UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-12929
COMMSCOPE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1375 LENOIR RHYNE BOULEVARD, HICKORY, NORTH CAROLINA 28601
(Address of principal executive offices)
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
As of July 23, 1999 there were 50,737,954 shares of Common Stock
outstanding.
COMMSCOPE, INC.
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
Page No.
-------------
Part I-Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash 5
Flows
Condensed Consolidated Statement of 6
Stockholders' Equity
Notes to Condensed Consolidated Financial 7 - 9
Statements
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Position 10 - 16
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of Security 16
Holders
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
Net Sales $ 186,882 $ 141,886 $ 334,953 $ 275,488
---------- ---------- ----------- -----------
Operating Costs and Expenses:
Cost of sales 137,022 109,189 248,258 215,223
Selling, general and administrative 17,330 12,935 31,899 25,468
Research and development 1,945 1,449 3,434 3,202
Amortization of goodwill 1,347 1,297 2,594 2,600
---------- ---------- ----------- -----------
Total operating costs and expenses 157,644 124,870 286,185 246,493
---------- ---------- ----------- -----------
Operating Income 29,238 17,016 48,768 28,995
Other income (expense) (17) 7 (7) 2,134
Interest expense (2,567) (4,099) (5,365) (8,296)
Interest income 111 182 250 340
---------- ---------- ----------- -----------
Income before income taxes 26,765 13,106 43,646 23,173
Provision for income taxes (9,673) (4,607) (15,794) (8,342)
---------- ---------- ----------- -----------
Net Income $ 17,092 $ 8,499 $ 27,852 $ 14,831
========== ========== =========== ===========
Net income per share:
Basic $ 0.34 $ 0.17 $ 0.55 $ 0.30
Assuming dilution $ 0.33 $ 0.17 $ 0.54 $ 0.30
Weighted-average shares outstanding:
Basic 50,650 49,177 50,527 49,155
Assuming dilution 51,906 49,588 51,613 49,456
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
June 30, December 31,
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 5,737 $ 4,129
Accounts receivable, less allowance for doubtful accounts of
$4,919 and $4,126, respectively 124,544 93,627
Inventories 35,878 29,986
Prepaid expenses and other current assets 2,156 3,745
Deferred income taxes 13,369 12,925
----------- -----------
Total current assets 181,684 144,412
Property, plant and equipment, net 150,202 135,082
Goodwill, net of accumulated amortization of
$45,986 and $43,396, respectively 164,882 164,024
Other intangibles, net of accumulated amortization of
$30,684 and $29,314, respectively 18,081 19,451
Investments and other assets 2,332 2,358
----------- -----------
Total Assets $ 517,181 $ 465,327
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 42,180 $ 23,717
Other accrued liabilities 37,003 26,713
----------- -----------
Total current liabilities 79,183 50,430
Long-term debt 172,445 181,800
Deferred income taxes 16,576 17,543
Other non-current liabilities 12,475 11,582
----------- -----------
Total Liabilities 280,679 261,355
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at June 30, 1999 and
December 31, 1998 -- --
Common Stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 50,732,762 at June 30, 1999;
50,254,467 at December 31, 1998 507 503
Additional paid-in capital 161,706 155,631
Retained earnings 75,690 47,838
Accumulated other comprehensive income (loss) (1,401) --
----------- -----------
Total Stockholders' Equity 236,502 203,972
----------- -----------
Total Liabilities and Stockholders' Equity $ 517,181 $ 465,327
=========== ===========
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 27,852 $ 14,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 14,077 12,184
Gain on sale of assets of the high temperature
aerospace and industrial cable business -- (1,873)
Gain on sale of other property, plant and equipment (4) --
Changes in assets and liabilities:
Accounts receivable (34,693) (3,775)
Inventories (1,014) 4,341
Prepaid expenses and other current assets 1,588 1,259
Deferred income taxes (1,411) (2,028)
Accounts payable and other accrued liabilities 28,902 25,014
Other non-current liabilities 893 737
Other (145) 67
------------- -------------
Net cash provided by operating activities 36,045 50,757
INVESTING ACTIVITIES:
Additions to property, plant and equipment (15,018) (9,865)
Acquisition of business in Seneffe, Belgium (17,023) --
Sale of assets of the high temperature aerospace and
industrial cable business -- 9,654
Sale of other property, plant and equipment 172 --
Other -- 146
------------- -------------
Net cash used in investing activities (31,869) (65)
FINANCING ACTIVITIES:
Net repayments under revolving credit facility (25,000) (47,000)
Proceeds of term loan facility for acquisition of business
in Seneffe, Belgium 16,353 --
Exercise of stock options 6,060 900
Issuance of stock to outside director 19 --
------------- -------------
Net cash used in financing activities (2,568) (46,100)
Change in cash and cash equivalents 1,608 4,592
Cash and cash equivalents, beginning of period 4,129 3,330
------------- -------------
Cash and cash equivalents, end of period $ 5,737 $ 7,922
============= =============
See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS, EXCEPT SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999
Accumulated
Number of Other
Common Additional Comprehensive Total
Shares Common Paid-In Retained Income Stockholders'
Outstanding Stock Capital Earnings (Loss) Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 50,254,467 $ 503 $ 155,631 $ 47,838 $ -- $ 203,972
Issuance of shares for stock option exercises 477,295 4 6,056 -- -- 6,060
Issuance of shares to outside director 1,000 -- 19 -- -- 19
Comprehensive income (loss) - currency
translation adjustment -- -- -- -- (1,401) (1,401)
Net income -- -- -- 27,852 -- 27,852
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 1999 50,732,762 $ 507 $ 161,706 $ 75,690 $ (1,401) $ 236,502
============ ============ ============ ============ ============ ============
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par value.
No preferred stock is currently issued or outstanding.
See notes to condensed consolidated financial statements.
6
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CommScope, Inc. ("CommScope" or the "Company") was incorporated in Delaware
in January 1997 and, through its wholly owned subsidiary CommScope, Inc. of
North Carolina ("CommScope NC"), operates in the cable manufacturing
business. The Company designs, manufactures, markets and sells coaxial,
fiber optic and high performance electronic cables primarily used in
communications, local area network and industrial applications. CommScope
is a leading manufacturer and supplier of coaxial cable for cable
television applications and other communications applications in the United
States. CommScope is also a leading supplier of coaxial cable to
international communications markets, primarily the cable television
market.
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of income for the three months and the six months
ended June 30, 1999 and 1998, the condensed consolidated statements of cash
flows for the six months ended June 30, 1999 and 1998, and the condensed
consolidated statement of stockholders' equity for the six months ended
June 30, 1999 are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a
fair presentation of the interim period financial statements. There were no
adjustments of a non-recurring nature recorded during the three months and
the six months ended June 30, 1999 and 1998. The results of operations for
the interim period are not necessarily indicative of the results of
operations to be expected for the full year.
The unaudited interim condensed consolidated financial statements of
CommScope have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These interim condensed consolidated financial
statements should be read in conjunction with the Company's December 31,
1998 audited consolidated financial statements and notes thereto included
in the Company's 1998 Annual Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
June 30, December 31,
1999 31, 1998
------------ --------------
Raw materials $ 15,078 $ 12,379
Work in process 8,769 5,811
Finished goods 12,031 11,796
------------ ------------
$ 35,878 $ 29,986
============ ============
7
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
3. NET INCOME PER SHARE
Below is a reconciliation of weighted-average common shares outstanding for
basic net income per share to weighted-average common and common equivalent
shares outstanding for diluted net income per share:
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1999 1998 1998
---------------------------------------
Average number of common shares
outstanding - for basic net income 50,650 50,527 49,177 49,155
per share
Dilutive effect of stock options 1,256 1,086 411 301
-----------------------------------------
Average number of common and common
equivalent shares outstanding - for
diluted net income per share 51,906 51,613 49,588 49,456
=========================================
4. LONG-TERM DEBT
Long-term debt consisted of the following:
June 30, December 31,
1999 1998
------------ -----------------
Credit Agreement (as defined below) $ 146,000 $ 171,000
Eurodollar Credit Agreement (as defined below) 15,645 --
Alabama State Industrial Development
Authority Notes 10,800 10,800
----------- -----------------
$ 172,445 $ 181,800
=========== =================
In July 1997, the Company entered into a $350 million revolving credit
agreement with a group of banks (the "Credit Agreement"). The Company
utilizes the Credit Agreement for, among other things, general working
capital needs, financing strategic acquisitions, and other general
corporate purposes.
In February 1999, the Company entered into a term loan agreement for 15
million Euros (the "Eurodollar Credit Agreement"). The Company utilized the
proceeds of the loan to fund the acquisition costs and working capital
needs of a new manufacturing facility in Seneffe, Belgium.
5. BUSINESS ACQUISITIONS AND DIVESTITURES
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables
business to Alcatel for an adjusted price of $13 million. The Company
recognized a pre-tax gain from the sale of $1.9 million ($0.02 per basic
and diluted share, net of tax effect).
8
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. BUSINESS ACQUISITIONS AND DIVESTITURES (continued)
Effective January 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Seneffe,
Belgium. The acquisition provides the Company with a European base of
operations, access to established distribution channels and complementary
coaxial cable technologies. The operation in Seneffe is the largest CATV
coaxial cable manufacturer in Europe with annual sales by Alcatel of
approximately $35 million in 1998.
The Seneffe acquisition has been accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities
have been recorded at their estimated fair value at the date of the
acquisition of approximately $20 million. Payment for the acquired business
was not required until March 1999 and was financed primarily by borrowings
under the new Eurodollar Credit Agreement.
6. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and for hedging activities. The new standard requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 133 is effective for the Company beginning with the year
ending December 31, 2001. Management is currently evaluating the effects of
SFAS No. 133 on the Company's financial statements and current disclosures.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included
in this document as well as the audited consolidated financial statements,
related notes thereto and management's discussion and analysis of financial
condition and results of operations for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K. Unless otherwise
specified, capitalized terms used herein are used as defined in the audited
consolidated financial statements of CommScope for the year ended December
31, 1998 or in the unaudited condensed consolidated financial statements
included in this document.
HIGHLIGHTS
CommScope reported net income of $17 million ($0.34 per basic share and
$0.33 per diluted share) for the quarter ended June 30, 1999, an increase
of $9 million (101%) from the quarter ended June 30, 1998 net income of $8
million ($0.17 per basic and diluted share).
For the six months ended June 30, 1999, CommScope reported net income of
$28 million ($0.55 per basic share and $0.54 per diluted share), an
increase of $13 million (88%) from the six months ended June 30, 1998 net
income of $15 million ($0.30 per basic and diluted share).
Net income for the six months ended June 30, 1998 includes a one-time
pre-tax gain of $1.9 million related to the sale of the Company's
high-temperature aerospace and industrial cables business. Excluding the
gain, net income for the six months ended June 30, 1998 was $14 million
($0.28 per basic and diluted share).
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1999 WITH THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1998
NET SALES
Net sales for the second quarter and six months ended June 30, 1999
increased $45 million (32%) to $187 million and $60 million (22%) to $335
million, respectively, from the comparable prior year periods. The increase
in net sales is primarily due to strengthening domestic coaxial cable sales
and solid growth in all key product categories.
For the second quarter and six months ended June 30, 1999, international
sales increased 22% and 31%, respectively, compared to the corresponding
periods in 1998, due mainly to the acquisition of the Company's new coaxial
cable business in Seneffe, Belgium and improving Latin American sales.
Net sales to cable television and other video distribution markets
("CATV/Video Products") for the second quarter and six months ended June
30, 1999 increased $31 million (28%) to $143 million and $46 million (21%)
to $262 million, respectively, from comparable prior year periods. The
increase in sales of CATV/Video Products resulted primarily from improving
coaxial cable sales to domestic telecommunications companies and cable
television system operators (MSOs).
Net sales for local area network and other data applications ("LAN
Products") for the second quarter and six months ended June 30, 1999
increased $2 million (11%) to $23 million and decreased $6 million (13%) to
$38 million, respectively, from comparable prior periods. The
year-over-year sales decrease for LAN Products is primarily due to pricing
pressure in the LAN market. However, sales of LAN products made a strong
recovery in the second quarter of 1999, compared to the first quarter of
1999 and the second quarter of 1998, due primarily to the strength of the
underlying market, the ongoing shift to high-performance products, and the
acceptance of CommScope's Isolite TM foamed insulation for Unshielded
Twisted Pair (UTP) cables.
10
Net sales for wireless and other telecommunications applications ("Wireless
and Other Telecom Products") for the second quarter and six months ended
June 30, 1999 were $21 million and $36 million, respectively, as compared
to $9 million and $16 million for the comparable periods in 1998. These
substantial increases reflect strong sales growth in both Cell Reach for
wireless applications and other telecommunications products for enhanced
communications services.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the second quarter and six months ended June 30, 1999 was
$50 million and $87 million, respectively, compared to $33 million and $60
million for the comparable prior year periods, an increase of 53% and 44%,
respectively. Gross profit margins improved to 26.7% and 25.9% for the
second quarter and six months ended June 30, 1999, respectively, compared
to 23.0% and 21.9% for the comparable prior periods. The primary drivers of
the improvement in gross profit and gross profit margins are the increased
sales volumes and favorable product mix, engineered manufacturing
efficiencies including "value capture" vertical integration, material and
commodity cost improvements, and improving Cell Reach profitability. These
improvements were somewhat offset by lower prices for LAN Products and
sales from the Seneffe facility, which currently has lower than
Company-average margins.
The Company anticipates continued improvement in gross profit margins due
to ongoing cost reduction initiatives. However, these improvements may be
moderated by the pricing environment for LAN Products, the implementation
of a new enterprise information management system and increasing commodity
prices.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the second quarter
and six months ended June 30, 1999 was $17 million and $32 million,
respectively, compared to $13 million and $25 million for the comparable
prior periods. As a percentage of net sales, SG&A expense was 9% and 10%,
respectively, for the second quarter and six months ended June 30, 1999,
compared to 9% for both comparable periods of 1998. SG&A expense increased
primarily due to the expansion of sales and marketing efforts to support
developing products and sales growth targets.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained
steady at 1% during all periods presented. The Company has ongoing programs
to develop new products and market opportunities for its products and core
capabilities and new manufacturing technologies to achieve cost reductions.
OTHER INCOME, NET
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables
business to Alcatel for an adjusted price of $13 million. The Company
recognized a pre-tax gain from the sale of $1.9 million ($0.02 per basic
and diluted share, net of tax effect).
INTEREST EXPENSE
Interest expense for the second quarter and six months ended June 30, 1999
was $2.6 million and $5.4 million, respectively, compared to $4.1 million
and $8.3 million for the comparable prior periods. The decrease in interest
costs is due to the reduction in borrowings under the Company's credit
facility from $208 million at the end of the second quarter of 1998 to $146
million at the end of the second quarter of 1999. This reduction in
interest expense was partially offset during the six months ended June 30,
1999 by interest expense on new borrowings of 15 million Euros (equivalent
to $16.4 million at the date of borrowing), which are discussed below under
LIQUIDITY AND CAPITAL RESOURCES.
INCOME TAXES
The effective tax rate was 36% for the six months ended June 30, 1999 and
1998.
11
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $36 million for the six months ended June
30, 1999 compared to $51 million for the comparable period in 1998, a
decrease of $15 million, or 29%. The decrease in cash flow provided by
operations is primarily due to increased accounts receivable resulting from
higher sales volume and moderated somewhat by improved cash collections.
Working capital was $103 million at June 30, 1999, compared to $94 million
at December 31, 1998. Management of the Company believes that working
capital levels are appropriate to support current levels of orders and
backlog.
During the six months ended June 30, 1999, the Company invested $15 million
in equipment and facilities compared to $10 million for the comparable
period in 1998. The capital spending in each period was primarily
attributable to vertical integration projects, capacity expansion, and
equipment upgrades to meet increased current and anticipated future
business demands. The Company utilized an additional $17 million during the
six months ended June 30, 1999 to acquire Alcatel's coaxial cable business
in Seneffe, Belgium. During the six months ended June 30, 1998, the Company
received initial cash proceeds of $10 million related to the sale of its
high temperature aerospace and industrial cables business.
The Company's principal sources of liquidity both on a short-term and
long-term basis are cash flows provided by operations and funds available
under long-term credit facilities. During the six months ended June 30,
1999 the Company repaid $25 million under its revolving credit facility.
Additionally, the Company borrowed 15 million Euros (equivalent to $16.4
million on the date of borrowing) under a new variable rate term loan
agreement (the "Eurodollar Credit Agreement") to fund the acquisition of
the coaxial cable business in Seneffe, Belgium. Based upon its analysis of
the Company's consolidated financial position and the expected results of
its operations in the future, management believes that the Company will
have sufficient cash flows from future operations and the financial
flexibility to attract both short-term and long-term capital on acceptable
terms as may be needed to fund operations, capital expenditures and other
growth objectives. There can be no assurance, however, that future
industry-specific developments, general economic trends or other situations
will not adversely affect the Company's operations or its ability to meet
its cash requirements.
In the normal course of business, CommScope uses various financial
instruments, including derivative financial instruments, for purposes other
than trading. Non-derivative financial instruments include letters of
credit and commitments to extend credit (accounts receivable). The Company
controls its exposures to credit risk associated with its financial
instruments through credit approvals, credit limits and monitoring
procedures. At June 30, 1999, in management's opinion, CommScope did not
have any significant exposure to any individual or customer or
counter-party, nor did CommScope have any significant concentration of
credit risk related to any financial instrument.
Derivative financial instruments utilized by CommScope, which are not
entered into for speculative purposes, include commodity pricing contracts,
foreign currency exchange contracts, and contracts hedging exposure to
interest rates. At June 30, 1999, the Company evaluated its commodity
pricing and foreign currency exchange exposures and concluded that it was
not currently beneficial to use derivative financial instruments to hedge
its current positions with respect to those exposures. However, the
Company's Eurodollar Credit Agreement (which is not a derivative financial
instrument) serves as a hedge against currency exchange exposures related
to the Company's net investment in its coaxial cable business in Seneffe,
Belgium.
As of June 30, 1999 the Company had entered into an interest rate swap
agreement to effectively convert an aggregate amount of $50 million of
outstanding variable-rate borrowings to a fixed-rate basis. The agreement
expires in October 2001. Under the agreement, interest settlement payments
will be made quarterly based upon the spread between the three month LIBOR,
as adjusted quarterly, and the fixed rate of 4.81%.
12
Also as of June, 30, 1999, the variable rate borrowing under the Eurodollar
Credit Agreement was effectively converted into a fixed rate of 4.53%
through an interest rate swap agreement with terms that are identical to
the Eurodollar Credit Agreement. Net payments or receipts resulting from
the interest rate swap agreements are recorded as adjustments to interest
expense in each quarter.
At June 30, 1999, the weighted average effective interest rate on
outstanding borrowings and associated credit fees under the Credit
Agreement, the Eurodollar Credit Agreement, and the Alabama State
Industrial Development Authority Notes was 5.7%.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and for hedging activities. The new standard requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 133 is effective for the Company beginning with the year
ending December 31, 2001. Management is currently evaluating the effects of
SFAS No. 133 on the Company's financial statements and current disclosures.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies, and adopted the Euro as their new common legal currency. As of
that date, the Euro began trading on currency exchanges. The legacy
currencies of the participating countries will remain legal tender for a
transition period between January 1, 1999 and January 1, 2002. The Company
conducts business in member countries.
During the transition period, cash-less payments (for example, wire
transfers) can be made in the Euro, and parties to individual transactions
can elect to pay for goods and services using either the Euro or the legacy
currency. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and eventually withdraw all
legacy currencies so that they will no longer be available.
The Company is addressing the issues involved with the introduction of the
Euro. Among the issues facing the company are the assessment and conversion
of information technology ("IT") systems to allow for transactions to take
place in both the legacy currencies and the Euro and the eventual
elimination of legacy currencies. In addition, the Company is reviewing
certain existing contracts for potential modification and assessing its
pricing / marketing strategies in the affected European markets.
Based on current information, CommScope does not expect that the Euro
conversion will have a material adverse effect on its business, results of
operations, cash flows or financial condition.
13
YEAR 2000
CommScope is currently addressing an issue common to most companies -
ensuring that its existing IT systems and applications and other non-IT
control devices are suitable for continued use into and beyond the Year
2000. Many IT systems and applications and non-IT control devices utilized
by the Company use only two digits to identify a year in the date field -
and accordingly may recognize a date using "00" as the Year 1900 or some
other date rather than the Year 2000. Failure to make appropriate
modifications or upgrades to critical IT systems and applications and
non-IT control devices could result in a system failure or miscalculations
causing significant disruptions to operations. Third parties with whom the
Company interacts also employ various computer systems with similar Year
2000 compliance issues. Failure by third parties to adequately address
their own Year 2000 compliance issues exposes the Company to business risks
such as a reduced demand for the Company's products or the lack of
availability of critical raw materials or services required for
manufacturing the Company's products. The Company's products themselves -
high performance, high bandwidth cables for the telecommunications industry
- - are not affected by the Year 2000 problem. The Year 2000 compliance
discussion below is based on information currently available to the
Company. Readers are cautioned that forward-looking statements contained in
the Year 2000 section should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements".
To address the Year 2000 compliance issue, the Company has appointed a
corporate-wide Year 2000 compliance project team which is responsible for
coordinating the identification, evaluation, and implementation of changes
to IT systems and applications and non-IT control devices necessary to
achieve a Year 2000 date conversion. The Year 2000 compliance project team
is also investigating significant third parties to determine the
effectiveness of their efforts toward achieving Year 2000 compliance.
The Year 2000 compliance project team has designed a systematic methodology
of addressing the Year 2000 compliance issue, which includes: (1)
identification and evaluation of IT systems and applications and non-IT
control devices with Year 2000 compliance issues; (2) implementation of
changes to IT systems and applications and non-IT control devices to
achieve Year 2000 compliance; (3) testing of the corrective actions taken
to ensure Year 2000 compliance for the identified systems; and (4)
development of contingency plans in the event of the failure of third
parties to become Year 2000 compliant.
A database of internal IT systems and applications and non-IT control
devices which rely on date-sensitive computer logic has been developed to
provide a starting framework from which to address the significant issues
related to Year 2000 compliance. Each of these systems, applications and
devices has been classified as a priority A, B, or C issue. Both A and B
priority items are deemed as critical systems which must be modified or
upgraded into Year 2000 compliance. Priority C items are non-critical IT
and non-IT systems which will be upgraded into Year 2000 compliance upon
completion of the modification of A and B priority items.
The Year 2000 compliance project team has also accumulated a database of
significant third parties. Each of these third parties has been contacted
and asked to provide responses which will allow the Company to assess their
ability to achieve Year 2000 compliance. The Company is currently following
up on non-responses and, where necessary, responses received. The Company
has begun evaluating third party compliance through internal testing, where
feasible, to verify that the modifications are effective. Almost all of the
Company's suppliers are still engaged in executing their Year 2000
compliance efforts. As a result, the Company at this time cannot fully
evaluate the Year 2000 risks to its supply of goods and services. The
Company maintains a list of alternative suppliers as part of its
contingency plan in the event current suppliers do not timely complete
their compliance efforts. However, because there are limited sources of
certain materials used in manufacturing the Company's products, the Company
may not be able to develop an alternative source of supply if the
operations of its current suppliers are interrupted as a result of Year
2000 non-compliance. CommScope will continue to monitor the Year 2000
status of its suppliers to minimize this risk and will develop or modify,
as appropriate, contingency plans as the risks become more clear.
14
Modifications to most written programs for IT systems and applications
(which initially were developed in-house) have been in progress by Company
personnel since early 1997. In addition, certain non-compliant systems and
applications have been or are being replaced with Year 2000 compliant
systems and products. Substantially all IT systems and applications
acquired from external sources are being upgraded to Year 2000 compliant
versions (if they are not already) through system upgrades or through the
purchase of new systems. The Company believes that it has achieved 79% Year
2000 compliance for critical internal IT systems and applications at June
30, 1999, with 100% Year 2000 compliance requirements for such systems and
applications targeted for the end of the third quarter of 1999. Virtually
all the critical non-IT systems (including a variety of equipment control
devices) have been identified and are being evaluated and modified, as
appropriate, for Year 2000 compliance through upgrades to Year 2000
compliant devices.
The Company plans to test the effectiveness of corrective actions taken to
achieve Year 2000 compliance during 1999 and has begun to perform
compliance testing on systems and applications for which Year 2000
modifications have been made. As compliance testing is completed and a full
assessment of the risks from potential Year 2000 systems failures can be
made, the Company plans to develop Year 2000 contingency plans for such
risks. These contingency plans will factor in business and operating
decisions related to the potential failure of significant third parties to
become Year 2000 compliant.
The Company currently does not believe that the costs of addressing Year
2000 compliance issues will be material to the Company's results of
operations, financial condition or cash flows. The Company estimates that,
through June 30, 1999, it has spent $730,000 to address Year 2000
compliance issues for IT systems and applications and $125,000 for non-IT
devices. Future expenditures to address Year 2000 compliance issues are
currently estimated at $245,000 for IT systems and applications and
$275,000 for non-IT devices. The Company expects to finance expenditures
for Year 2000 compliance modifications through cash flows from future
operations.
Due to the Company's dependence upon, and its current uncertainty with, the
Year 2000 compliance of certain third-party suppliers and vendors, the
Company is unable to determine at this time its most reasonably likely
worst case scenario. The Company expects its Year 2000 compliance efforts
to reduce significantly the Company's current level of uncertainty
regarding the impact of these Year 2000 issues.
The Company believes that the corrective actions implemented under the
direction of the Year 2000 compliance project team will be completed on a
timely basis in a cost-effective manner to ensure that the Company's
internal systems will be operational and suitable for continued use in the
Year 2000 and beyond. In addition, the Company believes that significant
third parties will become Year 2000 compliant or that adequate contingency
plans will be developed and implemented to ensure minimal business
interruption to the Company's operations. However, there can be no
guarantee that problems associated with system failure or deficient system
operation due to Year 2000 compliance issues will not result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
15
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q which are other than historical facts
are intended to be "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, the Private Securities Litigation Reform
Act of 1995 and other related laws. These forward-looking statements are
identified by their use of such terms and phrases as "intends", "intend",
"intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projects", "projected", "projections", "plans",
"anticipates", "anticipated", "should", "designed to", "foreseeable
future", "believe", "believes" and "scheduled" and similar expressions.
These statements are subject to various risks and uncertainties, many of
which are outside the control of the Company, such as the level of market
demand for the Company's products, competitive pressures, the ability to
achieve reductions in costs and to continue to integrate acquisitions,
price fluctuations of materials and the potential unavailability thereof,
foreign currency fluctuations, technological obsolescence, international
economic and political uncertainties and other specific factors discussed
in Exhibit 99 to the Form 10-Q for the six months ended June 30, 1999. The
information contained in this Form 10-Q represents the Company's best
judgment at the date of this report based on information currently
available. However, the Company does not intend to update this information
to reflect developments or information obtained after the date of this
report and disclaims any legal obligation to do so.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bi-metallic center conductors are among the major raw materials that
the Company uses in producing coaxial cables. It purchases bi-metallic
center conductors from Copperweld Bimetallic Products Company under a
long-term supply agreement expiring in March 2000. On July 28, 1999,
the Company received from Copperweld a demand for arbitration of a
pricing dispute under the agreement, stating that Copperweld is
entitled to recover from the Company an amount which Copperweld
alleges "could exceed $5,000,000." The Company intends to answer the
demand for arbitration by denying that it owes any amount to
Copperweld and demanding that Copperweld pay the Company a purchase
price rebate exceeding $1,000,000. The Company's management believes
that the Company's position in this matter is meritorious and intends
to pursue vigorously the Company's claim and to defend vigorously
against Copperweld's allegation. No assurance can be given as to the
outcome of this arbitration.
ITEM 2. CHANGES IN SECURITIES
On June 14, 1999, the Company amended its Rights Agreement. A copy of
the amendment has been filed on the Amendment to the Registration
Statement on Form 8-A/A filed June 14, 1999 (file No. 1-12929).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the "Meeting") on
May 7, 1999. Proxies for such meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
A total of 50,509,737 shares of Common Stock with one vote each were
entitled to vote at the Meeting and holders of 44,492,987 shares voted
in person or by proxy, constituting a quorum.
At the Meeting, two of the Company's directors were elected for 3 year
terms ending at the 2002 Annual Meeting of Stockholders by the vote
set forth below:
Name of Director Votes For Votes Withheld
Edward D. Breen 43,689,152 803,835
James M. Whitson 44,031,357 461,630
The Company's other four directors, whose terms of office continue
after the Meeting, are Frank M. Drendel, Duncan M. Faircloth, Boyd L.
George, and George N. Hutton, Jr.
A proposal to ratify the appointment by the board of directors of the
Company of Deloitte & Touche LLP as independent auditors for the
Company for the 1999 fiscal year was approved by 44,401,138 votes cast
in favor, 59,038 votes cast against and 32,811 votes abstaining.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
-----------
4.2* Amendment No. 1 to the Rights Agreement, dated as of
June 14, 1999, between CommScope, Inc. and ChaseMellon
Shareholder Services, LLC.
10.8 Amended and Restated CommScope, Inc. 1997 Long Term
Incentive Plan, as amended through June 9, 1999.
10.9.1 Form of Amendment No. 1 to Severance Protection
Agreement between the Company and certain executive
officers.
10.11 CommScope, Inc. Annual Incentive Plan, as amended
through June 9, 1999.
27. Financial Data Schedule.
99. Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended June 30,
1999:
None
- ------------------
* Incorporated herein by reference from the Amendment to the Registration
Statement on Form 8-A/A filed June 14, 1999 (file No. 1-12929).
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
July 30, 1999 /s/ Jearld L. Leonhardt
- ------------------------- -----------------------------------------
Date Jearld L. Leonhardt
Executive Vice President and Chief
Financial Officer
Signing both in his capacity as Executive
Vice President on behalf of the Registrant
and as Chief Financial Officer of the
Registrant
18