UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1375 Lenoir Rhyne Boulevard, Hickory, North Carolina 28601
(Address of principal executive offices)
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
As of October 31, 1999 there were 50,802,723 shares of Common Stock outstanding.
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CommScope, Inc.
Form 10-Q
September 30, 1999
Table of Contents
Page No.
-----------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statement of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 10 - 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- ---------------
Net sales $ 202,315 $ 150,057 $ 537,268 $ 425,545
---------------- --------------- ---------------- ---------------
Operating costs and expenses:
Cost of sales 147,782 112,776 396,040 327,999
Selling, general and administrative 16,830 13,229 48,729 38,697
Research and development 2,106 1,236 5,540 4,438
Amortization of goodwill 1,347 1,297 3,941 3,897
---------------- --------------- ---------------- ---------------
Total operating costs and expenses 168,065 128,538 454,250 375,031
---------------- --------------- ---------------- ---------------
Operating income 34,250 21,519 83,018 50,514
Other income (expense) (1) 42 (8) 2,176
Interest expense (2,424) (3,806) (7,789) (12,102)
Interest income 57 96 307 436
---------------- --------------- ---------------- ---------------
Income before income taxes 31,882 17,851 75,528 41,024
Provision for income taxes (12,144) (6,430) (27,938) (14,772)
---------------- --------------- ---------------- ---------------
Net income $ 19,738 $ 11,421 $ 47,590 $ 26,252
================ =============== ================ ===============
Net income per share:
Basic $ 0.39 $ 0.23 $ 0.94 $ 0.53
Assuming dilution $ 0.38 $ 0.23 $ 0.92 $ 0.53
Weighted-average shares outstanding:
Basic 50,775 49,196 50,611 49,169
Assuming dilution 52,273 49,600 51,861 49,505
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<S> <C> <C>
(Unaudited)
September 30, December 31,
1999 1998
---------------- ----------------
Assets
Cash and cash equivalents $ 6,823 $ 4,129
Accounts receivable, less allowance for doubtful accounts of
$5,524 and $4,126, respectively 138,851 93,627
Inventories 36,691 29,986
Prepaid expenses and other current assets 2,527 3,745
Deferred income taxes 14,555 12,925
---------------- ----------------
Total current assets 199,447 144,412
Property, plant and equipment, net 158,944 135,082
Goodwill, net of accumulated amortization of
$47,333 and $43,396, respectively 163,535 164,024
Other intangibles, net of accumulated amortization of
$31,369 and $29,314, respectively 17,396 19,451
Investments and other assets 2,244 2,358
---------------- ----------------
Total Assets $ 541,566 $ 465,327
================ ================
Liabilities and Stockholders' Equity
Accounts payable $ 43,330 $ 23,717
Other accrued liabilities 43,329 26,713
---------------- ----------------
Total current liabilities 86,659 50,430
Long-term debt 167,471 181,800
Deferred income taxes 17,469 17,543
Other non-current liabilities 12,952 11,582
---------------- ----------------
Total Liabilities 284,551 261,355
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at September 30, 1999 and
December 31, 1998 -- --
Common Stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 50,794,834 at September 30, 1999;
50,254,467 at December 31, 1998 508 503
Additional paid-in capital 162,494 155,631
Retained earnings 95,428 47,838
Accumulated other comprehensive loss (1,415) --
---------------- ----------------
Total Stockholders' Equity 257,015 203,972
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 541,566 $ 465,327
================ ================
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<S> <C> <C>
Nine Months Ended
September 30,
------------------------------------
1999 1998
---------------- -----------------
Operating Activities:
Net income $ 47,590 $ 26,252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 21,207 18,341
Gain on sale of assets of the high temperature aerospace and industrial
cable business -- (1,873)
Changes in assets and liabilities:
Accounts receivable (48,952) (12,107)
Inventories (1,644) 5,193
Prepaid expenses and other current assets 1,203 740
Deferred income taxes (1,705) (1,514)
Accounts payable and other accrued liabilities 36,379 22,419
Other non-current liabilities 1,370 1,159
Other 86 15
---------------- -----------------
Net cash provided by operating activities 55,534 58,625
Investing Activities:
Additions to property, plant and equipment (28,860) (16,198)
Acquisition of business in Seneffe, Belgium (17,023) --
Sale of assets of the high temperature aerospace and industrial cable business -- 9,654
Other 21 280
---------------- -----------------
Net cash used in investing activities (45,862) (6,264)
Financing Activities:
Net repayments under revolving credit facility (30,000) (52,000)
Proceeds of term loan facility for acquisition of business in Seneffe, Belgium 16,353 --
Exercise of stock options 6,849 1,129
---------------- -----------------
Net cash used in financing activities (6,798) (50,871)
Effect of exchange rate changes on cash (180) --
Change in cash and cash equivalents 2,694 1,490
Cash and cash equivalents, beginning of period 4,129 3,330
---------------- -----------------
Cash and cash equivalents, end of period $ 6,823 $ 4,820
================ =================
See notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share data)
Nine Months Ended September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Number of Additional Other Total
Common Shares Common Paid-In Retained Comprehensive Stockholders'
Outstanding Stock Capital Earnings Loss Equity
--------------------------------------------------------------------------------
Balance December 31, 1998 50,254,467 $ 503 $ 155,631 $ 47,838 $ -- $ 203,972
Issuance of shares for stock option exercises 539,367 5 6,844 -- -- 6,849
Issuance of shares to outside director 1,000 -- 19 -- -- 19
Comprehensive loss - currency translation
adjustment -- -- -- -- (1,415) (1,415)
Net income -- -- -- 47,590 -- 47,590
--------------------------------------------------------------------------------
Balance September 30, 1999 50,794,834 $ 508 $ 162,494 $ 95,428 $ (1,415) $ 257,015
================================================================================
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par value.
No preferred stock is currently issued or outstanding.
See notes to condensed consolidated financial statements.
</TABLE>
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CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CommScope, Inc. ("CommScope" or the "Company") was incorporated in Delaware in
January 1997 and, through its wholly owned subsidiary CommScope, Inc. of North
Carolina ("CommScope NC"), operates in the cable manufacturing business.
CommScope is a world leader in the design and manufacture of high-performance,
high-bandwidth cables for telecommunications applications. The Company believes
it is the world's largest manufacturer of coaxial cable for hybrid fiber coaxial
("HFC") cable television systems. 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.
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1999, the condensed
consolidated statements of income for the three months and the nine months ended
September 30, 1999 and 1998, the condensed consolidated statements of cash flows
for the nine months ended September 30, 1999 and 1998, and the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 1999 are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the interim period financial statements. There were no
adjustments of a non-recurring nature recorded during the three months and the
nine months ended September 30, 1999 and 1998. The results of operations for the
interim period are not necessarily indicative of the results of operations to be
expected for the full year.
The unaudited interim condensed consolidated financial statements of CommScope
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These interim
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 1998 audited consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
September 30, December 31,
1999 1998
---- ----
Raw materials $15,497 $12,379
Work in process 7,599 5,811
Finished goods 13,595 11,796
------- -------
$36,691 $29,986
======= =======
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CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
3. NET INCOME PER SHARE
Below is a reconciliation of weighted-average common shares outstanding for
basic net income per share to weighted-average common and common equivalent
shares outstanding for diluted net income per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 1999 30, 1999 30, 1998 30, 1998
----------- ------------- ----------- -----------
Average number of common shares outstanding - for
basic net income per share 50,775 50,611 49,196 49,169
Dilutive effect of stock options 1,498 1,250 404 336
----------- ------------- ----------- -----------
Average number of common and common equivalent
shares outstanding - for diluted net income per share
52,273 51,861 49,600 49,505
=========== ============= =========== ===========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
------------------ -----------------
Credit Agreement (as defined below) $ 141,000 $ 171,000
Eurodollar Credit Agreement (as defined below) 15,671 --
Alabama State Industrial Development Authority Notes 10,800 10,800
------------------ -----------------
$ 167,471 $ 181,800
================== =================
</TABLE>
In July 1997, the Company entered into a $350 million revolving credit agreement
with a group of banks (the "Credit Agreement"). The Company utilizes the Credit
Agreement for, among other things, general working capital needs, financing
strategic acquisitions, and other general corporate purposes.
In February 1999, the Company entered into a term loan agreement for 15 million
Euros (the "Eurodollar Credit Agreement"). The Company utilized the proceeds of
the loan to fund the acquisition costs and working capital needs of a new
manufacturing facility in Seneffe, Belgium.
5. BUSINESS ACQUISITIONS AND DIVESTITURES
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business to
Alcatel for an adjusted price of $13 million. The Company recognized a pre-tax
gain from the sale of $1.9 million ($0.02 per basic and diluted share, net of
tax effect).
8
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CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
5. BUSINESS ACQUISITIONS AND DIVESTITURES (continued)
Effective January 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Seneffe, Belgium. The
acquisition provides the Company with a European base of operations, access to
established distribution channels and complementary coaxial cable technologies.
The Seneffe acquisition has been accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair value at the date of the acquisition of
approximately $20 million. Payment for the acquired business was not required
until March 1999 and was financed primarily by borrowings under the new
Eurodollar Credit Agreement.
6. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2001. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the unaudited condensed consolidated
financial statements and accompanying notes included in this document as well as
the audited consolidated financial statements, related notes thereto and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K. Unless otherwise specified, capitalized terms used herein
are used as defined in the audited consolidated financial statements of
CommScope for the year ended December 31, 1998 or in the unaudited condensed
consolidated financial statements included in this document.
HIGHLIGHTS
CommScope reported net income of $20 million ($0.39 per basic share and $0.38
per diluted share) for the quarter ended September 30, 1999, an increase of $9
million (73%) from the quarter ended September 30, 1998 net income of $11
million ($0.23 per basic and diluted share).
For the nine months ended September 30, 1999, CommScope reported net income of
$48 million ($0.94 per basic share and $0.92 per diluted share), an increase of
$22 million (81%) from the nine months ended September 30, 1998 net income of
$26 million ($0.53 per basic and diluted share).
Net income for the nine months ended September 30, 1998 includes a one-time
pre-tax gain of $1.9 million related to the sale of the Company's
high-temperature aerospace and industrial cables business. Excluding the gain,
net income for the nine months ended September 30, 1998 was $25 million ($0.51
per basic and diluted share).
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1999 WITH THE THREE AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998
NET SALES
Net sales for the third quarter and nine months ended September 30, 1999
increased $52 million (35%) to $202 million and $112 million (26%) to $537
million, respectively, from the comparable prior year periods. The increase in
net sales is primarily driven by strong broadband cable sales to domestic
telecommunications companies and solid growth in all key product categories.
For the third quarter and nine months ended September 30, 1999, international
sales increased 24% and 28%, respectively, compared to the corresponding periods
in 1998, due mainly to the acquisition of the Company's new coaxial cable
business in Seneffe, Belgium and improving sales in the Asia/Pacific Rim region.
While third quarter 1999 Latin American sales decreased compared to third
quarter 1998, year-to-date sales were level from 1998 to 1999 and the Company is
beginning to see encouraging signs of activity in this region, demonstrated by
three recently announced contracts representing more than $11 million in
potential revenues to the Company over the next few years.
Net sales to cable television and other video distribution markets ("CATV/Video
Products") for the third quarter and nine months ended September 30, 1999
increased $29 million (24%) to $149 million and $75 million (22%) to $410
million, respectively, from comparable prior year periods. The increase in sales
of CATV/Video Products resulted primarily from strong sales of broadband cable
to domestic telecommunications companies and cable television system operators
(MSOs).
Net sales for local area network and other data applications ("LAN Products")
for the third quarter and nine months ended September 30, 1999 increased $6
million (36%) to $23 million and $1 million (1%) to $60 million, respectively,
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from comparable prior periods. Demand remains strong for high-performance
products and pricing for selected products appears to be stabilizing. However,
capacity constraints have limited growth in sales of the Company's LAN Products.
During the third quarter of 1999, the Company expanded its production capacity
for enhanced bandwidth cables and began a 130,000 square-foot expansion of its
Claremont, NC facility, in part to support sales growth in LAN Products. The
Company is optimistic about growth in sales of its LAN Products, due primarily
to the strength of the underlying market, the ongoing shift to high-performance
products, and the acceptance of CommScope's IsoliteTM foamed insulation for
Unshielded Twisted Pair (UTP) cables.
Net sales for wireless and other telecommunications applications ("Wireless and
Other Telecom Products") for the third quarter and nine months ended September
30, 1999 were $31 million and $67 million, respectively, as compared to $14
million and $30 million for the comparable periods in 1998. These substantial
increases reflect strong growth in both sales of Cell Reach for wireless
applications, which more than tripled year-over-year in the third quarter and
nine months ended September 30, and sales of other telecommunications products,
which primarily represent cables designed for switching and transmission
applications for enhanced telecommunications services.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the third quarter and nine months ended September 30, 1999 was
$55 million and $141 million, respectively, compared to $37 million and $98
million for the comparable prior year periods, an increase of 46% and 45%,
respectively. Gross profit margins improved to 27.0% and 26.3% for the third
quarter and nine months ended September 30, 1999, respectively, compared to
24.8% and 22.9% for the comparable prior periods. The primary drivers of the
improvement in gross profit and gross profit margins are the increased sales
volumes and favorable product mix, engineered manufacturing efficiencies
including "value capture" vertical integration, material and commodity cost
improvements, and improving Cell Reach profitability. These improvements were
somewhat offset by lower prices for certain LAN Products and the acquisition of
the Seneffe facility. This facility, while profitable and improving, currently
has lower than Company-average margins.
The Company anticipates continued improvement in gross profit margins due to
ongoing cost reduction initiatives. However, these improvements may be moderated
by increasing commodity prices and the implementation of a new enterprise
information management system.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the third quarter and
nine months ended September 30, 1999 was $17 million and $49 million,
respectively, compared to $13 million and $39 million for the comparable prior
periods. As a percentage of net sales, SG&A expense was 8% and 9%, respectively,
for the third quarter and nine months ended September 30, 1999, compared to 9%
for both comparable periods of 1998. The decrease in third quarter 1999 SG&A
expense as a percentage of net sales was due primarily to the strength of sales.
However, SG&A expense (in dollars) increased over the prior year as a result of
the expansion of sales and marketing efforts to support developing products and
sales growth targets.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained steady at
1% during all periods presented. The Company has ongoing programs to develop new
products and market opportunities for its products and core capabilities and new
manufacturing technologies to achieve cost reductions.
OTHER INCOME, NET
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business to
Alcatel for an adjusted price of $13 million. The Company recognized a pre-tax
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gain from the sale of $1.9 million ($0.02 per basic and diluted share, net of
tax effect).
INTEREST EXPENSE
Interest expense for the third quarter and nine months ended September 30, 1999
was $2.4 million and $7.8 million, respectively, compared to $3.8 million and
$12.1 million for the comparable prior periods. The decrease in interest costs
is due to the reduction in borrowings under the Company's credit facility from
$203 million at the end of the third quarter of 1998 to $141 million at the end
of the third quarter of 1999. This reduction in interest expense was partially
offset during the nine months ended September 30, 1999 by interest expense on
new borrowings of 15 million Euros (equivalent to $16.4 million at the date of
borrowing), which are discussed below under Liquidity and Capital Resources.
INCOME TAXES
The effective tax rate was 37% and 36% for the nine months ended September 30,
1999 and 1998, respectively. This slight fluctuation in the Company's effective
tax rate is primarily a result of the strength in year-to-date domestic versus
international sales, which diluted the impact of the Company's foreign sales
corporation tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $56 million for the nine months ended September
30, 1999 compared to $59 million for the comparable period in 1998, a decrease
of $3 million, or 5%. The decrease in cash flow provided by operations is
primarily due to increased accounts receivable resulting from higher sales
volume and moderated somewhat by improved cash collections.
Working capital was $113 million at September 30, 1999, compared to $94 million
at December 31, 1998. Management of the Company believes that working capital
levels are appropriate to support current levels of orders and backlog.
During the nine months ended September 30, 1999, the Company invested $29
million in equipment and facilities compared to $16 million for the comparable
period in 1998. The capital spending in each period was primarily attributable
to vertical integration projects, capacity expansion, and equipment upgrades to
meet increased current and anticipated future business demands. Based on
expectations of continued growth, the Company plans to accelerate capital
expenditures over the next few quarters. The Company utilized an additional $17
million during the nine months ended September 30, 1999 to acquire Alcatel's
coaxial cable business in Seneffe, Belgium. During the nine months ended
September 30, 1998, the Company received initial cash proceeds of $10 million
related to the sale of its high temperature aerospace and industrial cables
business.
The Company's principal sources of liquidity both on a short-term and long-term
basis are cash flows provided by operations and funds available under long-term
credit facilities. During the nine months ended September 30, 1999 the Company
repaid $30 million under its revolving credit facility. Additionally, the
Company borrowed 15 million Euros (equivalent to $16.4 million on the date of
borrowing) under a new variable rate term loan agreement (the "Eurodollar Credit
Agreement") to fund the acquisition of the coaxial cable business in Seneffe,
Belgium. Based upon its analysis of the Company's consolidated financial
position and the expected results of its operations in the future, management
believes that the Company will have sufficient cash flows from future operations
and the financial flexibility to attract both short-term and long-term capital
on acceptable terms as may be needed to fund operations, capital expenditures
and other growth objectives. There can be no assurance, however, that future
industry-specific developments, general economic trends or other situations will
not adversely affect the Company's operations or its ability to meet its cash
requirements.
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In the normal course of business, CommScope uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
Non-derivative financial instruments include letters of credit and commitments
to extend credit (accounts receivable). The Company controls its exposures to
credit risk associated with its financial instruments through credit approvals,
credit limits and monitoring procedures. At September 30, 1999, in management's
opinion, CommScope did not have any significant exposure to any individual or
customer or counter-party, nor did CommScope have any significant concentration
of credit risk related to any financial instrument.
Derivative financial instruments utilized by CommScope, which are not entered
into for speculative purposes, include commodity pricing contracts, foreign
currency exchange contracts, and contracts hedging exposure to interest rates.
At September 30, 1999, the Company evaluated its commodity pricing and foreign
currency exchange exposures and concluded that it was not currently beneficial
to use derivative financial instruments to hedge its current positions with
respect to those exposures. However, the Company's Eurodollar Credit Agreement
(which is not a derivative financial instrument) serves as a hedge against
currency exchange exposures related to the Company's net investment in its
coaxial cable business in Seneffe, Belgium.
As of September 30, 1999 the Company had entered into an interest rate swap
agreement to effectively convert an aggregate amount of $50 million of
outstanding variable-rate borrowings to a fixed-rate basis. The agreement
expires in October 2001. Under the agreement, interest settlement payments will
be made quarterly based upon the spread between the three month LIBOR, as
adjusted quarterly, and the fixed rate of 4.81%.
Also as of September, 30, 1999, the variable rate borrowing under the Eurodollar
Credit Agreement was effectively converted into a fixed rate of 4.53% through an
interest rate swap agreement with terms that are identical to the Eurodollar
Credit Agreement. Net payments or receipts resulting from the interest rate swap
agreements are recorded as adjustments to interest expense in each quarter.
At September 30, 1999, the weighted average effective interest rate on
outstanding borrowings and associated credit fees under the Credit Agreement,
the Eurodollar Credit Agreement, and the Alabama State Industrial Development
Authority Notes was 5.8%.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2001. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European 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 will remain legal tender for a transition period between January 1,
1999 and January 1, 2002. The Company conducts business in member countries.
During the transition period, cash-less payments (for example, wire transfers)
can be made in the Euro, and parties to individual transactions can elect to pay
for goods and services using either the Euro or the legacy currency. Between
January 1, 2002 and July 1, 2002, the participating countries will introduce
Euro notes and coins and eventually withdraw all legacy currencies so that they
will no longer be available.
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The Company is addressing the issues involved with the introduction of the Euro.
Among the issues facing the company are the assessment and conversion of
information technology ("IT") systems to allow for transactions to take place in
both the legacy currencies and the Euro and the eventual elimination of legacy
currencies. In addition, the Company is reviewing certain existing contracts for
potential modification and assessing its pricing / marketing strategies in the
affected European markets.
Based on current information, CommScope does not expect that the Euro conversion
will have a material adverse effect on its business, results of operations, cash
flows or financial condition.
YEAR 2000
CommScope is currently addressing an issue common to most companies - ensuring
that its existing IT systems and applications and other non-IT control devices
are suitable for continued use into and beyond the Year 2000. Many IT systems
and applications and non-IT control devices were originally created using only
two digits to identify a year in the date field - and accordingly may recognize
a date using "00" as the Year 1900 or some other date rather than the Year 2000.
Failure to make appropriate modifications or upgrades to critical IT systems and
applications and non-IT control devices could result in a system failure or
miscalculations causing significant disruptions to operations. Third parties
with whom the Company interacts also employ various computer systems with
similar Year 2000 compliance issues. Failure by third parties to adequately
address their own Year 2000 compliance issues exposes the Company to business
risks such as a reduced demand for the Company's products or the lack of
availability of critical raw materials or services required for manufacturing
the Company's products. The Company's products themselves - high performance,
high bandwidth cables for the telecommunications industry - are not affected by
the Year 2000 problem. The Year 2000 compliance discussion below is based on
information currently available to the Company. Readers are cautioned that
forward-looking statements contained in the Year 2000 section should be read in
conjunction with the Company's disclosures under the heading "Forward-Looking
Statements".
To address the Year 2000 compliance issue, the Company has appointed a
corporate-wide Year 2000 compliance project team which is responsible for
coordinating the identification, evaluation, and implementation of changes to IT
systems and applications and non-IT control devices necessary to achieve a Year
2000 date conversion. The Year 2000 compliance project team is also
investigating significant third parties to determine the effectiveness of their
efforts toward achieving Year 2000 compliance.
The Year 2000 compliance project team has designed a systematic methodology of
addressing the Year 2000 compliance issue, which includes: (1) identification
and evaluation of IT systems and applications and non-IT control devices with
Year 2000 compliance issues; (2) implementation of changes to IT systems and
applications and non-IT control devices to achieve Year 2000 compliance; (3)
testing of the corrective actions taken to ensure Year 2000 compliance for the
identified systems; and (4) development of contingency plans in the event of the
failure of third parties to become Year 2000 compliant.
A database of internal IT systems and applications and non-IT control devices
which rely on date-sensitive computer logic has been developed to provide a
starting framework from which to address the significant issues related to Year
2000 compliance. Each of these systems, applications and devices has been
classified as a priority A, B, or C issue. Both A and B priority items are
deemed as critical systems which must be modified or upgraded into Year 2000
compliance. Priority C items are non-critical IT and non-IT systems which will
be upgraded into Year 2000 compliance upon completion of the modification of A
and B priority items.
The Year 2000 compliance project team has also accumulated a database of
significant third parties. Each of these third parties has been contacted and
asked to provide responses which will allow the Company to assess their ability
to achieve Year 2000 compliance. The Company continues to follow up on
non-responses and, where necessary, responses received. Almost all of the
Company's suppliers are still engaged in executing their Year 2000 compliance
efforts. As a result, the Company at this time cannot fully evaluate the Year
2000 risks to its supply of goods and services. The Company has substantially
14
<PAGE>
completed its evaluation of third party compliance through internal testing,
where feasible, to verify that third party modifications are effective. The
Company will continue to evaluate and test third party compliance as it
continues to receive notice that its suppliers have completed their year 2000
compliance efforts. The Company maintains a list of alternative suppliers as
part of its contingency plan in the event current suppliers do not timely
complete their compliance efforts. However, because there are limited sources of
certain materials used in manufacturing the Company's products, the Company may
not be able to develop an alternative source of supply if the operations of its
current suppliers are interrupted as a result of Year 2000 non-compliance.
Correspondence received from the Company's suppliers indicates that they do not
anticipate any Year 2000 problems resulting in an inability to meet CommScope's
materials requirements. In addition, the Company has negotiated with significant
suppliers to maintain additional inventories of raw materials on consignment at
the supplier's site or in off-site storage, to mitigate the risk that those
vendors may experience production interruptions as a result of Year 2000 issues.
CommScope will continue to monitor the Year 2000 status of its suppliers to
minimize this risk and will develop or modify, as appropriate, contingency plans
if new risks become apparent.
Modifications to most written programs for IT systems and applications (which
initially were developed in-house) have been in progress by Company personnel
since early 1997. In addition, certain non-compliant systems and applications
have been or are being replaced with Year 2000 compliant systems and products.
Substantially all IT systems and applications acquired from external sources
have been or are being upgraded to Year 2000 compliant versions through system
upgrades or through the purchase of new systems. The Company believes that it
has achieved 92% Year 2000 compliance, based on tests performed, for critical
internal IT systems and applications at November 12, 1999, with 100% Year 2000
compliance for those critical systems and applications targeted for completion
of upgrades and testing by the end of November 1999. Virtually all the critical
non-IT systems (including a variety of equipment control devices) have been
identified and evaluated and are being modified and tested, as appropriate, for
Year 2000 compliance through upgrades to Year 2000 compliant devices, with 100%
compliance expected before the end of the fourth quarter.
The Company continues to test the effectiveness of corrective actions taken to
achieve Year 2000 compliance during 1999. Based upon a full assessment of the
risks from potential Year 2000 systems failures, the Company has developed Year
2000 contingency plans for such risks. These contingency plans will factor in
business and operating decisions related to the potential failure of significant
third parties to become Year 2000 compliant. These contingency plans include
alternate supply sourcing and build-up of inventories by major suppliers (both
discussed above), as well as emergency utility backup procedures and manual
procedures to perform automated tasks.
The Company currently does not believe that the costs of addressing Year 2000
compliance issues will be material to the Company's results of operations,
financial condition or cash flows. The Company estimates that, through September
30, 1999, it has spent $840,000 to address Year 2000 compliance issues for IT
systems and applications and $125,000 for non-IT devices. Future expenditures to
address Year 2000 compliance issues are currently estimated at $110,000 for IT
systems and applications and $90,000 for non-IT devices. The Company expects to
continue to finance expenditures for Year 2000 compliance modifications through
cash flows from future operations.
Due to the Company's dependence upon, and its current uncertainty with, the Year
2000 compliance of certain third-party customers, suppliers and vendors, the
Company is unable to determine at this time its most reasonably likely worst
case scenario. There is a risk that lack of Year 2000 readiness on the part of
the Company's customers could have a negative effect on the Company's sales, but
this effect cannot be reasonably estimated. The risk that the Company may not be
able to meet customer demand as a result of supply shortages has been addressed
by the Company's contingency plan. The Company expects its continuing Year 2000
compliance efforts and contingency plans to reduce significantly the Company's
level of risk related to the impact of all known Year 2000 issues.
The Company believes that the corrective actions implemented under the direction
of the Year 2000 compliance project team will be completed on a timely basis in
a cost-effective manner to ensure that the Company's internal systems will be
15
<PAGE>
operational and suitable for continued use in the Year 2000 and beyond. In
addition, the Company believes that significant third parties will become Year
2000 compliant or that adequate contingency plans that have been developed will
ensure minimal business interruption to the Company's operations. However, there
can be no guarantee that problems associated with system failure or deficient
system operation due to Year 2000 compliance issues will not result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q which 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. These forward-looking statements are identified 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" and "scheduled" and
similar expressions. These statements are subject to various risks and
uncertainties, many of which are outside the control of the Company, such as the
level of market demand for the Company's products, competitive pressures, the
ability to achieve reductions in costs and to continue to integrate
acquisitions, price fluctuations of materials and the potential unavailability
thereof, foreign currency fluctuations, technological obsolescence,
international economic and political uncertainties and other specific factors
discussed in Exhibit 99 to the Form 10-Q for the nine months ended September 30,
1999. The information contained in this Form 10-Q represents the Company's best
judgment at the date of this report based on information currently available.
However, the Company does not intend to update this information to reflect
developments or information obtained after the date of this report and disclaims
any legal obligation to do so.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bi-metallic center conductors are among the major raw materials that the Company
uses in producing coaxial cables. It purchases bi-metallic center conductors
from Copperweld Bimetallic Products Company under a long-term supply agreement
expiring in March 2000. On July 28, 1999, the Company received from Copperweld a
demand for arbitration of a pricing dispute under the agreement, and the Company
thereafter asserted a counterclaim concerning the pricing dispute. By agreement
dated November 11, 1999, the Company and Copperweld agreed to settle this
dispute, and Copperweld agreed to continue to supply bi-metallic center
conductors to the Company, both through and following the March 2000 expiration
date of the current supply agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
27. Financial Data Schedule
99. Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended September
30, 1999:
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
November 12, 1999 /s/ Jearld L. Leonhardt
Date Jearld L. Leonhardt
Executive Vice President
and Chief Financial Officer
Signing both in his
capacity as Executive Vice
President on behalf of the
Registrant and as Chief
Financial Officer of the
Registrant
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
CommScope, Inc. condensed consolidated financial statements as of and for
the nine months ended September 30, 1999 and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<CIK> 0001035884
<NAME> CommScope, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 6,823
<SECURITIES> 0
<RECEIVABLES> 138,851
<ALLOWANCES> 5,524
<INVENTORY> 36,691
<CURRENT-ASSETS> 199,447
<PP&E> 253,760
<DEPRECIATION> 94,816
<TOTAL-ASSETS> 541,566
<CURRENT-LIABILITIES> 86,659
<BONDS> 0
0
0
<COMMON> 508
<OTHER-SE> 256,507
<TOTAL-LIABILITY-AND-EQUITY> 541,566
<SALES> 537,268
<TOTAL-REVENUES> 537,268
<CGS> 396,040
<TOTAL-COSTS> 396,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,789
<INCOME-PRETAX> 75,528
<INCOME-TAX> 27,938
<INCOME-CONTINUING> 47,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,590
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.92
</TABLE>
COMMSCOPE, INC.
EXHIBIT 99 - FORWARD-LOOKING INFORMATION
The Securities Exchange Act of 1934, the Private Securities Litigation
Reform Act of 1995, and other related laws provide a "safe harbor" for
forward-looking statements. The Company's Form 10-K for the year ended December
31, 1998, the Company's Annual Report to Stockholders, any Form 10-Q or Form 8-K
of the Company, or any other oral or written statements made by or on behalf of
the Company, may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "think", "designed to,"
"foreseeable future," "believe," "believes" and "scheduled" and similar
expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The actual results of the Company may differ significantly from the results
discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States and other markets where the
Company operates; (b) changes in capital availability or costs, such as changes
in interest rates, market perceptions of the industry in which the Company
operates, or security ratings; (c) employee workforce factors; (d) authoritative
generally accepted accounting principles or policy changes from such
standard-setting bodies as the Financial Accounting Standards Board and the
Securities and Exchange Commission; (e) potential disruption from the "Year
2000" problem, and the factors set forth below.
LEVERAGE; CERTAIN RESTRICTIONS UNDER CREDIT FACILITIES
Total long-term debt as of September 30, 1999 was approximately $167
million or 39% of the Company's book capital structure (which consists of
long-term debt and total stockholders' equity). The degree to which the Company
is leveraged could have important consequences, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be impaired; (ii) a portion of the
Company's and its subsidiaries' cash flow from operations must be dedicated to
the payment of the principal of and interest on its indebtedness; (iii) the
Credit Agreement, dated as of July 23, 1997, among CommScope, Inc. of North
Carolina, a wholly owned subsidiary of the Company, certain banks, and The Chase
Manhattan Bank, as Administrative Agent, contains certain restrictive financial
and operating covenants, including, among others, requirements that the Company
satisfy certain financial ratios; (iv) a significant portion of the Company's
borrowings are at floating rates of interest, causing the Company to be
vulnerable to increases in interest rates; (v) the Company's degree of leverage
may make it more vulnerable to a downturn in general economic conditions; and
(vi) the Company's degree of leverage may limit its flexibility in responding to
changing business and economic conditions.
DEPENDENCE OF THE COMPANY ON THE CABLE TELEVISION INDUSTRY AND CABLE TELEVISION
CAPITAL SPENDING
The majority of the Company's revenues come from sales to the cable
television industry. Demand for the Company's products depends primarily on
capital spending by cable television operators for constructing, rebuilding or
upgrading their systems. The amount of this capital spending, and, therefore,
the Company's sales and profitability will be affected by a variety of factors,
including general economic conditions, acquisitions of cable television
operators by non-cable television operators, cable system consolidation within
the industry, the financial condition of domestic cable television operators and
their access to financing, competition from satellite and wireless television
providers and telephone companies, technological developments and new
legislation and regulation of cable television operators. There can be no
assurance that cable television capital spending will increase from historical
levels or that existing levels of cable television capital spending will be
maintained.
1
<PAGE>
In recent years, cable television capital spending has also been affected
by new legislation and regulation, on the federal, state and local level, and
many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. During 1993 and 1994,
the Federal Communications Commission (the "FCC") adopted rules under the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), regulating rates that cable television operators may charge for lower
tiers of service and generally not regulating the rates for higher tiers of
service. In 1996, the Telecommunications Act of 1996 (the "Telecom Act") was
enacted to eliminate certain governmental barriers to competition among local
and long distance telephone, cable television, broadcasting and wireless
services. The FCC is continuing its implementation of the Telecom Act which,
when fully implemented, may significantly impact the communications industry and
alter federal, state and local laws and regulations regarding the provision of
cable and telephony services. Among other things, the Telecom Act eliminates
substantially all restrictions on the entry of telephone companies and certain
public utilities into the cable television business. Telephone companies may now
enter the cable television business as traditional cable operators, as common
carrier conduits for programming supplied by others, as operators of wireless
distribution systems, or as hybrid common carrier/cable operator providers of
programming on so-called "open video systems." The economic impact of the 1992
Cable Act, the Telecom Act and the rules thereunder on the cable television
industry and the Company is still uncertain.
Although the domestic cable television industry is comprised of thousands
of cable systems, a small number of cable television operators own a majority of
cable television systems and account for a majority of the capital expenditures
made by cable television operators. The loss of some or all of the Company's
principal cable television customers could have a material adverse effect on the
business of the Company.
TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING THE
COMPANY
Many of the markets that the Company serves are characterized by advances
in information processing and communications capabilities which require
increased transmission speeds and greater capacity ("bandwidth") for carrying
information. These advances require ongoing improvements in the capabilities of
wire and cable products. The Company believes that its future success will
depend in part upon its ability to enhance existing products and to develop and
manufacture new products that meet or anticipate such changes. The failure to
introduce successful new or enhanced products on a timely and cost-competitive
basis could have an adverse impact on the Company's operations and financial
condition.
Fiber optic technology presents a potential substitute for the products
that comprise the majority of the Company's sales. To date, fiber optic cables
have penetrated the cable television and local area network ("LAN") markets
served by the Company in high-bandwidth point-to-point and trunking
applications. Fiber optic cables have not, to date, significantly penetrated the
local distribution and residential application markets served by the Company
because of the high relative cost of electro-optic interfaces and the high cost
of fiber termination and connection. At the same time, advances in data
transmission equipment and copper cable technologies have increased the relative
performance of copper-based cables which are the Company's principal product
offerings. However, a significant decrease in the cost of fiber optic systems
could make such systems superior on a price/performance basis to copper systems.
While the Company is a fiber optic cable manufacturer and supplier to a small
portion of the cable television market and certain specialty markets, such a
significant decrease in the cost of fiber optic systems would likely have an
adverse effect on the Company.
COMPETITION
The Company's coaxial, fiber optic and electronic cable products compete
with those of a substantial number of foreign and domestic companies, some with
greater resources, financial or otherwise, than the Company, and the rapid
technological changes occurring in the telecommunications industry could lead to
the entry of new competitors. Existing competitors' actions and new entrants may
have an adverse impact on the Company's sales and profitability. The Company
believes that it enjoys a strong competitive position in the coaxial cable
market because of its position as a low-cost, high-volume coaxial cable producer
and its reputation as a high-quality provider of state-of-the-art cables, along
with its strong orientation toward customer service. However, there can be no
assurance that the Company will continue to compete successfully with its
existing competitors or that it will be able to compete successfully with new
competitors.
2
<PAGE>
IMPACT OF PRICE FLUCTUATIONS OF RAW MATERIALS ON THE COMPANY; SOURCES OF RAW
MATERIALS
Fabricated aluminum, plastics, bi-metals, copper and optical fiber are the
principal raw materials purchased by the Company, and the Company's
profitability may be affected by changes in the market price of these materials
(which are linked to the commodity markets). Although the Company has generally
been able to pass on increases in the price of these materials to its customers,
there can be no assurance that the Company will be able to do so in the future.
Additionally, significant increases in the price of the Company's products due
to increases in the cost of raw materials could have a negative effect on demand
for the Company's products.
A significant portion of the Company's raw material purchases are
bi-metallic center conductors for coaxial cables, nearly all of which are
purchased from a single supplier, Copperweld Corporation, under a long-term
supply arrangement expiring in March 2000. Copperweld has agreed to continue to
supply bi-metallic center conductors to the Company after expiration of the
present arrangement, but this continuing supply relationship is indefinite in
duration. If the Company becomes unable to continue to purchase bi-metallic
center conductors from this supplier, either before or after expiration of this
arrangement, the Company may be unable to obtain these raw materials on
commercially acceptable terms from another source. There are few, and limited,
alternative sources of supply with respect to bi-metallic center conductors. The
Company acquired the clad wire fabrication equipment and technology of Texas
Instruments Incorporated in February 1999 for manufacturing copper-clad aluminum
wire and copper-clad steel wire. The Company anticipates that in 2000 it will
begin to produce a significant portion of the bi-metallic center conductors used
by the Company. However, the loss of Copperweld as a supplier of bi-metallic
center conductors, either during the term of the current supply contract or
after expiration of that agreement, and/or the failure of the Company to
vertically integrate these products, could have a material adverse effect on the
Company. In addition to bi-metallic wires, fine aluminum wire, which is a
smaller raw material purchase than bi-metallic wire, is purchased primarily from
a single source. 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 the Company was unable to vertically
integrate the production of these products. In such event, there could be a
materially adverse impact on the Company's financial results. Additionally,
fluorinated-ethylene-propylene (FEP) is the primary raw material used throughout
the industry for producing flame-retarding cables for LAN 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 LAN cable sales growth.
INTERNATIONAL OPERATIONS
Management remains guarded about the near-term outlook for international
sales. During 1998, international sales decreased by approximately 30%, or $60.6
million, compared to 1997, due to monetary crises in key overseas markets,
including the Pacific Rim and South America. Excluding the Seneffe acquisition,
management expects 1999 international sales to be relatively unchanged compared
to 1998. The Seneffe operation is expected to provide approximately 5% growth in
total company sales in 1999, compared to 1998. In the long run, the Company's
management believes that continued growth in international markets, including
the developing markets in Asia, the Middle East and Latin America, and the
expected privatization of the telecommunications structure in many European
countries, represent significant future opportunities. However, the Company
cannot predict with certainty the outlook for international sales in 1999 and
beyond due to unpredictable political and economic uncertainties.
International operations are subject to the usual risks inherent in sales
abroad, including risks with respect to currency exchange rates, economic and
political destabilization, restrictive actions by foreign governments,
nationalizations, the laws and policies of the United States affecting trade,
foreign investment and loans, and foreign tax laws.
ENVIRONMENT
The Company 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 material
adverse effect on the Company's financial condition.
3
<PAGE>
The Company's present and past facilities have been in operation for many
years, and over that time in the course of those operations, such facilities
have used substances which are or might be considered hazardous, and the Company
has generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future which the Company cannot now predict.
4
