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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 October 31, 1997
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 No. 0-1424
ADC Telecommunications, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0743912
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12501 Whitewater Drive
Minnetonka, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 938-8080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.20
par value
Common Stock
Purchase Rights
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 / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of January 9, 1998, was approximately $4,545,205,023 (based on
the last sale price of such stock as reported by the Nasdaq Stock Market
National Market).
The number of shares outstanding of the registrant's common stock, $.20
par value, as of January 9, 1998, was 133,928,138.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II of this Form 10-K is incorporated
herein by reference to portions of the Company's Annual Report to Shareholders
for the fiscal year ended October 31, 1997. The information required by Part
III of this Form 10-K is incorporated by reference to portions of the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before February 24,
1998.
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PART I
ITEM 1. BUSINESS
ADC designs, manufactures, markets and integrates a broad range of
products and services that enable its customers to construct and upgrade
their telecommunications networks to support increasing user demand for
voice, data and video services, primarily within an area of the
telecommunications market known as the "local loop." The local loop is the
portion of the public network from the central office, through the equipment
that connects the local central office to the subscriber's equipment, onto
the customer's premises and across the enterprise or residential network.
Telephone companies, cable television operators, wireless network providers
and other public network providers are building the infrastructure required
to offer Internet access, higher speed data, video and telephony services,
entertainment and other interactive services to residential and business
customers. Greater and greater amounts of network bandwidth are required for
these services, and the Company's development efforts and product offerings
are focused on "unlocking the capacity of the local loop," eliminating
bottlenecks and increasing the speed and efficiency of the network.
The Company's products include equipment, services and integrated solutions
within three functional product groups: transmission, enterprise networking and
broadband connectivity. The Company's transmission products are designed for
use in copper-based, coax-based, fiber-based or wireless transmission networks
and are sold primarily to public network providers in the United States and
internationally. The Company's enterprise networking products are designed for
use in copper-based, fiber optic and wireless networks and are sold primarily to
private voice, data and video network providers around the world. The Company's
broadband connectivity products are designed for use in copper-based, coax,
fiber optic or wireless transmission networks and are sold to both public and
private global network providers.
The Company's customers include: public network providers, which consist
of all five of the Regional Bell Operating Companies (RBOCs), post telephone and
telegraph companies (PTT's), other telephone companies, long distance carriers,
wireless service providers, major cable TV operators, Internet service providers
and other international and domestic public network providers; private and
governmental network providers (such as various large business customers and
governmental agencies); and major telecommunications Original Equipment
Manufacturers (OEMs).
As used in this report, unless the context otherwise requires, the terms
"Company" and "ADC" refer to ADC Telecommunications, Inc. and its wholly owned
and majority owned subsidiaries; 1995, 1996 and 1997 refer to the Company's
fiscal years ended October 31, 1995, 1996 and 1997, respectively; and 1998
refers to the Company's fiscal year ending October 31, 1998.
INDUSTRY BACKGROUND
Since the Company entered the telecommunications equipment industry in the
1970s, the industry has grown and changed substantially, primarily as a result
of continuous technological development; increased demand for new, higher speed,
higher capacity services such as Internet access, digital video and advanced
wireless services; the convergence of all voice, data and video network traffic
into integrated multimedia services over public and private networks; and a
changing regulatory and competitive environment. The Company believes that
these trends will continue to drive changes in the telecommunications equipment
industry for the foreseeable future.
Several important technological developments have spurred the evolution of
the telecommunications equipment industry. One important technological change
has been the deployment
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of fiber optic transmission systems. In a fiber optic system, lasers transmit
voice, data and video traffic in the form of analog or digital coded light
pulses through glass fibers. The increasing shift to fiber optic transmission
systems has been principally due to the ability of fiber optics to carry large
volumes of information at high speeds, its insensitivity to electromagnetic
interference and the high transmission quality made possible by the physical
properties of light. As technologies such as Synchronous Optical NETwork
(SONET), Dense Wave Division Multiplexing (DWDM) and 1550 nanometer laser
transmission technologies have evolved over the last several years, the capacity
of fiber optic systems to transport information has increased significantly.
The development of cost-effective digital technology has also allowed
greater capacity (or speed) in network transmission and has resulted in an
increasing trend over the past decade to replace analog technology in copper,
fiber and wireless transmission networks. In analog technology, information is
converted to a voltage or current wave form for processing or transmission. In
digital technology, information is converted to digital bits and then processed
or transmitted using computer based components. Very high-speed digital
technology developments such as SONET, cell based Asynchronous Transfer Mode
(ATM) and Orthogonal Frequency Division Multiplexing (OFDM) modulation
technologies have enabled network providers to transmit increasing amounts of
data and video communications.
Another important technological change in the telecommunications
marketplace is the use of integrated circuits in both public and private
telecommunications networks, facilitating significantly more complex networks.
Network equipment utilizing integrated circuits is increasingly performing the
high speed switching, network performance monitoring, network management,
information compression, data translation and other complex functions required
to address expanding users' needs.
More recently, wireless technology developments have had an impact on the
telecommunications equipment industry. There has been substantial growth in
wireless communications such as cellular telephone services and satellite-based
services, Personal Communications Services (PCS) communications, Multichannel
Multipoint Distribution Systems (MMDS) and Local Multipoint Distribution Systems
(LMDS) for wireless cable services and wireless data and paging services. This
growth has been spurred by the convenience of mobility and the limits of
wireline infrastructure. In particular, in countries without reliable or
extensive wireline systems, wireless service could ultimately provide the
primary service platform for both mobile and fixed telecommunications
applications, because of the potential savings in installation time and cost.
The Company believes that in future years the continuing development of wireless
communications technology could substantially extend the reach of current
communications networks.
Finally, over the past two years, Digital Subscriber Line (DSL) technology
and Digital Loop Carrier (DLC) technology advancements have resulted in a
resurgence of copper-based transmission of high bandwidth services to business
customers. The Company believes that in future years the continuing development
of DSL and DLC technologies could enable network providers to transport
residential broadband services over copper-based systems in certain
applications.
Increased demand for new, higher speed, higher capacity services such as
Internet access, digital video and advanced wireless services has in turn
resulted in substantial demands on network infrastructure over the past decade.
Networks increasingly are required to transmit large volumes of data and video
for the purpose of communicating information, conducting business and delivering
entertainment. In addition, both public and private network customers are
requesting the convergence of their voice, data and video traffic into
integrated multimedia services transmitted over one network. Such demands have
prompted the development and use of "broadband" networks, which feature the
improved reliability and increased speed of transmission generally required for
data and video
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transmission over the network. Specifically, the industry term "broadband"
refers to all transmission speeds of T1 (1.544 million bits per second) and
higher. Growth in broadband network applications has resulted in increased
infrastructure investment by network operators in order to expand network
capacity and provide new applications and services to meet users' needs.
The evolution in technology and user needs has been accompanied by changes
in the domestic and international regulatory environment. Since the divestiture
of the AT&T regional operating companies in 1984 (in a consent decree), the
RBOCs have been prevented from manufacturing equipment for use in
telecommunications networks. As the RBOCs have embarked on aggressive expansion
plans, significant opportunities have been created for independent
telecommunications equipment manufacturers such as the Company.
In February 1996, the U.S. Congress enacted the Telecommunications Reform
Act of 1996 (the "Telecommunications Act"), which opened competition for local
loop access services to local telephone companies, long distance telephone
companies, cable TV companies, electric utilities and potentially others. The
Telecommunications Act represents a fundamental change from the Communications
Act of 1934, which governed the U.S. telephone industry structure prior to 1996
and which protected franchised monopolies in local telephone service. The
Telecommunications Act also allows the RBOCs to provide long distance service
and manufacture telecommunications equipment under certain circumstances,
another significant change from the 1984 consent decree which required
divestiture of the AT&T regional operating companies. The objective of the
Telecommunications Act is to reduce regulation and stimulate competition in
telecommunications services, which in turn is expected to result in more rapid
introduction of new technologies and services, better quality of service, a
broader range of service options, lower costs to consumers and stimulation of
the overall economy through an improved information system infrastructure. The
Company believes that Congress intended for the competition among service
providers to be both services-based (i.e., the service provider buys and resells
bandwidth) and equipment-based (i.e., the service provider also operates the
equipment).
Since the passage of the Telecommunications Act, the Federal Communications
Commission (FCC) and the federal courts, as well as various state governments
and agencies, have initiated efforts to define and establish rules for
implementation of the new law. Although implementation of the
Telecommunications Act and the intended increase in competition has begun, there
have been a number of delays and continuing uncertainties. The Company believes
that the impact of the Telecommunications Act in reducing regulation of and
increasing competition in the U.S. telecommunications industry will take a
number of years to unfold.
Outside the United States, the telecommunications equipment market has also
expanded and changed significantly in recent years, as network users have
increasingly demanded access to voice, data and video communications
capabilities. Many countries without reliable or extensive wireline systems are
seeking to develop and enhance their telecommunications infrastructure. This
growth in demand for network services and infrastructure has been accompanied by
changes in the international regulatory environment. In many countries,
government operated telecommunications monopolies are being converted to private
network services providers, and competition among such carriers is expected to
intensify. Policies of deregulation and privatization are currently being
followed in many countries, and these policies increase opportunities for
independent companies to supply products and services within public telephone
system markets and within private voice, data and video communications markets.
The Company believes that "broadband global networking," or the emerging
series of worldwide broadband networks, represents a key enabling capability for
meeting the information needs of network users. The addition of high speed data
and video traffic has driven the need for broadband
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infrastructure and has enabled the creation of a wide range of new applications,
including broadband Internet access and e-mail, video on demand, electronic
commerce, distance learning, telecommuting, telemedicine and high speed imaging
such as remote medical imaging. The Company participates in this emerging
broadband global network market by providing a broad variety of end-to-end
integrated equipment and services solutions.
STRATEGY
ADC's strategy is to capitalize on opportunities in the evolving global
telecommunications market by providing equipment, services and integrated
systems solutions for its customers' voice, data and video telecommunications
networks primarily within the local loop area of the telecommunications market.
ADC's broad range of products addresses key areas of the telecommunications
network infrastructure, and these products are used to connect physical
networks, access network services, transport network traffic and manage
networks. ADC's many product offerings address the diverse needs of its
customers within the local loop, including the RBOCs, PTT's, other telephone
companies, long distance carriers, wireless service providers, the major cable
TV operators, other public network providers, private network providers and
telecommunications OEMs.
Key components of the Company's strategy include:
- - FOCUS ON BROADBAND LOCAL LOOP MARKET OPPORTUNITIES. In recent years,
broadband requirements for both public and private networks have grown
significantly. ADC offers a broad line of telecommunications equipment
that addresses customers' network needs in the "local loop." The Company
believes that the local loop presents some of the greatest market growth
opportunities and customer needs in the telecommunications equipment
industry today, and is therefore focusing its product development and
marketing efforts on these emerging opportunities. Through internal
development, acquisitions and joint ventures, ADC has organized its local
loop offerings into three major network product areas: transmission,
enterprise networking and broadband connectivity. In addition, through a
combination of internal core competency development and external
acquisition and partnering activities, ADC has grown its systems
integration and network management capabilities to the level required to
offer customers much more complete, end-to-end solutions to their network
needs. ADC's local loop products and services enable network providers to
address their three major broadband customer markets: residential, business
and wireless.
- - FOCUS ON BROADBAND TECHNOLOGIES THAT "UNLOCK THE CAPACITY OF THE LOCAL
LOOP." In the public network local loop market, broadband deployment has
been driven by telephone and cable television providers seeking to
establish the infrastructure required to offer Internet access,
higher-speed data, video and telephony services, entertainment and other
interactive services to residential customers over a single network.
Broadband deployment in the public network local loop market has also been
accelerated by telephone providers and competitive local exchange carriers
seeking to establish a single network which will offer higher-speed voice,
data and video services utilizing increasing amounts of bandwidth to
business customers. In addition, both residential and business customers
are driving local loop network requirements by increasingly demanding
advanced wireless services. ADC is focusing its development resources on
technologies that will "unlock the capacity of the local loop" (i.e.,
eliminate bottlenecks and increase the speed and efficiency within the
local loop). Examples of products developed by ADC to target these local
loop opportunities include the Company's Homeworx-TM- system, which has
been designed to enable telephone and cable television companies to provide
a range of voice, video and data services to residential customers; the
Soneplex-Registered Trademark- product platform, which allows public
network providers to cost effectively deliver and manage
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broadband services over the public network for their business customers;
the AAC-3-TM- ATM access concentrator, which allows customers to gain
access to high speed switched voice, data and video traffic on public
networks from their private networks; television transmission products for
the wireless cable and broadcast industry, which provide an alternative,
wireless method of broadcasting video and other services to residential
customers; and the Company's family of CityWide-TM- wireless systems, which
provide access to, add to and extend wireless communications coverage. In
addition, ADC's 1997 acquisitions and joint ventures and internal product
development efforts improved the Company's ability to target broadband
local loop network opportunities. See "SUPPLEMENT INTERNAL DEVELOPMENT
EFFORTS WITH STRATEGIC ALLIANCES AND ACQUISITIONS" in this section as well
as the specific product group discussions below.
- - LEVERAGE TECHNOLOGICAL CAPABILITIES ACROSS PRODUCT GROUPS. ADC has
developed substantial expertise in fiber optic, broadband copper, video,
wireless and broadband network management technologies and systems
integration services. The Company has built these core competencies
through internal development, acquisitions, joint ventures and technology
licensing arrangements. ADC's strategy is to leverage these core
competencies across its product groups in order to develop new product
architectures and network management tools for its customers' evolving
voice, data and video network needs in various market areas. For example,
the Company is continuing development of its wireless technologies for use
in converging wired and wireless applications, such as potential wireless
local loop products. See "SUPPLEMENT INTERNAL DEVELOPMENT EFFORTS WITH
STRATEGIC ALLIANCES AND ACQUISITIONS" in this section.
- - EXPAND INTERNATIONAL PRESENCE. ADC believes that significant growth in the
telecommunications equipment market will occur outside the United States as
a result of deregulation and the need of many foreign countries to
substantially expand or enhance their telecommunications services. During
both 1997 and 1996, ADC's international sales represented approximately 21%
of total sales, compared to 18% of total sales for 1995. ADC's strategy is
to continue to expand its international presence by increasing its
international sales and marketing resources, leveraging its existing
customer relationships, developing additional international distribution
channels and seeking strategic alliances and acquisitions. Three of ADC's
subsidiaries and several of its strategic alliance partners have their
principal operations or markets outside the U.S.
- - SUPPLEMENT INTERNAL DEVELOPMENT EFFORTS WITH STRATEGIC ALLIANCES AND
ACQUISITIONS. Because of the dynamic nature of the telecommunications
equipment industry, ADC has sought and intends to continue to seek
alliances and acquisitions which will: (i) add key technologies that ADC
can leverage across its businesses, (ii) broaden its product offerings,
(iii) permit the Company to enter attractive new markets and (iv) expand or
enhance its distribution channels. Recent examples of such alliances and
acquisitions include: (i) the acquisition of The Apex Group, Inc., a
software development and information management company based in Columbia,
Maryland; (ii) the acquisition of NewNet, Inc., a developer of intelligent
network telecommunications software, including Signaling Systems 7 (SS7)
technology and wireless intelligent network products (such as short
messaging servers), located in Shelton, Connecticut; and (iii) the
marketing and development agreement with interWAVE Communications
International, Ltd. of Redwood City, California, under which ADC is
marketing interWAVE's line of Global System for Mobile Communications (GSM)
system products worldwide.
The ability of the Company to implement its strategy effectively is subject
to many uncertainties, and there can be no assurance of any future results of
the Company's activities.
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PRODUCT GROUPS
The Company's products can be categorized into three general functional
groups: (i) transmission, (ii) enterprise networking and (iii) broadband
connectivity. These product groups accounted for 44%, 13% and 43%,
respectively, of the Company's net sales during 1997. Each of these product
groups is discussed below.
TRANSMISSION PRODUCTS
ADC's transmission products provide electronic and optical signal
generation primarily within the local loop portion of public networks. Certain
of the transmission products also provide access to the network in order to
monitor, test and reroute circuits within telecommunications transmission
systems. ADC's transmission products are designed for use in copper-based,
coax-based, fiber-based or wireless transmission networks and are sold to
telephone companies, cable TV companies, other public network providers and to
users of private voice, data and video networks. Transmission products and
services include fiber optic video delivery products, other high speed voice,
data and video delivery and access platforms, wireless cable and broadcast TV
transmission equipment, wireless microcell systems, wireless performance and
network management systems, test and monitoring systems, digital repeaters and
systems integration services and products. The Company's principal transmission
products are described below.
DV6000-TM- AND OTHER FIBER VIDEO DELIVERY EQUIPMENT. The Company's DV6000
system transmits a variety of signal types using a high speed, uncompressed
digital format (at speeds up to 10 billion bits per second, with capacity of up
to 64 channels) over fiber in the super trunking portions of broadcast and
interactive video networks. This system is used in public residential broadband
networks. During 1997, ADC added Ethernet-based data transport capabilities to
the DV6000 platform. The Company also manufactures various analog video
transmission systems used in cable TV and broadcast applications and interactive
systems for distance learning and campus interconnects.
HOMEWORX ACCESS TRANSPORT PLATFORM. The Company's Homeworx access transport
platform is a customer loop transmission system for small business and
residential customers utilizing Hybrid Fiber Coax (HFC) technology. The
Homeworx system has been designed for deployment on video-only, telephony-only
and integrated video, telephony and data broadband networks provided by
telephone operating companies, cable TV companies and other telecommunications
common carriers. In October 1997, NetCom Systems AB, a major alternative
provider of telecommunication services in Scandinavia, selected ADC's Homeworx
telephony equipment to deliver enhanced telephony and data services over its
existing cable TV HFC infrastructure to certain of its 320,000 customers at
Tele2, NetCom's telephony operator in Sweden. In December 1997, MediaOne began
deploying the Homeworx system for a major telephony network in Atlanta, Georgia.
In mid-1998, the Company expects to begin a limited number of customer test
trials for the symmetrical cable data modem portion of the Homeworx system which
was developed with another company. In addition, the Company recently announced
an asymmetrical cable data modem product obtained through a marketing and
development agreement with Phasecom. The Company currently plans to begin
shipping commercial volumes of the asymmetrical cable data modem products in the
first half of 1998. Finally, ADC has undertaken development of a High bit-rate
Digital Subscriber Line (HDSL) platform, a wireless broadband access platform
and an integrated wireless/wireline narrowband access platform for residential
network applications. These three new systems, all of which are based on the
Homeworx platform, provide an example of ADC's ability to leverage technology
developments into related applications. The Company anticipates that these
systems will be available for customer test trials by the end of 1998.
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SONEPLEX SERVICE DELIVERY PLATFORM. The Company's Soneplex platform is a
carrier-class, intelligent loop access platform enabling public network
providers to deliver T1/E1 based services to business customers. The Company's
Soneplex family of platforms employs various transport technologies, including
fiber optic and High bit-rate Digital Subscriber Line (HDSL) transmission, to
deliver high-bandwidth voice, data and video services over carriers' fiber and
copper facilities. Soneplex systems utilize integrated network management to
provide remote circuit provisioning, visibility and sectionalization, helping to
decrease the operating costs of public network delivery of T1/E1 services. The
integrated multiplexing capability of ADC's Soneplex platform also provides
public network carriers a more efficient inter-connection and direct interface
to their high-speed SONET core network. During 1997, ADC's Soneplex system was
approved for use at Bell Atlantic, GTE, Pacific Bell, Teleport Communications
Group, Hong Kong Tel, Hutchison Telecommunications and Shaw FiberLink. The
Company continues to introduce new modules and capabilities for the Soneplex
platform. During 1998, the Company plans to enhance the Soneplex system to
include much higher SONET speeds and international interfaces. Also, during
1998, the Company expects to enter customer test trials of its Cellworx system.
The Cellworx system is ADC's ATM based, very high-speed, intelligent platform
enabling public network providers and enterprise networks to deliver ATM and
SONET based services to business customers over copper and fiber facilities.
WIRELESS CABLE/BROADCAST TELEVISION TRANSMISSION EQUIPMENT. The Company
participates in the wireless cable and television broadcast market through its
subsidiary, Information Transmission Systems Corp. ("ITS"). ITS designs and
manufactures television transmission products for these markets, including
transmitters, combiners, back-up equipment and antennas to wireless cable
operators for MMDS. ITS's wireless products have enabled ADC to leverage the
Homeworx platform into other residential broadband applications.
CITYWIDE-TM- PRODUCTS. The Company's family of CityWide wireless systems
products includes the CityCell-Registered Trademark- and CityLink-Registered
Trademark- wideband digital microcells and repeaters for adding and extending
cellular communication coverage, both out-of-doors and in-building. The
CitySector-Registered Trademark- microcell is the first fully sectorized
microcell offering 25 to 100 watts of Radio Frequency (RF) power per sector.
Fully transparent to analog or digital modulation, the CityWide products have
been commercially deployed by five of seven major U.S. cellular network
providers The Company's new analog wideband CityCell microcell utilizes T1
copper transport rather than fiber transport. The Company has under development
PCS versions of its CityRFX-Registered Trademark- cellular indoor antenna
distribution systems. The Company also offers advanced intelligent network
solutions for its CityWide product family with the CityLink CDMA and GSM
repeaters.
OTHER CELLULAR AND PCS TRANSMISSION EQUIPMENT. During 1997, the Company entered
into a marketing and development agreement with interWAVE Communications
International, Ltd., in which ADC began marketing interWAVE's line of GSM system
products worldwide. In addition, ADC provides systems level design and
wireless base station equipment for various cellular, Cellular Digital Packet
Data (CDPD) and paging technologies. The Company's recent acquisition of
NewNet, Inc., a developer of intelligent network telecommunications software,
including Signaling Systems 7 (SS7) technology and wireless intelligent network
products (such as short messaging servers), has added core software competencies
to ADC's wireless product strategy. The Company expects to introduce various
wireless transmission products and systems and to begin customer field trials
for several of these new products during 1998.
WIRELESS PERFORMANCE AND NETWORK MANAGEMENT SYSTEMS. Through its London-based
subsidiary, Metrica Systems Ltd., the Company designs and sells
telecommunications network performance management software. Metrica Systems'
software platforms are used in the infrastructure management
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systems of over 90 wireless and, an increasing amount of, wireline public
network operators throughout the world.
SYSTEMS INTEGRATION SERVICES AND PRODUCTS. During 1997, ADC significantly
increased its systems integration capabilities with the acquisition of The Apex
Group, Inc., a software development and information management company. ADC
provides systems integration services relating to the Company's transmission
product group in the following areas: overall project management; technical
consulting and design; implementation; product support; performance assessment;
and training services. ADC's systems integration products consist of multimedia
systems from several ADC product areas designed specifically for integrated
voice, data and video applications, including distance learning, business,
medical and government networks. The Company supplies its systems integration
services and products primarily to telephone operating companies, other common
carriers and users of private telecommunications networks.
ENTERPRISE NETWORKING PRODUCTS
ADC's enterprise networking products provide interconnection and
transmission of voice, data and video signals within a private network and also
provide access to the public network. These products are designed for use in
copper-based, fiber optic and wireless global local loop networks and are sold
to users of private voice, data and video networks, either directly or through
telecommunications common carriers or Value Added Resellers (VARs), primarily
for use in business broadband networks. Enterprise networking products include
public network access equipment, internetworking products and data network
management products. The Company's principal enterprise networking products are
described below.
PUBLIC NETWORK ACCESS EQUIPMENT. The Company manufactures a family of Channel
Service Unit (CSU) and Data Service Unit (DSU) products which are used to
interconnect digitally the public network and the private network. This
equipment monitors circuits and provides system protection and other network
management functions. Certain of these products also enable the customer to
test the performance of its voice network and allow connection of voice, data
and video circuits. These products support T1, T3 (44.6 million bits per
second) and OC3 (155 million bits per second) services and a variety of data
protocols, including Frame Relay, Switched Multi-megabit Data Service (SMDS),
ATM, ISDN, HDSL and the Internet protocols. The Company's AAC-1-TM- and
AAC-3-TM- ATM access concentrators adapt, aggregate, multiplex and manage all
voice, data and video signals in various speeds, technologies and protocols for
transport over T1, E1, T3 and E3 speed ATM networks. During 1997, ADC enhanced
its Frame Relay access products for Internet and other high-speed digital
connections. The Company commercially released several remote access and
routing products, some of which are specifically designed for Internet access.
The Company has entered into agreements with other ATM equipment suppliers
providing for the joint marketing of and integration of ADC's ATM adaptation and
concentration technologies into the ATM switching and routing products
manufactured by such companies. During 1997, ADC and Cisco Systems, Inc.
announced a jointly developed, standards-based inverse multiplexing over ATM
solution targeted at carriers providing high-speed Frame Relay services.
INTERNETWORKING PRODUCTS. Internetworking products include fiber optic
backbones used to transport high speed multiple voice, data and video signals
simultaneously over private networks and link Local Area Networks (LANs),
mainframes, minicomputers, personal computers, telephone systems and video
equipment with diverse protocols within private networks or over the public
network; intelligent wiring hub products which interconnect workstations,
personal computers and terminals, utilizing many different LAN protocols and
types of cables; and network management systems.
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PATCH/SWITCH SYSTEM AND PATCHMATE-TM- MODULE. The Company's Patch/Switch system
is a data network management product which provides access to and monitors,
tests and reconfigures digital data circuits and permits local or remote
switching to alternate circuits or backup equipment. This system is modular,
permitting the user to select and combine the particular functions desired in a
system. The PatchMate module is a manually operated electromechanical device
used to gain access to the network in order to monitor, test and reconfigure
digital data circuits.
BROADBAND CONNECTIVITY PRODUCTS
ADC's broadband connectivity products provide the physical contact points
for connecting different telecommunications system components and gaining access
to telecommunications system circuits for the purpose of installing, testing,
monitoring, reconfiguring, splitting and multiplexing such circuits within
global public and private networks, predominantly the local loop portion. The
Company's broadband connectivity products are designed for use in copper-based,
coax, fiber optic or wireless transmission networks. These products are sold to
the RBOCs, other telephone companies, long distance carriers, other public
network providers such as cable TV companies and wireless services providers,
international network operators, private network providers and
telecommunications OEMs as part of their residential broadband, business
broadband and wireless networks. Broadband connectivity products and services
include various network access/connection devices for copper and coax networks,
various network access/connection devices for fiber optic networks, modular
fiber optic cable routing systems, outside plant cabinets and enclosures,
wireless infrastructure equipment and subsystems, broadband software
infrastructure management systems and systems integration services. The
Company's principal broadband connectivity products are described below.
JACKS, PLUGS, PATCH CORDS, JACKFIELDS AND PATCH BAYS. Jacks and plugs are the
basic components used to gain access to copper telecommunications circuits for
testing and maintenance. Patch cords are wires or cables with a plug on each
end. ADC incorporates its jacks, plugs and patch cords into its own products
and also sells them in component form, primarily to OEMs. A jackfield is a
module containing an assembly of jacks wired to terminal blocks or connectors
and used by telecommunications companies to gain access to copper communication
circuits for testing or patching the circuits. When testing a large number of
circuits, series of jackfields are combined in specialized rack assemblies
called patch bays. ADC manufactures a range of jackfields and patch bays in
various configurations. Certain of these jackfields are specialized for use in
audio and visual transmission networks in the broadcast industry.
DSX PRODUCTS. ADC manufactures digital signal cross-connect (DSX) modules and
bays, which are jackfields and patch bays designed to gain access to and
cross-connect digital copper circuits for voice, data and video transmission.
Since the introduction of DSX products in 1977, the Company has continued to
expand and refine its DSX product offerings. The Digital Distribution Point
(DDP) family of products within the DSX product group are mechanical
alternatives to hard-wiring equipment used for cable management and circuit
access with software based, electronic digital cross-connect systems.
TERMINAL BLOCK AND FRAME PRODUCTS. ADC manufactures a wide variety of terminal
blocks which are molded plastic blocks with contact points used to facilitate
multiple wire interconnections. The Company's cross-connect frames are terminal
block assemblies used to connect the external wiring of a telecommunications
network to the internal wiring of a telephone operating company central office
or to interconnect various pieces of equipment within a telephone company
central office or at a customer's premise.
VIDEO SIGNAL DISTRIBUTION PRODUCTS. ADC's series of Video Signal Distribution
(VSD) products are designed to meet the unique performance requirements of Radio
Frequency (RF) video transmission over coax cable. This product family includes
a series of splitter/combiner panels, a series of video jacks and
10
<PAGE>
panels which monitor, patch and provide a test access point and an analog video
interface system panel designed for on-demand testing.
OTHER FIBER OPTIC PRODUCTS. Fiber optic patch cords are functionally similar to
copper patch cords and are the basic components used to gain access to fiber
telecommunications circuits for testing, maintenance, cross-connection and
configuration purposes. The Company's LightTracer-TM- fiber optic patch cords
provide immediate identification of fiber optic connections. The Company
incorporates its fiber optic patch cords and cable assemblies into its own
products and also sells them in component form. ADC's subsidiary AOFR Pty. Ltd.,
located in Australia, sells fiber optic couplers which are passive connection
devices used in fiber optic transmission systems which conform to the stringent
environmental, reliability, performance and mechanical standards required in
global broadband network and test equipment markets. These products, which
include optical splitters and wavelength division multiplexers, enable efficient
and cost-effective deployment of broadband networks. The Company's fiber
distribution panels and frames are functionally similar to copper jackfields and
frames designed with special considerations of fiber optic properties. They
also provide interconnection points between fiber optic cables entering a
building and fiber optic cables connected to fiber optic equipment within the
building. ADC also sells Dense Wave Division Multiplexing (DWDM) Components
such as splitters and multiplexers which are designed with special
considerations of fiber optic properties. These products increase the channel
capacity of fiber optic cabling systems in multiples of four. ADC currently is
selling four-channel and eight-channel components and has recently introduced
sixteen-channel components. The Company's FiberGuide-Registered Trademark-
system is a modular routing system which provides a segregated, protected method
of storing and routing fiber patch cords and cables within buildings.
WIRELESS INFRASTRUCTURE EQUIPMENT AND SUBSYSTEMS. ADC designs, manufactures and
markets radio frequency filters, tower-top amplifiers and other wireless base
station and subscriber equipment components and subsystems through its
subsidiary Solitra Oy subsidiary located in Finland. These products are sold
primarily to wireless OEMs.
BROADBAND SOFTWARE INFRASTRUCTURE MANAGEMENT SOLUTIONS. ADC has developed a
number of software products which provide management of fiber optic
infrastructure connectivity, geographical tracking of equipment, cables and
other network elements in the telephone company central office, cable TV company
headend and outside plant portion of those networks.
SYSTEMS INTEGRATION SERVICES. The Company's systems integration services
relating to the Company's broadband connectivity product group are divided into
three areas: technical service design and management; operations and
implementation; and training and documentation services. These services
usually consist of layout and installation of new telecommunications networks,
modification of existing networks or the addition of equipment to existing
networks. The Company provides its systems integration services primarily to
telephone operating companies, other common carriers and users of private
telecommunications networks.
SALES AND MARKETING
ADC sells its products to customers in three primary markets: (i) the
United States public telecommunications network market, which consists of all
five of the RBOCs, other telephone companies, long distance carriers, wireless
service providers, the major cable TV operators and other domestic public
network providers; (ii) the private and governmental voice, data and video
network market in the United States, such as various large business customers
and governmental agencies that own and operate their own voice, data and video
networks for internal use; and (iii) the international public and private
network market. The U.S. public, U.S. private and governmental and
international
11
<PAGE>
market segments accounted for 73%, 6% and 21%, respectively, of the Company's
net sales for the year ended October 31, 1997; 71%, 8% and 21%, respectively,
of the Company's net sales for the year ended October 31, 1996; and 74%, 8% and
18%, respectively, of the Company's net sales for the year ended October 31,
1995. The Company also sells product for each of these customer groups to the
major telecommunications OEMs.
Purchases of products by public network providers and the OEMs which supply
such companies accounted for the largest portion of the Company's net sales.
The Company's transmission and broadband connectivity products for public
network providers are primarily located in central transmission facilities (such
as telephone company network central offices, cable TV company network
supertrunks and headend offices, and wireless network global switching centers
and base stations, all of which contain the equipment used in switching and
transmitting incoming and outgoing circuits). Increasingly, portions of the
Company's public network transmission systems are located in the public network
outside plant facilities (outside the central transmission buildings) and on
customers' premises. The Company's private and governmental network customers
generally purchase the Company's enterprise-wide communications systems and
public network access equipment for installation in the networks located at
their premises.
The Company also markets its products outside the United States primarily
to telephone operating companies and cable TV companies for public
telecommunications networks located in Canada, Europe, the Pacific Rim,
Australia and Central and South America.
A majority of the Company's sales are made by a direct sales force, and the
Company maintains sales offices throughout the United States as well as in
Canada, Europe, the Pacific Rim, Australia and Central and South America. The
Company's products are sold in the United States by several sales offices
located throughout the country, as well as through dealer organizations and
distributors. The Company's products are sold outside the United States by
several field sales offices and by independent sales representatives and
distributors, as well as through United States public and private network
providers who also distribute outside the United States.
The Company has a customer service group that supports field sales
personnel and is responsible for application engineering, customer training,
entering orders and supplying delivery status information, and a field service
engineering group that provides on-site service to customers.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing telecommunications environment, to maintain its
significant expertise in core technologies and to continue to meet and
anticipate its customers' needs. The Company continually reviews and evaluates
technological changes affecting the telecommunications market and invests
substantially in applications-based research and development. The Company
intends to continue an ongoing program of new product development that combines
internal development efforts with acquisitions, joint ventures and licensing or
marketing arrangements relating to new products and technologies from sources
outside the Company.
In recent years, increasingly significant portions of new
telecommunications equipment purchased by public network providers and private
network customers have employed fiber optic transmission, digital, integrated
circuit, wireless and broadband copper-based technologies for residential,
business and wireless local loop applications. In the future, these
telecommunications network equipment purchasing trends will include increasingly
sophisticated, software-intensive, switching and network management systems. As
a result, the Company's internal and external product
12
<PAGE>
development activities are primarily directed at the following areas: (i) the
integration of fiber optic technology into additional products; (ii) the
continuing development of its Homeworx system for telephony, data and integrated
video, telephony and data applications; (iii) the development of network systems
software; (iv) the continuing development of its Soneplex and Cellworx systems
for integrated voice, data and video applications; (v) the continuing
development of wireless products; (vi) the incorporation of ATM technology into
voice, data and video products for both public and private telecommunications
networks; and (vii) the addition of video compression technology to its product
line.
New product development often requires long-term forecasting of market
trends, development and implementation of new processes and technologies and a
substantial capital commitment. As a result of these and other factors,
development and customer acceptance of new products is inherently uncertain, and
there can be no assurance that such products will be developed on a timely basis
or achieve market acceptance.
COMPETITION
Competition in the telecommunications equipment industry is intense, and
the Company believes that competition may increase substantially with the
deployment of broadband networks and regulatory changes. Many of the Company's
foreign and domestic competitors have more extensive engineering, manufacturing,
marketing, financial and personnel resources than those of the Company. The
Company's transmission products are competitive with products offered by several
other companies, including Lucent Technologies, Northern Telecom, Inc. and
Motorola, Inc. The Company's enterprise networking products are competitive
with the products of a number of other companies. Both the Company's
transmission and enterprise networking products face strong price competition
and pressure from alternative distribution strategies utilized by other
companies. The Company's broadband connectivity products are competitive with
the products offered by numerous other companies, including Lucent Technologies,
Siecor Corporation and Telect Inc. In addition, the Company faces increasing
competition from a number of other smaller competitors, none of which is
dominant at this time.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to the Company's group of competitors. The
Company believes its success in competing with other manufacturers of
telecommunications products depends primarily on its engineering, manufacturing
and marketing skills, the price, quality and reliability of its products and its
delivery and service capabilities. While the market for the Company's products
has not historically been characterized by significant price competition, the
Company may face increasing pricing pressures from current and future
competitors in certain or all of the markets for its products.
The Company believes that technological change, the increasing addition of
data, video and other services to integrated multimedia networks, continuing
regulatory change and industry consolidation or new entrants will continue to
cause rapid evolution in the competitive environment of the telecommunications
equipment market, the full scope and nature of which are difficult to predict at
this time. Increased competition could result in price reductions, reduced
margins and loss of market share by the Company. The Company believes industry
regulatory change may create new opportunities for suppliers of
telecommunications equipment. The Company expects, however, that such
opportunities may attract increased competition from others as well. In
addition, the Company expects that Lucent Technologies will continue to be a
major supplier to the RBOCs, and compete more extensively outside the RBOC
market. The Company also believes that the rapid technological changes which
characterize the telecommunications industry will continue to make the markets
in which the Company competes attractive to new entrants. There can be no
assurance that the Company
13
<PAGE>
will be able to compete successfully with its existing or new competitors or
that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.
MANUFACTURING AND SUPPLIES
The Company manufactures a wide variety of products which are fabricated,
assembled and tested in its own facilities or in subcontracted facilities. In
an effort to reduce costs, the Company also takes advantage of off-shore
assembly and sourcing. The manufacturing process for the Company's electronic
products consists primarily of assembly and testing of electronic systems built
from fabricated parts, printed circuit boards and electronic components. The
manufacturing process for the Company's electromechanical products consists
primarily of fabrication of jacks, plugs, and other basic components from raw
materials, assembly of components and testing. The Company's sheet metal,
plastic molding, stamping and machining capabilities permit the Company to
configure components to customer specifications.
The Company purchases raw materials and component parts, consisting
primarily of copper wire, optical fiber, steel, brass, nickel-steel alloys,
gold, plastics, printed circuit boards, solid state components, discrete
electronic components and similar items, from several suppliers. Although a few
of the components used by the Company are single sourced, the Company has
experienced no significant difficulties to date in obtaining adequate quantities
of these raw materials and component parts. This circumstance could change in
the future, however, and the Company cannot be sure that the quantity or quality
of raw materials and component parts will be as readily available in the future.
PROPRIETARY RIGHTS
The Company owns a number of United States and foreign patents relating to
its products. These patents, in the aggregate, constitute a valuable asset of
the Company. The Company, however, believes that its business is not dependent
upon any single patent or any group of related patents.
The Company has registered the initials ADC alone and in conjunction with
specific designs as trademarks in the United States and various foreign
countries.
EMPLOYEES
As of October 31, 1997, there were approximately 5,924 persons employed by
the Company. The Company considers relations with its employees to be good.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Certain portions of this Form 10-K, including "Business" herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated herein by reference, contain various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended. Forward-looking statements represent the Company's
expectations or beliefs concerning future events, including the following: any
statements regarding future sales and gross profit percentages, any statements
regarding the continuation of historical trends, any statements regarding the
sufficiency of the Company's cash balances and cash generated from operating and
financing activities for the Company's future liquidity and capital resource
needs, any statements regarding the effect of regulatory changes and any
statements regarding the future of the telecommunications
14
<PAGE>
industry. The Company cautions that any forward-looking statements made by the
Company in this report or in other announcements made by the Company are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including, without
limitation, the factors set forth on Exhibit 99-a to this Form 10-K.
ITEM 2. PROPERTIES
The Company's corporate headquarters are currently located in four leased
buildings in Minnetonka, Minnesota comprising an aggregate of approximately
286,400 square feet. Leases for the Company's headquarters buildings expire at
different times through 2001.
During 1997, the Company constructed a new manufacturing facility in
Shakopee, Minnesota, which, together with an adjacent distribution facility
constructed in 1996, comprises approximately 372,000 square feet. The Company
also owns approximately 89 acres of undeveloped land in Eden Prairie, Minnesota.
The Company also owns and leases a variety of other facilities for the
Company's manufacturing, development, distribution, warehousing, sales and other
activities. These facilities, including sales offices, are located in various
cities in the United States, Canada, Mexico, Venezuela, the United Kingdom,
Belgium, Germany, Finland, Australia, India, Singapore, Thailand, the
Philippines, Argentina, Malaysia, Korea and China.
The Company believes that the facilities used in its operations and
currently under development are suitable for their respective uses and adequate
to meet the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Office Officer Since Age
- ---- ------ ------------- ---
William J. Cadogan Chairman of the Board of 1987 49
Directors, President, Chief
Executive Officer and Chief
Operating Officer
John M. Baker Senior Vice President, 1997 41
President, ADC Wireless
Systems Group
Lynn J. Davis Senior Vice President, 1984 50
President, Broadband
Connectivity Group
Richard S. Gilbert Senior Vice President, 1994 45
President, Enterprise
Networking Group
Charles R. Kenmore Senior Vice President, 1997 48
President, International
William L. Martin III Senior Vice President, 1994 50
President, Transport Systems
Group
Vivek Ragavan Senior Vice President, 1996 45
President, Broadband
Communications Division
Robert E. Switz Senior Vice President, Chief 1994 51
Financial Officer
Darryl E. Ponder Vice President, Business 1997 37
Development
Charles T. Roehrick Vice President, Controller 1995 43
John A. Schofield Vice President, President, 1996 49
ADC Systems Integration, Inc.
The Company's executive officers were last elected as executive officers by
the Board of Directors on February 25, 1997, except Messrs. Kenmore and Ponder
who joined the Company in November 1997. Messrs. Cadogan and Davis have served
in various capacities with the Company for more than five years. Biographical
information regarding the other named officers follows.
Mr. Baker joined the Company in February 1997. From January 1996 until
such time, he was Vice President of Network Technology for Pacific Bell Mobile
Services, a wireless communications company. From October 1990 to January 1996,
Mr. Baker served as Vice President of PCS Base Station Systems for Nokia
Telecommunications, a manufacturer of radio infrastructure equipment.
16
<PAGE>
Mr. Gilbert joined the Company in June 1992. Prior to November 1994, he
was Vice President and General Manager, Access Group for six months and Vice
President, Engineering for two years. From 1991 to 1992, he was Vice President
of Research and Development at Make Systems, Inc., a manufacturer of a network
design and analysis tool. From 1990 to 1991, Mr. Gilbert was Assistant Vice
President of Software Engineering for Vitalink Communications Corporation, a
manufacturer of data communications equipment.
Mr. Kenmore joined the Company in November 1997. Between January 1995 and
November 1997, he served as Senior Corporate Vice President and General Manager
International Division of Boca Research, Inc., a manufacturer of voice, data and
video network products. From 1989 to 1994, Mr. Kenmore held the position of
Vice President and General Manager, International Information Systems Group of
Motorola, a manufacturer of voice and data wireline and wireless network
products.
Mr. Martin joined the Company in September 1994. From 1990 until such
time, he was employed by Ascom Timeplex, a manufacturer of data and
telecommunications equipment, most recently as Vice President, Technical
Marketing. His previous positions included Vice President, China Business
Development and Vice President, U.S. Sales. From 1987 to 1990, he was the Chief
Executive Officer of Broadband Telesystems when that company was acquired by
Ascom Timeplex.
Mr. Ragavan joined the company in January 1996. From November 1991 until
such time, he was employed by General Instrument Corp., a manufacturer of analog
and digital settops and broadband transmission equipment, as Vice President of
Engineering. From January 1980 to November 1991, he was Vice President of
Engineering for COMSAT Technology Products, a manufacturer of satellite based
voice and data communications systems.
Mr. Switz joined the Company in January 1994. Prior to such time, he was
employed by Burr-Brown Corporation, a manufacturer of precision
micro-electronics, from 1988, most recently as Vice President, Chief Financial
Officer and Director, Ventures and Systems Business.
Mr. Ponder joined the company in November 1997. Between March 1990 and
November 1997, he was employed by Alcatel Network Systems, a manufacturer of
telecommunications equipment such as lightwave transmission systems, digital
crossconnects, microwave radios and loop access products. While at Alcatel, he
served in various senior management positions, most recently as Senior Director,
Marketing and Business Development.
Mr. Roehrick joined the Company in January 1995. Prior to such time he was
employed by Cray Research, Inc., a manufacturer of large scale computers, most
recently as Controller. From 1992 to 1993, he was Assistant Controller of Cray
Research, and, from 1989 to 1991 he was Director of Accounting for that company.
Mr. Schofield originally joined the Company in October 1992. He returned
to the Company in October 1995 after holding the position with DSC
Communications of Vice President, International Sales and Marketing for a brief
period between July and October of 1995. Prior to such time, he was Managing
Director for Asia Pacific/Latin America. He was Senior Vice President, Sales
and Marketing at Telex Communications, Inc., a manufacturer and marketer of
electronic audio communications devices, from 1990 to 1992. He held several
Vice President positions at Memorex Telex Corporation, a manufacturer and
marketer of computer terminal and peripheral equipment, most recently as Vice
President and General Manager, Airline and Systems Business Group.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The section entitled "Quarterly Stock Prices" on page 21 of the Company's
Annual Report to Shareholders for the fiscal year ended October 31, 1997 (the
"Annual Report") is incorporated herein by reference. This section is also
included on Exhibit 13-a to this Form 10-K, as filed with the Securities and
Exchange Commission (the "SEC" or the "Commission").
On October 1, 1997, the Company issued 1,313,848 shares (the "Shares") of
its Common Stock in a transaction that was not registered under the Securities
Act. The Shares were issued to the shareholders of NewNet, Inc. ("NewNet")
pursuant to an agreement dated October 1, 1997 among the Company and such NewNet
shareholders, providing for the acquisition of all of the issued shares of
capital stock of NewNet by the Company. No underwriter or placement agent was
involved in the issuance of the Shares, and the Company did not receive any cash
consideration for the Shares (which constituted the purchase price paid by the
Company for NewNet). The Shares were issued to the former NewNet shareholders
in a transaction exempt pursuant to Section 4(2) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The summary of certain consolidated statement of income and balance sheet
information for the five years ended October 31, 1997 which is included in the
tables on pages 34 through 37 of the Annual Report is incorporated herein by
reference. This information is also included on Exhibit 13-a to this Form 10-K,
as filed with the SEC. Such summary information should be read in conjunction
with the consolidated financial statements and notes thereto incorporated by
reference in Item 14 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 17 through 21 of the Annual Report
is incorporated herein by reference. This section is also included in
Exhibit 13-a to this Form 10-K, as filed with the SEC.
18
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements appearing on pages 22 through 37 of the Annual
Report are incorporated herein by reference. These financial statements are
also included on Exhibit 13-a to this Form 10-K, as filed with the SEC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" on pages 3 through 6 and
16 through 17, respectively, of the Company's definitive proxy statement for
its 1998 Annual Meeting of Shareholders to be filed with the Commission on or
before February 24, 1998 (the "Proxy Statement") are incorporated herein by
reference. The section entitled "Executive Officers of the Registrant" in
Item 4 of this Form 10-K is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" on pages 7 through 16 of the
Proxy Statement is incorporated herein by reference (except for the information
set forth under the subcaption "Compensation and Organization Committee Report
on Executive Compensation," which is not incorporated herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" on pages 2 through 3 of the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" on page 16 of the Proxy
Statement is incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Company are part of
this report and are found on the pages of the Annual Report indicated below and
incorporated herein by this reference. These financial statements are included
on Exhibit 13-a to this Form 10-K, as filed with the SEC.
<TABLE>
<CAPTION>
Page Reference
in the Annual
Report to Shareholders
-----------------------
<S> <C>
Report of Independent Public Accountants 22
Consolidated Statements of Income for the years ended October
1997, 1996 and 1995 23
Consolidated Balance Sheets as of October 31, 1997 and 1996 24
Consolidated Statements of Stockholders' Investment for
the years ended October 31, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows for the years
ended October 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 27
Summary of Operations for the years ended October 31,
1987 through October 31, 1997 (Unaudited) 34
Summary of Balance Sheets for the years ended October 31,
1987 through October 31, 1997 (Unaudited) 36
</TABLE>
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Commission have been omitted as not required or not
applicable, or the information required has been included elsewhere by reference
in the financial statements and related notes.
3. Listing of Exhibits
Exhibit
Number Description
- ------ -----------
3-a Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
20
<PAGE>
Exhibit
Number Description
- -------- ------------
3-b Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-a Form of certificate for shares of Common Stock of ADC
Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a to
the Company's Form 10-Q for the quarter ended January 31, 1996.)
4-b Restated Articles of Incorporation of ADC Telecommunications, Inc., as
amended. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-c Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-d Second Amended and Restated Rights Agreement, amended and restated as
of November 28, 1995, between ADC Telecommunications, Inc. and Norwest
Bank Minnesota, N.A. (amending and restating the Rights Agreement
dated as of September 23, 1986, as amended and restated as of August
16, 1989), which includes as Exhibit A thereto the form of Right
Certificate. (Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated December 11, 1995.)
10-a* Stock Option and Restricted Stock Plan, restated as of January 26,
1988. (Incorporated by reference to Exhibit 10-a to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1988.)
10-b* Amendment to Stock Option and Restricted Stock Plan dated as of
September 26, 1989. (Incorporated by reference to Exhibit 10-e to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1989.)
10-c* ADC Telecommunications, Inc. 1991 Stock Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10-c to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1996).
10-d* Business Development Management Incentive Plan Document - Directors
and Above Fiscal Year 1997. (Incorporated by reference to Exhibit
10-a of the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997.)
10-e* Business Unit Management Incentive Plan Document - Directors and Above
Fiscal Year 1997. (Incorporated by reference to Exhibit 10-d to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1996.)
10-f* Corporate Management Incentive Plan Document - Directors and Above
Fiscal Year 1997. (Incorporated by reference to Exhibit 10-e to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1996.)
21
<PAGE>
Exhibit
Number Description
- -------- ------------
10-g* International Management Incentive Plan Document Fiscal Year 1997.
(Incorporated by reference to Exhibit 10-f to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1996.)
10-h* Executive Incentive Exchange Plan Fiscal Year 1997. (Incorporated by
reference to Exhibit 10-g to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.)
10-i* Executive Incentive Exchange Plan Fiscal Year 1996. (Incorporated by
reference to Exhibit 10-h to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.)
10-j* Broadband Connectivity Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-h to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.)
10-k* Corporate Management Incentive Plan Fiscal Year 1996. (Incorporated by
reference to Exhibit 10-i to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1996.)
10-l* Enterprise Networking Group Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-j to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1996.)
10-m* International Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-k to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.)
10-n* Network Services Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-m to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.)
10-o* ADC Video Systems Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-o to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.)
10-p* Systems Integration Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-r to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.)
10-q* Business Unit Management Incentive Plan Fiscal Year 1998.
10-r* Corporate Management Incentive Plan Fiscal Year 1998.
10-s* International Management Incentive Plan Fiscal Year 1998.
10-t* Business Development Management Incentive Plan Fiscal Year 1998.
22
<PAGE>
Exhibit
Number Description
- -------- ------------
10-u* Executive Incentive Exchange Plan Fiscal Year 1998.
10-v* Supplemental Executive Retirement Plan Agreement for William J.
Cadogan, dated as of November 1, 1990, between ADC Telecommunications,
Inc. and William J. Cadogan, as amended. (Incorporated by reference
to Exhibit 10-u to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1996.)
10-w* ADC Telecommunications, Inc. Change in Control Severance Pay Plan
Statement and Summary Plan Description. (Incorporated by reference to
Exhibit 10-q to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1989.)
10-x* First Amendment of ADC Telecommunications, Inc. Change in Control
Severance Pay Plan Statement and Summary Plan Description, effective
July 22, 1997.
10-y* Compensation Plan for Directors of ADC Telecommunications, Inc.,
restated as of December 31, 1988. (Incorporated by reference to
Exhibit 10-b to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1989.)
10-z* First Amendment of the Compensation Plan for Directors of ADC
Telecommunications, Inc. restated as of December 31, 1988.
(Incorporated by reference to Exhibit 10-s to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1989.)
10-aa* ADC Telecommunications, Inc. Nonemployee Director Stock Option Plan,
as amended.
10-bb* ADC Telecommunications, Inc. Deferred Compensation Plan, dated as of
November 1, 1978, as amended. (Incorporated by reference to Exhibit
10-aa to the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996.)
10-cc* ADC Telecommunications, Inc. Pension Excess Plan, dated as of January
1, 1985, as amended. (Incorporated by reference to Exhibit 10-bb to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.)
10-dd* ADC Telecommunications, Inc. 401(k) Excess Plan, dated as of September
1, 1990, as amended. (Incorporated by reference to Exhibit 10-cc to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.)
10-ee Lease Agreement, dated August 21, 1990, between Minnetonka Corporate
Center I Limited Partnership and ADC Telecommunications, Inc.
(Incorporated by reference to Exhibit 10-x to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1990.)
10-ff Lease Agreement, dated October 26, 1990, between Lutheran Brotherhood
and ADC Telecommunications, Inc. (Incorporated by reference to
Exhibit 10-w to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990.)
10-gg Sublease Agreement, dated October 31, 1990, between Seagate
Technology, Inc. and ADC Telecommunications, Inc. (Incorporated by
reference to Exhibit 10-y to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1990.)
23
<PAGE>
Exhibit
Number Description
- -------- ------------
10-hh Sublease, dated as of February 21, 1995, between Seagate Technology,
Inc. and ADC Telecommunications, Inc. (Incorporated by reference to
Exhibit 10-a of the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1995.)
10-ii Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the Company's
facility located at 5900 Clearwater Drive, Minnetonka Corporate
Center, Minnetonka, Minnesota). (Incorporated by reference to Exhibit
10-w to the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
10-jj Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the Company's
facility located at 5950 Clearwater Drive, Minnetonka Corporate
Center, Minnetonka, Minnesota). (Incorporated by reference to Exhibit
10-x to the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
10-kk Stock Purchase Agreement, dated July 1, 1996, by and between ADC
Telecommunications, Inc., ADC Mersum Oy and the Shareholders of
Solitra Oy. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated July 1, 1996.)
13-a Portions of the 1997 Annual Report to Shareholders.
21-a Subsidiaries of the Company.
23-a Consent of Independent Public Accountants to the incorporation of
their report dated November 25, 1997, included in this Form 10-K, into
the Company's previously filed Registration Statements, File Nos.
2-83584, 33-22654, 33-40356, 33-40357, 33-52635, 33-52637, 33-58407,
33-58409, 33-59445, 333-02133, 333-04481, 333-07309, 333-15283,
333-25311, 333-25241, 333-25569, 333-25623, 333-32023, 333-37419 and
333-37619.
24-a Power of Attorney.
27-a Financial Data Schedule.
99-a Cautionary Statement Regarding Forward-Looking Statements.
There have been excluded from the exhibits filed with this report instruments
defining the rights of holders of long-term debt of the Company where the total
amount of the securities authorized under such instruments does not exceed 10%
of the total assets of the Company. The Company hereby agrees to furnish a copy
of any such instruments to the Commission upon request.
(b) No reports on Form 8-K were filed during the quarter ended October 31,
1997.
(c) See Exhibit Index and Exhibits attached to this Form 10-K.
(d) See Item 14(a)(3) above.
- -----------------
* Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ADC TELECOMMUNICATIONS, INC.
Dated: January 16, 1998 By: /s/ William J. Cadogan
----------------------------------
William J. Cadogan
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ William J. Cadogan Chairman of the Board, Dated: January 16, 1998
- --------------------------
William J. Cadogan President and
Chief Executive Officer
(principal executive officer)
/s/ Robert E. Switz Senior Vice President, Dated: January 16, 1998
- --------------------------
Robert E. Switz Chief Financial Officer
(principal financial officer)
/s/ Charles T. Roehrick Vice President, Controller Dated: January 16, 1998
- --------------------------
Charles T. Roehrick (principal accounting officer)
James C. Castle* Director
Thomas E. Holloran* Director
B. Kristine Johnson* Director
Charles W. Oswald* Director
Irene M. Qualters* Director
Alan E. Ross* Director
Jean-Pierre Rosso* Director
Donald M. Sullivan* Director
Warde F. Wheaton* Director
John D. Wunsch* Director
*By /s/ David F. Fisher Dated: January 16, 1998
------------------------
David F. Fisher
Attorney-in-Fact
</TABLE>
25
<PAGE>
ADC TELECOMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3-a Restated Articles of Incorporation of ADC
Telecommunications, Inc., as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 dated April 15, 1997.
3-b Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-a Form of certificate for shares of Common Stock of ADC
Telecommunications, Inc. (Incorporated by reference to
Exhibit 4-a to the Company's Form 10-Q for the quarter ended
January 31, 1996.)
4-b Restated Articles of Incorporation of ADC
Telecommunications, Inc., as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 dated April 15, 1997.)
4-c Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-d Second Amended and Restated Rights Agreement, amended and
restated as of November 28, 1995, between ADC
Telecommunications, Inc. and Norwest Bank Minnesota, N.A.
(amending and restating the Rights Agreement dated as of
September 23, 1986, as amended and restated as of August 16,
1989), which includes as Exhibit A thereto the form of Right
Certificate. (Incorporated by reference to Exhibit 4 to the
Company's Form 8-K dated December 11, 1995.)
10-a Stock Option and Restricted Stock Plan, restated as of
January 26, 1988. (Incorporated by reference to Exhibit
10-a to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1988.)
10-b Amendment to Stock Option and Restricted Stock Plan dated as
of September 26, 1989. (Incorporated by reference to
Exhibit 10-e to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1989.)
10-c ADC Telecommunications, Inc. 1991 Stock Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10-c to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996).
10-d Business Development Management Incentive Plan Document -
Directors and Above Fiscal Year 1997. (Incorporated by
reference to Exhibit 10-a of the
26
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997.)
10-e Business Unit Management Incentive Plan Document -Directors
and Above Fiscal Year 1997. (Incorporated by reference to
Exhibit 10-d to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996.)
10-f Corporate Management Incentive Plan Document -Directors and
Above Fiscal Year 1997. (Incorporated by reference to
Exhibit 10-e to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996.)
10-g International Management Incentive Plan Document Fiscal Year
1997. (Incorporated by reference to Exhibit 10-f to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996.)
10-h Executive Incentive Exchange Plan Fiscal Year 1997.
(Incorporated by reference to Exhibit 10-g to the Company's
Annual Report on Form 10-K for the fiscal year ended October
31, 1996.)
10-i Executive Incentive Exchange Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-h to the Company's
Annual Report on Form 10-K for the fiscal year ended October
31, 1996.)
10-j Broadband Connectivity Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-h to the
Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
10-k Corporate Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-i to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996.)
10-l Enterprise Networking Group Management Incentive Plan Fiscal
Year 1996. (Incorporated by reference to Exhibit 10-j to the
Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
10-m International Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-k to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996.)
10-n Network Services Management Incentive Plan Fiscal Year 1996.
(Incorporated by reference to Exhibit 10-m to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996.)
10-o ADC Video Systems Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-o to the
Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
27
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10-p Systems Integration Management Incentive Plan Fiscal Year
1996. (Incorporated by reference to Exhibit 10-r to the
Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.)
10-q Business Unit Management Incentive Plan Fiscal Year 1998.
10-r Corporate Management Incentive Plan Fiscal Year 1998.
10-s International Management Incentive Plan Fiscal Year 1998.
10-t Business Development Management Incentive Plan Fiscal Year
1998.
10-u Executive Incentive Exchange Plan Fiscal Year 1998.
10-v Supplemental Executive Retirement Plan Agreement for William
J. Cadogan, dated as of November 1, 1990, between ADC
Telecommunications, Inc. and William J. Cadogan, as amended.
(Incorporated by reference to Exhibit 10-u to the Company's
Annual Report on Form 10-K for the fiscal year ended October
31, 1996.)
10-w ADC Telecommunications, Inc. Change in Control Severance Pay
Plan Statement and Summary Plan Description. (Incorporated
by reference to Exhibit 10-q to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1989.)
10-x First Amendment of ADC Telecommunications, Inc. Change in
Control Severance Pay Plan Statement and Summary Plan
Description, effective July 22, 1997.
10-y Compensation Plan for Directors of ADC Telecommunications,
Inc., restated as of December 31, 1988. (Incorporated by
reference to Exhibit 10-b to the Company's Quarterly Report
on Form 10-Q for the quarter ended January 31, 1989.)
10-z First Amendment of the Compensation Plan for Directors of
ADC Telecommunications, Inc. restated as of December 31,
1988. (Incorporated by reference to Exhibit 10-s to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1989.)
10-aa ADC Telecommunications, Inc. Nonemployee Director Stock
Option Plan, as amended.
10-bb ADC Telecommunications, Inc. Deferred Compensation Plan,
dated as of November 1, 1978, as amended. (Incorporated by
reference to Exhibit 10-aa to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996.)
28
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10-cc ADC Telecommunications, Inc. Pension Excess Plan, dated as
of January 1, 1985, as amended. (Incorporated by reference
to Exhibit 10-bb to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.)
10-dd ADC Telecommunications, Inc. 401(k) Excess Plan, dated as of
September 1, 1990, as amended. (Incorporated by reference
to Exhibit 10-cc to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.)
10-ee Lease Agreement, dated August 21, 1990, between Minnetonka
Corporate Center I Limited Partnership and ADC
Telecommunications, Inc. (Incorporated by reference to
Exhibit 10-x to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1990.)
10-ff Lease Agreement, dated October 26, 1990, between Lutheran
Brotherhood and ADC Telecommunications, Inc. (Incorporated
by reference to Exhibit 10-w to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1990.)
10-gg Sublease Agreement, dated October 31, 1990, between Seagate
Technology, Inc. and ADC Telecommunications, Inc.
(Incorporated by reference to Exhibit 10-y to the Company's
Annual Report on Form 10-K for the fiscal year ended October
31, 1990.)
10-hh Sublease, dated as of February 21, 1995, between Seagate
Technology, Inc. and ADC Telecommunications, Inc.
(Incorporated by reference to Exhibit 10-a of the Company's
Quarterly Report on Form 10-Q for the quarter ended April
30, 1995.)
10-ii Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the
Company's facility located at 5900 Clearwater Drive,
Minnetonka Corporate Center, Minnetonka, Minnesota).
(Incorporated by reference to Exhibit 10-w to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996.)
10-jj Extension of Lease, dated December 7, 1995, between ADC
Telecommunications, Inc. and Lutheran Brotherhood (for the
Company's facility located at 5950 Clearwater Drive,
Minnetonka Corporate Center, Minnetonka, Minnesota).
(Incorporated by reference to Exhibit 10-x to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996.)
10-kk Stock Purchase Agreement, dated July 1, 1996, by and between
ADC Telecommunications, Inc., ADC Mersum Oy and the
Shareholders of Solitra Oy. (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated July 1, 1996.)
29
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
13-a Portions of the 1997 Annual Report to Shareholders.
21-a Subsidiaries of the Company.
23-a Consent of Independent Public Accountants to the
incorporation of their report dated November 25, 1997,
included in this Form 10-K, into the Company's previously
filed Registration Statements, File Nos. 2-83584, 33-22654,
33-40356, 33-40357, 33-52635, 33-52637, 33-58407, 33-58409,
33-59445, 333-02133, 333-04481, 333-07309, 333-15283,
333-25311, 333-25241, 333-25569, 333-25623, 333-32023,
333-37419 and 333-37619.
24-a Power of Attorney.
27-a Financial Data Schedule.
99-a Cautionary Statement Regarding Forward-Looking Statements.
30
<PAGE>
Exhibit 10-u
ADC TELECOMMUNICATIONS, INC.
EXECUTIVE INCENTIVE EXCHANGE PLAN
FISCAL YEAR 1998
<PAGE>
ADC TELECOMMUNICATIONS, INC.
EXECUTIVE INCENTIVE EXCHANGE PLAN
FISCAL YEAR 1998
I. PLAN NAME AND EFFECTIVE DATE
The name of this Plan is the ADC Telecommunications, Inc. ("Company") Executive
Incentive Exchange Plan - Fiscal Year 1998 ("FY 1998"), effective November 1,
1997 through October 31, 1998.
II. PURPOSE
The purpose of the Plan is to provide exceptional rewards for exceptional
performance of eligible executives, align executive rewards with shareholder
interests, and provide an incentive for retention.
III. ADMINISTRATION
This Plan will be administered by the same Committee ("Committee") appointed and
authorized by the Company's Board of Directors to administer the Company's 1991
Stock Incentive Plan. The Committee is authorized to make all decisions as
required in administration of the Plan and to exercise its discretion to define,
interpret, construe, apply, and make any exceptions to the terms of the Plan.
IV. STOCK OPTION ISSUANCE
All stock options issued under this Plan will be granted under the Company's
1991 Stock Incentive Plan and/or its successor plans.
V. ELIGIBILITY
The Committee will establish rules of eligibility for participation in the Plan
in accordance with the 1991 Stock Incentive Plan and determine eligibility in
accordance with those rules. Eligibility is limited to those Corporate and
Divisional Vice Presidents in salary grade 19 or above who receive approval from
the Chief Executive Officer for participation in the Fiscal Year Plan. A
limited number of selected additional executives may be included also as
approved by the Chief Executive Officer. All Plan participants must also be
participants under the Company's Management Incentive Plan ("MIP").
VI. PLAN GOALS AND ACHIEVEMENT
All goals and objectives under this Plan shall be identical to the goals and
objectives stated in each participant's MIP. Total payouts are calculated in
the same fashion as payouts made under the applicable MIP.
<PAGE>
VII. EXCHANGE ELECTION
Prior to the beginning of FY 1998, participants may irrevocably elect to
exchange up to 50% of their FY 1998 MIP award for options to purchase common
stock of the Company. Such elections may be made in 10% increments up to a
maximum of 50% of the cash MIP award. Participants hired or promoted into a
position eligible for this Plan during FY 1998 may make this election up to 30
days following the date of hire or promotion. No election may be made after May
1, 1998 by new hires or newly promoted eligible participants. No exchange will
be made if the portion elected for exchange is less than One Hundred Dollars
($100.00).
VIII. EXCHANGE DATE
Exchanges made under this Plan will be made as soon as administratively feasible
following the close of FY 1998 and as soon as MIP awards are approved. The
exchange date will be the same day as the MIP awards are approved. For purposes
of this document, the terms exchange date and grant date are synonymous.
IX. EXCHANGE CALCULATION
The MIP award that will be used to calculate the exchange to options will be the
incentive amount eligible to be paid for the fiscal year excluding any amounts
allocated to bonus bank accounts as defined in the Management Incentive Plan.
The dollar amount of the MIP award elected to be exchanged will first be
multiplied by an exchange factor ("Factor") of six (6). This amount is then
divided by the Black-Scholes value of an option to purchase one share of ADC
common stock on the last day of FY 1997 to determine the number of option shares
to be received by the participant.
This Black-Scholes value will reflect the vesting characteristics of the options
to be granted under this Plan and other characteristics as appropriate, and as
such may differ from the Black-Scholes value applied for other options granted
under other Company plans. The final number of shares will be rounded down if
necessary to the nearest whole share.
This exchange causes payment of the MIP cash incentive amount exchanged to be
forfeited, except as described under Section XIII.
X. NATURE OF OPTIONS TO BE GRANTED
All options granted under this Plan will be nonqualified stock options, that are
not "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
<PAGE>
XI. TERM AND VESTING OF OPTIONS
All options granted under this Plan will have a term and method of exercise as
determined by the Committee. The term will be 10 years from the date of
exchange or grant. Options will vest in three (3) equal annual installments,
beginning one (1) year after the grant date.
XII. EXERCISE PRICE OF OPTIONS
The exercise price of the stock options granted under this plan will be the Fair
Market Value of the Company's common stock on the last business day of the
fiscal year and be determined in accordance with the 1991 Stock Incentive Plan.
XIII. EFFECT OF CHANGE IN EMPLOYMENT STATUS ON CURRENT YEAR ELECTIONS (CHANGES
DURING THE PLAN YEAR)
A. VOLUNTARY RESIGNATION OR INVOLUNTARY TERMINATION. A participant who
voluntarily resigns employment or who is terminated involuntarily, except
as defined under paragraph B below, prior to the end of FY 1998 will
relinquish all rights to the grant of any stock option under this plan.
B. TERMINATION OF EMPLOYMENT BASED UPON JOB ELIMINATION. Subject to the
approval of the Committee, a participant who is involuntarily terminated
because of a job elimination may receive a cash equivalent calculated in
the same fashion as the applicable pro-rata cash MIP payment would be
made (not subject to the Factor), provided at least three months was
served in the eligible position.
C. CHANGE IN JOB STATUS BASED UPON A PROMOTION/DEMOTION. A participant who
is demoted from an eligible position under this Plan to an ineligible
position will exchange the pro-rata portion of cash MIP award that is
calculated according to the time served in the eligible position during
FY 1998, provided at least three months was served in the eligible
position. A participant who is promoted into an eligible position under
this Plan will be provided the opportunity to exchange the pro-rata MIP
award that is calculated according to the time served in the eligible
position under this Plan during FY 1998, as provided in Section VII of
this document, based upon the exchange percentage elected by the
participant.
D. DEATH. If a participant dies during FY 1998, the participant's heirs as
determined by will or applicable laws of descent and distribution will
have no right to receive any stock options under this plan. Heirs will
receive instead the cash equivalent of the pro-rata MIP award that is
calculated according to the MIP Plan, but not subject to the Factor.
<PAGE>
XIV. EFFECT OF CHANGE IN EMPLOYMENT STATUS OCCURRING AFTER FY 1998 ON
EXCHANGES MADE IN FY 1998
All stock options already awarded under this Plan will vest fully upon a
participant's death, disability, or voluntary retirement. For purposes of this
Plan, retirement from the Company shall be defined as having attained age 55
with 10 years of service with the Company ("early retirement"), or age 65 with 5
years of service with the Company ("normal retirement").
If a participant terminates for any other reason, termination provisions will be
applied. For each grant or exchange already made, if the participant terminates
prior to the vesting of the first one third of the options, all options and the
MIP cash equivalent amount will be immediately forfeited. If the participant
terminates after the first one third of the options have vested, all vested
options will remain exercisable for a period of one (1) year. All unvested
options will be forfeited, and no cash equivalent will be provided.
XV. EFFECT OF CHANGE IN CONTROL ON EXCHANGES ALREADY MADE
In the event of a change in control of the Company as referenced in stock
option agreements issued pursuant to this Plan, all unvested options will
immediately vest in full.
<PAGE>
Exhibit 10-t
ADC TELECOMMUNICATIONS
BUSINESS DEVELOPMENT
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
<PAGE>
ADC TELECOMMUNICATIONS
BUSINESS DEVELOPMENT
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
I. PLAN NAME AND EFFECTIVE DATE
The name of this Plan is the ADC Telecommunications, Inc. ("Company"), Business
Development Management Incentive Plan - Directors and Above, Fiscal Year ("FY")
1998, effective November 1, 1997 through October 31, 1998.
II. PURPOSE
The purpose of the Plan is to provide, with full regard to the protection of
shareholder's investments, a direct financial incentive for eligible employees
to perform an effective leadership role and make a significant contribution to
the Company's established goals.
III. ADMINISTRATION
This Plan is administered by a Management Incentive Plan Committee ("Committee")
appointed and authorized by the Company's Board of Directors. Subject to the
complete and full discretion of the Board of Directors, the Committee is
authorized to make all decisions as required in administration of the Plan and
to exercise its discretion to define, interpret, construe, apply and make any
exceptions to the terms of the Plan.
IV. ELIGIBILITY
The Committee establishes rules of eligibility for participation in the Plan and
determines eligibility in accordance with those rules. For Fiscal Year 1998,
eligibility applies to all employees in Grades 18 and above, plus any Grade 16
and 17 directors. Participation is effective as of the date approved by the
Committee and is communicated to the participant by an incentive opportunity
statement ("Participant Form") specifying the target incentive level for the
position. No employee will become a participant in the Plan after May 1, 1998,
unless the employee is already a participant in the Management Incentive Plan
for Managers.
<PAGE>
V. PLAN GOALS
The Plan reinforces the key financial goals which support ADC's long-term
strategic plans. The FY 1998 goal categories and weights for Business
Development participants are as follows:
GOAL WEIGHT
---- ------
* Business Development EVA Improvement 50%
* Corporate EVA Improvement 30%
** Individual Contribution 20%
-----
TOTAL 100%
* EVA Improvement is the dollar amount of planned year-over-year improvement
in EVA. EVA Improvement goals are set for each of the next 3 years.
** The Individual Contribution goal measures your performance against
pre-determined objectives. The objectives are to be documented on the
attached "Individual Objective" form and require your Supervisor's and
Division head's approval.
VI. INCENTIVE PAYOUT OPPORTUNITIES
A. The payout opportunity for meeting the Individual Contribution goal is as
follows:
PAYOUTS
-------------------------------------------
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
Individual Contribution 0% of Target 100% 200% of Target
Results between threshold-target and target-maximum are interpolated.
B. The payout opportunity for meeting the EVA Improvement goals are as
follows:
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
EVA Improvement N/A 100% N/A
(unlimited downside) (unlimited upside)
Incentive amounts are interpolated based on leverage (the slope of the
line).
There are no thresholds and maximums for the EVA Improvement goals.
However, the specific incentive payout is a function of a bonus bank
concept which is described in Section VII and Section VIII.
<PAGE>
VII. BONUS BANK DEFINITION
As mentioned earlier, the Plan offers unlimited upside and downside rewards to
participants for creating value. In order to ensure that EVA Improvements are
sustainable over a multi-year period, a bonus bank is created whereby
exceptional performance (above 200% of target) is credited to your account and
poor performance (negative amounts below 0% of the target level) is deducted
from your account.
The specific mechanics of the bonus bank are described below.
VIII. HOW THE BONUS BANK WORKS
A. A bonus bank account is created when the EVA Improvement goal achievement
is above 200% of target or below 0% of the target level.
B. Amounts achieved in excess of 200% of target are put into an EVA
Improvement bonus bank. These amounts vest at a rate of 25% per year,
beginning immediately, and then after 1 year, 2 years, and 3 years,
respectively.
C. If EVA Improvement is less than 0% of the target level for the current Plan
year, a negative amount is calculated and is handled as follows:
1. If there is a positive current year bonus bank amount, the
negative amount offsets it. After the negative has been applied, any
positive vested amount is paid. If the bonus bank is negative at the
end of the year, the negative amount is carried over to the next
year.
2. If no positive bank balances have been carried forward from prior
year(s), the entire negative amount goes into the bonus bank and is
carried forward into the next plan year. Then, in that next Plan
year, if EVA Improvement is positive, the negative amount offsets
amounts earned in that year in this manner and order:
a) Up to 100% of target achieved: No reduction or offset.
Amount is paid immediately.
b) Between 100% and 200% of target. Offset applies before any
payout occurs. The remaining amount, if any, is paid
immediately.
c) Over 200% of target: Offset applies before any amounts are
banked and subject to vesting. Any remaining amounts are
subject to vesting schedule described above.
D. The bonus bank is a bookkeeping account and as such, amounts allocated to a
participant's bonus bank earn no interest, are unfunded, and do not
actually vest until they are paid out in in accordance with the Plan.
<PAGE>
IX. MAXIMUM EVA IMPROVEMENT GOAL PAYOUT IN ANY PLAN YEAR
Notwithstanding the above, the maximum amount that may be paid in any one year
to a participant due to the EVA Improvement goal, including amounts achieved for
the current year and bonus bank amounts that vest in the current year, may not
exceed 400% of the EVA Improvement target incentive amount.
X. CURRENT PLAN YEAR PAYMENT
Payments which become due and payable under this Plan for the current Plan year
include:
- - The amount achieved for the Individual Contribution goal, PROVIDED 0% OF
THE TARGET LEVEL FOR ONE OF THE EVA IMPROVEMENT GOALS ARE MET.
- - Current year EVA Improvement goal achievement up to 200% of target (if
there are no negative offsets).
- - Vested amount of EVA Improvement bonus bank account balance.
Payments which become due and payable under this Plan are made as soon as
administratively feasible following the close of the Company's Fiscal Year.
XI. CALCULATION OF INDIVIDUAL PAYMENTS AND BONUS BANK ACCOUNT BALANCES
A. The obligation to make payments under the Plan is determined by achievement
of goals as determined by the Board of Directors.
B. Calculations under this Plan are a function of:
1. Target incentive opportunity - expressed as a percentage of an
individual's FY 1998 earnings. The target % for each participant
is designated on the "Participant Form."
2. Participant's 1998 Fiscal Year base salary earnings.
3. Performance against the established goals.
C. Individual award calculations are shown by the following examples:
<PAGE>
Assume we have a Plan participant with the following facts:
- --------------------------------------------------------------------------------
Current Plan Year 1998
- --------------------------------------------------------------------------------
Grade 17
- --------------------------------------------------------------------------------
Base Salary Earnings $85,000
- --------------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $17,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE DOLLARS
---- ------ ------------------------
Business Development EVA Improvement 50% $8,500
Corporate EVA Improvement 30% $5,100
Individual Contribution 20% $3,400
------
$17,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
-----------------------------------
Business Development EVA Improvement 300% x $8,500 = $25,500*
Corporate EVA Improvement 110% x $5,100 = $ 5,610*
Individual Contribution 100% x $3,400 = $ 3,400
- --------------------------------------------------------------------------------
*EVA IMPROVEMENT INCENTIVE CALCULATIONS:
- - 1st 200% of target Business Development EVA incentive = $17,000
Adjustments: None. Pay immediately.
- - Above 200% of Business Development EVA Improvement target = $8,500
Adjustments: Put into bonus bank. 25% vests immediately; the rest at
25% per year.
- - Corporate EVA Improvement incentive = $5,610
Adjustments: None. Pay immediately.
- - Final EVA incentive payout:
$17,000 + $5,610 + ($8,500 x 25%) = 24,735
- - EVA bonus bank balance to carry over = 75% of $8,500 or $6,375:
vests in 1999 = $2,125
vests in 2000 = $2,125
vests in 2001 = $2,125
------
$6,375
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $24,735 (FINAL EVA PAYOUT) + $3,400
(INDIVIDUAL CONTRIBUTION) = $28,135.
<PAGE>
Assume the same Participant has the following facts the next year:
- --------------------------------------------------------------------------------
Current Plan Year 1999
- --------------------------------------------------------------------------------
Grade 17
- --------------------------------------------------------------------------------
Base Salary Earnings $90,000
- --------------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $18,000
- --------------------------------------------------------------------------------
EVA Bonus Bank $2,125 vests in 1999
- --------------------------------------------------------------------------------
$2,125 vests in 2000
- --------------------------------------------------------------------------------
$2,125 vests in 2001
- --------------------------------------------------------------------------------
$6,375 Total Bonus Bank
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE DOLLARS
Business Development EVA Improvement 50% $9,000
Corporate EVA Improvement 30% $5,400
Individual Contribution 20% $3,600
-------
$18,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
-----------------------------------
Business Development EVA Improvement -50% x $9,000 = $-4,500*
Corporate EVA Improvement 110% x $5,400 = $ 5,940*
Individual Contribution 100% x $3,600 = $ 3,600
- --------------------------------------------------------------------------------
*EVA IMPROVEMENT INCENTIVE CALCULATIONS:
-Corporate EVA incentive amount = $5,940
Adjustments: None. Pay immediately.
-Business Development EVA incentive amount:
- -4,500 offsets positive bonus bank
- Apply to amount due to vest in 1999 (current Plan year)
-4,500
2,125
-2,375 remaining negative accrual is carried forward to 2000
-EVA bonus bank balance to carry over:
2,125 due to vest in 2000
-2,375 negative carry over from 1999
-250 beginning of year 2000 bank balance
2,125 due to vest in 2001
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $5,940 (CORPORATE EVA IMPROVEMENT) +
$3,600 (INDIVIDUAL CONTRIBUTION) = $9,540.
<PAGE>
XII. EFFECT OF CHANGE IN EMPLOYMENT STATUS
A. VOLUNTARY RESIGNATION AND RETIREMENT. A participant who voluntarily resigns
full-time employment or retires prior to the end of the Fiscal Year receives no
payment under the Plan for the current Plan year's performance or any EVA bonus
bank account balances being carried over. The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
B. CHANGE BASED UPON UNSATISFACTORY JOB PERFORMANCE. A participant who is
involuntarily terminated or transferred to a position not eligible for this Plan
for reasons of unsatisfactory job performance receives no payment under the Plan
for the current Plan year's performance or any EVA bonus bank account balances
being carried over from prior Plan year(s). The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
C. CHANGE BASED UPON JOB ELIMINATION. Subject to the approval of the Committee,
a participant who is involuntarily terminated or transferred to a position not
eligible for this Plan or another Management Incentive Plan because of a job
elimination may retain the right to a pro rata calculation under this Plan for
the current year's performance, plus a pro rata portion of any EVA bonus bank
balance that would otherwise have vested at the end of the current Plan year,
based upon the time served in the eligible position during the Fiscal Year,
provided at least three months was served in the eligible position. Rights to
any unvested EVA bonus bank account balances at the end of the Plan year are
forfeited. The participant does not have any obligations with respect to any
negative EVA bonus bank account balances that remain after the pro rata
calculation.
D. CHANGE BASED UPON PROMOTION, DEMOTION, OR TRANSFER TO ANOTHER ELIGIBLE PLAN
JOB. A current participant who is promoted, demoted, or transferred from an
eligible position under this Plan to another eligible position under this Plan
during the Fiscal Year has a pro rata calculation of the current year's
performance awards based upon the time served in each position during the Fiscal
Year, provided at least three months were served in each position. If a
participant is in an eligible position for less than three months during the
Fiscal Year, the payment calculation is based on the incentive level of the
position served in the longest. Any positive or negative bonus bank accounts
transfer with the individual in their entirety.
E. CHANGE IN JOBS WITHIN THE COMPANY BUT NOT ELIGIBLE FOR THIS PLAN. A
participant who changes jobs within the Company but is not eligible for this
Plan, retains the right to a pro rata payout under this Plan for the current
year's performance, plus a pro rata portion of any EVA bonus balance that would
otherwise have vested at the end of the current Plan year, based upon the time
served in the eligible position during the Fiscal Year, provided at least three
months was served in the eligible position. Rights to any unvested EVA bonus
bank account balances at the end of the Plan year are forfeited. The
participant does not have any obligations with respect to any negative EVA bonus
bank account balances that remain after the pro rata calculation.
<PAGE>
F. DEATH. If a participant dies during the Fiscal Year, the participant's
heirs as determined by will or applicable laws of descent and distribution will
have a pro rata calculation of the current year's performance, plus a pro rata
portion of any EVA bonus bank balance that would otherwise have vested at the
end of the current Plan year, based upon the time served in the eligible
position during the Fiscal Year. Rights to any unvested EVA bonus bank account
balances at the end of the current Plan year are forfeited. The participant's
heirs do not have any obligations with respect to any negative EVA bonus bank
account balances that remain after the pro rata calculation.
XIII. COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986
If a current Plan year payout causes the participant's total cash compensation
to exceed one million dollars in the Fiscal Year, the participant must defer
the portion that exceeds the one million dollars in the ADC Telecommunications
Deferred Compensation Plan.
XIV. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors reserves and retains the right to modify, rescind or
terminate this plan in whole or in part, at its sole discretion, and nothing in
this Plan limits this right in any way or creates any rights in any employee of
future participation in this Plan or any other plan, or constitutes any
guarantee of compensation or employment with ADC. Further, neither the Board of
Directors nor the Company has any obligation under this Plan or otherwise to
adopt this or any other plan in any future fiscal year.
<PAGE>
Exhibit 10-q
ADC TELECOMMUNICATIONS
BUSINESS UNIT
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
<PAGE>
ADC TELECOMMUNICATIONS
BUSINESS UNIT
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
I. PLAN NAME AND EFFECTIVE DATE
The name of this Plan is the ADC Telecommunications, Inc. ("Company"), Business
Unit Management Incentive Plan - Directors and Above, Fiscal Year ("FY") 1998,
effective November 1, 1997 through October 31, 1998.
II. PURPOSE
The purpose of the Plan is to provide, with full regard to the protection of
shareholder's investments, a direct financial incentive for eligible employees
to perform an effective leadership role and make a significant contribution to
the Company's established goals.
III. ADMINISTRATION
This Plan is administered by a Management Incentive Plan Committee ("Committee")
appointed and authorized by the Company's Board of Directors. Subject to the
complete and full discretion of the Board of Directors, the Committee is
authorized to make all decisions as required in administration of the Plan and
to exercise its discretion to define, interpret, construe, apply and make any
exceptions to the terms of the Plan.
IV. ELIGIBILITY
The Committee establishes rules of eligibility for participation in the Plan and
determines eligibility in accordance with those rules. For Fiscal Year 1998,
eligibility applies to all employees in Grades 18 and above, plus any Grade 16
and 17 directors. Participation is effective as of the date approved by the
Committee and is communicated to the participant by an incentive opportunity
statement ("Participant Form") specifying the target incentive level for the
position. No employee will become a participant in the Plan after May 1, 1998,
unless the employee is already a participant in the Management Incentive Plan
for Managers.
<PAGE>
V. PLAN GOALS
The Plan reinforces the key financial goals which support ADC's long-term
strategic plans. The FY 1998 goal categories and weights for Business Unit
participants are as follows:
GOAL WEIGHT
---- ------
* Business Unit EVA Improvement 60%
Business Unit Revenue 20%
** Key Business Unit Goal 20%
---
TOTAL 100%
* EVA Improvement is the dollar amount of planned year-over-year improvement
in EVA. EVA Improvement goals are set for each of the next 3 years.
** The key Business Unit goal varies by Business Unit. See attached goal
sheet for definition of applicable key Business Unit goal.
VI. INCENTIVE PAYOUT OPPORTUNITIES
A. The payout opportunity for meeting the Business Unit Revenue and key
Business Unit goal are as follows:
PAYOUTS
-----------------------------------------
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
Business Unit Revenue 0% of Target 100% 400% of Target
Key Business Unit Goal 0% of Target 100% 200% of Target
Results between threshold-target and target-maximum are interpolated.
B. The payout opportunity for meeting the EVA Improvement goal is as follows:
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
Business Unit EVA Improvement N/A 100% N/A
(unlimited (unlimited
downside) upside)
Incentive amounts are interpolated based on leverage (the slope of the
line).
There are no thresholds and maximums for the EVA Improvement goal.
However, the specific incentive payout is a function of a bonus bank
concept which is described in Section VII and Section VIII.
<PAGE>
VII. BONUS BANK DEFINITION
As mentioned earlier, the Plan offers unlimited upside and downside rewards to
participants for creating value. In order to ensure that EVA Improvements are
sustainable over a multi-year period, a bonus bank is created whereby
exceptional performance (above 200% of target) is credited to your account and
poor performance (negative amounts below 0% of the target level) is deducted
from your account.
The specific mechanics of the bonus bank are described below.
VIII. HOW THE BONUS BANK WORKS
A. A bonus bank account is created when the EVA Improvement goal achievement
is above 200% of target or below 0% of the target level.
B. Amounts achieved in excess of 200% of target are put into an EVA
Improvement bonus bank. These amounts vest at a rate of 25% per year,
beginning immediately, and then after 1 year, 2 years, and 3 years,
respectively.
C. If EVA Improvement is less than 0% of the target level for the current Plan
year, a negative amount is calculated and is handled as follows:
1. If there is a positive current year bonus bank amount, the
negative amount offsets it. After the negative has been applied, any
positive vested amount is paid. If the bonus bank is negative at the
end of the year, the negative amount is carried over to the next
year.
2. If no positive bank balances have been carried forward from prior
year(s), the entire negative amount goes into the bonus bank and is
carried forward into the next plan year. Then, in that next Plan
year, if EVA Improvement is positive, the negative amount offsets
amounts earned in that year in this manner and order:
a) Up to 100% of target achieved: No reduction or offset.
Amount is paid immediately.
b) Between 100% and 200% of target. Offset applies before any
payout occurs. The remaining amount, if any, is paid
immediately.
c) Over 200% of target: Offset applies before any amounts are
banked and subject to vesting. Any remaining amounts are
subject to vesting schedule described above.
D. The bonus bank is a bookkeeping account and as such, amounts allocated to a
participant's bonus bank earn no interest, are unfunded, and do not
actually vest until they are paid out in in accordance with the Plan.
<PAGE>
IX. MAXIMUM EVA IMPROVEMENT GOAL PAYOUT IN ANY PLAN YEAR
Notwithstanding the above, the maximum amount that may be paid in any one year
to a participant due to the EVA Improvement goal, including amounts achieved for
the current year and bonus bank amounts that vest in the current year, may not
exceed 400% of the EVA Improvement target incentive amount.
X. CURRENT PLAN YEAR PAYMENT
Payments which become due and payable under this Plan for the current Plan year
include:
- - The amount achieved for the Revenue goal.
- - The amount achieved for the key Business Unit goal, PROVIDED THE THRESHOLD
REVENUE DOLLAR AMOUNT IS MET OR 0% OF THE TARGET LEVEL FOR THE EVA
IMPROVEMENT GOAL IS MET.
- - Current year EVA Improvement goal achievement up to 200% of target (if
there are no negative offsets).
- - Vested amount of EVA Improvement bonus bank account balance.
Payments which become due and payable under this Plan are made as soon as
administratively feasible following the close of the Company's Fiscal Year.
XI. CALCULATION OF INDIVIDUAL PAYMENTS AND BONUS BANK ACCOUNT BALANCES
A. The obligation to make payments under the Plan is determined by achievement
of goals as determined by the Board of Directors.
B. Calculations under this Plan are a function of:
1. Target incentive opportunity - expressed as a percentage of an
individual's FY 1998 earnings. The target % for each participant
is designated on the "Participant Form."
2. Participant's 1998 Fiscal Year base salary earnings.
3. Performance against the established goals.
C. Individual award calculations are shown by the following examples:
<PAGE>
Assume we have a Plan participant with the following facts:
- -----------------------------------------------------------------------------
Current Plan Year 1998
- -----------------------------------------------------------------------------
Grade 17
- -----------------------------------------------------------------------------
Base Salary Earnings $85,000
- -----------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $17,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE
---- ------ ----------------
DOLLARS
-------
Business Unit EVA Improvement 60% $10,200
Business Unit Revenue 20% $ 3,400
Key Business Unit Goal 20% $ 3,400
-------
$17,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
-----------------------------------
Business Unit EVA Improvement 300% x $10,200 = $30,600*
Business Unit Revenue 110% x $3,400 = $ 3,740
Key Business Unit Goal 100% x $3,400 = $ 3,400
- -----------------------------------------------------------------------------
*BUSINESS UNIT EVA IMPROVEMENT INCENTIVE CALCULATIONS:
- - 1st 200% of target EVA incentive = $20,400
Adjustments: None. Pay immediately.
- - Above 200% of target = $10,200
Adjustments: Put into bonus bank. 25% vests immediately; the rest at
25% per year.
- - Final EVA incentive payout:
$20,400 + ($10,200 x 25%) =$22,950
- - EVA bonus bank balance to carry over = 75% of $10,200 or $7,650:
vests in 1999 = $2,550
vests in 2000 = $2,550
vests in 2001 = $2,550
------
$7,650
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $22,950 (FINAL EVA PAYOUT) + $3,740
(REVENUE) + $3,400 (KEY BUSINESS UNIT GOAL) = $30,090.
<PAGE>
Assume the same Participant has the following facts the next year:
- -----------------------------------------------------------------------------
Current Plan Year 1999
- -----------------------------------------------------------------------------
Grade 17
- -----------------------------------------------------------------------------
Base Salary Earnings $90,000
- -----------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $18,000
- -----------------------------------------------------------------------------
EVA Bonus Bank $2,550 vests in 1999
- -----------------------------------------------------------------------------
$2,550 vests in 2000
- -----------------------------------------------------------------------------
$2,550 vests in 2001
------
- -----------------------------------------------------------------------------
$7,650 Total Bonus Bank
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE
---- ------ ----------------
DOLLARS
-------
Business Unit EVA Improvement 60% $10,800
Business Unit Revenue 20% $ 3,600
Key Business Unit Goal 20% $ 3,600
-------
$18,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
-----------------------------------
Business Unit EVA Improvement -50% x $10,800 = $-5,400*
Business Unit Revenue 90% x $ 3,600 = $ 3,240
Key Business Unit Goal 110% x $ 3,600 = $ 3,960
- -----------------------------------------------------------------------------
*BUSINESS UNIT EVA IMPROVEMENT INCENTIVE CALCULATIONS:
- -$-5,400 offsets positive bonus bank
- -Apply to amount due to vest in 1999 (current plan year)
-5,400
2,550 due to vest in 1999
-----
-2,850 remaining negative accrual is carried forward to 2000
-EVA bonus bank balance to carry over:
2,550 due to vest in 2000
-2,850 negative carry over from 1999
------
-300 beginning of year 2000 bank balance
2,250 due to vest in 2001
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $3,240 (REVENUE) + $3,960 (KEY BUSINESS
UNIT GOAL) = $7,200.
<PAGE>
XII. EFFECT OF CHANGE IN EMPLOYMENT STATUS
A. VOLUNTARY RESIGNATION AND RETIREMENT. A participant who voluntarily resigns
full-time employment or retires prior to the end of the Fiscal Year receives no
payment under the Plan for the current Plan year's performance or any EVA bonus
bank account balances being carried over. The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
B. CHANGE BASED UPON UNSATISFACTORY JOB PERFORMANCE. A participant who is
involuntarily terminated or transferred to a position not eligible for this Plan
for reasons of unsatisfactory job performance receives no payment under the Plan
for the current Plan year's performance or any EVA bonus bank account balances
being carried over from prior Plan year(s). The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
C. CHANGE BASED UPON JOB ELIMINATION. Subject to the approval of the Committee,
a participant who is involuntarily terminated or transferred to a position not
eligible for this Plan or another Management Incentive Plan because of a job
elimination may retain the right to a pro rata calculation under this Plan for
the current year's performance, plus a pro rata portion of any EVA bonus bank
balance that would otherwise have vested at the end of the current Plan year,
based upon the time served in the eligible position during the Fiscal Year,
provided at least three months was served in the eligible position. Rights to
any unvested EVA bonus bank account balances at the end of the Plan year are
forfeited. The participant does not have any obligations with respect to any
negative EVA bonus bank account balances that remain after the pro rata
calculation.
D. CHANGE BASED UPON PROMOTION, DEMOTION, OR TRANSFER TO ANOTHER ELIGIBLE PLAN
JOB. A current participant who is promoted, demoted, or transferred from an
eligible position under this Plan to another eligible position under this Plan
during the Fiscal Year has a pro rata calculation of the current year's
performance awards based upon the time served in each position during the Fiscal
Year, provided at least three months were served in each position. If a
participant is in an eligible position for less than three months during the
Fiscal Year, the payment calculation is based on the incentive level of the
position served in the longest. Any positive or negative bonus bank accounts
transfer with the individual in their entirety.
E. CHANGE IN JOBS WITHIN THE COMPANY BUT NOT ELIGIBLE FOR THIS PLAN. A
participant who changes jobs within the Company but is not eligible for this
Plan, retains the right to a pro rata payout under this Plan for the current
year's performance, plus a pro rata portion of any EVA bonus balance that would
otherwise have vested at the end of the current Plan year, based upon the time
served in the eligible position during the Fiscal Year, provided at least three
months was served in the eligible position. Rights to any unvested EVA bonus
bank account balances at the end of the Plan year are forfeited. The
participant does not have any obligations with respect to any negative EVA bonus
bank account balances that remain after the pro rata calculation.
<PAGE>
F. DEATH. If a participant dies during the Fiscal Year, the participant's
heirs as determined by will or applicable laws of descent and distribution will
have a pro rata calculation of the current year's performance, plus a pro rata
portion of any EVA bonus bank balance that would otherwise have vested at the
end of the current Plan year, based upon the time served in the eligible
position during the Fiscal Year. Rights to any unvested EVA bonus bank account
balances at the end of the current Plan year are forfeited. The participant's
heirs do not have any obligations with respect to any negative EVA bonus bank
account balances that remain after the pro rata calculation.
XIII. COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986
If a current Plan year payout causes the participant's total cash compensation
to exceed one million dollars in the Fiscal Year, the participant must defer
the portion that exceeds the one million dollars in the ADC Telecommunications
Deferred Compensation Plan.
XIV. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors reserves and retains the right to modify, rescind or
terminate this plan in whole or in part, at its sole discretion, and nothing in
this Plan limits this right in any way or creates any rights in any employee of
future participation in this Plan or any other plan, or constitutes any
guarantee of compensation or employment with ADC. Further, neither the Board of
Directors nor the Company has any obligation under this Plan or otherwise to
adopt this or any other plan in any future fiscal year.
<PAGE>
Exhibit 10-r
ADC TELECOMMUNICATIONS
CORPORATE
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
<PAGE>
ADC TELECOMMUNICATIONS
CORPORATE
MANAGEMENT INCENTIVE PLAN DOCUMENT - DIRECTORS AND ABOVE
FISCAL YEAR 1998
I. PLAN NAME AND EFFECTIVE DATE
The name of this Plan is the ADC Telecommunications, Inc. ("Company"), Corporate
Management Incentive Plan - Directors and Above, Fiscal Year ("FY") 1998,
effective November 1, 1997 through October 31, 1998.
II. PURPOSE
The purpose of the Plan is to provide, with full regard to the protection of
shareholder's investments, a direct financial incentive for eligible employees
to perform an effective leadership role and make a significant contribution to
the Company's established goals.
III. ADMINISTRATION
This Plan is administered by a Management Incentive Plan Committee ("Committee")
appointed and authorized by the Company's Board of Directors. Subject to the
complete and full discretion of the Board of Directors, the Committee is
authorized to make all decisions as required in administration of the Plan and
to exercise its discretion to define, interpret, construe, apply and make any
exceptions to the terms of the Plan.
IV. ELIGIBILITY
The Committee establishes rules of eligibility for participation in the Plan and
determines eligibility in accordance with those rules. For Fiscal Year 1998,
eligibility applies to all employees in Grades 18 and above, plus any Grade 16
and 17 directors. Participation is effective as of the date approved by the
Committee and is communicated to the participant by an incentive opportunity
statement ("Participant Form") specifying the target incentive level for the
position. No employee will become a participant in the Plan after May 1, 1998,
unless the employee is already a participant in the Management Incentive Plan
for Managers.
<PAGE>
V. PLAN GOALS
The Plan reinforces the key financial goals which support ADC's long-term
strategic plans. The FY 1998 goal categories and weights for Corporate
participants are as follows:
GOAL WEIGHT
---- ------
* Corporate EVA Improvement 60%
Corporate Revenue 20%
** Individual Contribution 20%
---
TOTAL 100%
* EVA Improvement is the dollar amount of planned year-over-year improvement
in EVA. EVA Improvement goals are set for each of the next 3 years.
** The Individual Contribution goal measures your performance against
pre-determined objectives. The objectives are to be documented on the
attached "Individual Objective" form and require your Supervisor's and
Division head's approval.
VI. INCENTIVE PAYOUT OPPORTUNITIES
A. The payout opportunity for meeting the Corporate Revenue and Individual
Contribution goals are as follows:
PAYOUTS
-------------------------------------------
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
Corporate Revenue 0% of Target 100% 400% of Target
Individual Contribution 0% of Target 100% 200% of Target
Results between threshold-target and target-maximum are interpolated.
B. The payout opportunity for meeting the EVA Improvement goal is as follows:
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
EVA Improvement N/A 100% N/A
(unlimited downside) (unlimited upside)
Incentive amounts are interpolated based on leverage (the slope of the
line).
There are no thresholds and maximums for the EVA Improvement goal.
However, the specific incentive payout is a function of a bonus bank
concept which is described in Section VII and Section VIII.
<PAGE>
VII. BONUS BANK DEFINITION
As mentioned earlier, the Plan offers unlimited upside and downside rewards to
participants for creating value. In order to ensure that EVA Improvements are
sustainable over a multi-year period, a bonus bank is created whereby
exceptional performance (above 200% of target) is credited to your account and
poor performance (negative amounts below 0% of the target level) is deducted
from your account.
The specific mechanics of the bonus bank are described below.
VIII. HOW THE BONUS BANK WORKS
A. A bonus bank account is created when the EVA Improvement goal achievement
is above 200% of target or below 0% of the target level.
B. Amounts achieved in excess of 200% of target are put into an EVA
Improvement bonus bank. These amounts vest at a rate of 25% per year,
beginning immediately, and then after 1 year, 2 years, and 3 years,
respectively.
C. If EVA Improvement is less than 0% of the target level for the current Plan
year, a negative amount is calculated and is handled as follows:
1. If there is a positive current year bonus bank amount, the
negative amount offsets it. After the negative has been applied,
any positive vested amount is paid. If the bonus bank is
negative at the end of the year, the negative amount is carried
over to the next year.
2. If no positive bank balances have been carried forward from prior
year(s), the entire negative amount goes into the bonus bank and
is carried forward into the next plan year. Then, in that next
Plan year, if EVA Improvement is positive, the negative amount
offsets amounts earned in that year in this manner and order:
a) Up to 100% of target achieved: No reduction or offset.
Amount is paid immediately.
b) Between 100% and 200% of target. Offset applies before
any payout occurs. The remaining amount, if any, is paid
immediately.
c) Over 200% of target: Offset applies before any amounts
are banked and subject to vesting. Any remaining amounts
are subject to vesting schedule described above.
D. The bonus bank is a bookkeeping account and as such, amounts allocated to a
participant's bonus bank earn no interest, are unfunded, and do not
actually vest until they are paid out in in accordance with the Plan.
<PAGE>
IX. MAXIMUM EVA IMPROVEMENT GOAL PAYOUT IN ANY PLAN YEAR
Notwithstanding the above, the maximum amount that may be paid in any one year
to a participant due to the EVA Improvement goal, including amounts achieved for
the current year and bonus bank amounts that vest in the current year, may not
exceed 400% of the EVA Improvement target incentive amount.
X. CURRENT PLAN YEAR PAYMENT
Payments which become due and payable under this Plan for the current Plan year
include:
- - The amount achieved for the Revenue goal.
- - The amount achieved for the Individual Contribution goal, PROVIDED THE
THRESHOLD REVENUE DOLLAR AMOUNT IS MET OR 0% OF THE TARGET LEVEL FOR THE
EVA IMPROVEMENT GOAL IS MET.
- - Current year EVA Improvement goal achievement up to 200% of target (if
there are no negative offsets).
- - Vested amount of EVA Improvement bonus bank account balance.
Payments which become due and payable under this Plan are made as soon as
administratively feasible following the close of the Company's Fiscal Year.
XI. CALCULATION OF INDIVIDUAL PAYMENTS AND BONUS BANK ACCOUNT BALANCES
A. The obligation to make payments under the Plan is determined by achievement
of goals as determined by the Board of Directors.
B. Calculations under this Plan are a function of:
1. Target incentive opportunity - expressed as a percentage of an
individual's FY 1998 earnings. The target % for each participant
is designated on the "Participant Form."
2. Participant's 1998 Fiscal Year base salary earnings.
3. Corporate and individual performance against the established
goals.
C. Individual award calculations are shown by the following examples:
<PAGE>
Assume we have a Plan participant with the following facts:
- ------------------------------------------------------------------------------
Current Plan Year 1998
- ------------------------------------------------------------------------------
Grade 17
- ------------------------------------------------------------------------------
Base Salary Earnings $85,000
- ------------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $17,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE DOLLARS
---- ------ ------------------------
Corporate EVA Improvement 60% $10,200
Corporate Revenue 20% $ 3,400
Individual Contribution 20% $ 3,400
-------
$17,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
-----------------------------------
Corporate EVA Improvement 300% x $10,200 = $30,600*
Corporate Revenue 110% x $3,400 = $ 3,740
Individual Contribution 100% x $3,400 = $ 3,400
- ------------------------------------------------------------------------------
*CORPORATE EVA IMPROVEMENT INCENTIVE CALCULATIONS:
- - 1st 200% of target EVA incentive = $20,400
Adjustments: None. Pay immediately.
- - Above 200% of target = $10,200
Adjustments: Put into bonus bank. 25% vests immediately; the rest at
25% per year.
- - Final EVA incentive payout:
$20,400 + ($10,200 x 25%) =$22,950
- - EVA bonus bank balance to carry over = 75% of $10,200 or $7,650:
vests in 1999 = $2,550
vests in 2000 = $2,550
vests in 2001 = $2,550
------
$7,650
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $22,950 (FINAL EVA PAYOUT) + $3,740
(REVENUE) + $3,400 (INDIVIDUAL CONTRIBUTION) = $30,090.
<PAGE>
Assume the same Participant has the following facts the next year:
- --------------------------------------------------------------------------------
Current Plan Year 1999
- --------------------------------------------------------------------------------
Grade 17
- --------------------------------------------------------------------------------
Base Salary Earnings $90,000
- --------------------------------------------------------------------------------
Target Incentive Opportunity 20% of base salary earnings or $18,000
- --------------------------------------------------------------------------------
EVA Bonus Bank $2,550 vests in 1999
- --------------------------------------------------------------------------------
$2,550 vests in 2000
- --------------------------------------------------------------------------------
$2,550 vests in 2001
------
- --------------------------------------------------------------------------------
$7,650 Total Bonus Bank
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL WEIGHT TARGET INCENTIVE DOLLARS
---- ------ ------------------------
Corporate EVA Improvement 60% $10,800
Corporate Revenue 20% $ 3,600
Individual Contribution 20% $ 3,600
-------
$18,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOAL ACHIEVEMENT (AS A % OF TARGET)
Corporate EVA Improvement -50% x $10,800 = $-5,400*
Corporate Revenue 90% x $ 3,600 = $ 3,240
Individual Contribution 110% x $ 3,600 = $ 3,960
- --------------------------------------------------------------------------------
*CORPORATE EVA IMPROVEMENT INCENTIVE CALCULATIONS:
- -$-5,400 offsets positive bonus bank
-Apply to amount due to vest in 1999 (current plan year)
-5,400
2,550 due to vest in 1999
-----
-2,850 remaining negative accrual is carried forward to 2000
-EVA bonus bank balance to carry over:
2,550 due to vest in 2000
-2,850 negative carry over from 1999
------
-300 beginning of year 2000 bank balance
2,250 due to vest in 2001
TOTAL CURRENT YEAR INCENTIVE PAYOUT: $3,240 (REVENUE) + $3,960 (INDIVIDUAL
CONTRIBUTION) = $7,200.
<PAGE>
XII. EFFECT OF CHANGE IN EMPLOYMENT STATUS
A. VOLUNTARY RESIGNATION AND RETIREMENT. A participant who voluntarily resigns
full-time employment or retires prior to the end of the Fiscal Year receives no
payment under the Plan for the current Plan year's performance or any EVA bonus
bank account balances being carried over. The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
B. CHANGE BASED UPON UNSATISFACTORY JOB PERFORMANCE. A participant who is
involuntarily terminated or transferred to a position not eligible for this Plan
for reasons of unsatisfactory job performance receives no payment under the Plan
for the current Plan year's performance or any EVA bonus bank account balances
being carried over from prior Plan year(s). The participant does not have any
obligations with respect to any negative EVA bonus bank account balances
remaining at the end of the Plan year.
C. CHANGE BASED UPON JOB ELIMINATION. Subject to the approval of the Committee,
a participant who is involuntarily terminated or transferred to a position not
eligible for this Plan or another Management Incentive Plan because of a job
elimination may retain the right to a pro rata calculation under this Plan for
the current year's performance, plus a pro rata portion of any EVA bonus bank
balance that would otherwise have vested at the end of the current Plan year,
based upon the time served in the eligible position during the Fiscal Year,
provided at least three months was served in the eligible position. Rights to
any unvested EVA bonus bank account balances at the end of the Plan year are
forfeited. The participant does not have any obligations with respect to any
negative EVA bonus bank account balances that remain after the pro rata
calculation.
D. CHANGE BASED UPON PROMOTION, DEMOTION, OR TRANSFER TO ANOTHER ELIGIBLE PLAN
JOB. A current participant who is promoted, demoted, or transferred from an
eligible position under this Plan to another eligible position under this Plan
during the Fiscal Year has a pro rata calculation of the current year's
performance awards based upon the time served in each position during the Fiscal
Year, provided at least three months were served in each position. If a
participant is in an eligible position for less than three months during the
Fiscal Year, the payment calculation is based on the incentive level of the
position served in the longest. Any positive or negative bonus bank accounts
transfer with the individual in their entirety.
E. CHANGE IN JOBS WITHIN THE COMPANY BUT NOT ELIGIBLE FOR THIS PLAN. A
participant who changes jobs within the Company but is not eligible for this
Plan, retains the right to a pro rata payout under this Plan for the current
year's performance, plus a pro rata portion of any EVA bonus balance that would
otherwise have vested at the end of the current Plan year, based upon the time
served in the eligible position during the Fiscal Year, provided at least three
months was served in the eligible position. Rights to any unvested EVA bonus
bank account balances at the end of the Plan year are forfeited. The
participant does not have any obligations with respect to any negative EVA bonus
bank account balances that remain after the pro rata calculation.
<PAGE>
F. DEATH. If a participant dies during the Fiscal Year, the participant's
heirs as determined by will or applicable laws of descent and distribution will
have a pro rata calculation of the current year's performance, plus a pro rata
portion of any EVA bonus bank balance that would otherwise have vested at the
end of the current Plan year, based upon the time served in the eligible
position during the Fiscal Year. Rights to any unvested EVA bonus bank account
balances at the end of the current Plan year are forfeited. The participant's
heirs do not have any obligations with respect to any negative EVA bonus bank
account balances that remain after the pro rata calculation.
XIII. COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986
If a current Plan year payout causes the participant's total cash compensation
to exceed one million dollars in the Fiscal Year, the participant must defer
the portion that exceeds the one million dollars in the ADC Telecommunications
Deferred Compensation Plan.
XIV. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors reserves and retains the right to modify, rescind or
terminate this plan in whole or in part, at its sole discretion, and nothing in
this Plan limits this right in any way or creates any rights in any employee of
future participation in this Plan or any other plan, or constitutes any
guarantee of compensation or employment with ADC. Further, neither the Board of
Directors nor the Company has any obligation under this Plan or otherwise to
adopt this or any other plan in any future fiscal year.
<PAGE>
Exhibit 10-s
ADC TELECOMMUNICATIONS
INTERNATIONAL
MANAGEMENT INCENTIVE PLAN DOCUMENT
FISCAL YEAR 1998
<PAGE>
ADC TELECOMMUNICATIONS
INTERNATIONAL
MANAGEMENT INCENTIVE PLAN DOCUMENT
FISCAL YEAR 1998
I. PLAN NAME AND EFFECTIVE DATE
The name of this Plan is the ADC Telecommunications, Inc. ("Company"),
International Management Incentive Plan - Fiscal Year ("FY") 1998, effective
November 1, 1997 through October 31, 1998.
II. PURPOSE
The purpose of the Plan is to provide, with full regard to the protection of
shareholder's investments, a direct financial incentive for eligible management
employees to perform an effective leadership role and make a significant
contribution to the Company's established goals.
III. ADMINISTRATION
This Plan is administered by a Management Incentive Plan Committee ("Committee")
appointed and authorized by the Company's Board of Directors. Subject to the
complete and full discretion of the Board of Directors, the Committee is
authorized to make all decisions as required in administration of the Plan and
to exercise its discretion to define, interpret, construe, apply and make any
exceptions to the terms of the Plan.
IV. ELIGIBILITY
The Committee establishes rules of eligibility for participation in the Plan and
determines eligibility in accordance with those rules. Participation is
effective as of the date approved by the Committee and is communicated to the
participant by an incentive opportunity statement ("Participant Form")
specifying the target incentive level for the position held by the participant.
No employee will become a participant in the Plan after May 1, 1998.
V. TIME OF PAYMENT
Payments which become due under this Plan are made as soon as administratively
feasible following the close of the Company's fiscal year.
<PAGE>
VI. PLAN GOALS
The Plan reinforces the key financial goals which support ADC's long-term
strategic plans. The FY 1998 goal categories and weights for International
participants are as follows:
GOAL WEIGHT
---- ------
International Revenue 60%
* Corporate EVA Improvement 20%
** Individual Contribution 20%
---
TOTAL 100%
* EVA Improvement is the dollar amount of planned year-over-year
improvement in EVA.
EVA Improvement goals are set for each of the next three years.
** The Individual Contribution goal measures your performance against
pre-determined objectives. The objectives are to be documented on the
attached "Individual Objective" form and require your direct manager's
and Business Unit head's approval.
VII. MINIMUM PERFORMANCE PAYOUT REQUIREMENTS
A. To ensure protection of shareholder interest before an incentive payout
can be generated, the threshold for International Revenue or Corporate
EVA Improvement must be met.
VIII. CALCULATION OF PAYMENTS
A. DETERMINATION OF ACHIEVEMENT AGAINST GOALS AND OBLIGATION TO MAKE
PAYMENTS.
1. The obligation to make payments under the Plan is determined by
achievement of goals determined by the Board of Directors.
2. The payout opportunity for meeting the goals are as follows:
GOAL THRESHOLD TARGET MAXIMUM
---- --------- ------ -------
International Revenue 0% of Target 100% 400% of Target
Corporate EVA Improvement 0% of Target 100% 400% of Target
Individual Contribution 0% of Target 100% 200% of Target
Results between threshold-target and target-maximum are interpolated.
<PAGE>
B. CALCULATION OF INDIVIDUAL PAYMENTS UNDER THIS PLAN IS A FUNCTION OF:
1. Target incentive opportunity - expressed as a percentage of an
individual's FY 1998 earnings. The target % for each participant is
designated on the "Participant Form."
2. Participant's 1998 fiscal year base salary earnings.
3. Performance against the established goals.
C. INDIVIDUAL AWARD CALCULATIONS ARE SHOWN BY THE FOLLOWING EXAMPLE:
Assume we have a Plan participant with the following facts:
Grade: 15
Target Payout: 11% of base salary earnings
Base Salary Earnings: 65,000
Minimum performance payout requirement is met.
GOAL WEIGHT ACHIEVEMENT
(As a % of Target)
International Revenue 60% 100%
Corporate EVA Improvement 20% 110%
Individual Contribution 20% 100%
----
OVERALL RESULT AS % OF TARGET 102%
Calculation of Payment:
$65,000 (FY Earnings) x 11% (Target Opportunity) x 102% (Overall Result
as a % of Target)=$7,293.
<PAGE>
IX. EFFECT OF CHANGE IN EMPLOYMENT STATUS
A. VOLUNTARY RESIGNATION. A participant who voluntarily resigns full-time
employment prior to the end of the Fiscal Year receives no payment under
the Plan.
B. CHANGE BASED UPON UNSATISFACTORY JOB PERFORMANCE. A participant who is
involuntarily terminated or transferred to a non-eligible position for
reasons of unsatisfactory job performance receives no payment under this
plan.
C. CHANGE BASED UPON JOB ELIMINATION. Subject to the approval of the
Committee, a participant who is involuntarily terminated or transferred
to a non-eligible position because of a job elimination may retain the
right to a pro-rata payment based upon the time served in the eligible
position during the fiscal year, provided at least three months was
served in the eligible position.
D. CHANGE BASED UPON PROMOTION / DEMOTION. A current participant who is
promoted or demoted from an incentive eligible position to another
incentive eligible position during the fiscal year has a pro rata
calculation of payment based upon the time served in each position during
the Fiscal Year, provided at least three months was served in each
position. If a participant is in an eligible position for less than
three months during the fiscal year, the payment calculation is based on
the incentive level of the position served in the longest.
E. CHANGE BASED UPON TRANSFER TO ANOTHER POSITION. A current participant
who transfers to another position within the Company that is eligible for
participation in an ADC Management Incentive Plan with different goals
during the Fiscal Year has a pro rata calculation of payment based on the
goals and length of time served in the respective positions, provided at
least three months was served in each position. If a participant is in a
job for less than three months during the Fiscal Year, the payment
calculation is based on the goals of the position served in the longest.
F. DEATH. If a participant dies during the fiscal year, the participant's
heirs as determined by will or applicable laws of descent and
distribution has a pro-rata calculation of payment based upon the time
the participant served in the eligible position during the fiscal year.
X. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors reserves and retains the right to modify, rescind or
terminate this plan in whole or in part, at its sole discretion, and nothing in
this Plan limits this right in any way or creates any rights in any employee of
future participation in this Plan or any other plan, or constitutes any
guarantee of compensation or employment with ADC. Further, neither the Board of
Directors nor the Company has any obligation under this Plan or otherwise to
adopt this or any other plan in any future fiscal year.
<PAGE>
EXHIBIT 10-aa
ADC TELECOMMUNICATIONS, INC.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
(As Amended through April 1, 1997)
SECTION 1. PURPOSE.
This plan shall be known as the "ADC Telecommunications, Inc. Nonemployee
Director Stock Option Plan" and is hereinafter referred to as the "Plan." The
purpose of the Plan is to promote the interests of ADC Telecommunications, Inc.,
a Minnesota corporation (the "Company"), by enhancing its ability to attract and
retain the services of experienced and knowledgeable outside directors and by
providing additional incentive for such directors to increase their interest in
the Company's long-term success and progress.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a committee (the "Committee") of three or
more persons appointed by the Board of Directors of the Company. Grants of
stock options under the Plan and the amount and nature of the awards to be
granted shall be automatic as described in Section 6. However, all questions of
interpretation of the Plan or of any options issued under it shall be determined
by the Committee and such determination shall be final and binding upon all
persons having an interest in the Plan.
SECTION 3. PARTICIPATION IN THE PLAN.
Each director of the Company shall be eligible to participate in the Plan
unless such director is an employee of the Company or any subsidiary of the
Company.
SECTION 4. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 11 hereof, the stock to be subject to
options under the Plan shall be authorized but unissued shares of the Company's
common stock, par value $.20 per share (the "Common Stock"). Subject to
adjustment as provided in Section 11 hereof, the maximum number of shares with
respect to which options may be exercised under this Plan shall be 840,000
shares. If an option under the Plan expires, or for any reason is terminated,
any shares that have not been purchased upon exercise of the option prior to the
expiration or termination date shall again be available for options thereafter
granted during the term of the Plan.
SECTION 5. NONQUALIFIED STOCK OPTIONS.
All options granted under the Plan shall be nonqualified stock options
which do not qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended.
<PAGE>
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
Each option granted under this Plan shall be evidenced by a written
agreement in such form as the Committee shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:
(a) INITIAL OPTION GRANTS. An option to purchase 16,000 shares of
Common Stock shall be granted automatically on the first business day
immediately following each meeting of the Company's shareholders or Board
of Directors during the term of the Plan to each eligible director, if any,
who is elected to the Board of Directors for the first time at such
meeting.
(b) ANNUAL OPTION GRANTS. Subject to Section 6(c) hereof, an option
to purchase 8,000 shares of Common Stock shall be granted automatically on
the first business day immediately following each annual meeting of the
Company's shareholders held during the term of the Plan beginning with the
1995 annual meeting of shareholders (the "Annual Option Grant Date") to
each eligible director in office on such Annual Option Grant Date who prior
to such Annual Option Grant Date has received an option pursuant to
Section 6(a) hereof.
(c) RETURN ON EQUITY REQUIREMENT. No options shall be granted
pursuant to Section 6(b) hereof on any Annual Option Grant Date if the
Company's "return on equity" (as hereinafter defined) for the fiscal year
ended immediately preceding such Annual Option Grant Date was less than
10%. "Return on equity" shall mean the percentage determined by dividing
(i) the net income of the Company for such fiscal year by (ii) the total
stockholders' investment in the Company as of the end of the next preceding
fiscal year. Net income and total stockholders' investment shall be
determined by reference to the Company's audited financial statements. If
the Company does not have net income for any fiscal year, the return on
equity for such fiscal year shall be deemed to be less than 10%.
(d) OPTIONS NON-TRANSFERABLE. No option granted under the Plan shall
be transferable by the optionee otherwise than by will or by the laws of
descent and distribution as provided in Section 6(g) hereof; PROVIDED,
HOWEVER, that an optionee may, in the manner established by the Committee,
transfer an option to any member of such optionee's immediate family
(which, for purposes of this clause (d) shall mean such optionee's
children, grandchildren, or current spouse) or to one or more trusts
established for the exclusive benefit of one or more such immediate family
members or one or more partnerships in which the Participant or such
immediate family members are the only partners, and PROVIDED FURTHER that
(1) there is no consideration for such transfer, and (2) the options held
by such transferees continue to be subject to the same terms and conditions
(including restrictions on subsequent transfers) as were applicable to such
options immediately prior to their transfer. During the lifetime of the
optionee, the
2
<PAGE>
options shall be exercisable only by such optionee. No option or interest
therein may be transferred, assigned, pledged or hypothecated by the
optionee during such optionee's lifetime, except as set forth at this
section (d), whether by operation of law or otherwise, or be made subject
to execution, attachment or similar process.
(e) PERIOD OF OPTIONS. Options shall terminate upon the expiration
of 10 years from the date on which they were granted.
(f) EXERCISE OF OPTIONS.
(i) Options granted under the Plan shall not be exercisable
for a period of one year after the date on which they were granted,
but thereafter will be exercisable in full at any time or from time to
time during the term of the option.
(ii) The exercise of any option granted hereunder shall only be
effective at such time as counsel to the Company shall have determined
that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any federal or state securities or other
laws. An optionee desiring to exercise an option may be required by
the Company, as a condition of the effectiveness of any exercise of an
option granted hereunder, to agree in writing that all Common Stock to
be acquired pursuant to such exercise shall be held for his or her own
account without a view to any distribution thereof, that the
certificates for such shares shall bear an appropriate legend to that
effect and that such shares will not be transferred or disposed of
except in compliance with applicable federal and state securities
laws.
(iii) An optionee electing to exercise an option shall give
written notice to the Company of such election and of the number of
shares subject to such exercise. The full purchase price of such
shares shall be tendered with such notice of exercise. Payment shall
be made to the Company in cash (including check, bank draft or money
order).
(g) EFFECT OF DEATH. If the optionee shall die prior to the time the
option is fully exercised, such option may be exercised at any time within
two years after his or her death by the personal representatives or
administrators of the optionee or by any person or persons to whom the
option is transferred by will or the applicable laws of descent and
distribution, to the extent of the full number of shares the optionee was
entitled to purchase under the option on the date of death and subject to
the condition that no option shall be exercisable after the expiration of
the term of the option.
SECTION 6A. ONE-TIME GRANT
On April 1, 1997, benefits accrued pursuant to the Company's Directors'
Supplemental Retirement Plan prior to its termination, shall be converted to
options for the purchase of the
3
<PAGE>
Company's Common Stock to be issued pursuant to the Plan, in accordance with the
following schedule:
Length of Service 12/96 No. of Option Shares
----------------------- --------------------
< 1 year 900
2 to 3 years 2,750
3 to 4 years 3,650
5 to 6 years 5,450
6 to 7 years 6,350
10 + years 9,100
Each such option shall have an exercise price equal to the market price of
a share of the Common Stock as of the close of trading on April 1, 1997, and
each such option shall be exercisable on the earlier of the date on which a
participant no longer is a member of the Board of Directors of the Company or
9.5 years from April 1, 1997, and each unexercised option shall expire ten years
from April 1, 1997.
SECTION 7. OPTION EXERCISE PRICE.
The option exercise price per share for the shares covered by each option
shall be equal to the "fair market value" of a share of Common Stock as of the
date on which the option is granted, as determined pursuant to Section 9 hereof.
SECTION 8. TIME FOR GRANTING OPTIONS.
Unless the Plan shall have been discontinued as provided in Section 13
hereof, the Plan shall terminate upon the expiration of 10 years from the date
upon which it takes effect as provided in Section 12 hereof. No option may be
granted after such termination, but termination of the Plan shall not, without
the consent of the optionee, alter or impair any rights or obligations under any
option theretofore granted.
SECTION 9. FAIR MARKET VALUE OF COMMON STOCK.
For purposes of the Plan, the fair market value of the Common Stock on a
given date shall be (i) the last sale price of the Common Stock as reported on
the NASDAQ National Market System on such date, if the Common Stock is then
quoted on the NASDAQ National Market System, or (ii) the closing price of the
Common Stock on such date on a national securities exchange, if the Common Stock
is then being traded on a national securities exchange. If on the date as of
which the fair market value is being determined the Common Stock is not publicly
traded, the Committee shall make a good faith attempt to determine such fair
market value and, in connection therewith, shall take such actions and consider
such factors as it deems necessary or advisable.
4
<PAGE>
SECTION 10. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute, or be evidence of, any agreement or understanding, express or
implied, that the Company will retain a director for any period of time, or at
any particular rate of compensation.
(b) NO SHAREHOLDER RIGHTS FOR OPTIONS. An optionee shall have no rights
as a shareholder with respect to the shares covered by options until the date of
the issuance to such optionee of a stock certificate therefor, and no adjustment
will be made for cash dividends or other rights for which the record date is
prior to the date such certificate is issued.
SECTION 11. ADJUSTMENTS TO COMMON STOCK.
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of whatever
amount), stock split or other change in the corporate structure, appropriate
adjustments in the Plan and outstanding options shall be made. In the event of
any such changes, adjustments shall include, where appropriate, changes in the
aggregate number of shares subject to the Plan, the number of shares subject to
outstanding options and the option exercise prices thereof in order to prevent
dilution or enlargement of option rights.
SECTION 12. EFFECTIVE DATE OF THE PLAN.
The Plan shall take effect immediately upon its approval by the affirmative
vote of the holders of a majority of the shares present in person or by proxy
and voted at a duly held meeting of shareholders of the Company.
SECTION 13. AMENDMENT OF THE PLAN.
The Board may suspend or discontinue the Plan or revise or amend it in any
respect whatsoever; provided, however, that without approval of the shareholders
of the Company no revision or amendment shall be made that (a) absent such
shareholder approval, would cause Rule 16b-3, as promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation thereto, to become unavailable with respect
to the Plan or (b) requires the approval of the Company's shareholders under any
rules or regulations of the National Association of Securities Dealers, Inc. or
any securities exchange that are applicable to the Company. The Board shall not
alter or impair any option theretofore granted under the Plan without the
consent of the holder of the option.
SECTION 14. GOVERNING LAW.
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of the State of Minnesota and construed
accordingly.
5
<PAGE>
Exhibit 10-x
FIRST AMENDMENT
OF
ADC TELECOMMUNICATIONS, INC.
CHANGE IN CONTROL SEVERANCE PAY PLAN STATEMENT AND SUMMARY
PLAN DESCRIPTION
Effective July 22, 1997
The "ADC TELECOMMUNICATIONS, INC. CHANGE IN CONTROL SEVERANCE PAY PLAN AND
SUMMARY PLAN DESCRIPTION (1989 Statement)" adopted by ADC TELECOMMUNICATIONS,
INC. (the "Principal Sponsor") to be effective as of September 26, 1989
(hereinafter referred to as the "Plan Statement"), is hereby amended in the
following respects:
1. GENERAL DEFINITIONS. Section 1.1 of the Plan Statement shall be amended by
replacing the term Eligible Employment in its entirety with the following:
Eligible Employment - active employment as a common law employee in one of the
following job classifications of the Employer:
(a) Chief Executive Officer,
(b) Vice President,
(c) Director, or
(d) Other participants in the Management Incentive Plan ("MIP"), Sales
Management Incentive Plan ("SMIP"), or any other equivalent incentive
bonus plan covering management employees that the Compensation
Committee of the Board has determined to be included in the
classification of Eligible Employment.
2. GENERAL DEFINITIONS. Section 1.1 of the Plan Statement shall be amended by
adding the definition of the terms Incentive Bonus and Incentive Bonus Plan as
follows:
Incentive Bonus - any bonus received as a result of participation in an
Incentive Bonus Plan including amounts elected under the Executive Incentive
Exchange Plan and/or the Deferred Compensation Plan.
Incentive Bonus Plan - the MIP, SMIP or any other equivalent incentive bonus
plan covering management employees that the Compensation Committee of the Board
has determined to be included in the Change of Control Plan, including the
Executive Incentive Exchange Plan and the Deferred Compensation Plan.
1
<PAGE>
3. Part 3. Severance Payment. Section 3.2 of the Plan Statement shall be
amended by replacing Section 3.2 in its entirety with the following:
Section 3.2
Amount of Payment
Subject to the eligibility requirement set forth in Section 3.1 and the
limitations set forth in Section 3.4 and Part 5, a severance payment will be
made to you in accordance with the following schedule:
Pay per Years
Job Classification of Service Minimum Minimum
- --------------------------------------------------------------------------
Chief Executive Officer --- 3 years 3 years
Vice President Grade 19
and above --- 2 years 2 years
Grade 18 and above Director
and Grade 18 Vice President --- 18 months 18 months
Grade 16 and 17 Director
and Vice President --- 1 year 1 year
Other MIP, SMIP, or equivalent
participant 3 weeks 4 months 24 months
For purposes of determining the amount in the preceding schedule, pay shall mean
the sum of your base pay and your bonus received under an Incentive Bonus Plan
(MIP, SMIP or equivalent bonus), if any.
Your base pay shall be the greater of:
(a) your base pay in effect on the date of the Change in Control, or
(b) your base pay in effect on the date of the termination of your
employment.
Your bonus shall be your Incentive Bonus under an Incentive Bonus Plan (MIP,
SMIP, or equivalent) in effect for the Incentive Bonus plan year for which your
Incentive Bonus is being determined and shall be the greater of:
(a) the amount of such bonus earned as determined by your actual
performance as of the date of the Change in Control, or if greater,
the date of the termination of your employment, or
(b) the pro rata amount of such bonus targeted for the full Incentive
Bonus plan year as determined by multiplying your full year target
award by a fraction, the numerator of which is the number of months of
service in such year as of the date of the termination of your
employment and the
2
<PAGE>
denominator of which is twelve (12). In determining the pro rata
amount of such bonus, the Incentive Bonus plan year will be the plan
year in which occurs the date of the Change in Control, or if it
results in a greater pro rata amount, the Incentive Bonus plan year
will be the Incentive Bonus plan year in which occurs the termination
of your employment, or
(c) if bonuses are paid from the Incentive Bonus Plan monthly, the
aggregate amount of such bonus payments paid during the Incentive
Bonus plan year as of the date of the Change of Control, or if
greater, the date of the termination of your employment, or
(d) if bonuses are paid from the Incentive Bonus Plan quarterly, the
aggregate amount of bonus payments paid during the Incentive Bonus
plan year as of the date of the Change of Control: plus the pro rata
amount of such bonus targeted for the full quarter of the Incentive
Bonus plan quarter as determined by multiplying your full quarter
target award by a fraction, the numerator of which is the number of
months of service in such quarter as of the date of the termination of
your employment and the denominator of which is three (3). In
determining the pro rata amount of such bonus, the Incentive Bonus
plan quarter will be the plan quarter in which occurs the date of the
Change in Control, or if it results in a greater pro rata amount, the
Incentive Bonus plan quarter will be the Incentive Bonus plan quarter
in which occurs the termination of employment.
4. BONUS PAYMENT. Section 4.2 of the Plan Statement shall be amended to read
in full as follows:
Section 4.2
Amount of Payment
Subject to the eligibility requirement set forth in Section 4.1 and the
limitation set forth in Part 5, a bonus payment will be made to you equal to a
pro rata amount (as determined below) of your bonus under the Employer's
Incentive Bonus Plans (MIP, SMIP, or equivalent) in effect for the Incentive
Bonus plan year for which your Incentive Bonus is being determined. The amount
of such payment shall be the greater of:
(a) the amount of such bonus earned as determined by your actual
performance as of the date of the Change in Control, or if greater,
the date of the termination of your employment, or
(b) if bonuses are paid from the Incentive Bonus Plan annually, the pro
rata amount of such bonus targeted for the full Incentive Bonus plan
year as determined by multiplying your full year target award by a
fraction, the numerator of which is the number of months of service in
such year as of the date of the termination of your employment and the
denominator of
3
<PAGE>
which is twelve (12). In determining the pro rata amount of such
bonus, the Incentive Bonus plan year will be the Incentive Bonus plan
year in which occurs the date of the Change in Control, or if it
results in a greater pro rata amount, the Incentive Bonus Plan year
will be the Incentive Bonus plan year in which occurs the termination
of your employment, or
(c) if bonuses are paid from the Incentive Bonus Plan monthly, the
aggregate amount of such bonus payments paid during the Incentive
Bonus plan year as of the date of the Change of Control, or if
greater, the date of the termination of your employment, or
(d) if bonuses are paid from the Incentive Bonus Plan quarterly, the
aggregate amount of bonus payments paid during the Incentive Bonus
plan year as of the date of the Change of Control: plus the pro rata
amount of such bonus targeted for the full quarter of the Incentive
Bonus plan quarter as determined by multiplying your full quarter
target award by a fraction, the numerator of which is the number of
months of service in such quarter as of the date of the termination of
your employment and the denominator of which is three (3). In
determining the pro rata amount of such bonus, the (Incentive Bonus
plan quarter will be the plan quarter in which occurs the date of the
Change in Control, or if it results in a greater pro rata amount, the
Incentive Bonus plan quarter will be the Incentive Bonus plan quarter
in which occurs the termination of your employment.
5. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan
Statement shall continue in full force and effect.
4
<PAGE>
Exhibit 13-a
PORTIONS OF 1997 ANNUAL REPORT TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company offers a broad range of products and services that enable its
customers to construct and upgrade their telecommunications networks to support
increasing user demand for voice, data and video services. The local loop is the
portion of the public network from the central office, through the equipment
that connects the local central office to the subscriber's equipment, onto the
customer premise and across the enterprise or residential network. Telephone
companies, cable television operators, wireless network providers and other
public network providers are building the infrastructure required to offer
Internet access, higher speed data, video and telephony services, entertainment
and other interactive services to residential and business customers. Greater
and greater amounts of network bandwidth are required for these services and the
Company's development efforts and product offerings are focused on "unlocking
the capacity of the local loop," eliminating bottlenecks and increasing the
speed and efficiency of the network. Such product offerings include equipment,
services and integrated solutions within the following general functional
product groups: transmission, enterprise networking and broadband connectivity.
The Company's transmission products are designed for use in copper based, coax
based, fiber based or wireless transmission networks and are sold primarily to
public network providers in the United States and internationally. The Company's
enterprise networking products are designed for use in copper based, fiber optic
and wireless networks and are sold primarily to private voice, data and video
network providers around the world. The Company's broadband connectivity
products are designed for use in copper based, coax, fiber optic or wireless
transmission networks and are sold to both public and private global network
providers.
Historically, the Company's principal product offerings generally consisted
of copper based and fiber based products designed to address the needs of its
customers for transmission, enterprise networking and connectivity on
traditional telephony networks. With the growth of multimedia applications and
the associated development of enhanced voice, data and video services, the
Company's more recent product offerings and research and development efforts
have increasingly focused on emerging technologies and applications relating to
the broadband telecommunications equipment market. The market for broadband
telecommunications equipment is evolving and rapidly changing. The Company's
future growth is dependent in part on its ability to successfully develop and
commercially introduce new products in each of its product groups addressing
this
<PAGE>
market, as well as the growth in this market. The growth in the market for such
broadband telecommunications products is dependent on a number of factors,
including the amount of capital expenditures by public network providers,
regulatory and legal developments, any adjustments to overall market capital
expenditure rates which could result from the ongoing consolidation of customers
in this market as well as the influx of new customer entrants to the market and
end-user demand for integrated voice, data video and other network services.
There can be no assurance that the Company's new or enhanced products will meet
with market acceptance or be profitable.
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors. The Company is growing through acquisition and
expansion and results of operations described in this report may not be
indicative of results to be achieved in future periods. The Company's expense
levels are based in part on expectations of future revenues. If revenue levels
in a particular period do not meet expectations, operating results will be
adversely affected. In addition, the Company's results of operations are subject
to seasonal factors. The Company historically has experienced a stronger demand
for its products in the fourth fiscal quarter, primarily as a result of customer
budget cycles and Company year-end incentives, and has experienced a weaker
demand for its products in the first fiscal quarter, primarily as a result of
the number of holidays during late November, December and early January and a
general industry slowdown during that period. There can be no assurance that
these historical seasonal trends will continue in the future.
-2-
<PAGE>
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three years ended October 31, 1997, and the percentage changes in
these income and expense items between years are contained in the following
table:
<TABLE>
<CAPTION>
Percentage Increase
Percentage of Net Sales Years Ended Between Years
----------------------------------- -----------------------
1997 vs. 1996 vs.
1997 1996 1995 1996 1995
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 40.6% 41.2%
Cost of product sold (53.4) (53.0) (51.5) 41.7 45.3
Gross profit 46.6 47.0 48.5 39.4 37.0
Expenses:
Development and
product engineering (10.5) (10.9) (11.3) 36.2 35.5
Selling and
administration (19.0) (19.4) (22.2) 37.9 23.3
Goodwill amortization (.9) (.6) (.6) 91.3 67.1
Non-recurring charges (2.0) -- (.7) -- --
Operating income 14.2 16.1 13.7 24.4 65.8
Other income (expense),
net:
Interest 0.6 1.3 1.2 (33.6) 54.4
Other (.2) (.9) (.2) (63.2) --
Income before income
taxes 14.6 16.5 14.7 24.4 58.5
Provision for income
taxes (5.3) (5.9) (5.3) 24.4 58.5
Net income 9.3% 10.6% 9.4% 24.4 58.5
</TABLE>
NET SALES The following table sets forth the Company's net sales for the
three years ended October 31, 1997, for each of the functional product groups
(dollars in thousands):
<TABLE>
<CAPTION>
Percentage Increase
Net Sales for the Years Ended October 31, Between Years
-------------------------------------------------------------- ---------------------
1997 1996 1995
---------- --------- ---------
Net Net Net 1997 vs. 1996 vs.
Product Group Sales % Sales % Sales % 1996 1995
---------- ------ --------- ------ --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transmission $ 509,704 43.8% $304,820 36.8% $184,432 31.5% 67.2% 65.3%
Enterprise Networking 154,399 13.2 145,651 17.6 127,405 21.7 6.0 14.3
Broadband
Connectivity 500,347 43.0 377,538 45.6 274,385 46.8 32.5 37.6
Total $1,164,450 100.0% $828,009 100.0% $586,222 100.0% 40.6 41.2
</TABLE>
Net sales were $1.16 billion and $828.0 million for the years ended October 31,
1997 and 1996, reflecting 40.6% and 41.2% annual increases, respectively, over
the prior years. The increases in net sales in both 1997 and 1996 predominantly
reflect
-3-
<PAGE>
increases in sales of transmission products (67.2% in 1997 and 65.3% in 1996)
and broadband connectivity products (32.5% in 1997 and 37.6% in 1996). Within
these two product groups, net sales increased approximately $109 million in 1997
and $70.0 million in 1996 as a result of revenue contributions from acquired
companies.
In addition to the growth from acquisition, the Company's 67.2% and 65.3%
growth in net sales of transmission products during 1997 and 1996, respectively,
primarily reflects increased sales of transmission systems to public
telecommunications network providers such as telephone companies, cable TV
operators and wireless service providers. The very strong growth of transmission
product sales resulted in sales of transmission products increasing to 43.8% of
total net sales in 1997, from 36.8% of total net sales in 1996 and 31.5% of
total net sales in 1995. If the Company's transmission system products
internally developed or acquired within the last three years and continuing
enhancements to these products meet with reasonable market acceptance, the
Company anticipates that net sales of transmission products will continue to
grow as a percentage of the Company's total net sales.
Besides the revenue growth from acquisitions, the Company's 32.5% and 37.6%
growth in net sales of broadband connectivity products in 1997 and 1996,
respectively, predominantly reflects the Company's success in selling these
products into new global broadband market applications (such as cable TV
companies and certain international customers). Within the broadband
connectivity product group, net sales of ADC's digital signaling cross-connect
(DSX) modules and bays have declined as a percentage of total net sales to 21.7%
from 22.7% in 1996 and 23.9% in 1995. The Company believes that future sales of
DSX and other copper connectivity products will continue to account for a
substantial portion of the Company's revenues, although these products may
continue to decline as a percentage of total net sales primarily due to changes
in the Company's product mix and the ongoing evolution of technologies in the
telecommunications marketplace.
Net sales of enterprise networking products increased 6.0% and 14.3% during
1997 and 1996, respectively. These increases reflect growth in net sales of
public network access equipment, partially offset by decreases in net sales of
Local Area Network (LAN) equipment. Recognizing changes in the competitive
environment for LAN equipment and the industry trend toward integration of LAN
and Wide Area Network (WAN) technologies and products, the Company combined its
Kentrox and Fibermux subsidiaries into one enterprise networking group and
(during July 1997) transferred the Fibermux manufacturing operation to Kentrox.
This group combines LAN and WAN expertise in its development of advanced network
access and transport products.
Net sales for 1997 and 1996 include $247.4 million and $172.2 million of
sales to customers outside of the U.S., representing 21.2% and 20.8%,
respectively, of total
-4-
<PAGE>
net sales. If the Company's international marketing efforts continue to be
successful and if the Company's global products meet with reasonable market
acceptance, management anticipates that net sales outside the U.S. will continue
to grow as a percentage of the Company's total net sales.
GROSS PROFIT During 1997, 1996 and 1995, the gross profit percentages were
46.6%, 47.0% and 48.5% of net sales, respectively. The 1997 and 1996 declines in
gross profit percentages primarily resulted from the continuing change in
product sales mix toward sales of newer, lower margin products which address
emerging broadband applications. The Company anticipates that its future gross
profit percentages will continue to be affected by the mix of products the
Company sells, the timing of new product introductions and manufacturing volume,
among other factors.
OPERATING EXPENSES Total operating expenses for the years ended October
31, 1997, 1996 and 1995 were $377.0 million, $256.0 million and $203.8 million,
representing 32.4%, 30.9% and 34.8% of net sales, respectively. The increase in
operating expenses as a percentage of net sales during 1997 reflects the $22.7
million of non-recurring charges recorded during the quarter ended January 31,
1997. Such charges primarily represent the write-off of purchased research and
development resulting from the acquisition of the wireless infrastructure group
from PCSI, as well as expenses related to a consolidation of the Company's West
Coast operations. Operating expenses before non-recurring charges for 1997 were
$354.3 million, representing 30.4% of net sales. The 1997 decrease of .5% of net
sales (before non-recurring charges) compared to 1996 reflects the Company's
ability to leverage recurring operating expenses against revenue levels.
The increases in absolute dollars of operating expenses during 1997 and
1996 were due primarily to expanded operations. In the year ended October 31,
1995, a non-recurring charge of $3.9 million related primarily to a personnel
reduction at the Fibermux facility resulting from the realignment of the
Company's enterprise networking operations. Operating expenses before this
charge for 1995 were $199.9, representing 34.1% of net sales. The 1996 decrease
of 3.2% of net sales compared to 1995 again reflects the Company's ability to
leverage operating expenses against revenue levels.
Development and product engineering expenses were $122.6 million, $90.0
million and $66.5 million for the years ended October 31, 1997, 1996 and 1995,
respectively, reflecting increases of 36.2% during 1997 and 35.5% during 1996.
These increases resulted from substantial product development efforts in each of
the Company's three functional product groups and, in 1997 and 1996, newly
acquired businesses. The Company believes that, given the rapidly changing
technology and competitive environment in the telecommunications equipment
industry, continued commitment to product development efforts will be required
for the Company to remain competitive. Accordingly, the Company intends to
continue to
-5-
<PAGE>
allocate substantial resources to product development for each of its three
functional product groups. However, the Company recognizes the need to balance
the cost of product development with expense control and remains committed to
carefully managing the rate of increase of such expenses.
Selling and administration expenses were $221.6 million, $160.7 million and
$130.3 million for the years ended October 31, 1997, 1996 and 1995,
respectively, reflecting increases of 37.9% during 1997 and 23.3% during 1996.
These increases resulted from selling activities associated with new product
introductions, additional personnel costs related to expanded operations and, in
1997 and 1996, newly acquired businesses.
Several of the Company's acquisitions have been accounted for as purchase
transactions in which the purchase prices exceeded the fair value of the
acquired assets. The amortization of these goodwill amounts over five to 25
years on a straight line basis resulted in increased goodwill amortization
expense for the years ended October 31, 1997 and 1996, to $10.0 million in 1997
and $5.2 million in 1996, from $3.1 million in the year ended October 31, 1995.
See Note 4 to the Consolidated Financial Statements included in this report for
a discussion of acquisitions made in 1997 and 1996.
OTHER INCOME (Expense), Net For the years ended October 31, 1997, 1996 and
1995, the net interest income category represented net interest income on cash
balances. See "Liquidity and Capital Resources" below for a discussion of cash
levels. Other expense for the years ended October 31, 1997 and 1996 primarily
represented the Company's share of net operating results of its venture
investments accounted for on an equity basis.
INCOME TAXES See Note 7 to the Consolidated Financial Statements included
in this report for a reconciliation of the federal statutory tax rate to an
effective tax rate of 36.0% in 1997, 1996 and 1995. This rate reflects the
varying amounts of non-deductible goodwill amortization included in operating
expenses in each of the three years, and the beneficial impact of tax credits.
NET INCOME Net income was $108.8 million (or $.83 per share) for the year
ended October 31, 1997, an increase of 24.4% over $87.5 million (or $.68 per
share) for the year ended October 31, 1996. The non-recurring charges of $22.7
million reduced net income by $.11 per share during 1997. Net income for 1996
represented an increase of 58.5% over $55.2 million (or $.47 per share) for the
year ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents (primarily short-term investments in commercial
paper with maturities of less than 90 days) decreased $73.4 million and $55.3
million
-6-
<PAGE>
during the years ended October 31, 1997 and 1996, respectively. The major
elements of the 1997 decrease were net income before non-recurring charges,
depreciation and amortization of $181.4 million offset by a $95.7 million
increase in working capital (reflecting the growth in the Company's business),
property and equipment additions of $119.0 million and acquisition payments of
$33.9 million. The higher level of property and equipment additions in 1997
reflects the continuation of certain major facilities and systems upgrades begun
in 1996. The major elements of the 1996 decrease were net income before
depreciation and amortization of $121.3 million offset by the $55.2 million
increase in working capital (reflecting the growth in the Company's business),
property and equipment additions of $69.1 million and acquisition payments of
$49.3 million. See Note 4 to the Consolidated Financial Statements included in
this report for a discussion of acquisitions.
At October 31, 1997, the Company had approximately $3.8 million of debt
outstanding. All such debt represents debt of companies acquired during 1997 and
1996.
Management believes that current cash balances and cash generated from
operating activities will be adequate to fund working capital requirements and
capital expenditures (for which approximately $35 million had been committed at
October 31, 1997) for 1998. However, the Company may find it necessary to seek
additional sources of financing to support its capital needs, for additional
working capital, potential investments or acquisitions, or otherwise.
-7-
<PAGE>
QUARTERLY STOCK PRICE
The Company's Common Stock, $.20 par value, is traded on the Nasdaq
National Market under the symbol "ADCT." The following table sets forth the high
and low sale prices for each quarter during the years ended October 31, 1997 and
1996, as reported on that system. All prices have been restated to reflect a
two-for-one stock split effected in the form of a 100% stock dividend paid in
October 1996.
Fiscal Year Ended October 31, 1997 Low High
First Quarter 30 1/8 40 1/4
Second Quarter 21 1/4 37 3/4
Third Quarter 26 1/4 45 1/4
Fourth Quarter 29 5/16 40 1/4
Fiscal Year Ended October 31, 1996 Low High
First Quarter 14 1/4 24 1/8
Second Quarter 16 1/4 22 1/8
Third Quarter 19 1/2 25 3/8
Fourth Quarter 21 5/16 35 1/8
No cash dividends have been declared or paid during the past five years. The
Company currently anticipates that it will retain any future earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. As of October 31, 1997, there were approximately 4,446
holders of record of the Common Stock.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This Annual Report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as the Shareholders Letter
and the discussion of the Company's business, contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements represent the Company's expectations or beliefs
concerning future events, including the following: any statements regarding
future sales and gross profit percentages, any statements regarding the
continuation of historical trends, and any statements regarding the sufficiency
of the Company's cash balances and cash generated from operating and financing
activities for the Company's future liquidity and capital resource needs, any
statements regarding the effect of regulatory changes and any statement
regarding the future of the telecommunications industry or the Company's
business. The Company cautions that any forward-looking statements made by the
Company in this report or in other announcements made by the Company are further
qualified by important factors
-8-
<PAGE>
that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitations, the factors set
forth on Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1997.
-9-
<PAGE>
Report of Independent Public Accountants
To ADC Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of ADC
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES as of October 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended October 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADC Telecommunications, Inc.
and Subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
November 25, 1997
-10-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended October 31 (In Thousands, Except Per Share Amounts)
1997 1996 1995
---------- ---------- ----------
Net Sales $1,164,450 $ 828,009 $ 586,222
Cost of Product Sold 621,811 438,847 302,094
Gross Profit 542,639 389,162 284,128
Gross profit percentage 46.6% 47.0% 48.5%
Expenses:
Development and product engineering 122,638 90,038 66,460
Selling and administration 221,624 160,705 130,297
Goodwill amortization 10,013 5,235 3,133
Non-recurring charges 22,700 -- 3,914
Total expenses 376,975 255,978 203,804
Operating Income 165,664 133,184 80,324
Other Income (Expense), Net 4,393 3,479 5,905
Income before Income Taxes 170,057 136,663 86,229
Provision for Income Taxes 61,220 49,200 31,043
Net Income $ 108,837 $ 87,463 $ 55,186
Average Common Shares Outstanding 131,673 128,314 117,094
Earnings per Share $ 0.83 $ 0.68 $ 0.47
The accompanying notes are an integral part of these consolidated financial
statements.
-11-
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 (In Thousands) 1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 109,794 $ 183,221
Accounts receivable, net of reserves of $4,803 and $3,921 246,241 163,219
Inventories, net of reserves of $20,961 and $14,603 168,379 130,582
Prepaid income taxes and other assets 25,053 22,479
Total current assets 549,467 499,501
Property and Equipment, net 215,677 131,080
Other Assets, Principally Goodwill 171,159 135,881
$ 936,303 $ 766,462
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current maturities of long-term debt $ 650 $ 2,247
Accounts payable 62,879 49,459
Accrued liabilities 118,870 90,373
Total current liabilities 182,399 142,079
Long-Term Debt, Less Current Maturities 3,109 6,913
Total liabilities 185,508 148,992
Stockholders' Investment:
common stock, $0.20 par value; authorized 300,000
shares; issued 133,508 and 65,177 shares 26,702 13,035
Paid-in capital 243,743 232,266
Retained earnings 485,683 373,540
Cumulative translation adjustment (4,612) 232
Deferred compensation (721) (1,603)
Total stockholders' investment 750,795 617,470
$ 936,303 $ 766,462
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-12-
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
****
<TABLE>
<CAPTION>
Common Stock Cumulative
---------------------- Paid-In Retained Translation Deferred
Shares Amount Capital Earnings Adjustment Compensation
------- -------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 27,888 $ 5,577 $ 34,851 $225,476 $ -- $ (1,146)
Stock split effected in the form of a
stock dividend 28,044 5,609 (5,609) -- -- --
Stock issued for secondary public offering 6,325 1,265 180,489 -- -- --
Stock issued for employee benefit plans 480 96 9,535 -- -- (714)
Reduction of deferred compensation -- -- -- -- -- 966
Translation adjustments -- -- -- -- (715) --
Net income -- -- -- 55,186 -- --
BALANCE, OCTOBER 31, 1995 62,737 12,547 219,266 280,662 (715) (894)
Stock issued for business acquisitions 1,911 382 198 5,415 -- --
Stock issued for employee benefit plans 529 106 12,802 -- -- (1,490)
Reduction of deferred compensation -- -- -- -- -- 781
Translation adjustments -- -- -- -- 947 --
Net income -- -- -- 87,463 -- --
BALANCE, OCTOBER 31, 1996 65,177 13,035 232,266 373,540 232 (1,603)
Stock split effected in the form of a
stock dividend 65,177 13,035 (13,035) -- -- --
Stock issued for business acquisitions 2,239 448 15,066 3,306 -- --
Stock issued for employee benefit plans 915 184 9,446 -- -- (80)
Reduction of deferred compensation -- -- -- -- -- 962
Translation adjustments -- -- -- -- (4,844) --
Net income -- -- -- 108,837 -- --
BALANCE, OCTOBER 31, 1997 133,508 $ 26,702 $243,743 $485,683 $ (4,612) $ (721)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-13-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended October 31 (In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 108,837 $ 87,463 $ 55,186
Adjustments to reconcile net income to net cash
from operating activities:
Non-recurring charges 22,700 -- 3,914
Depreciation and amortization 49,843 33,794 26,341
Reduction in deferred compensation 962 781 966
Decrease in deferred income taxes (6,789) (3,448) (4,652)
Other (93) 28 455
Changes in assets and liabilities
Accounts receivable (72,693) (45,767) (31,130)
Inventories (34,441) (35,100) (21,466)
Prepaids and other assets (7,863) (3,048) (2,455)
Accounts payable 5,921 15,104 6,559
Accrued liabilities 13,329 13,650 10,541
Total cash from operating activities 79,713 63,457 44,259
INVESTING ACTIVITIES:
Property and equipment additions, net (119,030) (69,057) (32,456)
Acquisition payments (33,917) (49,291) (4,676)
Long-term investments (3,523) (7,268) (8,139)
Total cash used for investing activities (156,470) (125,616) (45,271)
FINANCING ACTIVITIES:
Decrease in long-term debt (5,279) (4,897) (400)
Common stock sold 9,534 11,696 190,671
Total cash from financing activities 4,255 6,799 190,271
EFFECT OF EXCHANGE RATE CHANGES ON CASH (925) 90 (280)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (73,427) (55,270) 188,979
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 183,221 238,491 49,512
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 109,794 $ 183,221 $ 238,491
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 55,209 $ 46,129 $ 27,549
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of ADC Telecommunications, Inc. (a Minnesota corporation) and all
significant subsidiaries in which ADC has more than a 50% equity ownership
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
CASH EQUIVALENTS Cash equivalents primarily represent short-term investments in
commercial paper with original maturities of three months or less. The carrying
amounts of these investments approximate their fair value due to their short
maturities.
INVENTORIES Inventories include material, labor and overhead and are stated at
the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of three
to thirty years or, in the case of leasehold improvements, over the term of the
lease, if shorter. Both straight-line and accelerated methods of depreciation
are used for income tax purposes.
GOODWILL The excess of the cost of acquired businesses over the fair value of
the net assets acquired is amortized on a straight-line basis ranging from five
to twenty-five years. Management periodically assesses the amortization period
and recoverability of the carrying amount of goodwill based upon an estimate of
future cash flows from related operations.
RESEARCH AND DEVELOPMENT COSTS The Company's policy is to expense all research
and development costs in the period incurred.
INCOME TAXES The Company utilizes the liability method of accounting for income
taxes. Deferred tax liabilities or assets are recognized for the expected future
tax consequences of temporary differences between the book and tax bases of
assets and liabilities.
EARNINGS PER SHARE Earnings per share is computed using the weighted average
number of common shares outstanding during the year, after consideration of the
dilutive effect of stock options and restricted stock awards.
-15-
<PAGE>
FOREIGN CURRENCY TRANSLATION The Company accounts for translation of foreign
currency in accordance with the provisions of SFAS No. 52. The resulting
translation adjustments are recorded directly to a separate component of
stockholders' investment. Use of Estimates The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are
based on management's knowledge of current events and actions it may undertake
in the future, they may ultimately differ from actual results.
NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 128 - Earnings Per Share was issued
during February 1997 and simplifies the standards for calculating and presenting
earnings per share. This pronouncement is effective for periods ending after
December 15, 1997; earlier application is not permitted. The adoption of SFAS
No. 128 will not have a material impact on the calculation of earnings per share
given the Company's present capital structure.
-16-
<PAGE>
NOTE 2: CONSOLIDATED INCOME STATEMENT INFORMATION
International Sales
International sales were $247,409,000, $172,212,000 and $106,416,000 during
1997, 1996 and 1995, respectively.
Other Income (Expense), Net:
(In Thousands) 1997 1996 1995
-------- -------- --------
Interest income $ 7,369 $ 10,906 $ 7,078
Interest expense (393) (402) (275)
Other income (expense), net (2,583) (7,025) (898)
$ 4,393 $ 3,479 $ 5,905
NON-RECURRING CHARGES During the first quarter of 1997, the Company recorded a
non-recurring charge of $22.7 million. This charge primarily represented the
write-off of purchased research and development from the acquisition of the
Wireless Infrastructure Group of Pacific Communications Sciences, Inc. ("PCSI"),
as well as expenses related to the consolidation of the Company's West Coast
operations.
During the second quarter of 1995, the Company initiated a realignment of
its Kentrox and Fibermux subsidiaries into one business unit. The Company
recorded a charge of $3,914,000 in conjunction with the realignment, related
primarily to a personnel reduction. As a result of the realignment,
approximately 100 Fibermux employees, primarily in sales, administration and
engineering, were separated from the Company.
-17-
<PAGE>
NOTE 3: CONSOLIDATED BALANCE SHEET INFORMATION
(In Thousands) 1997 1996
-------- --------
Inventories:
Purchased materials and manufactured products $154,403 $119,006
Work-in-process 13,976 11,576
$168,379 $130,582
Property and equipment:
Land and buildings $ 66,441 $ 43,965
Machinery and equipment 304,797 209,347
Furniture and fixtures 30,687 22,319
401,925 275,631
Less accumulated depreciation and amortization (186,248) (144,551)
$215,677 $131,080
Goodwill:
Goodwill $151,104 $136,940
Less accumulated amortization (30,169) (20,156)
$120,935 $116,784
Accrued liabilities:
Accrued compensation and benefits $ 54,881 $ 42,968
Accrued income taxes 27,684 14,566
Other accrued liabilities 36,305 32,839
$118,870 $ 90,373
-18-
<PAGE>
NOTE 4: ACQUISITIONS
During the first quarter of 1997, the Company acquired substantially all
the assets and liabilities of the Wireless Infrastructure Group of PCSI, a
wholly-owned subsidiary of Cirrus Logic, Inc., for $23 million in cash. The
Wireless Infrastructure Group designs and manufactures equipment for wireless
data and advanced paging communications. The acquisition was accounted for as a
purchase, and resulted in a non-recurring charge for the write-off of purchased
research and development described in Note 2. The inclusion of the Wireless
Infrastructure Group operating results for periods prior to the date of
acquisition would not have materially affected results of operations.
During 1997, the Company exchanged a total of 2,239,356 shares of its
common stock in two separate business combinations for all of the outstanding
common stock of The Apex Group, Inc. ("Apex") and NewNet, Inc. ("NewNet"). Both
transactions were accounted for as poolings of interests. Apex, acquired during
April, provides information management and consulting services. NewNet, acquired
during October, develops intelligent network telecommunications software. During
1996, the Company exchanged a total of 1,910,965 shares of its common stock in
three separate business combinations for all the outstanding shares of Da Tel
Fibernet, Inc. ("Da Tel"), Information Transmission Systems Corp. ("ITS"), and
Metrica Systems Limited ("Metrica"). These transactions were accounted for as
poolings of interests. Da Tel was acquired during March and provides
engineering, design and installation services for telecommunications companies.
ITS also was acquired during March and designs and manufactures wireless
television transmission products for the cable and broadcast industries.
Metrica, a United Kingdom based company, was acquired during May and designs and
manufactures management software for wireless networks.
Financial data for periods prior to the closing of these five pooling
transactions have not been restated because neither the net assets nor operating
results were material, individually or in the aggregate, to the Company's
consolidated financial statements.
During the second quarter of 1996, the Company purchased all of the
outstanding stock of Skyline Technology, Inc. ("Skyline") for an initial cash
payment of $12 million and additional consideration not to exceed $20 million.
The purchase price exceeded the fair value of the acquired assets by
approximately $11 million. Additional consideration may be payable over a three
year period beginning November 1, 1996, subject to the achievement of certain
financial results. No additional consideration was earned during 1997. Skyline
designs and manufactures ISDN/Frame Relay access products.
-19-
<PAGE>
During the third quarter of 1996, the Company purchased 80% of the
outstanding common stock of Solitra Oy ("Solitra"), based in Kempele, Finland,
and agreed to acquire the remaining 20% over a three-year period. The stock was
acquired for an initial cash payment of $41 million plus additional
consideration which is payable subject to the achievement of certain financial
results. The initial purchase price exceeded the fair value of the acquired
assets by approximately $38.5 million. Additional consideration, if any, will be
payable over a three-year period beginning November 1, 1996. During 1997,
approximately $3 million of additional consideration was earned and will be
payable during 1998. Solitra designs and manufactures components for cellular
network base stations as well as high specification filters for mobile phones.
The acquisitions of Skyline and Solitra were accounted for as purchases.
Accordingly, the results of operations of the acquired entities have been
included in the Company's consolidated financial statements since the respective
dates of acquisition. Goodwill associated with these acquisitions is being
amortized using the straight line method over periods ranging from ten to
fifteen years. The inclusion of Skyline and Solitra financial data prior to the
dates of acquisition would not have materially affected reported results.
-20-
<PAGE>
NOTE 5: EMPLOYEE BENEFIT PLANS
PENSION PLAN The Company maintains a defined benefit plan covering a majority
of its employees. The plan is funded in accordance with the requirements of
Federal laws and regulations. Plan assets consist of fixed income securities and
a managed portfolio of equity securities.
<TABLE>
<CAPTION>
Pension expense included the following components:
(In Thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 2,856 $ 2,368 $ 1,766
Interest cost on the projected benefit obligation 2,453 1,944 1,682
Return on assets (6,250) (4,614) (3,627)
Net amortization and deferral 3,745 2,891 2,240
$ 2,804 $ 2,589 $ 2,061
Discount rate used to determine actuarial present
value of benefits at October 31 8.0% 8.0% 7.5%
</TABLE>
The rate of compensation increase used to measure the projected benefit
obligation was 5% for all three years. The expected long-term rate of return on
plan assets was 9%.
During 1997, the Board approved the termination of the defined benefit
plan. The termination of the defined benefit plan will be effective January 5,
1998, with the actual settlement of the plan scheduled for 1998. The effect of
the termination and subsequent settlement are not material to the Company's
operations. The following table sets forth the funded status of the plan as of
October 31:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation:
Vested $ (28,080) $ (21,926)
Nonvested (2,178) (1,376)
Total (30,258) (23,302)
Excess of projected benefit obligation over accumulated
benefit obligation (6,805) (7,366)
Projected benefit obligation (37,063) (30,668)
Market value of plan assets 34,895 29,011
Unfunded projected benefit obligation (2,168) (1,657)
Unrecognized net gain (6,447) (4,769)
Unrecognized prior service cost 1,592 1,717
Unrecognized transition liability 709 780
Total accrued pension liability $ (6,314) $ (3,929)
</TABLE>
RETIREMENT SAVINGS PLAN The Company maintains a Retirement Savings Plan for
employees who have completed one year of service. The Company contributes 1% of
wages and, depending on Company performance, partially matches employee
contributions to the Plan up to 6% of wages. Employees are fully vested in all
contributions. The Company's contributions to the plan totaled $8,232,000,
$7,394,000
-21-
<PAGE>
and $6,141,000 during 1997, 1996, and 1995, respectively. A portion of the
Company's cash contributions is invested in the Company's stock by the Plan's
trustee.
STOCK AWARD PLANS The Company maintains a Stock Incentive Plan to grant certain
stock awards, including stock options at fair market value and restricted
shares, to key employees of the Company. A maximum of 22,419,008 stock awards
can be granted under this plan; 8,711,011 shares were available for stock awards
as of October 31, 1997. The Company also maintains a Nonemployee Director Stock
Option Plan in order to enhance the ability to attract and retain the services
of experienced and knowledgeable outside directors. This plan provides for
granting of a maximum of 840,000 non-qualified stock options at fair market
value. As of October 31, 1997, 384,500 shares were available for option grants
under this plan. In addition, a total of 427,422 shares have been reserved under
plans adopted in conjunction with certain acquisitions.
The following schedule summarizes activity in the plans:
Stock Restricted Grant
Options Stock Price
--------- ---------- ---------
Outstanding at October 31, 1995 5,319,394 165,140 $1 - $21
Granted 1,206,116 70,378 $1 - $33
Exercised (963,514) -- $1 - $21
Restrictions Lapsed -- (104,932) $6 - $23
Canceled (353,920) (22,000) $5 - $23
Outstanding at October 31, 1996 5,208,076 108,586 $1 - $32
Granted 6,803,318 2,466 $1 - $51
Exercised (821,761) -- $1 - $22
Restrictions Lapsed -- (15,891) $9 - $24
Canceled (525,146) (2,600) $11 - $47
Outstanding at October 31, 1997 10,664,487 92,561 $1 - $51
Exercisable at October 31, 1997 4,094,521 -- $1 - $38
During 1995, options for 1,273,476 shares were exercised at prices ranging
from $1 to $13 per share.
During 1997, the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" which encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity instruments. As
permitted under the new standard, the Company has continued to account for
employee stock options using the intrinsic value method outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized by the company for its
Stock Incentive Plan or its Non-employee Director Stock Option Plan. If
compensation expense for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates consistent with the
-22-
<PAGE>
method of SFAS No. 123, the Company's net income and earnings per share would
have decreased to the pro forma amounts indicated below:
(In Thousands, Except Per Share Amounts) 1997 1996
--------- ---------
Net Income
As reported $ 108,837 $ 87,463
Pro forma $ 89,681 $ 85,793
Earnings Per Share
As reported $ 0.83 $ 0.68
Pro forma $ 0.68 $ 0.67
Pro forma net income reflects only options and other stock based awards
granted during 1997 and 1996. Therefore, the full impact of calculating
compensation costs for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented because compensation cost is reflected
over the options' vesting period, which is normally three years, and
compensation cost for options granted prior to fiscal year 1996 is not
considered.
The weighted-average fair value per option at the date of grant for options
granted in 1997 and 1996 was $17.34 and $11.24, respectively. The fair value was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for 1997 and 1996:
1997 1996
--------- ---------
Risk-free interest rate 6.41% 6.27%
Expected dividend yield -- --
Expected volatility factor 44.7% 38.7%
Expected option term 7 years 7 years
NOTE 6: CAPITAL STOCK
AUTHORIZED STOCK The Company is authorized to issue 300,000,000 shares of $0.20
par value common stock and 10,000,000 shares of no par value preferred stock.
There are no preferred shares issued.
STOCK SPLIT On September 24, 1996, the Company declared a two-for-one stock
split effected in the form of a 100% stock dividend paid November 1, 1996. All
references in the accompanying financial statements and notes to earnings per
share, average common shares outstanding, Stock Award Plan data and related
share prices have been adjusted to reflect the split.
STOCK OFFERING On June 14, 1995, the Company completed a secondary public
offering of 6,325,000 shares of its common stock at $30 per share. The net
proceeds from the offering were $181,754,000, which are used for general
corporate purposes,
-23-
<PAGE>
including working capital, capital expenditures and possible acquisitions or
strategic alliances.
SHAREHOLDER RIGHTS PLAN The Company has adopted a Shareholder Rights Plan which
provides that if any person or group acquires 15% or more of the Company's
common stock, each right not owned by such person or group will entitle its
holder to purchase, at the Right's then current purchase price ($62.50 for each
one-half share of the Company's common stock at October 31, 1997) common stock
of the Company having a value of twice the Right's purchase price. The Rights
would not be triggered, however, if the acquisition of 15% or more of the
Company's common stock is pursuant to a tender offer or exchange for all
outstanding shares of the Company's common stock which is determined by the
board of directors to be fair and in the best interests of the Company and its
stockholders. The Rights are redeemable at $0.01 per share any time prior to the
time they become exercisable. The Rights will expire on November 28, 2005, if
not previously redeemed or exercised.
NOTE 7: INCOME TAXES
The components of the provision for income taxes are as follows:
(In Thousands) 1997 1996 1995
-------- -------- --------
Current taxes payable:
Federal $ 53,890 $ 44,483 $ 30,666
Foreign 7,523 2,078 573
State 6,596 6,087 4,456
68,009 52,648 35,695
Deferred (6,789) (3,448) (4,652)
Total provision $ 61,220 $ 49,200 $ 31,043
The provision for foreign income taxes is based upon foreign pretax
earnings of approximately $18,980,000, $8,260,000 and $1,547,000 during 1997,
1996 and 1995, respectively.
The effective income tax rate differs from the Federal statutory rate as
follows:
1997 1996 1995
---- ---- ----
Federal statutory rate 35% 35% 35%
Research and development tax credits (2) (1) (2)
Goodwill amortization 1 1 1
State income taxes, net 2 3 3
FSC exempt income (1) -- --
Other, net 1 (2) (1)
Effective income tax rate 36% 36% 36%
-24-
<PAGE>
Deferred tax assets (liabilities) as of October 31 are comprised of the
following:
(In Thousands) 1997 1996
--------- ---------
Current deferred tax assets:
Asset valuation reserves $ 5,320 $ 5,225
Accrued liabilities 11,895 10,989
Other 179 3
Total $ 17,394 $ 16,217
Non-current deferred tax assets (liabilities):
Intangibles $ 21,394 $ --
Depreciation (1,731) (2,698)
Other (271) 395
Total $ 19,392 $ (2,303)
NOTE 8: COMMITMENTS AND CONTINGENCIES
OPERATING LEASES A portion of the Company's operations are conducted using
leased equipment and facilities. These leases are noncancelable and renewable
with expiration dates ranging through the year 2006. The rental expense included
in the accompanying consolidated statements of income was $11,749,000,
$7,281,000, and $5,676,000 for 1997, 1996, and 1995 respectively.
The following is a schedule of future minimum rental payments required
under all noncancelable operating leases as of October 31, 1997:
(In Thousands)
1998 $10,354
1999 9,443
2000 7,943
2001 5,364
2002 and thereafter 7,794
-----
$40,898
CONTINGENCIES There are no legal proceedings pending against or involving the
Company which, in the opinion of management, will have a material adverse effect
on the Company's financial position or results of operations.
CHANGE OF CONTROL The board of directors has approved the extension of certain
employee benefits, including salary continuation to key employees, in the event
of a change of control of the Company. The board has retained the flexibility to
cancel such provisions under certain circumstances.
-25-
<PAGE>
NOTE 9: QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997 First Second Third Fourth
(Unaudited, in Thousands, Quarter Quarter Quarter Quarter Total
except Earnings Per Share) ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 256,777 $ 279,199 $ 293,312 $ 335,162 $ 1,164,450
Gross Profit 117,669 129,323 137,046 158,601 542,639
Income Before Income Taxes 16,243 45,096 51,182 57,536 170,057
Provision for Income Taxes 5,848 16,235 18,425 20,712 61,220
Net Income $ 10,395 $ 28,861 $ 32,757 $ 36,824 $ 108,837
Average Common Shares
Outstanding 130,445 131,009 131,820 133,405 131,673
Earnings Per Share $ 0.08 $ 0.22 $ 0.25 $ 0.28 $ 0.83
<CAPTION>
1996 First Second Third Fourth
(Unaudited, in Thousands, Quarter Quarter Quarter Quarter Total
except Earnings Per Share) ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 162,591 $ 193,053 $ 217,313 $ 255,052 $ 828,009
Gross Profit 77,910 89,417 101,746 120,089 389,162
Income Before Income Taxes 25,487 31,094 36,206 43,876 136,663
Provision for Income Taxes 9,174 11,195 13,034 15,797 49,200
Net Income $ 16,313 $ 19,899 $ 23,172 $ 28,079 $ 87,463
Average Common Shares
Outstanding 125,516 128,048 129,704 130,098 128,314
Earnings Per Share $ 0.13 $ 0.15 $ 0.18 $ 0.22 $ 0.68
</TABLE>
-26-
<PAGE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended October 31 (Dollars
in Thousands, Except Per Share Amounts) 1987 1988 1989 1990 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES $ 166,863 $ 179,852 $ 196,388 $ 259,802 $ 293,839
Cost of Product Sold 87,981 97,427 107,764 133,802 148,614
Gross Profit 78,882 82,425 88,624 126,000 145,225
Expenses:
Development and product engineering 15,473 17,401 17,360 25,462 32,315
Selling and administration 38,927 40,921 48,580 62,793 74,369
Goodwill amortization -- -- 267 920 1,953
Non-recurring charges -- -- -- -- --
Total expenses 54,400 58,322 66,207 89,175 108,637
OPERATING INCOME 24,482 24,103 22,417 36,825 36,588
Interest Expense (460) (450) (493) (615) (1,803)
Interest Income 1,223 2,306 3,324 1,870 1,695
Other Income (Expense), Net 193 (1,028) 997 92 (75)
Income before Income Taxes and
Extraordinary Item 25,438 24,931 26,245 38,172 36,405
Provision for Income Taxes 10,175 7,978 9,842 15,269 14,380
Income before Extraordinary Item 15,263 16,953 16,403 22,903 22,025
Extraordinary Item, Net of Income Taxes -- -- -- -- --
NET INCOME $ 15,263 $ 16,953 $ 16,403 $ 22,903 $ 22,025
Average Common Shares Outstanding 103,552 104,376 105,336 106,120 106,952
EARNINGS PER SHARE
Income before Extraordinary Item $ .15 $ .16 $ .16 $ .22 $ .21
NET INCOME $ .15 $ .16 $ .16 $ .22 $ .21
RETURN ON SALES INDICES
Gross Profit 47% 46% 45% 48% 49%
Operating Income 15% 13% 11% 14% 12%
Net Income 9% 9% 8% 9% 7%
INTERNATIONAL SALES $ 20,659 $ 26,116 $ 31,277 $ 41,623 $ 37,960
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
10-Year 5-Year
Compound Compound
Growth Rate Growth Rate
1992 1993 1994 1995 1996 1997 1987-1997 1992-1997
---------- ---------- ---------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 316,496 $ 366,118 $ 448,735 $ 586,222 $ 828,009 $ 1,164,450 21% 30%
155,074 178,572 221,448 302,094 438,847 621,811 22 32
161,422 187,546 227,287 284,128 389,162 542,639 21 27
36,063 40,988 48,974 66,460 90,038 122,638 23 28
82,966 93,311 110,799 130,297 160,705 221,624 19 22
2,720 2,798 3,135 3,133 5,235 10,013 -- --
3,800 -- -- 3,914 -- 22,700 -- --
125,549 137,097 162,908 203,804 255,978 376,975 21 25
35,873 50,449 64,379 80,324 133,184 165,664 21 36
(1,912) (285) (151) (275) (402) (393) -- --
970 468 1,309 7,078 10,906 7,369 -- --
(205) (895) (1,216) (898) (7,025) (2,583) -- --
34,726 49,737 64,321 86,229 136,663 170,057 21 37
13,700 18,101 23,800 31,043 49,200 61,220 20 35
21,026 31,636 40,521 55,186 87,463 108,837 22 39
-- -- (1,450) -- -- -- -- --
$ 21,026 $ 31,636 $ 39,071 $ 55,186 $ 87,463 $ 108,837 22 39
108,352 109,996 111,220 117,094 128,314 131,673 -- --
$ .19 $ .29 $ .36 $ .47 $ .68 $ .83 19 34
$ .19 $ .29 $ .35 $ .47 $ .68 $ .83 19 34
51% 51% 51% 48% 47% 47%
11% 14% 14% 14% 16% 14%
7% 9% 9% 9% 11% 9%
$ 49,347 $ 58,919 $ 67,113 $ 106,416 $ 172,212 $ 247,409 28% 38%
</TABLE>
-28-
<PAGE>
SUMMARY OF BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in Thousands) 1987 1988 1989 1990
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 26,184 $ 39,875 $ 17,576 $ 25,978
Accounts receivable 21,719 19,338 29,918 37,338
Inventories 19,972 19,439 24,723 33,845
Prepaid income taxes and
other assets 3,811 3,498 3,697 5,364
Total current assets 71,686 82,150 75,914 102,525
Property and Equipment:
Plant, property and
equipment, at cost 59,247 70,045 81,246 94,965
Less: accumulated depreciation (26,936) (33,118) (38,701) (49,581)
Property and equipment, net 32,311 36,927 42,545 45,384
Other Assets 824 617 25,372 33,756
$ 104,821 $ 119,694 $ 143,831 $ 181,665
Liabilities
Current Liabilities:
Current maturities of
long-term debt $ 229 $ 236 $ 444 $ 1,257
Accounts payable 5,875 4,999 6,996 10,140
Accrued liabilities 16,029 13,498 16,424 25,938
Total current liabilities 22,133 18,733 23,864 37,335
Deferred Income Taxes 3,645 4,391 4,806 5,476
Long-Term Debt 3,161 2,925 4,691 4,841
Stockholders' Investment
Common Stock 2,595 2,620 2,644 2,658
Paid-In Capital 17,828 18,613 19,617 20,093
Retained Earnings 55,459 72,412 88,815 111,718
Deferred Compensation -- -- (606) (456)
Cumulative Translation Adjustment -- -- -- --
Total stockholders'
investment 75,882 93,645 110,470 134,013
$ 104,821 $ 119,694 $ 143,831 $ 181,665
Other Statistics and Ratios
Working Capital $ 49,553 $ 63,417 $ 52,050 $ 65,190
Current Ratio 3.24 4.39 3.18 2.75
Long-Term Debt/Total
Capitalization 4% 3% 4% 3%
Return on Average Assets 16% 15% 12% 14%
Return on Average Equity 22% 20% 16% 19%
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 30,109 $ 20,484 $ 16,324 $ 49,512 $ 238,491 $ 183,221 $ 109,794
41,373 47,414 66,830 75,348 107,255 163,219 246,241
40,427 39,063 48,278 64,203 86,559 130,582 168,379
7,621 8,394 11,099 10,305 15,442 22,479 25,053
119,530 115,355 142,531 199,368 447,747 499,501 549,467
116,779 127,441 146,528 162,189 191,537 275,631 401,925
(58,971) (69,496) (83,652) (96,057) (112,851) (144,551) (186,248)
57,808 57,945 62,876 66,132 78,686 131,080 215,677
69,831 67,462 74,647 69,184 74,650 138,184 171,159
$ 247,169 $ 240,762 $ 280,054 $ 334,684 $ 601,083 $ 768,765 $ 936,303
$ 1,412 $ 324 $ 300 $ 400 $ 410 $ 2,247 $ 650
10,167 12,445 21,194 22,132 28,820 49,459 62,879
28,946 27,302 33,407 44,821 59,731 90,373 118,870
40,525 40,071 54,901 67,353 88,961 142,079 182,399
4,636 4,393 3,949 2,163 1,256 2,303 --
43,634 14,110 810 410 -- 6,913 3,109
2,686 2,722 5,539 5,577 12,547 13,035 26,702
22,285 25,745 29,465 34,851 219,266 232,266 243,743
133,743 154,769 186,405 225,476 280,662 373,540 485,683
(340) (1,048) (1,015) (1,146) (894) (1,603) (721)
-- -- -- -- (715) 232 (4,612)
158,374 182,188 220,394 264,758 510,866 617,470 750,795
$ 247,169 $ 240,762 $ 280,054 $ 334,684 $ 601,083 $ 768,765 $ 936,303
$ 79,005 $ 75,284 $ 87,630 $ 132,015 $ 358,786 $ 357,422 $ 367,068
2.95 2.88 2.60 2.96 5.03 3.52 3.01
21% 7% -- -- -- 1% --
10% 9% 12% 13% 12% 13% 13%
15% 12% 16% 16% 14% 16% 16%
</TABLE>
-30-
<PAGE>
EXHIBIT 21-a
SUBSIDIARIES OF THE COMPANY
The following list of subsidiaries of the Company identifies the name of the
subsidiary, the state or other jurisdiction of incorporation or organization and
the name under which such subsidiaries do business:
ADC VIDEO SYSTEMS, INC.
A Delaware corporation
AVS, ADC Video Systems
FIBERMUX CORPORATION
A California corporation
Fibermux, ADC Fibermux
KENTROX INDUSTRIES, INC.
A Delaware corporation
Kentrox, ADC Kentrox
ADC SYSTEMS INTEGRATION, INC.
A Georgia corporation
Da Tel
ADC MERSUM OY
Finland
ADC WIRELESS SYSTEMS, INC.
A Minnesota corporation
ADC METRICA
United Kingdom
ADC NewNet, Inc.
A Minnesota corporation
INFORMATION TRANSMISSION SYSTEMS CORP.
A Pennsylvania corporation
ADC ITS
SKYLINE TECHNOLOGY, INC.
A California corporation
<PAGE>
ADC EUROPE N.V.
Belgium
ADC, ADC Europe
ADC de MEXICO, S.A. de C.V.
Mexico
ADC TELECOM CANADA INC.
Canada
ADC TELECOMMUNICATIONS (HOLDINGS) PTY. LIMITED
Australia
ADC TELECOMMUNICATIONS SINGAPORE PTE. LIMITED
Singapore
ADC TELECOMMUNICATIONS U.K. LTD
United Kingdom
ADC, ADC Telecommunications
ADC TELECOMUNICACIONES VENEZUELA, S.A.
Venezuela
ADC INTERNATIONAL, INC.
Barbados
ADC TELECOMMUNICATIONS GmbH
Germany
ADC TELECOMUNICACOES DO BRASIL LTDA.
Brasil
ADC WIRELESS MICROSYSTEMS, INC.
California
ADC MICROCELLULAR SYSTEMS LTD.
United Kingdom
THE APEX GROUP, INC.
Maryland
ADC Apex
<PAGE>
PCS SOLUTIONS LLC
Delaware
ADC INTERNATIONAL OUS, INC.
Minnesota
SHANGHAI ADC TELECOMMUNICATIONS EQUIPMENT CO. LTD. (50% owned)
People's Republic of China
NANJING ADC BROADBAND COMMUNICATIONS CO. LTD. (60% owned)
People's Republic of China
<PAGE>
EXHIBIT 23-a
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated November 25, 1997, included in this Form 10-K, and incorporated by
reference into the Company's previously filed Registration Statements, File Nos.
2-83584, 33-22654, 33-40356, 33-40357, 33-52635, 33-52637, 33-58407, 33-58409,
33-59445, 333-02133, 333-04481, 333-07309, 333-15283, 333-25311, 333,25241,
333-25569, 333-25623, 333-32023, 333-37419 and 333-37619.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 16, 1998
<PAGE>
EXHIBIT 24-a
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of William J. Cadogan, Robert E. Switz and David
F. Fisher, with full power to each to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
the Annual Report on Form 10-K of ADC Telecommunications, Inc. (the "Company")
for the Company's fiscal year ended October 31, 1997, and any or all amendments
to said Annual Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and to file the same with such other authorities as necessary,
granting unto each such attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each such
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this 2nd day
of December, 1997, by the following persons.
/s/ William J. Cadogan /s/ James C. Castle
- ----------------------------------- -----------------------------------
William J. Cadogan James C. Castle, Ph.D.
/s/ Thomas E. Holloran /s/ B. Kristine Johnson
- ----------------------------------- -----------------------------------
Thomas E. Holloran B. Kristine Johnson
/s/ Charles W. Oswald /s/ Irene M. Qualters
- ----------------------------------- -----------------------------------
Charles W. Oswald Irene M. Qualters
/s/ Alan E. Ross /s/ Jean-Pierre Rosso
- ----------------------------------- -----------------------------------
Alan E. Ross Jean-Pierre Rosso
/s/ Donald M. Sullivan /s/ John D. Wunsch
- ----------------------------------- -----------------------------------
Donald M. Sullivan John D. Wunsch
/s/ Warde F. Wheaton
- -----------------------------------
Warde F. Wheaton
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES, FOR THE
FISCAL YEAR ENDED OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 109,794
<SECURITIES> 0
<RECEIVABLES> 246,241<F1>
<ALLOWANCES> 4,077
<INVENTORY> 168,379<F2>
<CURRENT-ASSETS> 549,467
<PP&E> 401,925
<DEPRECIATION> (186,248)
<TOTAL-ASSETS> 936,303
<CURRENT-LIABILITIES> 182,399
<BONDS> 0
0
0
<COMMON> 26,702
<OTHER-SE> 724,093
<TOTAL-LIABILITY-AND-EQUITY> 936,303
<SALES> 1,164,450
<TOTAL-REVENUES> 1,164,450
<CGS> 621,811
<TOTAL-COSTS> 621,811
<OTHER-EXPENSES> 376,975
<LOSS-PROVISION> 2,181
<INTEREST-EXPENSE> 393
<INCOME-PRETAX> 170,057
<INCOME-TAX> 61,220
<INCOME-CONTINUING> 108,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,837
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<FN>
<F1> Amount is net of allowance for bad debts and returns and allowances.
<F2> Amount is net of obsolescence reserves.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99-a
Cautionary Statement Regarding Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor legislation. This Form
10-K, the Company's Annual Report to Shareholders, any Form 10-Q or Form 8-K of
the Company or any other written or oral 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. The
words "believe," "expect," "anticipate," "intends," "estimate," "forecast,"
"project" and similar expressions identify forward-looking statements.
The Company wishes to caution investors that any forward-looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to the Risk Factors listed below (many of which have been discussed in prior SEC
filings by the Company). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution investors
that other factors may in the future prove to be important in affecting the
Company's results of operations. New factors emerge from time to time and it is
not possible for management to predict all of such factors, nor can it assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views 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.
RISK FACTORS
RAPID TECHNOLOGICAL CHANGE AND IMPORTANCE OF NEW PRODUCTS. The
telecommunications equipment industry is characterized by rapid technological
change, evolving industry standards, changing market conditions and frequent new
product introductions and enhancements. The introduction of products embodying
new technologies or the emergence of new industry standards can render existing
products or products under development obsolete or unmarketable. ADC's ability
to anticipate changes in technology and industry standards and successfully to
develop and introduce new products on a timely basis will be a significant
factor in ADC's ability to grow and remain competitive. New product development
often requires long-term forecasting of market trends, development and
implementation of new technologies and processes and a substantial capital
commitment. ADC has invested and continues to invest substantial resources
toward the development of new products. Development and customer acceptance of
new products is inherently uncertain, and there can be no assurance that ADC
will successfully complete the commercialization of new products on a timely
basis or that such products will be commercially successful. Any failure by ADC
to anticipate or respond on a cost-effective and timely basis to technological
developments, changes in industry standards or customer requirements, or any
significant delays in product development or introduction, could have a material
adverse effect on ADC's business, operating results and financial condition.
UNCERTAIN MARKET FOR BROADBAND NETWORK PRODUCTS. Over the past several
years, ADC's principal product offerings have generally consisted of
copper-based and fiber-based products designed to address the needs of its
customers for connectivity, transmission and networking applications on
traditional telephony networks. However, with the growth of multimedia and the
associated development of enhanced voice, video and data transmission
technologies, ADC's recent product offerings and research and development
efforts have been increasingly focused on addressing the broadband
telecommunications equipment market through the use of new or different
technologies. The market for broadband
1
<PAGE>
telecommunications products is emerging and rapidly changing. ADC's future
growth is dependent in part on its ability to successfully develop and
commercially introduce new products in each of its product groups addressing
this market, as well as the growth in this market. The growth in the market for
such broadband telecommunications products is dependent on a number of factors,
including regulatory and legal developments and end-user demand for integrated
voice, video, data and other network services. There can be no assurance that
the market for broadband telecommunications products will develop rapidly, or
that there can be reliable predictions made of technological trends or products
in this field. In addition, to the extent this market develops, there can be no
assurance that ADC's products will meet with market acceptance or be profitable.
There also can be no assurance that public network providers will increase or
maintain consistent levels of capital expenditures for deployment of
telecommunications network systems, equipment or technologies, or that they will
respond quickly or favorably to regulatory changes in the telecommunications
equipment industry.
COMPETITION. Competition in the telecommunications equipment industry is
intense, and ADC believes that competition may increase substantially with the
deployment of broadband networks and the recent regulatory changes. See
"Changing Regulatory Environment." Many of ADC's foreign and domestic
competitors have more extensive engineering, manufacturing, marketing, financial
and personnel resources than ADC. ADC believes its success in competing with
other manufacturers of telecommunications products depends primarily on its
engineering, manufacturing and marketing skills, the price, quality and
reliability of its products, and its delivery and service capabilities. ADC
anticipates increasing pricing pressures from current and future competitors in
certain of the markets for its products. In addition, ADC believes that
technological change, the increasing addition of data, video and other services
to networks, continuing regulatory change and industry consolidation or new
entrants will continue to cause rapid evolution in the competitive environment
of the telecommunications equipment market, the full scope and nature of which
is difficult to predict at this time. Increased competition could result in
price reductions, reduced margins and loss of market share by ADC. There can be
no assurance that ADC will be able to compete successfully with its existing or
new competitors or that competitive pressures faced by ADC will not materially
and adversely affect its business, operating results and financial condition.
FLUCTUATIONS IN OPERATING RESULTS. ADC's operating results may
fluctuate significantly from quarter to quarter due to several factors,
including, without limitation, the volume and timing of orders from, and
shipments to, major customers, the timing of and the ability to obtain new
customer contracts, the timing of new product announcements and the
availability of product by ADC or its competitors, overall level of capital
expenditures by public network providers, market acceptance of new and
enhanced versions of ADC's products, variations in the mix of products ADC
sells or its sales channels, and the availability and cost of key components.
Many of the foregoing factors, in turn, are affected by the changing
competitive environment in which the Company's customers operate and may be
affected by consolidation among telecommunications service providers. In
addition, the Company is experiencing growth through acquisition and
expansion, and its recent results of operations may not be indicative of
results to be achieved in future periods. ADC's expense levels are based in
part on expectations of future revenues. If revenue levels in a particular
period do not meet expectations, operating results will be adversely
affected. In addition, ADC's results of operations are subject to seasonal
factors. ADC historically has experienced a stronger demand for its products
in the fourth fiscal quarter, primarily as a result of ADC year-end
incentives and customer budget cycles, and has experienced a weaker demand
for its products in the first fiscal quarter, primarily as a result of the
number of holidays in late November, December and early January and a general
industry slowdown during that period. There can be no assurance that these
historical seasonal trends will continue in the future.
CHANGING REGULATORY ENVIRONMENT. The telecommunications industry is
subject to regulation in the United States and other countries. ADC's business
is dependent upon the continued growth of the telecommunications industry in the
United States and internationally. Federal and state regulatory agencies
regulate most of ADC's domestic customers. On January 3, 1996, the U.S.
Congress passed the Telecommunications Act of 1996 (the "Telecommunications
Act"). The President of the United States signed the Telecommunications Act
into law on February 8, 1996. The Telecommunications Act will lift certain
restrictions on the ability of companies, including Regional Bell Operating
Companies ("RBOCs") and other customers of ADC, to compete with one another and
change the regulation of the telecommunications industry. While ADC believes
that the changes in regulation of the
2
<PAGE>
telecommunications industry could increase ADC's opportunities to provide
solutions for its customers' voice, data and video needs, this is dependent on
the reaction of ADC's existing and prospective customers to such regulatory
trends. To date, increased competition among telecommunications service
providers as contemplated by the Telecommunications Act has not been fully
realized and there can be no assurance as to the timing and intensity of such
competition. The effect on the market for ADC's products also is difficult to
predict at this time, and there can be no assurance that competition in ADC's
product market will not intensify as a result of such changes in regulation.
Changes in current or future laws or regulations, in the United States or
elsewhere, could materially and adversely affect ADC's business.
INTERNATIONAL OPERATIONS. Export sales accounted for 18%, 21% and 21% of
ADC's net sales in fiscal 1995, 1996, and 1997, respectively, and ADC expects
that export sales may increase as a percentage of net sales in the future. In
addition, ADC owns or subcontracts manufacturing operations located in Mexico,
Australia, China, Finland, and the United Kingdom. Due to its export sales and
its international manufacturing operations, ADC is subject to the risks of
conducting business internationally, including unexpected changes in, or
impositions of, legislative or regulatory requirements, fluctuations in the U.S.
dollar which could materially and adversely affect U.S. dollar revenues or
operating expenses, tariffs and other barriers and restrictions, potentially
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, and the burdens of complying with a variety of
foreign laws and telecommunications standards. ADC also is subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships, in connection with its international
operations. ADC maintains business operations throughout Asia, and has business
arrangements in Korea, Indonesia and Malaysia. Economic conditions in these
countries, and in Asia in general, which first came to light in November 1997,
represent a potential risk to these business arrangements. There can be no
assurance that the Company's business arrangements in Asia will not suffer
adverse impact from these conditions. There also can be no assurance that such
factors will not materially and adversely affect ADC's operations in the future
or require ADC to modify significantly its current business practices. In
addition, the laws of certain foreign countries may not protect ADC's
proprietary technology to the same extent as do the laws of the United States.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. ADC's future success depends in part
upon its proprietary technology. Although ADC attempts to protect its
proprietary technology through patents, copyrights and trade secrets, it also
believes that its future success will depend upon product development,
technological expertise and distribution channels. There can be no assurance
that ADC will be able to protect its technology, or that competitors will not be
able to develop similar technology independently. ADC has received and may in
the future receive from third parties, including some of its competitors,
notices claiming that it is infringing third-party patents or other proprietary
rights. There can be no assurance that ADC would prevail in any litigation over
third-party claims, or that it would be able to license any valid and infringed
patents on commercially reasonable terms. Furthermore, litigation, regardless
of its outcome, could result in substantial cost to and diversion of effort by
ADC. Any litigation or successful infringement claims by third parties could
materially and adversely affect ADC's business, operating results and financial
condition.
VOLATILITY OF STOCK PRICE. Based on the trading history of its stock, ADC
believes factors such as announcements of new products by ADC or its
competitors, quarterly fluctuations in ADC's financial results, customer
contract awards, developments in telecommunications regulation and general
conditions in the telecommunications equipment industry have caused and are
likely to continue to cause the market price of ADC's Common Stock to fluctuate
substantially. In addition, telecommunications equipment company stocks have
experienced significant price and volume fluctuations that often have been
unrelated to the operating performance of such companies. This market volatility
may adversely affect the market price of ADC's Common Stock.
3
