EXHIBIT 99.2
OFS BRIGHTWAVE, LLC
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 2002 AND THE PERIOD
FROM INCEPTION (NOVEMBER 17, 2001) TO
DECEMBER 31, 2001
OFS BRIGHTWAVE, LLC
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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PAGE(S)
FINANCIAL STATEMENTS:
Report of Independent Accountants 1
Consolidated Statement of Financial Position
as of December 31, 2002 and 2001 2
Consolidated Statement of Operations and Comprehensive Income
for the year ended December 31, 2002 and the period from
inception (November 17, 2001) to December 31, 2001 3
Consolidated Statement of Changes in Members' Interest for the
year ended December 31, 2002 and the period from inception
(November 17, 2001) to December 31, 2001 4
Consolidated Statement of Cash Flows for the year ended
December 31, 2002 and the period from inception (November 17,
2001) to December 31, 2001 5
Notes to the Consolidated Financial Statements 6 - 21
FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
for the year ended December 31, 2002 and the period from
inception (November 17, 2001) to December 31, 2001 22
All other schedules are omitted as they are not applicable or the required
information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
OFS BrightWave, LLC:
In our opinion, the accompanying consolidated statement of financial
position and the related consolidated statement of operations and
comprehensive income, of changes in members' interest, and of cash flows
present fairly, in all material respects, the financial position of OFS
BrightWave, LLC ("the Company") at December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December
31, 2002 and the period from inception (November 17, 2001) to December 31,
2001, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
As described in Note 1 and Note 3, the Company is a majority owned
subsidiary of Fitel USA. Fitel USA also owns OFS Fitel and the two
enterprises (the Company and OFS Fitel) have a supply agreement and
contract manufacturing agreement with each other. The Company and OFS Fitel
also share certain management and overhead expenses. The results of
operations or financial position of the Company could differ from those
that would have been obtained if the enterprises were autonomous.
/s/ PricewaterhouseCoopers LLP
February 14, 2003, except as to Note 3,
which is as of February 28, 2003
Atlanta, Georgia
OFS BRIGHTWAVE, LLC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(U.S. DOLLARS IN THOUSANDS)
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DECEMBER 31, DECEMBER 31,
2002 2001
ASSETS
Current assets
Cash and cash equivalents $ 11,448 $ 171,421
Accounts receivables, net of allowance for
doubtful accounts of $894 and $0, respectively 13,431 39,770
Receivable from affiliates 28,801 25,506
Inventories 27,493 61,354
Other receivable - 7,508
Other current assets 2,703 10,067
----------- -----------
Total current assets 83,876 315,626
Property, plant and equipment, net 501,498 618,424
Amounts due from affiliate related to pension
and other postretirement benefits 465 3,497
Identified intangible assets, net 150,823 165,855
Goodwill 2,052 133,833
Other assets 427 38
----------- -----------
Total assets $ 739,141 $ 1,237,273
=========== ===========
LIABILITIES, MINORITY INTEREST AND MEMBERS' INTEREST
Current liabilities
Accounts payable $ 13,697 $ 22,589
Payable to affiliates 25,333 24,191
Payroll and benefits liabilities 10,439 5,715
Acquisition related reimbursements to members - 22,954
Acquisition related liabilities 1,100 25,938
Obligations under capital leases, current 1,567 1,481
Other current liabilities and accrued expenses 5,217 11,451
----------- -----------
Total current liabilities 57,353 114,319
Notes payable to members 175,000 150,000
Pension obligation and other postretirement benefits 4,078 3,791
Obligations under capital lease 2,809 4,163
Deferred income taxes - 32,058
Other liabilities 410 3,599
Minority interest in equity of affiliates 45,338 52,400
----------- -----------
284,988 360,330
----------- -----------
Members' interest 454,153 876,943
----------- -----------
Total liabilities, minority interest and
members'interest $ 739,141 $ 1,237,273
=========== ===========
The accompanying notes are an integral part of these financial statements.
OFS BRIGHTWAVE, LLC
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(U.S. DOLLARS IN THOUSANDS)
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FOR THE PERIOD FROM
INCEPTION
(NOVEMBER 17, 2001)
YEAR ENDED TO
DECEMBER 31, 2002 DECEMBER 31, 2001
Revenues $ 84,300 $ 29,340
Revenue from affiliate 12,798 -
---------------- -----------------
97,098 29,340
Cost of revenues 241,570 65,951
---------------- -----------------
Gross margin (144,472) (36,611)
---------------- -----------------
Operating expenses
Research and development 7,339 794
In process research and development - 13,000
Marketing and sales 27,972 3,823
General and administrative 46,519 7,004
Restructuring charges 104,653 -
Asset impairment charges 133,834 -
Amortization of intangible assets 15,032 2,145
---------------- -----------------
Total operating expenses 335,349 26,766
---------------- -----------------
Operating loss (479,821) (63,377)
Interest expense, net (4,359) (622)
Other expense (347) -
Other income from affiliates 9,146 1,431
Minority interest 11,817 1,315
---------------- -----------------
Loss before income taxes (463,564) (61,253)
Benefit from income taxes 32,058 -
---------------- -----------------
Net loss (431,506) (61,253)
Other comprehensive loss
Foreign currency translation
adjustments 603 2
---------------- -----------------
Comprehensive loss $ (430,903) $ (61,251)
================ =================
The accompanying notes are an integral part of these financial statements.
OFS BRIGHTWAVE, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(U.S. DOLLARS IN THOUSANDS)
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Balance at November 17, 2001 $ 938,194
Net loss for the period from inception (November 17,
2001) to December 31, 2001 (61,253)
Effect of foreign currency translation 2
--------------
Balance at December 31, 2001 876,943
Net loss (431,506)
Contribution from member for additional joint venture 7,000
Contribution from member for additional transaction costs 1,113
Effect of foreign currency translation 603
--------------
Balance at December 31, 2002 $ 454,153
==============
The accompanying notes are an integral part of these financial statements.
OFS BRIGHTWAVE, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
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FOR THE PERIOD FROM
INCEPTION
(NOVEMBER 17, 2001)
YEAR ENDED TO
DECEMBER 31, 2002 DECEMBER 31, 2001
Net cash used in operating activities
Net loss $ (431,506) $ (61,253)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation of property, plant and
equipment 52,447 7,542
Amortization and in-process
research and development charge 15,032 15,145
Allowance for doubtful accounts 894 -
Impairment charges 133,834 -
Non-cash restructuring charges 76,599 -
Deferred income taxes (32,058) -
Minority interest in equity of
affiliates (11,817) (1,315)
Changes in assets and liabilities
Accounts receivable 25,979 (21,755)
Receivable from affiliates (1,162) (25,506)
Other receivables 7,508 -
Inventories 35,952 16,144
Accounts payable (11,584) 14,751
Payable to affiliates 1,142 24,191
Payroll and benefits liabilities 4,724 4,963
Change in pension assets and
liabilities 3,319 490
Acquisition related reimbursements to
members (22,954) 2,947
Acquisition related liabilities (24,838) (459)
Other, net 1,711 5,552
----------------- -----------------
Net cash used in operating
activities (176,778) (18,563)
----------------- -----------------
Cash flow from investing activities
Cash paid for acquisition, net of cash
acquired (6,563) -
Cash expenditures for propertyand equipment (8,478) (4,201)
----------------- -----------------
Net cash used in investing
activities (15,041) (4,201)
----------------- -----------------
Cash flow from financing activities
Issuance of debt to members 25,000 150,000
Contributions from member 8,114 -
Repayment of obligations under capital
leases (1,268) (124)
----------------- -----------------
Net cash provided byfinancing
activities 31,846 149,876
----------------- -----------------
Net (decrease) increase in cash (159,973) 127,112
Cash and cash equivalents at beginning of
period 171,421 44,309
----------------- -----------------
Cash and cash equivalents at end of period $ 11,448 $ 171,421
================= =================
The accompanying notes are an integral part of these financial statements.
OFS BRIGHTWAVE, LLC
NOTES TO FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS)
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1. BACKGROUND AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of OFS
BrightWave, LLC, a Delaware limited liability company ("the Company"
or "BrightWave"), a majority owned subsidiary of Fitel USA
Corporation, a Delaware corporation ("Fitel USA"). Fitel USA's
ultimate parent is The Furukawa Electric Co., ltd. ("Furukawa") of
Japan. The Company is a designer, manufacturer and supplier of leading
edge optical fiber cable for high speed optical networks. The Company
has facilities located in the United States, Brazil, Germany, and
Russia. The Company also manufactures fiber under a contract
manufacturing agreement for OFS Fitel, LLC ("Fitel"), a wholly owned
subsidiary of Fitel USA.
These financial statements have been prepared in United States dollars
and in accordance with generally accepted accounting principles in the
United States of America ("GAAP"), using the push down accounting
basis to record the acquisition described in Note 2.
As described in Note 2, BrightWave is owned 81.6% by Fitel USA and
18.4% by CommScope Optical Technologies, Inc., a wholly-owned
subsidiary of CommScope Inc. ("CommScope"). In addition, income and
loss is allocated to the members proportionately according to their
respective ownership interest in the Company. Fitel is considered an
affiliate of the Company for financial reporting purposes. Fitel USA
and CommScope are considered members for financial reporting purposes.
2. FORMATION OF COMPANY
On November 17, 2001, the inception of the Company, Furukawa purchased
Lucent Technologies' optical fiber solutions business for $2,300
million. The business operations were separated into two entities,
Fitel and BrightWave. Fitel is comprised of the Optical Connectivity
Business ("Connectivity"), the Specialty Photonics Business
("Specialty") and Optical Fiber ("Fiber"). BrightWave is comprised of
the Fiber Optic Cable Business ("FOC") assets that provide
contract-manufacturing services to Fiber and the manufacturing of
fiber optic cable. CommScope, Inc. ("CommScope"), purchased an 18.4%
interest in BrightWave for approximately $173 million at the time of
Fitel USA's purchase of BrightWave. Approximately $1,359 million of
the $2,300 million purchase price was allocated to Fitel and the
balance, approximately $941 million to BrightWave based on the
relative fair value of the businesses. The Sviazstroy-I joint venture
in Russia was included in the purchase agreement and valued at $7,000,
however the sale was subject to the approval of the other partner in
the joint venture.
In the third quarter of 2002, the Company paid $7,000 for a 51%
interest in the Sviazstroy 1 joint venture. The purchase price was
allocated to the assets acquired and liabilities assumed based on
their fair values at the date the acquisition was completed. The
results of operations of this joint venture have been consolidated
into those of the Company beginning August 1, 2002. The excess
consideration above the fair value of the net assets acquired was
$2,052 and has been included in goodwill. The acquisition is not
material for pro-forma financial information disclosures.
The purchase price allocated to the Company was allocated to the
tangible and intangible assets and liabilities and in-process research
and development ("IPR&D") based upon their fair values at the date of
the acquisition. The excess of the purchase price allocated
to the Company over the fair value of the net assets and in-process
research and development has been recorded as goodwill. The amount of
the purchase price allocated to BrightWave was allocated as follows:
Consideration paid by members $ 933,601
Joint venture company not included at closing
and purchased in 2002 7,000
Costs incurred by members in formation
of the company, net of reimbursements 4,593
-----------
945,194
Fair value of tangible assets required
Cash 44,743
Trade receivables 18,549
Receivable due from lucent 7,508
Inventory 79,588
Amounts due from affiliates related to pension
and other postretirement benefits 3,733
Fixed assets 630,540
Other assets 11,512
-----------
796,173
-----------
Fair value of liabilities assumed
Acquisition related reimbursements to members 22,699
Acquisition related liabilities 26,397
Deferred tax liability 32,058
Other liabilities 24,706
Pension obligations 3,536
Minority interest 58,469
-----------
167,865
-----------
Identifiable specified intangible assets 168,000
In process research and development 13,000
Goodwill 135,886
-----------
Total $ 945,194
===========
Acquisition reimbursements to members represents legal and severance
benefit costs incurred by the respective members on behalf of the
Company. Through a Memorandum of Understanding, the members agreed on
amounts to be reimbursed upon formation of the Company.
Acquisition related liabilities represents involuntary employee
termination benefits and other costs that qualify for recognition
under EITF 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination.
A charge of $13,000 for IPR&D was recorded in the results from
operations for the period ended December 31, 2001. The IPR&D product
process technology includes proprietary technology that is currently
under development to support future products. Specifically, projects
to develop next generation optical fiber and cable designs were
assessed in this analysis.
An independent appraisal firm employed the royalty savings method to
identify the fair value of the IPR&D and other identifiable
intangibles. Discounted cash flow methods were employed to evaluate
existing product process technology and incomplete technology. Future
revenue projections were allocated for all existing technology and
current IPR&D projects. All current IPR&D projects are expected to be
released by late 2003. For both existing product process technology
and IPR&D product process technology, initially allocated percentages
of revenue are reduced over time. The pattern of reduction is intended
to reflect the anticipated life cycle of the assets and the
re-engineering of the assets over that life cycle. A discount rate of
15%, representing the required rate of return for the asset, was used
in the determination of the fair value of the IPR&D process
technology.
3. RELATED PARTY TRANSACTIONS INCLUDING DEBT DUE TO MEMBERS
CONTRACT MANUFACTURING AND FIBER SUPPLY AGREEMENTS WITH OFS FITEL, LLC
The Company entered into a 3-year renewable manufacturing agreement
with Fitel. OFS BrightWave earns gross margin on the production and
sale of fiber to Fitel as a contract manufacturer. The sales price of
fiber to Fitel is based upon transfer prices established by the Board
of Managers of the Company and Fitel. Under the agreement, the Company
agrees to purchase all raw materials for fiber production from Fitel
or a supplier designated by Fitel and be Fitel's contract manufacturer
in conjunction with Fitel's own fiber making capacity. There were no
purchases of raw materials from Fitel during the period from inception
(November 17, 2001) to December 31, 2002. Concurrently, the Company
entered into a 3-year renewable sale supply agreement with Fitel to
purchase all of the necessary fiber used in the manufacturing of the
Company's cable products. Fitel earns gross margin on the sale of
fiber to the Company based upon transfer prices established by the
Board of Managers of the Company and Fitel. For financial reporting
purposes, revenues are recognized on the sale of fiber to Fitel when
the fiber is sold to an external third party of Fitel or is sold as
fiber optic cable to an external third party customer by the Company.
For the year ending December 31, 2002, the Company recognized revenue
of $9,191 under this agreement. Under the supply agreement, Fitel sold
$14,140 and $12,590 of fiber to the Company during the year ended
December 31, 2002 and the period from inception (November 17, 2001) to
December 31, 2001, respectively. The Board of Managers of the Company
and Fitel are controlled by Fitel USA.
NOTES PAYABLE TO MEMBERS
On November 16, 2001 and in connection with CommScope's acquisition of
an 18.4% interest in the Company, the Company entered into a credit
facility with CommScope. The Agreement provides for a $30 million
revolving credit facility maturing on November 16, 2006. The Company
has drawn the full amount under the credit agreement as of December
31, 2002. Accrued interest is payable in quarterly installments. The
revolving credit facility bears an interest rate determined by the
3-month London Interbank Offered Rate ("LIBOR") plus an applicable
margin of 1.75%. The LIBOR rate was 1.38% and 1.82%
at December 31, 2002 and 2001, respectively. Accrued interest payable
at December 31, 2002 was approximately $263.
On November 19, 2001, the Company entered into a revolving credit
facility with Fitel USA. The agreement provides a $120 million
revolving credit facility to the Company maturing on November 16,
2006. On December 18, 2002, the Company signed a promissory note with
Fitel USA in the amount of $25 million maturing on March 31, 2003. The
Company has drawn $120 million under the credit agreement and $25
million under the promissory note as of December 31, 2002. Accrued
interest for both loans is payable in quarterly installments. The
revolving credit facility and promissory note bear an interest rate
determined by the 3-month London Interbank Offered Rate ("LIBOR") plus
an applicable margin of 1.75%. The LIBOR was 1.38% and 1.82% at
December 31, 2002 and 2001, respectively.
SUPPORT FROM FURUKAWA
Furukawa will provide the necessary funds to allow the Company to
continue its operations through March 31, 2004. Hence, the Company's
financial statements have been presented on a going concern basis,
which contemplates the realization of assets and liabilities in the
normal course of business.
OTHER
The Company paid management fees to Fitel USA in the amount of $1,175
and $135 for the year ended December 31, 2002 and the period from
November 17 to December 31, 2001, respectively. The fee represents
reimbursable costs incurred by Fitel USA for operating costs of the
holding company.
The Company recorded rental income in other income of $9,146 and
$1,431 from Fitel for its use of space at the Company's Norcross,
Georgia facility for the year ended December 31, 2002 and for the
period from November 17, 2001 to December 31, 2001, respectively.
Transition from Lucent required the Company and Fitel to enter into
certain transition service agreements with Lucent. Lucent charged the
Company and Fitel for specific usage of their services including
certain electronic data interfacing, payroll and benefits processing
and information systems resources. The charges are allocated between
the Company and Fitel based on headcount and percentage of revenue.
The results from operations include expenses of $2.8 million and $5.3
million for transition service agreements for the year ended December
31, 2002 and for the period from inception (November 17, 2001) to
December 31, 2001, respectively. As of December 31, 2002, all
transition service agreements have been completed.
The Company shares certain management and overhead services with
Fitel, a wholly owned subsidiary of Fitel USA. These shared services
consist of managerial resources, information technology, risk
management, and human resources functions. The costs for these shared
services are allocated between the Company and Fitel based on expected
usage for these services. Management believes this provides a
reasonable allocation of the charges. The results from operation
include $29.3 million and $4.5 million of allocated shared services
charges for the year ended December 31, 2002 and for the period from
inception (November 17, 2001) to December 31, 2001, respectively.
The Company recorded revenue of $517 from sales to CommScope for the
year ended December 31, 2002. Included in the consolidated balance
sheet as of December 31, 2002 is $28 of accounts receivable from
CommScope. Included in the Company's results from operations is $935
of interest expense related to notes payable to CommScope.
As part of the purchase of the interest in BrightWave, Furukawa
granted CommScope a put for the amount of their investment interest in
the Company of approximately $173 million. The put gives CommScope the
right to sell to Furukawa all of the membership interest owned by
CommScope and its Affiliates. As amended on October 9, 2002, the put
is exercisable by CommScope commencing on February 15, 2006 and ending
on March 15, 2006. The put is an obligation of Furukawa and does not
represent a liability of BrightWave.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The Company consolidates companies in which it exercises control. The
results of subsidiaries are included in the consolidated financial
statements from the effective date of acquisition. The Company
eliminates all significant intercompany balances and transactions in
consolidation.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the period
reported. Significant estimates include the allowance for doubtful
accounts, useful lives of fixed assets and identifiable intangible
assets, valuation allowance on deferred tax assets, amounts reported
for long-term obligations, such as amounts reported for pension and
post employment benefits and reserves for excess or obsolete
inventory. Actual results could differ from those estimates.
FOREIGN CURRENCY
For operations outside of the United States that prepare financial
statements in currencies other than the U.S. dollar, results of
operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at end of
period exchange rates. Gains and losses resulting from foreign
currency transactions (transactions denominated in a currency other
than the entity's functional currency) are included in the
consolidated statement of operations and comprehensive income.
REVENUE RECOGNITION
Revenue is generally recognized when all significant contractual
obligations have been satisfied, collection of the fixed and
determinable receivable is reasonably assured, and the product is
delivered to a third party customer.
SHIPPING AND HANDLING COSTS
Shipping and handling fees related to sales transactions are billed to
customers and recorded as revenue. Shipping and handling costs
incurred are recorded in cost of revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs include salaries, supplies, and
facility costs attributed to research and development activities and
are charged to expense as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent bank deposits and certain
short-term investments. All highly liquid investments with maturities
of three months or less are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined principally on
a first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation
commences once an asset has been placed into service. Depreciation is
determined using a straight-line method over the estimated useful
lives of the various asset classes. Estimated lives range from three
to twelve years for machinery, electronic and other equipment, and
twenty-five years for buildings.
Major renewals and improvements are capitalized and minor
replacements, maintenance and repairs are charged to operations as
incurred. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the consolidated balance
sheets and any gain or loss is reflected in the consolidated
statements of operations.
INTERNAL USE SOFTWARE
Certain costs of computer software developed or obtained for internal
use are capitalized and amortized on a straight-line basis over three
years. Costs for general and administrative overhead, maintenance and
training, as well as the cost of software that does not add
functionality to the existing system, are expensed as incurred.
GOODWILL AND OTHER ACQUIRED INTANGIBLES
In accordance with SFAS 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized. Other intangible assets are amortized
on a straight-line basis over the useful life of the asset, which is
the period the asset is expected to contribute directly or indirectly
to future cash flows. A range of 8 to 16 years has been used for
amortization of specific intangible assets.
IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
In accordance with SFAS 142, "Goodwill and Other Intangible Assets",
goodwill will be reviewed for impairment on an annual basis.
Additionally, goodwill is tested for impairment between annual tests
if an event occurs or circumstances change that would more likely than
not reduce the fair value of the entity below its carrying value. In
accordance with SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", other
long-lived assets, which include property, plant and equipment, will
be reviewed for impairment when factors indicate that a potential
impairment may have occurred. Impairment occurs when the carrying
amount of the asset exceeds its implied fair value. When the carrying
amount of the asset exceeds the fair value, the Company recognizes an
impairment loss in an amount equal to that excess. After an impairment
loss is recognized, the adjusted carrying amount of the asset becomes
its new accounting basis.
ACCRUED PRODUCT WARRANTY COSTS
The Company offers a wide variety of warranty terms for its products.
Warranty accruals are determined based on historical results of
product returns and warranty expense of the previous owner. All
warranty obligations anticipated to be fulfilled beyond one year are
classified as noncurrent liabilities. The following table reconciles
the changes in the product warranty liability included in the
consolidated balance sheet:
DECEMBER 31,
2002
Liability at beginning of period $ 600
Warranty accruals during the period 179
Settlements during the period (59)
-----------
Liability at end of the period $ 720
===========
PENSION ASSETS AND BENEFIT OBLIGATION
The pension asset and benefit obligation information represents the
Company's sponsored plans and its allocated share of Fitel's
non-contributory pensions, health and welfare and life plan in which
the Company participates. The allocation from plans participated in by
the Company is based on the headcount and salary levels associated
with the Company's employees for the period presented. Benefit
obligations primarily consist of the Company's post retirement plan
liability and are not based on allocation.
INCOME TAXES
The Company is organized as a limited liability company and is treated
as a partnership for income tax purposes. Fitel USA and CommScope are
responsible for the payment of taxes due on the earnings of the
Company. The consolidated financial statements of the Company include
wholly-owned corporations that are responsible for paying taxes as a
corporation. For these corporations, the asset and liability approach
is used to recognize deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are recorded when necessary to reduce deferred
tax assets to the realizable amounts when it becomes more likely than
not the deferred tax assets will not be realized by the Company.
CONCENTRATION OF CREDIT RISK
One customer accounts for 13% of the Company's revenue and another
customer accounts for 26% of the Company's accounts receivable. The
Company expects a significant portion of its future revenues to
continue to be generated by a limited number of customers. The loss of
any of these customers or any substantial reduction in orders by any
of these customers could materially and adversely affect the Company's
operating
results. The Company has a significant concentration of customers in
the telecommunications industry.
RISKS AND UNCERTAINTIES
The Company operates in several foreign jurisdictions, which present
certain macro-economic and regulatory risks and uncertainties. Areas
of uncertainty include the likely future direction of economic and
regulatory policy, as well as political developments. Additionally,
the telecommunications industry remains highly regulated and
restrictions in certain foreign countries may limit the degree in
which foreign-owned entities may operate. The Company also has a
significant investment in plant and equipment and significant
intangible assets which may not be recoverable in future periods due
to the unpredictable nature of the fiber and fiber optic cable
markets. Our customers are concentrated in the telecommunications
industry and the Company's results of operations will be impacted
significantly by the levels of capital expenditure of companies in
this industry segment. Management of BrightWave is unable to predict
what changes in conditions may occur and what the effects of such
changes may be on the financial position and results of operations of
the Company.
RECLASSIFICATION
Certain prior period balances have been reclassified in order to
conform with current presentation.
5. INTANGIBLE ASSETS
AS OF DECEMBER 31, 2002
-------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- -------------
Amortized intangible assets
Trademark $ 20,000 $ (2,500)
Existing Core Process Technology 56,000 (4,200)
Existing Product Process Technology 57,000 (8,016)
Customer Relationships 35,000 (2,461)
-------------- -------------
Total $ 168,000 $ (17,177)
============== =============
Unamortized intangible assets
Goodwill $ 2,052
--------------
Aggregate Amortization Expense
For period from inception (November 17,
2001) to December 31, 2001 including
IPR&D charge $ 15,145
For the year ended December 31, 2002 15,032
Estimated Amortization Expense
For the year ended 12/31/03 $ 15,268
For the year ended 12/31/04 $ 15,268
For the year ended 12/31/05 $ 15,268
For the year ended 12/31/06 $ 15,268
For the year ended 12/31/07 $ 15,268
The fair values of the acquired intangible assets were estimated using
the expected present value of future cash flows. Amortization expense
is calculated on a straight-line basis over a period ranging from 8 to
16 years. Trademarks are deemed to have a useful life of 9 years and
will cease amortizing on November 17, 2010. Existing core process
technology has a useful life of 15 years and will cease amortizing on
November 17, 2016. The existing product process technology has a
useful life of 8 years and will cease amortization on November 17,
2009. Customer relationships are amortized over a 16-year period.
During the second quarter of 2002, the Company undertook steps to
significantly reduce headcount and restructure the fiber and cable
production process among the production plants. These steps were the
result of the continued weakening of demand and decline in the pricing
of the worldwide fiber and fiber-optic cable markets. The Company
revised downward both its long-term and short-term sales forecasts.
Management determined these circumstances and actions to be a
triggering event as defined by SFAS No. 142 "Goodwill and Other
Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets."
The Company tested its fixed assets, goodwill and definite-lived
intangible assets for recoverability as of May 31, 2002. Management
performed an analysis on an undiscounted cash flow basis, which
indicated that the long-lived assets, excluding goodwill, were not
impaired. Management engaged a valuation specialist to perform an
independent valuation of the business enterprise value, along with the
associated specified intangible assets and goodwill. This analysis was
performed using a discounted cash flow model based on forward-looking
information regarding market share, revenues, costs, and an
appropriate discount rate to arrive at the fair value of each
intangible asset. As a result, the Company identified that goodwill
had been impaired and recorded a goodwill impairment charge of $133.8
million as an operating expense in 2002.
6. RESTRUCTURING ACTIONS
As a result of the continued weakening demand and decline in the
pricing in the world-wide fiber and fiber-optic cable markets, the
Company implemented plans during 2002 to restructure its production
process and reduce operating costs. The Company recorded a charge of
$104,653 in 2002 for business restructuring expenses. The components
of the charge include $28,054 of employee separation costs and $76,599
of asset abandonment charges.
The employee separation costs were incurred in connection with the
elimination of approximately 800 positions worldwide, consisting of
both management and union-represented employees. Certain fixed assets
in Norcross, Georgia and Augsburg, Germany were abandoned due to new
sourcing plans and lack of foreseeable demand for certain products.
The assets have no remaining useful life and their net book values
were written-down to zero. The table below summarizes the status of
the Company's restructuring reserve during 2002.
Cash Remaining
Payments Reserve at
Total Non-Cash Made in December 31,
Charges Charges 2002 2002
---------- --------- --------- -----------
Asset abandonment $ 76,599 $ 76,599 $ - $ -
Severance and workforce reduction 28,054 - 20,273 7,781
---------- --------- --------- -----------
Total $ 104,653 $ 76,599 $ 20,273 $ 7,781
========== ========= ========= ===========
7. SUPPLEMENTAL INFORMATION
DECEMBER 31, DECEMBER 31,
2002 2001
Inventories
Raw materials $ 17,493 $ 22,906
Work-in-process 3,967 29,936
Finished goods 6,033 8,512
---------- ----------
Total inventories $ 27,493 $ 61,354
========== ==========
Property, plant and equipment, net
Land and improvements $ 30,278 $ 29,351
Buildings and improvements 182,990 197,105
Machinery, electronic and other equipment 287,647 338,400
Construction-in-progress 55,648 61,110
---------- ----------
Total property, plant and equipment 556,563 625,966
Less: accumulated depreciation (55,065) (7,542)
---------- ----------
Property, plant and equipment, net $ 501,498 $ 618,424
========== ==========
DECEMBER 31, DECEMBER 31,
2002 2001
Depreciation of property, plant
and equipment $ 52,447 $ 7,542
8. COMMITMENTS AND CONTINGENCIES
The Company has from time to time been involved in legal proceedings
and litigation arising in the ordinary course of business. In the
opinion of management, the outcome of all current proceedings, claims
and litigation will not materially affect the Company's financial
position.
The Company has a supply agreement in place with a key supplier that
extends beyond fiscal 2002. The agreement commits the Company to
purchase from this supplier certain percentages of its total purchases
of certain raw materials. Penalty clauses of up to $50 million take
effect in 2004 through 2006 should these certain percentages of total
purchases not be met.
9. LEASES
The Company leases land, building and equipment under agreements that
expire in various years. Rental expense under operating leases was
$7,501 for the year ended December 31, 2002. The table below shows the
future minimum lease payments due under non-cancelable operating
leases at December 31, 2002:
CAPITAL OPERATING
LEASES LEASE
2003 $ 1,790 $ 6,314
2004 1,790 5,912
2005 1,178 5,088
2006 - 4,746
2007 - 4,676
Thereafter - 33,082
--------- ----------
Total minimum obligations $ 4,758 $ 59,818
==========
Less interest on capital leases 382
---------
Present value of net minimum
obligation 4,376
Less: current portion 1,567
---------
Long-term obligations at
December 31, 2002 $ 2,809
=========
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
OFS BrightWave sponsors a defined benefit pension plan, and a retiree
healthcare plan and participates in a defined benefit pension plan, a
retiree healthcare plan and a retiree life insurance plan, sponsored
by Fitel. Substantially all of the hourly employees are covered by
these plans. The amounts shown in the following tables include an
allocation of the components of net periodic benefit cost for the
plans in which OFS BrightWave participates.
The following tables summarize benefit costs, as well as the
assumptions, benefit obligations, changes in plan assets and funded
status at or for the year ending December 31, 2002 and for the period
from inception (November 17, 2001) through December 31, 2001.
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
2002 2002 TOTAL 2001 2001 TOTAL
---------- ---------- ---------- ---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning
of period $ 77,149 $ 31,236 $ 76,056 $ 30,869
Service cost 5,059 1,110 424 140
Interest cost 5,526 2,242 634 256
Actuarial (gain) or loss 3,794 889 (3) -
Benefit paid (7,149) (917) (156) (29)
Curtailment (15) (149) - -
Plan amendment - - 194 -
Settlement (667) - - -
---------- ---------- ---------- ---------- ----------
Benefit obligation at end of year $ 83,697 $ 34,411 $ 77,149 $ 31,236
========== ========== ========== ========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of period $ 92,470 $ 15,429 $ 91,189 $ 15,297
Actual return on plan assets (7,297) 25 942 159
Asset transfer 6,212 1,388 - -
Employer contribution 1,044 19 495 2
Benefits paid (7,149) (917) (156) (29)
Settlement (667) - - -
---------- ---------- ---------- ---------- ----------
Fair value of plan assets at end
of year $ 84,613 $ 15,944 $ 92,470 $ 15,429
========== ========== ========== ========== ==========
Funded status 916 (18,467) 15,322 (15,807)
Unrecognized prior service cost - - 194 -
Unamortized net (gain) or loss 12,933 1,005 (3) -
---------- ---------- ---------- ---------- ----------
Prepaid (accrued) benefit cost $ 13,849 $ (17,462) $ 15,513 $ (15,807)
========== ========== ========== ========== ==========
Amounts recognized in the
statement of financial
position
Prepaid benefit cost $ 16,951 $ - $ 17,265 $ -
Accrued benefit liability (3,102) (17,462) (1,752) (15,807)
---------- ---------- ---------- ---------- ----------
Net amount recognized $ 13,849 $ (17,462) $ 15,513 $ (15,807)
========== ========== ========== ========== ==========
Amounts due from (owed to)
Fitel for plans which
BrightWave participates $ 15,619 $ (15,154) $ 465 $ 17,242 $ (13,745) $ 3,497
========== ========== ========== ========== ========== ==========
Pension obligations for plans
which BrightWave sponsors $ (1,770) $ (2,308) $ (4,078) $ (1,729) $ (2,062) $ (3,791)
========== ========== ========== ========== ========== ==========
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 6.75% 6.75% 7.25% 7.25%
Expected return on plan
assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation
increase 4.90% 4.90% 4.50% N/A
For measurement purposes, a 10 percent annual rate of increase in the
per capita cost of covered health care benefits for participants under
age 65 was assumed for 2002. The rate was assumed to decrease
gradually to 5 percent for 2009 and remain at that level thereafter. A
12 percent annual rate of increase in the per capita cost of covered
health care benefits for participants age 65 and over was assumed for
2002. The rate was assumed to decrease gradually to 5 percent for 2012
and remain at that level thereafter.
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
2002 2002 2001 2001
---------- ---------- ---------- ----------
COMPONENT OF NET PERIODIC BENEFIT COST
Service cost $ 5,059 $ 1,110 $ 424 $ 140
Interest cost 5,526 2,242 634 256
Expected return on plan assets (8,238) (1,378) (944) (159)
Recognized net actuarial (gain)/loss 168 - - -
---------- ---------- ---------- ----------
Total net periodic benefit cost $ 2,515 $ 1,974 $ 114 $ 237
========== ========== ========== ==========
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plan with accumulated
benefit obligation in excess of plan assets were $3,991, $3,627, and
$965, respectively as of December 31, 2002, and $2,288, $1,519, and
$561, respectively, as of December 31, 2001.
The Company has multiple non-pension postretirement benefit plans. The
health care plans are contributory, with participants' contributions
adjusted annually; the life insurance plan is noncontributory. The
accounting for the health care plans anticipates future cost-sharing
changes to the written plan that are consistent with the Company's
expressed intent to cap its portion of the cost.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point
change in the health care cost trend rates would have the following
effects:
2002 2001
------------------------ -----------------------
1% 1% 1% 1%
INCREASE DECREASE INCREASE DECREASE
Effect on total of service and interest
cost components $ 199 $ (159) $ 16 $ (12)
Effect on postretirement benefit
obligation $ 1,581 $ (1,291) $ 632 $ (528)
11. INCOME TAXES
The Company is a partnership for U.S. Federal and state income tax
purposes. Any taxes of the Company are the responsibility of the
partners. The Company's foreign and domestic corporate subsidiaries
file separate tax returns.
As of December 31, 2002, BrightWave's corporate subsidiaries have U.S.
and Non-U.S. net operating loss carryforwards of approximately $84
million, which begin expiring at varying times.
The Company has recorded an income tax benefit for the year ended
December 31, 2002 in the amount of $32,058. This benefit relates to
the reduction in deferred tax liabilities.
from fixed asset book-to-tax differences. Realization of the resulting
deferred tax assets is dependent upon future taxable income.
Accordingly, the Company has recorded valuation allowances of $26,091
and $740 as of December 31, 2002 and 2001, respectively, because
realization of the net deferred tax asset cannot be sufficiently
assured.
The components of deferred tax assets and liabilities at December 31,
2002, for BrightWave's corporate subsidiaries subject to income tax,
as are follows:
DECEMBER 31, DECEMBER 31,
2002 2001
Deferred income tax assets
Reserves and allowances $ 279 $ 18
Intangibles 15,082 -
Net operating loss/credit
carryforwards 31,524 2,769
----------- -----------
Total deferred tax assets 46,885 2,787
Valuation allowance (26,091) (740)
----------- -----------
Net deferred tax assets 20,794 2,047
Deferred income tax liabilities
Property, plant and equipments (20,794) (34,077)
Intangibles - (28)
----------- -----------
(20,794) (34,105)
----------- -----------
Net deferred tax liability $ - $ (32,058)
=========== ===========
A reconciliation of the benefit for income taxes to the amount
compiled by applying the statutory federal income tax rate to loss
before income taxes is as follows:
DECEMBER 31,
2002 2001
------------ ------------
Tax at federal statutory rate (35%) $ (167,247) $ (21,438)
State, net of federal benefit (3,340) -
Tax benefit (expense) for partners 108,462 20,674
Change in valuation allowance 25,351 740
Tax rate difference on foreign
operations (542) 24
Other 258 -
------------ ------------
Provision for taxes $ (32,058) $ -
============ ============
12. SEGMENT REPORTING
The Company has identified the following geographic reportable
segments: North America, Europe/Middle East/Africa, and Other. Other
includes Central America, Latin America, China, and Asia Pacific. The
chief operating decision-makers of the Company evaluate the business
on a global basis with consideration of resource allocation on a
geographic basis. The accounting policies of the segments are the same
as described in the summary of significant accounting policies. The
Company evaluates segment performance based on operating income.
Revenues for each segment are based on the location of the third-party
customer. All intercompany transactions between segments have been
eliminated. Segment results for the year ended December 31, 2002 and
for the period from inception (November 17) to December 31, 2001 as
follows:
EUROPE/
MIDDLE
NORTH EAST/ COMBINED
AMERICA AFRICA OTHER TOTAL
------------- ------------ ----------- ------------
FOR THE YEAR ENDING DECEMBER 31, 2002
Total revenues $ 85,415 $ 11,058 $ 625 $ 97,098
Depreciation and amortization 65,368 1,521 590 67,479
Operating loss (406,659) (51,575) (21,587) (479,821)
Property, plant and equipment, net 479,990 15,712 5,796 501,498
Capital expenditures 8,219 235 24 8,478
EUROPE/
MIDDLE
NORTH EAST/ COMBINED
AMERICA AFRICA OTHER TOTAL
------------- ------------ ----------- ------------
FOR THE PERIOD FROM NOVEMBER 17 TO
DECEMBER 31, 2001
Total revenues $ 25,377 $ 3,906 $ 57 $ 29,340
Depreciation and amortization 22,502 110 75 22,687
Operating loss (60,892) (1,644) (841) (63,277)
Property, plant and equipment, net 603,286 8,259 6,879 618,424
Capital expenditures 3,621 12 568 4,201
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." SFAS No. 143 addresses accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
BrightWave will adopt this new standard effective January 1, 2003.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other things, this statement rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
(SFAS No. 4), which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. As a result,
the criteria in Accounting Principles Board Opinion No. 30, "Reporting
the Results of the Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," which requires gains
and losses on extinguishments of debt to be classified as income or
loss from continuing operations, will now be applied. BrightWave will
adopt this new standard effective January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 addresses
significant issues relating to the recognition, measurement, and
reporting of costs associated with exit and disposal activities,
including restructuring activities, and nullifies the guidance in EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." BrightWave will adopt this new standard
effective January 1, 2003.
In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,
an interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34." FIN 45 clarifies the requirements of
SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. The disclosure provisions of the interpretation
are effective for financial statements of periods that end after
December 15, 2002 (see Note 4). However, the provisions for initial
recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002.
14. UNAUDITED QUARTERLY FINANCIAL RESULTS
The following table presents the Company's unaudited quarterly results
of operations for each quarter in the year ending December 31, 2002.
The information has been prepared on the same basis as the audited
financial statements. This table includes all adjustments that
management considers necessary for the fair presentation of the
Company's operating results for the quarters presented.
CONSOLIDATED STATEMENT OF FOR THE 2002 QUARTER ENDING
OPERATIONS DATA: --------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- ----------- ---------------- ---------------
Revenue 26,797 22,039 21,020 27,242
Gross profit (48,434) (47,023) (27,320) (21,695)
Total operating expenses 24,980 258,953 30,369 21,047
Net loss (69,083) (269,560) (53,992) (38,871)
OFS BRIGHTWAVE, LLC
VALUATION AND QUALIFYING ACCOUNTS
(U.S. DOLLARS IN THOUSANDS)
BEGINNING ADDITIONS BALANCE
OF PERIOD -------------------------------- AS OF
(NOVEMBER 17, CHARGE CHARGE TO DECEMBER 31,
DESCRIPTION 2001) TO EXPENSES OTHER ACCOUNTS DEDUCTIONS 2001
- ----------- ------------- -------------- ---------------- ---------- -----------
Allowance for uncollectible
accounts $ - $ - $ - $ - $ -
Allowance for deferred tax
assets - - 740 - 740
ADDITIONS BALANCE
-------------------------------- AS OF
JANUARY 1, CHARGE CHARGE TO DECEMBER 31,
DESCRIPTION 2002 TO EXPENSES OTHER ACCOUNTS DEDUCTIONS 2002
- ----------- ------------- -------------- ---------------- ---------- -----------
Allowance for uncollectible
accounts $ - $ 894 $ - $ - $ 894
Allowance for deferred tax
assets 740 - 25,351 - 26,091