-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ONc2VfcO65MXf5Bh8hragFJnpNkTKrbSFCG8cp66j9FldF+HPWSETk+oRDyP2bwG 7meZrI/5Unx8bFY0HK86ZA== 0001047469-99-009987.txt : 19990317 0001047469-99-009987.hdr.sgml : 19990317 ACCESSION NUMBER: 0001047469-99-009987 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADC TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0000061478 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 410743912 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01424 FILM NUMBER: 99566528 BUSINESS ADDRESS: STREET 1: 12501 WHITEWATER DR. CITY: MINNETONKA STATE: MN ZIP: 55343- BUSINESS PHONE: 6129388080 MAIL ADDRESS: STREET 1: 4900 W 78TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55435 FORMER COMPANY: FORMER CONFORMED NAME: MAGNETIC CONTROLS CO DATE OF NAME CHANGE: 19850605 10-Q 1 10-Q 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 January 31, 1999 OR / / TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission file number 0-1424 ADC Telecommunications, Inc. --------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0743912 - ------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12501 Whitewater Drive, Minnetonka, MN 55343 ------------------------------------------------------ (Address of principal executive offices)(zip code) (612) 938-8080 ------------------------------------------------------ (Registrant's telephone number, including area code) N/A ------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.20 par value: 134,808,118 shares as of March 12, 1999 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - UNAUDITED (IN THOUSANDS) ASSETS
JANUARY 31, OCTOBER 31, 1999 1998 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 187,412 $ 287,700 Accounts receivable 338,207 365,989 Inventories 204,060 175,763 Prepaid income taxes and other assets 47,111 33,418 ------------ ------------ Total current assets 776,790 862,870 PROPERTY AND EQUIPMENT, net 270,847 256,961 OTHER ASSETS, principally goodwill 297,092 180,756 ------------ ------------ $ 1,344,729 $ 1,300,587 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREOWNERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 69,837 $ 67,150 Accrued liabilities 148,797 115,559 Note payable 200,000 200,000 Current maturities of long-term debt 513 735 ------------ ------------ Total current liabilities 419,147 383,444 LONG TERM DEBT, less current maturities 4,844 2,769 ------------ ------------ Total liabilities 423,991 386,213 SHAREOWNERS' INVESTMENT (135,408 and 134,897 shares outstanding) 920,738 914,374 ------------ ------------ $ 1,344,729 $ 1,300,587 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. -2- ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTERS ENDED JANUARY 31, --------------------------- 1999 1998 ------------ ------------ NET SALES $ 367,205 $ 286,396 COST OF PRODUCT SOLD 192,371 152,846 ------------ ------------ GROSS PROFIT 174,834 133,550 ------------ ------------ Gross profit percentage 47.6% 46.6% ------------ ------------ EXPENSES: Research and development 38,987 30,938 Selling and administration 77,727 62,094 Goodwill amortization 4,776 2,538 Non-recurring charges 60,327 -- ------------ ------------ Total expenses 181,817 95,570 ------------ ------------ OPERATING INCOME (LOSS) (6,983) 37,980 OTHER INCOME (EXPENSES), NET: Interest (838) 1,444 Other (878) (333) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (8,699) 39,091 PROVISION FOR INCOME TAXES 4,526 13,682 ------------ ------------ NET INCOME (LOSS) $ (13,225) $ 25,409 ------------ ------------ ------------ ------------ BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.19 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. -3- ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS)
FOR THE QUARTERS ENDED JANUARY 31, --------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (13,225) $ 25,409 Adjustments to reconcile net income to net cash from operating activities - Non-recurring charges 60,327 -- Depreciation and amortization 21,512 15,220 Reduction in deferred compensation 177 140 Other 1,488 1,444 Changes in assets and liabilities Accounts receivable 47,509 14,073 Inventories (5,766) (13,370) Prepaid income taxes and other (701) (7,295) assets Accounts payable (4,783) (5,764) Accrued liabilities (2,061) (6,310) ------------ ------------ Total cash from operating activities 104,477 23,547 ------------ ------------ INVESTMENT ACTIVITIES: Acquisitions (192,422) (16,000) Property and equipment additions, net (19,345) (24,339) Long-term investments (4,944) 627 ------------ ------------ Total cash used for investment activities (216,711) (39,712) ------------ ------------ FINANCING ACTIVITIES: Increase (decrease) in long term debt 1,121 (471) Common stock issued, net 11,534 4,509 ------------ ------------ Total cash from financing activities 12,655 4,038 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (709) (357) ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS (100,288) (12,484) CASH AND CASH EQUIVALENTS, beginning of period 287,700 109,794 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 187,412 $ 97,310 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. -4- ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1ST 4TH 3RD 2ND QUARTER QUARTER QUARTER QUARTER 1999 1998 1998 1998 ----------- ----------- ----------- ----------- NET SALES $ 367,205 $ 396,151 $ 362,496 $ 334,635 COST OF PRODUCT SOLD 192,371 212,382 193,641 177,668 ----------- ----------- ----------- ----------- GROSS PROFIT 174,834 183,769 168,855 156,967 ----------- ----------- ----------- ----------- Gross profit percentage 47.6% 46.4% 46.6% 46.9% ----------- ----------- ----------- ----------- EXPENSES: Research and development 38,987 34,101 35,775 37,097 Selling and administration 77,727 73,029 68,476 64,409 Goodwill amortization 4,776 3,196 2,954 2,968 Non-recurring charges 60,327 -- -- -- ----------- ----------- ----------- ----------- Total expenses 181,817 110,326 107,205 104,474 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) (6,983) 73,443 61,650 52,493 OTHER INCOME (EXPENSE), NET: Interest (838) 1,012 1,109 1,115 Other (878) (3,114) (285) (780) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (8,699) 71,341 62,474 52,828 PROVISION FOR INCOME TAXES 4,526 24,968 21,867 18,489 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (13,225) $ 46,373 $ 40,607 $ 34,339 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- EARNINGS (LOSS) PER SHARE (BASIC) $ (0.10) $ 0.34 $ 0.30 $ 0.26 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- EARNINGS (LOSS) PER SHARE (DILUTED) $ (0.10) $ 0.34 $ 0.30 $ 0.25 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC) 135,206 134,784 134,525 134,275 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (DILUTED) 135,206 136,649 136,826 136,283 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. -5- ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED Note 1 ACCOUNTING POLICIES: The information furnished in this report is unaudited but reflects all adjustments which are necessary, in the opinion of management, for a fair statement of the results for the interim periods. The operating results for the three months ended January 31, 1999, are not necessarily indicative of the operating results to be expected for the full fiscal year. These statements should be read in conjunction with the Company's most recent Annual Report on Form 10-K. Note 2 INVENTORIES: Inventories include material, labor and overhead and are stated at the lower of first-in, first-out cost or market. Inventories at January 31, 1999, and October 31, 1998, consisted of (in thousands):
January 31 October 31, 1999 1998 ------------- ------------- Purchased materials and $ 184,416 $ 156,006 manufactured products Work-in-process 19,644 19,757 ------------- ------------- $ 204,060 $ 175,763 ------------- ------------- ------------- -------------
Note 3 NON-RECURRING CHARGES: The non-recurring charges of $60.3 million during the quarter ended January 31, 1999 represent restructuring charges of $30.0 million and the write-off of purchased in-process research and development charges of $30.3 million from the acquisitions of Teledata Communications Ltd., Hadax Electronics, Inc. and Phasor Electronics, GmbH. Purchased in-process research and development charges are described in Note 4 below. In November 1998, ADC's management approved a restructuring plan, which included initiatives to integrate the software operations of the former Wireless Systems Group with the newly formed Integrated Solutions Group, consolidate unproductive and duplicative facilities, reposition certain products and dispose of product lines that no longer fit ADC's current focus and growth strategy. Total accrued restructuring costs of $30.0 million were charged to operations in the first quarter related to these initiatives. These restructuring charges included employee termination costs and other incremental costs incurred as a direct result of the restructuring plan. Note 4 ACQUISITIONS: ADC completed three acquisitions during the first quarter of fiscal 1999 as follows:
TRANSACTION VALUE ACQUISITION (IN THOUSANDS) ------------------------------------------ ----------------- Teledata Communications, Ltd. (acquired November 1998) $ 209,000 Hadax Electronics, Inc. (acquired November 1998) 25,000 Phasor Electronics, GmbH (acquired January 1998) 9,300 --------------- $ 243,300 --------------- ---------------
-6- The aggregate purchase price of $243.3 million consisted of cash plus stock options valued at approximately $8.3 million and the assumption of existing debt (offset by the inclusion of cash in the acquired companies). The cash component of the purchase price was paid primarily through the use of funds previously obtained under the Company's available revolving credit facility. The results of operations and the estimated fair value of the assets acquired and liabilities assumed are included in ADC's financial statements from the date of acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based on ADC's estimates of fair value. The fair value of approximately $96 million assigned to intangible assets acquired consists of existing technology, assembled work force, non-competition agreements, agency relationships, customer accounts and other less significant intangible assets. The application of purchase accounting to the acquisitions described above was based on independent third-party appraisals using preferred valuation techniques to attribute fair value to acquired assets. Estimation of the fair value of in-process research and development included consideration of factors specific to the products, such as stage of completion, complexity of the work completed to date, the difficulty of completing development within a reasonable period of time, technological uncertainties, costs already incurred and the projected costs to complete. Based on these factors, management determined that it was appropriate to record a write-off of purchased in-process research and development charges of $30.3 million for the quarter ended January 31, 1999. The appraisals incorporated management's best estimates for future revenue and profitability from products in the process of development at the time of acquisition. As is the case with all projections of future events, actual results could differ. The financial statements include results from acquisitions for periods subsequent to acquisition dates. Inclusion of financial data prior to the acquisition dates would not have a material effect on reported results. Note 5 COMPREHENSIVE INCOME: On November 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting of Comprehensive Income". The standard requires the display and reporting of comprehensive income, which includes all changes in shareowners' equity with the exception of additional investments by shareowners or distributions to shareowners. Comprehensive income for the Company includes net income and the effect of translation which is charged or credited to the cumulative translation adjustments account within shareowners' equity. Comprehensive income for the three months ended January 31, 1999 and 1998 is as follows (dollars in thousands):
FOR THE QUARTER ENDED JANUARY 31, ---------------------------------- 1999 1998 -------------- ------------- Net income (loss) $ (13,225) $ 25,409 Changes in cumulative translation adjustments 1,394 (3,255) -------------- -------------- Comprehensive income (loss) $ (11,831) $ 22,154 -------------- -------------- -------------- --------------
-7- Note 6 EARNINGS PER SHARE: Basic earnings per common share was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. The following table reconciles the number of shares utilized in the earnings per share calculations for the quarters ended January 31, 1999 and 1998.
QUARTERS ENDED JANUARY 31, --------------------------------- (IN THOUSANDS EXCEPT EARNINGS 1999 1998 PER SHARE) --------------- --------------- Net income (loss) $ (13,225) $ 25,409 Net income (loss) per common share (basic) (0.10) 0.19 Net income (loss) per common share (diluted) (0.10) 0.19 Weighted average common shares outstanding (basic) 135,206 133,719 Effect of diluted securities - stock options* -- 3,195 Weighted average common shares outstanding (diluted) 135,206 136,914
*Stock options were antidilutive in the quarter ended January 31, 1999 due to a net loss for the period. As a result, there is no effect to the weighted average shares outstanding. Note 7 STOCK REPURCHASE PROGRAM: In April 1998, the Company announced a stock repurchase program under which the Company may purchase up to 6.7 million shares of common stock in open market transactions as market and business conditions warrant. The Company may also utilize forward repurchase agreements, "equity collar" arrangements using call and put options, or other arrangements as part of this stock repurchase program. In connection with the stock repurchase program, the Company sold put options to independent third parties that entitle holders of the options to sell shares of Company common stock to the Company. In addition, the Company purchased call options from the same parties that entitled the Company to buy shares of its common stock. In January 1999, ADC received 188,100 shares of its common stock in partial settlement of outstanding options. The remaining options were settled in February 1999. As a result of the February settlement of outstanding options, ADC received an additional 849,522 shares. Shares received in settlement of the "equity collar" arrangements were retired and remain available for re-issuance at a later date. These settlements had an insignificant effect on ADC's financial statements for the quarter ended January 31, 1999 and will not significantly affect ADC's future results of operations or financial condition. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ADC Telecommunications, Inc. ("ADC") offers a broad range of systems and solutions that enable its customers to create and upgrade their communications networks to support increasing user demand for voice, Internet/data and video services. Telephone companies, cable TV operators, wireless service providers and other communications service providers are building the infrastructure required to offer high-speed Internet access, data, video, telephony and other interactive multimedia services to residential and business customers. Broader network bandwidths are required for these services, and ADC's development efforts and product offerings are focused on "unlocking the capacity of the local loop" by eliminating bottlenecks and increasing the speed and efficiency of communications networks. The local loop is the last mile of the communications network from the local service providers' offices through the network equipment that connects to the end-user's residence or business. ADC offers hardware and software systems, and integrated solutions within the following four product groups: Broadband Connectivity Group, Business Broadband Group, Residential Broadband Group and Integrated Solutions Group. Each of these groups is described below. BROADBAND CONNECTIVITY products are designed for use in twisted-pair, coaxial, fiber-optic or wireless transmission networks and are sold to both public and private global service providers. ADC's Broadband Connectivity products provide the physical contact points for connecting different communications system components and gaining access to communications system circuits for the purpose of installing, testing, monitoring, accessing, managing, reconfiguring, splitting and multiplexing such circuits within the local loop portion and central office of global public and private networks. ADC's Broadband Connectivity products are sold to the Regional Bell Operating Companies, other telephone companies, long distance carriers, other public network providers (including cable TV operators and wireless services providers), international network operators, private network providers and original equipment manufacturers (OEM). Broadband Connectivity products include network access/connection devices for twisted-pair and coaxial networks, network access/connection devices for fiber-optic networks, modular fiber-optic cable routing systems, outside plant cabinets and other enclosures, and wireless infrastructure equipment. Broadband Connectivity products also include ADC's family of CityWide-TM- wireless systems products, which consist of wideband digital microcells and repeaters for extending cellular communication coverage, both in buildings and outdoors. BUSINESS BROADBAND products enable carriers to deliver voice, Internet/data and video services to their business customers. Products include Interoffice and Loop Transport Platforms (including Soneplex(R) and Cellworx-TM-products) as well as a broad family of access devices often sold with these platforms to provide complete service delivery solutions. Soneplex is a carrier-class, intelligent loop access platform enabling Incumbent Local Exchange Carriers and Competitive Local Exchange Carriers to deliver T1/E1-based services over copper or fiber facilities. Soneplex integrates functions and capabilities that reduce a carrier's total cost of delivering T1/E1-based services. Cellworx is a next-generation OC-12/48 SONET/SDH transport element integrating ATM and SONET/SDH technologies. While Soneplex is centered on T1/E1-based -9- service delivery, Cellworx is a broad-based service delivery infrastructure product aimed at reducing a carrier's capital and operating costs of delivering a full range of high-speed and low-speed services over copper (HDSL, ADSL and others) or fiber facilities. Business Broadband products also include access devices, consisting of Customer Located Devices (which are part of the carrier's network) as well as Customer Premise Devices (which are owned by the carrier's business customer). These products can work alone or in conjunction with Soneplex or Cellworx products or with other vendors' transport systems. They include DSU/CSUs, T1/E1 multiplexers (offering a variety of voice, data and video interfaces), T3/E3 multiplexers, integrated access devices and ATM access concentrators. During the quarter ended January 31, 1999, the Business Broadband Group introduced its new ServicePoint and Opera access products, recorded its first revenues for Cellworx and shipped its new Soneplex HDSL2 capability (i.e., single pair HDSL) to a key customer beta trial. ServicePoint is designed to be the industry's next generation DSU/CSU product, and Opera is designed to be the industry's next generation Integrated Access Device. ADC believes that ServicePoint is the first to integrate, terminate, and monitor traffic control capabilities and that Opera is the first protocol independent service platform enabling multiple services to be delivered flexibility and cost effectively from the same platform. RESIDENTIAL BROADBAND products offer digital transport systems that enable cable TV operators to economically transport high-speed digital signals for two-way voice, video and Internet/data services to residences and businesses, primarily through ADC's Homeworx-TM- access transport platform and DV6000-TM- system. ADC's Homeworx access transport platform utilizes Hybrid Fiber/Coaxial (HFC) technology. The Homeworx system has been designed for deployment on video-only, telephony-only and integrated video, telephony and data broadband networks provided by telephone operating companies, cable TV operators and other communications common carriers. ADC's DV6000 system transmits a variety of signal types using a high-speed, uncompressed digital format over fiber in the super trunking portions of cable TV, broadcast and interactive video networks. The DV6000 system and related MPEG-based products are also used to provide a wide range of video transport and interactive distance learning services for government, campus and other broadcast markets. ADC also provides a line of analog fiber-optics transmitter and node products for the cable TV industry. These products are deployed in the United States and internationally by cable TV operators that are upgrading their equipment to carry two-way service over HFC systems, including digital interactive video, Internet/data and voice services. Teledata Communications, Ltd. was acquired on November 5, 1998. Teledata's product portfolio consists of a family of digital loop carriers and wireless local loop access solutions. Digital loop carriers (DLC's) include the BroadAccess-TM- family of compact and flexible future generation DLCs, which provide voice and data services. Teledata's wireline and wireless solutions address a wide variety of access requirements both in situations where new networks are being deployed and in established networks. Its products are modular and scalable making them easily configurable for differing subscriber cluster sizes, and are suitable for indoor or outdoor installations in a variety of environmental conditions and network configurations. Teledata's products also offer advanced monitoring, testing, maintenance and management features and incorporate a number of core technologies, including fiber optics and high speed digital transmissions, digital radio and software for telecommunications network management and protocol conversion. -10- The purchase of Phasor Electronics, an Austrian-based manufacturer of radio frequency amplifiers, provides the Residential Broadband Group with an established international customer base as well as the critical local engineering and support services required to compete in the rapidly growing European market for cable TV amplifiers. Phasor's customer base includes major European cable television operators and original equipment manufacturers. INTEGRATED SOLUTIONS products consist of project management, technical consulting and design, implementation, reliability, performance and training services, and software systems, which support multi-division and multi-vendor solutions. ADC provides services and software primarily to telephone operating companies, cable TV operators, other common carriers and users of private communications networks. Software is provided through ADC's subsidiaries, ADC NewNet, ADC Metrica and ADC Apex. ADC NewNet is a developer of intelligent network communications software, including Signaling Systems 7 (SS7) technology, wireless intelligent network products (such as short messaging servers) and products compliant with the Communications Assistance to Law Enforcement Act (CALEA). ADC Metrica designs and sells communications network performance management software to wireline and wireless service providers. ADC Apex provides SoftXchange-TM- network management software and operations and business support system services. Historically, ADC's principal product offerings generally consisted of copper-based and fiber-optic-based products designed to address the needs of its customers for transmission and connectivity on traditional telephony networks. With the growth of multimedia applications and the related development of enhanced voice, Internet/data and video services, ADC's more recent product offerings and research and development efforts have increasingly focused on emerging technologies and hardware, software and service offerings for broadband communications applications. The market for broadband communications hardware and software systems, and integrated solutions is evolving and rapidly changing. ADC's growth is dependent in part on its ability to successfully develop and commercially introduce new products in each of its product groups addressing this market and also dependent on the growth of the market. The growth in the market for such broadband communications products is dependent on a number of factors, including the amount of capital expenditures by communications service providers, regulatory and legal developments, changes to capital expenditure rates by communications service providers (which could result from the ongoing consolidation of customers in these markets as well as the addition of new customer entrants to the market) and end-user demands for integrated voice, Internet/data, video and other communications services. There can be no assurance that ADC's new or enhanced products and services will meet with market acceptance or be profitable. ADC's operating results may fluctuate significantly from quarter to quarter due to several factors. ADC is growing through acquisition and expansion, and results of operations described in this report may not be indicative of results to be achieved in future periods. ADC's expense levels are based in part on management's expectations of future revenues. Although management has and will continue to take measures to adjust expense levels, if revenue levels in a particular period fluctuate, operating results may be adversely affected. In addition, ADC's results of operations are subject to seasonal factors. ADC historically has experienced a stronger demand for its products in the fourth fiscal quarter, primarily as a result of customer budget cycles and ADC year-end incentives, and has experienced a weaker demand for its products in the first fiscal quarter, primarily as a result of the number of holidays in late November, December and early January and a general -11- industry slowdown during that period. There can be no assurance that these historical seasonal trends will continue in the future. YEAR 2000 MATTERS Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities). As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with Year 2000 requirements. The potential global impact of the Year 2000 problem is not known, and, if not corrected in a timely manner, could affect ADC and the U.S. and world economy generally. ADC's project team (consisting of representatives from its information technology, finance, business development, manufacturing, product development, sales, marketing and legal departments) is addressing internal and external Year 2000 issues. ADC's internal financial, manufacturing and other computer systems are being reviewed to assess and minimize Year 2000 issues. ADC's assessment of internal systems includes its information technology ("IT") as well as non-IT systems (which systems may contain embedded technology in manufacturing or process control equipment containing microprocessors or other similar circuitry). ADC's Year 2000 readiness program includes the following phases: identifying systems that may be modified or replaced; carrying out modifications to existing systems or convert to new systems; and conducting validation testing of various systems and applications to determine their readiness. ADC is currently finishing the second and beginning the third phase of this program for its corporate-level IT systems and finishing the first and beginning the second phase for other systems. ADC's product development processes currently contain steps to include Year 2000 readiness verification for all current and future products. Most of ADC's existing products are currently Year 2000 ready, and ADC believes that all of its products will be Year 2000 ready prior to October 31, 1999. The amount of work required to address Year 2000 issues is not expected to be extensive. ADC has replaced certain of its financial and operational systems in the last several years, and management believes that the new equipment and software substantially address Year 2000 issues. However, ADC may be required to modify some of its existing hardware and software. ADC retained a consulting firm to assess ADC's corporate-level IT system readiness for Year 2000. The firm concluded that more than 75% of these hardware and software systems are Year 2000 ready. ADC has addressed the remaining 25% and is assessing the other hardware and software used by ADC and its business units for Year 2000 readiness. ADC estimates that it will complete its Year 2000 readiness program for all of its significant internal systems by October 31, 1999. -12- ADC retained the same consulting firm to assess ADC's engineering design systems readiness for Year 2000. The firm concluded that 80% of ADC's engineering application software is or is in the process of becoming Year 2000 ready and 75% of the engineering hardware is or is in the process of becoming Year 2000 ready. ADC has addressed the remaining hardware and software used by ADC and its business units for Year 2000 readiness. ADC estimates that it will complete its Year 2000 readiness program for all of its significant engineering design systems by October 31, 1999. In addition, ADC is requesting assurances from its major suppliers that they are addressing the Year 2000 issue and that products and services purchased by ADC from such suppliers will function properly in the year 2000. Also, contacts are being made with ADC's major customers. These actions are intended to help mitigate the possible external impact of the Year 2000 problem. However, it is impossible to fully assess the potential consequences in the event that service interruptions from suppliers occur or in the event that there are disruptions in such infrastructure areas as utilities, communications, transportation, banking and government. The total estimated cost for resolving ADC's Year 2000 issues is approximately $3.5 million, of which approximately $1.7 million has been spent through January 31, 1999. The total cost estimate includes the cost of replacing systems in cases where ADC has accelerated plans to replace such systems, which are not Year 2000 ready. Estimates of Year 2000 costs are based on numerous assumptions, and there can be no assurance that the estimates are correct or that actual costs will not be materially greater than anticipated. Based on its assessments to date, ADC believes it will not experience any material disruption as a result of Year 2000 issues in internal manufacturing processes, information processing, or interfacing with major customers, or with processing orders and billing. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to ADC, a shutdown of certain of ADC's operations at individual facilities could occur for the duration of the disruption. ADC is developing a contingency plan (in the event of a Year 2000 disruption) to provide for continuity of processing based on the outcome of testing its Year 2000 readiness program and the results of surveying its major suppliers and customers. Preliminary contingency plans are expected to be completed in April 1999 and final plans by June 1999. Assuming no major disruption in service from utility companies or other critical third-party providers, ADC believes that it will be able to manage its total Year 2000 transition without any material effect on ADC's results of operations or financial condition. The most reasonably likely worst-case scenario of failure by ADC or its suppliers or customers to resolve Year 2000 issues could potentially be a temporary slowdown or cessation of manufacturing operations at one or more of ADC's facilities, and/or a temporary inability on the part of ADC to timely process orders and to deliver finished products to customers. Delays in meeting customers' orders could potentially affect the timing of billings to and payments received from customers and could result in complaints, charges or claims. Customers' Year 2000 issues could potentially also delay the timing of payments to ADC. -13- EURO CONVERSION On January 1, 1999, several member countries of the European Union established fixed conversion rates, and adopted the Euro as their new common legal currency. Beginning on such date, the Euro began trading on currency exchanges while the legacy currencies remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During the transition period, parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002 the participating countries will introduce Euro currency coins and withdraw all legacy currencies. The Euro conversion may affect cross-border competition by creating cross-border price transparency. ADC is assessing its pricing and marketing strategy in order to insure that ADC remains competitive in a broader European market. ADC is also modifying its information technology systems to allow for transactions to take place in both the legacy currencies and the Euro and the eventual elimination of the legacy currencies. In addition, ADC is reviewing whether certain existing contracts will need to be modified. ADC's currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. ADC will continue to evaluate issues involving introduction of the Euro. Based on current information and assessments, ADC does not expect that the Euro conversion will have a material effect on its results of operations or financial condition. RISK MANAGEMENT In the past, the Company has sold put options and purchased call options on shares of the Company's common stock in connection with its stock repurchase program. See Note 7 to the Unaudited Consolidated Financial Statements. The Company is not currently a party to any such put option and call option program, but the Company may elect to enter into such a program in the future. In the event it does so, the Company would have exposure to adverse market changes in the value of its common stock. ADC is exposed to market risk from changes in foreign currency exchange rates, which could impact ADC's results of operations and financial condition. To a limited extent, ADC manages its exposure to these market risks through the use of short-term foreign currency forward contracts. ADC has historically hedged accounts receivable in foreign currencies, but may in the future hedge anticipated transactions with vendors and customers to further manage risk of fluctuations in currency exchange rates. ADC uses forward contracts as risk management tools and not for speculative purposes. While ADC manages exposure to foreign currency fluctuations relating to customer transactions, the decline in value of currencies may adversely affect future product sales because ADC's products may become more expensive for customers to purchase in their local currency. RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the quarters ended January 31, 1999 and 1998 and the percentage changes in these income and expense items between periods are contained in the following table: -14-
PERCENTAGE INCREASE PERCENTAGE OF NET SALES (DECREASE) FOR THE QUARTERS ENDED BETWEEN JANUARY 31 PERIODS ------------------------------- -------------- 1999 1998 -------------- -------------- NET SALES 100.0% 100.0% 28.2% COST OF PRODUCT SOLD (52.4) (53.4) 25.9 -------------- -------------- GROSS PROFIT 47.6 46.6 30.9 EXPENSES: Research and Development (10.6) (10.7) 26.0 Selling and administration (21.2) (21.7) 25.2 Goodwill amortization (1.3) (0.9) 88.2 Non-recurring charges (16.4) -- -- -------------- -------------- -------------- OPERATING INCOME (LOSS) (1.9) 13.3 (118.4) OTHER INCOME (EXPENSE), NET: Interest (0.2) 0.5 (158.0) Other (0.3) (0.1) (163.7) -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES (2.4) 13.7 (122.3) PROVISION FOR INCOME TAXES (1.2) (4.8) (66.9) -------------- -------------- NET INCOME (LOSS) (3.6)% 8.9% (152.0) -------------- -------------- -------------- -------------- -------------- --------------
NET SALES: The following table sets forth the Company's net sales for the quarters ended January 31, 1999 and 1998 for each of the Company's functional product groups described above:
QUARTER ENDED JANUARY 31, ($ IN THOUSANDS) ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- PRODUCT GROUP NET SALES % NET SALES % - ----------------------------------------------- ------------- ------------- ------------- ------------- BROADBAND CONNECTIVITY $ 175,196 47.7% $ 126,127 44.0% BUSINESS BROADBAND 73,283 19.9 80,483 28.1 RESIDENTIAL BROADBAND 66,369 18.1 43,236 15.1 INTEGRATED SOLUTIONS 52,357 14.3 36,550 12.8 ------------- ------------- ------------- ------------- TOTAL $ 367,205 100.0% $ 286,396 100.0% ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Net sales for the quarter ended January 31, 1999 were $367.2 million, an $80.8 million or 28.2% increase over the comparable 1998 quarter. This net increase is the result of increases in net sales for the broadband connectivity products plus revenue contributions from companies acquired since January 31, 1998. Such revenue contributions from acquired companies totaled $25.9 million for the quarter ended January 31, 1999. Consistent with prior years, ADC's first quarter sales were adversely impacted by the seasonal buying patterns of its customers. As such, first quarter revenues were $28.9 million less than fourth quarter 1998 revenues. Net sales of Broadband Connectivity products represent 47.7% of total revenues and increased 38.9% during the quarter ended January 31, 1999. The growth in this product group is primarily attributable to strong global demand for ADC's DSX products, optical components, and fiber frames. The Company expects that future sales of Broadband Connectivity products will continue to account for a substantial portion of the Company's revenues, although these products may decline as a -15- percentage of total net sales primarily due to the ongoing evolution of technologies in the telecommunications marketplace. During the quarter ended January 31, 1999, net sales of Business Broadband products decreased $7.2 million or 8.9% over the comparable 1998 quarter. The decrease was the result of lower shipments of Loop Transport and CSU/DSU access products due to temporary changes in customer buying patterns by certain large customers. The $23.1 million or 53.5% increase in net sales of Residential Broadband products is primarily the result of the additional shipments from Teledata which was acquired in November 1998 and the continued roll out of Homeworx-TM- cable telephony systems. During the quarter ended January 31, 1999, net sales of Integrated Solutions Group increased $15.8 million or 43.2% over the comparable 1998 quarter as record first quarter sales were recorded for both system integration services and software products. Strong demand continues as telecommunication service providers aggressively build and upgrade networks that offer integrated voice, video and Internet/data services. GROSS PROFIT: The gross profit percentage for first quarter 1999, 47.6% of net sales, improved over the 46.6% gross profit percentage for first quarter 1998 primarily due to a product sales mix that was weighted toward sales of higher margin products. Future gross profit percentages will continue to be affected by the mix of products, the timing of new product introductions and manufacturing volume, among other factors. OPERATING EXPENSES: Operating expenses for the quarters ended January 31, 1999 and 1998 were $181.8 million (including non-recurring charges of $60.3 million in the first quarter of 1999), and $95.6 million, respectively. The 1999 non-recurring charges represent the write-off of purchased in-process research and development costs resulting from the acquisitions of Teledata Communications, Hadax Electronics, and Phasor Electronics along with costs for strategic restructuring of the product line previously referred to as Wireless Systems Group. See Notes 3 and 4 to the Consolidated Financial Statements concerning restructuring costs and the write-off of purchased in-process research and development costs. Operating expenses before non-recurring charges for the quarters ended January 31, 1999 and 1998 were $121.5 million and $95.6 million, representing 33.1% and 33.4% of net sales, respectively. The increase in absolute dollars of operating expenses before non-recurring charges was due primarily to costs associated with acquired companies and expanded operations necessary to support higher revenue levels. Research and development expenses were $39.0 million for the quarter ended January 31, 1999, representing a 26.0% increase over $30.9 million for the quarter ended January 31, 1998. The increase reflects the activities from acquired companies plus substantial product development and introduction efforts in all functional product groups. ADC believes that, given the rapidly changing technology and competitive environment in the telecommunications equipment industry, continued commitment to product development efforts will be required for ADC to remain competitive. Accordingly, ADC intends to continue to allocate substantial resources to product development for each functional product groups. However, ADC recognizes the need to balance the cost of product development with expense control and remains committed to carefully managing the rate of increase of such expenses. -16- Selling and administration expenses were $77.7 million for the quarter ended January 31, 1999, representing a 25.2% increase over the quarter ended January 31, 1998. The increase reflects selling activities of acquired companies, new product introductions and additional personnel costs related to expanded operations. Several of ADC's acquisitions have been accounted for as purchase transactions in which the initial purchase prices exceeded the fair value of the acquired assets. The amortization of goodwill from new acquisitions resulted in increased goodwill amortization expense of $4.8 million for the quarter ended January 31, 1999, compared to $2.5 million in the quarter ended January 31, 1998. OTHER INCOME (EXPENSE), NET: For the quarters ended January 31, 1999 and 1998, the net interest income (expense) category represented net interest income on cash and cash equivalents. See "Liquidity and Capital Resources" below for a discussion of cash levels. Other expense primarily represented the gain or loss on foreign exchange transactions, the sale of fixed assets and the ADC's share of net operating results of its investments in other companies accounted for on an equity basis. INCOME TAXES: The effective income tax rate for the 1999 quarter was significantly affected by non-tax deductible purchased in-process research and development charges. These expenses are associated with the acquisitions made during the quarter. In addition, a higher marginal rate of 37% was applied to restructuring expenses. Excluding the impact of purchased in-process research and development and the higher rate used for restructuring charges, the effective income tax rate was 34% and 35% for the quarters ended January 31, 1999 and 1998, respectively. In addition to the non-deductible goodwill amortization included in operating expenses each quarter, the rates reflect the beneficial impact of foreign and domestic tax incentives. NET INCOME: ADC reported a net loss of $13.2 million (or $0.10 per share) for the quarter ended January 31, 1999, compared to net income of $25.4 million (or $0.19 per share) for the quarter ended January 31, 1998. See Note 3 to the Unaudited Consolidated Financial Statements. Before the non-recurring charges of $47.3 million, net of tax, net income for the quarter ended January 31, 1999 was $34.1 million (or $0.25 per share). LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents, primarily short-term investments in commercial paper with maturities of less than 90 days, decreased $100.3 million and $12.5 million during the quarters ended January 31, 1999 and 1998, respectively. The major elements of the 1999 decrease were the use of cash for acquisitions offset by $104.5 million provided by operations plus approximately $40 million cash that was obtained in the Teledata acquisition. The major elements of the 1998 change were cash provided by operations of $23.5 million offset by cash used in the acquisition of W.E.Tech, Inc. ($16 million) and the purchase of property and equipment ($24.3 million). At January 31, 1999 and October 31, 1998, the Company had approximately $204.8 million and $202.8 million of debt outstanding, respectively. This represents $200 million outstanding on a revolving credit facility plus debt of acquired companies. -17- Management believes that current cash balances, cash generated from operating activities, and available credit facilities will be adequate to fund working capital requirements and capital expenditures during the remainder of the fiscal year. However, ADC may find it necessary to seek additional sources of financing to support its capital needs, for additional working capital, potential investments or acquisitions, or otherwise. At January 31, 1999, ADC has a $340 million five-year credit facility for general corporate purposes. During fiscal 1998 ADC drew $200 million under the facility in connection with its pending acquisition of Teledata. This amount remains outstanding at January 31, 1999 at an interest rate equal to commercial paper interest rate plus 25 basis points (5.25% at January 31, 1999). CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent ADC's expectations or beliefs concerning future events, including the following: any statements regarding future sales and gross profit percentages, any statements regarding the continuation of historical trends, and any statements regarding the sufficiency of ADC's cash balances and cash generated from operating and financing activities for ADC's future liquidity and capital resource needs. ADC cautions that any forward-looking statements made by the Company in this Form 10-Q or in other announcements made by ADC are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitations, the factors set forth on Exhibit 99-a to the Company's Report on Form 10-K for the year ended October 31, 1998. -18- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. An annual meeting of shareholders was held on February 23, 1999. Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities and Exchange Act of 1934, there was no solicitation in opposition to the management's nominees for director as listed in the proxy statement and all such nominees were elected. b. At the annual meeting, James C. Castle, Donald M. Sullivan and John D. Wunsch were elected as directors, and William J. Cadogan, Thomas E. Holloran, B. Kristine Johnson, Alan E. Ross, Jean-Pierre Rosso and Warde F. Wheaton continued as directors after the annual meeting. The following table shows the vote totals with respect to the election of the three directors: For terms expiring in 2002 VOTES AUTHORITY NAME FOR WITHHELD ------------------------------------------------------------- James C. Castle 119,511,932 358,170 Donald M. Sullivan 119,516,486 353,616 John D. Wunsch 119,513,477 356,625 c. In addition to the election of directors, shareholders also approved amendments to ADC's 1991 Stock Incentive Plan to (i) increase the number of shares available for issuance pursuant to awards thereunder, (ii) extend the term of the 1991 Stock Incentive Plan until February 26, 2006 and (iii) limit the number of shares of ADC Common Stock that can be issued as restricted stock awards under the 1991 Stock Incentive Plan. -19- The following table shows the vote totals with respect to the amendments to the 1991 Stock Incentive Plan: Votes For: 85,619,838 Votes Against: 33,802,985 Abstentions: 446,079 Broker non-votes: 1,200 d. None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 4-a Form of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a to the Company's Form 10-Q for the quarter ended January 31, 1996.) 4-b Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 dated April 15, 1997.) 4-c Restated Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 dated April 15, 1997.) 4-d Second Amended and Restated Rights Agreement, amended and restated as of November 28, 1995, between ADC Telecommunications, Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September 23, 1986, as amended and restated as of August 16, 1989), which includes as Exhibit A thereto the form of Right Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated December 11, 1995.) 10-a ADC Telecommunications, Inc. 1991 Stock Incentive Plan (as amended and restated through February 23, 1999). 27-a Financial Data Schedule. b. Reports on Form 8-K -20- None -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 16, 1999 ADC TELECOMMUNICATIONS, INC. By: /s/ Robert E. Switz ---------------------------------- Robert E. Switz Senior Vice President, Chief Financial Officer (Principal Financial Officer, Duly Authorized Officer) -22- ADC TELECOMMUNICATIONS, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED JANUARY 31, 1999 Exhibit No. Description - ---------- ----------- 4-a Form of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a to the Company's Form 10-Q for the quarter ended January 31, 1996.) 4-b Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 dated April 15, 1997.) 4-c Restated Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 dated April 15, 1997.) 4-d Second Amended and Restated Rights Agreement, amended and restated as of November 28, 1995, between ADC Telecommunications, Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September 23, 1986, as amended and restated as of August 16, 1989), which includes as Exhibit A thereto the form of Right Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated December 11, 1995.) 10-a ADC Telecommunications, Inc. 1991 Stock Incentive Plan (as amended and restated through February 23, 1999) . . . . 27-a Financial Data Schedule . . . . . . . . . . . . . . . . . . EX-10.A 2 EXHIBIT 10.A ADC TELECOMMUNICATIONS, INC. 1991 STOCK INCENTIVE PLAN (as amended and restated through February 23, 1999) SECTION 1. PURPOSE; EFFECT ON PRIOR PLAN. (a) PURPOSE. The purpose of the ADC Telecommunications, Inc. 1991 Stock Incentive Plan (the "Plan") is to aid in maintaining and developing management personnel capable of assuring the future success of ADC Telecommunications, Inc. (the "Company"), to offer such personnel incentives to put forth maximum efforts for the success of the Company's business and to afford such personnel an opportunity to acquire a proprietary interest in the Company. (b) EFFECT ON PRIOR PLAN. From and after the effective date of the Plan, no stock options or restricted stock awards shall be granted under the Company's Stock Option and Restricted Stock Plan. All outstanding stock options and restricted stock awards previously granted under the Stock Option and Restricted Stock Plan shall remain outstanding in accordance with the terms thereof. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or Dividend Equivalent granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. (e) "Committee" shall mean a committee of the Board of Directors of the Company designated by such Board to administer the Plan and composed of not less than three directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3. (f) "Dividend Equivalent" shall mean any right granted under Section 6(e) of the Plan. 1 (g) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, for purposes of the Plan, the Fair Market Value of Shares on a given date shall be (i) the last sale price of the Shares as reported on the NASDAQ National Market System on such date, if the Shares are then quoted on the NASDAQ National Market System or (ii) the closing price of the Shares on such date on a national securities exchange, if the Shares are then being traded on a national securities exchange. (h) "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (i) "Key Employee" shall mean any employee of the Company or any Affiliate who the Committee determines to be a key employee. (j) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. (k) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (l) "Participant" shall mean a Key Employee designated to be granted an Award under the Plan. (m) "Performance Award" shall mean any right granted under Section 6(d) of the Plan. (n) "Person" shall mean any individual, corporation, partnership, association or trust. (o) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan. (p) "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. (q) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation thereto. (r) "Shares" shall mean shares of Common Stock, $.20 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan. (s) "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. 2 SECTION 3. ADMINISTRATION. (a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments are to be calculated in connection with) Awards; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock or Restricted Stock Units; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash or Shares payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award and any employee of the Company or any Affiliate. (b) MEETINGS OF THE COMMITTEE. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as the Committee may determine. A majority of the Committee's members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable. SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(c), the number of Shares available for granting Awards under the Plan shall be 29,019,008. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares or cash payments to be received thereunder, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. In addition, any Shares that are used by a Participant as full or partial payment to the Company of the purchase price of Shares acquired upon exercise of an Option shall again be available for granting Awards. 3 (b) ACCOUNTING FOR AWARDS. For purposes of this Section 4, (i) if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan; and (ii) if an Award entitles the holder to receive cash payments but the amount of such payments are denominated in or based on a number of Shares, such number of Shares shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan; provided, however, that Awards that operate in tandem with (whether granted simultaneously with or at a different time from), or that are substituted for, other Awards may be counted or not counted under procedures adopted by the Committee in order to avoid double counting. (c) ADJUSTMENTS. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or securities or other property) which thereafter may be made the subject of Awards, (ii) the number and type of Shares (or securities or other property) subject to outstanding Awards and (iii) the exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. (d) INCENTIVE STOCK OPTIONS. Notwithstanding the foregoing, the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 29,019,008, subject to adjustment as provided in the Plan and Section 422 or 424 of the Code. SECTION 5. ELIGIBILITY. Any Key Employee, including any Key Employee who is an officer or director of the Company or any Affiliate, shall be eligible to be designated a Participant; provided, however, that an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a "subsidiary corporation" of the Company within the meaning of Section 424(f) of the Code. SECTION 6. AWARDS. (a) OPTIONS. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: 4 (i) EXERCISE PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that such purchase price shall not be less than the Fair Market Value of a Share on the date of grant of such Option. (ii) OPTION TERM. The term of each Option shall be fixed by the Committee. (iii) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. (b) STOCK APPRECIATION RIGHTS. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (c) RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) RESTRICTIONS. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. (ii) STOCK CERTIFICATES. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate or certificates. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. 5 (iii) FORFEITURE; DELIVERY OF SHARES. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units. (iv) LIMIT ON RESTRICTED STOCK AWARDS. Effective February 23, 1999, the maximum number of Shares under the Plan available for grants of Restricted Stock made after such date shall be 235,046 Shares. (d) PERFORMANCE AWARDS. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash or Shares (including, without limitation, Restricted Stock) and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment to be made pursuant to any Performance Award shall be determined by the Committee. (e) DIVIDEND EQUIVALENTS. The Committee is hereby authorized to grant to Participants Dividend Equivalents under which such Participants shall be entitled to receive payments (in cash or Shares, as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan and any applicable Award Agreement, such Dividend Equivalents may have such terms and conditions as the Committee shall determine. (f) GENERAL. (i) NO CASH CONSIDERATION FOR AWARDS. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. 6 (iii) FORMS OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and of any applicable Award Agreement, payments to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in Shares, cash or a combination thereof as the Committee shall determine, and may be made in a single payment, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments. (iv) LIMITS ON TRANSFER OF AWARDS. No Award and no right under any such Award shall be assignable, alienable, salable or transferable by a Participant otherwise than by will or by the laws of descent and distribution; PROVIDED, HOWEVER, that a Participant may, in the manner established by the Committee, (A) designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant, or (B) transfer a Non-Qualified Stock Option to any member of such Participant's immediate family (which, for purposes of this clause (B) shall mean such Participant's children, grandchildren, or current spouse) or to one or more trusts established for the exclusive benefit of one or more such immediate family members or partnerships in which the Participant or such immediate family members are the only partners, PROVIDED that (1) there is no consideration for such transfer, and (2) the Non-Qualified Options held by such transferees continue to be subject to the same terms and conditions (including restrictions on subsequent transfers) as were applicable to such Non-Qualified Options immediately prior to their transfer. Each Award or right under any Award shall be exercisable during the Participant's lifetime only by the Participant, by a transferee pursuant to a transfer permitted by clause (B) of this Section 6(f)(iv), or, if permissible under applicable law, by the Participant's or such transferee's guardian or legal representative. No Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee. (vi) RULE 16B-3 SIX-MONTH LIMITATIONS. To the extent required in order to comply with Rule 16b-3 only, any equity security offered pursuant to the Plan may not be sold for at least six months after acquisition, except in the case of death or disability, and any derivative security issued pursuant to the Plan shall not be exercisable for at least six months, except in case of death or disability. Terms used in the preceding sentence shall, for the purposes of such sentence only, have the meanings, if any, assigned or attributed to them under Rule 16b-3. (vii) RESTRICTIONS; SECURITIES EXCHANGE LISTING. All certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. If the Shares are traded on a securities exchange, the Company shall not be required to deliver any Shares covered by an Award unless and until such Shares have been admitted for trading on such securities exchange. (viii) AWARD LIMITATIONS UNDER THE PLAN. No Participant may be granted any Award or Awards under the Plan, the value of which Award or Awards are based solely on an increase in the value of Shares after the date of grant of such Award or Awards, for more 7 than 1,000,000 Shares, in the aggregate, in any one calendar year period beginning with the 1994 calendar year. The foregoing annual limitation specifically includes the grant of any Awards representing "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) AMENDMENTS TO THE PLAN. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that: (i) absent such approval, would cause Rule 16b-3 to become unavailable with respect to the Plan; (ii) requires the approval of the Company's shareholders under any rules or regulations of the National Association of Securities Dealers, Inc. or any securities exchange that are applicable to the Company; or (iii) requires the approval of the Company's shareholders under the Code in order to permit Incentive Stock Options to be granted under the Plan. (b) AMENDMENTS TO AWARDS. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof. (c) CORRECTION OF DEFECTS, OMISSIONS AND INCONSISTENCIES. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. SECTION 8. INCOME TAX WITHHOLDING; TAX BONUSES. (a) WITHHOLDING. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or 8 (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. (b) TAX BONUSES. The Committee, in its discretion, shall have the authority, at the time of grant of any Award under this Plan or at any time thereafter, to approve bonuses to designated Participants to be paid upon their exercise or receipt of (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of such restrictions). The Committee shall have full authority in its discretion to determine the amount of any such tax bonus. SECTION 9. GENERAL PROVISIONS. (a) NO RIGHTS TO AWARDS. No Key Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Key Employees, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to different Participants. (b) DELEGATION. The Committee may delegate to one or more officers of the Company or any Affiliate or a committee of such officers the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to Key Employees who are not officers or directors of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. (c) GRANTING OF AWARDS. The granting of an Award pursuant to the Plan shall take place only when an Award Agreement shall have been duly executed on behalf of the Company. (d) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (e) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (f) GOVERNING LAW. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Minnesota. (g) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended 9 without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect. (h) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (i) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. (j) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 10. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective as of the date of its approval by the shareholders of the Company. SECTION 11. TERM OF THE PLAN. Awards shall be granted under the Plan during a period commencing February 26, 1991, the date the Plan was approved by the shareholders of the Company, through February 26, 2006, the date to which the shareholders of the Company extended the expiration date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the ending date of the period stated above, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond the end of such period. 10 EX-27.A 3 EXHIBIT 27.A
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR ADC TELECOMMUNICATIONS, INC., AND SUBSIDIARIES FOR THE FISCAL QUARTER ENDED JANUARY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS OCT-31-1999 NOV-01-1998 JAN-31-1999 187,412 0 338,207 2,786 204,060 776,790 514,646 243,799 1,344,729 419,147 0 0 0 28,296 892,442 1,344,729 367,205 367,205 192,371 192,371 181,817 614 3,065 (8,699) 4,526 (13,225) 0 0 0 (13,225) (.10) (.10) AMOUNT IS NET OF ALLOWANCE FOR BAD DEBTS AND RETURNS. AMOUNT IS NET OF OBSOLESCENCE RESERVES.
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