**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                                        |
|-------------------------------------------------------|
|                                                  |   |
| **ý**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                  |   |
| **For the quarterly period ended July 31, 2003** |
|                                                  |   |
| **OR**                                                |
|                                                  |   |
| **o**                                                 | **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  incorporation or organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |   |
| **13625 Technology Drive, Eden Prairie, MN 55344-2252**                             |
| (Address of principal executive  offices) (Zip code)                           |
|                                                                                |   |   |
| **(952) 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 bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 

| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

Common stock,$.20 par value:  804,859,035****shares as of September 8, 2003

 

 

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**PARTI. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS—UNAUDITED**

 

**(Inmillions)**

 
|                                                                             |   | **July 31,  2003** |       | **October 31,  2002** |       |
|----------------------------------------------------------------------------------|--------|-------------------------|------------|----------------------------|------------|
| **ASSETS:**                                                                      |   |                    | ** ** |                       | ** ** |
|                                                                             |   |                    | ** ** |                       | ** ** |
| CURRENT ASSETS:                                                                  |   |                    |       |                       |       |
| Cash and cash equivalents                                                        |   | $                       | 743.7      |                       | $          | 278.9 |   |
| Available-for-sale securities                                                    |   | 3.5                     |       | 0.5                        |       |
| Accounts receivable, net                                                         |   | 100.2                   |       | 114.6                      |       |
| Unbilled revenue                                                                 |   | 33.5                    |       | 25.8                       |       |
| Inventories, net                                                                 |   | 76.5                    |       | 94.9                       |       |
| Prepaid income taxes                                                             |   | 15.3                    |       | 126.6                      |       |
| Prepaid and other current assets                                                 |   | 29.4                    |       | 44.5                       |       |
|                                                                             |   |                    |       |                       |       |
| Total current assets                                                             |   | 1,002.1                 |       | 685.8                      |       |
|                                                                             |   |                    |       |                       |       |
| PROPERTY AND EQUIPMENT, net                                                      |   | 206.9                   |       | 206.8                      |       |
| ASSETS HELD FOR SALE                                                             |   | 24.6                    |       | 20.0                       |       |
| RESTRICTED CASH                                                                  |   | 21.0                    |       | 177.0                      |       |
| OTHER ASSETS                                                                     |   | 38.7                    |       | 54.6                       |       |
|                                                                             |   |                    |       |                       |       |
| Total assets                                                                     |   | $                       | 1,293.3    |                       | $          | 1,144.2 |   |
|                                                                             |   |                    |       |                       |       |
| **LIABILITIES AND SHAREOWNERS’ INVESTMENT:**                                |   |                    |       |                       |       |
|                                                                             |   |                    |       |                       |       |
| CURRENT LIABILITIES:                                                             |   |                    |       |                       |       |
| Accounts payable                                                                 |   | $                       | 46.1       |                       | $          | 73.0 |   |
| Accrued compensation and benefits                                                |   | 62.0                    |       | 74.1                       |       |
| Restructuring accrual                                                            |   | 40.0                    |       | 124.2                      |       |
| Other accrued liabilities                                                        |   | 115.9                   |       | 110.8                      |       |
| Notes payable                                                                    |   | 8.5                     |       | 15.7                       |       |
|                                                                             |   |                    |       |                       |       |
| Total current liabilities                                                        |   | 272.5                   |       | 397.8                      |       |
|                                                                             |   |                    |       |                       |       |
| LONG-TERM NOTES PAYABLE                                                          |   | 400.0                   |       | 10.8                       |       |
| OTHER LONG-TERM LIABILITIES                                                      |   | 3.3                     |       | 3.4                        |       |
|                                                                             |   |                    |       |                       |       |
| Total liabilities                                                                |   | 675.8                   |       | 412.0                      |       |
|                                                                             |   |                    |       |                       |       |
| SHAREOWNERS’ INVESTMENT  (804.1 and 799.6 shares outstanding, respectively) |   | 617.5                   |       | 732.2                      |       |
|                                                                             |   |                    |       |                       |       |
| Total liabilities and shareowners’ investment                               |   | $                       | 1,293.3    |                       | $          | 1,144.2 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED**

**(Inmillions, except per share amounts)**

 
|                                                   |   | **Three  months Ended  July 31,** |       | **Nine  Months Ended  July 31,** |       |
|--------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                   |   | **2003**                               |       | **2002**                              |       | **2003** |   | **2002** |   |
| NET SALES:                                             |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Product                                                |   | $                                      | 136.5      |                                  | $          | 177.7 |   | $ | 430.5 |   | $ | 641.5 |   |
| Service                                                |   | 52.0                                   |       | 57.4                                  |       | 149.9 |   | 185.4 |   |
| TOTAL NET SALES                                        |   | 188.5                                  |       | 235.1                                 |       | 580.4 |   | 826.9 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| COST OF SALES:                                         |   |                                   |       |                                  |       |   |   |   |   |
| Product                                                |   | 75.7                                   |       | 149.1                                 |       | 238.0 |   | 461.0 |   |
| Service                                                |   | 40.3                                   |       | 53.0                                  |       | 125.7 |   | 164.4 |   |
| TOTAL COST OF SALES                                    |   | 116.0                                  |       | 202.1                                 |       | 363.7 |   | 625.4 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| GROSS PROFIT                                           |   | 72.5                                   |       | 33.0                                  |       | 216.7 |   | 201.5 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| EXPENSES:                                              |   |                                   |       |                                  |       |   |   |   |   |
| Research and development                               |   | 25.4                                   |       | 52.1                                  |       | 85.1 |   | 147.9 |   |
| Selling and administration                             |   | 49.6                                   |       | 95.1                                  |       | 174.6 |   | 314.2 |   |
| Impairment charges                                     |   | 0.2                                    |       | 160.1                                 |       | 14.8 |   | 178.8 |   |
| Restructuring charges                                  |   | 12.0                                   |       | 19.2                                  |       | 32.2 |   | 80.0 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| Total Expenses                                         |   | 87.2                                   |       | 326.5                                 |       | 306.7 |   | 720.9 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| OPERATING  LOSS                                        |   | (14.7                                  | )          | (293.5                                | )          | (90.0 | ) | (519.4 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| OTHER INCOME (EXPENSE), NET                            |   | (0.4                                   | )          | (4.0                                  | )          | 4.0 |   | 19.0 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                               |   | (15.1                                  | )          | (297.5                                | )          | (86.0 | ) | (500.4 | ) |
| PROVISION (BENEFIT) FOR INCOME TAXES                   |   | —                                 |       | 331.6                                 |       | — |   | 262.7 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| NET LOSS                                               |   | $                                      | (15.1      | )                                     | $          | (629.1 | ) | $ | (86.0 | ) | $ | (763.1 | ) |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| AVERAGE COMMON SHARES OUTSTANDING (BASIC  AND DILUTED) |   | 804.1                                  |       | 796.4                                 |       | 802.7 |   | 794.9 |   |
|                                                   |   |                                   |       |                                  |       |   |   |   |   |
| LOSS PER SHARE (BASIC AND DILUTED)                     |   | $                                      | (0.02      | )                                     | $          | (0.79 | ) | $ | (0.11 | ) | $ | (0.96 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED**

**(Inmillions)**

 
|                                                                                |   | **Nine  Months Ended  July 31,** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                |   | **2003**                              |   | **2002** |   |
| OPERATING ACTIVITIES:                                                               |   |                                  |   |   |   |
| Net loss                                                                            |   | $                                     | (86.0  | ) | $ | (763.1 | ) |
| Adjustments to reconcile net loss to net  cash from operating activities:           |   |                                  |   |   |   |
| Purchased in process research and  development                                      |   | —                                |   | 10.5 |   |
| Inventory and fixed asset impairments                                               |   | 17.4                                  |   | 156.6 |   |
| Goodwill write-off                                                                  |   | —                                |   | 36.6 |   |
| Depreciation and amortization                                                       |   | 46.4                                  |   | 83.1 |   |
| Provision for losses on receivables                                                 |   | 1.7                                   |   | 23.3 |   |
| Inventory reserves                                                                  |   | (0.2                                  | )      | 29.0 |   |
| Non-cash stock compensation                                                         |   | 5.5                                   |   | 10.8 |   |
| Change in deferred income taxes                                                     |   | —                                |   | 474.1 |   |
| Loss on write-down of investments                                                   |   | —                                |   | 39.9 |   |
| Gain on sale of investments                                                         |   | (2.0                                  | )      | (66.5 | ) |
| Loss on sale of business and product lines                                          |   | 2.8                                   |   | 4.8 |   |
| Loss on sale of fixed assets and sale  leasebacks                                   |   | 1.5                                   |   | 8.2 |   |
| Other                                                                               |   | (0.9                                  | )      | — |   |
| Changes in operating assets and  liabilities, net of acquisitions and divestitures: |   |                                  |   |   |   |
| Accounts and unbilled receivables                                                   |   | 15.4                                  |   | 126.9 |   |
| Inventories                                                                         |   | 15.9                                  |   | 60.9 |   |
| Prepaid and other assets                                                            |   | 154.2                                 |   | 69.1 |   |
| Accounts payable                                                                    |   | (33.8                                 | )      | (80.2 | ) |
| Accrued liabilities                                                                 |   | (107.3                                | )      | (59.0 | ) |
|                                                                                |   |                                  |   |   |   |
| Total cash provided by operating activities                                         |   | 30.6                                  |   | 165.0 |   |
|                                                                                |   |                                  |   |   |   |
| INVESTING ACTIVITIES:                                                               |   |                                  |   |   |   |
| Acquisitions, net of cash acquired                                                  |   | —                                |   | (4.3 | ) |
| Divestitures, net of cash disposed                                                  |   | 0.5                                   |   | 1.1 |   |
| Property and equipment additions, net of  disposals                                 |   | (65.5                                 | )      | (30.1 | ) |
| Change in restricted cash                                                           |   | 156.0                                 |   | (276.5 | ) |
| Sale of available-for-sale securities, net                                          |   | —                                |   | 68.7 |   |
| Sale (purchase) of long-term investments,  net                                      |   | 3.7                                   |   | (3.0 | ) |
|                                                                                |   |                                  |   |   |   |
| Total cash provided by (used) for investing  activities                             |   | 94.7                                  |   | (244.1 | ) |
|                                                                                |   |                                  |   |   |   |
| FINANCING ACTIVITIES:                                                               |   |                                  |   |   |   |
| Issuance (repayments) of debt                                                       |   | 371.5                                 |   | (4.1 | ) |
| Sale of warrants, net of purchased call  options                                    |   | (34.5                                 | )      | — |   |
| Common stock issued                                                                 |   | 2.8                                   |   | 6.5 |   |
|                                                                                |   |                                  |   |   |   |
| Total cash provided by (used for) financing  activities                             |   | 339.8                                 |   | 2.4 |   |
|                                                                                |   |                                  |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                             |   | (0.3                                  | )      | (0.1 | ) |
|                                                                                |   |                                  |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                   |   | 464.8                                 |   | (76.8 | ) |
| CASH AND CASH EQUIVALENTS, beginning of  period                                     |   | 278.9                                 |   | 348.6 |   |
|                                                                                |   |                                  |   |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                            |   | $                                     | 743.7  |   | $ | 271.8 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**NOTESTO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED**

 

**Note 1 Basis ofPresentation:**

 

The interiminformation furnished in this report is unaudited but reflects all normalrecurring adjustments which are necessary, in the opinion of our management,for a fair statement of the results for the interim periods.  The operating results for the quarter endedJuly 31, 2003, are not necessarily indicative of the operating results tobe expected for the full fiscal year. These statements should be read inconjunction with our most recent Annual Report filed on Form 10-K for thefiscal year ended October 31, 2002.

 

*Reclassifications.*  Certain prior year amounts have beenreclassified to conform to the current year presentation.

 

*Recently Issued Accounting Pronouncements.*  In June 2002, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 supersededEmerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  The principal difference between SFAS No.146 and EITF No. 94-3 relates to when an entity can recognize a liabilityrelated to exit or disposal activities. SFAS No. 146 requires that a liability be recognized for a costassociated with an exit or disposal activity when the liability isincurred.  EITF No. 94-3 allowed aliability related to an exit or disposal activity to be recognized on the datean entity commits to an exit plan.  Weadopted this standard on January 1, 2003, which was the standard’seffective date.  The standard did notmaterially impact our consolidated financial results or financial position uponadoption.

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of the Indebtedness of Others,” which requires a guarantor torecognize and measure certain types of guarantees at fair value.  In addition, Interpretation No. 45 requiresthe guarantor to make new disclosures for these guarantees and other types ofguarantees that are not subject to the initial recognition and measurementprovisions.  The disclosure requirementsare effective for financial statements with interim or annual periods endedafter December 15, 2002, while the recognition and measurement provisionsare applicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  We adopted theinitial recognition and measurement provision as well as the disclosureprovision of Interpretation No. 45 during the first quarter of fiscal2003.  The initial recognition andmeasurement provisions did not have a material impact on our consolidatedfinancial results or financial position. See Note 12 for guarantee disclosure information.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure.” The provisions of SFAS No. 148 amend SFAS No. 123, “Accounting for StockBased Compensation,” to provide alternative methods of transitioning to a fairvalue-based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 also expands thedisclosure requirements of SFAS No. 123 by requiring more detailed disclosurein both annual and interim financial statements.  The transition provisions of SFAS No. 148 will not have amaterial impact on our financial results, as we do not plan to adopt the fairvalue-based accounting provisions of SFAS No. 123, which is commonly referredto as expensing of stock options.  Thedisclosure provisions of SFAS No. 148 are effective for interim periodsbeginning after December 15, 2002. Accordingly, we adopted the disclosure provisions of this standardduring the second quarter of fiscal 2003. See Note 14 for this SFAS No. 148 disclosure.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities, an Interpretation of Accounting Research BulletinNo. 51,” which requires companies to consolidate certain types of variableinterest entities.  A variable interestentity is an entity that has inadequate invested equity at risk to meetexpected future losses, or whose holders of the equity investments lack any ofthe following three characteristics: (i) the ability to make decisions about the entity’s activities; (ii)the obligation to absorb the entity’s losses if they occur; or (iii) the rightto receive the entity’s future returns if they occur.  Interpretation No. 46 is applicable immediately for all variableinterests created after January 31, 2003. For all variable interest entities created before February 1, 2003,the provisions of this interpretation are effective in the first fiscal year orinterim period beginning after June 15, 2003 (our fourth quarter of fiscal2003). We are not currently a party to any transactions involving variableinterest entities.

 

*Summary of Significant AccountingPolicies. *Adetailed description of our significant accounting policies can be found in ourmost recent Annual Report filed on Form 10-K for the fiscal year endedOctober 31, 2002.

 

5

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**Note 2 Inventories:**

 

Inventoriesinclude material, labor and overhead and are stated at the lower of first-in,first-out cost or market. Inventories consisted of (in millions):

 

|                                           |   | **July 31,  2003** |       | **October 31,  2002** |       |
|------------------------------------------------|--------|-------------------------|------------|----------------------------|------------|
|                                           |   |                    | ** ** |                       | ** ** |
| Purchased materials and manufactured  products |   | $                       | 66.5       |                       | $          | 82.5 |   |
| Work-in-process                                |   | 10.0                    |       | 12.4                       |       |
|                                           |   |                    |       |                       |       |
|                                           |   | $                       | 76.5       |                       | $          | 94.9 |   |

 

**Note 3 Income Taxes:**

 

A deferred taxasset generally represents future tax benefits to be received when certainexpenses previously recognized in U.S. GAAP-based income statements becomedeductible expenses under applicable income tax laws.  Thus, realization of a deferred tax asset is dependent on futuretaxable income against which these deductions can be applied.  SFAS No. 109, “Accounting for Income Taxes,”requires that a valuation allowance be established when it is more likely thannot that all or a portion of deferred tax assets will not be realized.  In fiscal 2002 and for the three and ninemonths ended July 31, 2003, we recorded a full valuation allowance againstall our deferred tax assets. We expect to provide a full valuation allowance onany future tax benefits until we can sustain a level of profitability thatdemonstrates our ability to utilize these assets. We will not record taxbenefits or significant provisions for pre-tax income (loss) until either ourdeferred tax assets are fully utilized to reduce future income tax liabilitiesor the value of our deferred tax assets are restored on the balance sheet.  As of July 31, 2003, we had $739.2million of deferred tax assets that have a full valuation allowance againstthem and thus are not reflected on the Condensed Consolidated BalanceSheet.  Our deferred tax assets expirethrough October 31, 2023.

 

**Note 4 Property Plant & Equipment:**

 

We record ourproperty, plant and equipment, net of accumulated depreciation at theappropriate carrying value****inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  For the three andnine months ended July 31, 2003, we recognized $0.2 million and $14.8million, respectively, of impairment charges in accordance with SFAS No. 144.As of July 31, 2003, we believe that the current carrying value representsthe fair value as defined by SFAS No. 144, and therefore no impairment existsrelated to our operating assets at this time. We will continue to assess ourlong-lived assets and if deemed necessary in accordance with SFAS 144, willrecord impairment related charges at that time.

 

|                           |   | **July 31,  2003** |       | **October 31,  2002** |       |
|--------------------------------|--------|-------------------------|------------|----------------------------|------------|
|                           |   |                    | ** ** |                       | ** ** |
| Land and buildings             |   | $                       | 135.9      |                       | $          | 113.5 |   |
| Machinery and equipment        |   | 405.0                   |       | 418.8                      |       |
| Furniture and fixtures         |   | 39.9                    |       | 37.8                       |       |
| Less: accumulated depreciation |   | (375.7                  | )          | (370.9                     | )          |
| Total                          |   | 205.1                   |       | 199.2                      |       |
| Construction in progress (CIP) |   | 1.8                     |       | 7.6                        |       |
| Total                          |   | $                       | 206.9      |                       | $          | 206.8 |   |

 

**Note 5 ComprehensiveLoss:**

 

The followingtable presents the calculation of comprehensive loss as required by SFASNo. 130. Comprehensive loss has no impact on our net loss, balance sheetor shareowners’ investment. The components of comprehensive loss are as follows(in millions):

 
|                                                                                                                |   | **Three  months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net loss                                                                                                            |   | $                                      | (15.1  | )                                     | $      | (629.1 | ) | $ | (86.0 | ) | $ | (763.1 | ) |
| Change in  cumulative translation adjustments                                                                       |   | (1.0                                   | )      | 3.8                                   |   | (6.6 | ) | (2.6 | ) |
| Reclassification adjustment for realized  (gains) losses on securities classified as available for sale, net-of-tax |   | —                                 |   | (22.2                                 | )      | — |   | (41.8 | ) |
| Unrealized gain (loss) from securities  classified as available for sale, net-of-tax                                |   | 0.4                                    |   | 0.1                                   |   | 3.0 |   | (2.3 | ) |
|                                                                                                                |   |                                   |   |                                  |   |   |   |   |   |
| Comprehensive loss                                                                                                  |   | $                                      | (15.7  | )                                     | $      | (647.4 | ) | $ | (89.6 | ) | $ | (809.8 | ) |

 

6

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**Note 6 Earnings(Loss) Per Share:**

 

Basic loss percommon share was calculated by dividing net loss by the weighted average numberof common shares outstanding during the period. Diluted earnings per sharewould typically be calculated by dividing net income by the sum of the weightedaverage number of common shares outstanding plus all additional common sharesthat would have been outstanding if all potentially dilutive common stockequivalents had been satisfied with shares of common stock.  No such potentially dilutive common stock equivalentswere included in the diluted loss per share calculation as their impact wouldhave been anti-dilutive due to our net loss. The following table specifies the number of shares utilized in the lossper share calculations for the periods ended July 31, 2003 andJuly 31, 2002 (in millions, except for per share amounts).

 
|                                                            |   | **Three  months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|-----------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                            |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net loss                                                        |   | $                                      | (15.1  | )                                     | $      | (629.1 | ) | $ | (86.0 | ) | $ | (763.1 | ) |
| Loss per common share (basic and diluted)                       |   | (0.02                                  | )      | (0.79                                 | )      | (0.11 | ) | (0.96 | ) |
| Weighted average common shares outstanding  (basic and diluted) |   | 804.1                                  |   | 796.4                                 |   | 802.7 |   | 794.9 |   |
|                                                                 |        |                                        |        |                                       |        |  |  |  |  |  |  |  |  |

 

Because of their anti-dilutiveeffect, stock options and all shares reserved for issuance upon conversion ofour convertible notes were excluded for the three and nine month periods endedJuly 31, 2003.  Upon achieving apositive net income, our recent issuance of convertible notes will require usto use the “if-converted” method for computing diluted earnings per share withrespect to the shares reserved for issuance upon conversion of the notes.  Under this method, we will add back thenet-of-tax interest expense on the convertible notes and then divide net incomeby outstanding shares, including all 99.7 million shares reserved for issuanceupon conversion of the notes.  If thiscalculation results in further diluting the earnings per share, our dilutedearnings per share will include all 99.7 million shares of common stockreserved for issuance upon conversion of our convertible notes.  If this calculation is anti-dilutive, thenet-of-tax interest on the convertible notes will not be added back and the99.7 million shares of common stock reserved for issuance upon conversion ofour convertible notes will not be included. See Note 13 for a discussion of our convertible notes.

 

**Note 7 Divestitures:**

 

During fiscal2002 and the nine months ended July 31, 2003, we sold or shut downnon-strategic product lines.  The netsales, operating income (loss) and net loss of the divested product lines wereas follows (in millions, except for per share amounts):

 
|                                       |   | **Three  months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|--------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                       |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net sales                                  |   | $                                      | — |                                  | $      | 3.9 |   | $ | 1.6 |   | $ | 15.2 |   |
| Operating  income (loss)                   |   | —                                 |   | (23.1                                 | )      | (1.0 | ) | (92.9 | ) |
| Net loss  (basic and diluted)              |   | —                                 |   | (9.2                                  | )      | (1.0 | ) | (70.6 | ) |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Loss per  common share (basic and diluted) |   | $                                      | — |                                  | $      | (0.01 | ) | $ | (0.00 | ) | $ | (0.09 | ) |

 

**Note 8 SegmentReporting:**

 

The“management approach” required by SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information,” requires us to disclose selectedfinancial data by operating segment. This approach is based on the way weorganize segments within an enterprise for making operating decisions andassessing performance. We have identified two reportable segments based on ourinternal organizational structure, management of operations and performanceevaluation. These segments are Broadband Infrastructure and Access, andIntegrated Solutions. Segment detail is summarized as follows (in millions):

 

7

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|                                                      |   | **Broadband  Infrastructure  and Access** |   | **Integrated  Solutions** |   | **Unallocated  Items** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------|--------|------------------------|--------|------------------|--------|
| **Three Months Ended July 31, 2003**                 |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 112.6  |                      | $      | 23.9                   |   | $                | — |   | $ | 136.5 |   |
| Service                                                   |   | —                                    |   | 52.0                      |   | —                 |   | 52.0             |   |
| Total external sales                                      |   | 112.6                                     |   | 75.9                      |   | —                 |   | 188.5            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges (1) |   | —                                    |   | —                    |   | (13.5                  | )      | (13.5            | )      |
| Operating loss                                            |   | (5.3                                      | )      | 3.7                       |   | (13.1                  | )      | (14.7            | )      |
| Other income (expense), net                               |   | —                                    |   | —                    |   | (0.4                   | )      | (0.4             | )      |
| Pre-tax loss                                              |   | (5.3                                      | )      | 3.7                       |   | (13.5                  | )      | (15.1            | )      |
| Assets                                                    |   | 302.5                                     |   | 286.1                     |   | 704.7                  |   | 1,293.3          |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| **Three Months Ended July 31, 2002**                 |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 156.5  |                      | $      | 21.2                   |   | $                | — |   | $ | 177.7 |   |
| Service                                                   |   | —                                    |   | 57.4                      |   | —                 |   | 57.4             |   |
| Total external sales                                      |   | 156.5                                     |   | 78.6                      |   | —                 |   | 235.1            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges (1) |   | —                                    |   | —                    |   | (193.2                 | )      | (193.2           | )      |
| In-process research and development                       |   | —                                    |   | —                    |   | —                 |   | —           |   |
| Operating loss                                            |   | (76.2                                     | )      | (14.3                     | )      | (203.0                 | )      | (293.5           | )      |
| Other income (expense), net                               |   | —                                    |   | —                    |   | (4.0                   | )      | (4.0             | )      |
| Pre-tax loss                                              |   | (76.2                                     | )      | (14.3                     | )      | (207.0                 | )      | (297.5           | )      |
| Assets                                                    |   | 538.1                                     |   | 215.9                     |   | 820.4                  |   | 1,574.4          |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| **Nine Months Ended July 31, 2003**                  |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 364.9  |                      | $      | 65.6                   |   | $                | — |   | $ | 430.5 |   |
| Service                                                   |   | —                                    |   | 149.9                     |   | —                 |   | 149.9            |   |
| Total external Sales                                      |   | 364.9                                     |   | 215.5                     |   | —                 |   | 580.4            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges (1) |   | —                                    |   | —                    |   | (49.7                  | )      | (49.7            | )      |
| Operating loss                                            |   | (24.8                                     | )      | (5.6                      | )      | (59.6                  | )      | (90.0            | )      |
| Other income, net                                         |   | —                                    |   | —                    |   | 4.0                    |   | 4.0              |   |
| Pre-tax loss                                              |   | (24.8                                     | )      | (5.6                      | )      | (55.6                  | )      | (86.0            | )      |
| Assets                                                    |   | 302.5                                     |   | 286.1                     |   | 704.7                  |   | 1,293.3          |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| **Nine Months Ended July 31, 2002**                  |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 559.0  |                      | $      | 82.5                   |   | $                | — |   | $ | 641.5 |   |
| Service                                                   |   | —                                    |   | 185.4                     |   | —                 |   | 185.4            |   |
| Total external sales                                      |   | 559.0                                     |   | 267.9                     |   | —                 |   | 826.9            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges(1)  |   | —                                    |   | —                    |   | (272.2                 | )      | (272.2           | )      |
| In-process research and development                       |   | —                                    |   | —                    |   | (10.5                  | )      | (10.5            | )      |
| Operating loss                                            |   | (216.2                                    | )      | (25.9                     | )      | (277.3                 | )      | (519.4           | )      |
| Other income (expense), net                               |   | —                                    |   | —                    |   | 19.0                   |   | 19.0             |   |
| Pre-tax loss                                              |   | (216.2                                    | )      | (25.9                     | )      | (258.3                 | )      | (500.4           | )      |
| Assets                                                    |   | 538.1                                     |   | 215.9                     |   | 820.4                  |   | 1,574.4          |   |

 

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(1)          These impairment, restructuring and otherdisposal charges were not allocated to a specific segment.  See Note 9 for a discussion of thesecharges.

 

**Note 9 Impairment,Restructuring and Other Disposal Charges:**

 

During thethree and nine months ended July 31, 2003 and 2002, we continued our planto improve operating performance by restructuring and streamlining ouroperations.  As a result, we incurredimpairment charges related to the disposal of excess equipment, restructuringcharges associated with workforce reductions as well as the consolidation ofexcess facilities, and other disposal charges associated with inventorywrite-offs and certain administrative charges related to product linedivestitures or shutdowns. The impairment, restructuring and other disposalcharges resulting from our actions, by category of expenditures, are as followsfor the three and nine months ended July 31, 2003 and 2002, respectively(in millions):

 

8

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| **Three Months Ended July 31, 2003**     |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 5.3                                       |   | $                         | — |      | $      | — |   | $ | 5.3 |   |
| Fixed asset write-downs                       |   | 0.2                     |   | —                     |   | —                                    |   | —                    |   | 0.2       |   |
| Facility consolidation and lease  termination |   | —                  |   | 6.7                        |   | —                                    |   | —                    |   | 6.7       |   |
| Inventory write-offs                          |   | —                  |   | —                     |   | —                                    |   | 1.3                       |   | 1.3       |   |
| Other                                         |   | —                  |   | —                     |   | —                                    |   | —                    |   | —    |   |
| Total                                         |   | $                       | 0.2    |                       | $      | 12.0                                      |   | $                         | — |      | $      | 1.3 |   | $ | 13.5 |   |

 
| **Three Months Ended July 31, 2002**       |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------------|--------|----------------------------|--------|------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                        |   | $                       | — |                       | $      | 18.9                                     |   | $                         | — |      | $      | — |   | $ | 18.9 |   |
| Fixed asset write-downs                         |   | 123.5                   |   | —                     |   | —                                   |   | —                    |   | 123.5     |   |
| Goodwill write-downs                            |   | 36.6                    |   | —                     |   | —                                   |   | —                    |   | 36.6      |   |
| Facility consolidation and lease termination    |   | —                  |   | —                     |   | —                                   |   | —                    |   | —    |   |
| Inventory write-offs                            |   | —                  |   | —                     |   | —                                   |   | 13.8                      |   | 13.8      |   |
| Committed sales contracts – administrative |   | —                  |   | —                     |   | 0.1                                      |   | —                    |   | 0.1       |   |
| Other                                           |   | —                  |   | 0.3                        |   | —                                   |   | —                    |   | 0.3       |   |
| Total                                           |   | $                       | 160.1  |                       | $      | 19.2                                     |   | $                         | 0.1    |      | $      | 13.8 |   | $ | 193.2 |   |

 
| **Nine Months Ended July 31, 2003**      |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 26.8                                      |   | $                         | — |      | $      | — |   | $ | 26.8 |   |
| Fixed asset write-downs                       |   | 14.8                    |   | —                     |   | —                                    |   | —                    |   | 14.8      |   |
| Facility consolidation and lease  termination |   | —                  |   | 5.3                        |   | —                                    |   | —                    |   | 5.3       |   |
| Inventory write-offs                          |   | —                  |   | —                     |   | —                                    |   | 2.7                       |   | 2.7       |   |
| Other                                         |   | —                  |   | 0.1                        |   | —                                    |   | —                    |   | 0.1       |   |
| Total                                         |   | $                       | 14.8   |                       | $      | 32.2                                      |   | $                         | — |      | $      | 2.7 |   | $ | 49.7 |   |

 
| **Nine Months Ended July 31, 2002**        |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                        |   | $                       | — |                       | $      | 30.8                                      |   | $                         | — |      | $      | — |   | $ | 30.8 |   |
| Fixed asset write-downs                         |   | 142.2                   |   | —                     |   | —                                    |   | —                    |   | 142.2     |   |
| Goodwill write-downs                            |   | 36.6                    |   | —                     |   | —                                    |   | —                    |   | 36.6      |   |
| Facility consolidation and lease  termination   |   | —                  |   | 35.9                       |   | —                                    |   | —                    |   | 35.9      |   |
| Inventory write-offs                            |   | —                  |   | —                     |   | —                                    |   | 14.5                      |   | 14.5      |   |
| Committed sales contracts – administrative |   | —                  |   | —                     |   | (1.1                                      | )      | —                    |   | (1.1      | )      |
| In-process research and development             |   | —                  |   | 10.5                       |   | —                                    |   | —                    |   | 10.5      |   |
| Other                                           |   | —                  |   | 2.8                        |   | —                                    |   | —                    |   | 2.8       |   |
| Total                                           |   | $                       | 178.8  |                       | $      | 80.0                                      |   | $                         | (1.1   | )         | $      | 14.5 |   | $ | 272.2 |   |

 

***Impairment Charges:***As a result of our intention to sell, scale-back or exit non-strategicbusinesses, we evaluated our property and equipment assets for impairment. Forthe three and nine months ended July 31, 2003, we recognized $0.2 millionand $14.8 million, respectively, of impairment charges in accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Forthe three and nine months ended July 31, 2002, we recognized $160.1million and $178.8 million, respectively, of impairment charges in accordancewith SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets.”

 

***RestructuringCharges:*** Restructuring charges relate principally to employee severance costs andfacility consolidation costs resulting from the closure of facilities and otherworkforce reductions attributable to our efforts to reduce costs.  During the three and nine months endedJuly 31, 2003, approximately 220 and 1,240 employees, respectively, wereimpacted by reductions in force.  Thecosts of these reductions will be funded through cash from operations.  Restructuring charges for the nine months endedJuly 31, 2002, include an in-process research and development charge of$10.5 million related to our buy-out of two joint ventures (See Note 10).

 

Facilityconsolidation and lease termination costs represent lease termination costs andother costs associated with our decision to consolidate and close duplicativeor excess manufacturing and office facilities. During the nine months ended July 31, 2003, we negotiated afavorable lease termination settlement with a landlord of a leased facility andaccordingly reversed $4.2 million of our previous restructuring accrual forthis lease settlement.

 

***Other DisposalCharges: ***Inventorywrite-offs represent losses incurred to write down the carrying value ofinventory for product lines that have been discontinued.  Revenues and gross margins from theseproduct lines are not material to our consolidated results of operations.Committed sales contracts represent the administrative expenses necessary tocomplete or negotiate settlements 

 

9

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with respect to certaincommitted sales contracts, which costs would normally be classified as sellingand administration expenses.  Thesecosts are a direct result of our decision to exit certain product lines.

 

***Effect ofRestructuring Charges on Future Cash Flows:*** Thefollowing table provides detail on the activity and our remaining restructuringaccrual balance by category as of July 31, 2003 (in millions):

 
| **Type of Charge**       |   | **Accrual  October 31, 2002** |   | **Net  Additions** |   | **Cash  Charges** |   | **Accrual  July 31, 2003** |   |
|--------------------------|--------|------------------------------------|--------|--------------------|--------|-------------------|--------|---------------------------------|--------|
|                     |   |                               |   |               |   |              |   |                            |   |
| Employee severance costs |   | $                                  | 17.0   |               | $      | 26.8              |   | $                               | 32.4   |   | $ | 11.4 |   |
| Facilities consolidation |   | 105.6                              |   | 5.3                |   | 82.3              |   | 28.6                            |   |
| Other                    |   | 1.6                                |   | 0.1                |   | 1.7               |   | —                          |   |
| Total                    |   | $                                  | 124.2  |               | $      | 32.2              |   | $                               | 116.4  |   | $ | 40.0 |   |

 

No adjustmentwas made to our restructuring accrual balance for changes in assumptions duringthe three months ended July 31, 2003. For the nine months ended July 31, 2003, we recorded a $3.2 millionreduction to the restructuring accrual balance due to a change in assumptions.  The adjustment was primarily related to thetermination of a lease for a manufacturing facility used in our opticalcomponents business.  We were able toterminate this lease much earlier than our original estimate and at a lowersettlement cost than the original estimate. This adjustment was recorded as an offset to the additions to theaccrual, and thus is reflected in the “Net Additions” column in the tableabove.

 

We expect thatsubstantially all of the remaining $11.4 million accrual relating to employeeseverance costs as of July 31, 2003, will be paid from unrestricted cash bythe end of the first quarter of fiscal 2004. Of the $28.6 million to be paidfor the consolidation of facilities, we expect that approximately $11.1 millionwill be paid from unrestricted cash through July 31, 2004, and the balancewill be paid from unrestricted cash over the respective lease terms of thefacilities through 2015. Based on our intention to continue to consolidate andclose duplicative or excess manufacturing operations in order to reduce ourcost structure, we may incur additional restructuring charges (both cash andnon-cash) in future periods, which may have a material effect on our operatingresults.

 

In addition tothe restructuring accrual described above, we have $24.6 million of assets heldfor sale (of which $4.8 million relates to our Broadband Infrastructure andAccess segment and $19.8 million was not allocated to either of our segments).We classified these assets as “Held for Sale” pursuant to our decision to exitnon-strategic product lines and to reduce the size of our operations.  We expect to sell or dispose of these assetsbefore July 31, 2004.

 

**Note 10 JointVentures:**

 

InJanuary 2001 and December 2001, we entered into a total of threejoint ventures with Competence Research and Development Ltd., an independentcompany.  The joint ventures wereestablished to share development risk and capital resources associated with theongoing development of technology used in our iANTM, BroadAccessTM, and SmallSubscriber product lines.  The jointventures were successful in advancing the development of technology related tothese product lines.  When the jointventures were established we held 34%, 20%, and 49% interests, respectively, inthe three joint venture entities. Because we did not have majority control over the joint ventures, theseinvestments were accounted for using the equity method.  Therefore, a pro rata portion of the jointventures’ profits or losses was reflected in our Condensed Consolidated IncomeStatement as Other Income (Expense). During the nine months ended July 31, 2002, we incurred $2.6million in equity losses related to these joint ventures.

 

InDecember 2001, we purchased Competence’s 66% interest in one of the jointventures for $3.9 million in cash and the assumption of $16.5 million in debtowed by that joint venture, the proceeds of which were being used to fund thedevelopment of technology.  In February 2002,we purchased Competence’s remaining interests in the other joint ventures for atotal of approximately $350,000 in cash and the assumption of approximately$4.2 million in debt, the proceeds of which were used to fund the developmentof the technology.  The debt related tothe February 2002 purchases was paid off immediately following thepurchases.  We recorded expenses of$10.5 million for in-process research and development projects associated withthe purchase of Competence’s interests in these ventures in the second quarterof fiscal 2002.  In addition, $10.3million was allocated to developed technology, of which $5.3 was written offprior to fiscal 2003.  The remainder isbeing amortized over a period of seven years. Appraisals for purchased in-process and developed technology were determinedusing the income approach, discounted based on the estimated likelihood thatthe project ultimately would succeed.

 

**Note11 Synthetic Leases:**

 

We were party to an operatinglease agreement related to our world headquarters facility in Eden Prairie,Minnesota. This lease was set to expire in October of fiscal 2006. Thisoperating lease, which is sometimes referred to as a “synthetic lease,”contained a minimum residual value guarantee by us at the end of the leaseterm, and also gave us a purchase option at the end of the lease term.

 

10

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During the three months endedJuly 31, 2003, we purchased this property for an aggregate purchase priceof $46.8 million.  The entire purchaseprice was paid out of the pledged collateral that was classified as restrictedcash on our Condensed Consolidated Balance Sheet.

 

In addition tothe purchase of the world headquarters building, during the nine months endedJuly 31, 2003, we purchased a total of four other properties that we hadbeen leasing under synthetic leases. Two properties were purchased for $55.9 million and the remaining twowere purchased for $45.5 million.  Allof the properties were purchased using the restricted cash we had previouslypledged to secure the lease obligations. The two properties that were purchased for $55.9 million were recordedat their fair market value of $15.7 million, which resulted in a $5.2 millionimpairment charge and a $35.0 million reduction in our restructuring accrual aswe had previously recognized this loss in a prior fiscal year. These twoproperties are currently classified as assets held for sale on our CondensedConsolidated Balance Sheet because we intend to sell them within one year fromthe date of purchase. The remaining two properties that were purchased for$45.5 million were immediately sold for total proceeds of $15.3 million whichbecame available to us as unrestricted cash. The majority of the difference between the purchase price for these twoproperties of $45.5 million and the sales price of $15.3 million we receivedwas previously accrued as part of our restructuring accrual.

 

**Note 12 Guarantees:**

 

In connectionwith the sale of a participation interest in a customer note receivable for$14.3 million, we guaranteed the payment obligation of the customer to thepurchaser of the participation interest. During the nine months ended July 31, 2003, the underlying customerdefaulted on the note receivable. Therefore, we were required to pay the purchaser of the participationinterest $14.5 million, which was the outstanding principal and interest on thenote receivable at the time the customer defaulted.  Of the $14.5 million payment, we used $14.3 million from our restrictedcash that was previously pledged to secure our guarantee with the remainderbeing paid from unrestricted cash.  Thisnote receivable has been fully reserved for as part of our allowance fordoubtful accounts reserve. As of July 31, 2003, we did not have anyoutstanding guarantees.

 

We haveentered into a variety of agreements with third parties that includeindemnification clauses, both in the ordinary course of business and inconnection with our divestitures of certain product lines.  These clauses require us to compensate thesethird parties for certain liabilities and damages incurred by them.  We have not made any significantindemnification payments as a result of these clauses, and in accordance withFASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others,” havenot accrued any amounts with respect to these indemnification clauses.

 

**Note 13 Long-TermDebt:**

 

OnJune 4, 2003, we issued $400.0 million of convertible unsecuredsubordinated notes in two separate transactions pursuant to Rule 144A under theSecurities Act of 1933.  This issuancewas made through an initial offering of $350.0 million of convertible notes onMay 29, 2003, and the subsequent exercise in full by the underwriters ofsuch offering of their option to purchase an additional $50.0 million ofconvertible notes.  The net proceeds tous from this offering were $355.5 million after underwriting discounts of $10.0million and the net payment for the purchased call options and warranttransactions described below.  In thefirst transaction we issued $200.0 million of 1.0% fixed rate convertibleunsecured subordinated notes that mature on June 15, 2008.  In the second transaction, we issued $200.0million of convertible unsecured subordinated notes that have a variableinterest rate and mature on June 15, 2013.  The interest rate for the variable rate notes is equal to 6-monthLIBOR plus 0.375%.  The interest ratefor the variable rate notes will be reset on each semi-annual interest paymentdate, which are June 15 and December 15 of each year beginning onDecember 15, 2003, for both the fixed and variable rate notes. The initialinterest rate on the variable note is 1.59625% for the period endingDecember 15, 2003. The holders of both the fixed and variable rate notesmay convert all or some of their notes into shares of our common stock at anytime prior to maturity at a conversion price of $4.013 per share.  We may not redeem the fixed rate notesanytime prior to their maturity date. We may redeem any or all of the variable rate notes at any time on orafter June 23, 2008.

 

Concurrentwith the issuance of the fixed and variable rate notes, we purchased five andten-year call options on our common stock to reduce the potential dilution fromconversion of the notes.  Under theterms of these call options, which become exercisable upon conversion of thenotes, we have the right to purchase from the counterparty at a purchase priceof $4.013 per share the aggregate number of shares that we are obligated toissue upon conversion of the fixed and variable notes, which is a maximum of99.7 million shares.  We also have theoption to settle the call options with the counterparty through a net sharesettlement or cash settlement, either of which would be based on the extent towhich the then-current market price of our common stock exceeds $4.013 pershare.  The total cost of the calloptions was $137.3 million, which was recognized in shareowners’ investment.  The cost of the call options was partiallyoffset by the sale of warrants to acquire shares of our common stock with termsof five and ten years to the same counterparty with whom we entered into thecall options.  The warrants areexercisable for an aggregate of 99.7 million shares at an exercise price of$5.28 per share.  The warrants becomeexercisable upon conversion of the notes, and may be settled, at our option,either through a net share settlement or a net cash settlement, either of whichwould be based on the extent to which the then-current

 

11

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market price of our commonstock exceeds $5.28 per share.  Thegross proceeds from the sale of the warrants were $102.8 million, which wasrecognized in shareowners’ investment. The call options and the warrants are subject to early expiration uponconversion of the notes.  The net effectof the call options and the warrants is to either reduce the potential dilutionfrom the conversion of the notes (if we elect net share settlement) or to increasethe net cash proceeds of the offering (if we elect net cash settlement) if thenotes are converted at a time when the current market price of our common stockis greater than $4.013 per share.

 

We plan to usethe cash proceeds from this offering for general corporate purposes andstrategic opportunities, including financing for possible acquisitions orinvestments in complementary businesses, technologies or products.

 

**Note 14 SFAS 148 Disclosure:**

 

We recentlyadopted the disclosure provisions of SFAS No. 148.  However, as discussed in Note 1, we did not adopt the transitionprovisions of SFAS No. 148.  As a resultof adopting the disclosure provisions of SFAS No. 148, we are required todisclose the method we use to account for stock based compensation on aquarterly basis.  Stock compensation isawarded to certain key employees in the form of stock options and restrictedstock.  We account for our stockcompensation in accordance with Accounting Principles Board (APB) Opinion 25,“Accounting for Stock Issued to Employees,” and related interpretations. Allstock options are issued at fair market value on the date of grant.  Accordingly, we did not recognize stockcompensation expense for stock options granted during the periodspresented.  SFAS No. 148 also requiresdisclosure of how stock compensation expense would be computed under SFAS No.123, “Accounting for Stock Based Compensation,” using the fair valuemethod.  Under the fair value basedmethod, compensation cost is measured at the grant date based on the value ofthe award and is recognized over the service period, which is usually thevesting period.  Fair value isdetermined using an option-pricing model, such as Black-Scholes, that takesinto account the stock price at the grant date, the exercise price, theexpected life of the option, the volatility of the underlying stock, theexpected dividends, and the risk-free interest rate over the expected life ofthe option.  The following tablesummarizes what our operating results would have been if the fair value methodof accounting for stock options had been utilized (in millions, except for pershare amounts):

 
|                                                       |   | **Three  months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                       |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net Loss                                                   |   |                                   |   |                                  |   |   |   |   |   |
| As reported                                                |   | $                                      | (15.1  | )                                     | $      | (629.1 | ) | $ | (86.0 | ) | $ | (763.1 | ) |
| Stock compensation expense – fair value  based method |   | (10.3                                  | )      | (22.5                                 | )      | (40.8 | ) | (91.1 | ) |
| Pro Forma Net Loss                                         |   | $                                      | (25.4  | )                                     | $      | (651.6 | ) | $ | (126.8 | ) | $ | (854.2 | ) |
|                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Loss Per Share – Basic and Diluted                    |   |                                   |   |                                  |   |   |   |   |   |
| As reported                                                |   | $                                      | (0.02  | )                                     | $      | (0.79 | ) | $ | (0.11 | ) | $ | (0.96 | ) |
| Pro forma                                                  |   | $                                      | (0.03  | )                                     | $      | (0.82 | ) | $ | (0.16 | ) | $ | (1.08 | ) |

 

During thethree months ended July 31, 2003, we offered to eligible employees theright to exchange certain of their employee stock options for a lesser numberof new options to be granted six months and one day following the surrender oftheir existing options.  The newoptions, which are expected to be granted on or about December 29, 2003,will have an exercise price equal to the average of the high and low tradingprice of our common stock on the grant date and will vest over a two yearperiod from the grant date.  Forpurposes of the above tabular disclosure of what our operating results wouldhave been under the fair value method of accounting for stock options, theunrecognized compensation cost of the cancelled options together with anyincremental fair value of the replacement options will be amortized over a 30month period, which consists of the 24 month vesting period for the replacementoptions and the six month and one day period between the cancellation of thesurrendered options and the grant of the replacement options.

 

We have issuedrestricted stock as part of employee incentive programs as well as inconjunction with our fiscal year 2000 purchase of Broadband Access Systems,Inc.  The fair market value of therestricted stock is amortized over the projected remaining vesting period.  During the three and nine months endedJuly 31, 2003, we incurred $1.1 million and $5.7 million, respectively, ofnon-cash stock compensation expense related to restricted stock issuances.  Non-cash stock compensation expense for thethree and nine months ended July 31, 2002, was $3.4 million and $10.9million, respectively.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Business**

 

ADC is aleading global supplier of broadband network equipment, software and systemsintegration services that enable communications service providers to deliverhigh-speed Internet, data, video and voice services to consumers and businessesworldwide. Telephone companies, cable television operators, Internet and dataservice providers, wireless service providers and other communications serviceproviders are building and upgrading the broadband network infrastructurerequired to offer high-speed Internet access as well as data, video, telephonyand other interactive multimedia services. Our product offerings anddevelopment efforts are focused on increasing the speed and efficiency of thelast mile/kilometer portion of broadband communications networks, and ourproduct and service offerings help connect communications service providers’offices to businesses and end users’ homes as well as to wirelesscommunications devices.

 

Our customersinclude local and long-distance telephone companies, cable televisionoperators, wireless service providers, new competitive service providers,broadcasters, governments, businesses, system integrators and communicationsequipment manufacturers and distributors. We offer broadband connectivitycomponents and systems, broadband access and network equipment, software andsystems integration services to our customers through the following twosegments of product and service offerings:

 

•                                          BroadbandInfrastructure and Access; and

 

•                                          IntegratedSolutions.

 

*Broadband Infrastructure and Access*focuses on Internet Protocol (IP)-based offerings for the cable industry,Digital Subscriber Line (DSL) offerings for the telecommunications industry,and broadband connectivity products for wireline, cable and wirelesscommunications network applications. These products consist of:

 

•                                          connectivitysystems and components that provide the infrastructure to wireline, cable andwireless service providers to connect Internet, data, video and voice servicesto the network over copper, coaxial and fiber-optic cables, and

 

•                                          accesssystems used by wireline, cable and wireless service providers to deliverhigh-speed Internet, data and voice services to consumers and businesses in thelast mile/kilometer of communication networks.

 

*Integrated Solutions*products and services consist of systems integration services and operationssupport systems (OSS) software for broadband, multiservice communications overwireline, cable and wireless networks. Systems integration services are used todesign, equip and build communications networks that deliver Internet, data,video and voice services to consumers and businesses. OSS software includescommunications billing, customer management, network performance andservice-level assurance software used by service providers to operatecommunications networks.

 

**MarketplaceConditions**

 

Our operatingresults during the three and nine months ended July 31, 2003, continued tobe adversely affected by the prolonged downturn in general economic conditions,and continuing adverse conditions in the communications equipment industry inparticular. In this economic environment, many of our communications serviceprovider customers are continuing to defer capital spending, and reduce theircommunications equipment purchases. We also experienced and expect to continueto experience increased pricing pressure from many of our customers.  A majority of our revenues continue to bederived from telecommunications service providers.  These companies in particular have greatly reduced their spendingon communications equipment, resulting in significant reductions in our yearover year revenues.  We have also beenimpacted by reduced or deferred capital spending by our cable industrycustomers as these customers focus on the profitable deployment of broadbandservices, which has caused uncertainty with respect to the timing of theirplans to expand their networks to offer voice-over Internet Protocolservices.  Moreover, some of ourcustomers, both in the telecommunications service industry and the cableindustry, have experienced serious financial difficulties, which in some caseshave resulted in bankruptcy filings or cessation of operations.  We believe that all of the conditionsdescribed above are impacting the communications equipment industry generally,and are not unique to us.

 

As theprolonged downturn in the communications service industry continues, we expectsome consolidation among our customers in order for them to increase marketshare, diversify product portfolios and/or achieve greater economies ofscale.  This activity is likely to havean impact on our results of operations during the time the consolidating companiesfocus on integrating their operations and choose their equipment vendors.  There can be no assurance that we will be asupplier to the surviving service provider. An example of this trend became evident during the nine month periodended July 31, 2003, with the acquisition of AT&T Broadband by ComcastCorporation, which has caused uncertainty with respect to our future revenuesfor IP cable products as Comcast integrates AT&T Broadband’s operations.

 

In addition tothe consolidation we expect from our customers, we expect several forms ofstructural correction in the communications equipment industry.  Over the next twelve to eighteen months weexpect some competitors to drop out of the

 

13

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marketplace due to bankruptcyor shareholder liquidation.  We alsobelieve that companies in the communications equipment industry will seek toform more strategic alliances or consolidate to diversify product portfolios orobtain greater economies of scale. Finally, we expect continuing product linerationalization as companies divest unprofitable product lines in an effort tofocus on profitable business opportunities. With the proceeds of our recent convertible note offering, we intend topursue opportunities to acquire additional product lines or businesses that arecomplimentary to our strategic focus. We may also divest non-strategic product lines as we focus on growingour business profitably.  We continue toreview our product portfolio for appropriate strategic additions ordivestitures.

 

When thedownturn in communications equipment spending first became evident in fiscal2001, we implemented a cost restructuring plan through which we took steps toreduce operating expenses and capital spending.  As it became evident in 2002 and 2003 that our industry wasexperiencing a more pronounced and prolonged economic downturn, we tookadditional cost restructuring measures to realize further cost savings. Ouractions to date have included:

 

•                                          thesale of non-strategic product lines;

•                                          facilityclosure and consolidation;

•                                          eliminationof duplicative functions;

•                                          significantreductions in discretionary spending;

•                                          thedisposition of surplus equipment; and

•                                          substantialreductions in our workforce.

 

Demand forcommunications equipment remains at low levels compared to pre-2001 levels, andas a result of the significant slowdown in capital spending in our targetmarkets, it is difficult to predict the level of future demand in thesemarkets, even in the very short term. Despite the above-mentioned restructuring actions, we may be unable tomeet our anticipated revenue levels in any particular quarter, in which caseour operating results could be materially adversely affected for that period ifwe are unable to further reduce our expenses in time to counteract such adecline in revenue.

 

We continue tobe dependent on telecommunications service providers for the majority of ourrevenues, with the four major U.S. incumbent local exchange carriers accountingfor approximately 26% and 30% of our revenues during the three and nine monthsended July 31, 2003, respectively. In addition, our top ten customers accounted for approximately 45% and56% of our revenues during the three and nine months ended July 31, 2003,respectively.

 

OnFebruary 20, 2003, the Federal Communications Commission (FCC) adoptedrules under the U.S. Telecommunications Act of 1996 concerning the obligationof the established telecommunication service providers to share their networkswith competitors, a practice known as “unbundling.” The FCC essentiallyretained the existing unbundling obligations of the carriers (known as UNE-P)with respect to their historic copper-based network infrastructure, and rulednot to require the unbundling of certain network elements in their nextgeneration hybrid and fiber networks. In August 2003, the FCC issued itsfinal rules on unbundling obligations, and it is too early to predict whateffect these rules will have on capital spending by our customers. Portions ofthese rules have already been subjected to legal challenges by variousconstituents within the telecommunications industry, and additional legalchallenges are likely. Overall, we do not anticipate that this aspect of thedecision will result in increased capital spending by the incumbent carriers orinsurgent competitors in the near term.

 

Our results ofoperations have historically been subject to seasonal factors, with strongerdemand for our products during the fourth fiscal quarter ending October 31(primarily as a result of customer budget cycles and our fiscal year-endincentives) and weaker demand for our products during the first fiscal quarterending January 31 (primarily as a result of the number of holidays in lateNovember, December and early January, the development of annual capitalbudgets by our customers during that period, and a general industry slowdownduring that period). There can be no assurance that these historical seasonaltrends will continue in the future. For instance, due to the economic downturnin the communications equipment and services market during fiscal 2002 and2001, the trend was not evident in either fiscal year. This trend was also notevident during the first nine months of fiscal 2003.

 

A moredetailed description of the risks to our business related to seasonality, alongwith other risk factors associated with our business, can be found inExhibit 99-a to our Form 10-Q for the quarter ended April 30, 2003.

 

**Impairment,Restructuring and Other Disposal Charges**

 

We recordedadditional impairment, restructuring, and other disposal charges during thethree and nine months ended July 31, 2003 and 2002. Impairment chargesrepresent a write-down of the carrying value of property, equipment andgoodwill assets to their estimated fair market value. Restructuring chargesrepresent the direct costs of employee terminations and facility consolidationsas a result of downsizing our business. Other disposal charges represent thedirect costs of exiting certain product lines. A brief

 

14

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explanation of these chargesfollows, and a more thorough summary is contained in Note 9 to the CondensedConsolidated Financial Statements in Item 1 of this Form 10-Q.

 

***Three Months EndedJuly 31, 2003 and 2002***

 

During thethree months ended July 31, 2003 and 2002, we incurred the followingcharges (in millions):

 

|   |                   | **Three Months Ended  July 31,** |   |
|--------|------------------------|---------------------------------------|--------|
|   |                   | **2003**                              |   | **2002** |   |
| • | Impairment Charges     |                                  | $      | 0.2 |   | $ | 160.1 |   |
| • | Restructuring Charges  |                                  | 12.0   |   | 19.2 |   |
| • | Other Disposal Charges |                                  | 1.3    |   | 13.9 |   |
|   |                   | $                                     | 13.5   |   | $ | 193.2 |   |

 

***ImpairmentCharges****.* For the three months ended July 31, 2003, the impairment chargesconsisted solely of property and equipment impairments, which impacted both theBroadband Infrastructure and Access and Integrated Solutions segments.  The impairment charges were the result ofour plan to dispose of excess equipment that resulted from our decision toclose or consolidate duplicative facilities in order to streamline and reducethe size of our operations.  The fairmarket value of this equipment was determined using external sources, primarilyproceeds received from previous equipment sales.  For the three months ended July 31, 2002, the impairmentcharges related primarily to the write-down of the carrying value of theproperty, equipment and goodwill related to our former optical componentsbusiness.

 

***RestructuringCharges****. *The$12.0 million of restructuring charges incurred during the three months endedJuly 31, 2003, consisted principally of $5.3 million for employeeseverance costs related to workforce reductions and $6.7 million for facilityconsolidation and lease termination costs. The employee terminations affected both the Broadband Infrastructure andAccess and Integrated Solutions segments. Approximately 220 employees wereimpacted by reductions in force during the quarter.  The $6.7 million of facility consolidation costs primarilyrelates to the consolidation of six facilities associated with our IntegratedSolutions segment. The $19.2 million of restructuring charges incurred duringthe three months ended July 31, 2002, consisted principally of $18.9million for employee severance costs and $0.3 million of other restructuringrelated costs.

 

***Other DisposalCharges****.*Forthe three months ended July 31, 2003, we incurred $1.3 million ofinventory write-offs associated with discontinuing product lines.  For the three months ended July 31,2002, the $13.9 million of other disposal charges consists principally of inventorywrite offs for discontinued product lines. All of these inventory write-offs were reported in cost of sales.

 

***Nine Months EndedJuly 31, 2003 and 2002***

 

During thenine months ended July 31, 2003 and 2002, we incurred the followingcharges (in millions):

 

|   |                   | **Nine Months Ended  July 31,** |   |
|--------|------------------------|--------------------------------------|--------|
|   |                   | **2003**                             |   | **2002** |   |
| • | Impairment charges     |                                 | $      | 14.8 |   | $ | 178.8 |   |
| • | Restructuring charges  |                                 | 32.2   |   | 80.0 |   |
| • | Other Disposal charges |                                 | 2.7    |   | 13.4 |   |
|   |                   | $                                    | 49.7   |   | $ | 272.2 |   |

 

***ImpairmentCharges****. *For the nine months ended July 31,2003, the impairment charges consisted solely of property and equipmentimpairments, which impacted both the Broadband Infrastructure and Access andIntegrated Solutions segments.  Theimpairment charges were the result of our plan to dispose of excess equipmentthat resulted from our decision to streamline and reduce the size of ouroperations.  The fair market value ofthis equipment was determined using external sources, primarily proceedsreceived from previous equipment sales or estimates of discounted cashflows.  For the nine months ended July 31,2003, the impairment charges related primarily to the write-down in thecarrying value of property, equipment and goodwill related to product linesthat we determined to dispose of or shut down. The largest of these product lines was our former optical componentsbusiness.

 

***RestructuringCharges****. *The$32.2 million of restructuring charges incurred during the nine months endedJuly 31, 2003, consist principally of $26.8 million for employee severancecosts related to workforce reduction and $5.3 million of facility consolidationcharges.  The employee terminationsaffected both the Broadband Infrastructure and Access and Integrated Solutions

 

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segments. Approximately 1,240employees were impacted by reductions in force during the nine months endedJuly 31, 2003.  The $5.3 million offacility consolidation charges reflects a $4.2 million reversal of a previousaccrual related to a manufacturing facility used in our optical componentsbusiness.  The $80.0 million ofrestructuring charges incurred during the nine months ended July 31, 2002,consisted principally of $30.8 million of employee severance costs, $35.9million of facility consolidation and lease termination costs, $10.5 millionassociated with the write-off of in process research and development and $2.8million of other costs associated with our facility consolidation andrestructuring plans.

 

***Other DisposalCharges****.*Forthe nine months ended July 31, 2003, the $2.7 million of other disposalcharges represent additional inventory write-offs related to product lines thathave been discontinued.  This charge wasreported in cost of sales on our Condensed Consolidated Statement ofOperations.  For the nine months endedJuly 31, 2002, the $13.4 million of other disposal charges represent $14.5million of inventory write-offs reported as cost of sales as well as $(1.1)million of committed sales contracts expense offsets which relate toadministrative costs that are reported as selling and administrative expensesin our Condensed Consolidated Statement of Operations.

 

***Effect of Restructuring Charges on FutureCash Flow***

 

The followingtable provides detail on the remaining restructuring accrual by category as ofJuly 31, 2003, and October 31, 2002 (in millions):

 

| **Type of Charge**       |   | **Accrual  October 31, 2002** |   | **Accrual  July 31, 2003** |   |
|--------------------------|--------|------------------------------------|--------|---------------------------------|--------|
|                     |   |                               |   |                            |   |
| Employee severance costs |   | $                                  | 17.0   |                            | $      | 11.4 |   |
| Facilities consolidation |   | 105.6                              |   | 28.6                            |   |
| Other                    |   | 1.6                                |   | —                          |   |
| Total                    |   | $                                  | 124.2  |                            | $      | 40.0 |   |

 

We believethat our entire restructuring accrual of $40.0 million as of July 31,2003, will have to be paid from unrestricted cash as follows:

 

•                  Substantiallyall of the $11.4 million of employee severance costs will be paid through thefirst quarter of fiscal 2004.

 

•                  The facilityconsolidation accrual relates principally to excess leased facilities.  Of the $28.6 million facility consolidationaccrual, we estimate $11.1 million will be paid through July 31, 2004,with the remainder being paid over the respective lease terms ending through fiscal2015.

 

Therestructuring accrual was established based on our assumptions of the relevantcosts at the time the restructuring decisions were made.  The accrual is periodically adjusted basedon new information and actual costs incurred. The ultimate resolution of the accrual may result in adjustments, whichmay have a material effect on our operating results.  Although most of our restructuring plan initiatives have beenimplemented, we do not expect to complete our current restructuring plan untilthe end of fiscal 2003.  Accordingly, weexpect to continue to incur restructuring charges throughout the remainder ofthe fiscal year and may incur such charges in later fiscal years.

 

**Results of Operations**

 

The followingtable contains information regarding the percentage to net sales of certainincome and expense items for the three and nine months ended July 31, 2003and 2002:

 

|                                     |   | **Percentage  of Net Sales**           |   |
|------------------------------------------|--------|----------------------------------------|--------|
|                                     |   | **Three  Months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|                                     |   | **2003**                               |   | **2002** |   | **2003** |   | **2002** |   |
|                                     |   |                                   |   |   |   |   |   |   |   |
| **Net Sales:**                           |   |                                   |   |   |   |   |   |   |   |
| Product                                  |   | 72.4                                   | %      | 75.6 | % | 74.2 | % | 77.6 | % |
| Service                                  |   | 27.6                                   |   | 24.4 |   | 25.8 |   | 22.4 |   |
| **Total Net Sales**                      |   | 100.0                                  |   | 100.0 |   | 100.0 |   | 100.0 |   |
| **Cost of Sales:**                       |   |                                   |   |   |   |   |   |   |   |
| Product                                  |   | 40.1                                   |   | 63.4 |   | 41.1 |   | 55.7 |   |
| Service                                  |   | 21.4                                   |   | 22.5 |   | 21.6 |   | 19.9 |   |
| **Total Cost of Sales**                  |   | 61.5                                   |   | 85.9 |   | 62.7 |   | 75.6 |   |
| **Gross Profit**                         |   | 38.5                                   |   | 14.1 |   | 37.3 |   | 24.4 |   |
| **Expenses:**                            |   |                                   |   |   |   |   |   |   |   |
| Research and development                 |   | 13.5                                   |   | 22.2 |   | 14.7 |   | 17.9 |   |
| Selling and administration               |   | 26.3                                   |   | 40.5 |   | 30.1 |   | 38.0 |   |
| Impairment charges                       |   | —                                 |   | 68.0 |   | 2.5 |   | 21.6 |   |
| Restructuring charges                    |   | 6.5                                    |   | 8.2 |   | 5.5 |   | 8.4 |   |
| In process  research and development     |   | —                                 |   | — |   | — |   | 1.3 |   |
| **Total Expenses**                       |   | 46.3                                   |   | 138.9 |   | 52.8 |   | 87.2 |   |
| **Operating Income / (Loss)**            |   | (7.8                                   | )      | (124.8 | ) | (15.5 | ) | (62.8 | ) |
| **Other Income (Expense), Net**          |   | (0.2                                   | )      | (1.7 | ) | 0.7 |   | 2.3 |   |
| **Loss Before Income Taxes**             |   | (8.0                                   | )      | (126.5 | ) | (14.8 | ) | (60.5 | ) |
| **Provision (Benefit) for Income Taxes** |   | —                                 |   | (141.1 | ) | — |   | (31.8 | ) |
| **Net Loss**                             |   | (8.0                                   | )      | (267.6 | ) | (14.8 | ) | (92.3 | ) |

 

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***Net Sales***

 

The followingtable sets forth our net sales for the three and nine months endedJuly 31, 2003 and 2002, respectively, for each of our functional productand service segments described above (in millions):

 
|                                    |   | **Three  Months Ended July 31,** |   | **Nine  Months Ended July 31,** |   |
|-----------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                    |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                    |   | **Net Sales**                         |   | **%**                                |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   |
| **Broadband Infrastructure and Access** |   | $                                     | 112.6  |                                 | 59.7   | % | $ | 156.5 |   | 66.6 | % | $ | 364.9 |   | 62.9 | % | $ | 559.0 |   | 67.6 | % |
| **Integrated  Solutions:**              |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                 |   | 23.9                                  |   | 12.7                                 |   | 21.2 |   | 9.0 |   | 65.6 |   | 11.3 |   | 82.5 |   | 10.0 |   |
| Service                                 |   | 52.0                                  |   | 27.6                                 |   | 57.4 |   | 24.4 |   | 149.9 |   | 25.8 |   | 185.4 |   | 22.4 |   |
| **Total Integrated Solutions**          |   | 75.9                                  |   | 40.3                                 |   | 78.6 |   | 33.4 |   | 215.5 |   | 37.1 |   | 267.9 |   | 32.4 |   |
| **Total**                               |   | $                                     | 188.5  |                                 | 100.0  | % | $ | 235.1 |   | 100.0 | % | $ | 580.4 |   | 100.0 | % | $ | 826.9 |   | 100.0 | % |

 

Net sales were$188.5 million and $580.4 million for the three and nine months endedJuly 31, 2003, respectively, reflecting a 19.8% and 29.8% decrease overthe comparable 2002 time periods.  Prioryear amounts for the three and nine months periods included $3.9 million and$15.2 million of net sales from product lines divested prior to fiscal2003.  International sales comprised35.9% and 37.1% of our net sales for the three and nine months endedJuly 31, 2003, respectively, and 28.6% and 27.7% for the three and ninemonths ended July 31, 2002, respectively.

 

During thethree and nine months ended July 31, 2003, net sales of BroadbandInfrastructure and Access products declined by 28.1% and 34.7%, respectively,over the comparable 2002 time periods. Net sales in all of our Broadband Infrastructure and Access productlines decreased as a result of lower volumes of products sold due to reductionsin communications service provider capital budgets, as well as the lack of newnetwork build-outs or significant expansions of existing networks.  In addition, sales of our IP Cable productline decreased as a result of a significant customer being acquired by ComcastCorporation.  Our wireline product linecontinues to face strong competition, which is continuing to put pressure onour market share positions for these products. In response, we intend to continue to aggressively defend our currentmarket share by delivering high quality products and superior customer serviceat competitive prices.

 

During thethree and nine months ended July 31, 2003, net sales of our IntegratedSolutions products declined by 3.4% and 19.6%, respectively, over thecomparable 2002 time periods.  Net salesin this segment decreased as a result of continued reductions in our customers’capital spending budgets, which was tempered by an increase in sales of oursoftware products due to increased license volumes, and a broadening of thehistoric customer base for our systems integration services, which haspredominately been the major U.S. incumbent local exchange carriers, towireless carriers and long distance service providers.  We anticipate that future revenue in ourIntegrated Solutions segment will be subject to increased variability, becausewe intend to focus our software sales efforts on major accounts, whichtypically have longer sales cycles for large-scale software installations.

 

For the threemonths ended July 31, 2003, international sales increased as a percentageof sales in part due to an increase in the sale of systems integration servicesin Europe.  For the nine months endedJuly 31, 2003, the increase in international sales as a percentage oftotal sales over the comparable fiscal 2002 period was largely attributable tothe recognition of $16.0 million of deferred revenue from a European customerduring the three months ended January 31, 2003.  In addition, during the nine months ended July

 

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31, 2003, as a result ofmeeting customer acceptance criteria, we recognized $8.1 million of revenuefrom a software installation at a large European customer, the majority ofwhich related to license fees.  As apercentage of total sales, international sales increased in many regions duringthe three and nine months ended July 31, 2003, compared to the same 2002period, including Canada, Europe and the Asia Pacific region.  We attribute these increases to morepronounced capital spending reductions in the United States than in these otherregions.

 

***Gross Profit***

 

During thethree and nine months ended July 31, 2003, gross profit percentages were38.5% and 37.3%, respectively, and 14.0% and 24.4% for the three and ninemonths ended July 31, 2002, respectively. The increase in gross profit percentage was primarily due to a reductionin our fixed costs of sales as a result of our restructuring activities aimedat downsizing our operations in response to the continued downturn in thetelecommunications industry. In addition, inventory write-downs totaling $13.8million and $14.5 million were taken for the three months and nine months endedJuly 31, 2002, respectively, as compared to $1.3 and $2.7 million for thethree and nine months ended July 31, 2003, respectively, related todiscontinued product lines.  We alsobenefited from a more favorable sales mix toward our higher margin productlines as well as from production efficiencies and reduced production costsresulting from our decision to outsource portions of our manufacturingoperations.   We anticipate that ourfuture gross profit percentage will vary based on many factors, including salesmix, competitive pricing, timing of new product introductions, timing ofcustomer acceptance and collectibility of large-scale sales transactions andmanufacturing volume.

 

***Operating Expenses***

 

Totaloperating expenses for the three and nine months ended July 31, 2003, were$87.2 million and $306.7 million, respectively, representing 46.3% and 52.8% ofnet sales, respectively. Included in these operating expenses wererestructuring charges of $12.0 million and $32.2 million and impairment chargesof $0.2 million and $14.8 million for the three and nine months endedJuly 31, 2003, respectively.  Totaloperating expenses for the three and nine months ended July 31, 2002, were$326.5 million and $720.9 million, respectively, representing 138.9% and 87.2%of net sales, respectively.  Included inthese operating expenses were impairment charges of $160.1 million and $178.8million, respectively, and restructuring and in process research anddevelopment charges of $19.2 million and $80.0 million, respectively.  The decrease in our operating expenses inabsolute dollars and as a percentage of revenue was primarily due to a significantreduction in the amount of our restructuring and impairment charges, theongoing cost savings from our restructuring efforts and the divestiture ofcertain business units and product lines. We will continue to monitor ouroperating expenses for opportunities to further reduce our operating costs.

 

Research anddevelopment expenses were $25.4 million and $85.1 million for the three andnine months ended July 31, 2003, respectively, compared to $52.1 millionand $147.9 million during the three and nine months ended July 31, 2002,respectively.  This represents adecrease of 51.2% and 42.5% during the three and nine months endedJuly 31, 2003, over the comparable 2002 time periods.  Research and development expenses for thethree and nine months ended July 31, 2003, decreased by $26.7 million and$62.8 million of which $8.2 million and $29.1 million are due to thedivestiture or discontinuance of certain business units and product lines infiscal 2002. We believe that, given the rapidly changing technological andcompetitive environment in the communications equipment industry, continuedcommitment to product development efforts will be required for us to remaincompetitive. Accordingly, we intend to continue to allocate substantialresources, as a percentage of our net sales, to product development in each ofour operating segments.

 

Selling andadministration expenses were $49.6 million and $174.6 million for the three andnine months ended July 31, 2003, respectively, which was a decrease of47.8% and 44.4% from $95.1 million and $314.2 million for the three and ninemonths ended July 31, 2002, respectively. This decrease reflected theeffects of headcount reductions resulting from our continued restructuringefforts.  In addition, of the $45.5million and $139.6 million reductions for the three and nine months endedJuly 31, 2003, $11.7 and $34.4 million, respectively, was attributable tolower bad debt expense in the current year, and $5.7 million and $34.5 million,respectively, was due to the divestiture or discontinuance of certain businessunits and product lines in fiscal 2002.

 

***Other Income(Expense), Net***

 

The following table provides a breakdown ofother income and expenses for the three and nine months ended July 31,2003 and 2002 (in millions):

 
|                                   |   | **Three months ended  July 31,** |   | **Nine months ended  July 31,** |   |
|----------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Interest income                        |   | $                                     | 2.3    |                                 | $      | 3.3 |   | $ | 5.3 |   | $ | 8.3 |   |
| Cash interest expense                  |   | (1.4                                  | )      | (1.0                                 | )      | (1.6 | ) | (3.0 | ) |
| Non-cash interest expense              |   | (0.1                                  | )      | —                               |   | (0.2 | ) | — |   |
| Loss on sale of product lines          |   | —                                |   | (4.8                                 | )      | (2.8 | ) | (4.8 | ) |
| Gain on sale of investments            |   | —                                |   | 13.7                                 |   | 2.0 |   | 22.6 |   |
| Gain (loss) on sale of fixed assets    |   | (.6                                   | )      | (5.3                                 | )      | (1.6 | ) | (8.9 | ) |
| Loss on equity investment              |   | —                                |   | (3.0                                 | )      | — |   | (6.5 | ) |
| Gain on patent infringement settlement |   | —                                |   | —                               |   | — |   | 26.2 |   |
| Other                                  |   | (.6                                   | )      | (6.9                                 | )      | 2.9 |   | (14.9 | ) |
|                                   |   |                                  |   |                                 |   |   |   |   |   |
| **Total Other Income (Expense)**       |   | $                                     | (0.4   | )                                    | $      | (4.0 | ) | $ | 4.0 |   | $ | 19.0 |   |

 

18

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***Income Taxes***

 

As a result ofour cumulative losses over the past two fiscal years and the full utilizationof our loss carryback potential, we are not recognizing a tax benefit on ourpretax losses until we can sustain a level of profitability that demonstratesour ability to utilize our deferred tax assets. Therefore, the effective incometax rate for the three and nine months ended July 31, 2003, was zero. Theeffective income tax rate for the three and nine months ended July 31,2002, was 38.0% and 38.0%, excluding the impact of lower rates used forrestructuring charges.  In addition,during the third quarter of 2002, a full valuation allowance was establishedagainst our net deferred tax assets. This valuation allowance was $453.4 million for the three and ninemonths ended July 31, 2002, which was partially offset by a tax benefit onthe pre-tax loss as well as tax benefit adjustments related to tax law changesof $121.8 million and $190.7 million for the three and nine months endedJuly 31, 2002, respectively.

 

***Net Loss***

 

Net loss was($15.1) million (or $0.02 per diluted share) and ($86.0) million (or $0.11 perdiluted share) for the three and nine months ended July 31, 2003,respectively, compared to net loss of ($629.1) million, or ($0.79) per dilutedshare and ($763.1) million, or ($0.96) per diluted share for the three and ninemonths ended July 31, 2002, respectively.

 

**Application ofCritical Accounting Policies and Estimates**

 

There were nosignificant changes to our critical accounting policies during the three andnine months ended July 31, 2003. See our most recent Annual Report filed on Form 10-K for fiscal 2002 fora discussion of our critical accounting policies.

 

**Liquidity and CapitalResources**

 

***Cash***

 

Cash and cashequivalents, primarily short-term investments in commercial paper withmaturities of less than 90 days and other short-term investments had a balanceof $743.7 million at July 31, 2003, which is an increase of $464.8 millioncompared to October 31, 2002.  Themajor sources of cash during the nine months ended July 31, 2003, were$132.9 million in income tax refunds and the proceeds of our $400.0 millionconvertible unsecured subordinated note offering on June 4, 2003. Inaddition, restricted cash decreased by $156.0 million.  Of this amount, $148.2 million was used topurchase five properties subject to “synthetic” operating leases, and $14.3 millionwas used to pay a guarantee of a customer note receivable.  Other cash outflows included $63.0 millionused to fund investing and financing activities (such as net property plant andequipment additions) and the repayment of long-term debt.  Cash inflows of $45.9 million wereassociated with working capital management improvements, which were offset bynet losses from operations.

 

As ofJuly 31, 2003, we had restricted cash of $21.0 million.  Restricted cash represents cash pledged tovarious financial institutions to secure certain of our obligations, primarilycash collateral for letters of credit and foreign currency hedgingactivities.  As a result, restrictedcash is not available to us for working capital.  The restricted cash is expected to become available to us uponsatisfaction of the obligations pursuant to which the letters of credit andcurrency hedging arrangements were issued. We are entitled to the interest earnings on our restricted cash balances.

 

During thenine months ended July 31, 2002, cash decreased $76.8 million compared toOctober 31, 2001.  In addition, asof July 31, 2002, we held approximately $6.4 million in marketablesecurities.  The major elements of the2002 change included $165.0 million in cash proceeds from improved workingcapital management, income tax refunds and a patent infringement settlement,which were offset by a $276.5 million increase in restricted cash and netlosses from operations.

 

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***Finance-relatedTransactions***

 

OnJune 4, 2003, we issued $400.0 million of convertible unsecuredsubordinated notes in two separate transactions pursuant to Rule 144A under theSecurities Act of 1933.  This issuancewas made through an initial offering of $350.0 million of convertible notes onMay 29, 2003, and the subsequent exercise in full by the underwriters ofsuch offering of their option to purchase an additional $50.0 million ofconvertible notes.  The net proceeds tous from this offering were $355.5 million after underwriting discounts of $10.0million and the net payment for the purchased call options and warranttransactions described below.  In thefirst transaction we issued $200.0 million of 1.0% fixed rate convertible unsecuredsubordinated notes that mature on June 15, 2008.  In the second transaction, we issued $200.0 million ofconvertible unsecured subordinated notes that have a variable interest rate andmature on June 15, 2013.  Theinterest rate for the variable rate notes is equal to 6-month LIBOR plus 0.375%.  The interest rate for the variable ratenotes will be reset on each semi-annual interest payment date, which areJune 15 and December 15 of each year beginning on December 15,2003, for both the fixed and variable rate notes. The initial interest rate onthe variable note is 1.59625% for the period ending December 15, 2003. Theholders of both the fixed and variable rate notes may convert all or some oftheir notes into shares of our common stock at any time prior to maturity at aconversion price of $4.013 per share. We may not redeem the fixed rate notes anytime prior to their maturitydate.  We may redeem any or all of thevariable rate notes at any time on or after June 23, 2008.

 

Concurrentwith the issuance of the fixed and variable rate notes, we purchased five andten-year call options on our common stock to reduce the potential dilution fromconversion of the notes.  Under theterms of these call options, which become exercisable upon conversion of thenotes, we have the right to purchase from the counterparty at a purchase priceof $4.013 per share the aggregate number of shares that we are obligated toissue upon conversion of the fixed and variable notes, which is a maximum of99.7 million shares.  We also have theoption to settle the call options with the counterparty through a net sharesettlement or cash settlement, either of which would be based on the extent towhich the then-current market price of our common stock exceeds $4.013 pershare.  The total cost of the calloptions was $137.3 million, which was recognized in shareowners’investment.  The cost of the calloptions was partially offset by the sale of warrants to acquire shares of ourcommon stock with terms of five and ten years to the same counterparty withwhom we entered into the call options. The warrants are exercisable for an aggregate of 99.7 million shares atan exercise price of $5.28 per share. The warrants become exercisable upon conversion of the notes, and may besettled, at our option, either through a net share settlement or a net cashsettlement, either of which would be based on the extent to which thethen-current market price of our common stock exceeds $5.28 per share.  The gross proceeds from the sale of thewarrants were $102.8 million, which was recognized in shareowners’investment.  The call options and thewarrants are subject to early expiration upon conversion of the notes.  The net effect of the call options and thewarrants is to either reduce the potential dilution from the conversion of thenotes (if we elect net share settlement) or to increase the net cash proceedsof the offering (if we elect net cash settlement) if the notes are converted ata time when the current market price of our common stock is greater than $4.013per share.

 

We plan to usethe cash proceeds from this offering for general corporate purposes andstrategic opportunities, including financing for possible acquisitions orinvestments in complementary businesses, technologies or products.

 

During thenine months ended July 31, 2003, we cancelled our accounts receivablesecuritization arrangement because we did not plan to utilize it.  We entered into this arrangement with afinancial institution in December 2001, and the arrangement was intendedto function much like a revolving line of credit, but with a lower cost offunds than a traditional revolving line of credit.  Pursuant to this arrangement, we were able to sell certain of ourU.S.-sourced accounts receivable to the financial institution without recourseto us.  The accounts receivablesecuritization agreement was never utilized.

 

***Vendor Financing***

 

We have workedwith customers and third-party financiers to find a means of funding customerequipment purchases from us by negotiating financing arrangements. As ofJuly 31, 2003 and 2002, we had commitments to extend credit ofapproximately $57.7 million and $58.0 million, respectively, under sucharrangements. The total amount drawn and outstanding under the commitments wasapproximately $21.5 million and $14.0 million as of July 31, 2003 and2002, respectively. The commitments to extend credit are conditional agreementsgenerally having fixed expiration or termination dates and specific interestrates, conditions and purposes. These commitments may expire without being drawn.   Someof these commitments enable the customer to draw on the commitment after thecustomer has made payment to us for the products we sold, up to the amount thecustomer previously paid to us. Accordingly, amounts committed may affect future cash flows. Weregularly review all outstanding commitments, and the results of these reviewsare considered in assessing the overall risk for possible credit losses. AtJuly 31, 2003, we have recorded approximately $19.0 million in lossreserves in the event of non-performance under these financing arrangements.

 

In connectionwith the sale of a participation interest in a customer note receivable for$14.3 million, we guaranteed the payment obligation of the customer to thepurchaser of the participation interest. During the nine months ended July 31, 2003, the customer defaultedon the note receivable.  Therefore, wewere required to pay the purchaser of the participation interest $14.5 million,which was the outstanding principal and interest amount on the note receivableat the time the customer defaulted.  Ofthe

 

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$14.5 million payment, we used$14.3 million from our restricted cash that was previously pledged to secureour guarantee with the remainder being paid from unrestricted cash. This notereceivable has been fully reserved for as part of our allowance for doubtfulaccounts reserve.

 

***WorkingCapital Outlook***

 

Our mainsource of liquidity continues to be our unrestricted cash on hand.  We expect to receive a federal income taxrefund of approximately $5.0 million during the fourth fiscal quarter of 2003.We intend to continue to use our unrestricted cash to fund our operations inthe event that positive cash flow is not achieved in the near term and to pay our$40.0 million restructuring accrual.  Webelieve that our current unrestricted cash on hand should be adequate to fundour working capital requirements, planned capital expenditures, andrestructuring costs through fiscal 2003 and beyond.

 

We believe thatthe cash provided by our recent convertible note financing transaction willalso enable us to pursue strategic opportunities, including possible productline or business acquisitions.  However,if the cost of one or more acquisition opportunities exceeds our existingcapital resources, additional sources of capital may be required.  Given the current state of thecommunications equipment industry, there are few alternatives available assources of financing.  Commercial bankfinancing is not readily available at this time to us or to many othercompanies in our industry.  Accordingly,any plan to raise additional capital would likely involve an equity-based orequity-linked financing, such as another issuance of convertible debt or theissuance of common stock or preferred stock, which would be dilutive toexisting shareholders.  Following thecompletion of our recent convertible note financing transaction, we only haveapproximately 10 million shares of common stock available for issuance underour articles of incorporation after taking into account our share reserves forour stock option plans and employee stock purchase plan.  Accordingly, any plan to raise capitalthrough the issuance of shares of common stock or securities convertible intocommon stock may require an amendment to our articles of incorporation, whichwould require the approval of shareowners.

 

***Off-balance SheetArrangements***

 

We were aparty to an operating lease agreement related to our world headquartersfacility in Eden Prairie, Minnesota. This lease was set to expire inOctober of fiscal 2006. This operating lease, which is sometimes referredto as a “synthetic lease,” contained a minimum residual value guarantee by usat the end of the lease term, and also gave us a purchase option at the end ofthe lease term. During the three months ended July 31, 2003, we purchasedthis property for an aggregate purchase price of $46.8 million.  The entire purchase price was paid out ofthe pledged collateral that was classified as restricted cash on our CondensedConsolidated Balance Sheet.

 

This leasearrangement was originally entered into as an economical means of financing theconstruction of our world headquarters facility.  Subsequently, the purchase option price for this facility wasfully cash collateralized.  As a result,we no longer were receiving any financing benefits from this arrangement.  During the three and nine months endedJuly 31, 2003, we incurred rent expense under this lease in the amount of$0.3 million and $0.9 million, respectively. During the three and nine months ended July 31, 2002, we incurredrent expense under this lease in the amount of $1.8 million and $4.6 million,respectively.  During the three and ninemonths ended July 31, 2003 and 2002, we incurred cash outlays from ourunrestricted cash (for payment of rent) of like amounts.

 

In addition tothe purchase of the world headquarters building, during the nine months endedJuly 31, 2003, we purchased a total of four other properties that we hadbeen leasing under synthetic leases. Two properties were purchased for $55.9million and the remaining two were purchased for $45.5 million.  All of the properties were purchased usingthe restricted cash we had previously pledged to secure the leaseobligations.  The two properties thatwere purchased for $55.9 million were recorded at their fair market value of$15.7 million, which resulted in a $5.2 million impairment charge and a $35.0million reduction in our restructuring accrual as we had previously recognizedthis loss in a prior fiscal year. These two properties are currently classifiedas assets held for sale on our Condensed Consolidated Balance Sheet because weintend to sell them within one year from the date of purchase. The remainingtwo properties that were purchased for $45.5 million were immediately sold fortotal proceeds of $15.3 million, which became available to us as unrestrictedcash.  The majority of the differencebetween the purchase price for these two properties of $45.5 million and thesales price we received was previously accrued as part of our restructuringaccrual.

 

In connectionwith our investment activity, we invested in two independent venture capitalfunds in fiscal 2000.  Our investmentsin these funds are recorded as long-term assets on our Condensed ConsolidatedBalance Sheet.  We committed to investan aggregate of $15.0 million in these funds as the fund managers made capitalcalls.  During the three and nine monthsended July 31, 2003, we contributed $0.5 million and $1.2 million, respectively,to these funds.  During the three andnine months ended July 31, 2002, we contributed $1.1 and $1.3 million,respectively to these funds.  As ofJuly 31, 2003, our outstanding unfunded commitment totaled $8.2million.  We expect that our remaining commitmentwill be funded through the use of unrestricted cash on hand over the course ofthe next three years.

 

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**Cautionary Statement for Purposes of the“Safe Harbor” Provisions of the Private Securities Litigation Reform Act of1995**

 

The foregoingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, as well as the Notes to the Condensed Consolidated FinancialStatements, contain various “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.Forward-looking statements represent our expectations or beliefs concerningfuture events, including but not limited to the following: any statementsregarding future sales, profit percentages, earnings per share and otherresults of operations, our estimates of probable liabilities relating topending litigation, the continuation of historical trends, the sufficiency ofour cash balances and cash generated from operating and financing activitiesfor our future liquidity and capital resource needs and the effect ofregulatory changes.  We caution that anyforward-looking statements made by us in this report or in other announcementsmade by us are qualified by important factors that could cause actual resultsto differ materially from those in the forward-looking statements.  These include, without limitation:  the magnitude and duration of thesignificant downturn in the communications equipment industry which began in2001, particularly with respect to the demand for equipment bytelecommunication service providers, from which a majority of our revenues arederived; our ability to restructure our business to achieve operatingprofitability; macroeconomic factors that influence the demand fortelecommunications services and the consequent demand for communicationsequipment; possible consolidation among our customers, which could causedisruption in our customer relationships or displacement of us as an equipmentvendor to the surviving entity; our ability to keep pace with rapidtechnological change in our industry; our ability to make the proper strategicchoices with respect to product line acquisitions or divestitures; increasedcompetition within our industry and increased pricing pressure from ourcustomers; our dependence on relatively few customers for a majority of ourrevenues; fluctuations in our operating results from quarter-to-quarter, whichare influenced by many factors outside of our control, including variations indemand for particular products in our portfolio which have varying profitmargins; the impact of regulatory changes on our customers’ willingness to makecapital expenditures for our equipment, software and services; financialproblems, work interruptions in operations or other difficulties faced by someof our customers, which can influence future sales to these customers as wellas our ability to collect amounts due us; economic and regulatory conditionsoutside of the United States, as approximately 25% to 40% of our sales comefrom non-U.S. jurisdictions; our ability to protect our intellectual propertyrights and defend against infringement claims made by third parties; possiblelimitations on our ability to raise additional capital if required, either dueto unfavorable market conditions, lack of investor demand or the currentcorporate charter limitation on our ability to issue additional shares ofcommon stock; our ability to attract and retain qualified employees; ourability to maintain key competencies during a period of reduced resources andrestructuring; potential liabilities that could arise if there are design ormanufacturing defects with respect to any of our products; our ability toobtain raw materials and components, and our increased dependence on contractmanufacturers to make certain of our products; changes in interest rates,foreign currency exchange rates and equity securities prices, all of which willimpact our operating results; our ability to successfully defend orsatisfactorily settle our pending litigation; and other risks anduncertainties, including those identified in Exhibit 99-a to our Form 10-Q forthe period ended April 30, 2003. We disclaim any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposedto market risk from changes in security prices, foreign exchange rates andinterest rates. Market fluctuations could affect our results of operations andfinancial condition adversely. We, at times, reduce this risk through the useof derivative financial instruments. We do not enter into derivative financialinstruments for the purpose of speculation.

 

We are exposedto interest rate risk as a result of issuing $200.0 million of convertibleunsecured subordinated notes that have a variable interest rate on June 4,2003.  The interest rate on these notesis equal to 6-month LIBOR plus 0.375%. The interest rate on these notes will reset semiannually on eachinterest payment date, which is June 15 and December 15 of each yearuntil their maturity in fiscal 2013. Assuming interest rates rise 1%, 5% and 10%, our annual interest expensewould increase by $2.0 million, $10.0 million and $20.0 million, respectively.

 

We offer anon-qualified 401(k) excess plan to allow certain executives to defer earningsin excess of the annual individual contribution and compensation limits on401(k) plans imposed by the U.S. Internal Revenue Code.  Under this plan, the salary deferrals andour matching contributions are not placed in a separate fund or trust account.Rather, the deferrals represent our unsecured general obligation to pay thebalance owing to the executives upon termination of their employment.  In addition, the executives are able toelect to have their account balances indexed to a variety of diversified mutualfunds (stock, bond and balanced), as well as to our common stock.  Accordingly, our outstanding deferredcompensation obligation under this plan is subject to market risk.  As of July 31, 2003, our outstandingdeferred compensation obligation related to the 401(k) excess plan was $6.8million, of which approximately $1.2 million was indexed to ADC commonstock.  Assuming a 20%, 50% and 100%aggregate increase in the value of the investment alternatives to which theaccount balances may be indexed, our outstanding deferred compensationobligation would increase by $1.4 million, $3.4 million and $6.8 million,respectively, and we would incur an expense of a like amount.

 

We are exposedto market risk from changes in foreign exchange rates. To mitigate the riskfrom these exposures, we have instituted a balance sheet hedging program. Theobjective of this program is to protect our net monetary assets and liabilitiesin non-

 

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functional currencies fromfluctuations due to movements in foreign exchange rates. The program operatesin markets where hedging costs are beneficial. We attempt to minimize exposureto currencies in which hedging instruments are unavailable or prohibitivelyexpensive by managing our operating activities and net asset positions. Themajority of hedging instruments utilized are forward contracts with maturitiesof less than one year.  Foreign exchangecontracts reduce our overall exposure to exchange rate movements, since gainsand losses on these contracts offset losses and gains on the underlyingexposure.

 

**ITEM 4.  DISCLOSURE CONTROLS AND PROCEDURES**

 

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)).  Based onthat evaluation, our CEO and CFO have concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures areadequately designed to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the applicablerules and forms.  During the periodcovered by this Quarterly Report on Form 10-Q, there was no change in ourinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGALPROCEEDINGS**

 

OnMarch 5, 2003, we were served with a shareowner lawsuit brought by WandaKinermon that has been filed in the United States District Court for theDistrict of Minnesota.  The complaintnames ADC, William J. Cadogan, our former Chairman and Chief Executive Officer,and Robert E. Switz, our Chief Executive Officer, as defendants. During the periodthe lawsuit covers, Mr. Switz held the position of Executive Vice President andChief Financial Officer. This lawsuit purports to bring suit on behalf of aclass of purchasers of our publicly traded securities from November 2000to March 28, 2001.  Since thislawsuit was served, we were named as a defendant in 11 other substantiallysimilar lawsuits.  The complaints allegethat we violated the securities laws and our fiduciary duties by making falseand misleading statements about our financial performance and businessprospects.  These shareowner lawsuitshave been consolidated into a single lawsuit, which has been captioned In ReADC Telecommunications, Inc. Securities Litigation.

 

OnMay 19, 2003, we were served with a lawsuit brought by Lorraine Osbornethat has been filed in the United States District Court for the District ofMinnesota.  The complaint names ADC, thethird party we utilize to administer and serve as trustee of our RetirementSavings Plan and several of our current and former officers and directors asdefendants.  Since this lawsuit wasserved, we were served with two substantially similar lawsuits.  These lawsuits have been brought byindividuals who seek to represent a class of participants in our RetirementSavings Plan who purchased our common stock as one of the investmentalternatives under the plan.  Thelawsuits allege a breach of fiduciary duties under the Employee RetirementIncome Security Act.  We anticipate thatthese three lawsuits will be consolidated in the near future.

 

We believethat all of the above lawsuits are without merit and intend to defend theseactions vigorously.  However, litigationis by its nature uncertain and unfavorable resolutions of these lawsuits couldmaterially adversely affect our business, results of operations or financialcondition.

 

We havereceived notices from certain technology companies claiming that some of ourproducts may infringe patents owned by these companies.  These notices also include an offer tolicense the patented technology.  We arestill in the process of investigating these allegations.  At this time we are not able to predictwhether these claims may result in a material impact on our business, resultsof operations or financial condition.

 

We are a party to variousother lawsuits, proceedings and claims arising in the ordinary course ofbusiness or otherwise.  The amount of monetary liability resulting from anadverse result in many of such lawsuits, proceedings or claims cannot bedetermined at this time.  As ofJuly 31, 2003, we had recorded approximately $18.1 million in lossreserves in the event of such adverse outcomes in these matters.  Litigation by its nature is uncertain and wecannot predict the ultimate outcome of these matters with certainty.  However, in light of the reserves we havetaken, we believe the ultimate resolution of these other lawsuits, proceedingsand claims will not have a material adverse impact on our business, results ofoperations or financial condition.

 

**ITEM 2. CHANGES IN SECURITIES**

 

On June 4,2003, we sold $200.0 million aggregate principal amount of 1% ConvertibleSubordinated Notes due December 15, 2008, and $200.0 million aggregateprincipal amount of Floating Rate Convertible Subordinated Notes dueDecember 15, 2013 (the total $400.0 million of notes are referred to asthe “Notes”). The initial purchasers were Banc of America Securities, LLC,Credit

 

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Suisse First Boston, MerrillLynch & Co. and Morgan Stanley, who purchased the notes from us at 97.5% offace value. Holders of the Notes may convert the Notes into shares of ourcommon stock at a conversion rate of 249.1901 shares per $1,000 principalamount of Notes (equal to a conversion price of $4.013 per share) at anytimeprior to maturity or their repurchase, subject to adjustment in certaincircumstances. The offer and sale of the Notes was exempt from the registrationrequirements of the Securities Act of 1933, as amended, pursuant to Rule 144A.

 

We filed aRegistration Statement on Form S-3 for the resale of the Notes and the sharesof the common stock issuable upon conversion of the Notes.  However, the SEC has not yet declared theregistration statement to be effective.  Of the net proceeds from the sale of the Notes, $34.5 million was usedto enter into a call option and warrant transaction with two of the initialpurchasers to reduce the potential dilution from conversion of the Notes (SeeNote 13 to the Condensed Consolidated Financial Statements in Item 1 of thisForm 10-Q for a description of this call option and warrant transaction). Thenet remaining proceeds of $355.5 million from the sale of the Notes wereinvested in short-term investments per our investment policy. The net proceedsremain available for general corporate purposes.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5. OTHERINFORMATION**

 

Pursuant tothe shareowner approval we received at our March 4, 2003 annual meeting ofshareowners, we offered to eligible employees the right to exchange certain oftheir existing employee stock options for a lesser number of employee stockoptions at a new exercise price.  Thefinal exchange ratios used for this stock option exchange program were as follows:

 

| **Current Exercise Price  Range of Eligible Options** |   | **Exchange  Ratio** |   |
|-------------------------------------------------------|--------|---------------------|--------|
|                                                  |   |                |   |
| $4.00 to $5.49                                        |   | 1.50 to 1.00        |   |
| $5.50 to $7.99                                        |   | 2.00 to 1.00        |   |
| $8.00 to $14.99                                       |   | 2.75 to 1.00        |   |
| $15.00 or higher                                      |   | 4.75 to 1.00        |   |

 

Our offerunder this stock option exchange program expired at 11:59 p.m. Central Time onJune 27, 2003.  Of the 3,136employees who were eligible to participate, 1,815 elected to participate.  Of the 45,086,569 options eligible to betendered in the offer, we accepted for cancellation options to purchase27,766,074 shares of common stock.  Uponthe terms and subject to the conditions of the offer, we expect to grantoptions to purchase an aggregate of 11,605,217 shares of our common stock inexchange for such tendered options on or about December 29, 2003.  The new options will be issued with anexercise price equal to the average of the high and low trading price of ourcommon stock on the NASDAQ Stock Market on the date of the grant of the newoptions (subject to the terms and conditions of the offer).

 

**ITEM 6. EXHIBITS ANDREPORTS ON FORM 8-K**

 

a.                                       Exhibits

 

See ExhibitIndex on page 26 for a description of the documents that are filed as exhibitsto this Quarterly Report on Form 10-Q or incorporated by reference herein.  Any document incorporated by reference isidentified by a parenthetical referencing the SEC filing which included thedocument.  We will furnish to asecurityholder upon request a copy of any Exhibit at cost.

 

b.                                      Reportson Form 8-K

 

We filed orfurnished the following Current Reports on Form 8-K during the quarter endedJuly 31, 2003:

 
| **Date**          |   | **Item Reported**                                                                                               |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                            |
| May 21, 2003 |   | Item 9 and Item 12 – May 21, 2003 – news release announcing our  second quarter earnings.        |
| May 22, 2003 |   | Item 5 – May 19, 2003 – reporting the filing of a purported  class action lawsuit against us and |

 

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|               |   | certain individual defendants alleging violations of ERISA.                                                                |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
| May 29, 2003  |   | Item 5 and Item 7 – May 29, 2003 – to file updated risk factors.                                            |
| June 5, 2003  |   | Item 9 – June 5, 2003 – Regulation FD disclosure                                                            |
| July 31, 2003 |   | Item 5, 7 and 9 – July 30, 2003 – reporting adoption of Amended  and Restated Shareholder Rights Agreement. |

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
| Dated:  September 12,  2003 | ADC TELECOMMUNICATIONS, INC. |
|---------------------------------------|------------------------------|
|                                  |                         |   |
|                                  | By:                          | /s/ Gokul V. Hemmady |
|                                  |                         | Gokul V. Hemmady |
|                                  |                         | Vice President, Chief Financial Officer and Controller  (Principal Financial Officer and Duly Authorized Officer) |

 

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**ADCTELECOMMUNICATIONS, INC.**

**EXHIBITINDEX TO FORM 10-QFOR THE THREE MONTHS ENDED JULY 31, 2003**

 
| **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 ADC’s Form 10-Q for the quarter ended April 30, 1996.)                                                                                                                                                                                    |
| 4-b              |   | Restated Articles of Incorporation of ADC Telecommunications, Inc.,  as amended prior to January 20, 2000. (Incorporated by reference to  Exhibit 4.1 to ADC’s Registration Statement on Form S-3 dated  April 15, 1997.)                                                                                                                                          |
| 4-c              |   | Articles of Amendment to Restated Articles of Incorporation of ADC  Telecommunications, Inc. dated January 20, 2000. (Incorporated by  reference to Exhibit 4.6 to ADC’s Registration Statement on  Form S-8 dated March 14, 2000.)                                                                                                                                |
| 4-d              |   | Articles of Amendment to Restated Articles of Incorporation of ADC  Telecommunications, Inc., dated June 30, 2000. (Incorporated by  reference to Exhibit 4-g to ADC’s Quarterly Report on Form 10-Q for  the quarter ended July 31, 2000.)                                                                                                                   |
| 4-e              |   | Restated Bylaws of ADC Telecommunications, Inc., as amended  effective July 30, 2002.   (Incorporated by reference to exhibit 4-e ADC’s Quarterly Report on  Form 10-Q for the quarter ended July 31, 2002)                                                                                                                                                             |
| 4-f              |   | Rights Agreement, as amended and restated July 30, 2003, between  ADC Telecommunications, Inc. and Computershare Investor Services, LLC as  Rights Agent (Incorporated by reference to Exhibit 4-b to ADC’s Form 8-A/A  filed on July 31, 2003)                                                                                                                                   |
| 4-g              |   | Indenture dated as of June 4, 2003 between ADC  Telecommunications, Inc. and U.S. Bank National Association.                                                                                                                                                                                                                                                                                |
| 4-h              |   | Registration Rights Agreement dated as of June 4, 2003 between  ADC Telecommunications, Inc. and Banc of America Securities LLC, Credit  Suisse First Boston LLC and Merrill Lynch Pierce Fenner & Smith  Incorporated as representatives of the Initial Purchase of ADC’s 1%  Convertible Subordinated Notes due 2008 and Floating Rate Convertible Subordinated  Notes due 2013. |
| 10-a             |   | First Amendment of ADC Telecommunications, Inc. 401(k) Excess Plan  (2002 Restatement) dated as of February 26, 2002.                                                                                                                                                                                                                                                                  |
| 10-b             |   | Second Amendment of ADC Telecommunications, Inc. 401(k) Excess Plan  (2002 Restatement) dated as of April 1, 2003.                                                                                                                                                                                                                                                                     |
| 10-c             |   | Third Amendment of ADC Telecommunications, Inc. 401(k) Excess Plan  (2002 Restatement) dated as of January 1, 2003.                                                                                                                                                                                                                                                                    |
| 10-d             | **     | Executive Employment Agreement dated as of May 5, 2003 between  ADC Telecommunications, Inc. and Dilip Singh.                                                                                                                                                                                                                                                                               |
| 10-e             |   | Executive Employment Agreement dated as of August 13, 2003,  between ADC Telecommunications, Inc., and Robert E. Switz                                                                                                                                                                                                                                                                      |
| 10-f             |   | Early Termination Option Notice dated May 30, 2003, from ADC  Telecommunications, Inc. to Lease Plan North America, Inc.                                                                                                                                                                                                                                                                    |
| 10-g             |   | Termination of Memorandum of Ground Lease dated July 17, 2003,  from ADC Telecommunications, Inc. and Lease Plan North America, Inc.                                                                                                                                                                                                                                                        |
| 10-h             |   | Termination, Satisfaction and Release of Memorandum of Lease,  Mortgage and Security Agreement between Lease Plan North America, Inc., ADC  Telecommunications, Inc., ABN AMRO Bank N.V. and Amsterdam Funding  Corporation.                                                                                                                                                                     |
| 10-i             |   | Quit Claim Deed, Quit Claim Bill of Sale and Termination of Lease  dated July 17, 2003, executed by Lease Plan North America, Inc. in favor  of ADC Telecommunications, Inc.                                                                                                                                                                                                                |
| 31-a             |   | Certification of principal executive officer required by Exchange Act  Rule 13a-14(a)                                                                                                                                                                                                                                                                                                            |
| 31-b             |   | Certification of principal financial officer required by Exchange Act  Rule 13a-14(a)                                                                                                                                                                                                                                                                                                            |
| 32               |   | Certifications furnished pursuant to 18 U.S.C. 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                  |

 

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** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, asamended, confidential portions of Exhibit 10-d have been deleted and filedseparately with the Securities and Exchange Commission pursuant to a requestfor confidential treatment.

 

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