<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-1424
ADC TELECOMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0743912
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12501 WHITEWATER DRIVE, MINNETONKA, MN 55343
---------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 938-8080
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.20 par value: 135,500,744 shares as of June 9, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 124,708 $ 287,700
Accounts receivable 336,761 365,989
Inventories 215,759 175,763
Prepaid income taxes and other assets 48,899 33,418
---------- ----------
Total current assets 726,127 862,870
PROPERTY AND EQUIPMENT, net 279,299 256,961
OTHER ASSETS, principally goodwill 302,365 180,756
---------- ----------
$1,307,791 $1,300,587
---------- ----------
---------- ----------
LIABILITIES AND SHAREOWNERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 81,415 $ 67,150
Accrued liabilities 164,167 115,559
Note payable 70,000 200,000
Current maturities of long-term debt 361 735
---------- ----------
Total current liabilities 315,943 383,444
LONG-TERM DEBT, less current maturities 9,464 2,769
---------- ----------
Total liabilities 325,407 386,213
SHAREOWNERS' INVESTMENT
(135,350 and 134,897 shares
outstanding, respectively) 982,384 914,374
---------- ----------
$1,307,791 $1,300,587
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED FOR THE SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $420,129 $334,635 $787,334 $621,031
-------- -------- -------- --------
COST OF PRODUCT SOLD 218,545 177,668 410,916 330,514
-------- -------- -------- --------
GROSS PROFIT 201,584 156,967 376,418 290,517
-------- -------- -------- --------
Gross profit percentage 48.0% 46.9% 47.8% 46.8%
-------- -------- -------- --------
EXPENSES:
Research and development 40,193 37,097 79,180 68,036
Selling and administration 87,163 64,409 164,890 126,501
Goodwill amortization 5,096 2,968 9,872 5,506
Non-recurring charges -- -- 60,327 --
-------- -------- -------- --------
Total expenses 132,452 104,474 314,269 200,043
-------- -------- -------- --------
OPERATING INCOME 69,132 52,493 62,149 90,474
OTHER INCOME (EXPENSE), NET:
Interest (426) 1,115 (1,264) 2,559
Other (704) (780) (1,582) (1,114)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 68,002 52,828 59,303 91,919
PROVISION FOR INCOME TAXES 23,120 18,489 27,646 32,172
-------- -------- -------- --------
NET INCOME $44,882 $34,339 $31,657 $59,747
-------- -------- -------- --------
-------- -------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING
(BASIC) 135,173 134,275 135,190 133,997
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE (BASIC) $ 0.33 $ 0.26 $ 0.23 $ 0.45
-------- -------- -------- --------
-------- -------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING
(DILUTED) 139,042 136,283 138,373 136,367
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE (DILUTED) $ 0.32 $ 0.25 $ 0.23 $ 0.44
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,657 $ 59,747
Adjustments to reconcile net income to net cash from
operating activities -
Non-recurring charges 60,327 --
Depreciation and amortization 43,521 26,430
Reduction in deferred compensation 368 278
Other 3,474 663
Changes in assets and liabilities
Accounts receivable 46,878 (19,235)
Inventories (18,365) (7,589)
Prepaid income taxes and other assets (3,623) (4,137)
Accounts payable 6,954 (11,434)
Accrued liabilities 18,841 (973)
--------- ---------
Total cash from operating activities 190,032 43,750
--------- ---------
INVESTMENT ACTIVITIES:
Acquisitions (192,422) (16,000)
Property and equipment additions, net (46,588) (46,702)
Long-term investments (13,146) 888
--------- ---------
Total cash used for investment activities (252,156) (61,814)
--------- ---------
FINANCING ACTIVITIES:
Decrease in debt (128,108) (189)
Common stock issued 28,170 10,494
--------- ---------
Total cash from/(used for) financing activities (99,938) 10,305
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (930) (264)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (162,992) (8,023)
CASH AND CASH EQUIVALENTS, beginning of period 287,700 109,794
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 124,708 $ 101,771
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2ND 1ST 4TH 3RD
QUARTER QUARTER QUARTER QUARTER
1999 1999 1998 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 420,129 $ 367,205 $ 396,151 $ 362,496
COST OF PRODUCT SOLD 218,545 192,371 212,382 193,641
--------- --------- --------- ---------
GROSS PROFIT 201,584 174,834 183,769 168,855
--------- --------- --------- ---------
Gross profit percentage 48.0% 47.6% 46.4% 46.6%
--------- --------- --------- ---------
EXPENSES:
Research and development 40,193 38,987 34,101 35,775
Selling and administration 87,163 77,727 73,029 68,476
Goodwill amortization 5,096 4,776 3,196 2,954
Non-recurring charges -- 60,327 -- --
--------- --------- --------- ---------
Total expenses 132,452 181,817 110,326 107,205
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 69,132 (6,983) 73,443 61,650
OTHER INCOME (EXPENSE), NET:
Interest (426) (838) 1,012 1,109
Other (704) (878) (3,114) (285)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 68,002 (8,699) 71,341 62,474
PROVISION FOR INCOME TAXES 23,120 4,526 24,968 21,867
--------- --------- --------- ---------
NET INCOME (LOSS) $ 44,882 $ (13,225) $ 46,373 $ 40,607
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE (BASIC) $ 0.33 $ (0.10) $ 0.34 $ 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE (DILUTED) $ 0.32 $ (0.10) $ 0.34 $ 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) 135,173 135,206 134,784 134,525
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) 139,042 135,206 136,649 136,826
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 ACCOUNTING POLICIES: The interim information furnished in this
report is unaudited but reflects all adjustments which are necessary,
in the opinion of management, for a fair statement of the results for
the interim periods. The operating results for the six months ended
April 30, 1999, are not necessarily indicative of the operating
results to be expected for the full fiscal year. These statements
should be read in conjunction with ADC's most recent Annual Report on
Form 10-K.
Note 2 INVENTORIES: Inventories include material, labor and overhead and
are stated at the lower of first-in, first-out cost or market.
Inventories at April 30, 1999, and October 31, 1998, consisted of (in
thousands):
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
------------- -------------
<S> <C> <C>
Purchased materials and $199,799 $156,006
manufactured products
Work-in-process 15,960 19,757
-------- --------
$215,759 $175,763
-------- --------
-------- --------
</TABLE>
Note 3 NON-RECURRING CHARGES: The non-recurring charges of $60.3 million
during the quarter ended January 31, 1999 represent restructuring
charges of $30.0 million and the write-off of purchased in-process
research and development charges of $30.3 million from acquisitions.
In November 1998, ADC's management approved a restructuring plan,
which included initiatives to integrate the software operations of the
former Wireless Systems Group with the newly formed Integrated
Solutions Group, consolidate unproductive and duplicative facilities,
reposition certain products and dispose of product lines that no
longer fit ADC's current focus and growth strategy. Total accrued
restructuring costs of $30.0 million were charged to operations in the
first quarter related to these initiatives. These restructuring
charges included employee termination costs and other incremental
costs incurred as a direct result of the restructuring plan. Payments
during the second quarter have not had a material effect on cash
flows. ADC expects the restructuring plan to be completed by fiscal
year-end.
6
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Note 4 COMPREHENSIVE INCOME: On November 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting of
Comprehensive Income". The standard requires the display and reporting
of comprehensive income, which includes all changes in shareowners'
equity with the exception of additional investments by shareowners or
distributions to shareowners. Comprehensive income for ADC includes
net income and the effect of translations which is a charge or credit
to the cumulative translation adjustments account within shareowners'
equity. Comprehensive income for the periods ended April 30, 1999 and
1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- -----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 44,882 $ 34,339 $ 31,657 $ 59,747
Changes in cumulative translation
adjustments (2,252) 1,272 (858) (1,983)
-------- -------- -------- --------
Comprehensive income $ 42,630 $ 35,611 $ 30,799 $ 57,764
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Note 5 EARNINGS PER SHARE: Basic earnings per common share was calculated by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share was
calculated by dividing net income by the sum of the weighted average
number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares
utilized in the earnings per share calculations for the periods ended
April 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- ----------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 44,882 $ 34,339 $ 31,657 $ 59,747
Earnings per common share (basic) $ 0.33 $ 0.26 $ 0.23 $ 0.45
Earnings per common share (diluted) $ 0.32 $ 0.25 $ 0.23 $ 0.44
Weighted average common shares
outstanding (basic) 135,173 134,275 135,190 133,997
Effect of dilutive securities - stock
options 3,869 2,008 3,183 2,370
Weighted average common shares
outstanding (diluted) 139,042 136,283 138,373 136,367
</TABLE>
7
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Note 6 In connection with its stock repurchase program, ADC had previously
sold put options to independent third parties that entitled holders
of the options to sell shares of ADC common stock to the Company.
Additionally, ADC had purchased call options (which were subject to
caps) from the same parties that entitled the Company to buy shares
of its common stock. The terms of these arrangements (which ran
until various dates through October 2000) allowed ADC to terminate
the arrangements at the Company's option via net share settlement at
valuations based on predetermined assumptions. During January and
February 1999, ADC elected to settle the arrangements, and according
to their terms ADC received a total of 1,037,622 shares of its common
stock as the net share settlement of its position.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ADC Telecommunications, Inc. ("ADC") offers a broad range of systems
and solutions that enable its customers to create and upgrade their
communications networks to support increasing user demand for voice,
Internet/data and video services. Telephone companies, cable TV operators,
wireless service providers and other communications service providers are
building the infrastructure required to offer high-speed Internet access, data,
video, telephony and other interactive multimedia services to residential and
business customers. Broader network bandwidths are required for these services,
and ADC's development efforts and product offerings are focused on "unlocking
the capacity of the local loop" by eliminating bottlenecks and increasing the
speed and efficiency of communications networks. The local loop is the last mile
of the communications network from the local service providers' offices through
the network equipment that connects to the end-user's residence or business.
ADC offers hardware and software systems, and integrated solutions
within the following three product groups: Broadband Connectivity, Broadband
Transport and Access, and Integrated Solutions. Due to changes in the internal
reporting structure of certain product lines during the second quarter ADC has
reorganized into three product groups. Each of these groups is described below.
BROADBAND CONNECTIVITY products are designed for use in twisted-pair,
coaxial, fiber-optic or wireless transmission networks and are sold to both
public and private global service providers. ADC's broadband connectivity
products provide the physical contact points for connecting different
telecommunications system components and gaining access to communications system
circuits for the purpose of installing, testing, monitoring, accessing,
managing, reconfiguring, splitting and multiplexing such circuits within the
local loop portion and central office of global public and private networks.
ADC's Broadband Connectivity products are sold to the Regional Bell Operating
Companies, other telephone companies, long distance carriers, other public
network providers (including cable TV operators and wireless service providers),
international network operators, private network providers and original
equipment manufacturers. Broadband Connectivity products include network
access/connection devices for twisted-pair and coaxial networks, network
access/connection devices for fiber-optic networks, modular fiber-optic cable
routing systems, outside plant cabinets and other enclosures, and wireless
infrastructure equipment. Broadband Connectivity products also include ADC's
family of CityWideTM wireless systems products, which consist of wideband
digital microcells and repeaters for extending cellular communication coverage,
both in buildings and outdoors.
BROADBAND TRANSPORT AND ACCESS products enable incumbent local
exchange carriers (ILEC), competitive local exchange carriers (CLEC),
inter-exchange carriers (IXC), community antenna television (CATV) and wireless
service providers to transport and/or provide access to the services they sell
to their business and residential customers. These products are best categorized
as "Service Delivery Infrastructure", and the services being
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delivered include voice, data (including Internet services), and video.
Generally, these products are aimed at upgrading a service provider's network to
broadband capabilities while also introducing new service delivery functionality
and cost effectiveness into the network.
Broadband Transport and Access transport products operate in the
Interoffice and/or Loop Transport portion of the service provider's network
and include Soneplex(R), Cellworx(TM), Homeworx(TM), DV6000(TM) and
BroadAccess(TM). Soneplex delivers T1-based services over copper or fiber
facilities and approximately 25% of all T1 access circuits in North America
are currently delivered over Soneplex. Cellworx, which is a next-generation
OC-12/48 SONET/SDH transport element integrating ATM, SONET/SDH and xDSL
technologies, is a broad-based service delivery infrastructure product aimed
at reducing a carrier's capital and operating costs of delivering a full
range of high-speed and low-speed services over copper (HDSL, ADSL and
others) or fiber facilities. Homeworx utilizes Hybrid Fiber/Coax (HFC)
technology to deliver video-only, telephony-only, or integrated video,
telephony and data services over coax loop facilities (which are most
prominently owned by CATV operators). ADC also provides a family of analog
fiber-optic transmitter and node products that CATV operators use to upgrade
their networks for HFC readiness. DV6000 transmits a variety of signal types
using a high-speed, uncompressed digital format over fiber facilities, and is
used in the super trunking portions of the cable TV, broadcast and a range of
interactive video networks, including distance learning government and campus
networks. BroadAccess, acquired as part of ADC's 1998 acquisition of Teledata
Communications, Ltd. during the first quarter of Fiscal Year 1999, is a
family of compact and flexible Digital Loop Carrier systems which are
generally used to deliver voice and data services.
Broadband Transport and Access products include both Customer Located
Devices (which are part of the carrier's network) as well as Customer Premise
Devices (which are owned by the carrier's business customer). These products can
work alone or in conjunction with one of ADC's transport systems or with other
vendors' transport systems. These devices include DSU/CSUs, T1/E1 multiplexers
and Integrated Access Devices (offering a wide variety of voice, data and video
interfaces), T3/E3 multiplexers and ATM access concentrators.
Through its subsidiary Phasor Electronics, an Austrian-based
manufacturer of radio frequency amplifiers, ADC has an established international
customer base as well as the critical local engineering and support services
required to compete in the rapidly growing European market for cable TV
amplifiers. Phasor's customer base includes major European cable television
operators and original equipment manufacturers.
INTEGRATED SOLUTIONS products consist of project management, technical
consulting and design, implementation, reliability, performance and training
services, and software systems, which support multi-division and multi-vendor
solutions. ADC provides services and software primarily to telephone operating
companies, cable TV operators, other common carriers and users of private
communications networks. ADC is a developer of intelligent network
communications software, including Signaling Systems 7 (SS7) technology,
wireless intelligent network products (such as short messaging servers) and
products compliant with the Communications Assistance to Law Enforcement Act
(CALEA). ADC designs and
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sells communications network performance management software to wireline and
wireless service providers. Integrated Solutions also provides ADC
SoftXchange(TM) network management software and operations and business support
system services.
Historically, ADC's principal product offerings generally consisted of
copper-based and fiber-optic-based products designed to address the needs of its
customers for transmission and connectivity on traditional telephony networks.
With the growth of multimedia applications and the related development of
enhanced voice, Internet/data and video services, ADC's more recent product
offerings and research and development efforts have increasingly focused on
emerging technologies and hardware, software and service offerings for broadband
communications applications. The market for broadband communications hardware
and software systems and integrated solutions is evolving and rapidly changing.
ADC's 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 and also dependent on the growth of the market. The growth in the
market for such broadband communications products is dependent on a number of
factors, including the amount of capital expenditures by communications service
providers, regulatory and legal developments, changes to capital expenditure
rates by communications service providers (which could result from the ongoing
consolidation of customers in the market as well as the addition of new customer
entrants to the market) and end-user demands for integrated voice,
Internet/data, video and other communications services. There can be no
assurance that ADC's new or enhanced products and services will meet with market
acceptance or be profitable.
ADC's operating results may fluctuate significantly from quarter to
quarter due to several factors. ADC 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. ADC's expense levels
are based in part on management's expectations of future revenues. Although
management has and will continue to take measures to adjust expense levels,
if revenue levels in a particular period fluctuate, operating results may 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 customer
budget cycles and ADC 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 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. In addition, it
is possible that some of ADC's customers may reduce their level of
expenditures for ADC's products, particularly software products, in the last
half of calendar year 1999 as a precautionary measure relating to the Year
2000 problem with computer systems generally.
YEAR 2000 MATTERS
Many currently installed computer systems and software are coded to
accept only two-digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to
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be upgraded or replaced in order to comply with Year 2000 requirements. The
potential global impact of the Year 2000 problem is not known, and, if not
corrected in a timely manner, could affect ADC and the U.S. and world economy
generally.
ADC's project team (consisting of representatives from its
information technology, finance, business development, manufacturing, product
development, sales, marketing and legal departments) is addressing internal
and external Year 2000 issues. ADC's internal financial, manufacturing and
other computer systems have been reviewed to assess and minimize Year 2000
issues. ADC's assessment of internal systems includes its information
technology ("IT") as well as non-IT systems (which systems may contain
embedded technology in manufacturing or process control equipment containing
microprocessors or other similar circuitry). ADC's Year 2000 readiness
program includes the following phases: identifying systems that may be
modified or replaced; carrying out modifications to existing systems or
convert to new systems; and conducting validation testing of various systems
and applications to determine their readiness. ADC is currently finalizing
the second phase and is in the process of the third phase of this program for
its corporate-level IT systems and finishing the second and beginning the
third phase for other systems.
ADC's product development processes currently contain steps to include
year 2000 readiness verification for all current and future products. Most of
ADC's existing products are currently Year 2000 ready, and ADC believes that all
of its active products will either be Year 2000 ready or have an upgrade path
identified on the ADC Year 2000 Internet web page prior to October 31, 1999.
Several obsolete or ADC discontinued products will not be upgraded and are so
listed on ADC's web page.
The amount of work required to address Year 2000 issues is not
expected to be extensive. ADC has replaced certain of its financial and
operational systems in the last several years, and management believes that the
new equipment and software substantially address Year 2000 issues. Existing
hardware and software has been assessed and required modifications have been
identified and/or are in the process of being identified.
ADC retained a consulting firm to assess ADC's corporate-level IT
system readiness for Year 2000. The firm concluded that more than 75% of these
hardware and software systems are Year 2000 ready. ADC has addressed the
remaining 25% and is assessing the other hardware and software used by ADC and
its business units for Year 2000 readiness. ADC estimates that it will complete
its Year 2000 readiness program for all of its significant internal systems by
October 31, 1999.
ADC retained the same consulting firm to assess ADC's engineering
design systems readiness for Year 2000. The firm concluded that 80% of ADC's
engineering application software is or is in the process of becoming Year 2000
ready and 75% of the engineering hardware is or is in the process of becoming
Year 2000 ready. ADC has addressed the remaining hardware and software used by
ADC and its business units for Year 2000 readiness. ADC estimates that it will
complete its Year 2000 readiness program for all of its significant engineering
design systems by October 31, 1999.
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In addition, ADC is requesting assurances from its major suppliers
that they are addressing the Year 2000 issue and that products and services
purchased by ADC from such suppliers will function properly in the Year 2000.
Also, contacts are being made with ADC's major customers. These actions are
intended to help mitigate the possible external impact of the year 2000 problem.
However, it is impossible to fully assess the potential consequences in the
event that service interruptions from suppliers occur or in the event that there
are disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government.
The total estimated cost for resolving ADC's year 2000 issues is
approximately $3.5 million, of which approximately $2.2 million has been spent
through April 30, 1999. The total cost estimate includes the cost of replacing
systems in cases where ADC has accelerated plans to replace such systems that
are not Year 2000 ready. Estimates of year 2000 costs are based on numerous
assumptions, and there can be no assurance that the estimates are correct or
that actual costs will not be materially greater than anticipated.
Based upon assessments to date, ADC believes it will not experience
any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing, or interfacing with major
customers, or with processing orders and billing. However, if certain critical
third-party providers, such as those providers supplying electricity, water, or
telephone service, experience difficulties resulting in disruption of service to
ADC, a shutdown of certain of ADC's operations at individual facilities could
occur for the duration of the disruption.
ADC has a number of preliminary contingency plans (in the event of
a Year 2000 disruption) for its headquarters and major business unit sites,
ranging from primary business systems, to manufacturing processes and
facilities, to customer support procedures. Year 2000 readiness and business
continuity plans will continue to be addressed by ADC's Year 2000 Program
Team for finalization by the end of June 1999. Assuming no major disruption
in service from utility companies or other critical third-party providers,
ADC believes that it will be able to manage its Year 2000 transition without
any material adverse effect on ADC's business, results of operations or
financial condition.
The most reasonably likely worst-case scenario of failure by ADC or
its suppliers or customers to resolve Year 2000 issues could potentially be a
temporary slowdown or cessation of manufacturing operations at one or more of
ADC's facilities, and/or a temporary inability on the part of ADC to timely
process orders and to deliver finished products to customers. Delays in
meeting customers' orders could potentially affect the timing of billings to
and payments received from customers and could result in complaints, charges
or claims. Customers' year 2000 issues could delay the timing of customers'
payments to ADC, or result in a change in spending patterns by customers
which could affect orders and shipments of ADC's products during the
remainder of 1999.
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EURO CONVERSION
On January 1, 1999, several member countries of the European Union
established fixed conversion rates and adopted the Euro as their new common
legal currency. Beginning on such date, the Euro began trading on currency
exchanges while the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, parties can elect to pay for
goods and services and transact business using either the Euro or a legacy
currency. Between January 1, 2002 and July 1, 2002 the participating
countries will introduce Euro hard currency and withdraw all legacy
currencies.
The Euro conversion may affect cross-border competition by creating
cross-border price transparency. ADC is assessing its pricing and marketing
strategy in order to ensure that ADC remains competitive in a broader
European market. ADC is also modifying its information technology systems to
permit transactions to take place in both the legacy currencies and the Euro
and provide for the eventual elimination of the legacy currencies. In
addition, ADC is reviewing whether certain existing contracts will need to be
modified. ADC's currency risk and risk management for operations in
participating countries may be reduced as the legacy currencies are converted
to the Euro. ADC will continue to evaluate issues involving introduction of
the Euro. Based on current information and assessments, ADC does not expect
that the Euro conversion will have a material adverse effect on its business,
results of operations or financial condition.
RISK MANAGEMENT
ADC is exposed to market risk from changes in foreign currency
exchange rates, which could adversely affect ADC's business, results of
operations and financial condition. To a limited extent, while ADC manages
its exposure to these market risks through the use of short-term foreign
currency forward contracts. ADC hedges accounts receivable in foreign
currencies and, to a limited extent, has hedged anticipated transactions with
vendors and customers to further manage risk of fluctuations in currency
exchange rates. While ADC manages exposure to foreign currency fluctuations
relating to customer transactions, a decline in value of currencies may
adversely affect future product sales because ADC's products may become more
expensive for customers to purchase in their local currency.
14
<PAGE>
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three and six months ended April 30, 1999 and 1998 and the
percentage changes in these income and expense items between periods are
contained in the following table:
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
Percentage of Net Sales Between Periods
--------------------------------------------------------- ----------------------------
Three Months Ended Six Months Ended Three Months Six Months
April 30, April 30, Ended Ended
---------------------------- ---------------------------
1999 1998 1999 1998 April 30, April 30,
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0% 25.5% 26.8%
COST OF PRODUCT SOLD (52.0) (53.1) (52.2) (53.2) 23.0 24.3
----- ----- ----- ----- ---- ----
GROSS PROFIT 48.0 46.9 47.8 46.8 28.4 29.6
EXPENSES:
Research and development (9.6) (11.1) (10.1) (11.0) 8.3 16.4
Selling and administration (20.7) (19.2) (20.9) (20.4) 35.3 30.3
Goodwill amortization (1.2) (0.9) (1.3) (0.9) 71.7 79.3
Non-recurring charges -- -- (7.7) -- -- 100.0
----- ----- ----- ----- ---- ----
OPERATING INCOME 16.5 15.7 7.8 14.5 31.7 (31.3)
OTHER INCOME (EXPENSE), NET:
Interest (0.1) 0.3 (0.2) 0.4 NA NA
Other (0.2) (0.2) (0.2) (0.2) (9.7) 42.0
----- ----- ----- ----- ---- ----
INCOME BEFORE INCOME TAXES 16.2 15.8 7.4 14.7 28.7 47.0
PROVISION FOR INCOME TAXES (5.5) (5.5) (3.5) (5.2) 25.0 (14.1)
----- ----- ----- ----- ---- ----
NET INCOME 10.7% 10.3% 3.9% 9.5% 30.7 (47.0)
----- ----- ----- ----- ---- ----
----- ----- ----- ----- ---- ----
</TABLE>
NET SALES: The following table sets forth ADC's net sales for the
three and six-month periods ended April 30, 1999 and 1998 for each of ADC's
functional product groups described above (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
--------------------------------------------- ----------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- --------------------- --------------------
Net % Net % Net % Net %
Product Group Sales Sales Sales Sales
- ------------------- --------- -------- -------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BROADBAND
CONNECTIVITY $ 216.2 51.5% $ 156.0 46.6% $ 391.3 49.7% $ 282.1 45.4%
BROADBAND
TRANSPORT AND 153.4 36.5 137.6 41.1 293.1 37.2 261.3 42.1
ACCESS
INTEGRATED
SOLUTIONS 50.5 12.0 41.0 12.3 102.9 13.1 77.6 12.5
--------- -------- -------- -------- -------- ---------- --------- ---------
TOTAL $ 420.1 100.0% $ 334.6 100.0% $ 787.3 100.0% $ 621.0 100.0%
--------- -------- -------- -------- -------- ---------- --------- ---------
--------- -------- -------- -------- -------- ---------- --------- ---------
</TABLE>
Net sales for the three and six-month periods ended April 30,
1999 were $420.1 million and $787.3 million, reflecting 25.5% and 26.8%
increases, respectively, over the comparable 1998 time periods. These
increases reflected growth in all product groups. Revenue contributions from
acquired companies were $20.4 million and $46.3 million for the three and six
month periods ended April 30, 1999, respectively.
15
<PAGE>
During the quarter and six months ended April 30, 1999, net sales of
Broadband Connectivity products rose by 38.6% and 38.7%, respectively. This
growth reflects continued strong global demand for ADC's DSX products, optical
components, and fiber frames. Broadband Connectivity's sales have grown to
represent approximately half of ADC's net sales. ADC expects that future sales
of Broadband Connectivity products will continue to account for a substantial
portion of its net sales, although these products may decline as a percentage of
total revenues due to the ongoing evolution of technologies in the marketplace.
During the quarter and six months ended April 30, 1999, net sales of
Broadband Transport and Access products rose by 11.5% and 12.2%, respectively.
The growth is primarily a result of the Teledata acquisition which was completed
during the first quarter of Fiscal Year 1999.
During the quarter and six months ended April 30, 1999, Integrated
Solutions net sales increased 23.2% and 32.6%, respectively. This increase
continues to be generated by demand for both system integration services and
software products. This demand has been driven by telecommunication service
providers who are aggressively building and upgrading networks that offer
integrated voice, video and Internet/data services.
GROSS PROFIT: During the quarters ended April 30, 1999 and 1998,
gross profit percentages were 48.0% and 46.9%, respectively. During the
six-month periods ended April 30, 1999 and 1998, gross profit percentages
were 47.8% and 46.8%, respectively. The increase in gross profit percentages
was primarily the result of increased sales volume and product mix within the
Broadband Connectivity Group. ADC anticipates that its future gross profit
percentage will continue to be affected by product mix, the timing of new
product introductions and manufacturing volume, among other factors.
OPERATING EXPENSES: Total operating expenses for the quarters ended
April 30, 1999 and 1998 were $132.5 million and $104.5 million, respectively,
representing 31.5% and 31.2% of net sales, respectively. Total operating
expenses for the six months ended April 30, 1999 and 1998 were $314.3 million
and $200.0 million, respectively, representing 39.9% and 32.2% of net sales,
respectively. Included in the six-month operating expenses in 1999 is a
non-recurring charge of $60.3 million from the three months ended January 31,
1999. This charge included the write-off of purchased in-process research and
development costs resulting from the acquisitions of Teledata Communications,
Hadax Electronics, and Phasor Electronics, along with costs for strategic
restructuring of the Wireless Systems Group product line. The increase in
absolute dollars was also driven by costs associated with acquired companies,
including goodwill amortization, and expanded operations necessary to support
higher business volume. ADC has maintained a constant operating expense to net
sales ratio, excluding the effects of a non-recurring charge and goodwill
amortization.
Research and development expenses were $40.2 million for the quarter
ended April 30, 1999, an increase of 8.3% over $37.1 million for the quarter
ended April 30, 1998. For the six months ended April 30, 1999, research and
development expenses were $79.2 million, representing an increase of 16.4%
over $68.0 million for the six months ended April 30, 1998.
16
<PAGE>
These increases reflect the activities from acquired companies plus substantial
product development and introduction efforts in all product groups. ADC 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 ADC to remain competitive. Accordingly,
ADC intends to continue to allocate substantial resources to product development
for each of the product groups. However, ADC 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 $87.2 million for the quarter
ended April 30, 1999, representing an increase of 35.3% over $64.4 million
for the quarter ended April 30, 1998. For the six months ended April 30, 1999,
selling and administration expenses were $164.9 million, an increase of 30.3%
over $126.5 million for the six months ended April 30, 1998. These increases
reflect selling activities of acquired companies, new product introductions and
additional personnel related to expanded operations.
Several of ADC's acquisitions have been accounted for as purchase
transactions in which the initial purchase prices exceeded the fair value of
the acquired assets. As a result of ADC's acquisition activity, goodwill
amortization increased to $5.1 million in the quarter ended April 30, 1999
compared to $3.0 million in the quarter ended April 30, 1998. Goodwill
amortization for the six months ended April 30, 1999 has increased to $9.9
million from $5.5 million for the six months ended April 30, 1998.
OTHER INCOME (EXPENSE), NET: For the three-month and six-month
periods ended April 30, 1999, net interest expense was $0.4 million and $1.3
million, respectively. Net interest income for the three-month and six-month
periods ended April 30, 1998 was $1.1 million and $2.6 million, respectively.
This change reflects the temporary use of debt to finance recent acquisitions.
Other expense primarily represents the gain or loss on foreign
exchange transactions, the sale of fixed assets and ADC's share of net operating
results of its investments in other companies that are accounted for on an
equity basis.
INCOME TAXES: The effective income tax rate for the six months ended
April 30, 1999 was significantly affected by non-tax deductible purchased
in-process research and development charges. These expenses are associated with
the acquisitions made during the first six months of the current fiscal year. In
addition, a higher marginal rate of 37% was applied to restructuring expenses.
Excluding the impact of purchased in-process research and development and the
higher rate used for restructuring charges, the effective income tax rate was
34% and 35% for the three-month and six-month periods ended April 30, 1999 and
1998, respectively. The rate reduction reflects the utilization of foreign tax
incentives and other strategies to minimize global income taxes.
NET INCOME: Net income was $44.9 million (or $0.32 per diluted share)
for the quarter ended April 30, 1999, an increase of 30.7% over $34.3 million
(or $0.25 per diluted share) for
17
<PAGE>
the quarter ended April 30, 1998. Net income was $31.7 million (or $0.23 per
diluted share) for the six months ended April 30, 1999, a decrease of 47.0% over
$59.7 million (or $0.44 per diluted share) for the six months ended April 30,
1998. Excluding a $47 million, net of tax, non-recurring charge recorded in the
first quarter of 1999, six-month net income would have been $79 million, or
$0.57 per diluted share. The non-recurring charge is discussed in Note 3 to the
Unaudited Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, primarily short-term investments in
commercial paper with maturities of less than 90 days, decreased $163.0
million and $8.0 million during the six-month periods ended April 30, 1999
and 1998, respectively. The major cause of the 1999 decrease was the use of
cash for the acquisition of Teledata. To prepare for the acquisition, ADC
borrowed $200.0 million late in fiscal 1998, resulting in a $287.7 million
temporary cash balance at year-end. During fiscal 1999, generating $190.0
million of cash from operations has allowed ADC to reduce its note payable
from $200.0 million to $70.0 million. Compared to fiscal 1998, ADC is
generating substantially greater cash from operations in fiscal 1999 as a
result of improved profitability and better collections of accounts
receivable. The major elements of the fiscal 1998 cash flows were cash
provided by operations of $43.8 million offset by cash used in an acquisition
and the purchase of property and equipment ($46.7 million).
ADC believes that current cash on hand, cash generated from operating
activities, and available credit facilities will be adequate to fund its working
capital requirements and planned capital expenditures for the duration of the
fiscal year. However, ADC 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.
At April 30, 1999, ADC has a $340 million five-year credit facility
which is available for general corporate purposes, of which $70 million was
outstanding at April 30, 1999 at an interest rate equal to the commercial
paper interest rate plus 25 basis points.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 ADC'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 ADC's cash
balances and cash generated from operating and financing activities for ADC's
future liquidity and capital resource needs. ADC cautions that any
forward-looking statements made by ADC in this Form 10-Q or in other
announcements made by ADC are further qualified by important factors that could
cause actual
18
<PAGE>
results to differ materially from those in the forward-looking statements,
including, without limitations, the factors set forth on Exhibit 99 to this Form
10-Q.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 26, 1999, ADC announced the signing of a
definitive agreement to acquire the assets of Spectracom, Inc., a
developer of high-powered pump laser chips and modules for use in
fiber-optic networks. The acquisition is expected to provide ADC
with further depth in the burgeoning optics market and position
ADC to be a major supplier of both passive and active optical
components and modules to telecommunications original equipment
manufacturers (OEMs). The transaction is valued at up to $105
million, with $60 million paid in cash at closing and an
additional amount of up to $45 million to become payable if
certain technology developments are accomplished. The
Spectracom acquisition closed on June 10, 1999.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
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.)
99-a Cautionary Statement Regarding Forward-Looking
Statements
27-a Financial Data Schedule.
b. Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: June 11, 1999 ADC TELECOMMUNICATIONS, INC.
By: /S/ ROBERT E. SWITZ
--------------------------------
Robert E. Switz
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer,
Duly Authorized Officer)
22
<PAGE>
ADC TELECOMMUNICATIONS, INC.
EXHIBIT INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1999
EXHIBIT NO. DESCRIPTION
----------- -----------
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.)
99-a Cautionary Statement Regarding Forward-Looking
Statements
.................
27-a Financial Data Schedule
.......................................................
23
<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
SIX-MONTH PERIOD ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> APR-30-1999
<CASH> 124,708
<SECURITIES> 0
<RECEIVABLES> 336,761<F1>
<ALLOWANCES> 6,029
<INVENTORY> 215,759<F2>
<CURRENT-ASSETS> 726,127
<PP&E> 538,709
<DEPRECIATION> 259,410
<TOTAL-ASSETS> 1,307,771
<CURRENT-LIABILITIES> 315,943
<BONDS> 0
0
0
<COMMON> 27,070
<OTHER-SE> 955,314
<TOTAL-LIABILITY-AND-EQUITY> 1,307,791
<SALES> 787,334
<TOTAL-REVENUES> 787,334
<CGS> 410,916
<TOTAL-COSTS> 410,916
<OTHER-EXPENSES> 314,269
<LOSS-PROVISION> 794
<INTEREST-EXPENSE> 1,264
<INCOME-PRETAX> 59,303
<INCOME-TAX> 27,646
<INCOME-CONTINUING> 31,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,657
<EPS-BASIC> .23
<EPS-DILUTED> .23
<FN>
<F1>AMOUNT IS NET OF ALLOWANCE FOR BAD DEBTS AND RETURNS
<F2>AMOUNT IS NET OF OBSOLESCENCE RESERVES
</FN>
</TABLE>
<PAGE>
EXHIBIT 99-a
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
ADC Telecommunications, Inc. ("ADC") 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 act.
This Form 10-Q and ADC's Annual Report to Shareholders, any Form 10-K, Form
10-Q or Form 8-K of ADC or any other written or oral statements made by or on
behalf of ADC may include forward-looking statements which reflect ADC'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.
ADC wishes to caution you that any forward-looking statements made by
or on behalf of ADC 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 factors
listed under the caption "Risk Factors" below (many of which have been discussed
in prior SEC filings by ADC). Though ADC has attempted to list comprehensively
these important factors, ADC wishes to caution investors that other factors may
in the future prove to be important in affecting ADC'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 ADC 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.
You are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of ADC's views as of the date the
statement was made. ADC 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. In our industry, we also face evolving industry
standards, changing market conditions and frequent new product introductions
and enhancements. The introduction of products using new technologies or the
adoption of new industry standards can make existing products or products
under development obsolete or unmarketable. In order to grow and remain
competitive, we will need to anticipate changes in technology and industry
standards and successfully develop and introduce new products on a timely
basis in order 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 recently invested, and we will continue to invest,
substantial resources for the development of new products. Development and
customer acceptance of new products is inherently uncertain. As a result, we
cannot predict whether we will successfully develop new products on a timely
basis or whether the products we develop will be commercially successful. If
we fail to anticipate or respond on a cost-effective and timely basis to
technological developments, changes in industry standards or customer
requirements, or if we have any significant delays in product development or
introduction, our business, operating results and financial condition could
be materially and adversely affected.
UNCERTAIN MARKET FOR BROADBAND NETWORK PRODUCTS
In the past, our principal product offerings have been copper-based and
fiber-optic-based products designed to connect and transmit information on
traditional telephony networks. With the growth of multimedia applications and
the development of enhanced voice, video and Internet/data services, ADC's
recent product offerings and research and development efforts have been and are
focused on new technologies and hardware, software and service offerings for the
broadband telecommunications applications. The market for broadband
1
<PAGE>
telecommunications hardware, software and services is rapidly changing. Our
future growth is dependent in part on its ability to successfully develop and
commercially introduce new products for this market. Our future will also depend
on the growth of this market. The growth in the market for broadband
telecommunications products is dependent on a number of factors. These factors
include the amount of capital expenditures by public network providers,
regulatory and legal developments, changes to capital expenditure rates by other
network providers (which could result from consolidation of customers in the
market as well as the addition of new customers to the market) and end-user
demand for integrated voice, video, Internet/data and other network services. We
cannot predict whether the market for broadband telecommunications products will
develop rapidly. Also, we cannot predict technological trends or new products in
this market. In addition, to the extent this market develops, ADC cannot predict
whether its products will meet with market acceptance or be profitable. We may
not be able to compete successfully, and competitive pressures may materially
and adversely affect our business, operating results and financial condition.
COMPETITION
Competition in the telecommunications equipment industry is intense. We
believe that competition may increase substantially with the increased use of
broadband networks and recent regulatory changes. Many of ADC's foreign and
domestic competitors have more extensive engineering, manufacturing, marketing,
financial and personnel resources than we have. We believe our success in
competing with other manufacturers of telecommunications products will depend
primarily on our engineering, manufacturing and marketing skills, the price,
quality and reliability of its products, and its delivery and service
capabilities. We anticipate increasing pricing pressures from current and future
competitors. In addition, we believe that technological change, the increasing
addition of Internet/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. The full scope and nature
of these changes is difficult to predict at this time. Increased competition
could result in price reductions, reduced margins and loss of market share by
ADC. We cannot predict whether we will be able to compete successfully with our
existing products or with new competitors. Competitive pressures faced by ADC
could materially and adversely affect our business, operating results and
financial condition.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results vary significantly from quarter to quarter.
These fluctuations are the result of the volume and timing of orders from and
shipments to major customers, the timing of and the ability to obtain new
customer contracts and the timing of new product announcements. Our quarterly
results also vary due to the availability of our product and those of our
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 these factors are affected
by the changing competitive environment in which our customers operate.
Competition may be affected by consolidation among telecommunications service
providers. In addition, we are growing through acquisition and expansion, and
our recent results of operations may not be a good predictor of our results
in future periods. Our expense levels are based in part on expectations of
future revenues. If revenue levels in a particular period are lower than
expected, our operating results will be adversely affected. In addition, our
results of operations are also subject to seasonal factors. We historically
have had stronger demand for our products in the fourth fiscal quarter,
primarily as a result of our year-end incentives and customer budget cycles.
We have experienced weaker demand for our 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. We cannot predict if historical seasonal trends will continue in the
future. In addition, it is possible that some of ADC's customers may reduce
their level of expenditures for our products, particularly software products,
in the last half of calendar year 1999 as a precautionary measure relating to
the Year 2000 problem with computer systems generally.
CHANGING REGULATORY ENVIRONMENT
The telecommunications industry is subject to regulation in the United
States and other countries. Our business is dependent upon the continued growth
of the telecommunications industry in the United States and
2
<PAGE>
internationally. Federal and state regulatory agencies regulate most of ADC's
domestic customers. In early 1996, the U.S. Telecommunications Act of 1996 (the
"Telecommunications Act") was enacted. The Telecommunications Act lifted certain
restrictions on the ability of companies, including the Regional Bell Operating
Companies and other customers of ADC, to compete with one another. The
Telecommunications Act also made other significant changes in the regulation of
the telecommunications industry. While we believe that the changes could
increase our opportunities to provide solutions for our customers' voice, data
and video needs, this result is dependent on the reaction of our existing and
prospective customers to these new regulatory trends. To date, increased
competition among telecommunications service providers as contemplated by the
Telecommunications Act has not been fully realized, and we cannot predict the
timing and intensity of new competition. The effect on the market for our
products is difficult to predict, and we do not know whether competition in our
product market will not intensify as a result of the changes in regulation.
Changes in current or future laws or regulations in the United States or
elsewhere could materially and adversely affect our business.
INTERNATIONAL OPERATIONS
Our export sales accounted for 20% of our net sales in fiscal 1998 and
21% of our net sales in each of fiscal 1997 and 1996. We expect export sales to
increase as a percentage of net sales in the future. In addition to sales and
distribution in numerous countries, we own or subcontract operations located in
Australia, China, Finland, Israel, Mexico and the United Kingdom. Due to our
export sales and our international manufacturing operations, ADC is subject to
the risks of conducting business internationally. These risks include unexpected
changes in or impositions of legislative or regulatory requirements,
fluctuations in the U.S. dollar, and tariffs and other barriers and
restrictions. Other potential risks include 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. We are also subject to general geopolitical risks, such as political
and economic instability and changes in diplomatic and trade relationships. ADC
maintains business operations and has sales in many international markets,
including Asia and Latin America. Economic conditions in many of these markets,
and in particular in Asia and Latin America, represent significant risks to ADC.
We cannot predict whether our sales and business operations in these markets
will be adversely affected by these conditions. Instability in foreign markets,
particularly in Asia and Latin America, could negatively impact our results of
operations. Potential turmoil in the Middle East could also negatively impact
our results of operations and asset valuation for our recently acquired
subsidiary, Teledata Communications, Ltd., located in Herzliya, Israel. In
addition to the effect of international economic instability on foreign sales,
domestic sales to U.S. customers having significant foreign operations could be
adversely impacted by these economic conditions. We cannot predict whether or
not these factors will not materially and adversely affect our operations in the
future. In addition, the laws of certain foreign countries may not protect our
proprietary technology to the same extent as do the laws of the United States.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Our future success depends in part upon its proprietary technology.
Although we attempt to protect our proprietary technology through patents,
copyrights and trade secrets, our future success will depend upon product
development, technological expertise and distribution channels. We cannot
predict whether we can protect our technology, or whether competitors can
develop similar technology independently. We have received and may continue
to receive from third parties, including some of our competitors, notices
claiming that we are infringing third-party patents or other proprietary
rights. We cannot predict that we will prevail in any litigation over
third-party claims, or that we 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 our business, operating results
and financial condition.
YEAR 2000 MATTERS
Many currently installed computer systems and software are coded to
accept only two digit entries in date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. This problem could result in system failures or miscalculations,
causing disruptions of business
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operations (including a temporary inability to process transactions, send
invoices or engage in other business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known, and, if not corrected in a timely manner, could affect ADC
and the U.S. and world economy generally. Our product development processes
currently contain steps to include Year 2000 readiness verification for all
current and future products. We believe that most of our products are currently
Year 2000 ready. A few of our products, which contain Year 2000 issues, will be
phased out prior to the year 2000. A few other ADC products contain minor Year
2000 issues that do not affect performance or service. Although there can be no
assurance, we believe that readiness for our other products that are not Year
2000 ready will be achieved prior to January 1, 2000.
VOLATILITY OF STOCK PRICE
Based on the trading history of our Common Stock, we believe factors
have caused and are likely to continue to cause the market price of the Common
Stock to fluctuate substantially. These factors include such as announcements of
new products by ADC or its competitors, quarterly fluctuations in our financial
results, customer contract awards, developments in telecommunications regulation
and general conditions in the telecommunications equipment industry and general
economic conditions and general conditions in financial markets. In addition,
telecommunications equipment company stocks have experienced significant price
and volume fluctuations that are often unrelated to the operating performance of
such companies. This market volatility may adversely affect the market price of
the Common Stock.
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