UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-12929
CommScope, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 CommScope Place, S.E.
P.O. Box 339
Hickory, North Carolina
28602
(Address of principal executive offices) (Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
----------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part Ill of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant was approximately $1.1 billion as of March
22, 2002 (based on the closing price for the Common Stock on the New York
Stock Exchange on that date). For purposes of this computation, shares held
by affiliates and by directors and officers of the Registrant have been
excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the Registrant. As of March 22, 2002 there were 61,717,159
shares of the Registrant's Common Stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference in Part Ill hereof.
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references to "CommScope,
Inc.," or "we," "us," or "our" are to CommScope, Inc. and its direct and
indirect subsidiaries, including CommScope Inc. of North Carolina, on a
consolidated basis.
GENERAL
We are a leading worldwide designer, manufacturer and marketer of a
broad line of coaxial, fiber optic, and other high-performance electronic
cable products for cable television, telephony, Internet access and
wireless communications. We believe that we supplied over 50% of all
coaxial cable purchased in the United States in 2001 for broadband cable
networks using Hybrid Fiber Coax (HFC) architecture. We believe we are also
the largest manufacturer and supplier of coaxial cable for HFC cable
networks in the world. We are also a leading supplier of fiber optic cables
primarily for HFC cable networks and have developed specialized,
proprietary fiber optic products for telecommunications applications. We
are a leading supplier of coaxial cable for telephone central office
switching and transmission applications, as well as video distribution
applications such as satellite television and security surveillance. In
addition, we have developed an innovative line of coaxial cables for
wireless communication infrastructure applications that have superior
performance characteristics compared to traditional cables. We are also a
leading provider of high-performance premise wiring for local area
networks. We sell our products to approximately 2,100 customers in more
than 85 countries.
For the year ended December 31, 2001 our revenues were $738 million
and our net income was $27.9 million. During this period, approximately 80%
of our revenues were for HFC cable networks and other video applications,
8% were for wireless, central office and other telecommunications
applications and 12% were for local area network premise wiring
applications. International sales were approximately 23% of our revenues
during this period. For further discussion of current and prior year
domestic and international revenues, see Items 7 and 8 of this Form 10-K.
We believe that we are the world's most technologically advanced,
low-cost provider of coaxial cable. With our leading product offerings,
cost-efficient manufacturing and economies of scale, we believe we will
benefit from the convergence of video, voice and high-speed Internet access
and the resulting demand for enhanced HFC broadband networks.
We believe that the following industry trends will continue to drive
demand for our products:
o endorsement of the HFC architecture by major cable, telephone and
technology companies;
o increasing use of the Internet;
o increasing need for additional bandwidth to accommodate new
applications;
o increasing maintenance requirements for HFC cable networks as
operators improve reliability for telephony, data and other
two-way services;
o the continuing rapid deployment of wireless communications
systems worldwide;
o increasing demand for higher speed and bandwidth for local area
networks;
o regional clustering of cable systems that will facilitate the
delivery of advanced services such as telephony; and
o increased demand for high bandwidth optical fibers for metro and
local access applications.
Effective November 16, 2001, we acquired, through our indirect
wholly-owned subsidiary CommScope Optical Technologies, Inc. ("CommScope
Optical"), an approximate 18.4% interest in OFS BrightWave, LLC, a Delaware
limited liability company ("BrightWave") formed by us and The Furukawa
Electric Co., Ltd. ("Furukawa") to acquire certain fiber cable and
transmission fiber assets of the Optical Fiber Solutions Group ("OFS
Group") of Lucent Technologies Inc. ("Lucent").
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The joint venture investment will provide us with an interest in one
of the world's largest producers of optical fiber and cable. We believe
this investment and other arrangements with Furukawa:
o Create a strategic partner in the manufacture of optical fiber
and fiber optic cable
o Enhance our technology platform with cross licenses for use of
key intellectual property
o Establish an attractive supply arrangement for optical fiber,
including premium fiber
o Provide an opportunity to expand our sales of fiber optic cable
to cable television Multiple System Operators (MSOs)
We issued 10.2 million shares of our common stock to Lucent for an
aggregate amount of $203,388,000 in lieu of a portion of the cash purchase
price payable by Furukawa to Lucent pursuant to an asset and stock purchase
agreement entered into in connection with the acquisition of a portion of
Lucent's OFS Group. Of this amount, $173,388,000 represents our capital
contribution to BrightWave and the remaining $30,000,000 is in the form of
a revolving loan from CommScope Optical to BrightWave. An indirect
wholly-owned subsidiary of Furukawa owns the remaining 81.6% equity
interest in BrightWave.
BUSINESS STRATEGY
We have adopted a growth strategy to expand and strengthen our current
market position as the leading worldwide supplier of coaxial cable for
broadband communications. The principal elements of our growth strategy
are:
BUILD UPON THE STRENGTHS OF BRIGHTWAVE AND ITS AFFILIATES TO EXPAND
OUR PRODUCT OFFERINGS. Currently, we offer a broad range of cable products
for the cable television, wireless and LAN markets, and access to the
production of BrightWave and its affiliates will augment our coaxial cable
product line with a full line of fiber optic cables. During 2001, we sold
more than $110 million of fiber optic cable products worldwide, primarily
to broadband, cable television customers. We expect the addition of a
broader line of fiber optic cable products provides us an opportunity to
expand our sales of fiber optic cable to these customers.
BENEFIT FROM WORLDWIDE HFC PARADIGM SHIFT. A vast majority of video
networks worldwide, such as cable service providers, have adopted the HFC
cable network architecture for video service delivery.
We believe that the HFC cable network architecture provides the most
cost-effective bandwidth for multi-channel video, voice and data into homes
around the world. This architecture enables both cable and other
telecommunications service providers to offer new services such as
high-speed Internet access, video on demand, Internet protocol telephony,
high-definition television and other interactive services. Further growth
is expected as companies build-out and upgrade their networks in the global
marketplace. We believe our ability to offer a complete suite of cable
products, including optical fiber supplied by BrightWave and its
affiliates, positions us to be the "supplier of choice" to developers and
operators of HFC networks.
DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. We
maintain an active program to identify new market opportunities and develop
and commercialize products that use our core technology and manufacturing
competencies. We have developed new products and entered new markets,
including coaxial cable for wireless applications, satellite cables, local
area network cables, specialized coaxial based telecommunication cables,
broadcast audio and video cables and coaxial cables in conduit.
We have developed specialized coaxial (Power Feeder(R)) and fiber
optic (Fiber Feeder(TM)) cables for distribution and telephony applications
in HFC cable networks and have developed Cell Reach(R), a patented copper
coaxial cable solution for the wireless antenna market and UltraPipe(TM), a
high-end local area network cable product targeted for high-speed local
area network applications. We have also developed a number of broadband
cables for other wireless applications. Our ability to offer proprietary
products, which is expected to be enhanced through access to the
intellectual property and research and development expertise of BrightWave
and its affiliates, allows us to maintain our leadership position in our
existing markets and expand to serve new markets.
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CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. We invested approximately
$250 million in the development and acquisition of state-of-the-art
manufacturing facilities and new technologies during the past four fiscal
years. These investments help to increase our capacity and operating
efficiencies, improve management control and provide more consistent
product quality. As a result, we believe we are one of the few
manufacturers capable of satisfying volume production, time-to-market, and
technology requirements of customers for coaxial cable in the
communications industry. We believe that our breadth and scale permit us to
cost-effectively invest in improving our operating efficiency through
investments in engineering and cost-management programs. We intend to
capture additional value in the supply chain through ongoing vertical
integration projects. We have completed an aggressive three year capital
expenditure program and expect future capital expenditures to be below
depreciation and amortization for the next few years.
EXPAND OUR GLOBAL PLATFORM. We believe that the worldwide demand for
video and data services, the large number of television households outside
the United States and relatively low penetration rates for cable television
in most countries provide significant long-term opportunities. We have
become a major supplier of coaxial cable for the cable television and
broadband services industries in international markets, principally Europe,
Latin America and the Pacific Rim. In 2001 we had approximately 280
international customers in more than 85 countries, representing
approximately $173 million or approximately 23% of our 2001 revenue. We
support our international sales efforts with sales representatives based in
Europe, Latin America and the Pacific Rim. In 1999, we acquired the Alcatel
Cable Benelux, S.A. coaxial cable business in Seneffe, Belgium. With this
acquisition, we believe we became the largest manufacturer and supplier of
coaxial cable for HFC cable networks in Europe. This acquisition
strengthened our position as a supplier for the expected telecommunications
upgrade and rebuild activity in Germany, Spain and other European
countries. During 2001, we increased the capability and efficiency of our
Belgium facility for HFC related products and established capabilities for
the manufacture of products for wireless applications in late 2001.
During the fourth quarter of 2001, we completed the renovation of a
purchased facility in Brazil, which currently provides approximately
283,000 square feet of manufacturing and office space. This facility
manufactures products for both HFC and wireless applications, primarily for
sale to the Latin American market.
Although there is current uncertainty in international markets, we
believe that we are well positioned to benefit over the long term from
future international growth opportunities. As broadband HFC networks expand
globally, CommScope intends to acquire and open facilities in countries
that we believe have strategic value, particularly in Asia/Pacific Rim. We
believe in-country manufacturing is important because it moves us closer to
international customers, it can lower taxes and tariffs and provides the
opportunity to improve customer service.
LEVERAGE SUPERIOR CUSTOMER SERVICE. We believe that our coaxial cable
manufacturing capacity is greater than that of any other manufacturer. This
enables us to provide our customers with a unique high-volume service
capability. As a result of our 24-hour, seven days per week continuous
manufacturing operations, we are able to offer faster order turnaround
services. In addition, we believe that our ability to offer rapid delivery
services, materials management and logistics services to customers through
our private truck fleet is an important competitive advantage.
PRODUCT GROUPS
We manufacture and sell cable for three broad product groups, which
are similar in nature and share similar production processes, customers,
distribution channels and regulatory environments:
o Broadband (cable television) and Other Video applications;
o Local Area Network applications; and
o Wireless and Other Telecommunications applications.
DOMESTIC HFC CABLE TV MARKET. We design, manufacture and market
primarily coaxial cable, most of which is used in the cable television
industry. We manufacture two primary types of coaxial cable:
o semi-flexible, which has an aluminum or copper outer tubular
shield or outer conductor; and
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o flexible, which is typically smaller in diameter than
semi-flexible coaxial cable and has a more flexible outer
conductor typically made of metallic tapes and braided fine
wires.
Semi-flexible coaxial cables are typically used in the trunk and
feeder distribution portion of cable television systems, and flexible
coaxial cables, also known as drop cables, are typically used for
connecting the feeder cable to a residence or business or for some other
communications applications. We also manufacture fiber optic cable for the
cable television industry and others.
Cable television service traditionally has been provided primarily by
cable television system operators that have been awarded franchises from
the municipalities they serve. In response to increasing competitive
pressures and expanding revenue opportunities, cable television system
operators have been expanding the variety of their service offerings not
only for video, but for Internet access and telephony, which generally
requires increasing amounts of cable and system bandwidth. Cable television
system operators have generally adopted, and we believe that for the
foreseeable future will continue to adopt, HFC cable system designs when
seeking to increase system bandwidth. These systems combine the advantages
of fiber optic cable in transmitting clear signals over a long distance
without amplification, and the advantages of high-bandwidth coaxial cable
in ease of installation, low cost and compatibility with the receiving
components of the customer's communications devices. We believe that:
o cable television system operators are likely to increase their
use of fiber optic cable for the trunk and feeder portions of
their cable systems;
o there will be an ongoing need for high-capacity coaxial cable for
the local distribution and street-to-the-home portions of the
cable system; and
o coaxial cable will remain the most cost effective means for the
transmission of broadband signals to the home or business over
shorter distances in cable networks.
For local distribution purposes, coaxial cable has the necessary
signal carrying capacity or bandwidth to handle upstream and downstream
signal transmission.
The construction, expansion and upgrade of cable systems require
significant capital investment by cable operators. Cable television system
operators have been significant borrowers from the credit and capital
markets. Therefore, capital spending within the domestic cable television
industry has historically been cyclical, depending to a significant degree
on the availability of credit and capital. The cable television industry
has also been subject to varying degrees of both national and local
government regulation, most recently the Telecom Act and the 1992 Cable
Act, and their implementing regulations adopted in 1993 and 1994 and
thereafter. The regional Bell operating companies and other telephone
service providers have generally been subject to regulatory restrictions
which prevented them from offering cable television service within their
franchise telephone areas. However, the Telecom Act removes or phases out
many of the regulatory and sale restrictions affecting cable television
system operators and telephone operating companies in the offering of video
and telephone services. We believe that the Telecom Act, the implementing
regulations and case-law decisions will generally encourage competition
among cable television system operators, telephone operating companies and
other communications companies in offering video, telephone and data
services such as Internet access to consumers, and that providers of such
services will upgrade their present communications delivery systems.
INTERNATIONAL MARKETS. Cable system designs using HFC technology are
increasingly being used in international markets with low cable television
penetration. Based on industry trade publications and reports from
telecommunications industry analysts, we estimate that there are more than
800 million television households worldwide, including roughly 490 million
in the Asia/Pacific Rim region, roughly 250 million in Europe and nearly
100 million in the Latin America/Caribbean region, among others. This
compares to approximately 100 million television households in the United
States. We estimate that roughly 45% of the television households in Europe
subscribe to some form of multichannel television service compared to
subscription rates of nearly 85% in the United States. Based upon such
sources, we estimate that subscription rates in the Asia/Pacific Rim and
Latin America/Caribbean markets are even lower at roughly 35% and 20%,
respectively.
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As of December 31, 2001 we had sales in more than 95 countries. We
have penetrated the international marketplace through a field sales
organization and through a network of distributors and agents located in
major countries where we do business. In addition to new customers
developed by our network of distributors and sales representatives, many
large U.S. cable television operators, with whom we have had long
established business relationships, are active investors in cable
television systems outside the United States.
OTHER VIDEO MARKETS (NON-CABLE TELEVISION). Many specialized markets
or applications are served by multiple cable media such as coaxial, twisted
pair, fiber optic or combinations of each. We are a leading producer of
composite cables made of flexible coaxial and twisted copper pairs for full
service communications providers worldwide. In the satellite direct-to-home
cable market, where specialized cables transmit satellite-delivered video
signals and antenna positioning/control signals, we have developed a
leading market position. We market an array of premium metallic and optical
cable products directed at the broadcasting and video production studio
market.
WIRELESS COMMUNICATIONS MARKET. We believe that the deployment of
wireless communications systems throughout the United States and the rest
of the world presents a growth opportunity for us. Semi-flexible coaxial
cables are used to connect the antennae located at the top of wireless
antenna towers to the radios and power sources located adjacent to or near
the antenna site. Over the past few years, we developed the patented Cell
Reach(R) products, a line of copper shielded semi-flexible coaxial cable
and related connectors and accessories to address this market. Cell Reach
has been installed in thousands of wireless base stations with leading
service providers such as Nextel Communications, Inc., Sprint Corporation
and certain Sprint affiliates and certain AT&T affiliates.
We have expanded manufacturing capacity for this product line and are
in the process of establishing further international sales capabilities.
During 2001, we expanded our global capacity in the wireless market and now
have production capability in Latin America and Europe.
CommScope also manufactures other broadband coaxial cables, fiber
optic cables and twisted pair cables that are used for various wireless
applications, including Third Generation Wireless (3G), Personal
Communications Systems (PCS), Global System for Mobile Communications
(GSM), Universal Mobile Telecommunications (UMTS), Cellular, Multichannel
Multipoint Distribution Service (MMDS), Local Multipoint Distribution
System (LMDS), land mobile radio, paging and in-building wireless
applications. During 2001, we continued to develop specialized coaxial
cables for these applications, including the ExtremeflexTM product line
which are highly flexible low loss 50 ohm coaxial cables adapted from
CommScope's patented, highly successful digital BroadBand QR(R) product
line. In addition, we achieved TL 9000 registration for our wireless
products at our Cable Technology Center in Newton, North Carolina. The TL
9000 certification is an internationally recognized quality system
standard, which we believe demonstrates our quality commitment to our
wireless customers.
However, we expect ongoing aggressive competition from larger,
well-established companies with significant financial resources, brand
recognition in the cellular market and established marketing channels for
coaxial cable and accessories.
LOCAL AREA NETWORK MARKET. The proliferation of personal computers,
and more broadly the practice of distributed computing, has created a need
for products which enable users to share files, applications and peripheral
equipment such as printers and data storage devices. Local area networks,
typically consisting of at least one dedicated computer (a "server"),
peripheral devices, network software and interconnecting cables, were
developed in response to this demand. We manufacture a variety of twisted
pair, coaxial and fiber optic cables to transmit data for local area
network applications. The most widely used cable design for this
application consists of four high-performance twisted pairs that are
capable of transmitting data at rates in excess of 100 mbps. We focus our
products and marketing on cables with enhanced electrical and physical
performance such as our UltraPipe (TM) unshielded twisted pair. We believe
that UltraPipe cable is among the highest performing unshielded twisted
pair cables in the industry. During 2001, we expanded our presence as a
fiber optic supplier to the LAN market. We believe that access to fiber
optic products from BrightWave and its affiliates will provide us an
opportunity to increase our sales of fiber optic cable to LAN customers.
Copper and fiber optic composite cables are frequently combined in a single
cable to reduce installation costs and support multimedia applications.
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OTHER MARKETS. We have developed a strategy for addressing additional
cable consuming markets. By combining narrowly focused product and market
management with our cable manufacturing and operational skills, we are
entering new markets for broadcast, home automation, telephone central
office switching and transmission, and other high-performance
communications applications.
MANUFACTURING
We employ advanced cable manufacturing processes, the most important
of which are:
o thermoplastic extrusion for insulating wires and cables;
o high-speed welding and swaging of metallic shields or outer
conductors;
o braiding;
o cabling; and
o automated testing.
Many of these processes, some of which are proprietary and/or trade
secret information, are performed on equipment that has been modified for
our purposes or specifically built to our specifications, often internally
in our own machine shop facilities. We do not fabricate all of the raw
material components used in making most of our cables, such as certain
wires, tapes, tubes and similar materials. We believe, however, that
fabrication, to the extent economically feasible, could be done by us
instead of being outsourced.
For example, during 2001 we substantially completed certain aspects of
strategic vertical integration projects for bimetallic wire fabrication and
fine wire drawing and currently produce a significant portion of our needs
internally.
The manufacturing processes of the three principal types of cable we
manufacture are further described below.
COAXIAL CABLES. We employ a number of advanced plastic and metal
forming processes in the manufacture of coaxial cable. Three fundamental
process sequences are common to almost all coaxial cables:
o First, a plastic insulation material, called the dielectric, is
melt extruded around a metallic wire or center conductor. Current
state-of-the-art dielectrics consist of foamed plastics to
enhance the electrical properties of the cable. Precise control
of the foaming process is critical to achieve the mechanical and
electrical performance required for broadband services and
cellular communications applications. We believe that plastic
foam extrusion, using proprietary materials, equipment and
control systems, is one of our core competencies.
o The second step involves sheathing the dielectric material with a
metallic shield or outer conductor. Three basic shield designs
and processes are used. For semi-flexible coaxial cables, we
apply solid aluminum or copper shields over the dielectric by
either pulling the dielectric insulated wire into a long, hollow
metallic tube or welding the metallic tube directly over the
dielectric. Welding allows the use of thinner metal, resulting in
more flexible products. We use a proprietary welding process that
achieves significantly higher process speeds than those
achievable using other cable welding methods. The same welding
process has led to extremely efficient manufacturing processes of
copper shielded products for cellular communications. For both
hollow and welded tubes, the cable is passed through tools that
form the metallic shield tightly around the dielectric.
o Flexible coaxial cables, which are usually smaller in diameter
than semi-flexible coaxial cables, generally are made with the
third shield design. Flexible outer shield designs typically
involve laminated metallic foils and braided fine wires which are
used to enhance flexibility which is more desirable for indoor
wiring or for connecting subscribers in drop cable applications.
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o The third and usually final process sequence is the melt
extrusion of thermoplastic jackets to protect the coaxial cable.
A large number of variations are produced during this sequence
including: incorporating an integral strength member; customer
specified extruded stripes and printing for identification;
abrasion and crush resistant jackets; and adding moisture
blocking fillers.
TWISTED COPPER PAIRS. We insulate single copper wires using high-speed
thermoplastic extrusion techniques. Two insulated copper singles are then
twinned by twisting them into an electrically balanced pair unit in a
separate process. They are then bunched or cabled by grouping two or more
pair units into larger units for further processing in one or more further
processes depending on the number of pairs desired within the completed
cable. The cabled units are then shielded and jacketed or simply jacketed
without applying a metallic shield in the jacketing process. The jacketing
process involves extrusion of a plastic jacket over a shielded or
unshielded cable core. The majority of sales of our twisted copper pairs
come from plenum rated unshielded twisted pair cables for local area
network applications. Plenum cables are cables rated under the National
Electrical Code as safe for installation within the air plenum areas of
office buildings due to their flame retarding and low smoke generating
characteristics when heated. Plenum cables are made from more costly
thermoplastic insulating materials, such as FEP. These materials have
significantly higher extrusion temperature profiles that require more
costly extrusion equipment than non-plenum rated cables. We believe that
the processing of plenum rated materials is one of our core competencies.
FIBER OPTIC CABLES. We manufacture fiber optic cables by purchasing
bulk uncabled optical fiber singles and buffering them before cabling them
into unjacketed core units. We then apply protective outer jackets and,
sometimes, shields and jackets in a final process before testing. The
manufacturing and test equipment for fiber optic cables are different from
those used to manufacture coaxial and copper twisted pair cables. Most of
the fiber optic cables we produce are sold to the cable television and
local area network industry. Some of these fiber optic cables are produced
under licenses acquired from other fiber and fiber optic cable
manufacturers.
COMPOSITE CABLES. We also produce cables that are combinations of some
or all of coaxial cables, copper singles or twisted copper pairs and fiber
optic cables within a single cable for a variety of applications. The most
significant of the composite cables we manufacture are combination coaxial
and copper twisted pairs within a common outer jacket which are being used
by some telephone companies and cable operators to provide both cable
television services and telephone services to the same households over HFC
cable networks. Nearly all of our current markets have applications for
composite cables which we can manufacture.
BRIGHTWAVE OPTICAL FIBER AND FIBER OPTIC CABLE. Our equity-method
investee, BrightWave, is one of the world's largest manufacturers of
optical fiber and fiber optic cable. Brightwave produces
application-specific fiber and fiber optic cable for voice, data and video
transmission deployed in both long-haul and short-haul communications
networks. BrightWave sells cable primarily to large telecommunications
service providers including certain Regional Bell Operating Companies
(RBOCs). BrightWave manufactures fiber under a contract manufacturing
agreement for OFS Fitel, LLC ("Fitel") a wholly owned subsidiary of Fitel
USA. Fitel USA's ultimate parent is Furukawa.
BrightWave is headquartered in Norcross, Georgia and operates
production facilities in the United States, Brazil and Germany. While a
majority of sales are expected to be generated in North America, BrightWave
markets and sells its products in Asia/Pacific Rim, Latin America, and the
Europe.
As a contract manufacturer to Fitel, BrightWave produces
application-specific fibers, such as TrueWave, AllWave, and UltraWave,
which are used in terrestrial long haul, metro and LAN applications.
BrightWave has a worldwide reputation for high capacity and
industry-leading fiber designs. The combined optical fiber production
capabilities of BrightWave and Fitel, together, rank them as the world's
second largest producer of optical fiber and cable.
Manufacturing fiber optic cable consists of two basic steps: creating
a rod, also called a core preform or a blank, of very pure glass and then
heating the preform and drawing it into a thin fiber. After drawing, the
fiber is coated with a protective jacket and wound on a spool. Individual
fibers are often wrapped or packaged with other fibers to form cables
consisting of up to 864 stands of fiber. After manufacturing the fiber
itself, the fiber is packaged in a cable in various combinations of fiber
types and quantities to form a fiber optic cable that is sold to customers.
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BrightWave produces fiber optic cables in a broad range of fiber
types, fiber bundling, fiber counts and sheath designs. These cable
products provide state of the art terabit transport in configurations up to
864 fibers in ribbons for dense metro and long haul routes and smaller
ribbons or loose fiber bundles for last mile applications.
BrightWave's customers compete in markets characterized by rapid
technological changes, decreasing product life cycles, price competition
and increased user applications. These markets have experienced significant
expansion in the number and types of products and services they offer to
end-users, particularly in personal computing, portable access
communication devices and expanded networking capability.
BrightWave's primary competitors include Corning, Pirelli, Alcatel and
several Japanese-based competitors. While the optical fiber industry has
major barriers to entry, including capital and intellectual property,
current market conditions are extremely difficult. Due primarily to the
difficult market environment for certain telecommunications products and
challenging global economic conditions, we expect ongoing pricing pressure
and weak demand industry wide for fiber optic cable products during 2002.
Based on these factors, we expect that BrightWave will incur losses for
2002.
RESEARCH AND DEVELOPMENT
Our research, development and engineering expenditures for the
creation and application of new and improved products and processes were $7
million, $18 million and $8 million for the years ended December 31, 2001,
2000, and 1999, respectively. We focus our research and development efforts
primarily on two areas:
o those product areas that we believe have the potential for broad
market applications and significant sales within a one-to-three
year period; and
o new manufacturing technologies to achieve cost reductions.
During 2001, our major projects consisted primarily of research and
engineering activity related to the production of copper clad metals
required to advance the design of those materials and related processes to
the point that they meet specific functional and economic requirements and
are ready for full scale manufacturing. We have undertaken these projects
in an effort to reduce materials costs and reliance on limited sources of
key raw materials. In addition, we entered into cross-licensing
arrangements with Furukawa in 2001, providing us with access to key
technology for communications cable, especially fiber optic cable, that has
taken years to develop.
The widespread deployment of broadband services and HFC cable systems
is expected to provide opportunities for us to enhance our coaxial cable
product lines and to improve our manufacturing processes.
SALES AND DISTRIBUTION
We market our products worldwide through a combination of more than
140 direct sales, territory managers and manufacturers' representative
personnel. We support our sales organization with regional service centers
in: Alabama; Nevada; North Carolina; Puerto Rico; Australia; Belgium;
Brazil and England. In addition, we utilize local inventories, sales
literature, internal sales service support, design engineering services and
a group of product engineers who travel with sales personnel and territory
managers and assist in product application issues, and conduct technical
seminars at customer locations to support our sales organization. We have
expanded our global presence through our acquisition of Europe's largest
manufacturer of cable television coaxial cable and our establishment of a
manufacturing and distribution facility in Brazil.
9
A key aspect of our customer support and distribution chain is the use
of our private truck fleet. We believe that the ability to offer rapid
delivery services, materials management and logistics services to customers
through our private truck fleet is an important competitive advantage.
Our products are sold and used in a wide variety of applications. Our
products primarily are sold directly to cable system operators,
telecommunications companies, original equipment manufacturers and
indirectly through distributors. There has been a trend on the part of
larger customers to consolidate their lists of qualified suppliers to
companies that have a global presence, can meet quality and delivery
standards, have a broad product portfolio and design capability, and have
competitive prices. We have concentrated our efforts on service and
productivity improvements including advanced computer aided design and
manufacturing systems, statistical process controls and just-in-time
inventory programs to increase product quality and shorten product delivery
schedules. Our strategy is to provide a broad selection of products in the
areas in which we compete. We have achieved a preferred supplier
designation from many of our cable television, telephone and original
equipment manufacturer customers. We have also strengthened our information
technology infrastructure and implemented an integrated information
management system, which we believe will help us improve business
practices.
Cable television services in the United States are provided primarily
by cable television system operators. It is estimated that the six largest
cable television system operators account for more than 70% of the cable
television subscribers in the United States. The major cable television
system operators include such companies as AT&T, AOL Time Warner, Comcast,
Charter Communications, Cox Communications and Adelphia Communications.
Many of the major cable television system operators are our customers,
including those listed above. During the years ended December 31, 2001 and
2000 no customer accounted for 10% or more of our net sales. During the
year ended December 31, 1999, AT&T and its affiliates accounted for
approximately 10% of our net sales. No other customer accounted for 10% or
more of our net sales in 1999.
PATENTS
We pursue an active policy of seeking intellectual property
protection, namely patents, for new products and designs. We hold 70
patents worldwide and have 93 pending applications. We consider our patents
to be valuable assets, but no single patent is material to our operations
as a whole. We intend to rely on our proprietary knowledge, trade secrets
and continuing technological innovation to develop and maintain our
competitive position.
We have entered into cross-licensing arrangements with Furukawa in
2001, providing us with access to key technology for communications cable,
especially fiber optic cable.
BACKLOG
At December 31, 2001, 2000, and 1999, we had an order backlog of
approximately, $22 million, $156 million, and $104 million, respectively.
Orders typically fluctuate from quarter to quarter based on customer demand
and general business conditions. Backlog includes only orders for products
scheduled to be shipped within six months. In some cases, unfilled orders
may be canceled prior to shipment of goods; but cancellations historically
have not been material. However, our current order backlog may not be
indicative of future demand.
COMPETITION
We encounter competition in substantially all areas of our business.
We compete primarily on the basis of product specifications, quality,
price, engineering, customer service and delivery time. Competitors include
large, diversified companies, some of which have substantially greater
assets and financial resources than we do, as well as medium to small
companies. We also face competition from certain smaller companies that
have concentrated their efforts in one or more areas of the coaxial cable
market. We believe that we enjoy a strong competitive position in the
coaxial cable market due to our position as a low-cost, high-volume coaxial
cable producer and reputation as a high-quality provider of
state-of-the-art cables with a strong orientation toward customer service.
We also believe that we enjoy a strong competitive position in the
electronic cable market due to our large direct field sales organization
within the local area network group, the comprehensive nature of our
product line and our long established reputation for quality.
10
RAW MATERIALS
In the manufacture of coaxial and twisted pair cables, we process
metal tubes, tapes and wires including bimetallic center conductors (wires
made of aluminum or steel with thin outer skins of copper) that are
fabricated from high-grade aluminum, copper and steel. Most of these
fabricated metal components are purchased under supply arrangements with
some portion of the unit pricing indexed to commodity market prices for
these metals. We have adopted a hedging policy pursuant to which we may,
from time to time, attempt to match futures contracts or option contracts
for a specific metal with some portion of the anticipated metal purchases
for the same periods. Other major raw materials we use include
polyethyelenes, polyvinylchlorides, FEP and other plastic insulating
materials, optical fibers, and wood and cardboard shipping and packaging
materials (some of which are available only from limited sources).
In 2001, approximately 7% of our raw material purchases were for
bimetallic center conductors for coaxial cables, nearly all of which were
purchased from Copperweld Corporation. We are working toward a long term
supply arrangement with Copperweld for certain bimetallic center conductors
for 2002 and 2003. If we are unable to continue to purchase the necessary
quantities of bimetallic center conductors, we may be unable to obtain
these raw materials on commercially acceptable terms from another source.
During 2001, we produced a significant portion of our bimetallic center
conductor requirements internally. However, there are few, and limited,
alternative sources of supply for these raw materials. Management believes
that our expected supply arrangement with Copperweld, together with our
increasing internal production of bimetallic center conductors, addresses
concerns regarding the continuing availability of these key materials and
enhances our ability to support the demand for broadband cable. Although
the parent of Copperweld has filed for Chapter 11 debtor-in-possession
reorganization, management does not believe this will affect the Company's
supply arrangement with Copperweld. However, the loss of Copperweld as a
supplier of bimetallic center conductors, Copperweld's inability to supply,
and/or our failure to manufacture or adequately expand our internal
production of these products, could have a material adverse effect on our
business and financial condition.
In addition, we purchase fine aluminum wire from a limited number of
suppliers. Fine aluminum wire is a smaller raw material purchase than
bimetallic center conductors and we produced a significant portion of our
requirements internally. However, neither of these major raw materials
could be readily replaced in sufficient quantities if all supplies from the
respective primary sources were disrupted for an extended period and we
were unable to expand production of these products internally. In such
event, there could be a materially adverse impact on our financial results.
Additionally, FEP is the primary raw material used throughout the
industry for producing flame retarding cables for local area network
applications. There are few worldwide producers of FEP and market supplies
have been periodically limited over the past several years. Availability of
adequate supplies of FEP will be critical to future local area network
cable sales growth.
Optical fiber is a primary material used for making fiber optic
cables. There are few worldwide suppliers of optical fiber. Availability of
adequate supplies of optical fiber will be critical to future fiber optic
cable sales growth. We believe that our ownership in BrightWave and the
optical fiber supply arrangement with a BrightWave affiliate address
concerns about continuing availability of these materials and enhances our
ability to support the demand for broadband cable.
Alternative sources of supply or access to alternative materials are
generally available for all other major raw materials we use. We believe
supplies of all other major raw materials we use are generally adequate and
we expect them to remain so for the foreseeable future.
ENVIRONMENT
We use some hazardous substances and generate some solid and hazardous
waste in the ordinary course of our business. As a result, we are subject
to various federal, state, local and foreign laws and regulations governing
the use, discharge and disposal of hazardous materials. Because of the
nature of our business, we have incurred, and will continue to incur, costs
relating to compliance with these environmental laws. Although we believe
that we are in substantial compliance with such environmental requirements,
and we have not in the past been required to incur material costs in
connection with this compliance, there can be no assurance that our cost to
comply with these requirements will not increase in the future. Although we
are unable to predict what legislation or regulations may be adopted in the
future with respect to environmental protection and waste disposal,
compliance with existing legislation and regulations has not had and is not
expected to have a materially adverse effect on our operations or financial
condition.
11
EMPLOYEES
At December 31, 2001, we employed approximately 3,100 people.
Substantially all employees are located in the United States. We also have
employees in foreign countries, including those located in Belgium and
Brazil. We believe that our relations with our employees are satisfactory.
ITEM 2. PROPERTIES
Our principal administrative, production and research and development
facilities are located in the following locations:
The Hickory, North Carolina facility occupies approximately 85,000
square feet under a lease expiring in 2005 with up to two additional
five-year renewal terms, which may be granted at the option of the lessor.
We recently consolidated our executive offices, sales office and customer
service department and certain corporate and administrative functions in
this new leased facility.
The Catawba, North Carolina facility occupies approximately 1,000,000
square feet and is owned by us. The Catawba facility manufactures coaxial
cables, is the major distribution facility for our products and houses
certain administrative and engineering activities.
The Claremont, North Carolina facility occupies approximately 587,500
square feet and is owned by us. The Claremont facility manufactures
coaxial, copper twisted pair and fiber optic cables and houses certain of
our administrative, sales and engineering activities.
The Scottsboro, Alabama facility occupies approximately 150,000 square
feet and is owned by us. The Scottsboro facility manufactures coaxial
cables.
The Statesville, North Carolina facility occupies approximately
315,000 square feet and is owned by us. The Statesville facility houses
certain cable-in-conduit manufacturing, wire fabrication, recycling,
research and development, and engineering activities.
The Seneffe, Belgium, facility occupies approximately 134,000 square
feet, including a warehouse, and is owned by us. The Seneffe facility
houses certain coaxial cable manufacturing and sales activities for HFC,
wireless and other applications.
The Newton, North Carolina facility occupies approximately 455,000
square feet of wireless cable manufacturing, office and warehouse space and
is owned by us. This facility houses some of our administrative,
engineering, and research and development functions as well as
manufacturing and sales activities for our wireless products group.
The Sparks, Nevada facility occupies approximately 225,500 square feet
under a lease expiring in 2003 with additional renewal terms available. The
Sparks facility manufactures cable-in-conduit products and houses regional
service and distribution activities.
The Jaguariuna, Brazil facility occupies approximately 283,000 square
feet of manufacturing and office space and is owned by us. The Jaguariuna
facility houses certain coaxial cable manufacturing and sales activities
for HFC, wireless and other applications.
We own a 259,000 square-foot facility in Kings Mountain, North
Carolina that we recently constructed, but are currently not using. This
property is currently being offered for sale.
We do not believe there is any material long-term excess capacity in
our facilities, although utilization is subject to change based on customer
demand. We believe that our facilities and equipment generally are well
maintained, in good operating condition and suitable for our purposes and
adequate for our present operations.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business. We do
not believe that any such claims or lawsuits will have a materially adverse
effect on our financial condition and results of operations.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
three months ended December 31, 2001.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the New York Stock Exchange under the
symbol "CTV." The following table sets forth the high and low sale prices
as reported by the New York Stock Exchange for the periods indicated.
Common Stock
Price Range
--------------------------
High Low
----------- -----------
2000
First Quarter $ 49.38 $ 30.75
Second Quarter $ 50.13 $ 32.63
Third Quarter $ 40.31 $ 22.63
Fourth Quarter $ 26.88 $ 15.25
2001
First Quarter $ 22.50 $ 14.75
Second Quarter $ 26.80 $ 15.00
Third Quarter $ 24.45 $ 15.66
Fourth Quarter $ 22.91 $ 16.50
As of March 22, 2002, the approximate number of registered
stockholders of record of our common stock was 669.
We have never declared or paid any cash dividends on our common stock.
We do not currently intend to pay cash dividends in the foreseeable future,
but intend to reinvest earnings in our business. Certain of our debt and
lease agreements contain limits on our ability to pay cash dividends on our
common stock.
14
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
Year Ended December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
RESULTS OF OPERATIONS:
Net sales $738,498 $950,026 $748,914 $571,733 $599,216
Gross profit 179,644 251,054 200,106 134,593 141,000
Operating income 62,874 146,051 117,517 72,843 79,182
Net income 27,865 84,887 68,077 39,231 37,458
Pro forma net income (1) -- -- -- -- 34,604
NET INCOME PER SHARE
INFORMATION (1):
Weighted average number of
shares outstanding:
Basic 52,692 51,142 50,669 49,221 49,107
Assuming dilution 53,500 56,047 52,050 49,521 49,238
Net income per share:
Basic $ 0.53 $ 1.66 $ 1.34 $ 0.80 $ 0.70
Assuming dilution $ 0.52 $ 1.60 $ 1.31 $ 0.79 $ 0.70
BALANCE SHEET DATA:
Cash and cash equivalents $ 61,929 $ 7,704 $ 30,223 $ 4,129 $ 3,330
Property, plant and equipment, net 277,169 251,356 181,488 135,082 133,235
Total assets 889,005 721,182 582,535 465,327 483,539
Working capital 199,125 209,104 146,952 93,982 112,786
Long-term debt, including
current maturities 194,569 227,436 198,402 181,800 265,800
Stockholders' equity 606,514 374,520 281,344 203,972 150,032
OTHER INFORMATION:
Operating cash flows $158,168 $ 44,924 $ 79,419 $ 82,971 $59,688
Depreciation and amortization 40,529 35,799 29,295 24,662 21,677
Capital expenditures 70,841 98,640 57,149 22,784 29,871
(1) We, through our wholly owned subsidiary CommScope, Inc. of
North Carolina ("CommScope NC"), were formerly a wholly owned
indirect subsidiary of General Instrument Corporation with no
separately issued or outstanding equity securities prior to the
spin-off on July 28, 1997. On the date of the spin-off, through
a series of transactions and stockholder dividends initiated by
General Instrument, CommScope NC became our wholly owned
subsidiary. The unaudited pro forma information for 1997 has
been prepared utilizing the historical consolidated statements
of income of CommScope NC adjusted to reflect a net debt level
of $275 million at January 1, 1997 at an assumed weighted
average borrowing rate of 6.35% plus the amortization of debt
issuance costs associated with the new borrowings and a total
of 49.1 million common shares outstanding and 49.2 million
common and potential common shares outstanding for basic and
diluted earnings per share, respectively.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY BACKGROUND
CommScope, Inc., through its wholly owned subsidiaries and equity
method investee, operates in the cable manufacturing business with
manufacturing facilities located in the United States, Europe and Latin
America. We are a leading worldwide designer, manufacturer and marketer of
a wide array of broadband coaxial cables and other high-performance
electronic and fiber optic cable products for cable television, telephony,
Internet access and wireless communications. We believe we are the world's
largest manufacturer of coaxial cable for hybrid fiber coax (HFC) broadband
networks. We are also a leading supplier of coaxial, twisted pair and fiber
optic cables for premise wiring (local area networks), wireless and other
communication applications.
Effective November 16, 2001, we acquired an 18.4% ownership interest
in OFS BrightWave, LLC ("OFS BrightWave"), an optical fiber and fiber cable
venture between us and The Furukawa Electric Co., Ltd. ("Furukawa"). OFS
BrightWave was formed to operate a portion of the optical fiber and fiber
cable business ("OFS Group") acquired from Lucent Technologies Inc.
("Lucent"). We issued 10.2 million shares of CommScope, Inc. common stock,
valued at $203.4 million, to Lucent in lieu of a portion of the purchase
price payable by Furukawa for the acquisition of a portion of Lucent's OFS
Group. Of the amount paid by us, $173.4 million represented a capital
contribution in exchange for our 18.4% equity interest in OFS BrightWave
and $30 million represented a loan from one of our wholly owned
subsidiaries to OFS BrightWave. The remaining 81.6% equity interest in OFS
BrightWave is owned by an indirect wholly owned subsidiary of Furukawa. The
businesses acquired include transmission fiber and cable manufacturing
capabilities at a 2.9 million square foot facility in Norcross, Georgia, as
well as facilities in Germany and Brazil and an interest in a joint venture
in Carrollton, Georgia. We expect our investment in OFS BrightWave and
other arrangements with Furukawa to provide access to optical fiber,
including premium fiber, under a supply agreement, enhance our technology
platform with access to key intellectual property, and create a strategic
partner in optical fiber and fiber cable manufacturing.
CRITICAL ACCOUNTING POLICIES
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes discussion and analysis of our consolidated
financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates and their underlying
assumptions form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
16
objective sources. Management bases its estimates on historical experience
and on assumptions that are believed to be reasonable under the
circumstances and revises its estimates, as appropriate, when changes in
events or circumstances indicate that revisions may be necessary.
Significant accounting estimates reflected in our financial statements
include the allowance for doubtful accounts, inventory excess and
obsolescence reserves, warranty and distributor price protection reserves,
reserves for sales returns, discounts, allowances, and rebates, income tax
valuation allowances, and impairment reviews for investments, fixed assets,
goodwill and other intangibles. Although these estimates are based on
management's knowledge of and experience with past and current events and
on management's assumptions about future events, it is at least reasonably
possible that they may ultimately differ materially from actual results.
Management believes the following critical accounting policies require
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. We maintain allowances for doubtful
accounts for estimated losses expected to result from the inability of our
customers to make required payments. These estimates are based on
management's evaluation of the ability of our customers to make payments,
focusing on customer financial difficulties and age of receivable balances.
An adverse change in financial condition of a significant customer or group
of customers could materially affect management's estimates related to
doubtful accounts. We record estimated reductions to revenue for customer
programs and incentive offerings, such as discounts, allowances, rebates
and distributor price protection programs. These estimates are based on
contract terms, historical experience, inventory levels in the distributor
channel, and other factors. Management believes it has sufficient
historical experience to allow for reasonable and reliable estimation of
these reductions to revenue. However, declining market conditions could
result in increased estimates of sales returns and allowances and potential
distributor price protection incentives, resulting in incremental
reductions to revenue. We maintain allowances for excess and obsolete
inventory. These estimates are based on management's assumptions about and
analysis of relevant factors including current levels of orders and
backlog, shipment experience, forecasted demand and market conditions. We
do not believe our products are subject to a significant risk of
obsolescence in the short term and management believes it has the ability
to adjust production levels in response to declining demand. However, if
actual market conditions become less favorable than anticipated by
management, additional allowances for excess and obsolete inventory could
be required. Management reviews goodwill, intangible assets, investments,
and other long-lived assets for impairment when events or changes in
circumstances indicate that their carrying values may not be fully
recoverable. Management assesses potential impairment of the carrying
values of these assets based on market prices, if available, or assumptions
about and estimates of future cash flows expected to arise from these
assets. Future cash flows may be adversely impacted by operating
performance, market conditions, and other factors. If an impairment is
indicated by this analysis, the impairment charge to be recognized, if any,
would be measured as the amount by which the carrying value exceeds fair
value, estimated by management based on market prices, if available, or
forecasted cash flows, discounted using a discount rate commensurate with
the risks involved. Assumptions related to future cash flows and discount
rates involve management judgment and are subject to significant
uncertainty. If future cash flows, discount rates and other assumptions
used in the assessment and measurement of impairment differ from
management's estimates and forecasts, additional impairment charges could
be required. Discussion of 2001 impairment charges is located under the
heading "Impairment charges for fixed assets and investments" within the
"Comparison of results of operations for the year ended December 31, 2001
with the year ended December 31, 2000." See also discussion of new
standards for testing goodwill and other identifiable intangible assets for
impairment under "Newly Issued Accounting Standards."
FINANCIAL HIGHLIGHTS
For the three-year period 1999-2001, we reported the following results (in
thousands, except per share amounts):
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999
----------------- ------------------ ------------------
Net income $ 27,865 $ 84,887 $ 68,077
Net income per share - assuming dilution 0.52 1.60 1.31
Net income for the year ended December 31, 2001 included pretax
charges of $13 million, or $0.18 per diluted share, net of tax, related to
impairment of certain fixed assets, including our Kings Mountain facility
and an investment in a wireless infrastructure project management company,
now in the process of being liquidated. The tax benefit of the capital loss
arising from impairment of this investment has been offset by a valuation
allowance due to uncertainty about our ability to utilize this tax
deduction. These impairment charges were primarily the result of
challenging industry conditions which prompted management to make certain
estimates and assumptions in order to determine if the carrying values of
these assets may not be fully recoverable.
Also included in net income for the year ended December 31, 2001 were
pretax charges of approximately $8 million, or $0.09 per diluted share, net
of tax, representing financing and formation costs related to our
17
investment in OFS BrightWave. These pretax charges were incurred prior to
restructuring the joint venture arrangements with Furukawa related to the
acquisition of Lucent's OFS Group and are not capitalizable as part of our
investment in the restructured venture. See further discussion under
"Terminated acquisition costs."
Net income for the year ended December 31, 2000 included a pretax gain
of $517 thousand related to the final liquidation of a closed Australian
joint venture. This joint venture was completely dissolved as of December
29, 2000, when the deregistration period required by Australian legal
authorities expired.
Our consolidated financial statements and related notes, included in
Item 8, should be read as an integral part of the financial highlights and
the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
WITH THE YEAR ENDED DECEMBER 31, 2000
NET SALES
Net sales for the year ended December 31, 2001 decreased $211.5
million or 22% to $738.5 million, from 2000. The decrease in net sales was
mainly due to deteriorating global economic conditions which resulted in
declining demand and competitive pricing pressures for some product lines
both domestically and internationally.
The following table presents (in millions) our revenues by broad
product group as well as domestic versus international sales for the years
ended December 31, 2001 and 2000:
2001 Net % of 2001 Net 2000 Net % of 2000
Sales Sales Sales Net Sales
----------------------------------------------------------
Broadband/Video Products $588.3 79.7 % $ 723.8 76.2 %
LAN Products 88.3 12.0 85.3 9.0
Wireless & Other Telecom Products 61.9 8.3 140.9 14.8
----------------------------------------------------------
Total worldwide sales $738.5 100.0 % $ 950.0 100.0 %
==========================================================
Domestic sales $565.2 76.5 % $ 717.6 75.5 %
International sales 173.3 23.5 232.4 24.5
----------------------------------------------------------
Total worldwide sales $738.5 100.0 % $ 950.0 100.0 %
==========================================================
For the year ended December 31, 2001, international sales decreased
$59.1 million, or 25%, to $173.3 million, from 2000, with sales down year
over year in all regions primarily due to the difficult global environment.
While we believe that near term international sales will be depressed until
the global economy improves, we remain optimistic about the long-term
global opportunities for broadband cable. During 2001, we opened a new
manufacturing facility in Brazil, which we expect will enhance our
competitive position in Latin America, especially when this region's
economy improves.
Net sales of broadband and other video distribution products
("Broadband/Video Products") for the year ended December 31, 2001 decreased
$135.5 million, or 19%, to $588.3 million, from 2000. The decrease was
primarily attributable to lower sales volumes, and was significantly
affected by the downturn in international demand. Increases in sales to
most of the large domestic broadband service providers were more than
offset by substantial decreases in sales to alternate service providers and
to AT&T Broadband. Domestic Broadband/Video sales decreased approximately
18
16% year over year. The decrease in Broadband/Video Products sales volume
was somewhat offset by modest price increases for certain HFC products.
Sales were also positively affected by a favorable shift in product mix
resulting from sales of fiber optic cable, primarily for broadband
applications, which represented approximately 15% of total sales in 2001.
However, sales of fiber optic cable slowed during the second half of 2001
as a result of challenging market conditions and competitive pricing
pressures. While we expect the market for fiber optic cable to remain
difficult during 2002, we believe that our ability to offer both coaxial
and fiber optic cable, as well as other types of communications cables,
continues to be an important competitive advantage. We also believe that we
will benefit in 2002 from the anticipated increase in infrastructure
spending announced by AT&T Broadband.
Net sales of local area network and other data application products
("LAN Products") for the year ended December 31, 2001 increased $3.0
million, or 4%, to $88.3 million, from 2000. The increase was primarily due
to a favorable shift to more enhanced products at higher unit prices,
offset by a decline in unit volume. Net pricing was not a significant
factor in the year-over-year increase in sales of LAN Products. We began
implementing a comprehensive performance improvement plan for our LAN
Products group during the fourth quarter of 2000. This plan included, among
other things, reorganizing LAN sales and operational management as well as
ongoing efforts to reduce distribution channel inventory, improve
efficiency, and increase the velocity of the manufacturing and distribution
cycle. This reorganization resulted in growth in both sales and
profitability of our LAN Products and we believe it has improved our
ability to provide world-class network cabling solutions to our domestic
customers.
Net sales of wireless and other telecommunications products ("Wireless
and Other Telecom Products") for the year ended December 31, 2001 decreased
$79.0 million, or 56%, to $61.9 million, from 2000, primarily due to lower
sales of Other Telecom Products related to telephone central office
applications. The decrease in sales of Other Telecom Products was primarily
driven by lower volumes, offset somewhat by a favorable shift in product
mix. We expect ongoing softness and significant competitive pressures for
these Other Telecom Products. Sales of Wireless Products were down
significantly year over year primarily due to the general slowdown in
telecommunications capital spending and the inability of certain customers
to get financing for their projects. The decrease in sales of Wireless
Products was primarily driven by lower volumes, and was impacted somewhat
by an unfavorable shift in product mix. During 2001 we expanded our global
capacity in the wireless market and now have production capability in Latin
America and Europe. We continue to experience aggressive competition in the
wireless market.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 2001 was $179.6 million,
compared to $251.1 million for 2000, a decrease of 28%. Gross profit margin
decreased over 200 basis points to 24.3% for the year ended December 31,
2001, compared to 26.4% for 2000. The decreases in gross profit and gross
profit margin were primarily due to lower sales volumes. Changes in
material costs did not have a significant impact on 2001 gross profit
margin.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the year
ended December 31, 2001 increased $2.3 million, or 3%, to $83.5 million,
from 2000. The year-over-year increase in SG&A expense was primarily due to
increased charges for doubtful accounts and ongoing investment in our
information technology infrastructure. We recorded charges for doubtful
accounts in the amount of approximately $6.5 million in 2001 compared to
$4.5 million in 2000. We believe we have taken appropriate charges for
doubtful accounts as a result of the difficult market environment based on
our analysis of customer financial difficulties, age of receivable
balances, and other relevant factors. We plan to continue investing in our
information technology infrastructure in order to further differentiate our
service model through technology.
As a percentage of net sales, SG&A expense was 11.3% for the year
ended December 31, 2001 compared to 8.5% for the year ended December 31,
2000. The increase in SG&A expense as a percentage of net sales was
primarily due to sales declining faster than sales and marketing expenses,
as well as the factors discussed above. We intend to continue to fund
domestic and international sales and marketing efforts in order to enhance
our competitive position around the world in anticipation of improving
global economic conditions.
19
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales
decreased to 1.0% for the year ended December 31, 2001, compared to 1.9%
for the year ended December 31, 2000. This decrease was primarily due to
the substantial completion of certain aspects of our vertical integration
projects for bimetallic wire fabrication and fine wire drawing in 2001.
During 2001, our major projects consisted primarily of research and
engineering activity related to the production of copper clad metals
required to advance the design of those materials and related processes to
the point that they meet specific functional and economic requirements and
are ready for full-scale manufacturing. We have undertaken these projects
as part of our vertical integration strategy in an effort to reduce
materials costs and reliance on limited sources of key raw materials. These
projects were in process as of December 31, 2001 and are expected to
continue into 2002. In addition, we entered into cross-licensing
arrangements with Furukawa in 2001, providing us with access to key
technology for communications cable, especially fiber optic cable, that has
taken years to develop.
TERMINATED ACQUISITION COSTS
Our acquisition of an 18.4% ownership interest in OFS BrightWave as of
November 16, 2001 was restructured from a previously contemplated joint
venture arrangement announced July 24, 2001. Under the originally
contemplated arrangement, we would have formed two joint ventures with
Furukawa to acquire certain fiber cable and transmission fiber assets of
Lucent's OFS Group. Given the uncertain economic environment and severe
downturn in the telecommunications market as well as associated
difficulties in the financing markets following the September 11, 2001
tragedy, we agreed with Furukawa to restructure the joint venture
arrangements, resulting in a reduced ownership participation for us. As a
result of the restructuring of this venture, we recorded pretax charges of
approximately $8 million, or $0.09 per diluted share, net of tax, during
2001, related to financing and formation costs of the original joint
venture arrangements, which are not capitalizable as part of our investment
in the restructured venture.
IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
During 2001, we took a number of steps to manage costs and evaluated
all aspects of our business in response to challenging industry conditions.
As a result of our review, we recorded pretax charges of approximately $13
million, or $0.18 per diluted share, net of tax, during the year ended
December 31, 2001 related to the impairment of certain assets. Management
identified specific assets that were determined to have no future use in
our operations and assets whose anticipated undiscounted future cash flows
were less than their carrying values. These impairment adjustments included
equipment charges and a write-down of our Kings Mountain facility, which
was under construction. Equipment that was intended for the Kings Mountain
facility is expected to be redeployed overseas. The impairment charges also
included the write-off of an investment in a wireless infrastructure
project management company, now in the process of being liquidated, whose
fair value was determined to be zero. The tax benefit of the capital loss
arising from impairment of this investment has been offset by a valuation
allowance due to uncertainty about our ability to utilize this tax
deduction.
20
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the year ended December 31, 2000
included a pretax gain of $517 thousand related to the final liquidation of
a closed Australian joint venture. This joint venture was completely
dissolved as of December 29, 2000, when the deregistration period required
by the Australian legal authorities expired.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 2001 was $7.5
million, compared to $9.7 million for 2000. Our weighted average effective
interest rate on outstanding borrowings, including amortization of
associated loan fees, was 4.61% as of December 31, 2001, compared to 5.14%
as of December 31, 2000. The decrease in net interest expense was primarily
due to lower average outstanding balances on long-term debt and lower
variable interest rates.
INCOME TAXES
Our effective income tax rate was 37% for the year ended December 31,
2001 compared to 38% for 2000. The decrease in our effective income tax
rate was primarily a result of certain tax savings strategies. The benefit
of these strategies was offset by valuation allowances established for
deferred tax assets related to a capital loss carryforward on an investment
and a foreign net operating loss carryforward, the realization of which is
considered to be uncertain. We expect the effective income tax rate for
2002 to remain at approximately 37%.
EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
For the six week period from November 17, 2001 to December 31, 2001,
our 18.4% equity interest in the losses of OFS BrightWave was approximately
$11 million, pretax. Since OFS BrightWave has elected to be taxed as a
partnership, we have recorded a tax benefit of approximately $4 million
related to our 18.4% equity interest in the flow-through losses. The losses
of approximately $61 million incurred by OFS BrightWave during the six-week
period ended December 31, 2001 were impacted by nonrecurring startup and
organizational costs of approximately $15 million, related to the write-off
of in-process research and development, separation from Lucent and
commencement of independent operations. OFS BrightWave operates in the same
markets we do and its financial results were also adversely affected by the
downturn in the global economy and the telecommunications industry. In
addition, OFS BrightWave is party to manufacturing and supply agreements
with OFS Fitel, LLC, which is wholly owned by Furukawa. As a result of
Furukawa's controlling interest in both ventures, it has significant
influence over the structure and pricing of these agreements. Future
changes in these terms, over which we have limited influence, could have a
material impact on the profitability of OFS BrightWave and ultimately on
our results of operations and financial condition. Due primarily to the
difficult market environment for certain telecommunications products and
challenging global economic conditions, we expect ongoing pricing pressure
and weak demand industry wide for fiber optic cable products during 2002.
Based on these expectations, we expect that OFS BrightWave will incur
losses for 2002.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
WITH THE YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales for the year ended December 31, 2000 increased $201.1
million or 27% to $950.0 million, from 1999. The increase in net sales was
primarily driven by strong sales of broadband and fiber optic cable for HFC
applications. Higher sales volume, combined with price increases on certain
HFC products, accounted for the majority of the year-over-year sales
increase.
21
The following table presents (in millions) our revenues by broad
product group as well as domestic versus international sales for the years
ended December 31, 2000 and 1999:
2000 Net % of 2000 Net 1999 Net % of 1999
Sales Sales Sales Net Sales
----------------------------------------------------------
Broadband/Video Products $ 723.8 76.2 % $ 557.4 74.4 %
LAN Products 85.3 9.0 87.3 11.7
Wireless & Other Telecom Products 140.9 14.8 104.2 13.9
----------------------------------------------------------
Total worldwide sales $ 950.0 100.0 % $ 748.9 100.0 %
==========================================================
Domestic sales $ 717.6 75.5 % $ 571.2 76.3 %
International sales 232.4 24.5 177.7 23.7
----------------------------------------------------------
Total worldwide sales $ 950.0 100.0 % $ 748.9 100.0 %
==========================================================
For the year ended December 31, 2000, international sales increased
31% compared to 1999, mainly due to robust demand for HFC products around
the world, with particular strength in the Latin American region.
Net sales of Broadband/Video Products for the year ended December 31,
2000 increased $166.4 million or 30% to $723.8 million, from 1999. The
increase in sales of Broadband/Video Products resulted primarily from
strong sales of broadband cable to domestic telecommunications companies
and cable television system operators. Most of the increase was
attributable to volume with modest price increases on certain products and
slight improvement in product mix. Domestic Broadband/Video sales grew
approximately 29% year over year, led by strong sales of fiber optic cable.
Net sales of LAN Products for the year ended December 31, 2000
decreased $2 million or 2% to $85.3 million, from 1999. The decrease in
sales of LAN Products was primarily driven by declining unit volume and
some decline in prices, offset partially by a favorable shift to more
enhanced products with higher average selling prices. The year-over-year
unit volume decline in sales of LAN Products was primarily due to a buildup
of distribution channel inventory in the first half of 2000, which slowed
sales in the second half of the year. We began implementing a comprehensive
performance improvement plan for our LAN Products group during the fourth
quarter of 2000. This plan included, among other things, reorganizing LAN
sales and operational management as well as ongoing efforts to reduce
distribution channel inventory, improve efficiency, and increase the
velocity of the manufacturing and distribution cycle.
Net sales of Wireless and Other Telecom Products for the year ended
December 31, 2000 increased $36.7 million or 35% to $140.9 million, from
1999. This increase was primarily due to growth in sales of both telephone
central office products and our newest-generation wireless cables. Other
Telecom Products declined in terms of volume, but this decline was more
than offset by improved product mix. The volume of Wireless Products sold
increased year over year, but this increase was somewhat reduced by an
unfavorable shift in product mix and declining prices.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 2000 was $251.1 million,
compared to $200.1 million for 1999, an increase of 25%. Gross profit
margin decreased slightly to 26.4% for the year ended December 31, 2000,
compared to gross profit margin of 26.7% for 1999.
22
While price increases for HFC products had a positive effect on gross
profit margin during 2000, they were more than offset by the combination of
lower prices for LAN Products, the rising cost of key materials, and
reduced manufacturing efficiency resulting from capacity expansions.
During 2000, supplies of key materials, such as bimetallic center
conductors and optical fiber were tight. A major focus for us in 2000 was
the acceleration of internal production of bimetallic center conductors for
coaxial cables. While the ramp up of production progressed slower than
anticipated, we made significant progress improving output in this project
in the second half of 2000.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expense for the year ended December 31, 2000 was $81.2 million,
compared to $68.9 million for 1999. As a percentage of net sales, SG&A
expense was 8.5% for the year ended December 31, 2000 and 9.2% for the year
ended December 31, 1999. The absolute amount of SG&A expense increased over
the prior period as a result of the expansion of sales and marketing
efforts to support developing products and sales growth targets. However,
as a percentage of net sales, SG&A expense decreased in 2000 compared to
1999, as a result of increased sales levels and effective cost management
efforts.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales
increased to 1.9% for the year ended December 31, 2000, compared to 1.1%
for the year ended December 31, 1999. This increase was primarily due to
our vertical integration projects for bimetallic wire fabrication and fine
wire drawing. We have undertaken these projects as part of our vertical
integration strategy in an effort to reduce materials costs and reliance on
limited sources of key raw materials.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the year ended December 31, 2000
included a pretax gain of $517 thousand related to the final liquidation of
a closed Australian joint venture. This joint venture was completely
dissolved as of December 29, 2000, when the deregistration period required
by the Australian legal authorities expired.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 2000 was $9.7
million, compared to $9.6 million for 1999. Our weighted average effective
interest rate on outstanding borrowings, including amortization of
associated loan fees, was 5.14% as of December 31, 2000, compared to 4.82%
as of December 31, 1999.
INCOME TAXES
Our effective income tax rate was 38% for the year ended December 31,
2000 and 37% for 1999. This slight increase was primarily due to the
dilution of our foreign sales corporation tax benefit, a result of strong
domestic sales and increasing sales from our Belgium facility, and higher
tax rates in foreign jurisdictions, particularly Belgium.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity both on a short-term and long-term
basis are cash flows provided by operations and borrowing capacity under
credit facilities. Reduced sales and profitability could reduce the
availability of cash provided by operations. In addition, increases in
sales and accounts receivable could reduce our operating cash flows in the
short term until cash collections catch up to the higher level of billings.
23
Cash provided by operations increased $113.2 million, or 252%, to
$158.2 million for the year ended December 31, 2001, from 2000. This
increase in operating cash flow was primarily due to reduced working
capital on lower sales. The most significant impact on operating cash flow
during 2001 was derived from collections of accounts receivable in excess
of billings.
Working capital decreased 5% to $199.1 million at December 31, 2001,
from $209.1 million at December 31, 2000. The decrease in working capital
was primarily due to lower accounts receivable, resulting from collections
in excess of billings due to declining sales. Lower inventory levels
resulting from reduced demand for our products also contributed to reduced
working capital. The decrease in other accrued liabilities in 2001, which
increased working capital, was primarily due to lower accrued compensation
costs related to employee incentive plans.
During the year ended December 31, 2001, we invested $70.8 million in
equipment and facilities compared to $98.6 million in 2000. The capital
spending during 2001 and 2000 was primarily for projects related to
vertical integration, capacity expansion, and equipment upgrades. We have
completed an aggressive three-year capacity expansion program that
increased our overall production capability in order to position ourselves
to meet anticipated worldwide demand for HFC products. While we may place
additional production capability in important international markets, we
expect capital expenditures to remain at a level below depreciation and
amortization expense for the next several years. We currently expect
capital expenditures to be in the range of $25 to $30 million in 2002,
primarily for global capacity expansion and information technology
initiatives, depending upon business conditions.
As of December 31, 2001, we had committed funds of approximately $3.1
million under purchase orders and contracts related to vertical integration
projects and equipment and capacity upgrades to meet current and
anticipated future business demands.
During the fourth quarter of 2001, we made a strategic investment by
joining with Furukawa to acquire an interest in a portion of the optical
fiber and fiber cable business of Lucent's OFS Group. We acquired an 18.4%
ownership interest, valued at $173.4 million in OFS BrightWave, which
includes transmission fiber and fiber cable manufacturing capabilities at a
2.9 million square foot facility in Norcross, Georgia, as well as
facilities in Germany and Brazil and an interest in a joint venture in
Carrollton, Georgia. The acquisition of our $173.4 million ownership
interest and a $30 million note receivable was financed in a noncash
transaction by issuing 10.2 million shares of CommScope, Inc. common stock
valued at $203.4 million to Lucent. We also incurred direct costs of
acquisition of $4.8 million in 2001, which were capitalized in our
investment balance as of December 31, 2001. Although we are not required to
make any additional cash investments in the form of loans or capital
contributions to OFS BrightWave, our failure to do so could result in the
dilution of our ownership percentage. In addition, we have a contractual
right to sell our ownership interest to Furukawa in 2004 for a cash payment
to us of our original $173.4 million capital investment and an acceleration
of repayment of the note receivable.
OFS BrightWave is party to manufacturing and supply agreements with
OFS Fitel, LLC, which is wholly owned by Furukawa. As a result of
Furukawa's controlling interest in both ventures, it has significant
influence over the structure and pricing of these agreements. Future
changes in these terms, over which we have limited influence, could have a
material impact on the profitability of OFS BrightWave and ultimately on
the results of our operations and financial condition.
In addition, we are party to an optical fiber supply agreement with
OFS Fitel, LLC which provides us with another source for our optical fiber
requirements. The pricing under this arrangement is based on market prices,
adjusted periodically as agreed upon by the parties. We made no purchases
under this supply agreement during 2001.
During 2000, we made an investment of approximately $3.8 million in a
wireless infrastructure project management company. Our investment in this
company, now in the process of being liquidated, was determined to have no
realizable value by the end of 2001, and was completely written off as an
impaired asset.
Our revolving credit agreement, which expires in December 2002,
provides a total of $350 million in revolving credit commitments in the
form of loans and letters of credit. Our available borrowing capacity under
the revolving credit agreement, determined on a quarterly basis, is based
on certain financial ratios which are affected by the level of long-term
debt outstanding and our profitability. As of December 31, 2001, we had no
outstanding indebtedness under this revolving credit agreement and our
available borrowing capacity was approximately $269 million. We owed total
long-term debt of $194.6 million, or 24% of our book capital structure,
defined as long-term debt and total stockholders' equity, as of December
31, 2001, compared to $227.4 million, or 38% of our book capital structure,
as of December 31, 2000. The decrease in long-term debt during 2001 was
primarily due to the repayment of $30 million under our revolving credit
agreement, in addition to repayments of $2 million and favorable foreign
currency transaction gains on our Eurodollar Credit Agreement of
approximately $1 million, which were recorded to accumulated other
comprehensive loss.
24
Our revolving credit agreement contains covenants requiring us to
maintain a total debt to EBITDA ratio, a net worth maintenance ratio, and
an interest expense ratio. Our performance under these covenants could
impact our cost of funds and our noncompliance with these covenants could
negatively impact our access to funds available under that facility. We
were in compliance with these covenants as of December 31, 2001. However,
we expect the market for fiber optic cable to remain difficult during 2002,
and if our share of losses in OFS BrightWave is significant, we may be at
risk of noncompliance with these covenants. This revolving credit agreement
expires in December 2002 and we do not currently anticipate difficulty
securing new financing on acceptable terms.
MARKET RISK
We have established a risk management strategy that includes the
reasonable use of derivative and nonderivative financial instruments
primarily to manage our exposure to market risks resulting from adverse
fluctuations in commodity prices, interest rates and foreign currency
exchange rates. Derivative financial instruments which may be used by us,
include commodity pricing contracts, foreign currency exchange contracts,
and contracts hedging exposure to interest rates. Our policy is to
designate all derivatives as hedges. We do not use derivative financial
instruments for trading purposes, nor do we engage in speculation.
Materials, in their finished form, account for a large portion of our
cost of sales. These materials, such as fabricated aluminum, plastics,
bimetals, copper and optical fiber, are subject to changes in market price
as they are linked to the commodity markets. Management attempts to
mitigate these risks through effective requirements planning and by working
closely with our key suppliers to obtain the best possible pricing and
delivery terms. However, increases in the prices of certain commodity
products could result in higher overall production costs.
Approximately 23% of our 2001 sales were to customers located outside
the United States. Although we primarily bill customers in foreign
countries in US dollars, a portion of our sales are denominated in
currencies other than the US dollar, particularly sales from our foreign
subsidiaries. Significant changes in foreign currency exchange rates could
adversely affect our international sales levels and the related collection
of amounts due. In addition, a significant decline in the value of
currencies used in certain regions of the world as compared to the US
dollar could adversely affect product sales in those regions because our
products may become more expensive for those customers to pay for in their
local currency. The 1999 acquisition of our Belgian subsidiary created a
specific market risk that a decline in the value of the euro compared to
the US dollar could adversely affect our net investment in that subsidiary.
Our Eurodollar Credit Agreement, which is denominated in euros, serves as a
partial hedge of our net investment in the Belgian subsidiary. Our
investment in Brazil during 2000 created a new foreign subsidiary and a
specific market risk that a decline in the value of the Brazilian real
compared to the US dollar could adversely affect our net investment in that
subsidiary. We continue to evaluate alternatives to help us reasonably
manage the market risk of our net investment in the Brazilian subsidiary.
25
As of December 31, 2001 and 2000, the only derivative financial
instrument outstanding was an interest rate swap agreement that serves as a
fixed-rate hedge of the variable-rate borrowings under our Eurodollar
Credit Agreement, as required under the covenants of this term loan. The
fair value of the interest rate swap agreement outstanding at December 31,
2001 and 2000 was not material to our financial position. At December 31,
2001, we were continuing to evaluate hedging alternatives related to
foreign currency exposures. In addition, we evaluated our commodity pricing
exposures and concluded that it was not currently practical to use
derivative financial instruments to hedge our current commodity price
risks.
Our nonderivative financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables, and debt instruments.
At December 31, 2001 and 2000, the carrying values of each of the financial
instruments recorded on our balance sheet were considered representative of
their respective fair values due to their variable interest rates and / or
short terms to maturity, with the exception of our convertible debt, which
was recorded in the financial statements at $172.5 million, but had a fair
value of $136.7 million at December 31, 2001 and $122.5 million at December
31, 2000. Fair value of our debt is estimated using discounted cash flow
analysis, based on our current incremental borrowing rates for similar
types of arrangements, or quoted market prices whenever available.
The following tables summarize our market risks associated with
long-term debt and foreign currency exposure as of December 31, 2001 and
2000. The tables present principal and interest cash outflows and related
interest rates by year of maturity. Variable interest rates for each year
represent the interest rate effective for the related loan as of December
31, 2001 for the first table and as of December 31, 2000 for the second
table. However, the interest rate on the Eurodollar Credit Agreement for
both years is fixed at 4.53%, since we have designated an interest rate
swap agreement as a fixed-rate hedge of the variable rate borrowings under
this agreement, as required by its terms. The interest cash outflows for
the Eurodollar Credit Agreement, disclosed below, include the effect of the
interest rate swap agreement, which effectively converts the variable
interest payments to a fixed-rate basis. In addition, foreign currency
exchange rates on our Eurodollar Credit Agreement, for both principal and
interest payments, are based on the exchange rate as of December 31, 2001
for the first table and as of December 31, 2000 for the second table. The
tables assume payments will be made in accordance with due dates in the
respective agreements and no prepayment of any amounts due, with the
exception of the prepayment of $30 million under our revolving credit
agreement in early 2001.
26
The tabular format used below does not reflect our option to redeem
all or a portion of the $172.5 million convertible notes at any time on or
after December 15, 2002 at redemption prices specified in the indenture, or
our option to prepay the Eurodollar Credit Agreement in whole or in part at
any time prior to the due date of March 1, 2006.
Long-term Debt Principal and Interest Payments by Year
($ in millions)
As of December 31, 2001
2002 2003 2004 2005 2006 There- Total Fair
after Value
-----------------------------------------------------------------------------------
Fixed rate ($US) $ 6.9 $ 6.9 $ 6.9 $ 6.9 $179.4 $ -- $207.0 $136.7
Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% --
Variable rate ($US) $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 12.4 $13.4 $10.8
Average interest rate 2.13% 2.13% 2.13% 2.13% 2.13% 2.13%
Fixed rate (EUR) $ 3.1 $ 3.0 $ 2.9 $ 2.7 $ 0.7 $ -- $12.4 $11.3
Average interest rate 4.53% 4.53% 4.53% 4.53% 4.53% --
As of December 31, 2000
2001 2002 2003 2004 2005 There- Total Fair
after Value
-----------------------------------------------------------------------------------
Fixed rate ($US) $ 6.9 $ 6.9 $ 6.9 $ 6.9 $ 6.9 $ 179.4 $213.9 $122.5
Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Variable rate ($US) $30.2 $ -- $ -- $ -- $ -- $ -- $ 30.2 $ 30.0
Average interest rate 7.02% -- -- -- -- --
Variable rate ($US) $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 17.3 $ 20.8 $ 10.8
Average interest rate 6.66% 6.66% 6.66% 6.66% 6.66% 6.66%
Fixed rate (EUR) $ 2.7 $ 3.2 $ 3.2 $ 3.1 $ 2.9 $ 0.7 $ 15.8 $ 14.1
Average interest rate 4.53% 4.53% 4.53% 4.53% 4.53% 4.53%
27
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations
as of December 31, 2001 (in millions):
Amount of Payments Due
per Period
-----------------------------------------
Contractual Obligations Total Less than 1-3 years 4-5 years After 5
Payments Due 1 year years
-------------------------------------------------------
Long-term debt $ 194.6 $ 2.7 $ 5.4 $ 175.7 $ 10.8
Operating leases (a) 29.1 3.9 6.1 3.8 15.3
-------------------------------------------------------
Total contractual cash
obligations $ 223.7 $ 6.6 $ 11.5 $ 179.5 $ 26.1
=======================================================
(a) The contractual obligations related to operating leases include
payments due under a five-year tax-advantaged operating lease for our
corporate office building. At the end of the initial lease term, or renewal
term(s) if renewed, if we should decide not to purchase the facility for
the total construction cost of $12.8 million, we are obligated to pay a
final lease payment of approximately $11 million and to market the facility
on behalf of the lessor. Any proceeds received from the sale of the
facility would first be used to reimburse the lessor for the difference
between the total construction cost of the facility and the final lease
payment. Any remaining sales proceeds would be retained by us.
EFFECTS OF INFLATION
We continually attempt to minimize any effect of inflation on earnings
by controlling our operating costs and selling prices. During the past few
years, the rate of inflation has been low and has not had a material impact
on our results of operations.
The principal raw materials purchased by us (fabricated aluminum,
plastics, bimetals, copper and optical fiber) are subject to changes in
market price as these materials are linked to the commodity markets. To the
extent that we are unable to pass on cost increases to customers, the cost
increases could have a significant impact on the results of our operations.
OTHER
We are either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, we believe none of these legal
matters will have a materially adverse effect on our financial statements
upon final disposition. In addition, we are subject to various federal,
state, local and foreign laws and regulations governing the use, discharge
and disposal of hazardous materials. Our manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Compliance with current laws and regulations has not had, and is not
expected to have, a materially adverse effect on our financial statements.
NEWLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
Both statements are effective for us on January 1, 2002. SFAS No. 141
28
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and broadens the criteria for
recording intangible assets separate from goodwill. SFAS No. 142 requires
the use of a nonamortization approach to account for purchased goodwill and
certain intangible assets with indefinite useful lives and also requires at
least an annual assessment for impairment by applying a fair-value-based
test. Intangible assets with definite useful lives will continue to be
amortized over their useful lives. The adoption of these statements will
have a material impact on our results of operations and financial position
after December 31, 2001 when goodwill will no longer be amortized. The
pretax impact on our results of operations and financial position of
adopting a nonamortization approach to accounting for goodwill under SFAS
No. 142 is expected to be approximately $5.4 million per year. We are
currently assessing the impact of the other provisions of these two
statements, which will be adopted in 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." SFAS No.
143 will require the accrual, at fair value, of the estimated retirement
obligation for tangible long-lived assets if we are legally obligated to
perform retirement activities at the end of the related asset's life. We
are currently assessing the impact of this statement, which will be
effective for us on January 1, 2003.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment or Disposal of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," but retains many of its
fundamental provisions. Additionally, this statement expands the scope of
discontinued operations to include more disposal transactions. SFAS No.144
is effective for us on January 1, 2002. The initial adoption is not
expected to have a material impact on our financial statements.
EUROPEAN MONETARY UNION -- EURO
Effective January 1, 1999, 12 member countries of the European
Monetary Union established fixed conversion rates between their existing
sovereign currencies, and adopted the euro as their new common legal
currency. As of that date, the euro began trading on currency exchanges.
The legacy currencies of the participating countries remained legal tender
for a transition period between January 1, 1999 and January 1, 2002. We
conduct business in member countries.
During the transition period, cashless payments (for example, wire
transfers) could be made in the euro, and parties to individual
transactions could elect to pay for goods and services using either the
euro or the legacy currency. Between January 1, 2002 and February 28, 2002,
the participating countries introduced euro notes and coins and will
eventually withdraw all legacy currencies so that they will no longer be
available. European legislation provides that, unless otherwise agreed, the
introduction of the euro will not, by itself, give any party to a contract
the right to terminate the contract, or to demand renegotiation of the
terms.
As of December 31, 2001, we believe we have adequately addressed the
issues involved with the introduction of the euro. Among the issues which
we faced were the assessment and conversion of information technology
systems to allow for transactions to take place in both the legacy
currencies and the euro and the eventual elimination of legacy currencies.
We have also modified certain existing contracts, if required, and have
revised our pricing/marketing strategies in the affected European markets
to the extent necessary for the introduction of the euro. In addition, our
Belgian subsidiary successfully completed the conversion of its financial
systems and share capital to the euro. We do not believe the euro
conversion has had or will have a materially adverse effect on our
business, results of operations, cash flows or financial condition.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K that are other than historical facts
are intended to be "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, the Private Securities Litigation Reform
Act of 1995 and other related laws and include but are not limited to those
29
statements relating to sales and earnings expectations, expected demand,
cost and availability of key raw materials, internal production capacity
and expansion, competitive pricing, relative market position and outlook.
While we believe such statements are reasonable, the actual results and
effects could differ materially from those currently anticipated. These
forward-looking statements are identified, including, without limitation,
by their use of such terms and phrases as "intends," "intend," "intended,"
"goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projects," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes," "think," "thinks" and "scheduled" and similar expressions.
These statements are subject to various risks and uncertainties, many of
which are outside our control, including, without limitation, industry
excess capacity, financial performance of OFS BrightWave, pricing and
acceptance of our products, ability of our customers to secure adequate
financing or to pay, global economic conditions, expected demand from AT&T
Broadband and others, cost and availability of key raw materials (including
without limitation bimetallic center conductors, optical fibers, fine
aluminum wire and fluorinated-ethylene-propylene which are available only
from limited sources), successful operation of bimetal manufacturing and
other vertical integration activities, successful expansion and related
operation of our facilities, margin improvement, developments in
technology, industry competition, achievement of sales, growth, and
earnings goals, ability to obtain financing and capital on commercially
reasonable terms, regulatory changes affecting our business, foreign
currency fluctuations, technological obsolescence, the ability to achieve
reductions in costs, the ability to integrate acquisitions, our
participation in joint ventures, international economic and political
uncertainties, possible disruption due to terrorist activity or armed
conflict and other factors discussed. Actual results may also differ due to
changes in communications industry capital spending, which is affected by a
variety of factors, including, without limitation, general economic
conditions, acquisitions of communications companies by others,
consolidation within the communications industry, the financial condition
of communications companies and their access to financing, competition
among communications companies, technological developments, and new
legislation and regulation of communications companies. These and other
factors are discussed in greater detail in Exhibit 99.1 to this Form 10-K.
The information contained in this Form 10-K represents our best judgment at
the date of this report based on information currently available. However,
we do not intend, and are not undertaking any duty or obligation, to update
this information to reflect developments or information obtained after the
date of this report.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE #
Independent Auditors' Report........................................................32
Consolidated Statements of Income for the Years ended
December 31, 2001, 2000 and 1999.............................................33
Consolidated Balance Sheets as of December 31, 2001 and 2000........................34
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999.............................................35
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years ended December 31, 2001, 2000 and 1999..................36
Notes to Consolidated Financial Statements..........................................37 - 59
Schedule II - Valuation and Qualifying Accounts.....................................60
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CommScope, Inc.
We have audited the accompanying consolidated balance sheets of CommScope,
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and
the related consolidated statements of income, stockholders' equity,
comprehensive income and cash flows for each of the three years in the
period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We did not audit the financial statements of OFS BrightWave, LLC, the
Company's investment in which is accounted for by use of the equity method.
The Company's equity of $161,640 thousand in OFS BrightWave, LLC's net
assets at December 31, 2001 and of $6,922 thousand in that company's net
loss for the period from November 17, 2001 through December 31, 2001 are
included in the accompanying consolidated financial statements. The
financial statements of OFS BrightWave, LLC were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company, is based solely on the
report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits and the report of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of CommScope, Inc. and subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
March 18, 2002
32
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- ----------------- ------------------
Net sales (Note 17) $ 738,498 $ 950,026 $ 748,914
---------------- ----------------- ------------------
Operating costs and expenses:
Cost of sales (Note 17) 558,854 698,972 548,808
Selling, general and administrative 83,523 81,217 68,869
Research and development 7,117 18,419 8,332
Amortization of goodwill 5,365 5,367 5,388
Terminated acquisition costs (Notes 3 and 17) 7,963 - -
Impairment charges for fixed assets
and investments (Note 5) 12,802 - -
---------------- ----------------- ------------------
Total operating costs and expenses 675,624 803,975 631,397
---------------- ----------------- ------------------
Operating income 62,874 146,051 117,517
Other income (expense), net (Note 4) (191) 484 736
Interest expense (8,497) (10,214) (10,230)
Interest income (Note 17) 1,027 559 604
---------------- ----------------- ------------------
Income before income taxes and equity in losses
of OFS BrightWave, LLC 55,213 136,880 108,627
Provision for income taxes (20,426) (51,993) (40,550)
---------------- ----------------- ------------------
Income before equity in losses of OFS BrightWave, LLC 34,787 84,887 68,077
Equity in losses of OFS BrightWave, LLC (Note 3) (6,922) - -
---------------- ----------------- ------------------
Net income $ 27,865 $ 84,887 $ 68,077
================ ================= ==================
Net income per share (Note 2):
Basic $ 0.53 $ 1.66 $ 1.34
Assuming dilution $ 0.52 $ 1.60 $ 1.31
Weighted average shares outstanding (Note 2):
Basic 52,692 51,142 50,669
Assuming dilution 53,500 56,047 52,050
See notes to consolidated financial statements.
33
COMMSCOPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As of December 31,
-------------------------------------
2001 2000
----------------- -----------------
ASSETS
Cash and cash equivalents $ 61,929 $ 7,704
Accounts receivable, less allowance for doubtful accounts of
$12,599 and $9,187, respectively 105,402 197,536
Inventories (Note 6) 47,670 63,763
Prepaid expenses and other current assets (Notes 5 and 17) 12,724 3,364
Deferred income taxes (Note 12) 18,143 17,296
----------------- -----------------
Total current assets 245,868 289,663
Property, plant and equipment, net (Notes 5, 7 and 17) 277,169 251,356
Goodwill, net of accumulated amortization of
$59,493 and $54,140, respectively 151,307 156,685
Other intangibles, net of accumulated amortization of
$37,421 and $34,796, respectively 11,344 13,969
Investment in and advances to OFS BrightWave, LLC (Notes 3, 7 and 18) 196,860 --
Other assets (Notes 5, 9 and 10) 6,457 9,509
----------------- -----------------
Total Assets $ 889,005 $ 721,182
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 16,339 $ 39,958
Other accrued liabilities (Note 8) 27,753 38,481
Current portion of long-term debt (Note 9) 2,651 2,120
----------------- -----------------
Total current liabilities 46,743 80,559
Long-term debt, less current portion (Note 9) 191,918 225,316
Deferred income taxes (Note 12) 22,899 24,006
Other noncurrent liabilities (Note 11) 20,931 16,781
----------------- -----------------
Total Liabilities 282,491 346,662
Commitments and contingencies (Note 16)
Stockholders' Equity (Notes 13 and 14):
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at December 31, 2001 and 2000 -- --
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 61,688,256 at December 31, 2001;
51,263,703 at December 31, 2000 (Note 3) 617 513
Additional paid-in capital (Note 3) 381,823 175,803
Retained earnings 228,667 200,802
Accumulated other comprehensive loss (Notes 10 and 12) (4,593) (2,598)
----------------- -----------------
Total Stockholders' Equity 606,514 374,520
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 889,005 $ 721,182
================= =================
See notes to consolidated financial statements.
34
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
---------------- ---------------- ---------------
OPERATING ACTIVITIES:
Net income $ 27,865 $ 84,887 $ 68,077
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,529 35,799 29,295
Impairment charges for fixed assets and investments 12,802 -- --
Equity in losses of OFS BrightWave, LLC 11,290 -- --
Deferred income taxes (2,262) 1,350 (98)
Tax benefit from stock option exercises 672 4,195 3,201
Changes in assets and liabilities:
Accounts receivable 91,173 (70,450) (37,367)
Inventories 16,157 (23,912) (5,340)
Prepaid expenses and other current assets (8,669) (971) 1,356
Accounts payable and other accrued liabilities (34,872) 10,428 18,167
Other noncurrent liabilities 4,165 2,565 2,633
Other (682) 1,033 (505)
---------------- ---------------- ---------------
Net cash provided by operating activities 158,168 44,924 79,419
INVESTING ACTIVITIES:
Additions to property, plant and equipment (70,841) (98,640) (57,149)
Acquisition of business in Belgium -- -- (17,023)
Acquisition costs related to investment in OFS BrightWave, LLC (4,763) -- --
Investment in unconsolidated affiliate -- (3,750) --
Proceeds from disposal of fixed assets 1,071 504 314
---------------- ---------------- ---------------
Net cash used in investing activities (74,533) (101,886) (73,858)
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facility (30,000) 30,000 (171,000)
Principal payments on long-term debt (1,996) -- --
Proceeds from term loan facility for acquisition of business
in Belgium -- -- 16,353
Proceeds from issuance of convertible notes -- -- 172,500
Debt issuance costs -- -- (5,084)
Proceeds from exercise of stock options 2,914 4,737 8,030
---------------- ---------------- ---------------
Net cash provided by (used in) financing activities (29,082) 34,737 20,799
Effect of exchange rate changes on cash (328) (294) (266)
---------------- ---------------- ---------------
Change in cash and cash equivalents 54,225 (22,519) 26,094
Cash and cash equivalents, beginning of year 7,704 30,223 4,129
---------------- ---------------- ---------------
Cash and cash equivalents, end of year $ 61,929 $ 7,704 $ 30,223
================ ================ ===============
See notes to consolidated financial statements.
35
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Number of common shares outstanding:
Balance at beginning of year 51,263,703 50,889,208 50,254,467
Issuance of shares to Lucent (Note 3) 10,200,000 - -
Issuance of shares for stock option exercises 224,553 374,495 633,741
Issuance of shares to outside director -- -- 1,000
----------------- ----------------- -----------------
Balance at end of year 61,688,256 51,263,703 50,889,208
----------------- ----------------- -----------------
Common stock:
Balance at beginning of year $ 513 $ 509 $ 503
Issuance of shares to Lucent (Note 3) 102 - -
Issuance of shares for stock option exercises 2 4 6
----------------- ----------------- -----------------
Balance at end of year $ 617 $ 513 $ 509
----------------- ----------------- -----------------
Additional paid-in capital:
Balance at beginning of year $ 175,803 $ 166,875 $ 155,631
Issuance of shares to Lucent (Note 3) 202,436 - -
Issuance of shares for stock option exercises 2,912 4,733 8,024
Tax benefit from stock option exercises 672 4,195 3,201
Issuance of shares to outside director -- -- 19
----------------- ----------------- -----------------
Balance at end of year $ 381,823 $ 175,803 $ 166,875
----------------- ----------------- -----------------
Retained earnings:
Balance at beginning of year $ 200,802 $ 115,915 $ 47,838
Net income 27,865 84,887 68,077
----------------- ----------------- -----------------
Balance at end of year $ 228,667 $ 200,802 $ 115,915
----------------- ----------------- -----------------
Accumulated other comprehensive loss:
Balance at beginning of year $ (2,598) $ (1,955) $ -
Other comprehensive loss (1,995) (643) (1,955)
----------------- ----------------- -----------------
Balance at end of year $ (4,593) $ (2,598) $ (1,955)
----------------- ----------------- -----------------
Total stockholders' equity $ 606,514 $ 374,520 $ 281,344
================= ================= =================
Comprehensive income:
Net income $ 27,865 $ 84,887 $ 68,077
Other comprehensive loss, net of tax:
Foreign currency translation loss - foreign subsidiaries (761) (458) (1,411)
Foreign currency transaction loss on long-term
intercompany loans - foreign subsidiaries (1,832) (780) (1,323)
Hedging gain on nonderivative instrument (Notes 10 and 12) 571 595 779
Effect of adopting SFAS No. 133 (Notes 10 and 12) 229 -- --
Loss on derivative financial instrument designated
as a cash flow hedge (Notes 10 and 12) (202) -- --
----------------- ----------------- -----------------
Total other comprehensive loss, net of tax (1,995) (643) (1,955)
----------------- ----------------- -----------------
Total comprehensive income $ 25,870 $ 84,244 $ 66,122
================= ================= =================
See notes to consolidated financial statements.
36
COMMSCOPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
CommScope, Inc. ("CommScope" or the "Company"), through its wholly
owned subsidiaries and equity method investee, operates in the cable
manufacturing business, with manufacturing facilities located in the United
States, Europe and Latin America. CommScope, Inc. was incorporated in
Delaware in January 1997. CommScope is a leading worldwide designer,
manufacturer and marketer of a wide array of broadband coaxial cables and
other high-performance electronic and fiber optic cable products for cable
television, telephony, Internet access and wireless communications.
Management believes CommScope is the world's largest manufacturer of
coaxial cable for hybrid fiber coax (HFC) broadband networks. CommScope is
also a leading supplier of coaxial, twisted pair, and fiber optic cables
for premise wiring (local area networks), wireless and other communication
applications. In late 2001, CommScope acquired an equity interest in an
optical fiber and fiber cable manufacturing business (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include CommScope,
its wholly owned subsidiaries, and its equity-method investee. All material
intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent amounts on deposit in banks and
cash invested temporarily in various instruments with a maturity of three
months or less at the time of purchase.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out ("FIFO") basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including interest
costs associated with qualifying capital additions. Provisions for
depreciation are based on estimated useful lives of the assets using the
straight-line and accelerated methods. Average useful lives are 10 to 35
years for buildings and improvements and three to 10 years for machinery
and equipment. Expenditures for repairs and maintenance are charged to
expense as incurred.
GOODWILL, OTHER INTANGIBLES AND OTHER LONG-LIVED ASSETS
Through December 31, 2001, goodwill was being amortized on a
straight-line basis over 30 to 40 years. Other intangibles consist of
patents and customer lists, which were being amortized on a straight-line
basis over approximately 17 years. Effective January 1, 2002, the Company
revised its amortization policies to comply with the relevant provisions of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," which prohibits amortization of goodwill and
provides new guidance on the amortization of intangible assets. See further
discussion below under "Impact of Newly Issued Accounting Standards."
37
When events or changes in circumstances, such as significant
forecasted operating losses or a significant adverse change in legal
factors or business climate, indicate that the carrying amount of goodwill
may not be recoverable, the asset is reviewed by management for impairment.
An impairment loss would be recognized if the carrying value exceeds the
forecasted, undiscounted operating cash flows of the operating assets
related to the goodwill being evaluated. The impairment loss to be
recognized, if any, would be measured as the amount by which the carrying
value exceeds fair value, estimated based on forecasted operating cash
flows, discounted using a discount rate commensurate with the risks
involved. If an impairment loss is recognized, the reduced carrying amount
would be accounted for as the new cost and amortized over the remaining
useful life, which would also be revised, if appropriate. Management
believes there were no events or changes in circumstances during the year
ended December 31, 2001 that would indicate that the carrying amount of
goodwill may not be recoverable. Effective January 1, 2002, the Company
revised its goodwill impairment assessment policy to comply with the
relevant provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which provides new guidance on the evaluation of impairment of
goodwill. See further discussion below under "Impact of Newly Issued
Accounting Standards."
Management continually reassesses the appropriateness of both the
carrying value and remaining life of intangibles and other long-lived
assets by assessing recoverability based on forecasted operating cash
flows, on an undiscounted basis, and other factors. Management believes
that, as of December 31, 2001, the carrying value and remaining life of
intangibles and other long-lived assets is appropriate. See further
discussion below under "Impact of Newly Issued Accounting Standards" and
Note 5 for discussion of impairment charges for fixed assets and
investments.
LONG-TERM INVESTMENTS
The Company occasionally makes strategic investments in companies that
complement CommScope's business in order to gain operational and other
synergies. Investments in corporate entities with less than a 20% voting
interest are generally accounted for using the cost method. The Company
uses the equity method to account for investments in corporate entities in
which it has a voting interest of 20% to 50% and an other than minor to 50%
ownership interest in partnerships and limited liability companies, or in
which it otherwise has the ability to exercise significant influence. Under
the equity method, the investment is originally recorded at cost and
adjusted to recognize the Company's share of net earnings or losses of the
investee, limited to the extent of the Company's investment in and advances
to the investee, in addition to financial guarantees that create additional
basis in the investee. The Company regularly monitors and evaluates the
realizable value of its investments. If events and circumstances indicate
that a decline in the value of an investment has occurred and is other than
temporary, the Company reduces the carrying amount of the investment to
fair value (see Note 5 for discussion of impairment charges for fixed
assets and investments).
INCOME TAXES
Deferred income taxes reflect the future tax consequences of
differences between the financial reporting and tax bases of assets and
liabilities. Investment tax credits are recorded using the flow-through
method. The Company records a valuation allowance, when appropriate, to
reduce deferred tax assets to an amount that is more likely than not to be
realized.
No provision is made for income taxes which may be payable if
undistributed earnings of foreign subsidiaries were to be paid as dividends
to CommScope. CommScope currently intends that such earnings will continue
to be invested in those foreign subsidiaries. In addition, the Company does
not provide for taxes related to the foreign currency transaction gains and
losses on its long-term intercompany loans with foreign subsidiaries. These
loans are not expected to be repaid in the foreseeable future and the
foreign currency gains and losses are therefore recorded pretax to
accumulated other comprehensive income or loss on the balance sheet.
38
STOCK OPTIONS
Compensation cost for stock options is measured using the intrinsic
value method of accounting. All stock options granted by the Company have
option prices at least equal to the fair market value of the common stock
at the date of grant, resulting in an intrinsic value of zero at the date
of grant, and therefore no related compensation cost is recorded in the
financial statements.
REVENUE RECOGNITION
The Company's primary source of revenues is from product sales to
cable television system operators, telecommunications service providers,
original equipment manufacturers and distributors. Service revenue from
delivery of products shipped by Company owned trucks was not material to
the Company's reported sales during 2001, 2000 or 1999.
Revenue from sales of the Company's products shipped by nonaffiliated
carriers is recognized at the time the goods are delivered and title
passes, provided the earnings process is complete and revenue is
measurable. Delivery is determined by the Company's shipping terms, which
are primarily FOB shipping point. The Company recognizes revenue from sales
of the Company's products shipped by Company owned trucks at the time the
goods are delivered to the customer, regardless of the shipping terms.
For all arrangements, revenue is recorded at the net amount to be
received after deductions for estimated discounts, allowances, returns, and
rebates. In addition, accruals are established for warranties and price
protection programs with distributors at the time the related revenue is
recognized. These estimates and reserves are adjusted as needed based upon
historical experience, contract terms, inventory levels in the distributor
channel and other related factors.
SHIPPING AND HANDLING COSTS
Amounts billed to a customer in a sale transaction related to shipping
costs are included in net sales. All shipping costs incurred to transport
products to the customer are recorded in cost of sales. Internal handling
costs, which relate to activities to prepare goods for shipment, are
recorded in selling, general and administrative expense and were
approximately $3.2 million in 2001, $2.4 million in 2000 and $1.8 million
in 1999.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are
incurred. Advertising expense was $1.0 million in 2001, $1.4 million in
2000, and $1.1 million in 1999.
RESEARCH AND DEVELOPMENT COSTS
Research and development (R&D) costs are expensed in the period in
which they are incurred. R&D costs include materials, equipment and
facilities that have no alternative future use, depreciation on equipment
and facilities currently used for R&D purposes, personnel costs, contract
services, and reasonable allocations of indirect costs, if clearly related
to an R&D activity. Expenditures in the pre-production phase of an R&D
project are recorded in the income statement as research and development
expense. However, costs incurred in the pre-production phase that are
associated with output actually used in production are recorded in cost of
sales. A project is considered finished with pre-production efforts when
management determines that it has achieved acceptable levels of scrap and
yield, which vary by project. Expenditures related to ongoing production
are recorded in cost of sales.
39
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
CommScope is exposed to various risks resulting from adverse
fluctuations in commodity prices, interest rates, and foreign currency
exchange rates. CommScope's risk management strategy includes the use of
derivative and nonderivative financial instruments primarily as hedges of
these risks, whenever management determines their use to be reasonable and
practical. This strategy does not permit the use of derivative financial
instruments for trading purposes, nor does it allow for speculation. A
hedging instrument may be designated as a fair value hedge to manage
exposure to risks related to a firm commitment for the purchase of raw
materials or a foreign-currency-denominated firm commitment for the
purchase of equipment, or it may be designated as a cash flow hedge to
manage exposure to risks related to a forecasted purchase of raw materials,
variable interest rate payments, or a forecasted
foreign-currency-denominated sale of product. In addition, the use of
nonderivative financial instruments is limited to hedging fair value risk
related to a foreign-currency-denominated firm commitment or a net
investment in a foreign subsidiary.
The Company's risk management strategy permits the reasonable and
practical use of derivative hedging instruments such as forward contracts,
options, cross currency swaps, certain interest rate swaps, caps and
floors, and nonderivative hedging instruments such as
foreign-currency-denominated loans. The Company recognizes all derivative
financial instruments as assets and liabilities and measures them at fair
value. All hedging instruments are designated and documented as either a
fair value hedge, a cash flow hedge or a net investment hedge at inception.
For fair value hedges, the change in fair value of the derivative
instrument is recognized currently in earnings. To the extent the fair
value hedging relationship is effective, the change in fair value on the
hedged item is recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings. For cash flow hedges, the
effective portion of the change in fair value of the derivative instrument
is recorded in accumulated other comprehensive income or loss, net of tax,
and is recognized in the income statement when the hedged item affects
earnings. Any ineffectiveness of a cash flow hedge is recognized currently
in earnings. For net investment hedges, the effective portion of the change
in carrying amount of the nonderivative instrument is recorded in
accumulated other comprehensive income or loss, net of tax, and is
recognized in the income statement only if there is a substantially
complete liquidation of the investment in the foreign subsidiary. Any
ineffectiveness of a net investment hedge is recognized currently in
earnings. The effectiveness of designated hedging relationships is tested
and documented on at least a quarterly basis. At December 31, 2001 and
2000, the Company had two hedges, one of which involved the use of a
derivative financial instrument (see Note 10).
The Company has elected and documented the use of the normal purchases
and sales exception for normal purchases and sales contracts that meet the
definition of a derivative financial instrument.
FOREIGN CURRENCY TRANSLATION
Approximately 23% of the Company's 2001 sales were to customers
located outside of the United States. A portion of these sales were
denominated in currencies other than the US dollar, particularly sales from
the Company's foreign subsidiaries. The financial position and results of
operations of the Company's foreign subsidiaries are measured using the
local currency as the functional currency. Revenues and expenses of these
subsidiaries have been translated into U.S. dollars at average exchange
rates prevailing during the period. Assets and liabilities of these
subsidiaries have been translated at the rates of exchange as of the
balance sheet date. Translation gains and losses are recorded to
accumulated other comprehensive income or loss.
Aggregate foreign currency transaction gains and losses of the Company
and its subsidiaries, such as those resulting from the settlement of
foreign receivables or payables and short-term intercompany advances, were
recorded to other income (expense), net in the statement of income and were
not material to the results of the Company's operations during 2001, 2000,
or 1999. Foreign currency transaction gains and losses related to long-term
intercompany loans which are not expected to be settled in the foreseeable
future are recorded to accumulated other comprehensive income or loss.
40
The Eurodollar Credit Agreement (see Note 9), which is designated and
effective as a partial hedge of the Company's net investment in its Belgian
subsidiary, is translated at the rate of exchange as of the balance sheet
date. The transaction gains or losses on this loan are recorded, net of
tax, to accumulated other comprehensive income or loss.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the applicable
periods. Diluted net income per share is based on net income adjusted for
after-tax interest and amortization of debt issuance costs related to
convertible debt, if dilutive, divided by the weighted average number of
common shares outstanding adjusted for the dilutive effect of stock options
and convertible securities.
Below is a reconciliation of weighted average common shares
outstanding for basic net income per share to weighted average common and
potential common shares outstanding for diluted net income per share:
Year Ended December 31,
-------------------------------------
2001 2000 1999
------------ ----------- ------------
Numerator:
Net income for basic net income per share $27,865 $84,887 $68,077
Convertible debt interest and amortization, net of tax (A) -- 4,714 --
------------ ----------- ------------
Net income available to common stockholders for
diluted net income per share $27,865 $89,601 $68,077
============ =========== ============
Denominator:
Weighted average number of common shares
outstanding for basic net income per share 52,692 51,142 50,669
Effect of dilutive securities:
Convertible debt (A) -- 3,580 --
Employee stock options (B) 808 1,325 1,381
------------ ----------- ------------
Weighted average number of common and potential
common shares outstanding for diluted net income per
share 53,500 56,047 52,050
============ =========== ============
(A) On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a
conversion rate of 20.7512 shares per $1,000 principal amount. The
effect of the assumed conversion of these notes is included in the
calculation of net income per share, assuming dilution, for the year
ended December 31, 2000 because it is dilutive. The effect of the
assumed conversion of these notes was excluded from the computation of
net income per share, assuming dilution, for the years ended December
31, 2001 and 1999 because it would have been antidilutive. For the
year ended December 31, 2000, the dilutive effect of convertible debt
on net income represents after-tax interest expense and amortization
of deferred financing fees associated with this convertible debt. The
dilutive effect of convertible debt on weighted average shares
reflects the number of shares issuable upon conversion, assuming 100%
conversion of all convertible notes as of the beginning of the year.
See Note 9 for further discussion of convertible notes.
(B) Options to purchase approximately 705 thousand common shares at prices
ranging from $20.55 to $47.06 per share, were excluded from the
computation of net income per share, assuming dilution, for the year
ended December 31, 2001 because the options' exercise prices were
greater than the average market price of the common shares. These
options, which expire on various dates from 2009 through 2011, were
still outstanding as of December 31, 2001. There were approximately
708 thousand common shares at prices ranging from $33.56 to $47.06 per
share excluded from the computation of net income per share, assuming
dilution, for the year ended December 31, 2000. There were no common
shares excluded from the computation of net income per share, assuming
dilution, for the year ended December, 31, 1999. For additional
information regarding employee stock options, see Note 13.
41
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. These estimates and their underlying assumptions form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other objective sources. The
Company bases its estimates on historical experience and on assumptions
that are believed to be reasonable under the circumstances and revises its
estimates, as appropriate, when changes in events or circumstances indicate
that revisions may be necessary. Significant accounting estimates reflected
in the Company's financial statements include the allowance for doubtful
accounts, inventory excess and obsolescence reserves, warranty and
distributor price protection reserves, reserves for sales returns,
discounts, allowances, and rebates, income tax valuation allowances, and
impairment reviews for investments, fixed assets, goodwill and other
intangibles. Although these estimates are based on management's knowledge
of and experience with past and current events and on management's
assumptions about future events, it is at least reasonably possible that
they may ultimately differ materially from actual results.
CONCENTRATIONS OF RISK
Nonderivative financial instruments used by the Company in the normal
course of business include letters of credit and commitments to extend
credit, primarily accounts receivable. These financial instruments involve
risk, including the credit risk of nonperformance by the counterparties to
those instruments, and the maximum potential loss may exceed the reserves
provided in the Company's balance sheet. The Company manages its exposures
to credit risk associated with financial instruments through credit
approvals, credit limits and monitoring procedures. Although the Company
sells to a wide variety of customers dispersed across many different
geographic areas, sales to the largest domestic broadband service providers
represented approximately 40% of net sales during 2001. At December 31,
2001, the Company's two largest customer receivable balances comprised
approximately 26% of the Company's total trade accounts receivable. The
Company estimates the allowance for doubtful accounts based on the actual
payment history and individual circumstances of significant customers as
well as the age of receivables. In management's opinion, the Company did
not have significant unreserved risk of credit loss due to the
nonperformance of customers or other counterparties related to amounts
receivable. However, an adverse change in financial condition of a
significant customer or group of customers or in the telecommunications
industry could materially affect the Company's estimates related to
doubtful accounts.
The principal raw materials purchased by CommScope (fabricated
aluminum, plastics, bimetals, copper and optical fiber) are subject to
changes in market price as these materials are linked to the commodity
markets. The Company attempts to mitigate these risks through effective
requirements planning and by working closely with its key suppliers to
obtain the best possible pricing and delivery terms. To the extent that
CommScope is unable to pass on cost increases to customers, the cost
increases could have a significant impact on the results of operations of
CommScope.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
2001 presentation.
42
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." Both statements are effective for the Company on
January 1, 2002. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 and broadens the criteria for recording intangible assets separate
from goodwill. SFAS No. 142 requires the use of a nonamortization approach
to account for purchased goodwill and certain intangible assets with
indefinite useful lives and also requires at least an annual assessment for
impairment by applying a fair-value-based test. Intangible assets with
definite useful lives will continue to be amortized over their useful
lives. The adoption of these statements will have a material impact on the
Company's results of operations and financial position after December 31,
2001 when goodwill will no longer be amortized. The pretax impact on the
Company's results of operations and financial position of adopting a
nonamortization approach to accounting for goodwill under SFAS No. 142 is
expected to be approximately $5.4 million per year. The Company is
currently assessing the impact of the other provisions of these two
statements, which will be adopted in 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." SFAS No.
143 will require the accrual, at fair value, of the estimated retirement
obligation for tangible long-lived assets if the Company is legally
obligated to perform retirement activities at the end of the related
asset's life. The Company is currently assessing the impact of this
statement, which will be effective for the Company on January 1, 2003.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment or Disposal of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," but retains many of its
fundamental provisions. Additionally, this statement expands the scope of
discontinued operations to include more disposal transactions. SFAS No.144
is effective for the Company on January 1, 2002. The initial adoption is
not expected to have a material impact of the Company's financial
statements.
3. ACQUISITION OF EQUITY INTEREST IN OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an approximate 18.4%
ownership interest in OFS BrightWave, LLC (OFS BrightWave), an optical
fiber and fiber cable venture between CommScope and The Furukawa Electric
Co., Ltd. of Japan ("Furukawa"). OFS BrightWave was formed to operate a
portion of the optical fiber and fiber cable business ("OFS Group")
acquired from Lucent Technologies Inc. ("Lucent"). The businesses acquired
include transmission fiber and cable manufacturing capabilities at a
facility in Norcross, Georgia, as well as facilities in Germany and Brazil
and an interest in a joint venture in Carrollton, Georgia. CommScope
expects its arrangements with Furukawa and its subsidiaries, including its
investment in OFS BrightWave, to provide access to optical fiber, including
premium fiber, under a supply agreement, enhance its technology platform
with access to key intellectual property, and create a strategic partner in
optical fiber and fiber cable manufacturing.
CommScope issued 10.2 million unregistered shares of its common stock,
valued at $19.94 per share, to Lucent to fund the acquisition of
CommScope's interest in OFS BrightWave. The total proceeds of $203.4
million were used to acquire CommScope's 18.4% ownership interest in OFS
BrightWave, valued at $173.4 million, and to purchase a $30 million
interest bearing note receivable of the venture. The cost of initially
issuing the shares to Lucent and an estimate of costs related to future
registration of the shares, which totaled $850, have been recognized as a
reduction of the total proceeds in additional paid-in capital. CommScope
has a contractual right to sell its ownership interest to Furukawa within a
limited period of time in 2004, for a cash payment to CommScope of
CommScope's original $173.4 million capital investment and an acceleration
of repayment of the note receivable.
Although the Company's ownership interest in OFS BrightWave is less
than 20%, the investment has been accounted for using the equity method
since OFS BrightWave is organized as a limited liability company with
characteristics of a partnership. CommScope capitalized $4.8 million of
direct acquisition costs as part of its investment in OFS BrightWave.
43
CommScope's portion of the losses of OFS BrightWave for the period from
November 17, 2001 through December 31, 2001 has been included in the
consolidated financial statements of CommScope, Inc. for the year ended
December 31, 2001. These results are net of elimination of intercompany
profit in the amount of $191, net of tax, related to interest payments on
the $30 million note receivable and reimbursement of acquisition-related
expenses by OFS BrightWave (see Note 17). OFS BrightWave has elected to be
taxed as a partnership, therefore the Company's income tax benefit from
flow through losses has been recorded based on the Company's tax rates.
The following table provides summary financial information for OFS
BrightWave as of and for the six week period ended December 31, 2001:
Income Statement Data:
Net revenues $ 29,340
Gross profit (36,611)
Loss from continuing operations (61,253)
Net loss (61,253)
Balance Sheet Data:
Current assets $ 315,626
Noncurrent assets 921,647
Current liabilities 114,319
Other noncurrent liabilities 193,611
Minority interests 52,400
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity interest in the net assets of OFS
BrightWave as of December 31, 2001 was as follows:
Net assets of OFS BrightWave, LLC $876,943
CommScope ownership percentage 18.43225 %
--------------------
CommScope equity in net assets
of OFS BrightWave, LLC 161,640
Plus:
Advances 30,000
Direct costs of acquisition 4,763
Pushdown and other adjustments by majority
member in OFS BrightWave, LLC 457
--------------------
Investment in and advances to
OFS BrightWave, LLC $196,860
====================
The Company's ownership interest in OFS BrightWave was restructured
from a previously contemplated joint venture arrangement announced on July
24, 2001. Under the originally contemplated arrangement, CommScope and
Furukawa would have formed two joint ventures to acquire certain fiber
cable and transmission fiber assets of Lucent's OFS Group. Given the
uncertain economic environment and severe downturn in the
telecommunications market as well as associated difficulties in the
financing markets following the September 11, 2001 tragedy, CommScope and
Furukawa agreed to restructure the joint venture arrangement, resulting in
a lower ownership participation for CommScope. As a result of the
restructuring, the Company recorded pretax charges of approximately $8
million, or approximately $0.09 per diluted share, net of tax, during 2001,
related to financing and formation costs of the original joint venture
arrangement, which are not capitalizable as part of CommScope's investment
in the restructured venture.
4. OTHER ACQUISITIONS AND DIVESTITURES
Effective January 1, 1999, in a transaction with Alcatel Cable
Benelux, S.A. ("Alcatel"), the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Belgium. The
44
acquisition provides the Company with a European base of operations, access
to established distribution channels and complementary coaxial cable
technologies. The Belgium acquisition was accounted for using the purchase
method and, accordingly, the acquired assets and assumed liabilities were
recorded at their estimated fair value at the date of the acquisition of
approximately $20 million, including $3.5 million of goodwill, which was
amortized in 1999, 2000, and 2001 based on a 30 year period (see Note 2 for
"Impact of Newly Issued Accounting Standards"). Payment for the acquired
business was financed primarily by borrowings under the Eurodollar Credit
Agreement (see Note 9).
In 1995, CommScope entered into a joint venture agreement with Pacific
Dunlop Ltd. to produce cable in Australia, acquiring a 49% ownership
interest. Due to certain governmental regulation changes and other events
affecting the market for cable products in Australia in and around 1997,
manufacturing operations of the joint venture were suspended and formally
discontinued by decision of the joint venture's directors in 1997. In 1998,
a formal termination and dissolution agreement for the joint venture was
completed. Final dissolution of this joint venture was completed in
accordance with Australian legal requirements as of December 29, 2000. A
pretax gain of $517 related to the final liquidation of this joint venture
was recognized in other income during the year ended December 31, 2000. The
Company anticipates no third party claims and no additional gains or losses
related to this closed joint venture.
5. IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
The Company has taken a number of steps to manage costs and has been
evaluating all aspects of its business in response to challenging industry
conditions. As a result of its review, the Company recorded pretax
impairment charges totaling $12.8 million during 2001. Included in these
impairment charges was approximately $3.8 million related to an investment
in an unconsolidated affiliate, $4.4 million related to fixed assets
identified as held for disposal and $4.6 million related to fixed assets to
be held and used.
Management determined that the Company's investment in a wireless
infrastructure project management company, which was included in other
assets, and which was accounted for using the cost method, should be
completely written off in 2001. This determination was based on financial
information indicating severe cash flow shortages. The affiliate's board of
directors made the decision to cease operations and began the process of
liquidating the business during 2001. In late 2001, the majority common
stockholder and remaining management indicated that there would be no funds
available for the return of CommScope's investment. Management currently
believes CommScope has no material legal or contractual obligation for the
remaining liabilities of this investee and anticipates no further impact to
CommScope's financial position or results from the liquidation of its
assets.
The assets held for disposal consist of machinery and equipment used
or purchased for use in production. Management identified specific assets
that were determined to have no future use to the Company and developed a
plan of disposal for each of the assets. The assets held for disposal had a
carrying value of $1.6 million at the impairment date, after the second
quarter impairment charges including costs of disposal. Assets valued at
$1.1 million were sold during 2001 at amounts approximating the reduced
carrying values, leaving a remaining carrying value of approximately $500,
which was included in other current assets as of December 31, 2001.
The assets to be held and used consist of our newly constructed Kings
Mountain facility and other machinery and equipment whose anticipated
future cash flows have been affected by challenging industry conditions.
Equipment that was intended for the Kings Mountain facility is expected to
be redeployed overseas. The Company did not classify this facility as held
for disposal at December 31, 2001 because management had not committed to a
plan to actively sell the facility. However, subsequent to December 31,
2001, management has committed to a plan to sell this facility and has
begun an active program to complete the sale within a reasonable period of
time. Management believes the current carrying amount of this facility
approximates its fair market value at December 31, 2001. The fair values of
the assets to be held and used were determined using appraisals or present
value techniques.
45
6. INVENTORIES
December 31,
------------------------
2001 2000
------------ -----------
Raw materials $23,037 $28,382
Work in process 9,688 11,124
Finished goods 14,945 24,257
------------ -----------
$47,670 $63,763
============ ===========
7. PROPERTY, PLANT AND EQUIPMENT
December 31,
---------------------------
2001 2000
------------- -------------
$ $
Land and land improvements 6,742 9,701
Buildings and improvements 74,101 63,429
Machinery and equipment 306,570 275,406
Construction in progress 41,721 27,546
------------- -------------
429,134 376,082
Accumulated depreciation ( 151,965) ( 124,726)
------------- -------------
$277,169 $251,356
============= =============
Depreciation expense was $31,681, $26,631, and $20,778 for the years
ended December 31, 2001, 2000, and 1999, respectively. The Company
capitalized interest of $405 and $176 for the years ended December 31, 2001
and 2000, respectively. No interest was capitalized for the year ended
December 31, 1999.
8. OTHER ACCRUED LIABILITIES
December 31,
------------------------
2001 2000
------------ -----------
Salaries and compensation liabilities $11,136 $18,775
Retirement savings plan liabilities 6,819 11,308
Warranty reserves 1,326 1,672
Interest 371 463
Other 8,101 6,263
------------ -----------
$27,753 $38,481
============ ===========
9. LONG-TERM DEBT
December 31,
--------------------------
2001 2000
------------ ------------
Credit Agreement $ -- $30,000
Convertible Notes 172,500 172,500
Eurodollar Credit Agreement 11,269 14,136
IDA Notes 10,800 10,800
------------ ------------
194,569 227,436
Less current portion ( 2,651) (2.120)
------------ ------------
$191,918 $225,316
============ ============
46
CREDIT AGREEMENT
In July 1997 the Company entered into an unsecured $350 million
revolving credit agreement with a group of banks (as amended, the "Credit
Agreement"). The Company utilizes the Credit Agreement for, among other
things, general working capital needs, financing capital expenditures and
other general corporate purposes.
The Credit Agreement provides a total of $350 million in available
revolving credit commitments through (i) loans available at various
interest rates and interest maturity periods (collectively, the Revolving
Credit Loans) and (ii) the issuance of standby or commercial letters of
credit (Letters of Credit) of up to $50 million. The Company's available
borrowing capacity under the Credit Agreement, determined on a quarterly
basis, is based on certain financial ratios, which are affected by the
level of long-term debt outstanding and the Company's profitability. As of
December 31, 2001, the Company had no outstanding indebtedness under the
Credit Agreement and its available borrowing capacity under the Credit
Agreement was approximately $269 million. The Credit Agreement expires on
December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are
available by choosing from one of the following types of loans, which
primarily are differentiated by the interest rates available: (i) an ABR
Loan (as defined in the Credit Agreement), with interest based on the
highest of the prime rate of JP Morgan Chase Bank, the Base CD Rate (as
defined in the Credit Agreement) plus 1%, or the Federal Funds Effective
Rate (as defined in the Credit Agreement) plus 0.5%; (ii) a Eurodollar Loan
(as defined in the Credit Agreement), with interest based on the Eurodollar
Rate (LIBOR) plus a margin that will vary based on the Company's
performance with respect to certain calculated financial ratios as defined
in the Credit Agreement; (iii) an Absolute Rate Bid Loan (as defined in the
Credit Agreement), with interest determined through competitive bid
procedures among qualified lenders under the Credit Agreement; and (iv) a
Swing Line Loan (as defined in the Credit Agreement) for up to an aggregate
amount of $30 million, with interest based on a money market rate, the ABR
Loan rate, or a combination thereof.
Interest on the Revolving Credit Loans generally is payable quarterly
in arrears or, for a Eurodollar Loan, at the end of an interest period date
that is specified at the time funds are advanced to the Company, not to
exceed three months. A facility fee based on the total commitment under the
Credit Agreement and a fee for outstanding letters of credit are payable
quarterly.
The Credit Agreement contains certain financial and operating
covenants, including restrictions on incurring indebtedness and liens,
entering into transactions to acquire or merge with any entity, making
certain other fundamental changes, selling assets, paying dividends, and
maintaining certain levels of consolidated net worth, leverage ratio and
interest coverage ratio. The Company was in compliance with these covenants
at December 31, 2001.
CONVERTIBLE NOTES
In December 1999, the Company issued $172.5 million of 4% convertible
subordinated notes due December 15, 2006. These notes are convertible at
any time into shares of CommScope common stock at a conversion price of
$48.19 per share, which is subject to adjustment under certain
circumstances, as provided in the Indenture. The Company may redeem some or
all of these notes at any time on or after December 15, 2002 at redemption
prices specified in the Indenture. In connection with the issuance of the
convertible notes, the Company incurred costs of approximately $4.9
million, which have been capitalized as other assets and are being
amortized over the term of the notes. The net proceeds of $167.6 million
from this convertible debt offering were used primarily to repay
outstanding indebtedness under the Credit Agreement in addition to funding
capital expenditures and other general corporate activities.
47
EURODOLLAR CREDIT AGREEMENT
In February 1999, the Company entered into an unsecured term loan
agreement for 15 million euros ($16.4 million at the date of borrowing)
that matures on March 1, 2006 (as amended, the "Eurodollar Credit
Agreement"). The proceeds of the Eurodollar Credit Agreement were used to
fund a portion of the acquisition costs and initial working capital needs
of the Company's manufacturing facility in Belgium. Borrowings under this
loan agreement bear interest at a variable rate equal to the Euro LIBOR
Market Rate plus an applicable margin, payable quarterly. The interest rate
in effect at December 31, 2001 was 4.12%. Principal payments on this loan
are due in 20 equal quarterly installments of 750 thousand euros beginning
June 1, 2001.
As of December 31, 2001, the Company was party to an interest rate
swap agreement, as required by the terms of the Eurodollar Credit
Agreement, to effectively convert the variable-rate loan to a fixed-rate
basis. The notional amount is equal to the outstanding principal balance of
the Eurodollar Credit Agreement and decreases in tandem with principal
repayments, which began June 1, 2001. Under the agreement, interest
settlement payments are made quarterly based upon the spread between the
Euro LIBOR Market Rate, as adjusted quarterly, and a fixed rate of 4.53%
(see Note 10).
IDA NOTES
In January 1995, CommScope entered into a $10.8 million unsecured loan
agreement in connection with the issuance of notes by the Alabama State
Industrial Development Authority (the "IDA Notes"). Borrowings under the
IDA Notes bear interest at variable rates based upon current market
conditions for short-term financing. The interest rate in effect at
December 31, 2001 was 2.13%. All outstanding borrowings under the IDA Notes
are due on January 1, 2015.
OTHER MATTERS
Maturities of long-term debt for the next five years are as follows:
$2,651 in 2002; $2,651 in 2003; $2,651 in 2004, $2,651 in 2005, and
$173,165 in 2006.
The weighted average effective interest rate on outstanding
borrowings, including amortization of associated loan fees, under the above
debt instruments was 4.61% at December 31, 2001, and 5.14% at December 31,
2000.
10. DERIVATIVES AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date for FASB Statement No. 133" and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative financial instruments, including certain
derivative instruments embedded in other host contracts (collectively
referred to as embedded derivatives) and for hedging activities. The new
standards require an entity to recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair
value.
The only derivative instrument identified in the implementation of
SFAS No. 133 and outstanding for the year ended December 31, 2001 was an
interest rate swap, which effectively converts the variable-rate Eurodollar
Credit Agreement to a fixed-rate basis. The notional amount of the swap is
equal to the outstanding principal balance of the Eurodollar Credit
Agreement and decreases in tandem with principal repayments, which began
June 1, 2001. As of January 1, 2001, this interest rate swap was designated
and documented as a cash flow hedge of the risk of changes in the cash
flows attributable to fluctuations in the variable benchmark interest rate
associated with the underlying debt being hedged. This hedging instrument
was effective at the transition date to SFAS No. 133, and at the balance
48
sheet date, and is expected to continue to be effective for the duration of
the swap contract, resulting in no anticipated hedge ineffectiveness.
During the year ended December 31, 2001, the Company reclassified
approximately $200 from accumulated other comprehensive income to reduce
interest expense. The Company does not anticipate any material
reclassifications from accumulated other comprehensive income or loss to
interest expense during the next twelve months. The transition adjustment
as of January 1, 2001 was recorded as a change in accounting principle to
accumulated other comprehensive income and other assets on the balance
sheet and did not have a material impact on the Company's consolidated
results of operations, financial position, and cash flows. The fair value
of this derivative instrument, reflected in other assets, was approximately
$42 as of December 31, 2001.
Also, as of January 1, 2001, the Eurodollar Credit Agreement was
designated and effective as a partial hedge of the Company's net investment
in its Belgian subsidiary. There was no adjustment required under SFAS No.
133 as of January 1, 2001 related to this net investment hedge. This
hedging instrument was effective at the SFAS No. 133 transition date, and
at the balance sheet date, and is expected to continue to be effective for
the duration of the loan agreement, resulting in no anticipated
reclassifications from accumulated other comprehensive income or loss to
earnings.
Activity in the accumulated net gain on derivative instruments
included in accumulated other comprehensive loss for the year ended
December 31, 2001 consisted of the following:
Accumulated net gain on derivative instrument, beginning of year $
--
Net effect of adopting SFAS No. 133 229
Net loss on derivative financial instrument designated as a
cash flow hedge (202)
---------
Accumulated net gain on derivative instrument, end of year $ 27
=========
11. EMPLOYEE BENEFIT PLANS
The Company sponsors the CommScope, Inc. of North Carolina Employees
Retirement Savings Plan (the "Employees Retirement Savings Plan"). The
majority of the Company's contributions to the Employees Retirement Savings
Plan are made at the discretion of the Company's Board of Directors. In
addition, eligible employees may elect to contribute up to 10% of their
base salaries, limited to the maximum contribution amount allowed by the
Internal Revenue Service. The Company contributes an amount equal to 50% of
the first 4% of the employee's salary that the employee contributes. The
Company contributed $9.3 million in 2001, $8.3 million in 2000, and $6.5
million in 1999 to the Employees Retirement Savings Plan, of which $7.5
million, $6.4 million and $5.0 million each year was discretionary.
The Company sponsors a self-funded welfare plan (the "Plan") that
provides medical, dental, and short-term disability benefits to eligible
employees. Enrollment in the plan is optional, with the cost of the
premiums being shared by both the employee and the Company. The Company
established a Voluntary Employees' Benefit Association Trust ("VEBA Trust")
to provide for the payment of benefits under the Plan. The Company is
required to make cash contributions to the VEBA Trust from time to time in
amounts which, when added to participant premiums, are sufficient to fund
the benefits for participants and their beneficiaries under the Plan. The
Company made cash contributions to the VEBA Trust of $13.6 million in 2001,
$11.4 million in 2000, and $7.7 million in 1999.
The Company also sponsors an unfunded postretirement group medical and
dental plan (the "Postretirement Health Plan") that provides benefits to
full-time employees who retire from the Company at age 65 or greater with a
minimum of 10 years of active service. The Postretirement Health Plan is
contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance, with
Medicare as the primary provider of health care benefits for eligible
retirees. The accounting for the Postretirement Health Plan anticipates
future cost-sharing changes to the written plan that are consistent with
the Company's expressed intent to maintain a consistent level of cost
sharing with retirees. The Company recognizes the cost of providing and
maintaining postretirement benefits during employees' active service
periods.
Additionally, the Company currently sponsors two defined benefit
pension plans (the "Defined Benefit Pension Plans"). The first defined
benefit plan is a nonqualified unfunded supplemental executive retirement
49
plan that provides defined pension benefits to certain key executives who
retired prior to December 31, 2000. The defined benefits under this plan
are paid from Company contributions. Prior to January 1, 2001, this plan
also covered certain active key executives who had not yet retired. All
active participants' balances were settled as of January 1, 2001, resulting
in a gain in this plan of $4.7 million, and a new defined contribution
pension plan was established in its place for those active participants, as
described below. The second defined benefit pension plan is a nonqualified
pension plan, which provides pension benefits for certain international
management-level employees. This plan is funded by Company and employee
contributions.
Effective January 1, 2001, the Company amended and restated its
nonqualified unfunded supplemental executive retirement plan that
previously provided defined pension benefits to certain active and retired
key executives. As a result of this amendment and restatement, the benefits
provided under the plan for all participants, other than those who retired
prior to December 31, 2000, are now governed by the amended and restated
plan (the "Restated Plan"). Under the Restated Plan, which is a
noncontributory unfunded defined contribution pension plan, the Company
will credit each participant's account with contributions and earnings on
the accumulated balance thereof, as outlined in the plan, but the Company
is not required to make any payments until the participant is eligible to
receive retirement benefits under the plan. As of January 1, 2001, the
Company credited each participant's account under the Restated Plan with an
amount equal to the actuarially determined accumulated benefit obligation
for each participant under the terms of the original nonqualified unfunded
supplemental executive retirement plan. The total amount established by
CommScope as of January 1, 2001, and recognized as an expense of the
Restated Plan in 2001, was $4.1 million. The Company recognized additional
cost of $546 representing contributions and earnings under this plan for
the year ended December 31, 2001. The establishment of opening participant
balances and the additional cost recognized resulted in an accrued
liability for the Restated Plan of $4.6 million as of December 31, 2001.
The amendment and restatement of this plan had no material effect on the
consolidated financial statements of the Company upon adoption.
50
Amounts accrued under the Postretirement Health Plan, the Defined
Benefit Pension Plans, and the Restated Plan are included in other
noncurrent liabilities. The following table summarizes information for the
Defined Benefit Pension Plans and the Postretirement Health Plan:
Other
Pension Benefits Postretirement
Benefits
----------------------------------------------
2001 2000 2001 2000
----------- ---------- ------------ ----------
Change in benefit obligation:
Postretirement benefit obligation, beginning of year $6,377 $5,965 $17,522 $12,957
Service cost 74 104 1,819 1,237
Interest cost 109 432 1,353 1,001
Plan participants' contributions 13 11 19 15
Actuarial loss 77 44 5,133 2,374
Settlement of benefits ( 4,690) -- -- --
Benefits paid ( 108) ( 119) ( 43) ( 62)
Translation gain and other ( 52) ( 60) -- --
----------- ----------- ---------- ----------
Postretirement benefit obligation, end of year $1,800 $6,377 $25,803 $17,522
----------- ----------- ---------- ----------
Change in plan assets:
Fair value of plan assets, beginning of year $ 501 $ 418 $ -- $ --
Employer and plan participant contributions 231 206 43 62
Return on plan assets 30 23 -- --
Benefits paid ( 108) ( 119) ( 43) ( 62)
Translation loss and other ( 24) ( 27) -- --
----------- ----------- ---------- ----------
Fair value of plan assets, end of year $ 630 $ 501 $ -- $ --
----------- ----------- ---------- ----------
Funded status (postretirement benefit obligation
in excess of fair value of plan assets): $1,170 $5,876 $25,803 $17,522
Unrecognized net actuarial loss ( 78) ( 240) ( 11,902) ( 7,008)
Unrecognized net transition amount ( 377) ( 435) -- --
----------- ----------- ---------- ----------
Accrued benefit cost, end of year $ 715 $5,201 $13,901 $10,514
=========== =========== ========== ==========
Discount rate 6.40% 7.75% 7.00% 7.75%
Rate of return on plan assets 5.50% 5.50% -- --
Rate of compensation increase 3.50% 4.75% -- --
Net periodic benefit cost (credit) for the Defined Benefit Pension
Plans and the Postretirement Health Plan consisted of the following
components:
Other
Pension Benefits Postretirement Benefits
------------------------------ -------------------------------
2001 2000 1999 2001 2000 1999
--------- ---------- --------- ---------- ---------- ---------
Service cost $ 74 $ 104 $-- $1,819 $1,237 $1,021
Interest cost 109 432 362 1,353 1,001 682
Recognized actuarial loss -- 44 36 239 159 121
Amortization of transition obligation 29 29 -- -- -- --
Settlement gain (4,690) -- --
Return on plan assets (30) (23) -- -- -- --
--------- ---------- --------- ---------- ---------- ---------
Net periodic benefit cost (credit) $(4,508) $ 586 $ 398 $3,411 $2,397 $1,824
==================== ========= ========== ========== =========
For measurement purposes, a 13% annual rate of increase in health care
costs was assumed for 2002 and is assumed to decrease gradually to 4.25%
for 2014 and remain at that level thereafter. The increase in the
postretirement benefit obligation in 2001 is due to a decrease in the
discount rate and
51
increases in the claims cost and health care trend rate assumptions, and
was partially offset by a gain from demographic changes related to reduced
headcount.
Assumed health care cost trend rates can have a significant effect on
the amounts reported for the Postretirement Health Plan. A
one-percentage-point change in assumed health care cost trend rates would
have the following effects for the year ended December 31, 2001:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------- ----------------
Effect on total of service and interest cost components
of net periodic benefit cost $ 905 $ (669)
Effect on postretirement benefit obligation 4,668 (5,955)
12. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 2001, 2000, and 1999 were as follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Current:
Federal $17,842 $46,723 $37,404
State 781 3,920 3,244
------------ ----------- -----------
Current income tax provision 18,623 50,643 40,648
------------ ----------- -----------
Deferred:
Federal (1,611) 1,244 (90)
State (651) 106 (8)
------------ ----------- -----------
Deferred income tax provision (benefit) (2,262) 1,350 (98)
------------ ----------- -----------
Total provision for income taxes $16,361 $51,993 $40,550
============ =========== ===========
The total provision for income taxes for the year ended December 31,
2001 included a current federal income tax benefit of $4.1 million
reflected in equity in losses of OFS BrightWave, LLC.
The reconciliation of the statutory U.S. federal income tax rate to
the Company's effective income tax rate for the years ended December 31,
2001, 2000, and 1999 was as follows:
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 0.2 1.9 1.9
Foreign sales corporation benefit ( 2.9) ( 1.1) ( 1.4)
Permanent items and other ( 2.8) 2.2 1.8
Establishment of valuation allowances for net
operating loss and capital loss carryforwards 7.5 -- --
------------ ----------- -----------
Effective income tax rate 37.0% 38.0% 37.3%
============ =========== ===========
During 2001, the Company established a valuation allowance of $2,020
against a deferred tax asset arising from a foreign net operating loss
carryforward of approximately $6 million. The loss carryforward has no
expiration date, but is subject to local restrictions limiting its
deductibility. The Company also has a foreign net operating loss
carryforward of approximately $2 million, with no expiration date, which it
considers more likely than not to be realized based on a positive earnings
history. The Company also established a valuation allowance of $1,388
during 2001 against a deferred tax asset arising from the impairment charge
for an investment in a wireless infrastructure project management company,
now in the process of being liquidated (see Note 5), which creates a
capital loss for tax purposes. The Company
52
considers it more likely than not that this capital loss carryforward will
expire unused due to uncertainty about the creation of future capital
gains.
The components of deferred income tax assets and liabilities and the
classification of deferred tax balances on the balance sheet were as
follows:
December 31,
------------------------
2001 2000
------------ -----------
Deferred tax assets:
Accounts receivable and inventory reserves $11,957 $11,276
Warranty reserves 491 635
Employee benefits 3,515 3,709
Postretirement benefits 7,125 5,969
Foreign net operating losses 2,813 185
Investment in unconsolidated affiliate 1,388 --
Investment in OFS BrightWave, LLC 1,118 --
Other 2,433 1,676
------------ -----------
Total deferred tax assets 30,840 23,450
Valuation allowance ( 3,408) --
------------ -----------
------------ -----------
Net deferred tax assets 27,432 23,450
Deferred tax liabilities:
Property, plant and equipment ( 26,867) ( 25,040)
Goodwill and intangibles ( 4,178) ( 4,277)
Hedging gain ( 1,143) ( 843)
------------ -----------
Total deferred tax liabilities ( 32,188) ( 30,160)
------------ -----------
Net deferred tax liability $( 4,756) $( 6,710)
============ ===========
Deferred taxes as recorded on the balance sheet:
Current deferred tax asset $18,143 $17,296
Noncurrent deferred tax liability ( 22,899) ( 24,006)
------------ -----------
Net deferred tax liability $( 4,756) $( 6,710)
============ ===========
At December 31, 2001 the Company had approximately $9.8 million in
state investment tax credits that could be utilized to reduce state income
tax liabilities for future tax years through 2007.
The cumulative amount of undistributed earnings from foreign
subsidiaries amounted to approximately $2.9 million at December 31, 2001.
Although the Company does not currently intend to repatriate earnings from
foreign subsidiaries, foreign tax credits may be available as a reduction
of United States income taxes in the event of such distributions.
53
Income tax (expense) benefit for components of other comprehensive
loss for the years ended December 31, 2001, 2000, and 1999 was as follows:
Year Ended December 31,
------------------------------------
2001 2000 1999
----------- ----------- ----------
Hedging gain on nonderivative instrument $ (300) $ (368) $ (472)
Effect of adopting SFAS No. 133 (135) -- --
Loss on derivative instrument designated
as a cash flow hedge 120 -- --
----------- ----------- ----------
Total income tax expense for components
of other comprehensive loss $ (315) $ (368) $ (472)
=========== =========== ==========
13. STOCK COMPENSATION PLANS
In 1997, the Company adopted the Amended and Restated CommScope, Inc.
1997 Long-Term Incentive Plan (the "CommScope Incentive Plan"), which was
formally approved by the Company's stockholders in 1998. The CommScope
Incentive Plan provides for the granting of stock options, restricted
stock, performance units, performance shares and phantom shares to
employees of the Company and its subsidiaries and the granting of stock and
stock options to nonemployee directors of the Company. A total of 8.7
million shares have been authorized for issuance under the CommScope
Incentive Plan through December 31, 2001. Stock options generally expire 10
years from the date they are granted. Options vest over service periods
that generally range from two to four years. Upon initial election to the
Company's board of directors, a non-employee director is granted 1,000
shares of stock, which are fully vested and transferable upon issuance, and
an option to purchase 20,000 shares of stock, which vest over a three-year
period. If a director remains in office, a similar option is granted every
three years. The following tables summarize the Company's stock option
activity and information about stock options outstanding at December 31,
2001:
Weighted
Average
Shares Exercise Price
(in thousands) Per Share
----------------- -----------------
Stock options outstanding at December 31, 1998 4,532 $13.25
Granted 690 37.08
Cancelled ( 84) 14.29
Exercised ( 634) 12.72
----------------- -----------------
Stock options outstanding at December 31, 1999 4,504 16.96
Granted 1,446 18.81
Cancelled ( 123) 21.67
Exercised ( 375) 12.57
----------------- -----------------
Stock options outstanding at December 31, 2000 5,452 17.64
Granted 294 21.90
Cancelled ( 432) 22.40
Exercised ( 225) 13.00
----------------- -----------------
Stock options outstanding at December 31, 2001 5,089 $17.69
================= =================
Stock options exercisable at December 31, 1999 2,068 $12.99
Stock options exercisable at December 31, 2000 2,747 $15.04
Stock options exercisable at December 31, 2001 3,703 $16.50
Shares reserved for future issuance at December 31, 2001 2,327
54
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------------
Weighted
Average Weighted
Range of Remaining Weighted Average Average
Exercise Shares Contractual Life Exercise Price Shares Exercise Price
Prices (in thousands) (in Years) Per Share (in thousands) Per Share
------------- ----------------------------------------------------- ------------------------------------
$8 to $20 4,379 6.3 $14.55 3,288 $13.80
20 to 30 32 7.8 23.28 4 24.22
30 to 40 669 7.7 37.61 407 37.94
40 to 48 9 8.2 44.53 4 44.24
----------------------------------------------------- ------------------------------------
$8 to $48 5,089 6.5 $17.69 3,703 $16.50
===================================================== ====================================
The Company has elected to account for stock options using the
intrinsic value method. The weighted average fair value per option,
disclosed below, has been estimated using the Black-Scholes option pricing
model. Pro forma information, disclosed below, presents net income and net
income per share as if compensation expense had been recorded using the
fair value based method. These pro forma assumptions and disclosures were
as follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------- ------------ ------------
Valuation assumptions:
Expected option term (years) 3.5 3.5 3.5
Expected volatility 50.0% 50.0% 50.0%
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.0% 5.0% 6.0%
Weighted average fair value per option $ 9.05 $ 7.76 $15.87
Pro forma:
Net income (in thousands) $20,788 $78,734 $64,020
Net income per share - basic 0.39 1.54 1.26
Net income per share - assuming dilution 0.39 1.49 1.23
14. STOCKHOLDER RIGHTS PLAN
On June 10, 1997, the Board of Directors adopted a stockholder rights
plan designed to protect stockholders from various abusive takeover
tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder received a
dividend of one right for each outstanding share of common stock, which was
distributed on July 29, 1997. The rights are attached to, and presently
only trade with, the common stock and currently are not exercisable. Except
as specified below, upon becoming exercisable, all rights holders will be
entitled to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock ("Participating Preferred
Stock") for each right held at a price of $60.
The rights become exercisable and will begin to trade separately from
the common stock upon the earlier of (i) the first date of public
announcement that a person or group (other than pursuant to a Permitted
Offer or Lucent, its Subsidiaries, Affiliates, or Associates pursuant to
the Financing Agreement, each as defined) has acquired beneficial ownership
of 15% or more of the outstanding common stock; or (ii) 10 business days
(or such later date as the Board of Directors of the Company may determine)
following a person's or group's commencement of, or announcement of and
intention to commence, a tender or exchange offer, the consummation of
which would result in beneficial ownership of 15% or more of the common
stock. The rights will entitle holders (other than an Acquiring Person, as
defined) to purchase common stock having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. If the
Company is acquired through a merger or other business combination
transaction (other than a Permitted Offer, as defined), each right will
entitle the holder to purchase $120
55
worth of the surviving company's common stock for $60. The Company may
redeem the rights for $0.01 each at any time prior to such acquisitions.
The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved
the creation of (out of the authorized but unissued shares of preferred
stock of the Company) participating preferred stock, consisting of 0.4
million shares with a par value of $0.01 per share. The holders of the
participating preferred stock are entitled to receive dividends, if
declared by the Board of Directors, from funds legally available. Each
share of participating preferred stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of participating
preferred stock are not redeemable by the Company nor convertible into
common stock or any other security of the Company.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and an
interest rate swap contract (see Note 10). For cash and cash equivalents,
trade receivables and trade payables, the carrying amounts of these
financial instruments are considered representative of their fair values
due to their short terms to maturity. Fair values for the Company's debt
instruments with no quoted market prices are estimated using a discounted
cash flow analysis, based on interest rates that are currently available to
the Company for issuance of debt with similar terms and remaining
maturities. With respect to the Company's convertible notes (see Note 9),
fair value is based on quoted market prices. The fair value of the
Company's interest rate swap contract is based on the net present value of
the expected future contractual cash flows.
The carrying amounts and estimated fair values of the Company's
convertible notes and interest rate swap contract at December 31, 2001 and
2000, are summarized as follows:
December 31,
------------------------------------------------------
2001 2000
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
Convertible notes $172,500 $136,700 $172,500 $122,500
Interest rate swap 42 42 (a) 364
(a) The interest rate swap contract was not required to be recorded
in the Company's financial statements until January 1, 2001 when
the Company adopted SFAS No. 133 (see Note 10).
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2001 and 2000.
Although management is not aware of any factors that would significantly
affect these fair value estimates, such amounts have not been
comprehensively revalued for purposes of these financial statements since
those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.
16. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment and facilities under operating
leases expiring at various dates through the year 2011. Rent expense was
$7.6 million in 2001, $7.8 million in 2000, and $5.4 million in 1999.
Future minimum rental payments required under operating leases with initial
terms of one year or more as of December 31, 2001 are: $3.9 million in
2002; $3.2 million in 2003; $2.9 million in 2004; $2.2 million in 2005,
$1.6 million in 2006 and $15.3 million thereafter.
These future minimum lease payments include payments under a five-year
tax-advantaged operating lease with Wachovia Capital Investments, Inc.
("Wachovia") for the Company's recently constructed corporate office
building. The Company moved into the corporate office building in January
2002 under an arrangement whereby Wachovia retains legal title and
ownership of the facility, but CommScope, rather than Wachovia, is allowed
to claim a deduction for the tax depreciation on the assets. The lease
56
payments are variable, based on three-month Libor plus a credit spread
determined from a pricing grid, which is based on CommScope's senior
unsecured credit rating as determined by Moody's or S&P. CommScope has the
option at any time to purchase the facility for the total construction
amount funded by Wachovia of approximately $12.8 million. However, up to
two additional five-year renewals may be granted at the option of the
lessor. At the end of the initial lease term, or renewal term(s) if
renewed, if CommScope should decide not to purchase the facility, CommScope
is obligated to pay Wachovia a final lease payment of approximately $11
million, and to market the facility on Wachovia's behalf. Any proceeds
received from the sale of the facility would first be used to reimburse
Wachovia for the difference between the total cost of the facility and
CommScope's final lease payment. Any remaining sales proceeds would be
retained by CommScope. The Wachovia lease agreement also contains certain
financial covenants including a leverage ratio, a net worth maintenance
test, and an interest coverage ratio. The lease agreement also contains
certain cross-default provisions related to CommScope's other credit
facilities. The Company was in compliance with these covenants as of
December 31, 2001.
As of December 31, 2001, the Company had committed funds of
approximately $3.1 million under purchase orders and contracts related to
vertical integration projects and equipment and capacity upgrades to meet
current and anticipated future business demands.
CommScope is either a plaintiff or a defendant in pending legal
matters in the normal course of business; however, management believes none
of these legal matters will have a materially adverse effect on the
Company's financial statements upon final disposition. In addition,
CommScope is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous
materials. The Company's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
materially adverse effect on the Company's financial statements.
17. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND
GEOGRAPHIC INFORMATION
The Company's operations are conducted within one business segment
that designs, manufactures and markets coaxial, fiber optic and high
performance electronic cables primarily used in communications
applications. The Company's primary source of revenues is from product
sales to cable television system operators, telecommunications service
providers, original equipment manufacturers and distributors. Service
revenue from delivery of products shipped by Company owned trucks is not
material to the Company's reported sales. The Company aggregates and
reports its results in one reportable segment based on the similarity of
its products, production processes, distribution methods, and regulatory
environment.
Sales of coaxial cable products to a major customer and its affiliates
were approximately 10% of net sales in 1999, and less than 10% of net sales
in 2001 and 2000. No other customer accounted for 10% or more of net sales
during any of the three fiscal years in the period ended December 31, 2001.
Sales to related parties were less than 2% of net sales in 2001 and
2000, and less than 2.5% of net sales in 1999. Trade accounts receivable
from related parties were less than 1% of the Company's total trade
accounts receivable balance as of December 31, 2001 and less than 2% as of
December 31, 2000. Purchases from related parties were less than 1% of cost
of sales and operating expenses in 2001, 2000 and 1999.
As of December 31, 2001, the Company held a $30 million note
receivable from OFS BrightWave, in which CommScope owns an 18.4% equity
interest. The Company recognized interest income of $125 on this note
during the six weeks ended December 31, 2001, of which $23 was eliminated
in consolidation. In addition, CommScope had a $1.5 million receivable from
OFS BrightWave, included in other current assets, for an expected
reimbursement of costs incurred by CommScope on behalf of OFS BrightWave
related to the formation of OFS BrightWave with Furukawa. The income
statement benefit related to this $1.5 million reimbursement, of which $280
was eliminated in consolidation, was recorded to terminated acquisition
costs in the fourth quarter of 2001.
57
Sales to customers located outside of the United States
("international sales") comprised approximately 23% of net sales in 2001,
and 24% of net sales in 2000 and 1999. International sales by geographic
region, based on the destination of product shipments, and worldwide sales
by broad product group were as follows (in millions):
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Latin America $64.5 $67.5 $43.0
Asia / Pacific Rim 26.2 58.9 47.6
Europe 64.9 77.4 65.4
Canada 16.3 23.1 18.3
Other 1.4 5.5 3.4
--------------------------------
Total international sales $173.3 $232.4 $177.7
================================
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Broadband and other video application products $588.3 $723.8 $557.4
Local area network products 88.3 85.3 87.3
Wireless and other telecommunications products 61.9 140.9 104.2
--------------------------------
Total worldwide sales by broad product group $738.5 $950.0 $748.9
================================
Net property, plant and equipment by geographic area was as follows (in millions):
December 31,
----------------------
2001 2000
----------------------
United States $238.6 $231.7
Belgium 10.3 10.2
Brazil 28.3 9.5
----------------------
Total net property, plant and equipment $277.2 $251.4
======================
58
18. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------------------------------------
Cash paid during the year for:
Taxes $ 23,655 $ 47,268 $ 37,112
Interest (net of capitalized amounts) 7,732 9,467 10,304
Noncash investing and financing activities:
Acquisition of interest in OFS BrightWave $ (173,388) -- --
Purchase of note of OFS BrightWave (30,000) -- --
Issuance of common stock to Lucent 203,388 -- --
19. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
Fiscal 2001:
Net sales $217,360 $199,899 $177,702 $143,537
Gross profit 52,794 48,310 43,947 34,593
Operating income 28,006 11,630 12,460 10,778
Net income (loss) 16,579 5,978 6,345 (1,037)
Net income (loss) per share, basic 0.32 0.12 0.12 (0.02)
Net income (loss) per share, diluted 0.32 0.11 0.12 (0.02)
Fiscal 2000:
Net sales $203,939 $241,244 $256,873 $247,970
Gross profit 52,353 64,381 66,265 68,055
Operating income 28,975 38,004 39,661 39,411
Net income 16,727 22,293 22,988 22,879
Net income per share, basic 0.33 0.44 0.45 0.45
Net income per share, diluted 0.32 0.42 0.43 0.43
59
COMMSCOPE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
----------------------------
Charged to
Balanmce at Charged to Other Deductions Balance at
Beginning Costs and Accounts (Describe) End of
Description of Period Expenses (Describe) (1) Period
----------------------------------------------------------------------------------------------------------
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 2001 $9,187 $6,565 $-- $3,153 $12,599
Year ended December 31, 2000 $4,838 $4,519 $-- $ 170 $9,187
Year ended December 31, 1999 $4,126 $1,602 $-- $ 890 $4,838
(1) Uncollectible customer accounts written off, net of recoveries of
previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections
captioned "Management of the Company--Board of Directors of the Company",
"Management of the Company--Committees of the Board of Directors--Board
Meetings", and "Management of the Company--Section 16(a) Beneficial
Ownership Reporting Compliance" included in our Proxy Statement for the
2002 Annual Meeting of Stockholders ("2002 Proxy Statement"), which
sections are incorporated herein by reference.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company as of March 22, 2002.
Name and Title Age Business Experience
-------------- --- -------------------
Frank M. Drendel 57 Frank M. Drendel has been our
Chairman and Chief Chairman and Chief Executive Officer
Executive Officer since the spin-off. He has served
as Chairman and President of
CommScope NC, currently our
wholly-owned subsidiary, from
1986 to the spin-off and has
served as Chief Executive Officer
of CommScope NC since 1976. Mr.
Drendel is a director of Nextel
Communications, Inc., Corvis
Corporation, C-SPAN and the
National Cable Television
Association. Prior to that time,
Mr. Drendel has held various
positions with CommScope NC since
1971.
Brian D. Garrett 53 Brian D. Garrett has been President
President and Chief and Chief Operating Officer of
Operating Officer CommScope and CommScope NC since
1997. He was our Executive Vice
President, Operations from the
spin-off until 1997. From 1996 to
1997, he was Executive Vice
President and General Manager of
the Network Cable Division of
CommScope NC and Vice President
and General Manager of the
Network Cable Division of
CommScope NC from 1986 to 1996.
Prior to that time, Mr. Garrett
has held various positions with
CommScope, NC since 1980.
Jearld L. Leonhardt 53 Jearld L. Leonhardt has been our
Executive Vice President Executive Vice President and Chief
and Chief Financial Officer Financial Officer since 1999. He
has served as our Executive Vice
President, Finance and
Administration from the spin-off
until 1999. He was our Treasurer
from the spin-off until 1997. He
has served as Executive Vice
President and Chief Financial
Officer of CommScope NC since
1999. He has served as Executive
Vice President, Finance and
Administration of CommScope NC
from 1983 until 1999 and
Treasurer of CommScope NC from
1983 until 1997. Prior to that
time, Mr. Leonhardt has held
various positions with CommScope
NC since 1970.
61
Randall W. Crenshaw 45 Randall W. Crenshaw has been
Executive Vice President, Executive Vice President,
Procurement, and General Procurement, and General Manager,
Manager, Network Network, of CommScope and CommScope
NC since 2000. From the spin-off
until 2000, he was Executive Vice
President, Procurement of
CommScope and CommScope NC. From
1994 to 1997, Mr. Crenshaw was
Vice President Operations for the
Network Cable Division of
CommScope NC. Prior to that time,
Mr. Crenshaw has held various
positions with CommScope NC since
1985.
William R. Gooden 60 William R. Gooden has been our Senior
Senior Vice President Vice President and Controller since
and Controller the spin-off. He has served as
Senior Vice President and
Controller of CommScope NC since
1996 and was Vice President and
Controller from 1991 to 1996.
Prior to that time, Mr. Gooden
has held various positions with
CommScope NC since 1978.
Larry W. Nelson 59 Larry W. Nelson has been our
Executive Vice President, Executive Vice President, Business
Business Development Development, since the spin-off.
He has served as Executive Vice
President, Business Development,
of CommScope NC since 1997. From
1988 to 1997, he was Executive
Vice President and General
Manager, CATV, of CommScope NC.
Prior to that time, Mr. Nelson
has held various positions with
CommScope NC since 1968.
Christopher A. Story 42 Christopher A. Story has been
Executive Vice President, Executive Vice President, Global
Global Broadband Operations Broadband Operations, of CommScope
and CommScope NC since 2000. From
1998 until 2000, he was Senior
Vice President, CATV Operations,
of CommScope NC. From 1996 to
1998, he was Vice President, CATV
Operations, of CommScope NC.
Prior to that time, Mr. Story has
held various positions with
CommScope NC since 1989.
Gene W. Swithenbank 62 Gene W. Swithenbank has been our
Executive Vice President, Executive Vice-President, Global
Global Broadband Sales Broadband Sales and Marketing since
and Marketing July 2001. Prior to that he was
Executive Vice President, CATV
Sales and Marketing, since the
spin-off. He has served as
Executive Vice President, CATV
Sales and Marketing, of CommScope
NC since 1996. From 1992 to 1996,
Mr. Swithenbank was Senior Vice
President, CATV Sales and
Marketing, of CommScope NC. Prior
to that time, Mr. Swithenbank has
held various positions with
CommScope NC since 1970.
Frank B. Wyatt, II 39 Frank B. Wyatt, II has been Senior
Senior Vice President, General Vice President, General Counsel and
Counsel and Secretary Secretary of CommScope and CommScope
NC since 2000. He was Vice
President, General Counsel and
Secretary of CommScope and
CommScope NC from the spin-off
until 2000. He has served as
General Counsel and Secretary of
CommScope NC since 1996. Prior to
that time, Mr. Wyatt was an
attorney in private law firm
practice since 1987.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the section
captioned "Management of the Company" in our 2002 Proxy Statement and is
incorporated by reference herein. The sections captioned
62
"Management of the Company--Compensation Committee Report on Compensation
of Executive Officers" and "Performance Graph" in our 2002 Proxy Statement
are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in the sections
captioned "Beneficial Ownership of Common Stock" and "Management of the
Company--Stock Options" in our 2002 Proxy Statement, which sections are
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section
captioned "Management of the Company--Certain Relationships and Related
Transactions" in our 2002 Proxy Statement and is incorporated by reference
herein.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements.
The following consolidated financial statements of
CommScope, Inc. are included under Part II, Item 8:
Independent Auditors' Report.
Consolidated Statements of Income for the Years ended
December 31, 2001, 2000 and 1999.
Consolidated Balance Sheets as of December 31, 2001 and
2000.
Consolidated Statements of Cash Flows for the Years
ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years ended December 31,
2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts.
Included under Part II, Item 8.
Certain schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto. 3. List of
Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
On October 25, 2001 we filed a current report on Form
8-K announcing our financial results for the third
quarter ended September 30, 2001.
On November 26, 2001 we filed a current report on Form
8-K announcing formation of the BrightWave joint
venture to acquire certain fiber optic assets.
On December 26, 2001 we filed an amended current report
on Form 8-K/A to file certain financial information
related to the BrightWave joint venture.
64
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CommScope, Inc.
Date: March 22, 2002 By:/s/ Frank M. Drendel
-------------------------------------
Frank M. Drendel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frank M. Drendel Chairman of the Board and Chief March 22, 2002
------------------------------- Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and Chief March 22, 2002
------------------------------- Financial Officer (Principal financial
Jearld L. Leonhardt officer)
/s/ William R. Gooden Senior Vice President and Controller March 22, 2002
------------------------------- (Principal accounting officer)
William R. Gooden
/s/ Edward D. Breen Director March 22, 2002
-------------------------------
Edward D. Breen
/s/ Duncan M. Faircloth Director March 22, 2002
-------------------------------
Duncan M. Faircloth
/s/ Boyd L. George Director March 22, 2002
-------------------------------
Boyd L. George
/s/ George N. Hutton, Jr. Director March 22, 2002
-------------------------------
George N. Hutton, Jr.
/s/ June E. Travis Director March 22, 2002
-------------------------------
June E. Travis
/s/ James N. Whitson Director March 22, 2002
-------------------------------
James N. Whitson
65
INDEX OF EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
CommScope, Inc. (Incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (File No. 1-12929)).
3.2 Amended and Restated By-Laws of CommScope, Inc.
(Incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 1-12929)).
4.1 Rights Agreement, dated June 12, 1997, between
CommScope, Inc. and ChaseMellon Shareholder Services,
L.L.C. (Incorporated herein by reference from the
Registration Statement on Form 8-A filed June 30, 1997
(File No. 1-12929)).
4.1.1 Amendment No. 1 to Rights Agreement, dated as of June
14, 1999, between CommScope, Inc. and ChaseMellon
Shareholder Services. (Incorporated by reference from
the Amendment to Registration Statement on Form 8-A/A
filed June 14, 1999 (File No. 1-12929)).
4.1.2 Amendment No. 2 to Rights Agreement, dated as of
November 15, 2001 between CommScope, Inc. and Mellon
Investor Services LLC. (Incorporated by reference from
the Amendment to Registration Statement on Form 8-A/A
filed November 19, 2001 (File no. 1-12929)).
10.1 Employee Benefits Allocation Agreement, dated as of
July 25, 1997, among NextLevel Systems, Inc.,
CommScope, Inc. and General Semiconductor, Inc.
(Incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 1-12929)).
10.2 Debt and Cash Allocation Agreement, dated as of July
25, 1997, among NextLevel Systems, Inc., CommScope,
Inc. and General Semiconductor, Inc. (Incorporated
herein by reference from the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1997 (File
No. 1-12929)).
10.3 Insurance Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (Incorporated herein by reference
from the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997 (File No. 1-12929)).
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (Incorporated herein by reference
from the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997 (File No. 1-12929)).
10.5 Trademark License Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc. (Incorporated herein by
reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No.
1-12929)).
10.6 Transition Services Agreement, dated as of July 25,
1997, between NextLevel Systems, Inc. and CommScope,
Inc. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1997 (File No. 1-12929)).
10.7 Credit Agreement, dated as of July 23, 1997, among
CommScope, Inc. of North Carolina, Certain Banks, The
Chase Manhattan Bank, as Administrative Agent and The
Chase Manhattan Bank, Bank of America National Trust
and Savings Association, BankBoston , N.A., Bank of
Tokyo-Mitsubishi Trust Company, CIBC, Inc., Credit
Lyonnais Atlanta Agency, First Union National Bank, The
Fuji Bank, Limited, Atlanta Agency, NationsBank, N.A.,
Toronto Dominion (New York), Inc. and Wachovia Bank,
N.A. as Co-Agents. (Incorporated herein by reference
from the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997 (File No. 1-12929)).
10.7.1 First Amendment to the Credit Agreement, dated as of
December 7, 1999 to the Credit Agreement dated as of
July 23, 1997, among CommScope, Inc. of North Carolina,
The Chase Manhattan Bank, as Administrative Agent, and
the Banks from time to time parties thereto, and the
financial institutions named therein as co-agents for
the Banks. (Incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 1-12929)).
10.7.2 Second Amendment to the Credit Agreement, dated as of
April 27, 2000 to the Credit Agreement dated as of July
23, 1997, among CommScope, Inc. of North Carolina, The
Chase Manhattan Bank, as Administrative Agent, and the
Banks from time to time parties thereto, and the
financial institutions named therein as co-agents for
the Banks. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2000 (File no. 1-12929)).
10.8+ Amended and Restated CommScope, Inc. 1997 Long-Term
Incentive Plan, as amended through December 14, 2000.
(Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
2000. (File No. 1-12929)).
10.9+ Form of Severance Protection Agreement between the
Company and certain executive officers. (Incorporated
by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No.
1-12929)).
10.9.1+ Form of Amendment to Severance Protection Agreement
between the Company and certain Executive Officers.
(Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1999 (File No. 1-12929)).
10.10+ Employment Agreement between Frank Drendel, General
Instrument Corporation and CommScope, Inc. of North
Carolina, the Letter Agreement related thereto dated
May 20, 1993 and Amendment to Employment Agreement
dated July 25, 1997. (Incorporated by reference from
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-12929)).
10.11 Credit Agreement, dated February 26, 1999, between
First Union National Bank and CommScope, Inc. of North
Carolina. (Incorporated by reference from the Company's
Annual Report on Form 10-K for the year ended December
31, 1998 (File No. 1-12929)).
10.11.1 First Amendment to the Credit Agreement, dated as of
December 7, 1999 between First Union National Bank and
CommScope Inc. of North Carolina. (Incorporated by
reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (file No.
1-12929)).
10.11.2 Second Amendment to the Credit Agreement, dated as of
June 28, 2000 to the Credit Agreement dated as of
February 26, 1999, between the First Union National
Bank and CommScope, Inc. of North Carolina.
(Incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June
30, 2000 (File no. 1-12929)).
10.12+ The CommScope, Inc. Annual Incentive Plan, as amended
through June 9, 1999. (Incorporated by reference from
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (file No. 1-12929)).
10.13 Indenture dated as of December 15, 1999 between
CommScope, Inc. and First Union National Bank, as
Trustee (Incorporated by reference from the Company's
Registration Statement on form S-3 dated January 14,
2000 (File No. 333-94691)).
10.14 Registration Rights Agreement, dated December 15, 1999
between CommScope Inc. and the Initial Purchasers
(Incorporated by reference from the Company's
Registration Statement on form S-3 dated January 14,
2000 (File No. 333-94691)).
10.15 Amended and Restated Memorandum of Understanding, dated
as of November 15, 2001, by and between The Furukawa
Electric Co., Ltd. and CommScope, Inc. (Incorporated by
reference from the Company's Current Report on Form 8-K
dated November 26, 2001 (file no. 1-12929)).
10.16 Registration Rights Agreement, dated as of November 16,
2001, by and between CommScope, Inc. and Lucent
Technologies Inc. (Incorporated by reference from the
Company's Current Report on Form 8-K dated November 26,
2001 (file no. 1-12929)).
10.17 Financing Agreement, dated July 24, 2001 among
CommScope, Inc., The Furukawa Electric Co., Ltd. and
Lucent Technologies Inc. (Incorporated by reference
from the Company's Current Report on Form 8-K dated
November 26, 2001 (file no. 1-12929)).
10.18 Financing Agreement Supplement, dated November 9, 2001
among CommScope, Inc., The Furukawa Electric Co., Ltd.
and Lucent Technologies Inc. (Incorporated by reference
from the Company's Current Report on Form 8-K dated
November 26, 2001 (file no. 1-12929)).
10.19 Revolving Credit Agreement, dated as of November 16,
2001, by and between CommScope Optical Technologies,
Inc. and OFS BrightWave, LLC.
10.20 Amended and Restated Limited Liability Company
Agreement of OFS BrightWave, LLC, dated November 16,
2001, by and among OFS BrightWave, LLC, Fitel USA Corp.
and CommScope Optical Technologies, Inc.
12. Statements re: Computation of Ratios.
21. Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PriceWaterhouseCoopers, LLC.
99.1 Forward-Looking Information.
99.2 OFS BrightWave, LLC Consolidated Financial Statements.
--------------------------------------------
+ Management Compensation.