Company with a European base of operations, access
to established distribution channels and complementary coaxial cable
technologies. The Belgium acquisition was accounted for using the purchase
method and, accordingly, the acquired assets and assumed liabilities were
recorded at their estimated fair value at the date of the acquisition of
approximately $20 million, including $3.5 million of goodwill, which was
amortized through December 31, 2001 based on a 30 year period (see Note 2
for discussion of "Goodwill and Other Intangibles"). Payment for the
acquired business was financed primarily by borrowings under the Eurodollar
Credit Agreement (see Note 11).
In 1995, CommScope entered into a joint venture agreement with Pacific
Dunlop Ltd. to produce cable in Australia, acquiring a 49% ownership
interest. Due to certain governmental regulation changes and other events
affecting the market for cable products in Australia in and around 1997,
manufacturing operations of the joint venture were suspended and formally
discontinued by decision of the joint venture's directors in 1997. In 1998,
a formal termination and dissolution agreement for the joint venture was
completed. Final dissolution of this joint venture was completed in
accordance with Australian legal requirements as of December 29, 2000. A
pretax gain of $517 related to the final liquidation of this joint venture
was recognized in other income during the year ended December 31, 2000. The
Company anticipates no third party claims and no additional gains or losses
related to this closed joint venture.
5. IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
Due to the difficult business environment in telecommunications and
the continuing decline in demand for the Company's products, management
performed a test of recoverability for its long-lived assets during the
third quarter of 2002. The Company's long-term undiscounted cash flow
forecasts indicated that the carrying amounts of fixed assets used to
manufacture CommScope's wireless, fiber optic cable and other telecom
products may not be recoverable as of September 30, 2002. Management does
not currently plan to sell, abandon, or otherwise dispose of these assets,
and they were therefore classified as assets to be held and used as of
December 31, 2002.
The impairment loss recognized during the third quarter of 2002 was
measured as the amount by which the carrying values of the impaired assets
exceeded their respective fair values. Fair value of the equipment used to
manufacture fiber optic cable and other telecom products was determined
based on discounted cash flows, which was the best information available to
management. Fair value of the facility and equipment used to manufacture
wireless products was determined based on a combination of independent
appraisal, third-party estimates of current market values, and internal
estimates of current market values.
In addition, management's quarterly review of idle and obsolete fixed
assets indicated additional impairment for specifically-identified
manufacturing equipment. The fair values of these specifically-identified
fixed assets were determined based on internal estimates of current market
values for used equipment. These idle and obsolete assets did not meet the
criteria for classification as held for sale and were therefore classified
as assets to be held and used as of December 31, 2002.
The Company recognized total impairment charges for fixed assets in
the amount of $25.1 million for the year ended December 31, 2002. The
breakdown of these impairment charges was as follows (in millions):
Wireless cable manufacturing assets $ 15.1
Fiber optic cable manufacturing assets 5.3
Other telecommunications cable
manufacturing assets 3.0
Other manufacturing assets 1.7
---------
Total impairment charges $ 25.1
=========
48
The Company recorded pretax impairment charges totaling $12.8 million
during 2001. Included in these impairment charges was approximately $3.8
million related to an investment in an unconsolidated affiliate, $4.4
million related to fixed assets identified as held for disposal and $4.6
million related to fixed assets to be held and used. The assets held for
disposal had a carrying value of approximately $550 as of December 31,
2001. These assets were reclassified from other current assets to property,
plant and equipment during 2002 because management did not expect them to
be sold within one year and therefore these assets did not meet the SFAS
No. 144 criteria for classification as held for sale (See Note 2,
"Property, Plant and Equipment," for discussion of SFAS No. 144).
6. EMPLOYEE TERMINATION BENEFITS
The Company reduced its workforce by 202 employees during the third
quarter of 2002, primarily in response to the challenging global business
environment. The affected employees included manufacturing and
administrative personnel located in North Carolina at the Company's
corporate office and manufacturing facilities. This workforce reduction
resulted in pretax charges of approximately $1.3 million during the third
quarter of 2002 for employee termination benefits, which consisted of
severance pay and related fringe benefits. The Company recorded $1.0
million of these charges in cost of sales and $0.3 million in selling,
general and administrative expenses. The Company paid $1.1 million of these
costs during 2002, resulting in a remaining accrual of $0.2 million as of
December 31, 2002 related to the third quarter 2002 workforce reduction.
Management estimates that these remaining benefits will be paid in full by
June 2003.
The Company's management approved an additional workforce reduction of
153 employees in the fourth quarter of 2002, to be effective during the
first quarter of 2003. This workforce reduction was also primarily in
response to the challenging global business environment. The affected
employees included manufacturing and administrative personnel located at
several of the Company's North Carolina manufacturing facilities. These
employees were identified and the termination benefits were communicated to
them prior to December 31, 2002 in sufficient detail to allow them to
calculate their estimated benefits. The Company therefore recognized pretax
charges related to this planned workforce reduction in the amount of
approximately $1.2 million during the fourth quarter of 2002 for employee
termination benefits, which consisted of severance pay and related fringe
benefits. The Company recorded nearly all of these charges in cost of
sales. The Company did not pay any of these employee termination benefits
during the fourth quarter of 2002, resulting in a remaining accrual of $1.2
million as of December 31, 2002 for the planned workforce reduction.
Management estimates that these remaining benefits will be paid in full by
December 2003.
7. ACCOUNTS RECEIVABLE
During the year ended December 31, 2002, the Company wrote off $21.4
million of Adelphia Communications Corporation ("Adelphia") receivables as
a result of Adelphia's Chapter 11 bankruptcy, which was announced by
Adelphia in June 2002. The Company has reached agreement with Adelphia on
the terms under which the Company will do business after the Chapter 11
bankruptcy filing date.
8. INVENTORIES
AS OF DECEMBER
31,
----------------
2002 2001
----------------
Raw materials $12,402 $23,037
Work in process 11,160 9,688
Finished goods 12,692 14,945
----------------
$36,254 $47,670
================
49
9. PROPERTY, PLANT AND EQUIPMENT
AS OF DECEMBER
31,
--------------------
2002 2001
--------- ---------
Land and land improvements $ 9,359 $ 6,742
Buildings and improvements 78,624 74,101
Machinery and equipment 282,702 306,570
Construction in progress 22,956 41,721
--------- ---------
393,641 429,134
Accumulated depreciation (164,126) (151,965)
--------- ---------
$229,515 $277,169
========= =========
Depreciation expense was $33,241, $31,681, and $26,631 for the years
ended December 31, 2002, 2001, and 2000, respectively. No interest was
capitalized for the year ended December 31, 2002. The Company capitalized
interest of $405 and $176 for the years ended December 31, 2001 and 2000,
respectively.
10. OTHER ACCRUED LIABILITIES
AS OF DECEMBER
31,
-----------------
2002 2001
-------- --------
Salaries and compensation liabilities $11,918 $11,136
Retirement savings plan liabilities 6,586 6,819
Other 7,501 9,798
-------- --------
$26,005 $27,753
======== ========
11. LONG-TERM DEBT
AS OF DECEMBER
31,
------------------
2002 2001
-------- --------
Convertible Notes $172,500 $172,500
Eurodollar Credit Agreement -- 11,269
IDA Notes 10,800 10,800
-------- --------
183,300 194,569
Less current portion -- (2,651)
-------- --------
$183,300 $191,918
======== ========
SENIOR SECURED REVOLVING CREDIT FACILITY
As of January 10, 2003 the Company entered into a new $100 million
senior secured revolving credit facility with a group of banks. The new
facility, which was not drawn at closing, was established for future
liquidity, working capital needs and other general corporate purposes and
expires June 30, 2006. The new facility is secured by substantially all of
the Company's assets and provides a maximum of up to $100 million revolving
loan availability, including a $20 million sublimit for the issuance of
standby and documentary letters of credit. Availability is determined
monthly using a predetermined formula based on the amounts of eligible
accounts receivable, inventory and equipment, reduced by the total of any
outstanding borrowings or letters of credit under the facility. The Company
had initial availability of approximately $67 million at closing.
At the Company's option, advances under the new facility are available
as Base Rate loans, which bear interest at the base rate plus 0.75%, or as
Euro-Dollar loans, which bear interest at LIBOR plus 2.25%. The base rate
applicable to Base Rate loans is equal to the higher of (a) the prime rate
used by Wachovia Bank, N.A. or (b) the overnight federal funds rate (as
defined in the agreement) plus 0.5%.
50
An unused line fee is payable quarterly and calculated on the average
daily amount of the unused $100 million commitment during each calendar
quarter. This unused line fee is calculated at an annual rate of (a) 0.5%
when the average unused commitment is greater than or equal to 66.6% of the
total commitment, (b) 0.375% when the average unused commitment is less
than 66.6% and greater than or equal to 33.4% of the total commitment, or
(c) 0.25% when the average unused commitment is less than 33.4% of the
total commitment. Letter of credit fees are payable at an annual rate of
2.25% of the maximum amount available to be drawn under the letter of
credit and are subject to an additional upfront fee of 0.125% per year
payable to the issuer.
The new facility contains certain restrictive covenants, including
restrictions on incurring indebtedness and liens, entering into
transactions to acquire or merge with any entity, making certain other
fundamental changes, selling assets and paying dividends, among other
things. The Company is also required to comply with certain financial
covenants, as defined, including a fixed charge coverage ratio, a funded
debt to EBITDA ratio, a maximum annual capital expenditures covenant and a
covenant requiring minimum availability of $5 million, if the calculation
of availability falls below $50 million, or $30 million provided that there
are no outstanding revolving loans.
CONVERTIBLE NOTES
In December 1999, the Company issued $172.5 million of 4% convertible
subordinated notes due December 15, 2006. These notes are convertible at
any time into shares of CommScope common stock at a conversion price of
$48.19 per share, which is subject to adjustment under certain
circumstances, as provided in the Indenture. The Company may redeem some or
all of these notes at any time on or after December 15, 2002 at redemption
prices specified in the Indenture. In connection with the issuance of the
convertible notes, the Company incurred costs of approximately $4.9
million, which were capitalized as other assets and are being amortized
over the term of the notes. The net proceeds of $167.6 million from this
convertible debt offering were used primarily to repay outstanding
indebtedness under a revolving credit agreement in addition to funding
capital expenditures and other general corporate activities.
EURODOLLAR CREDIT AGREEMENT
As of December 2, 2002, the Company terminated its Eurodollar Credit
Agreement and a related interest rate swap agreement, which were both
scheduled to expire on March 1, 2006. The Company repaid the remaining
principal balance of $10.4 million and accrued interest of $0.5 million due
under the Eurodollar Credit Agreement upon termination. The termination of
the interest rate swap agreement, which served as a fixed-rate hedge of the
variable-rate borrowings under the Eurodollar Credit Agreement, resulted in
an immaterial after-tax loss.
IDA NOTES
In January 1995, CommScope entered into a $10.8 million unsecured loan
agreement in connection with the issuance of notes by the Alabama State
Industrial Development Authority (the "IDA Notes"). Borrowings under the
IDA Notes bear interest at variable rates based upon current market
conditions for short-term financing. The interest rate in effect at
December 31, 2002 was 1.59%. All outstanding borrowings under the IDA Notes
are due on January 1, 2015.
CREDIT AGREEMENT
As of November 4, 2002, the Company terminated its amended $250
million revolving credit agreement, which was scheduled to expire on
December 31, 2002. The Company had no outstanding borrowings under this
facility as of December 31, 2001 or at the date of termination of the
Credit Agreement.
OTHER MATTERS
There are no scheduled maturities of long-term debt during 2003, 2004,
or 2005. The principal amount of the Company's Convertible Notes in the
amount of $172,500 is due in 2006. There are also no scheduled maturities
of long-term debt in 2007.
51
The weighted average effective interest rate on outstanding
borrowings, including amortization of associated loan fees, under the above
debt instruments was 4.29% at December 31, 2002, and 4.61% at December 31,
2001.
12. DERIVATIVES AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date for FASB Statement No. 133" and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative financial instruments, including certain
derivative instruments embedded in other host contracts (collectively
referred to herein as embedded derivatives) and for hedging activities.
These Standards require an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value.
The only derivative instrument identified in the implementation of
SFAS No. 133 and outstanding for the year ended December 31, 2001 was an
interest rate swap, which effectively converted the variable-rate
Eurodollar Credit Agreement to a fixed-rate basis. The notional amount of
the swap was equal to the outstanding principal balance of the Eurodollar
Credit Agreement and decreased in tandem with principal repayments, which
began June 1, 2001. As of January 1, 2001, this interest rate swap was
designated and documented as a cash flow hedge of the risk of changes in
the cash flows attributable to fluctuations in the variable benchmark
interest rate associated with the underlying debt being hedged. This
hedging instrument was effective at the transition date to SFAS No. 133,
and at December 31, 2001, and was expected to continue to be effective for
the duration of the swap contract, resulting in no anticipated hedge
ineffectiveness. The transition adjustment as of January 1, 2001 was
recorded as a change in accounting principle to accumulated other
comprehensive income and other assets on the balance sheet and did not have
a material impact on the Company's consolidated results of operations,
financial position, and cash flows. The fair value of this derivative
instrument, reflected in other assets, was approximately $42 as of December
31, 2001.
Also, as of January 1, 2001, the Eurodollar Credit Agreement was
designated and effective as a partial hedge of the Company's net investment
in its Belgian subsidiary. There was no adjustment required under SFAS No.
133 as of January 1, 2001 related to this net investment hedge. This
hedging instrument was effective at the SFAS No. 133 transition date, and
at December 31, 2001, and was expected to continue to be effective for the
duration of the loan agreement, resulting in no anticipated
reclassifications from accumulated other comprehensive loss to earnings.
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. As a result, both hedging
relationships were terminated as well. The Company entered into a cross
currency rate and forward foreign exchange agreement on December 2, 2002 to
replace the Eurodollar Credit Agreement as a hedge of the Company's net
investment in its Belgian subsidiary.
As of December 31, 2002, 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 dollars
for euros, was $20 million at inception of the hedging relationship and as
of December 31, 2002. This hedging instrument was effective at inception of
the hedging relationship and at December 31, 2002, and was 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
$1.3 million as of December 31, 2002.
52
Activity in the accumulated net gain (loss) on derivative instruments
included in accumulated other comprehensive loss for the years ended
December 31, 2002 and 2001 consisted of the following:
YEAR ENDED
DECEMBER 31,
-----------------
2002 2001
-------- --------
Accumulated net gain on derivative instrument, beginning
of year $ 27 $ --
Net effect of adopting SFAS No. 133 -- 229
Net loss on derivative financial instrument designated as
a cash flow hedge (27) (202)
Net loss on derivative financial instrument designated as
a net investment hedge (802) --
------- --------
Accumulated net gain (loss) on derivative instruments,
end of year $ (802) $ 27
======= ========
13. EMPLOYEE BENEFIT PLANS
The Company sponsors the CommScope, Inc. of North Carolina Employees
Retirement Savings Plan (the "Employees Retirement Savings Plan"). The
majority of the Company's contributions to the Employees Retirement Savings
Plan are made at the discretion of the Company's Board of Directors. In
addition, eligible employees may elect to contribute up to 100% of their
base salaries, limited to the maximum contribution amount allowed by the
Internal Revenue Service. The Company also contributes an amount equal to
50% of the first 4% of the employee's salary that the employee contributes.
The Company contributed $6.1 million in 2002, $9.3 million in 2001, and
$8.3 million in 2000 to the Employees Retirement Savings Plan, of which
$4.4 million, $7.5 million, and $6.4 million each year was discretionary.
The Company sponsors a self-funded welfare plan (the "Plan") that
provides medical, dental, and short-term disability benefits to eligible
employees. Enrollment in the plan is optional, with the cost of the
premiums being shared by both the employee and the Company. The Company
established a Voluntary Employees' Benefit Association Trust ("VEBA Trust")
to provide for the payment of benefits under the Plan. The Company is
required to make cash contributions to the VEBA Trust from time to time in
amounts which, when added to participant premiums, are sufficient to fund
the benefits for participants and their beneficiaries under the Plan. The
Company made cash contributions to the VEBA Trust of $14.9 million in 2002,
$13.6 million in 2001, and $11.4 million in 2000.
The Company also sponsors an unfunded postretirement group medical and
dental plan (the "Postretirement Health Plan") that provides benefits to
full-time employees who retire from the Company at age 65 or older with a
minimum of 10 years of active service. The Postretirement Health Plan is
contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance, with
Medicare as the primary provider of health care benefits for eligible
retirees. The accounting for the Postretirement Health Plan anticipates
future cost-sharing changes to the written plan that are consistent with
the Company's expressed intent to maintain a consistent level of cost
sharing with retirees. The Company recognizes the cost of providing and
maintaining postretirement benefits during employees' active service
periods.
Additionally, the Company currently sponsors two defined benefit
pension plans (the "Defined Benefit Pension Plans"). The first defined
benefit plan is a nonqualified unfunded supplemental executive retirement
plan (the "Original Plan") that provides defined pension benefits to
certain key executives who retired prior to December 31, 2000. The defined
benefits under the Original Plan are paid from Company contributions. Prior
to January 1, 2001, the Original Plan also covered certain active key
executives who had not yet retired. All active participants' balances were
settled as of January 1, 2001, resulting in a gain in the Original Plan of
$4.7 million, and a new defined contribution pension plan was established
in its place for those active participants, as described in the paragraph
below. The second defined benefit pension plan is a nonqualified pension
plan, which provides pension benefits for certain international
management-level employees. This plan is funded by Company and employee
contributions.
53
Effective January 1, 2001, the Company amended and restated the
Original Plan that previously provided defined pension benefits to certain
active and retired key executives. As a result of this amendment and
restatement, the benefits provided under the Original Plan for all
participants, other than those who retired prior to December 31, 2000, are
now governed by the amended and restated plan (the "Restated Plan"). Under
the Restated Plan, which is a noncontributory unfunded defined contribution
pension plan, the Company will credit each participant's account with
contributions and earnings on the accumulated balance thereof, as outlined
in the Original Plan, but the Company is not required to make any payments
until the participant is eligible to receive retirement benefits under the
plan. As of January 1, 2001, for all active participants in the Original
Plan, the Company credited their respective accounts under the Restated
Plan with an amount equal to the actuarially determined accumulated benefit
obligation for each participant under the terms of the Original Plan. The
total amount established by CommScope as of January 1, 2001, and recognized
as an expense of the Restated Plan in 2001, was $4.1 million. The Company
recognized additional costs of $546 representing contributions and earnings
under this plan for the year ended December 31, 2001. The establishment of
opening participant balances and the additional cost recognized resulted in
an accrued liability for the Restated Plan of $4.6 million as of December
31, 2001. The amendment and restatement of this plan had no material effect
on the consolidated financial statements of the Company upon adoption. For
the year ended December 31, 2002, the Company recognized $613, representing
contributions and earnings under the Restated Plan, and made benefit
payments to retirees in the amount of $110, resulting in an accrued
liability of approximately $5.1 million as of December 31, 2002.
Amounts accrued under the Postretirement Health Plan, the Defined
Benefit Pension Plans, and the Restated Plan are included in other
noncurrent liabilities. The following table summarizes information for the
Defined Benefit Pension Plans and the Postretirement Health Plan:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------------------------------
2002 2001 2002 2001
-------------------------------------------
Change in benefit obligation:
Postretirement benefit obligation, beginning
of year $1,800 $6,377 $25,803 $17,522
Service cost 91 74 2,562 1,819
Interest cost 121 109 1,802 1,353
Plan participants' contributions 16 13 25 19
Actuarial (gain) loss (23) 77 1,156 5,133
Settlement of benefits -- (4,690) -- --
Benefits paid (164) (108) (179) (43)
Translation (gain) loss and other 64 (52) -- --
-------------------------------------------
Postretirement benefit obligation, end of year $1,905 $1,800 $31,169 $25,803
-------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year $ 630 $ 501 $ -- $ --
Employer and plan participant contributions 240 231 179 43
Return on plan assets 54 30 -- --
Benefits paid (164) (108) (179) (43)
Translation gain (loss) and other 85 (24) -- --
-------------------------------------------
Fair value of plan assets, end of year $ 845 $ 630 $ -- $ --
-------------------------------------------
Funded status (postretirement benefit
obligation in excess of fair value of plan
assets): $1,060 $1,170 $31,169 $ 25,803
Unrecognized net actuarial gain (loss) 19 (78) (12,619) (11,902)
Unrecognized net transition amount (386) (377) -- --
-------------------------------------------
Accrued benefit cost, end of year $ 693 $ 715 $18,550 $13,901
===========================================
Discount rate 6.29% 6.40% 6.75% 7.00%
Rate of return on plan assets 5.50% 5.50% -- --
Rate of compensation increase 3.50% 3.50% -- --
54
Net periodic benefit cost (credit) for the Defined Benefit Pension
Plans and the Postretirement Health Plan consisted of the following
components:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------- ---------------------
2002 2001 2000 2002 2001 2000
---------------------- ---------------------
Service cost $ 91 $ 74 $ 104 $2,562 $1,819 $1,237
Interest cost 121 109 432 1,802 1,353 1,001
Recognized actuarial loss -- -- 44 439 239 159
Amortization of transition
obligation 29 29 29 -- -- --
Settlement gain -- (4,690) -- -- -- --
Return on plan assets (54) (30) (23) -- -- --
---------------------- ---------------------
Net periodic benefit cost
(credit) $187 $(4,508) $ 586 $4,803 $3,411 $2,397
====================== =====================
For measurement purposes, a 12% annual rate of increase in health care
costs was assumed for 2003 and is assumed to decrease gradually to 5% for
2012 and remain at that level thereafter. The increase in the
postretirement benefit obligation in 2002 was due to a decrease in the
discount rate and increases in the claims cost and health care trend rate
assumptions and was partially offset by a gain from demographic changes
related to reduced headcount.
Assumed health care cost trend rates can have a significant effect on
the amounts reported for the Postretirement Health Plan. A
one-percentage-point change in assumed health care cost trend rates would
have had the following effects for the year ended December 31, 2002:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- ------------------
Effect on total of service and interest
cost components of net periodic benefit
cost $ 945 $(1,058)
Effect on postretirement benefit
obligation 7,874 (6,003)
14. INCOME TAXES
The components of the provision (benefit) for income taxes for the
years ended December 31, 2002, 2001, and 2000 were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal $(15,591) $17,842 $46,723
State 155 781 3,920
--------- --------- ---------
Current income tax provision (benefit) (15,436) 18,623 50,643
--------- --------- ---------
Deferred:
Federal (19,931) (1,611) 1,244
State (4,042) (651) 106
--------- --------- ---------
Deferred income tax provision (benefit) (23,973) (2,262) 1,350
--------- --------- ---------
Total provision (benefit) for income taxes $(39,409) $16,361 $51,993
========= ========= =========
The total provision for income taxes included an income tax benefit of
$31.5 million for the year ended December 31, 2002 and $4.1 million for the
year ended December 31, 2001, reflected in equity in losses of OFS
BrightWave.
55
The reconciliation of the statutory U.S. federal income tax rate to
the Company's effective income tax rate for the years ended December 31,
2002, 2001, and 2000 was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
---------- --------- --------
Statutory U.S. federal income tax rate (35.0)% 35.0% 35.0%
State income taxes, net of federal tax effect (2.4) 0.2 1.9
Export sales benefit (0.4) (2.9) (1.1)
Permanent items and other (0.7) (2.8) 2.2
General business credits (0.3) -- --
Valuation allowances for net operating loss
and capital loss carryforwards 1.8 7.5 --
---------- --------- --------
Effective income tax rate (37.0)% 37.0% 38.0%
========== ========= ========
During 2001, the Company established a deferred tax valuation
allowance of $2.0 million against a net foreign deferred tax asset arising
primarily from a foreign net operating loss carryforward. The loss
carryforward has no expiration date, but is subject to local restrictions
limiting its deductibility. During 2002, the deferred tax valuation
allowance increased by $0.8 million to a balance of $2.8 million as of
December 31, 2002.
The Company also had a foreign net operating loss carryforward of
approximately $2.8 million as of December 31, 2002, which had no expiration
date, and the Company considers it more likely than not to be realized.
In addition, the Company had a valuation allowance of $1.4 million as
of December 31, 2002, which was established in 2001 against a deferred tax
asset arising from the impairment charge for an investment in a wireless
infrastructure project management company, now in the process of being
liquidated (see Note 5), which created a capital loss for tax purposes. The
Company considered it more likely than not that this capital loss
carryforward will expire unused due to uncertainty about the creation of
future capital gains.
56
The components of deferred income tax assets and liabilities and the
classification of deferred tax balances on the balance sheet were as
follows:
As of December 31,
--------- --------
2002 2001
--------- --------
Deferred tax assets:
Accounts receivable and inventory reserves $11,024 $11,957
Employee benefits 3,441 3,515
Postretirement benefits 8,999 7,125
Foreign net operating losses 3,862 2,813
Investment in unconsolidated affiliate 1,388 1,388
Investment in OFS BrightWave, LLC 16,881 1,118
Other 4,389 2,924
-------- --------
Total deferred tax assets 49,984 30,840
Valuation allowance (4,233) (3,408)
-------- --------
Net deferred tax assets 45,751 27,432
Deferred tax liabilities:
Property, plant and equipment (22,059) (26,867)
Goodwill and intangibles (3,541) (4,178)
Hedging gain -- (1,143)
-------- --------
Total deferred tax liabilities (25,600) (32,188)
-------- --------
Net deferred tax asset (liability) $20,151 $(4,756)
======== ========
Deferred taxes as recorded on the balance
sheet:
Current deferred tax asset $16,579 $18,143
Noncurrent deferred tax asset (liability) 3,572 (22,899)
-------- --------
Net deferred tax asset (liability) $20,151 $(4,756)
======== ========
At December 31, 2002 the Company had approximately $11.7 million in
state investment tax credits that could be utilized to reduce state income
tax liabilities for future tax years through 2008.
At December 31, 2002 the Company had approximately $26.1 million in
foreign net operating loss carryforwards that can be utilized to reduce
foreign income tax for future years indefinitely. Approximately $23.3
million of these losses have a valuation allowance against them.
The cumulative amount of undistributed earnings from foreign
subsidiaries amounted to approximately $4 million at December 31, 2002.
Although the Company does not currently intend to repatriate earnings from
foreign subsidiaries, foreign tax credits may be available as a reduction
of United States income taxes in the event of such distributions.
Income tax (expense) benefit for components of other comprehensive
loss for the years ended December 31, 2002, 2001, and 2000 was as follows:
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------- --------- ---------
Hedging (gain) loss on non-derivative
instrument $ 447 $ (300) $ (368)
Effect of adopting SFAS No. 133 -- (135) --
Loss on derivative instrument designated
as a cash flow hedge 16 120 --
Loss on derivative instrument designated
as a net investment hedge 471 -- --
Total income tax (expense) benefit for --------- --------- ---------
components of other comprehensive loss $ 934 $ (315) $ (368)
========= ========= =========
57
15. STOCK COMPENSATION PLANS
In 1997, the Company adopted the Amended and Restated CommScope, Inc.
1997 Long-Term Incentive Plan (the "CommScope Incentive Plan"), which was
formally approved by the Company's stockholders in 1998. The Company
amended the CommScope Incentive Plan in 1998, 2000, and 2002 to, among
other things, increase the number of shares available under the plan. Each
of these amendments was approved by the Company's stockholders at the time
it was made. The CommScope Incentive Plan provides for the granting of
stock options, restricted stock, performance units, performance shares and
phantom shares to employees of the Company and its subsidiaries and the
granting of stock and stock options to nonemployee directors of the
Company. A total of 11.7 million shares have been authorized for issuance
under the CommScope Incentive Plan through December 31, 2002. Stock options
generally expire 10 years from the date they are granted. Options vest over
service periods that generally range from three to four years. Upon initial
election to the Company's board of directors, a non-employee director is
granted 1,000 shares of stock, which are fully vested and transferable upon
issuance, and an option to purchase 20,000 shares of stock, which vest over
a three-year period. If a non-employee director remains in office, a
similar option is granted every three years. Non-employee directors are
also eligible for discretionary stock option awards.
The following tables summarize the Company's stock option activity and
information about stock options outstanding at December 31, 2002:
WEIGHTED
AVERAGE
SHARES EXERCISE
(IN PRICE PER
THOUSANDS) SHARE
---------- ----------
Stock options outstanding at December 31, 1999 4,504 $ 16.96
Granted 1,446 18.81
Cancelled (123) 21.67
Exercised (375) 12.57
---------- ----------
Stock options outstanding at December 31, 2000 5,452 17.64
Granted 294 21.90
Cancelled (432) 22.40
Exercised (225) 13.00
---------- ----------
Stock options outstanding at December 31, 2001 5,089 17.69
Granted 3,693 11.18
Cancelled (370) 17.81
Exercised (73) 14.03
---------- ----------
Stock options outstanding at December 31, 2002 8,339 $ 14.84
========== ==========
Stock options exercisable at:
December 31, 2000 2,747 $ 15.04
December 31, 2001 3,703 $ 16.50
December 31, 2002 4,221 $ 17.55
Shares reserved for future issuance at
December 31, 2002 2,002
58
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------- ------------
WEIGHTED
WEIGHTED AVERAGE AVERAGE
REMAINING WEIGHTED AVERAGE EXERCISE
RANGE OF SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES PRICE PER
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PER SHARE (IN THOUSANDS) SHARE
----------------------------------------------------------------------- -------------- ------------
$7 to $10 2,297 9.7 $7.95 55 $ 8.75
10 to 20 5,384 6.5 15.06 3,572 14.35
20 to 30 31 6.8 23.28 12 23.07
30 to 40 618 6.9 37.62 576 37.81
40 to 48 9 7.2 44.53 6 44.41
------------------------------------------------------- -------------- ------------
$7 to $48 8,339 7.3 $14.84 4,221 $17.55
======================================================= ============== ============
The Company has elected to account for stock options using the
intrinsic value method. The weighted average fair value per option,
disclosed below, has been estimated using the Black-Scholes option pricing
model. The assumptions used to develop the weighted average fair value per
option were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
--------- ------- --------
Valuation assumptions:
Expected option term (years) 4.0 3.5 3.5
Expected volatility 66.0% 50.0% 50.0%
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 2.5% 4.0% 5.0%
Weighted average fair value per option $ 5.77 $ 9.05 $ 7.76
16. STOCKHOLDER RIGHTS PLAN
On June 10, 1997, the Board of Directors adopted a stockholder rights
plan designed to protect stockholders from various abusive takeover
tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder received a
dividend of one right for each outstanding share of common stock, which was
distributed on July 29, 1997. The rights are attached to, and presently
only trade with, the common stock and currently are not exercisable. Except
as specified below, upon becoming exercisable, all rights holders will be
entitled to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock ("Participating Preferred
Stock") for each right held at a price of $60.
The rights become exercisable and will begin to trade separately from
the common stock upon the earlier of (i) the first date of public
announcement that a person or group (other than pursuant to a Permitted
Offer, as defined) has acquired beneficial ownership of 15% or more of the
outstanding common stock; or (ii) 10 business days (or such later date as
the Board of Directors of the Company may determine) following a person's
or group's commencement of, or announcement of and intention to commence, a
tender or exchange offer, the consummation of which would result in
beneficial ownership of 15% or more of the common stock. The rights will
entitle holders (other than an Acquiring Person, as defined) to purchase
common stock having a market value (immediately prior to such acquisition)
of twice the exercise price of the right. If the Company is acquired
through a merger or other business combination transaction (other than a
Permitted Offer, as defined), each right will entitle the holder to
purchase $120 worth of the surviving company's common stock for $60. The
Company may redeem the rights for $0.01 each at any time prior to such
acquisitions. The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved
the creation of (out of the authorized but unissued shares of preferred
stock of the Company) participating preferred stock, consisting of 0.4
million shares with a par value of $0.01 per share. The holders of the
participating preferred stock are entitled to receive dividends, if
declared by the Board of Directors, from funds legally available. Each
share of participating preferred stock is entitled to one thousand votes on
59
all matters submitted to stockholder vote. The shares of participating
preferred stock are not redeemable by the Company nor convertible into
common stock or any other security of the Company.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and a
cross currency swap contract (see Note 12). For cash and cash equivalents,
trade receivables and trade payables, the carrying amounts of these
financial instruments as of December 31, 2002 and 2001 were considered
representative of their fair values due to their short terms to maturity.
Quoted market prices were not available for the Company's IDA Notes (see
Note 11), but management determined that the fair value of this debt
instrument approximated its carrying value based on a discounted cash flow
analysis, using interest rates that were available to the Company as of
December 31, 2002 and 2001 for issuance of debt with similar terms and
remaining maturities. With respect to the Company's convertible notes (see
Note 11), fair value was based on quoted market prices. The fair value of
the Company's cross currency swap contract was based on the net present
value of the difference between the expected future US dollar cash flows
and the expected future euro cash flows. The fair value of the Company's
interest rate swap contract at December 31, 2001 was based on the net
present value of the expected future contractual cash flows.
The carrying amounts and estimated fair values of the Company's
convertible notes, cross currency swap and interest rate swap as of
December 31, 2002 and 2001, are summarized as follows:
AS OF DECEMBER 31,
---------------------------------------
2002 2001
------------------ -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------
Convertible notes $172,500 $140,588 $172,500 $136,700
Cross currency swap 1,260 1,260 -- --
Interest rate swap -- -- 42 42
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2002 and 2001.
Although management is not aware of any factors that would significantly
affect these fair value estimates, such amounts have not been
comprehensively revalued for purposes of these financial statements since
those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.
18. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment and facilities under operating
leases expiring at various dates through the year 2011. Rent expense was
$7.1 million in 2002, $7.6 million in 2001, and $7.8 million in 2000.
Future minimum rental payments required under operating leases with initial
terms of one year or more as of December 31, 2002 are: $3.3 million in
2003; $2.8 million in 2004; $2.2 million in 2005; $1.7 million in 2006;
$1.3 million in 2007; and $2.8 million thereafter.
The Company terminated an operating lease for its corporate office
building on December 13, 2002 and exercised its option to acquire the
building for $12.8 million.
CommScope is either a plaintiff or a defendant in pending legal
matters in the normal course of business; however, management believes none
of these legal matters will have a materially adverse effect on the
Company's financial statements upon final disposition. In addition,
CommScope is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous
materials. The Company's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
materially adverse effect on the Company's financial statements.
60
19. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND
GEOGRAPHIC INFORMATION
The Company's operations are conducted within one business segment
that designs, manufactures and markets coaxial, fiber optic and high
performance electronic cables primarily used in communications
applications. The Company's primary source of revenues is from product
sales to cable television system operators, telecommunications service
providers, original equipment manufacturers and distributors. Service
revenue from delivery of products shipped by Company owned trucks was not
material to the Company's reported sales during 2002, 2001 or 2000. The
Company aggregates and reports its results in one reportable segment based
on the similarity of its products, production processes, distribution
methods, and regulatory environment.
AT&T Broadband merged with Comcast Corporation in November 2002, to
create a new company named Comcast Corporation ("Comcast"). On a pro forma
basis for the full year 2002, Comcast, combined with AT&T Broadband,
accounted for 20% of the Company's total sales during 2002, compared to
approximately 10% of the Company's total sales during 2001 and 2000. No
other customer accounted for 10% or more of net sales during 2002, 2001, or
2000. Comcast, on a combined basis with AT&T Broadband, comprised 19% of
the Company's gross accounts receivable as of December 31, 2002, compared
to 8%, on a combined pro forma basis, as of December 31, 2001. Accounts
receivable from another customer comprised approximately 12% of the
Company's gross accounts receivable as of December 31, 2002. No other
customer accounted for greater than 10% of gross accounts receivable as of
December 31, 2002 or 2001.
Sales to related parties were less than 1% of net sales in 2002 and
less than 2% of net sales in 2001 and 2000. Trade accounts receivable from
related parties were less than 1% of the Company's total trade accounts
receivable balance as of December 31, 2002 and 2001. In the fourth quarter
of 2002, Furukawa and its affiliates became related parties to the Company,
as a result of Furukawa's acquisition of approximately 13% of CommScope's
common stock. During the twelve months ended December 31, 2002, less than
5% of CommScope's total cost of sales and operating expenses were for
purchases of optical fiber from OFS Fitel, a wholly owned indirect
subsidiary of Furukawa. Purchases from all other related parties were less
than 1% of cost of sales and operating expenses in 2002, 2001 and 2000. As
of December 31, 2002, less than 25% of the Company's trade accounts payable
was related to purchases of optical fiber from OFS Fitel, most of which
were purchased during December of 2002. Trade accounts payable to all other
related parties were less than 1% of the Company's total trade accounts
payable balance as of December 31, 2002 and 2001.
As of December 31, 2002 and 2001, the Company held a $30 million note
receivable from OFS BrightWave, in which CommScope owns an 18.4% equity
interest. The Company recognized interest income on this note of $935 for
the year ended December 31, 2002 and $125 for the six week period ended
December 31, 2001, of which $172 and $23, respectively, was eliminated in
consolidation. In addition, as of December 31, 2001, CommScope had a $1.5
million receivable from OFS BrightWave, included in other current assets,
for an expected reimbursement of costs incurred by CommScope on behalf of
OFS BrightWave related to the formation of OFS BrightWave with Furukawa.
The income statement benefit related to this $1.5 million reimbursement, of
which $280 was eliminated in consolidation, was recorded to terminated
acquisition costs in the fourth quarter of 2001.
61
Sales to customers located outside of the United States
("international sales") comprised approximately 19% of net sales in 2002,
23% of net sales in 2001, and 24% of net sales in 2000. International sales
by geographic region, based on the destination of product shipments, and
worldwide sales by broad product group were as follows (in millions):
YEAR ENDED DECEMBER
31,
-----------------------
2002 2001 2000
-----------------------
Latin America $31.0 $64.5 $67.5
Asia / Pacific Rim 16.7 26.2 58.9
Europe 44.9 64.9 77.4
Canada 15.1 16.3 23.1
Other 3.8 1.4 5.5
-----------------------
Total international sales $111.5 $173.3 $232.4
=======================
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
-----------------------
Broadband and other video application
products $496.5 $588.3 $723.8
Local area network products 81.2 88.3 85.3
Wireless and other telecommunications
products 20.8 61.9 140.9
-----------------------
Total worldwide sales by broad product group $598.5 $738.5 $950.0
=======================
Net property, plant and equipment by geographic area was as follows
(in millions):
AS OF DECEMBER
31,
-----------------
2002 2001
-----------------
United States $201.6 $238.6
Belgium 10.8 10.3
Brazil 17.1 28.3
-----------------
Total net property, plant and equipment $229.5 $277.2
=================
20. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------------------------------
Cash paid during the year for:
Taxes $ 762 $ 23,655 $ 47,268
Interest (net of capitalized
amounts) 8,446 7,732 9,467
Noncash investing and financing
activities:
Acquisition of interest in OFS
BrightWave, LLC -- $(173,388) --
Purchase of note of OFS
BrightWave, LLC -- (30,000) --
Issuance of common stock to Lucent -- 203,388 --
62
21. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------------------------------------------
Fiscal 2002:
Net sales $159,751 $155,014 $147,819 $135,883
Gross profit 35,425 31,723 27,076 26,331
Operating income (loss) 12,197 (11,120) (19,597) 3,110
Net loss (1,648) (42,491) (19,562) (3,451)
Net loss per share, basic (0.03) (0.69) (0.32) (0.06)
Net loss per share, diluted (0.03) (0.69) (0.32) (0.06)
Fiscal 2001:
Net sales $217,360 $199,899 $177,702 $143,537
Gross profit 52,794 48,310 43,947 34,593
Operating income 28,006 11,630 12,460 10,778
Net income (loss) 16,579 5,978 6,345 (1,037)
Net income (loss) per
share, basic 0.32 0.12 0.12 (0.02)
Net income (loss) per
share, diluted 0.32 0.11 0.12 (0.02)
63
COMMSCOPE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------------------
BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS (DESCRIBE) (DESCRIBE)(1) OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 2002 $12,599 $25,217 $ -- $26,005 $11,811
Year ended December 31, 2001 $9,187 $6,565 $ -- $3,153 $12,599
Year ended December 31, 2000 $4,838 $4,519 $ -- $ 170 $9,187
- -------------------
(1) Uncollectible customer accounts written off, net of recoveries of
previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections
captioned "Management of the Company--Board of Directors of the Company",
"Management of the Company--Committees of the Board of Directors--Board
Meetings", and "Management of the Company--Section 16(a) Beneficial
Ownership Reporting Compliance" included in our 2003 Proxy Statement, which
sections are incorporated herein by reference.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company as of March 21, 2003.
NAME AND TITLE AGE BUSINESS EXPERIENCE
- -------------- --- -----------------------------------------------
Frank M. Drendel 58 Frank M. Drendel has been our Chairman and
Chairman and Chief Chief Executive Officer since July 28, 1997
Executive Officer when we were spun-off from General Instrument
Corporation (subsequently renamed General
Semiconductor, Inc.) and became an independent
company. He has served as Chairman and
President of CommScope, Inc. of North Carolina,
referred to herein as CommScope NC, currently
our wholly-owned subsidiary, from 1986 to the
spin-off and has served as Chief Executive
Officer of CommScope NC since 1976. Prior to
that time, Mr. Drendel has held various
positions with CommScope NC since 1971. Mr.
Drendel is a director of Nextel Communications,
Inc., C-SPAN and the National Cable Television
Association. Mr. Drendel was also recently
inducted into the Cable Television Hall of Fame.
Brian D. Garrett 54 Brian D. Garrett has been President and Chief
President and Chief Operating Officer of CommScope and CommScope NC
Operating Officer since 1997. He was our Executive Vice
President, Operations from the spin-off until
1997. From 1996 to 1997, he was Executive Vice
President and General Manager of the Network
Cable Division of CommScope NC and Vice
President and General Manager of the Network
Cable Division of CommScope NC from 1986 to
1996. Prior to that time, Mr. Garrett has held
various positions with CommScope, NC since 1980.
Jearld L. Leonhardt 54 Jearld L. Leonhardt has been our Executive Vice
Executive Vice President and Chief Financial Officer since
President 1999. He has served as our Executive Vice
and Chief Financial President, Finance and Administration from the
Officer spin-off until 1999. He was our Treasurer from
the spin-off until 1997. He has served as
Executive Vice President and Chief Financial
Officer of CommScope NC since 1999. He has
served as Executive Vice President, Finance and
Administration of CommScope NC from 1983 until
1999 and Treasurer of CommScope NC from 1983
until 1997. Prior to that time, Mr. Leonhardt
has held various positions with CommScope NC
since 1970.
65
Randall W. Crenshaw 45 Randall W. Crenshaw has been Executive Vice
Executive Vice President, Procurement, and General Manager,
President, Network Products Group, of CommScope and
Procurement, and CommScope NC since 2000. From the spin-off
General Manager, until 2000, he was Executive Vice President,
Network Products Group Procurement of CommScope and CommScope NC.
From 1994 to 1997, Mr. Crenshaw was Vice
President Operations for the Network Cable
Division of CommScope NC. Prior to that time,
Mr. Crenshaw has held various positions with
CommScope NC since 1985.
William R. Gooden 61 William R. Gooden has been our Senior Vice
Senior Vice President President and Controller since the spin-off.
and Controller He has served as Senior Vice President and
Controller of CommScope NC since 1996 and was
Vice President and Controller from 1991 to
1996. Prior to that time, Mr. Gooden has held
various positions with CommScope NC since 1978.
Edward A. Hally 53 Edward A. Hally has been Executive Vice
Executive Vice President and General Manager, Wireless
President and General Products of CommScope and CommScope NC since
Manager, Wireless October 2002. From 2001 to 2002, he served as
Products Group Senior Vice President and General Manager for
Inktomi Corporation, a global provider of
information-retrieval solutions. Prior to
2001, he was Corporate Vice President and
General Manager for Motorola GSM System
Products Division and based in the United
Kingdom. Prior to joining Motorola in 1996, he
worked in many capacities at Nortel Networks,
ultimately serving as Vice President/General
Manager for Nortel's Magellan Data Network
Business based in Frankfurt, Germany.
Christopher A. Story 43 Christopher A. Story has been Executive Vice
Executive Vice President, Global Broadband Products Group,
President, Operations, of CommScope and CommScope NC since
Global Broadband 2000. From 1998 until 2000, he was Senior Vice
Products Group, President, CATV Operations, of CommScope NC.
Operations From 1996 to 1998, he was Vice President, CATV
Operations, of CommScope NC. Prior to that
time, Mr. Story has held various positions with
CommScope NC since 1989.
Gene W. Swithenbank 63 Gene W. Swithenbank has been our Executive
Executive Vice Vice-President, Global Broadband Products
President, Global Group, Sales and Marketing since July 2001.
Broadband Products Prior to that he was Executive Vice President,
Group, Sales and CATV Sales and Marketing, since the spin-off.
Marketing He has served as Executive Vice President, CATV
Sales and Marketing, of CommScope NC since
1996. From 1992 to 1996, Mr. Swithenbank was
Senior Vice President, CATV Sales and
Marketing, of CommScope NC. Prior to that
time, Mr. Swithenbank has held various
positions with CommScope NC since 1970.
Frank B. Wyatt, II 40 Frank B. Wyatt, II has been Senior Vice
Senior Vice President, President, General Counsel and Secretary of
General Counsel and CommScope and CommScope NC since 2000. He was
Secretary Vice President, General Counsel and Secretary
of CommScope and CommScope NC from the spin-off
until 2000. He has served as General Counsel
and Secretary of CommScope NC since 1996.
Prior to that time, Mr. Wyatt was an attorney
in private law firm practice with Bell,
Seltzer, Park & Gibson, P.A. (now Alston & Bird
LLP) since 1987.
66
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the section
captioned "Management of the Company" in our 2003 Proxy Statement and is
incorporated by reference herein. The sections captioned "Management of the
Company--Compensation Committee Report on Compensation of Executive
Officers" and "Performance Graph" in our 2003 Proxy Statement are not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all
of our equity compensation plans in effect as of December 31, 2002:
(C)
NUMBER OF
(A) SECURITIES
NUMBER OF (B) REMAINING
SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR
ISSUED UPON EXERCISE PRICE FUTURE ISSUANCE
EXERCISE OF OF OUTSTANDING UNDER EQUITY
OUTSTANDING OPTIONS, COMPENSATION PLANS
OPTIONS, WARRANTS WARRANTS AND (EXCLUDING
AND RIGHTS RIGHTS SECURITIES
REFLECTED IN
PLAN CATEGORY COLUMN (A))
- -------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 8,339,355 $14.84 2,002,455
Equity compensation plans
not approved by security
holders -- -- --
----------------------------------------------------
Total 8,339,355 $14.84 2,002,455
====================================================
Other information required by this Item is contained in the sections
captioned "Beneficial Ownership of Common Stock" and "Management of the
Company--Stock Options" in our 2003 Proxy Statement, which sections are
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section
captioned "Management of the Company--Certain Relationships and Related
Transactions" in our 2003 Proxy Statement and is incorporated by reference
herein.
67
PART IV
ITEM 14. 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 within the last ninety days and have
concluded that the disclosure controls and procedures are effective.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
last day they were evaluated by our Chief Executive Officer and our Chief
Financial Officer.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements.
The following consolidated financial statements of CommScope,
Inc. are included under Part II, Item 8:
Independent Auditors' Report.
Consolidated Statements of Operations for the Years ended
December 31, 2002, 2001, and 2000.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years ended December
31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts. Included
under Part II, Item 8.
Certain schedules are omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
On October 9, 2002 we filed a current report on Form 8-K
announcing that we and Furukawa had privately repurchased 10.2
million shares of our common stock held by Lucent; of this
amount Furukawa purchased 7,656,900 shares of our common
stock, which it plans to hold for investment purposes.
On November 5, 2002 we filed a current report on Form 8-K
announcing our financial results for the third quarter ended
September 30, 2002, the termination of our then existing
revolving loan credit facility (under which we had no
outstanding indebtedness and which was scheduled to expire on
December 31, 2002) and that we have obtained temporary
financial covenant waivers for the period commencing on
September 30, 2002 and through and including December 31, 2002
under our $11 million eurodollar credit agreement and a $13
million operating lease.
68
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CommScope, Inc.
Date: March 21, 2003 By:/s/ Frank M. Drendel
-------------------------
Frank M. Drendel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frank M. Drendel Chairman of the Board and March 21, 2003
- ------------------------- Chief Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and March 21, 2003
- ------------------------- Chief Financial Officer
Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President and March 21, 2003
- ------------------------- Controller (Principal
William R. Gooden accounting officer)
/s/ Duncan M. Faircloth Director March 21, 2003
- -------------------------
Duncan M. Faircloth
/s/ Boyd L. George Director March 21, 2003
- -------------------------
Boyd L. George
/s/ George N. Hutton, Jr. Director March 21, 2003
- -------------------------
George N. Hutton, Jr.
/s/ June E. Travis Director March 21, 2003
- -------------------------
June E. Travis
/s/ James N. Whitson Director March 21, 2003
- -------------------------
James N. Whitson
69
CERTIFICATIONS
I, Frank M. Drendel, Chairman of the Board and Chief Executive Officer of
CommScope, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CommScope, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
/s/ FRANK M. DRENDEL
Frank M. Drendel
Chairman of the Board and Chief
Executive Officer
70
I, Jearld L. Leonhardt, Executive Vice President and Chief Financial Officer
(Principal financial officer) of CommScope, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CommScope, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
/s/ JEARLD L. LEONHARDT
Jearld L. Leonhardt
Executive Vice President and
Chief Financial Officer (Principal
financial officer)
71
INDEX OF EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement, dated as of October 9, 2002, by and
among Lucent Technologies Inc., CommScope, Inc. and The Furukawa
Electric Co., Ltd. (Incorporated herein by reference from the
Company's Current Report on Form 8-K dated October 9, 2002 (File
No. 1-12929)).
3.1 Amended and Restated Certificate of Incorporation of CommScope,
Inc. (Incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997
(File No. 1-12929)).
3.2 Amended and Restated By-Laws of CommScope, Inc. (Incorporated
herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 1-12929)).
4.1 Rights Agreement, dated June 12, 1997, between CommScope, Inc.
and ChaseMellon Shareholder Services, L.L.C. (Incorporated herein
by reference from the Registration Statement on Form 8-A filed
June 30, 1997 (File No. 1-12929)).
4.1.1 Amendment No. 1 to Rights Agreement, dated as of June 14, 1999,
between CommScope, Inc. and ChaseMellon Shareholder Services.
(Incorporated by reference from the Amendment to Registration
Statement on Form 8-A/A filed June 14, 1999 (File No. 1-12929)).
4.1.2 Amendment No. 2 to Rights Agreement, dated as of November 15,
2001 between CommScope, Inc. and Mellon Investor Services LLC.
(Incorporated by reference from the Amendment to Registration
Statement on Form 8-A/A filed November 19, 2001 (File no.
1-12929)).
10.1 Employee Benefits Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 1-12929)).
10.2 Debt and Cash Allocation Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 1-12929)).
10.3 Insurance Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
(Incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1997 (File No.
1-12929)).
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
(Incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1997 (File No.
1-12929)).
10.5 Trademark License Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 1-12929)).
10.6 Transition Services Agreement, dated as of July 25, 1997, between
NextLevel Systems, Inc. and CommScope, Inc. (Incorporated herein
by reference from the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997 (File No. 1-12929)).
10.7 Credit and Security Agreement, dated as of January 10, 2003,
among CommScope, Inc. of North Carolina, the lenders listed
therein, Wachovia Bank National Association, as Agent, and
E-1
Wachovia Securities, Inc, as Arranger.
10.7.1 Cross Currency Rate and Forward Foreign Exchange Transaction
Confirmation, dated as of December 2, 2002, between CommScope,
Inc. of North Carolina and Wachovia Bank National Association.
10.8+ Amended and Restated CommScope, Inc. 1997 Long-Term Incentive
Plan (as amended and restated through May 3, 2002).
10.9+ Form of Severance Protection Agreement between the Company and
certain executive officers. (Incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12929)).
10.9.1+ Form of Amendment to Severance Protection Agreement between the
Company and certain executive officers. (Incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1999 (File No. 1-12929)).
10.10+ Employment Agreement between Frank Drendel, General Instrument
Corporation and CommScope, Inc. of North Carolina, the Letter
Agreement related thereto dated May 20, 1993 and Amendment to
Employment Agreement dated July 25, 1997. (Incorporated by
reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12929)).
10.11+ The CommScope, Inc. Annual Incentive Plan, as amended through
June 9, 1999. (Incorporated by reference from the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 1-12929)).
10.12+ 1997 CommScope, Inc. of North Carolina Deferred Compensation Plan.
10.13+ CommScope, Inc. Deferred Compensation Plan for Directors.
10.14+ CommScope, Inc. Supplemental Executive Retirement Plan, as
Amended and Restated effective January 1, 2001.
10.15 Indenture dated as of December 15, 1999 between CommScope, Inc.
and First Union National Bank, as Trustee (Incorporated by
reference from the Company's Registration Statement on form S-3
dated January 14, 2000 (File No. 333-94691)).
10.16 Amended and Restated Memorandum of Understanding, dated as of
November 15, 2001, by and between The Furukawa Electric Co., Ltd.
and CommScope, Inc. (Incorporated by reference from the
Company's Current Report on Form 8-K dated November 26, 2001
(File No. 1-12929)).
10.16.1 Amendment No. 1, dated as of October 9, 2002, to the Amended and
Restated Memorandum of Understanding, dated as of November 15,
2001, by and between The Furukawa Electric Co., Ltd. and
CommScope, Inc. (Incorporated herein by reference from the
Company's Current Report on Form 8-K dated October 9, 2002 (File
No. 1-12929)).
10.17 Registration Rights Agreement, dated as of November 16, 2001, by
and between CommScope, Inc. and Lucent Technologies Inc.
(Incorporated by reference from the Company's Current Report on
Form 8-K dated November 26, 2001 (File No. 1-12929)).
10.18 Financing Agreement, dated July 24, 2001 among CommScope, Inc.,
The Furukawa Electric Co., Ltd. and Lucent Technologies Inc.
(Incorporated by reference from the Company's Current Report on
Form 8-K dated November 26, 2001 (File No. 1-12929)).
10.19 Financing Agreement Supplement, dated November 9, 2001 among
CommScope, Inc., The Furukawa Electric Co., Ltd. and Lucent
Technologies Inc. (Incorporated by reference from the Company's
Current Report on Form 8-K dated November 26, 2001 (File No.
1-12929)).
E-2
10.20 Revolving Credit Agreement, dated as of November 16, 2001, by and
between CommScope Optical Technologies, Inc. and OFS BrightWave,
LLC. (Incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (File
No. 1-12929)).
10.20.1 First Amendment to Revolving Credit Agreement, dated as of
October 9, 2002, by and between CommScope Optical Technologies,
Inc. and OFS BrightWave, LLC.
10.21 Amended and Restated Limited Liability Company Agreement of OFS
BrightWave, LLC, dated November 16, 2001, by and among OFS
BrightWave, LLC, Fitel USA Corp. and CommScope Optical
Technologies, Inc. (Incorporated herein by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-12929)).
10.22 Stockholders Agreement, dated as of October 9, 2002, by and
between CommScope, Inc. and The Furukawa Electric Co., Ltd.
(Incorporated herein by reference from the Company's Current
Report on Form 8-K dated October 9, 2002 (File No. 1-12929)).
10.23 Registration Rights Agreement, dated as of October 9, 2002, by
and between CommScope, Inc. and The Furukawa Electric Co., Ltd.
(Incorporated herein by reference from the Company's Current
Report on Form 8-K dated October 9, 2002 (File No. 1-12929)).
21. Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers, LLC.
99.1 Forward-Looking Information.
99.2 OFS BrightWave, LLC Consolidated Financial Statements.
99.3 Certification by Chairman of the Board and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.4 Certification by Executive Vice President and Chief Financial
Officer (Principal financial officer) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ------------------------
+ Management Compensation.
E-3