UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 COMMSCOPE PLACE, SE
P.O. BOX 339
HICKORY, NORTH CAROLINA
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
As of July 31, 2003 there were 59,219,567 shares of Common Stock
outstanding.
COMMSCOPE, INC.
FORM 10-Q
JUNE 30, 2003
TABLE OF CONTENTS
Page No.
-----------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Loss 6
Notes to Condensed Consolidated Financial Statements 7 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 141,422 $ 155,014 $ 270,790 $ 314,765
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 112,623 123,291 217,874 247,617
Selling, general and administrative 21,811 41,060 41,881 62,293
Research and development 1,455 1,783 3,044 3,778
Impairment charges for fixed assets 31,728 - 31,728 -
------------- ------------- ------------- -------------
Total operating costs and expenses 167,617 166,134 294,527 313,688
------------- ------------- ------------- -------------
Operating income (loss) (26,195) (11,120) (23,737) 1,077
Other income (expense), net (4) 746 205 359
Interest expense (2,183) (2,259) (4,341) (4,441)
Interest income 715 566 1,332 1,006
------------- ------------- ------------- -------------
Loss before income taxes and equity
in losses of OFS BrightWave, LLC (27,667) (12,067) (26,541) (1,999)
Provision for income tax benefit 10,237 4,465 9,820 740
------------- ------------- ------------- -------------
Loss before equity in losses of
OFS BrightWave, LLC (17,430) (7,602) (16,721) (1,259)
Equity in losses of OFS BrightWave, LLC (33,945) (34,889) (37,727) (42,880)
------------- ------------- ------------- -------------
Net loss $ (51,375) $ (42,491) $ (54,448) $ (44,139)
============= ============= ============= =============
Net loss per share:
Basic $ (0.87) $ (0.69) $ (0.92) $ (0.71)
Assuming dilution $ (0.87) $ (0.69) $ (0.92) $ (0.71)
Weighted average shares outstanding:
Basic 59,220 61,758 59,220 61,737
Assuming dilution 59,220 61,758 59,220 61,737
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
June 30, December 31,
2003 2002
-------------- -------------
ASSETS
Cash and cash equivalents $ 140,281 $ 120,102
Accounts receivable, less allowance for doubtful accounts of
$14,605 and $11,811, respectively 71,471 64,787
Inventories 37,437 36,254
Prepaid expenses and other current assets 25,979 20,737
Deferred income taxes 15,464 16,579
-------------- --------------
Total current assets 290,632 258,459
Property, plant and equipment, net 189,690 229,515
Goodwill, net of accumulated amortization of
$59,561 and $59,520, respectively 151,349 151,334
Other intangibles, net of accumulated amortization of
$41,182 and $39,930, respectively 7,583 8,835
Deferred income taxes 33,282 3,572
Investment in and advances to OFS BrightWave, LLC 51,574 111,528
Other assets 8,860 9,425
-------------- --------------
Total Assets $ 732,970 $ 772,668
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 18,122 $ 18,483
Other accrued liabilities 29,088 26,005
-------------- --------------
Total current liabilities 47,210 44,488
Long-term debt 183,300 183,300
Other noncurrent liabilities 32,506 27,345
-------------- --------------
Total Liabilities 263,016 255,133
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at June 30, 2003
and December 31, 2002 -- --
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued shares, including treasury stock: 61,762,667 at
June 30, 2003 and December 31, 2002; Issued and
outstanding shares: 59,219,567 at June 30, 2003 and
December 31, 2002 618 618
Additional paid-in capital 383,541 383,541
Retained earnings 107,067 161,515
Accumulated other comprehensive loss (8,048) (14,915)
Treasury stock, at cost: 2,543,100 shares at June 30, 2003
and December 31, 2002 (13,224) (13,224)
-------------- --------------
Total Stockholders' Equity 469,954 517,535
-------------- --------------
Total Liabilities and Stockholders' Equity $ 732,970 $ 772,668
============== ==============
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Six Months Ended
June 30,
----------------------------
2003 2002
------------- ------------
OPERATING ACTIVITIES:
Net loss $ (54,448) $ (44,139)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 17,433 18,279
Equity in losses of OFS BrightWave, LLC, pretax 59,970 68,146
Impairment charges for fixed assets 31,728 --
Deferred income taxes (27,463) (20,688)
Tax benefit from stock option exercises -- 128
Changes in assets and liabilities:
Accounts receivable (5,750) 17,061
Inventories (338) (2,105)
Prepaid expenses and other current assets (4,584) (1,880)
Accounts payable and other accrued liabilities 2,965 7,719
Other noncurrent liabilities 2,609 2,659
Other 478 112
------------- ------------
Net cash provided by operating activities 22,600 45,292
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,512) (5,439)
Proceeds from repayment of advance to OFS BrightWave, LLC -- 12,646
Proceeds from disposal of fixed assets 75 164
------------- ------------
Net cash (used in) provided by investing activities (2,437) 7,371
FINANCING ACTIVITIES:
Principal payments on long-term debt -- (1,371)
Long-term financing costs (1,195) (336)
Proceeds from exercise of stock options -- 1,029
------------- ------------
Net cash used in financing activities (1,195) (678)
Effect of exchange rate changes on cash 1,211 1,058
------------- ------------
Change in cash and cash equivalents 20,179 53,043
Cash and cash equivalents, beginning of period 120,102 61,929
------------- ------------
Cash and cash equivalents, end of period $ 140,281 $ 114,972
============= ============
See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED -- IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Six Months Ended
June 30,
--------------------------
2003 2002
------------ -------------
Number of common shares outstanding:
Balance at beginning of period 59,219,567 61,688,256
Issuance of shares to nonemployee director - 1,000
Issuance of shares for stock option exercises - 73,411
----------- -------------
Balance at end of period 59,219,567 61,762,667
----------- -------------
Common stock:
Balance at beginning of period $ 618 $ 617
Issuance of shares for stock option exercises - 1
----------- -------------
Balance at end of period $ 618 $ 618
----------- -------------
Additional paid-in capital:
Balance at beginning of period $ 383,541 $ 381,823
Issuance of shares to nonemployee director - 16
Issuance of shares for stock option exercises - 1,028
Tax benefit from stock option exercises - 128
----------- -------------
Balance at end of period $ 383,541 $ 382,995
------------ -------------
Retained earnings:
Balance at beginning of period $ 161,515 $ 228,667
Net loss (54,448) (44,139)
------------ -------------
Balance at end of period $ 107,067 $ 184,528
------------ -------------
Accumulated other comprehensive loss:
Balance at beginning of period $ (14,915) $ (4,593)
Other comprehensive income (loss) 6,867 (4,734)
------------ -------------
Balance at end of period $ (8,048) $ (9,327)
------------ -------------
Treasury stock, at cost:
Balance at beginning of period $ (13,224) $ -
Treasury shares repurchased - -
------------ -------------
Balance at end of period $ (13,224) $ -
------------ -------------
Total stockholders' equity $ 469,954 $ 558,814
============ =============
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------ -------------
Comprehensive loss:
Net loss $(51,375) $(42,491) $ (54,448) $ (44,139)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries (552) 2,119 (621) 2,136
Foreign currency transaction gain (loss) on long-term
intercompany loans - foreign subsidiaries 6,953 (5,841) 9,149 (6,092)
Hedging loss on nonderivative instrument - (887) - (791)
Gain (loss) on derivative financial instrument
designated as a cash flow hedge - (47) - 13
Loss on derivative financial instrument
designated as a net investment hedge (850) - (1,661) -
------------ ----------- ------------ -------------
Total other comprehensive income (loss), net of tax 5,551 (4,656) 6,867 (4,734)
------------ ----------- ------------ -------------
Total comprehensive loss $(45,824) $(47,147) $ (47,581) $ (48,873)
============ =========== ============ =============
See notes to condensed consolidated financial statements.
6
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CommScope, Inc. ("CommScope" or the "Company"), through its wholly
owned subsidiaries and equity method investee, operates in the cable
manufacturing business, with manufacturing facilities located in the United
States, Europe and Latin America. CommScope, Inc. was incorporated in
Delaware in January 1997. CommScope is a leading worldwide designer,
manufacturer and marketer of a wide array of broadband coaxial cables and
other high-performance electronic and fiber optic cable products for cable
television, telephony, Internet access, wireless communications and other
broadband services. Management believes CommScope is the world's largest
manufacturer of coaxial cable for hybrid fiber coaxial (HFC) broadband
networks. CommScope is also a leading supplier of coaxial, twisted pair,
and fiber optic cables for premise wiring (local area networks), wireless
and other communication applications. In late 2001, CommScope acquired an
equity interest in an optical fiber and fiber optic cable manufacturing
business (see Note 5).
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 2003, and the
condensed consolidated statements of operations, cash flows, stockholders'
equity and comprehensive loss for the three and six month periods ended
June 30, 2003 and 2002 are unaudited and reflect all adjustments of a
normal recurring nature which are, in the opinion of management, necessary
for a fair presentation of the interim period financial statements. The
results of operations for the interim period are not necessarily indicative
of the results of operations to be expected for the full year.
The unaudited interim condensed consolidated financial statements of
CommScope have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
Company's December 31, 2002 audited consolidated financial statements and
notes thereto included in the Company's 2002 Annual Report on Form 10-K.
CONCENTRATIONS OF RISK
Net sales to Comcast Corporation ("Comcast"), which merged with AT&T
Broadband in November 2002, accounted for 17% and 20% of the Company's
total net sales during the three and six months ended June 30, 2003,
respectively. During the three and six months ended June 30, 2002, net
sales to Comcast, as if combined with AT&T Broadband during the period,
accounted for 16% of the Company's total net sales. No other customer
accounted for 10% or more of the Company's total net sales for the three
and six months ended June 30, 2003 and 2002.
Accounts receivable from Comcast comprised approximately 17% of the
Company's net accounts receivable as of June 30, 2003, compared to 23% as
of December 31, 2002. Accounts receivable from another customer represented
approximately 11% of net accounts receivable as of June 30, 2003, compared
to 14% as of December 31, 2002.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED
GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of other intangible assets as of June 30, 2003 in
the amount of $7.6 million, net of accumulated amortization of $41.2
million, represents patented technology, with a carrying value of $0.1
million, and customer relationship assets, with a carrying value of $7.5
million. Amortization expense associated with these intangible assets was
$0.6 million and $1.3 million for the three and six months ended June 30,
2003 and $0.6 million and $1.3 million for the three and six months ended
June 30, 2002. Annual amortization expense for these other intangible
assets is expected to be $2.5 million in 2003, $2.4 million in 2004, $2.4
million in 2005 and $1.5 million in 2006.
The slight change in goodwill from December 31, 2002 to June 30, 2003
was due to the impact of translating the euro-denominated goodwill on the
balance sheet of the Company's Belgian subsidiary into CommScope's US
dollar reporting currency.
STOCK OPTIONS
As of June 30, 2003, the Company had one stock-based employee
compensation plan, the Amended and Restated CommScope, Inc. 1997 Long-Term
Incentive Plan. The Company accounts for this plan under the intrinsic
value method recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations. No stock-based employee compensation cost is
reflected in net loss, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net loss
and net loss per share as if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation using the Black-Scholes option pricing model:
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- ---------------------
2003 2002 2003 2002
--------- ---------- ---------- -----------
Net loss, as reported $( 51,375) $( 42,491) $( 54,448) $( 44,139)
Add: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 1,718 2,069 3,439 3,784
-------------------- ---------- ----------
Pro forma net loss $( 53,093) $( 44,560) $( 57,887) $( 47,923)
========== ========== ========== =========
Net loss per share:
Basic--as reported $( 0.87) $( 0.69) $( 0.92) $( 0.71)
Basic--pro forma $( 0.90) $( 0.72) $( 0.98) $( 0.78)
Diluted--as reported $( 0.87) $( 0.69) $( 0.92) $( 0.71)
Diluted--pro forma $( 0.90) $( 0.72) $( 0.98) $( 0.78)
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to 2003
presentation.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
three alternative methods of transition for an entity that voluntarily
adopts the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The provisions related to the
alternative transition methods and the new disclosure requirements were
effective for the Company as of December 31, 2002. There was no impact on
the Company's financial condition or results of operations as a result of
the adoption of SFAS No. 148, but the Company's disclosures related to
stock-based compensation have been modified in accordance with the new
requirements. The interim reporting provisions of SFAS No. 148 were
effective for the Company as of March 31, 2003, and management has modified
the Company's quarterly disclosures in accordance with the new
requirements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which is an interpretation
of ARB No. 51, "Consolidated Financial Statements." FIN 46 addresses how to
identify a variable interest entity and provides guidance on when such an
entity should be consolidated by an enterprise. The Company does not
currently hold an interest in a variable interest entity, thus the initial
application of this Interpretation did not affect the Company's results of
operations, financial position or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the
conditions under which a contract with an initial net investment meets the
characteristic of a derivative; clarifies when a derivative contains a
financing component; amends the definition of an underlying to conform it
to language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others;" and amends certain other existing pronouncements.
This Statement is effective for contracts entered into or modified by the
Company after June 30, 2003 and for hedging relationships designated by the
Company after June 30, 2003. All provisions of this Statement will be
applied prospectively. The application of this Statement is not expected to
have a material effect on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for the classification and measurement
of certain financial instruments with characteristics of both liabilities
and equity. It clarifies when an issuer must classify certain financial
instruments as liabilities (or as assets, in some circumstances), rather
than including them within stockholders' equity or separately classifying
them as mezzanine equity. This Statement was effective for CommScope for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective for the Company in the third quarter of 2003. The
Company has not issued any financial instruments within the scope of SFAS
No. 150; therefore, the application of SFAS No. 150 is not expected to
affect the Company's results of operations, financial position or
disclosures.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
2. INVENTORIES
June 30, December 31,
2003 2002
--------------- --------------
Raw materials $ 11,654 $ 12,402
Work in process 10,733 11,160
Finished goods 15,050 12,692
--------------- --------------
$ 37,437 $ 36,254
=============== ==============
3. LONG-TERM DEBT
June 30, December 31,
2003 2002
--------------- --------------
Convertible Notes $ 172,500 $ 172,500
IDA Notes 10,800 10,800
--------------- --------------
$ 183,300 $ 183,300
=============== ==============
The Company entered into a $100 million senior secured revolving
credit facility, which closed January 10, 2003. The facility, which was
established for future liquidity, working capital needs and other general
corporate purposes, was not drawn at closing and has not been drawn in any
amount from that date through June 30, 2003. The facility is secured by
substantially all of the Company's domestic assets and can have a maximum
availability of up to $100 million over its three and a half year expected
term, subject to certain covenants and conditions contained in the
agreement. As of June 30, 2003, the Company had availability of
approximately $70 million and no outstanding borrowings under this senior
secured revolving credit facility.
4. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the applicable
periods. Diluted net loss per share is based on net loss adjusted for
after-tax interest and amortization of debt issuance costs related to
convertible debt, if dilutive, divided by the weighted average number of
common shares outstanding adjusted for the dilutive effect of stock options
and convertible securities.
On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a conversion
rate of 20.7512 shares per $1,000 principal amount. The effect of the
assumed conversion of these notes was excluded from the calculation of net
loss per share, assuming dilution, for the three and six month periods
ended June 30, 2003 and 2002 because it would have been antidilutive in all
periods.
Additionally, options to purchase approximately 6 million common
shares were excluded from the computation of net loss per share, assuming
dilution, for the three and six months ended June 30, 2003 because they
would have been antidilutive in both periods. Options to purchase
approximately 3.5 million and 2 million common shares were excluded from
the computation of net loss per share, assuming dilution, for the three and
six months ended June 30, 2002, respectively, because they would have been
antidilutive in both periods.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an approximate 18.4%
ownership interest in OFS BrightWave, LLC ("OFS BrightWave"), an optical
fiber and fiber cable venture between CommScope and The Furukawa Electric
Co., Ltd. of Japan. CommScope's portion of the losses of OFS BrightWave for
the three and six month periods ended June 30, 2003 and 2002 has been
included in the condensed consolidated financial statements of CommScope
for the respective periods. These results are net of elimination of
intercompany profit in the amount of $27 and $54, net of tax, for the three
and six month periods ended June 30, 2003, respectively, and $21 and $52,
net of tax, for the three and six month periods ended June 30, 2002,
respectively, related to interest payments received from OFS BrightWave
under a $30 million revolving note. OFS BrightWave has elected to be taxed
as a partnership, therefore, the Company's income tax benefit from flow
through losses has been recorded based on the Company's tax rates. Income
tax expense or benefit provided by OFS BrightWave for income or losses
generated by its c-corporation subsidiary does not flow through to
CommScope and, therefore, does not impact CommScope's income tax benefit
from flow-through losses of OFS BrightWave. However, the income tax expense
or benefit provided for the income or loss generated by OFS BrightWave's
c-corporation subsidiary does impact CommScope's equity in the net assets
of OFS BrightWave, as shown in the reconciliation below.
OFS BrightWave incurred significant charges during the three months
ended June 30, 2003 primarily related to fixed asset impairment,
restructuring and cost reduction efforts. The total of these charges
recognized by OFS BrightWave in the second quarter of 2003 was $257.9
million. CommScope's equity method share of these charges resulted in an
increase of $17.3 million in CommScope's noncurrent deferred tax asset
during the three months ended June 30, 2003. OFS BrightWave also incurred
charges of $211.0 million in the second quarter of 2002, primarily for the
write off of goodwill and certain fixed assets, in addition to
restructuring and cost reduction efforts.
The following table provides summary financial information for OFS
BrightWave for the three and six month periods ended June 30, 2003 and 2002
and as of June 30, 2003 and December 31, 2002:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Income Statement Data:
Net revenues $ 21,781 $ 22,039 $ 50,046 $ 48,836
Gross profit ( 41,839 ) ( 63,378 ) ( 62,392 ) ( 111,811 )
Loss from continuing operations ( 292,553 ) ( 269,560 ) ( 325,357 ) ( 338,643 )
Net loss ( 292,553 ) ( 269,560 ) ( 325,357 ) ( 338,643 )
As of
-------------------------
December
June 30, 31,
2003 2002
------------ ------------
Balance Sheet Data:
Current assets $79,113 $83,876
Noncurrent assets 385,962 655,265
Current liabilities 69,372 57,353
Other noncurrent liabilities 225,222 182,297
Minority interests 41,595 45,338
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity in the net assets of OFS
BrightWave as of June 30, 2003 and December 31, 2002 was as follows:
As of
------------------------------
June 30, December 31,
2003 2002
------------ --------------
Net assets of OFS BrightWave, LLC $128,886 $454,153
CommScope ownership percentage 18.43225 % 18.43225 %
------------ -------------
CommScope equity in net assets of OFS
BrightWave, LLC 23,757 83,711
Plus:
Notes receivable from OFS BrightWave, LLC 30,000 30,000
Direct costs of acquisition 4,763 4,763
Pushdown and other adjustments by majority
member in OFS BrightWave, LLC ( 1,036 ) ( 1,036 )
Less:
Income tax benefit related to CommScope's share
of losses generated by OFS BrightWave,
LLC's domestic c-corporation subsidiary ( 5,910 ) ( 5,910 )
------------- -------------
Investment in and advances to OFS BrightWave, LLC $ 51,574 $111,528
============= =============
6. IMPAIRMENT CHARGES FOR FIXED ASSETS
During the three months ended June 30, 2003, management concluded that
certain manufacturing assets had no future use to the Company and initiated
a formal impairment review of these assets based on this change in
circumstances. Most of these assets were used in or acquired for use in the
manufacture of the Company's broadband and video distribution products
("Broadband/Video Products"), which have been adversely affected by the
difficult global business environment in telecommunications and an ongoing
decline in demand both domestically and internationally. These assets were
either uninstalled, underutilized, or idle, generating no current operating
cash flows. In addition, based on management's conclusion that these assets
had no future use to the Company, there were no expected future operating
cash flows for these assets. This absence of operating cash flows indicated
that the carrying amounts of these assets may not be recoverable as of June
30, 2003. Accordingly, management obtained third party appraisals of the
majority of these specifically-identified assets to determine their fair
values and the resulting amount of impairment losses to be recognized.
Based on these appraisals, CommScope recognized pretax impairment charges
in the amount of $23 million, or $0.25 per share, net of tax, related to
these specifically-identified assets. Management had not made a final
decision as to the disposition of these assets as of June 30, 2003, and
therefore, they have been classified as assets to be held and used, as
required by SFAS. No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
In addition, the Company's Brazilian operation, which primarily
manufactures Broadband/Video Products, has experienced declining local
demand in addition to reduced export sales and profitability resulting from
pricing and competitive pressures primarily due to the recent impact of
unfavorable local currency fluctuations. As a result of this change in
circumstances, management performed a test of recoverability for the
Brazilian manufacturing assets during the second quarter of 2003. The
Company's long-term undiscounted cash flow forecasts for its Brazilian
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
operation indicated that the carrying amounts of the manufacturing assets
at this facility may not be recoverable as of June 30, 2003. Accordingly,
management obtained third party appraisals of the Brazilian manufacturing
assets to determine their fair values and the resulting amount of
impairment losses to be recognized. Based on these appraisals, CommScope
recognized pretax impairment charges in the amount of $8.7 million, or
$0.09 per share, net of tax, of which $6.4 million were related to
broadband cable manufacturing assets and $2.3 million were related to
wireless cable manufacturing assets. Management intended to continue to use
these assets in production as of June 30, 2003, and therefore, they have
been classified as assets to be held and used.
The Company recognized total pretax impairment charges for fixed
assets in the amount of $31.7 million, or $0.34 per share, net of tax,
during the three months ended June 30, 2003. These impairment charges
resulted in an increase of $8.5 million in CommScope's noncurrent deferred
tax asset during the three months ended June 30, 2003. The breakdown of
these impairment charges was as follows (in millions):
Domestic broadband cable manufacturing assets $ 21.4
Brazilian manufacturing assets 8.7
Other domestic manufacturing assets 1.6
----------
Total impairment charges $ 31.7
==========
7. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME/LOSS
Three Months Six Months
Ended Ended
June 30, June 30,
---------------- -----------------
2003 2002 2003 2002
------- ------- -------- --------
Income tax benefit for components of
other comprehensive income/loss:
Hedging loss on nonderivative instrument $ - $ 521 $ - $ 464
Gain/loss on derivative financial instrument
designated as a cash flow hedge - 28 - ( 7 )
Loss on derivative instrument designated as
a net investment hedge 499 - 976 -
-------- ------- -------- --------
Total income tax benefit for components of
other comprehensive income/loss $ 499 $ 549 $ 976 $ 457
======== ======= ======== ========
8. DERIVATIVES AND HEDGING ACTIVITIES
As of June 30, 2003, the only derivative financial instrument
outstanding was a cross currency swap, which was designated and documented
at inception as a net investment hedge of a portion of the Company's net
investment in its Belgian subsidiary. The notional amount of this
derivative financial instrument, which is a cross currency swap of US
dollars for euros, was $20 million at inception of the hedging relationship
and as of June 30, 2003. This hedging instrument was effective at inception
of the hedging relationship and at June 30, 2003 and is expected to
continue to be effective for the duration of the agreement, resulting in no
anticipated hedge ineffectiveness. The fair value of this derivative
instrument, reflected in other noncurrent liabilities, was approximately
$3.7 million as of June 30, 2003, compared to $1.3 million as of December
31, 2002.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The only derivative instrument outstanding for the three months ended
June 30, 2002 was an interest rate swap, which effectively converted the
variable-rate Eurodollar Credit Agreement to a fixed-rate basis. As of
December 2, 2002, the Company terminated both the Eurodollar Credit
Agreement and the related interest rate swap agreement, which were both
scheduled to expire on March 1, 2006. This interest rate swap was
designated and documented as a cash flow hedge of the changes in the cash
flows attributable to fluctuations in the variable benchmark interest rate
associated with the underlying debt being hedged.
There were no material reclassifications from other comprehensive
income (loss) to earnings during the three and six month periods ending
June 30, 2003 and 2002.
Activity in the accumulated net gain (loss) on derivative instruments
included in accumulated other comprehensive loss for the three and six
month periods ended June 30, 2003 and 2002 consisted of the following:
Three Months Six Months
Ended Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Accumulated net gain (loss) on derivative
instruments, beginning of period $(1,613) $87 $ (802) $27
Net gain (loss) on derivative financial
instrument designated as a cash flow
hedge - (47) - 13
Net loss on derivative financial instrument
designated as a net investment hedge (850) - (1,661) -
------- -------- -------- --------
Accumulated net gain (loss) on derivative
instruments, end of period $(2,463) $40 $(2,463) $40
======== ======== ======== ========
9. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended
June 30,
-----------------------
2003 2002
-----------------------
Cash paid during the period for:
Income taxes $ 355 $ 454
Interest (net of capitalized amounts) 3,612 4,143
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included
in this document as well as the audited consolidated financial statements,
related notes thereto and management's discussion and analysis of financial
condition and results of operations, including management's discussion and
analysis about the application of critical accounting policies, for the
year ended December 31, 2002 included in our 2002 Annual Report on Form
10-K.
HIGHLIGHTS
For the quarter ended June 30, 2003, we incurred a net loss of $51.4
million, or $0.87 per share, compared to a net loss of $42.5 million, or
$0.69 per share, for the quarter ended June 30, 2002. Included in these net
losses were after-tax equity method losses in OFS BrightWave, LLC ("OFS
BrightWave") of $33.9 million, or $0.57 per share, during the three months
ended June 30, 2003, compared to $34.9 million, or $0.56 per share, during
the three months ended June 30, 2002. The net loss for the quarter ended
June 30, 2003 also reflected after-tax impairment charges of $20.0 million,
or $0.34 per share, primarily related to our broadband cable manufacturing
assets. In addition, the net loss for the quarter ended June 30, 2002
included after-tax charges of $12.9 million, or $0.21 per share, related to
the write off of Adelphia Communications Corporation ("Adelphia")
receivables.
For the six months ended June 30, 2003, we incurred a net loss of
$54.4 million, or $0.92 per share, compared to a net loss of $44.1 million,
or $0.71 per share, for the six months ended June 30, 2002. Included in
these net losses were after-tax equity method losses in OFS BrightWave of
$37.7 million, or $0.62 per share, during the six months ended June 30,
2003, compared to $42.9 million, or $0.69 per share, during the six months
ended June 30, 2002. The net loss for the six months ended June 30, 2003
also reflected after-tax impairment charges of $20.0 million, or $0.34 per
share, primarily related to our broadband cable manufacturing assets. In
addition, the net loss for the six months ended June 30, 2002 included
after-tax charges of $13.5 million, or $0.22 per share, related to the
write off of Adelphia receivables.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS
ENDED JUNE 30, 2003 WITH THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30,
2002
Net sales
Net sales for the quarter ended June 30, 2003 decreased $13.6 million,
or 8.8%, to $141.4 million, compared to the quarter ended June 30, 2002.
Net sales for the six months ended June 30, 2003 decreased $44.0 million,
or 14.0%, to $270.8 million, compared to the six months ended June 30,
2002. The decrease in net sales was due to lower sales of broadband and
other video distribution products ("Broadband/Video Products").
Domestic sales decreased 5.7% to $114.2 million in the second quarter
of 2003 and 14.7% to $218.4 million in the six months ended June 30, 2003
compared to the same periods in 2002. The decrease was due to lower
Broadband/Video Product sales. International sales decreased 19.8% to $27.2
million in the second quarter of 2003 and 11.0% to $52.4 million in the six
months ended June 30, 2003 compared to the same periods in 2002.
Net sales of Broadband/Video Products for the second quarter of 2003
decreased $16.7 million, or 13.3%, to $108.5 million, compared to the same
period in 2002. This decrease primarily resulted from a lower
15
year-over-year volume of sales to Charter Communications, Inc.
("Charter"), volume and pricing declines in fiber optic cable sales and a
decline in international sales volumes. For the six months ended June 30,
2003, net sales of Broadband/Video Products decreased $48.5 million, or
18.8% to $209.8 million, compared to the same period in 2002. This decrease
primarily resulted from a lower year-over-year volume of sales to Charter
and Adelphia, in addition to a decline in international sales volumes.
Despite lower sales to Comcast Corporation ("Comcast"), net sales of
Broadband/Video Products increased by $7.2 million, or 7.1%, from the first
quarter to the second quarter of 2003, primarily due to stronger sales to
other domestic broadband service providers. Sales to Comcast declined $6
million from the first quarter to the second quarter of 2003 and declined
from 23% of total quarterly net sales in the first quarter of 2003 to 17%
in the second quarter. Sales to Comcast were materially unchanged in the
second quarter of 2003, compared to the same period in 2002.
Pricing for coaxial cable remained relatively stable during the three
and six months ended June 30, 2003, compared to the same periods last year.
In contrast, sales of fiber optic cable, which represented more than 10% of
total net sales during the three and six month periods ended June 30, 2003
and 2002, continued to experience significant pricing pressure. Fiber optic
cable sales declined by more than 20% year over year in the three and six
month periods ended June 30, 2003 compared to the same periods in 2002. We
expect ongoing pricing pressure and weak demand industry wide for fiber
optic cable products at least through 2003.
Net sales of local area network and other data applications products
("LAN Products") for the second quarter of 2003 increased by $1.7 million,
or 7.4%, to $24.6 million, compared to the same period in 2002. For the six
months ended June 30, 2003, sales of LAN Products increased $4.7 million,
or 11.0%, to $47.6 million compared to the same period in 2002. In
addition, LAN Product sales increased $1.6 million, or 7.0%, in the second
quarter, compared to the first quarter of 2003. Sales of LAN Products
benefited from strengthening project business and increasing fiber optic
cable and apparatus sales volumes.
Net sales of wireless and other telecommunications products ("Wireless
and Other Telecom Products") for the second quarter of 2003 increased by
$1.4 million, or 20.3%, to $8.3 million, compared to the same period in
2002. For the six months ended June 30, 2003, sales of Wireless and Other
Telecom Products were stable as compared to the same period last year with
sales of $13.4 million and $13.6 million, respectively. We expect ongoing
aggressive competition for Wireless and Other Telecom Products. Although
wireless telecommunications capital spending remains weak, we believe that
we have made steady progress communicating the Cell Reach(R) value
proposition to customers and remain optimistic about long-term wireless
opportunities.
Gross profit (net sales less cost of sales)
Gross profit for the second quarter ended June 30, 2003 decreased to
$28.8 million, compared to second quarter 2002 gross profit of $31.7
million. Second quarter 2003 gross profit margin declined only slightly to
20.4% from 20.5% in the second quarter of 2002. For the six months ended
June 30, 2003, gross profit decreased to $52.9 million, compared to $67.1
million for the same period in 2002, with gross profit margins of 19.5% and
21.3%, respectively. The decreases in gross profit and gross profit margin
were primarily due to competitive pricing pressure primarily for fiber
optic cable products, in addition to lower Broadband/Video Product sales
volume. The combined impact of price decreases and lower sales volumes,
which resulted in lower overhead absorption rates for many products, more
than offset the year-over-year gross profit improvement resulting from
workforce reductions and asset impairments. Additionally, we continue to
experience rising costs of certain raw materials, primarily polyethylene
and other plastics, and expect these cost increases to pressure our gross
profit margin in the near term.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for the second
quarter ended June 30, 2003 was $21.8 million, or 15.4% of net sales,
compared to $41.1 million, or 26.5% of net sales, for the same period in
2002. For the six months ended June 30, 2003, SG&A expense was $41.9
million, or 15.5% of net sales, compared to $62.3 million or 19.8% of net
sales in the same period last year. The year-over-year decreases in SG&A
expense were primarily due to the bad debt expense related to the write off
of Adelphia receivables in 2002, which totaled $20.5 million in the second
quarter of 2002 and $21.4 million for the six months ended June 30, 2002.
16
Excluding the Adelphia write off, SG&A expense was $20.6 million, or
13.3% of net sales, for the three months ended June 30, 2002 and $40.9
million, or 13.0% of net sales, for the six months ended June 30, 2002. The
year-over-year increases in SG&A expense and SG&A expense as a percentage
of net sales, excluding the Adelphia write off, were primarily due to an
increase in bad debt expense. We believe we have taken appropriate charges
for doubtful accounts as a result of the difficult market environment based
on our analysis of customer financial difficulties, age of receivable
balances and other relevant factors.
Research and development
Research and development ("R&D") expense decreased to $1.5 million, or
1% of net sales, for the second quarter ended June 30, 2003 from $1.8
million, or 1.1% of net sales, for the same period in 2002. For the six
months ended June 30, 2003, R&D expense decreased to $3.0 million, or 1.1%
of net sales, compared with $3.8 million, or 1.2% of net sales, for the
same period in 2002. We expect R&D expense to remain at approximately 1% of
net sales in the near term.
Impairment charges for fixed assets
We recognized total pretax impairment charges for fixed assets in the
amount of $31.7 million, or $0.34 per share, net of tax, during the three
months ended June 30, 2003. The breakdown of these impairment charges was
as follows (in millions):
Domestic broadband cable manufacturing assets $ 21.4
Brazilian manufacturing assets 8.7
Other domestic manufacturing assets 1.6
----------
Total impairment charges $ 31.7
==========
During the three months ended June 30, 2003, we concluded that certain
manufacturing assets had no future use to us and initiated a formal
impairment review of these assets. Most of these assets were used in or
acquired for use in the manufacture of our Broadband/Video Products, which
have been adversely affected by the difficult global business environment
in telecommunications and an ongoing decline in demand both domestically
and internationally. Based primarily on third party appraisals, we
recognized pretax impairment charges in the amount of $23 million, or $0.25
per share, net of tax, related to these specifically-identified assets.
In addition, our Brazilian operation, which primarily manufactures
Broadband/Video Products, has experienced declining local demand in
addition to reduced export sales and profitability resulting from pricing
and competitive pressures primarily due to the recent impact of unfavorable
local currency fluctuations. As a result, we performed a test of
recoverability for the Brazilian manufacturing assets during the second
quarter of 2003. Based on third party appraisals, we recognized pretax
impairment charges in the amount of $8.7 million, or $0.09 per share, net
of tax, related to Brazilian manufacturing assets.
Net interest expense
Net interest expense for the quarter ended June 30, 2003 was $1.5
million, compared to $1.7 million for the same period in 2002. For the six
months ended June 30, 2003, net interest expense decreased to $3.0 million
compared with $3.4 million for the same period in 2002. The decrease in net
interest expense was primarily due to an increase in interest income earned
on a higher level of cash and cash equivalents.
17
Income taxes
Our effective income tax rate was 37% for the three and six months
ended June 30, 2003 and 2002.
Equity in losses of OFS BrightWave, LLC
For the three months ended June 30, 2003 and 2002, our 18.4% equity
interest in the losses of OFS BrightWave was approximately $53.9 million
and $55.4 million, pretax, respectively. For the six months ended June 30,
2003 and 2002 our 18.4% equity interest in the losses of OFS BrightWave was
approximately $60.0 million and $68.2 million, pretax, respectively. Since
OFS BrightWave has elected to be taxed as a partnership, we recorded a tax
benefit related to our 18.4% equity interest in the flow-through losses of
approximately $20.0 million and $20.5 million for the three months ended
June 30, 2003 and 2002, respectively. For the six months ended June 30,
2003 and 2002 we recorded a tax benefit related the flow-through losses of
approximately $22.2 million and $25.2 million, respectively. OFS BrightWave
operates in some of the same markets we do and its financial results were
also adversely affected by the difficult market environment in
telecommunications and the challenging global business environment. Due to
these conditions, OFS BrightWave incurred significant charges during the
second quarter of 2003 primarily related to fixed asset impairments,
restructuring and cost reduction efforts. The total of these charges
recognized by OFS BrightWave in the second quarter of 2003 was $257.9
million. OFS BrightWave also incurred charges of $211.0 million in the
second quarter of 2002, primarily for the write off of goodwill and certain
fixed assets, in addition to restructuring and cost reduction efforts.
We expect ongoing pricing pressure and weak demand industry wide for
fiber optic cable products at least through 2003. Therefore, we believe OFS
BrightWave will incur losses at least through 2003, and as a result we will
continue to recognize noncash equity method losses from our investment in
OFS BrightWave.
Liquidity and capital resources
Our principal sources of liquidity both on a short-term and long-term
basis are cash and cash equivalents, cash flows provided by operations and
availability under our senior secured revolving credit facility ("secured
credit facility"). Reduced sales and profitability could reduce cash
provided by operations and limit availability under the secured credit
facility. In addition, increases in working capital, due to seasonal
fluctuations in sales and collections, among other things, could reduce our
operating cash flows in the short term.
Cash provided by operating activities was $22.6 million for the six
months ended June 30, 2003, compared to $45.3 million for the same period
in 2002. This year-over-year decrease in operating cash flow primarily
resulted from lower sales and profitability. Excluding the write off of
Adelphia receivables in 2002, the change in accounts receivable for the six
months ended June 30 was consistent year over year.
Working capital was $240.1 million at June 30, 2003, compared to
$214.0 million at December 31, 2002. This increase in working capital
during the six months ended June 30, 2003 primarily related to an increase
in cash of $20.2 million over the same period to $140.3 million as of June
30, 2003. An increase in accounts receivable, driven by increasing
sequential sales, also impacted working capital by $6.7 million during the
six months ended June 30, 2003.
During the six months ended June 30, 2003, we invested $2.5 million in
property, plant and equipment compared to $5.4 million during the same
period in 2002. While we may place additional production capability in
certain international markets, we expect capital expenditures to remain at
a level below depreciation and amortization expense for the next several
years. We currently expect capital expenditures to be approximately $10
million in 2003, primarily for cost reduction efforts and information
technology initiatives, depending upon business conditions.
18
We owed total long-term debt of $183.3 million, or 28% of our book
capital structure, defined as long-term debt and total stockholders'
equity, as of June 30, 2003, compared to $183.3 million, or 26% of our book
capital structure as of December 31, 2002.
We entered into a $100 million senior secured revolving credit
facility, which closed January 10, 2003. The facility, which was
established for future liquidity, working capital needs and other general
corporate purposes, was not drawn at closing and has not been drawn in any
amount from that date through June 30, 2003. The facility is secured by
substantially all of our domestic assets and can have a maximum
availability of up to $100 million over its three and a half year expected
term, subject to certain covenants and conditions contained in the
agreement. As of June 30, 2003, we had availability of approximately $70
million and no outstanding borrowings under this secured credit facility.
In April 2003, Standard & Poor's Rating Services ("S&P") announced
that it lowered its corporate credit rating on CommScope to "BB" from "BB+"
and its subordinated debt rating to "B+" from "BB-." Although S&P indicated
that the outlook for CommScope is stable, the downgrade was mainly based on
reduced sales and profitability forecasts. The lower ratings do not affect
interest rates or covenant compliance under the Company's existing debt
agreements. As a result, we believe the lower ratings do not have a
material impact on our financial position, cash flows or results of
operations.
Forward-looking Statements
Certain statements in this Form 10-Q that are other than historical
facts are intended to be "forward-looking statements" within the meaning of
the Securities Exchange Act of 1934, the Private Securities Litigation
Reform Act of 1995 and other related laws and include but are not limited
to those statements relating to sales and earnings expectations, expected
demand, cost and availability of key raw materials, internal production
capacity and expansion, competitive pricing, relative market position and
outlook. While we believe such statements are reasonable, the actual
results and effects could differ materially from those currently
anticipated. These forward-looking statements are identified, including,
without limitation, by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projects," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes," "think," "thinks" and "scheduled" and
similar expressions.
These statements are subject to various risks and uncertainties, many
of which are outside our control, including, without limitation, expected
demand from Comcast Corporation and other major domestic MSOs; ability of
our customers to secure adequate financing to fund their infrastructure
projects or to pay us; product demand and industry excess capacity; changes
or fluctuations in global business conditions; financial performance of OFS
BrightWave; competitive pricing and acceptance of our products; changes in
cost and availability of key raw materials (including without limitation
polyethylene and other plastics, bimetallic center conductors, optical
fibers, fine aluminum wire and fluorinated-ethylene-propylene which are
available only from limited sources); our ability to recover higher
material and transportation costs from our customers through price
increases; possible future impairment charges for goodwill and other
long-lived assets; industry competition and our ability to retain customers
and negotiate contract renewals on acceptable terms; possible disruption
due to customer or supplier bankruptcy, reorganization, restructuring or
consolidation; our ability to obtain financing and capital on commercially
reasonable terms; covenant restrictions and our ability to comply with
covenants in our debt agreements; successful operation of bimetal
manufacturing and other vertical integration activities; successful
expansion and related operation of our facilities; achievement of sales,
growth, and earnings goals; our ability to achieve reductions in costs;
margin improvement; our ability to retain and attract key personnel;
developments in technology; intellectual property protection; product or
raw material performance issues; adequacy and availability of insurance;
litigation or regulatory developments, including future or pending tax
legislation; stock price fluctuations; foreign currency fluctuations;
technological obsolescence; acquisition and divestiture activities and our
ability to integrate acquisitions; environmental issues; our participation
in joint ventures; international economic and political uncertainties;
possible disruption due to terrorist activity or armed conflict; political
19
instability; major health concerns and other factors discussed. Actual
results may also differ due to changes in telecommunications industry
capital spending, which is affected by a variety of factors, including,
without limitation, general business conditions; acquisitions of
telecommunications companies by others; consolidation within the
telecommunications industry; the financial condition of telecommunications
companies and their access to financing; competition among
telecommunications companies; technological developments and new
legislation and regulation of telecommunications companies. These and other
factors are discussed in greater detail in Exhibit 99.1 to this Form 10-Q.
The information contained in this Form 10-Q represents our best judgment at
the date of this report based on information currently available. However,
we do not intend, and are not undertaking any duty or obligation, to update
this information to reflect developments or information obtained after the
date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2002, our major market risk exposure relates to adverse
fluctuations in commodity prices, interest rates and foreign currency
exchange rates. We have established a risk management strategy that
includes the reasonable use of derivative and nonderivative financial
instruments primarily to manage our exposure to these market risks. We
believe our exposure associated with these market risks has not materially
changed since December 31, 2002. We have not acquired any new derivative
financial instruments since December 31, 2002 or terminated any derivative
financial instruments that existed at that date.
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Our Chief Executive
Officer and our Chief Financial Officer have reviewed the effectiveness of
our disclosure controls and procedures as of the end of the period covered
by this report and have concluded that the disclosure controls and
procedures are effective.
20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the
"Meeting") on May 2, 2003. Proxies for the Meeting were solicited
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended. A total of 59,219,567 shares of Common Stock
with one vote each were entitled to vote at the Meeting and
holders of 54,599,750 shares voted in person or by proxy,
constituting a quorum.
At the Meeting, two of the Company's directors were elected for
three-year terms ending at the 2006 Annual Meeting of
Stockholders by the vote set forth below:
Name of Director Votes For Votes Withheld
Frank M. Drendel 53,084,600 1,515,150
Duncan M. Faircloth 52,050,972 2,548,778
The Company's other four directors, whose terms of office
continue after the Meeting with terms expiring at the annual
meetings in parentheses after their names, are Boyd L. George
(2004), George N. Hutton (2004), James N. Whitson (2005) and June
E. Travis (2005).
A proposal to ratify the appointment by the board of directors of
the Company of Deloitte & Touche LLP as independent auditors for
the Company for the 2003 fiscal year was approved by 52,502,188
votes cast in favor, 1,972,664 votes cast against and 124,898
votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Item 601(b)(32)(ii) of Regulation
S-K).
99.1 Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended June 30, 2003:
On April 29, 2003, we filed a current report on Form 8-K
announcing our financial results for the first quarter of 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
August 11, 2003 /s/ Jearld L. Leonhardt
--------------- -----------------------------
Date Jearld L. Leonhardt
Executive Vice President and Chief
Financial Officer signing both in his
capacity as Executive Vice President on
behalf of the Registrant and as Chief
Financial Officer of the Registrant
22