**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

----

 

**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 April 30, 2003** |
|                                              |   |
| **OR**                                            |
|                                              |   |
| **o**                                             | **TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from N/A to N/A**

 

**Commissionfile 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 |
|-----------------------|--------|-----------------|

 

**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:  804,130,856****shares as of June 9, 2003

 

 

----

 

**PARTI. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS—UNAUDITED**

 

**(Inmillions)**

 
|                                                                             |   | **April 30,  2003** |       | **October  31,  2002** |       |
|----------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
| **ASSETS:**                                                                      |   |                | ** ** |                   | ** ** |
|                                                                             |   |                | ** ** |                   | ** ** |
| CURRENT ASSETS:                                                                  |   |                |       |                   |       |
| Cash and cash equivalents                                                        |   | $                   | 374.5      |                   | $          | 278.9 |   |
| Available-for-sale securities                                                    |   | 3.1                 |       | 0.5                    |       |
| Accounts receivable, net                                                         |   | 110.1               |       | 114.6                  |       |
| Unbilled revenue                                                                 |   | 29.1                |       | 25.8                   |       |
| Inventories, net                                                                 |   | 83.7                |       | 94.9                   |       |
| Prepaid income taxes                                                             |   | 23.3                |       | 126.6                  |       |
| Prepaid and other current assets                                                 |   | 30.9                |       | 44.5                   |       |
|                                                                             |   |                |       |                   |       |
| Total current assets                                                             |   | 654.7               |       | 685.8                  |       |
|                                                                             |   |                |       |                   |       |
| PROPERTY AND EQUIPMENT, net                                                      |   | 170.9               |       | 206.8                  |       |
| ASSETS HELD FOR SALE                                                             |   | 24.5                |       | 20.0                   |       |
| RESTRICTED CASH                                                                  |   | 67.8                |       | 177.0                  |       |
| OTHER ASSETS                                                                     |   | 33.9                |       | 54.6                   |       |
|                                                                             |   |                |       |                   |       |
| Total assets                                                                     |   | $                   | 951.8      |                   | $          | 1,144.2 |   |
|                                                                             |   |                |       |                   |       |
| **LIABILITIES AND SHAREOWNERS’ INVESTMENT:**                                |   |                |       |                   |       |
|                                                                             |   |                |       |                   |       |
| CURRENT LIABILITIES:                                                             |   |                |       |                   |       |
| Accounts payable                                                                 |   | $                   | 49.2       |                   | $          | 73.0 |   |
| Accrued compensation and benefits                                                |   | 61.8                |       | 74.1                   |       |
| Restructuring accrual                                                            |   | 40.1                |       | 124.2                  |       |
| Other accrued liabilities                                                        |   | 122.3               |       | 110.8                  |       |
| Notes payable                                                                    |   | 8.6                 |       | 15.7                   |       |
|                                                                             |   |                |       |                   |       |
| Total current liabilities                                                        |   | 282.0               |       | 397.8                  |       |
|                                                                             |   |                |       |                   |       |
| LONG-TERM NOTES PAYABLE                                                          |   | —              |       | 10.8                   |       |
| OTHER LONG-TERM LIABILITIES                                                      |   | 3.4                 |       | 3.4                    |       |
|                                                                             |   |                |       |                   |       |
| Total liabilities                                                                |   | 285.4               |       | 412.0                  |       |
|                                                                             |   |                |       |                   |       |
| SHAREOWNERS’ INVESTMENT  (804.1 and 799.6 shares outstanding, respectively) |   | 666.4               |       | 732.2                  |       |
|                                                                             |   |                |       |                   |       |
| Total liabilities and shareowners’  investment                              |   | $                   | 951.8      |                   | $          | 1,144.2 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

----

 

**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED**

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

 
|                                                   |   | **Three  months Ended  April 30,** |       | **Six Months  Ended  April 30,** |       |
|--------------------------------------------------------|--------|------------------------------------|------------|----------------------------------|------------|
|                                                   |   | **2003**                           |       | **2002**                         |       | **2003** |   | **2002** |   |
| **NET SALES:**                                         |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Product                                                |   | $                                  | 142.1      |                             | $          | 235.1 |   | $ | 293.9 |   | $ | 463.8 |   |
| Service                                                |   | 49.8                               |       | 63.2                             |       | 97.9 |   | 128.0 |   |
| TOTAL NET SALES                                        |   | 191.9                              |       | 298.3                            | ** ** | 391.8 |   | 591.8 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| COST OF SALES:                                         |   |                               |       |                             |       |   |   |   |   |
| Product                                                |   | 78.3                               |       | 170.9                            |       | 162.4 |   | 311.9 |   |
| Service                                                |   | 40.2                               |       | 53.7                             |       | 85.3 |   | 111.4 |   |
| TOTAL COST OF SALES                                    |   | 118.5                              |       | 224.6                            |       | 247.7 |   | 423.3 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| GROSS PROFIT                                           |   | 73.4                               |       | 73.7                             |       | 144.1 |   | 168.5 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| EXPENSES:                                              |   |                               |       |                             |       |   |   |   |   |
| Research and development                               |   | 27.4                               |       | 51.4                             |       | 59.7 |   | 95.6 |   |
| Selling and administration                             |   | 61.0                               |       | 108.1                            |       | 124.9 |   | 219.2 |   |
| Impairment charges                                     |   | 4.3                                |       | 16.8                             |       | 14.6 |   | 18.7 |   |
| Restructuring charges                                  |   | 12.1                               |       | 47.4                             |       | 20.2 |   | 50.4 |   |
| In process research and development                    |   | —                             |       | 10.5                             |       | — |   | 10.5 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| Total Expenses                                         |   | 104.8                              |       | 234.2                            |       | 219.4 |   | 394.4 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| OPERATING  LOSS                                        |   | (31.4                              | )          | (160.5                           | )          | (75.3 | ) | (225.9 | ) |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| OTHER INCOME, NET                                      |   | 2.0                                |       | 27.5                             |       | 4.4 |   | 23.0 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                               |   | (29.4                              | )          | (133.0                           | )          | (70.9 | ) | (202.9 | ) |
| BENEFIT FOR INCOME TAXES                               |   | —                             |       | (43.8                            | )          | — |   | (68.9 | ) |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| NET LOSS                                               |   | $                                  | (29.4      | )                                | $          | (89.2 | ) | $ | (70.9 | ) | $ | (134.0 | ) |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| AVERAGE COMMON SHARES OUTSTANDING (BASIC  AND DILUTED) |   | 802.7                              |       | 794.9                            |       | 801.9 |   | 794.2 |   |
|                                                   |   |                               |       |                             |       |   |   |   |   |
| LOSS PER SHARE (BASIC AND DILUTED)                     |   | $                                  | (0.04      | )                                | $          | (0.11 | ) | $ | (0.09 | ) | $ | (0.17 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

----

 

**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED**

**(Inmillions)**

 
|                                                                                |   | **Six Months  Ended  April 30,** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                |   | **2003**                         |   | **2002** |   |
| OPERATING ACTIVITIES:                                                               |   |                             |   |   |   |
| Net loss                                                                            |   | $                                | (70.9  | ) | $ | (134.0 | ) |
| Adjustments to reconcile net loss to net  cash from operating activities:           |   |                             |   |   |   |
| Purchased in process research and  development                                      |   | —                           |   | 10.5 |   |
| Inventory and fixed asset impairments                                               |   | 15.9                             |   | 19.4 |   |
| Depreciation and amortization                                                       |   | 33.5                             |   | 58.0 |   |
| Provision for losses on receivables                                                 |   | 1.4                              |   | 2.1 |   |
| Inventory reserves                                                                  |   | (0.8                             | )      | 8.3 |   |
| Non-cash stock compensation                                                         |   | 2.1                              |   | 5.4 |   |
| Change in deferred income taxes                                                     |   | —                           |   | (1.5 | ) |
| Loss on write-down of investments                                                   |   | —                           |   | 22.3 |   |
| Gain on sale of investments                                                         |   | (2.0                             | )      | (31.2 | ) |
| Loss on sale of business                                                            |   | 2.8                              |   | — |   |
| Loss on sale of fixed assets and sale  leasebacks                                   |   | 1.0                              |   | 2.3 |   |
| Other                                                                               |   | 2.1                              |   | 1.5 |   |
| Changes in operating assets and liabilities,  net of acquisitions and divestitures: |   |                             |   |   |   |
| Accounts and unbilled receivables                                                   |   | 8.7                              |   | 117.6 |   |
| Inventories                                                                         |   | 9.3                              |   | 52.0 |   |
| Prepaid and other assets                                                            |   | 143.0                            |   | 152.5 |   |
| Accounts payable                                                                    |   | (30.8                            | )      | (57.1 | ) |
| Accrued liabilities                                                                 |   | (101.3                           | )      | (13.6 | ) |
|                                                                                |   |                             |   |   |   |
| Total cash provided by operating activities                                         |   | 14.0                             |   | 214.5 |   |
|                                                                                |   |                             |   |   |   |
| INVESTING ACTIVITIES:                                                               |   |                             |   |   |   |
| Acquisitions, net of cash acquired                                                  |   | —                           |   | (4.3 | ) |
| Divestitures, net of cash disposed                                                  |   | 0.5                              |   | — |   |
| Property and equipment additions, net of  disposals                                 |   | (16.1                            | )      | (21.8 | ) |
| Change in restricted cash                                                           |   | 109.1                            |   | (260.1 | ) |
| Sale of available-for-sale securities, net                                          |   | —                           |   | 32.2 |   |
| Sale (purchase) of long-term investments,  net                                      |   | 4.0                              |   | (1.8 | ) |
|                                                                                |   |                             |   |   |   |
| Total cash provided by (used) for investing  activities                             |   | 97.5                             |   | (255.8 | ) |
|                                                                                |   |                             |   |   |   |
| FINANCING ACTIVITIES:                                                               |   |                             |   |   |   |
| Repayments of debt                                                                  |   | (18.4                            | )      | (3.9 | ) |
| Common stock issued                                                                 |   | 2.8                              |   | 6.3 |   |
|                                                                                |   |                             |   |   |   |
| Total cash provided by (used for) financing  activities                             |   | (15.6                            | )      | 2.4 |   |
|                                                                                |   |                             |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                             |   | (0.3                             | )      | (0.2 | ) |
|                                                                                |   |                             |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                   |   | 95.6                             |   | (39.1 | ) |
| CASH AND CASH EQUIVALENTS, beginning of  period                                     |   | 278.9                            |   | 348.6 |   |
|                                                                                |   |                             |   |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                            |   | $                                | 374.5  |   | $ | 309.5 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

----

 

**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 endedApril 30, 2003 are not necessarily indicative of the operating results to beexpected for the full fiscal year. These statements should be read inconjunction with our most recent Annual Report filed on Form 10-K.

 

*Reclassifications.*  Certain prior year amounts have been reclassifiedto 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 (includingCertain Costs Incurred in a Restructuring).” The principal difference between SFAS. No. 146 and EITF No. 94-3relates to when an entity can recognize a liability related to exit or disposalactivities.  SFAS No. 146 requires thata liability be recognized for a cost associated with an exit or disposalactivity when the liability is incurred. EITF No. 94-3 allowed a liability related to an exit or disposalactivity to be recognized on the date an entity commits to an exit plan.  We adopted this standard on January 1, 2003,which was the standard’s effective date. The standard did not materially impact our consolidated financialresults or financial position upon adoption.

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of theIndebtedness of Others,” which requires a guarantor to recognize and measurecertain types of guarantees at fair value. In addition, Interpretation No. 45 requires the guarantor to make newdisclosures for these guarantees and other types of guarantees that are notsubject to the initial recognition and initial measurement provisions.  The disclosure requirements are effectivefor financial statements with interim or annual periods ended after December15, 2002, while the recognition and measurement provisions are applicable on aprospective basis to guarantees issued or modified after December 31,2002.  We adopted the initialrecognition and measurement provision as well as the disclosure provision ofInterpretation No. 45 during the first quarter of fiscal 2003.  The initial recognition and measurementprovisions did not have a material impact on our consolidated financial resultsor financial position.  See Note 10 forguarantee disclosure information.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.”  Theprovisions of SFAS No. 148 amend SFAS No. 123, “Accounting for Stock BasedCompensation,” 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 a materialimpact on our financial results, as we do not plan to adopt the fairvalue-based accounting provisions of SFAS No. 123, which is commonly referred toas expensing of stock options.  The disclosureprovisions of SFAS No. 148 are effective for interim periods beginning afterDecember 15, 2002.  Accordingly, weadopted the disclosure provisions of this standard during the second quarter offiscal 2003.

 

In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin No. 51,”which requires companies to consolidate certain types of variable interestentities.  A variable interest entity isan entity that has inadequate invested equity at risk to meet expected futurelosses, or whose holders of the equity investments lack any of the followingthree characteristics:  (i) the abilityto make decisions about the entity’s activities; (ii) the obligation to absorbthe entity’s losses if they occur; or (iii) the right to receive the entity’sfuture 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, theprovisions of this interpretation are effective in the first fiscal year orinterim period beginning after June 15, 2003 (our fourth quarter of fiscal2003).  In accordance with InterpretationNo. 46, we will be required to consolidate an operating lease related to ourworld headquarters facility, generally known as a “synthetic lease,” beginningin the fourth quarter of fiscal 2003. Interpretation No. 46 is not expected tohave a material impact on our consolidated financial position or results ofoperations as we intend to purchase this property from the lessor during thethird quarter of fiscal 2003.

 

*Summary of Significant AccountingPolicies. *Adetailed description of our significant accounting policies can be found in ourmost recent Annual Report filed on Form 10-K. As noted above, we recently adopted the disclosure provisions of SFASNo. 148,  but we did not adopt thetransition provisions of SFAS No. 148. As a result of adopting the disclosure provisions of SFAS No. 148, we

 

5

----

 

are required to disclose themethod we use to account for stock based compensation on a quarterlybasis.  Stock compensation is awarded tocertain key employees in the form of stock options and restricted stock.  We account for our stock compensation inaccordance with APB Opinion 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. All stock options are issued at fair market value onthe date of grant.  Accordingly, we didnot recognize stock compensation expense for stock options granted during theperiods presented.  The following tablesummarizes what our operating results would have been if we had utilized thefair value method of accounting for stock options (in millions):

 
|                                                       |   | **Three  months Ended  April 30,** |       | **Six Months  Ended  April 30,** |       |
|------------------------------------------------------------|--------|------------------------------------|------------|----------------------------------|------------|
|                                                       |   | **2003**                           |       | **2002**                         |       | **2003** |   | **2002** |   |
| **Net Loss**                                               |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| As reported                                                |   | $                                  | (29.4      | )                                | $          | (89.2 | ) | $ | (70.9 | ) | $ | (134.0 | ) |
| Stock compensation expense – fair value  based method |   | (19.0                              | )          | (35.3                            | )          | (37.5 | ) | (69.4 | ) |
| Pro Forma Net Loss                                         |   | $                                  | (48.4      | )                                | $          | (124.5 | ) | $ | (108.4 | ) | $ | (203.4 | ) |
|                                                       |   |                               |       |                             |       |   |   |   |   |
| Loss Per Share – Basic and Diluted                    |   |                               |       |                             |       |   |   |   |   |
| As reported                                                |   | $                                  | (0.04      | )                                | $          | (0.11 | ) | $ | (0.09 | ) | $ | (0.17 | ) |
| Pro forma                                                  |   | $                                  | (0.06      | )                                | $          | (0.16 | ) | $ | (0.14 | ) | $ | (0.26 | ) |

 

We have issuedrestricted stock as part of employee incentive plans as well as in conjunctionwith our fiscal year 2000 purchase of Broadband Access Systems, Inc.  The fair market value of the restrictedstock is amortized over the projected remaining vesting period.  During the three and six months ended April30, 2003, we incurred $1.2 million and $4.6 million, respectively, of non-cashstock compensation expense related to restricted stock issuances.  Non-cash stock compensation expense for thethree and six months ended April 30, 2002, was $3.7 million and $7.5 million,respectively.

 

**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):

 

|                                           |   | **April 30,  2003** |       | **October  31,  2002** |       |
|------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                           |   |                | ** ** |                   | ** ** |
| Purchased materials and manufactured  products |   | $                   | 73.2       |                   | $          | 82.5 |   |
| Work-in-process                                |   | 10.5                |       | 12.4                   |       |
|                                           |   |                |       |                   |       |
|                                           |   | $                   | 83.7       |                   | $          | 94.9 |   |

 

**Note 3 Other Assets:**

 

*Deferred tax assets.*A deferred tax asset generally represents future tax benefits to be receivedwhen certain expenses previously recognized in our U.S. GAAP-based incomestatement become deductible expenses under applicable income tax laws.  Thus, realization of a deferred tax asset isdependent on future taxable income against which these deductions can beapplied.  SFAS No. 109, “Accounting forIncome Taxes,” requires that a valuation allowance be established when it ismore likely than not that all or a portion of deferred tax assets will not berealized.  In fiscal 2002 and for thethree and six months ended April 30, 2003, we recorded a full valuationallowance against all our deferred tax assets. We expect to provide a fullvaluation allowance on any future tax benefits until we can sustain a level ofprofitability that demonstrates our ability to utilize these assets. We willnot record tax benefits or significant provisions for pre-tax income (loss)until either our deferred tax assets are fully utilized to reduce future incometax liabilities or the value of our deferred tax assets are restored on thebalance sheet.  As of April 30, 2003 wehad $735.4 million of deferred tax assets that have a full valuation allowanceagainst them and thus are not reflected on the condensed consolidated balancesheet.  Our deferred tax assets expirethrough October 31, 2022.

 

**Note 4 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):

 

6

----

 
|                                                                                                                |   | **Three  months Ended  April 30,** |      | **Six Months  Ended  April 30,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-----------|----------------------------------|--------|
|                                                                                                                |   | **2003**                           |      | **2002**                         |   | **2003** |   | **2002** |   |
| **Net loss**                                                                                                        |   | **$**                              | **(29.4** | **)**                            | **$**  | **(89.2** | **)** | **$** | **(70.9** | **)** | **$** | **(134.0** | **)** |
| Change in cumulative translation  adjustments                                                                       |   | (1.8                               | )         | 2.0                              |   | (5.6 | ) | (6.4 | ) |
| Reclassification adjustment for realized  (gains) losses on securities classified as available for sale, net-of-tax |   | —                             |      | (15.2                            | )      | — |   | (19.6 | ) |
| Unrealized gain (loss) from securities  classified as available for sale, net-of-tax                                |   | 0.4                                |      | (1.5                             | )      | 2.6 |   | (2.4 | ) |
|                                                                                                                |   |                               |      |                             |   |   |   |   |   |
| Comprehensive loss                                                                                                  |   | $                                  | (30.8     | )                                | $      | (103.9 | ) | $ | (73.9 | ) | $ | (162.4 | ) |

 

**Note 5 Divestitures:**

 

During fiscal2002 and for the six months ended April 30, 2003, we sold or shut downnon-strategic product lines.  The netsales and operating income (loss) of the divested product lines are as follows(in millions):

 
|                    |   | **Three  months Ended  April 30,** |    | **Six Months  Ended  April 30,** |   |
|-------------------------|--------|------------------------------------|---------|----------------------------------|--------|
|                    |   | **2003**                           |    | **2002**                         |   | **2003** |   | **2002** |   |
| **Net sales**           |   | **$**                              | **0.3** | ** **                       | **$**  | **4.5** | ** ** | **$** | **1.3** | ** ** | **$** | **11.4** | ** ** |
| Operating income (loss) |   | 0.2                                |    | (41.1                            | )      | 0.8 |   | (69.8 | ) |
|                         |        |                                    |         |                                  |        |  |  |  |  |  |  |  |  |

 

**Note 6 SegmentReporting:**

 

The“management approach” required by SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires us to discloseselected financial data by operating segment. This approach is based on the waywe organize 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):

 
|                                                     |   | **Broadband  Infrastructure  and Access** |   | **Integrated  Solutions** |   | **Unallocated  Items** |   | **Consolidated** |   |
|----------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------|--------|------------------------|--------|------------------|--------|
| **Three Months Ended April 30, 2003**                    |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                          |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                  |   | $                                         | 119.7  |                      | $      | 22.4                   |   | $                | — |   | $ | 142.1 |   |
| Service                                                  |   | —                                    |   | 49.8                      |   | —                 |   | 49.8             |   |
| Total external sales                                     |   | 119.7                                     |   | 72.2                      |   | —                 |   | 191.9            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges(1) |   | —                                    |   | —                    |   | (17.7                  | )      | (17.7            | )      |
| Operating loss                                           |   | (8.8                                      | )      | (0.6                      | )      | (22.0                  | )      | (31.4            | )      |
| Other income, net                                        |   | —                                    |   | —                    |   | 2.0                    |   | 2.0              |   |
| Pre-tax loss                                             |   | (8.8                                      | )      | (0.6                      | )      | (20.0                  | )      | (29.4            | )      |
| Assets                                                   |   | 320.6                                     |   | 268.6                     |   | 362.6                  |   | 951.8            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| **Three Months Ended April 30, 2002**                    |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                          |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                  |   | $                                         | 205.4  |                      | $      | 29.7                   |   | $                | — |   | $ | 235.1 |   |
| Service                                                  |   | —                                    |   | 63.2                      |   | —                 |   | 63.2             |   |
| Total external sales                                     |   | 205.4                                     |   | 92.9                      |   | —                 |   | 298.3            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges(2) |   | —                                    |   | —                    |   | (63.6                  | )      | (63.6            | )      |
| In-process research and development                      |   | —                                    |   | —                    |   | (10.5                  | )      | (10.5            | )      |
| Operating loss                                           |   | (78.6                                     | )      | (6.1                      | )      | (75.8                  | )      | (160.5           | )      |
| Other income, net                                        |   | —                                    |   | —                    |   | 27.5                   |   | 27.5             |   |
| Pre-tax loss                                             |   | (78.6                                     | )      | (6.1                      | )      | (48.3                  | )      | (133.0           | )      |
| Assets                                                   |   | 616.3                                     |   | 220.5                     |   | 1,453.2                |   | 2,290.0          |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| **Six Months Ended April 30, 2003**                      |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                          |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                  |   | $                                         | 252.2  |                      | $      | 41.7                   |   | $                | — |   | $ | 293.9 |   |
| Service                                                  |   | —                                    |   | 97.9                      |   | —                 |   | 97.9             |   |
| Total external Sales                                     |   | 252.2                                     |   | 139.6                     |   | —                 |   | 391.8            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges(1) |   | —                                    |   | —                    |   | (36.2                  | )      | (36.2            | )      |
| Operating loss                                           |   | (19.5                                     | )      | (9.3                      | )      | (46.5                  | )      | (75.3            | )      |
| Other income, net                                        |   | —                                    |   | —                    |   | 4.4                    |   | 4.4              |   |
| Pre-tax loss                                             |   | (19.5                                     | )      | (9.3                      | )      | (42.1                  | )      | (70.9            | )      |
| Assets                                                   |   | 320.6                                     |   | 268.6                     |   | 362.6                  |   | 951.8            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| **Six Months Ended April 30, 2002**                      |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                          |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                  |   | $                                         | 402.5  |                      | $      | 61.3                   |   | $                | — |   | $ | 463.8 |   |
| Service                                                  |   | —                                    |   | 128.0                     |   | —                 |   | 128.0            |   |
| Total external sales                                     |   | 402.5                                     |   | 189.3                     |   | —                 |   | 591.8            |   |
|                                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges(2) |   | —                                    |   | —                    |   | (68.5                  | )      | (68.5            | )      |
| In-process research and development                      |   | —                                    |   | —                    |   | (10.5                  | )      | (10.5            | )      |
| Operating loss                                           |   | (140.0                                    | )      | (11.7                     | )      | (74.2                  | )      | (225.9           | )      |
| Other income, net                                        |   | —                                    |   | —                    |   | 23.0                   |   | 23.0             |   |
| Pre-tax loss                                             |   | (140.0                                    | )      | (11.7                     | )      | (51.2                  | )      | (202.9           | )      |
| Assets                                                   |   | 616.3                                     |   | 220.5                     |   | 1,453.2                |   | 2,290.0          |   |

 

----

(1)          Includes $1.3 million and $1.4 million ofinventory write-offs associated with discontinued product lines; $4.3 millionand $14.6 of million impairment charges; and $12.1 million and $20.2 million ofemployee termination, facility consolidation and other charges not allocated toa specific segment for the three and six months ended April 30, 2003,respectively.

(2)          Includes $0.7 million and $0.7 million ofinventory write-offs associated with discontinued product lines; $16.8 millionand $18.7 of million impairment charges; and $46.1 million and $49.1 million ofemployee termination, facility consolidation and other charges not allocated toa specific segment for the three and six months ended April 30, 2002,respectively.

 

7

----

 

**Note 7 Impairment,Restructuring and Other Disposal Charges:**

 

During thethree and six months ended April 30, 2003 and 2002, we continued our plan toimprove operating performance by restructuring and streamlining ouroperations.  As a result, we incurredimpairment charges resulting from the disposal of excess equipment,restructuring charges associated with workforce reductions as well as theconsolidation of excess facilities, and other disposal charges associated withinventory write-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 six months ended April 30, 2003 and 2002, respectively (inmillions):

 
| **Three Months Ended April 30, 2003**         |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 9.8                                       |   | $                         | — |      | $      | — |   | $ | 9.8 |   |
| Fixed asset write-downs                       |   | 4.3                     |   | —                     |   | —                                    |   | —                    |   | 4.3       |   |
| Facility consolidation and lease  termination |   | —                  |   | 2.1                        |   | —                                    |   | —                    |   | 2.1       |   |
| Inventory write-offs                          |   | —                  |   | —                     |   | —                                    |   | 1.3                       |   | 1.3       |   |
| Other                                         |   | —                  |   | 0.2                        |   | —                                    |   | —                    |   | 0.2       |   |
| Total                                         |   | $                       | 4.3    |                       | $      | 12.1                                      |   | $                         | — |      | $      | 1.3 |   | $ | 17.7 |   |

 
| **Three Months Ended April 30, 2002**           |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                        |   | $                       | — |                       | $      | 10.4                                      |   | $                         | — |      | $      | — |   | $ | 10.4 |   |
| Fixed asset write-downs                         |   | 16.8                    |   | —                     |   | —                                    |   | —                    |   | 16.8      |   |
| Facility consolidation and lease  termination   |   | —                  |   | 35.8                       |   | —                                    |   | —                    |   | 35.8      |   |
| Inventory write-offs                            |   | —                  |   | —                     |   | —                                    |   | 0.7                       |   | 0.7       |   |
| Committed sales contracts – administrative |   | —                  |   | —                     |   | (1.3                                      | )      | —                    |   | (1.3      | )      |
| Other                                           |   | —                  |   | 1.2                        |   | —                                    |   | —                    |   | 1.2       |   |
| Total                                           |   | $                       | 16.8   |                       | $      | 47.4                                      |   | $                         | (1.3   | )         | $      | 0.7 |   | $ | 63.6 |   |

 
| **Six Months Ended April 30, 2003**           |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 21.5                                      |   | $                         | — |      | $      | — |   | $ | 21.5 |   |
| Fixed asset write-downs                       |   | 14.6                    |   | —                     |   | —                                    |   | —                    |   | 14.6      |   |
| Facility consolidation and lease  termination |   | —                  |   | (1.4                       | )      | —                                    |   | —                    |   | (1.4      | )      |
| Inventory write-offs                          |   | —                  |   | —                     |   | —                                    |   | 1.4                       |   | 1.4       |   |
| Other                                         |   | —                  |   | 0.1                        |   | —                                    |   | —                    |   | 0.1       |   |
| Total                                         |   | $                       | 14.6   |                       | $      | 20.2                                      |   | $                         | — |      | $      | 1.4 |   | $ | 36.2 |   |

 
| **Six Months Ended April 30, 2002**             |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Selling  and  Administrative  Charges** |   | **Cost of  Product Sold** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Employee severance costs                        |   | $                       | — |                       | $      | 11.9                                      |   | $                         | — |      | $      | — |   | $ | 11.9 |   |
| Fixed asset write-downs                         |   | 18.7                    |   | —                     |   | —                                    |   | —                    |   | 18.7      |   |
| Facility consolidation and lease  termination   |   | —                  |   | 35.9                       |   | —                                    |   | —                    |   | 35.9      |   |
| Inventory write-offs                            |   | —                  |   | —                     |   | —                                    |   | 0.7                       |   | 0.7       |   |
| Committed sales contracts – administrative |   | —                  |   | —                     |   | (1.3                                      | )      | —                    |   | (1.3      | )      |
| Other                                           |   | —                  |   | 2.6                        |   | —                                    |   | —                    |   | 2.6       |   |
| Total                                           |   | $                       | 18.7   |                       | $      | 50.4                                      |   | $                         | (1.3   | )         | $      | 0.7 |   | $ | 68.5 |   |

 

8

----

 

***RestructuringCharges:*** Employee severance costs relate to workforce reductions resulting fromthe closure of facilities and other workforce reductions attributable to ourefforts to reduce costs.  During thethree and six months ended April 30, 2003, approximately 350 and 1,020employees, respectively, were impacted by reductions in force.  The costs of these reductions will be fundedthrough cash from operations. These reductions have impacted both businesssegments and were widespread across all employee groups.

 

Facilityconsolidation costs represent lease termination costs and other costsassociated with our decision to consolidate and close duplicative or excessmanufacturing and office facilities. During the six months ended April 30, 2003, we negotiated a favorablelease termination settlement with a landlord of a leased facility and accordinglyreversed $4.2 million of our previous restructuring accrual for this leasesettlement.

 

***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.

 

Committedsales contracts – administrative represents the administrative expensesnecessary to complete or negotiate settlements 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.

 

***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 six months ended April 30, 2003, we recognized $4.3 million and$14.6 million, respectively, of impairment charges in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For thethree and six months ended April 30, 2002, we recognized $16.8 million and$18.7 million, respectively, of impairment charge in accordance with SFAS No.121, “Accounting for the Impairment of Long-Lived Assets.”

 

***Effect ofRestructuring Charges on Future Cash Flows:*** Thefollowing table provides detail on the activity and our remaining restructuringaccrual balance by category as of April 30, 2003 (in millions):

 

9

----

 
| **Type of Charge**       |   | **Accrual  October 31, 2002** |   | **Net  Additions** |   | **Cash  Charges** |   | **Accrual  April 30, 2003** |   |
|--------------------------|--------|-------------------------------|--------|--------------------|--------|-------------------|--------|-----------------------------|--------|
|                     |   |                          |   |               |   |              |   |                        |   |
| Employee severance costs |   | $                             | 17.0   |               | $      | 21.5              |   | $                           | 28.1   |   | $ | 10.4 |   |
| Facilities consolidation |   | 105.6                         |   | (1.4               | )      | 75.8              |   | 28.4                        |   |
| Other                    |   | 1.6                           |   | 0.1                |   | 0.4               |   | 1.3                         |   |
| Total                    |   | $                             | 124.2  |               | $      | 20.2              |   | $                           | 104.3  |   | $ | 40.1 |   |

 

The totaladjustment made to the restructuring accrual balance for changes in assumptionswas a $1.0 million increase and $3.2 million reduction during the three and sixmonths ended April 30, 2003, respectively. The adjustment was primarily related to the termination of a lease for amanufacturing facility used in our optical components business.  We were able to terminate this lease muchearlier than our original estimate and at a lower settlement cost than theoriginal estimate.  This adjustment wasrecorded as an offset to the additions to the accrual, and thus is reflected inthe “Net Additions” column in the table above.

 

We expect thatsubstantially all of the remaining $10.4 million accrual relating to employeeseverance costs as of April 30, 2003, will be paid from unrestricted cash bythe end of fiscal 2003. Of the $28.4 million to be paid for the consolidationof facilities, we expect that approximately $19.1 million will be paid fromunrestricted cash through April 30, 2004, and the balance will be paid over therespective lease terms of the facilities through 2008 from unrestricted cash.The remaining balance of $1.3 million will be paid through fiscal 2003 fromunrestricted cash as certain committed sales contracts are completed. Based onour intention to continue to reduce our cost structure, we may incur additionalrestructuring charges (both cash and non-cash) in future periods, which mayhave a material effect on our operating results.

 

In addition tothe restructuring accrual described above, we have $24.5 million of assets heldfor sale (of which $4.8 million relates to our Broadband Infrastructure andAccess segment and $19.7 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 April 30, 2004.

 

**Note 8 JointVentures:**

 

In January2001 and December 2001, we entered into a total of three joint ventures withCompetence Research and Development Ltd., an independent company.  The joint ventures were established to sharedevelopment risk and capital resources associated with the ongoing developmentof technology used in our iANTM, BroadAccessTM, and Small Subscriber productlines.  The joint ventures weresuccessful in advancing the development of technology related to these productlines.  When the joint ventures wereestablished we held 34%, 20%, and 49% interests, respectively, in the threejoint venture entities.  Because we didnot have majority control over the joint ventures, these investments wereaccounted for using the equity method. Therefore, a pro rata portion of the joint ventures’ profits or lossesis reflected in our condensed consolidated income statement as Other Income(Expense).  During the six months endedApril 30, 2002, we incurred $2.6 in equity losses related to these jointventures. There have been no losses incurred since January 31, 2002.

 

In December2001, we purchased Competence’s 66% interest in one of the joint ventures for$3.9 million in cash and the assumption of $16.5 million in debt owed by thatjoint venture, the proceeds of which were being used to fund the development oftechnology.  In February 2002, wepurchased 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 $10.5million for in-process research and development projects associated with thepurchase of Competence’s interests in these ventures in the second quarter offiscal 2002.  In addition, $10.3 millionwas allocated to developed technology, of which $5.3 was written off prior tofiscal 2003.  The remainder is beingamortized over a period of seven years. Appraisals for purchased in-process and developed technology weredetermined using the income approach, discounted based on the estimatedlikelihood that the project ultimately would succeed.

 

**Note9 Variable Interest Entities:**

 

We are a partyto an operating lease agreement related to our world headquarters facility inEden Prairie, Minnesota. This lease expires in October of fiscal 2006. Thisoperating lease, which is sometimes referred to as a “synthetic lease,”contains a minimum residual value guarantee by us at the end of the lease term,and also gives us a purchase option at the end of the lease term. If we chooseto retain the property at the end of the lease term, or if the lease isterminated prematurely, we must pay the purchase option price. If we dispose ofthe property at the end of the lease term, we must pay any shortfall of thesales proceeds as compared to the purchase option price, not to exceed theresidual value guarantee to the lessor. The aggregate purchase option price andminimum residual value guarantee from this lease are approximately $47.0million and $41.3 million, respectively. Under this lease, we have pledged cash collateral in the aggregate

 

10

----

 

amount of $47.0 million, whichis part of the restricted cash balance on our condensed consolidated balancesheet.  We currently intend to purchasethis property from the lessor during the third quarter of fiscal 2003 for thepurchase option price of $47.0 million.

 

During thethree months ended April 30, 2003 we purchased two properties that were subjectto synthetic leases from the lessor for $55.9 million.  The properties were purchased using therestricted cash we had previously pledged to secure our lease obligations.  We recorded these assets at their fairmarket value of $15.7 million, which resulted in a $5.2 million impairmentcharge and a $35.0 million reduction in our restructuring accrual as we hadpreviously recognized this loss in a prior period. Both purchased propertiesare classified as assets held for sale on our condensed consolidated balancesheet because we intend to sell them within one year from the date ofpurchase.  In addition to the assetspurchased during the three months ended April 30, 2003, we also purchased twoother properties that were subject to synthetic leases during the three monthsended January 31, 2003 from the lessor for a total of $45.5 million, usingrestricted cash pledged for these leases to pay for the purchase price, and immediatelysold the facilities for a total of $15.3 million.  The majority of the difference between the purchase price we paidto the lessor and the sales price we received was accrued as part of ourrestructuring accrual.  The $15.3million sales proceeds became available to us as unrestricted cash.

 

**Note 10 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 three months ended April 30, 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 ourrestricted cash that was previously pledged to secure our guarantee with theremainder being paid from unrestricted cash. This note receivable has been fully reserved for as part of ourallowance for doubtful accounts reserve. As of April 30, 2003, we did not haveany outstanding guarantees.

 

We haveentered into a variety of agreements with third parties that include indemnificationclauses, both in the ordinary course of business and in connection with ourdivestitures of certain product lines. These clauses require us to compensate these third parties for certainliabilities and damages incurred by them. We have not made any significant indemnification payments as a result ofthese clauses, and in accordance with FASB Interpretation No. 45 “GuarantorsAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” have not accrued any amounts in relationto these indemnification clauses.

 

**Note 11 SubsequentEvents:**

 

On June 4,2003, we issued $400 million of convertible unsecured subordinated notes in twoseparate transactions pursuant to Rule 144A under the Securities Act of 1933.  This issuance was made through an initialoffering of $350 million of convertible notes made on May 29, 2003, and thesubsequent exercise in full by the underwriters of such offering of theiroption to purchase an additional $50 million of convertible notes.  The net proceeds to us from this offeringwere $355.5 million after underwriting discounts of $10 million and the netpayment for the purchased call options and warrant transactions describedbelow.  In the first transaction, weissued $200 million of 1% fixed rate convertible unsecured subordinated notesthat mature on June 15, 2008.  In thesecond transaction, we issued $200 million of convertible unsecuredsubordinated notes that have a variable interest rate and mature on June 15,2013.  The interest rate for thevariable rate notes is equal to 6-month LIBOR plus 0.375%.  The interest rate for the variable ratenotes will be reset on each interest payment date.  Interest on both the fixed and variable rate notes will be paidsemiannually on June 15 and December 15 of each year beginning on December 15,2003.  The holders of both the fixed andvariable rate notes may convert all or some of their notes into shares of ourcommon stock at any time prior to maturity at a conversion price of $4.013 pershare.  We may not redeem the fixed ratenotes prior to their maturity date.  Wemay redeem any or all of the variable rate notes at any time on or after June23, 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 the optionto settle the call options with the counterparty through a net share settlementor cash settlement, either of which would be based on the extent to which thethen-current market price of our common stock exceeds $4.013 per share.  The total cost of the call options was$137.3 million, which was recognized in shareowners’ investment.  The cost of the call options was partiallyoffset by the sale of warrants with terms of five and ten years to acquireshares of our common stock to the same counterparty with whom we entered intothe call 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 market price of ourcommon stock exceeds $5.28 per share. The gross proceeds from the sale of the warrants were $102.8 million,which was recognized in shareowners’ investment.  The call options and the warrants are subject to early expirationupon conversion of the notes.  The neteffect of the call options and the warrants is to either reduce the potentialdilution from the conversion of the

 

11

----

 

notes (if we elect net sharesettlement) or to increase the net cash proceeds of the offering (if we electnet cash settlement) if the notes are converted at a time when the currentmarket price of our common stock is 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.

 

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

 

**Business**

 

We are 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 wireless communicationsdevices.

 

Our customersinclude local and long-distance telephone companies, cable televisionoperators, wireless service providers, new competitive service providers,broadcasters, governments, businesses, system integrators and communications equipmentmanufacturers and distributors. We offer broadband connectivity components andsystems, broadband access and network equipment, software and systemsintegration services to our customers through the following two segments ofproduct 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, 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 six months ended April 30, 2003, continued to be adverselyaffected by the downturn in general economic conditions, and adverse conditionsin the communications equipment industry in particular. The currentgeopolitical situation has caused additional uncertainty with respect to theprospects for economic growth generally. In this economic environment, many ofour communications service provider customers have deferred capital spending,reduced their communications equipment purchases, and announced plans tofurther reduce capital expenditures. We have also experienced and expect tocontinue to experience increased pricing pressure from many of ourcustomers.  A majority of our revenuescontinue to be derived from telecommunications service providers.  These companies in particular have greatlyreduced their spending on communications equipment, resulting in significantreductions in our revenues.  We havealso been impacted by reduced or deferred capital spending by our cableindustry customers as these customers focus on the profitable deployment ofbroadband services, which has caused uncertainty with respect to the timing oftheir plans to expand their networks to offer voice-over Internet Protocolservices.  Moreover, some of ourcustomers, both in the telecommunications service industry and the cable industry,have experienced serious financial

 

12

----

 

difficulties, which in somecases have 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 thedownturn in the communications service industry continues, we expect there tobe some 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 consolidatingcompanies focus 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 six month periodended April 30, 2003, with the acquisition of AT&T Broadband by ComcastCorporation, which has caused uncertainty with respect to our future IP Cablerevenues as Comcast integrates AT&T Broadband’s operations.

 

In addition tothe consolidation we expect from our customers, we expect there to be severalforms of structural correction in the communications equipment industry.  Over the next twelve to eighteen months weexpect some competitors to drop out of the market place due to bankruptcy orshareholder liquidation.  We alsobelieve that companies in the communications equipment industry will form morestrategic alliances or consolidate to diversify product portfolios or obtaingreater economics of scale. Finally, we expect there to be continuing productline rationalization as companies divest unprofitable product lines in aneffort to focus on profitable business opportunities.  We intend to pursue opportunities to acquire additional productlines or businesses that are complimentary to our strategic focus as well asdivest non-strategic product lines as we focus on growing our businessprofitably.  Although we are stillreviewing our product portfolio for strategic additions or divestitures, we areconsidering certain product lines for disposition.  However, no final decisions have been made in this regard.

 

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;

•                                          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.

 

On February20, 2003, the Federal Communications Commission (FCC) adopted rules concerningincumbent local exchange carriers’ network unbundling obligations.  The FCC released their new rules concerningtwo main areas relating to a carrier’s unbundling obligations - UNE-P andBroadband.  The FCC essentially kept inplace the carriers’ current UNE-P obligations, with state interpretations anddecisions, and ruled not to require the unbundling of certain network elementsin next generation hybrid and fiber networks. Overall, we do not anticipate that this aspect of the decision willresult in increased capital spending by the incumbent carriers in the nearterm.  With respect to the Broadbandportion of the ruling, although we believe that it may encourage long-terminvestment and commitment to the deployment of broadband networks by incumbentcarriers, it is too early to determine what the impact of this ruling may be.

 

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 capital budgetsby our customers during that period, and a general industry slowdown duringthat period). There can be no assurance that these historical seasonal trendswill continue in the future. For instance, due to the economic downturn in thecommunications equipment and services market during fiscal 2002 and 2001, thetrend was not evident in either fiscal year. This trend was also not evidentduring the first six months of fiscal 2003. A more detailed description of therisks to our business related to seasonality, along with other risk factorsassociated with our business, can be found in Exhibit 99-a to this Form10-Q.

 

13

----

 

**Impairment,Restructuring and Other Disposal Charges**

 

We recordedadditional impairment, restructuring, and other disposal charges during thethree and six months ended April 30, 2003 and 2002. Impairment chargesrepresent a write-down of the carrying value of property and equipment assetsto their estimated fair market value. Restructuring charges represent thedirect costs of employee terminations and facility consolidations as a resultof downsizing our business. Other disposal charges represent the direct costsof exiting certain product lines. A brief explanation of these charges follows,and a more thorough summary is contained in Note 7 to the CondensedConsolidated Financial Statements in Item 1 of this Form 10-Q.

 

***Three Months EndedApril 30, 2003 and 2002***

 

During thethree months ended April 30, 2003 and 2002, we incurred the following charges(in millions):

 

|   |                   | **Three Months Ended  April 30,** |   |
|--------|------------------------|-----------------------------------|--------|
|   |                   | **2003**                          |   | **2002** |   |
| • | Impairment Charges     |                              | $      | 4.3 |   | $ | 16.8 |   |
| • | Restructuring Charges  |                              | 12.1   |   | 47.4 |   |
| • | Other Disposal Charges |                              | 1.3    |   | (0.6 | ) |
|   |                   | $                                 | 17.7   |   | $ | 63.6 |   |

 

*Impairment Charges.*  The impairment charges consisted solely ofproperty and equipment impairments, which impacted both the BroadbandInfrastructure and Access and Integrated Solutions segments.  The impairment charges were the result ofour plan to dispose of excess equipment that resulted from our decision tostreamline and reduce the size of our operations.  The fair market value was determined using external sources,primarily proceeds received from previous equipment sales.

 

*Restructuring Charges. *The $12.1 millionof restructuring charges incurred during the three months ended April 30, 2003consist principally of $9.8 million for employee severance costs related toworkforce reductions and $2.1 million for facility consolidation and leasetermination costs.  The employeeterminations affected both the Broadband Infrastructure and Access andIntegrated Solutions segments. Approximately 350 employees were impacted byreductions in force during the quarter. The $2.1 million of facility consolidation costs primarily relates tothe consolidation of two facilities associated with our Integrated Solutionssegment and a $1.0 million facility consolidation charge as a result of arevised lease termination estimate on a previously vacated facility. The $47.4million of restructuring charges incurred during the three months ended April30, 2002 consists principally of $10.4 million for employee severance costs,$35.8 million for facility consolidation and lease termination costs, and $1.2million of other costs associated with our restructuring activities.

 

*Other Disposal Charges.*Forthe three months ended April 30, 2003 the $1.3 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 three months endedApril 30, 2002 the $(0.6) of other disposal charges represent $0.7 million ofinventory write offs that were reported in cost of sales, which were offset by$(1.3) of committed sales contracts – administrative costs that were reportedin selling and administrative expenses on our condensed consolidated statementof operations.

 

***Six Months EndedApril 30, 2003 and 2002***

 

During the sixmonths ended April 30, 2003 and 2002, we incurred the following charges (inmillions):

 

|   |                   | **Six Months Ended  April 30,** |   |
|--------|------------------------|---------------------------------|--------|
|   |                   | **2003**                        |   | **2002** |   |
| • | Impairment charges     |                            | $      | 14.6 |   | $ | 18.7 |   |
| • | Restructuring charges  |                            | 20.2   |   | 50.4 |   |
| • | Other Disposal charges |                            | 1.4    |   | (0.6 | ) |
|   |                   | $                               | 36.2   |   | $ | 68.5 |   |

 

*Impairment Charges. *The impairment charges consisted solelyof property and equipment impairments, which impacted both the BroadbandInfrastructure and Access and Integrated Solutions segments.  The impairment charges were the result ofour plan to

 

14

----

 

dispose of excess equipmentthat resulted from our decision to streamline and reduce the size of ouroperations.  The fair market value wasdetermined using external sources, primarily proceeds received from previousequipment sales or estimates of discounted cash flows.

 

*Restructuring Charges. *The $20.2 millionof restructuring charges incurred during the six months ended April 30, 2003consist principally of $21.5 million for employee severance costs related toworkforce reduction and $(1.4) million of facility consolidation charges.  The employee terminations affected both theBroadband Infrastructure and Access and Integrated Solutions segments. Approximately1,020 employees were impacted by reductions in force during the six monthsended April 30, 2003.  The $(1.4)million of facility consolidation charges reflects a $(4.2) million reversal ofa previous accrual related to a manufacturing facility used in our opticalcomponents business.  The $2.1 millionof additional facility consolidation charges incurred in the three months endedApril 30, 2003, partially offsets this reversal. The $50.4 million ofrestructuring charges incurred during the six months ended April 30, 2002consist principally of $11.9 million of employee severance costs, $35.9 millionof facility consolidation and lease termination costs and $2.6 million of othercosts associated with our restructuring plans.

 

*Other Disposal Charges.*Forthe six months ended April 30, 2003 the $1.4 million of other disposal chargesrepresent additional inventory write-offs related to product lines that havebeen discontinued.  This charge wasreported in cost of sales on our condensed consolidated statement ofoperations.  For the six months endedApril 30, 2002 the $(0.6) of other disposal charges represent $0.7 million ofinventory write offs as well as $(1.3) of committed sales contracts —administrative costs that are reported in selling and administrative expenseson our condensed consolidated statement of operations.

 

***Effect ofRestructuring Charges on Future Cash Flow***

 

The followingtable provides detail on the remaining restructuring accrual by category as ofApril 30, 2003 and October 31, 2002 (in millions):

 

| **Type of Charge**       |   | **Accrual  October 31, 2002** |   | **Accrual  April 30, 2003** |   |
|--------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                     |   |                          |   |                        |   |
| Employee severance costs |   | $                             | 17.0   |                        | $      | 10.4 |   |
| Facilities consolidation |   | 105.6                         |   | 28.4                        |   |
| Other                    |   | 1.6                           |   | 1.3                         |   |
| Total                    |   | $                             | 124.2  |                        | $      | 40.1 |   |

 

We believethat our entire restructuring accrual of $40.1 million as of April 30, 2003,will have to be paid from unrestricted cash as follows:

 

•                  Substantiallyall of the $10.4 million of employee severance costs will be paid through theremainder of fiscal 2003;

•                  The facilityconsolidation accrual relates principally to excess leased facilities.  Of the $28.4 million facility consolidationaccrual, we estimate $19.1 million will be paid through April 30, 2004, withthe remainder being paid over the respective lease terms ending through fiscal2008; and

•                  The other $1.3million accrual primarily relates to certain committed salescontracts–administrative costs and will be paid during the remainder of fiscal2003.

 

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 furtheradjustments, which may have a material effect on our operating results.  Although most of our restructuring planinitiatives have been implemented, we do not expect to complete ourrestructuring plan until the end of fiscal 2003.  Accordingly, we expect to continue to incur restructuring chargesthroughout the current fiscal year and may incur such charges in later fiscalyears.

 

**Results of Operations**

 

The followingtable contains information regarding the percentage to net sales of certainincome and expense items for the three and six months ended April 30, 2003 and2002, and the percentage changes in these income and expense items betweenperiods:

 

15

----

 
|                                 |   | **Percentage  of Net Sales**       |   | **Percentage  Increase or (Decrease)  Between Periods** |   |
|--------------------------------------|--------|------------------------------------|--------|---------------------------------------------------------|--------|
|                                 |   | **Three  Months Ended  April 30,** |   | **Six Months  Ended  April 30,**                        |   | **Three  Months  Ended April 30,** |   | **Six Months  Ended April 30,** |   |
|                                 |   | **2003**                           |   | **2002**                                                |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   |
|                                 |   |                               |   |                                                    |   |   |   |   |   |   |   |   |   |
| **Net Sales:**                       |   |                               |   |                                                    |   |   |   |   |   |   |   |   |   |
| Product                              |   | 74.0                               | %      | 78.8                                                    | %      | 75.0 | % | 78.4 | % | (39.6 | )% | (36.6 | )% |
| Service                              |   | 26.0                               |   | 21.2                                                    |   | 25.0 |   | 21.6 |   | (21.2 | ) | (23.5 | ) |
| **Total Net Sales**                  |   | 100.0                              |   | 100.0                                                   |   | 100.0 |   | 100.0 |   | (35.7 | ) | (33.8 | ) |
| **Cost of Sales:**                   |   |                               |   |                                                    |   |   |   |   |   |   |   |   |   |
| Product                              |   | 55.1                               |   | 72.7                                                    |   | 55.3 |   | 67.2 |   | (54.2 | ) | (47.9 | ) |
| Service                              |   | 80.7                               |   | 85.0                                                    |   | 87.1 |   | 87.0 |   | (25.1 | ) | (23.4 | ) |
| **Total Cost of Sales**              |   | 61.8                               |   | 75.3                                                    |   | 63.2 |   | 71.5 |   | (47.2 | ) | (41.5 | ) |
| **Gross Profit**                     |   | 38.2                               |   | 24.7                                                    |   | 36.8 |   | 28.5 |   | (0.4 | ) | (14.5 | ) |
| **Expenses:**                        |   |                               |   |                                                    |   |   |   |   |   |   |   |   |   |
| Research and development             |   | 14.3                               |   | 17.3                                                    |   | 15.2 |   | 16.2 |   | (46.7 | ) | (37.6 | ) |
| Selling and administration           |   | 31.8                               |   | 36.2                                                    |   | 31.9 |   | 37.0 |   | (43.6 | ) | (43.0 | ) |
| Impairment charges                   |   | 2.2                                |   | 5.6                                                     |   | 3.7 |   | 3.2 |   | (74.4 | ) | (21.9 | ) |
| Restructuring charges                |   | 6.3                                |   | 15.9                                                    |   | 5.2 |   | 8.5 |   | (74.5 | ) | (59.9 | ) |
| In process  research and development |   | —                             |   | 3.5                                                     |   | — |   | 1.8 |   | (100.0 | ) | (100.0 | ) |
| Total  Expenses                      |   | 54.6                               |   | 78.5                                                    |   | 56.0 |   | 66.6 |   | (55.3 | ) | (44.4 | ) |
| **Operating Loss**                   |   | (16.4                              | )      | (53.8                                                   | )      | (19.2 | ) | (38.2 | ) | 80.4 |   | 66.7 |   |
| **Other Income, Net**                |   | 1.0                                |   | 9.2                                                     |   | 1.1 |   | 3.9 |   | (92.7 | ) | (80.9 | ) |
| **Loss Before Income Taxes**         |   | (15.3                              | )      | (44.6                                                   | )      | (18.1 | ) | (34.3 | ) | 77.9 |   | 65.1 |   |
| **Benefit for Income Taxes**         |   | —                             |   | 14.7                                                    |   | — |   | 11.7 |   | (100.0 | ) | (100.0 | ) |
| **Net Loss**                         |   | (15.3                              | )      | (29.9                                                   | )      | (18.1 | ) | (22.6 | ) | 67.0 |   | 47.1 |   |

 

***Net Sales***

 

The followingtable sets forth our net sales for the three and six months ended April 30,2003 and 2002, respectively, for each of our functional product and service segmentsdescribed above (in millions):

 
|                                    |   | **Three  Months Ended April 30,** |   | **Six Months  Ended April 30,** |   |
|-----------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                    |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| **Product Group**                       |   | **Net Sales**                     |   | **%**                           |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   |
| **Broadband Infrastructure and Access** |   | $                                 | 119.7  |                            | 62.4   | % | $ | 205.4 |   | 68.9 | % | $ | 252.2 |   | 64.4 | % | $ | 402.5 |   | 68.0 | % |
| **Integrated  Solutions:**              |   |                              |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                 |   | 22.4                              |   | 11.7                            |   | 29.7 |   | 9.9 |   | 41.7 |   | 10.6 |   | 61.3 |   | 10.4 |   |
| Service                                 |   | 49.8                              |   | 25.9                            |   | 63.2 |   | 21.2 |   | 97.9 |   | 25.0 |   | 128.0 |   | 21.6 |   |
| **Total Integrated Solutions**          |   | 72.2                              |   | 37.6                            |   | 92.9 |   | 31.1 |   | 139.6 |   | 35.6 |   | 189.3 |   | 32.0 |   |
| **Total**                               |   | $                                 | 191.9  |                            | 100.0  | % | $ | 298.3 |   | 100.0 | % | $ | 391.8 |   | 100.0 | % | $ | 591.8 |   | 100.0 | % |

 

Net sales were$191.9 million and $391.8 million for the three and six months ended April 30,2003, respectively, reflecting a 35.7% and 33.8% decrease over the comparable2002 time periods.  Prior year amountsfor the three and six months periods included $3.9 million and $9.5 million ofnet sales from product lines divested prior to fiscal 2003.  International sales comprised 34.9% and37.6% of our net sales for the three and six months ended April 30, 2003,respectively, and 27.2% and 27.4% for the three and six months ended April 30,2002, respectively.

 

During thethree and six months ended April 30, 2003, net sales of BroadbandInfrastructure and Access products declined by 41.7% and 37.3%, 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 tosignificant reductions in communications service provider capital budgets, aswell as the lack of new network build-outs or significant expansions ofexisting networks.  In addition, salesof our IP Cable product line decreased as a result of a significant customerbeing acquired by Comcast Corporation. Our wireline product line continues to face intense competition which isputting pressure on our market share positions for these products.  In response, we intend to aggressivelycompete for market share by delivering high quality products and superiorcustomer service at competitive prices.

 

16

----

 

During thethree and six months ended April 30, 2003, net sales of our IntegratedSolutions products declined by 22.3% and 26.3%, respectively, over thecomparable 2002 time periods.  Net salesin all of our Integrated Solutions product lines decreased as a result ofcontinued reductions in our customers’ capital spending budgets.  Our software product line experienceddeclining sales of both service orders and new license orders.  We anticipate that our future revenue in ourIntegrated Solutions segment will be subject to increased variability due tothe timing of customer acceptance and associated revenue recognition forlarge-scale software installations.

 

For the sixmonths ended April 30, 2003, the increase in international sales as apercentage of total sales over the comparable fiscal 2002 period was largelyattributable to the recognition of $16.0 million of deferred revenue from aEuropean customer during the three months ended January 31, 2003.  In addition, during the three months endedApril 30, 2003, we recognized $8.1 million of revenue from a software installationat a large European customer, the majority of which related to license fees, asa result of meeting customer acceptance criteria.  As a percentage of total sales, international sales increasedacross many regions during the six months ended April 30, 2003 compared to thesame 2002 period including Canada, Europe, Japan and the Middle East/Africaregion.  We attribute these increases tomore pronounced capital spending reductions in the United States than in theseother regions.

 

***Gross Profit***

 

During thethree and six months ended April 30, 2003, gross profit percentages were 38.2%and 36.8%, respectively, and 24.7% and 28.5% for the three and six months endedApril 30, 2002, respectively.  Theincrease in gross profit percentage was primarily due to a reduction in ourfixed costs of sales as a result of our restructuring activities aimed atdownsizing our operations in response to the continued downturn in thetelecommunications industry. We also benefited from a more favorable sales mixtoward our higher margin product lines as well as from production efficienciesand reduced production costs as a result of our decision to outsource portionsof our manufacturing operations.   Weanticipate that our future gross profit percentage will vary based on manyfactors, including sales mix, competitive pricing, timing of new productintroductions, timing of customer acceptance and collectibility of large-scalesales transactions and manufacturing volume.

 

***Operating Expenses***

 

Totaloperating expenses for the three and six months ended April 30, 2003, were$104.8 million and $219.4 million, respectively, representing 54.6% and 56.0%of net sales, respectively. Included in these operating expenses wererestructuring charges of $12.1 million and $20.2 million and impairment chargesof $4.3 million and $14.6 million for the three and six months ended April 30,2003, respectively, which are discussed above. Total operating expenses for the three and six months ended April 30,2002, were $234.2 million and $394.4 million, respectively, representing 78.5%and 66.6% of net sales, respectively. Included in these operating expenses were restructuring and in processresearch and development charges of $56.6 million and $59.6 million,respectively, and impairment charges of $16.8 million and $18.7 million, respectively.  The decrease in absolute dollars and as apercentage of revenue of our operating expenses was primarily due to asignificant reduction in the dollar amount of our restructuring and impairmentcharges, the ongoing cost savings from our restructuring efforts as well as thedivestiture of certain business units and product lines. We will continue tomonitor our operating expenses for opportunities to further reduce ouroperating costs.

 

Research anddevelopment expenses were $27.4 million and $59.7 million for the three and sixmonths ended April 30, 2003, respectively, compared to $51.4 million and $95.6million during the three and six months ended April 30, 2002,respectively.  This represents adecrease of 46.7% and 37.6% during the three and six months ended April 30,2003 over the comparable 2002 time periods. Research and development expenses decreased by $10.6 million and $20.8million from the comparable 2002 three and six-month periods due to the divestitureor discontinuance of certain business units and product lines in fiscal 2002.We believe that, given the rapidly changing technological and competitiveenvironment in the communications equipment industry, continued commitment toproduct development efforts will be required for us to remain competitive.Accordingly, we intend to continue to allocate substantial resources, as apercentage of our net sales, to product development in each of our operatingsegments.

 

Selling andadministration expenses were $61.0 million and $124.9 million for the three andsix months ended April 30, 2003, respectively, which was a decrease of 43.6%and 43.0% from $108.1 million and $219.2 million for the three and six monthsended April 30, 2002, respectively. This decrease reflected the effects of ourrestructuring efforts.  In addition,selling and administrative expenses decreased by $18.6 million and $27.4million from the comparable 2002 three and six month periods due to thedivestiture or discontinuance of certain business units and product lines in fiscal2002.

 

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

 

The following table provides a breakdown ofother income and expenses for the three and six months ended April 30, 2003 and2002 (in millions):

 

17

----

 
|                                      |   | **Three months ended  April 30,** |   | **Six months ended  April 30,** |   |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                      |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Interest income                           |   | $                                 | 1.6    |                            | $      | 2.2 |   | $ | 2.7 |   | $ | 3.0 |   |
| Loss on sale of product lines             |   | —                            |   | —                          |   | (2.8 | ) | — |   |
| Gain on write-down or sale of investments |   | —                            |   | 4.3                             |   | 2.0 |   | 8.9 |   |
| Gain (loss) on sale of fixed assets       |   | (1.5                              | )      | 1.4                             |   | (1.0 | ) | (2.3 | ) |
| Loss on equity investment                 |   | —                            |   | (0.1                            | )      | — |   | (3.5 | ) |
| Gain on patent infringement settlement    |   | —                            |   | 26.2                            |   | — |   | 26.2 |   |
| Other                                     |   | 1.9                               |   | (6.5                            | )      | 3.5 |   | (9.3 | ) |
| **Total Other Income**                    |   | $                                 | 2.0    |                            | $      | 27.5 |   | $ | 4.4 |   | $ | 23.0 |   |

 

***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 demonstrates ourability to utilize our deferred tax assets. Therefore, the effective income taxrate for the three and six months ended April 30, 2003 was zero. The effectiveincome tax rate for the three and six months ended April 30, 2002 was 32.9% and34.0%, which resulted in part from lower effective tax rates applied torestructuring charges as well as certain non-deductible impairment charges.

 

***Net Loss***

 

Net loss was$29.4 million (or $0.04 per diluted share) and $70.9 million (or $0.09 perdiluted share) for the three and six months ended April 30, 2003, respectively,compared to net loss of $89.2 million (or $0.11 per diluted share) and $134.0million (or $0.17 per diluted share) for the three and six months ended April30, 2002, respectively.

 

**Application of CriticalAccounting Policies and Estimates**

 

There were nosignificant changes to our critical accounting policies during the three andsix months ended April 30, 2003.  Seeour Annual Report on Form 10-K for fiscal 2002 for a discussion of our criticalaccounting 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 $374.5 million at April 30, 2003, which is an increase of $95.6 millioncompared to October 31, 2002.  The majorsources of cash during the six months ended April 30, 2003, were $125.6 millionin income tax refunds and a $109.1 million reduction in restricted cash.  Of the $109.1 million reduction inrestricted cash, $101.4 million was used to purchase four properties subject tooperating leases.  In addition, $14.3million of previously restricted cash was used to pay a guarantee of a customernote receivable.  Other cash outflowsincluded $13.2 million used to fund investing and financing activities such asnet property plant and equipment additions and the repayment of long-term debtand $10.2 million of cash outflows associated with working capital managementand net cash losses from operations.

 

As of April30, 2003, we had restricted cash of $67.8 million.  Restricted cash represents cash pledged to various financialinstitutions to secure certain of our obligations, and thus is not available tous for working capital.  Of this restrictedcash, $47.0 million relates to a long-term operating lease obligation for ourworld headquarters facility, with the remainder representing cash collateralfor letters of credit and foreign currency hedging activities.  We expect that $47.0 million of ourrestricted cash will be used to settle the long-term lease obligation itsecures, and accordingly, will never become available to us for general workingcapital purposes.  The remainder of therestricted cash is expected to become available to us upon satisfaction of theobligations pursuant to which the letters of credit and currency hedgingarrangements were issued.  We areentitled to the interest earnings on our restricted cash balances.

 

During the sixmonths ended April 30, 2002, cash decreased $39.1 million compared to October31, 2001.  In addition, as of April 30,2002, we held approximately $37.3 million in marketable securities.  The major elements of the 2002 changeincluded $232.4 million in positive cash flow from improved working capital managementin addition to income tax refunds and a patent infringement settlement, whichwere offset by a $260.1 increase in restricted cash.

 

18

----

 

***Finance-relatedTransactions***

 

During thethree months ended April 30, 2003, we cancelled our accounts receivablesecuritization arrangement because we did not plan to utilize thisarrangement.  We entered into thisarrangement with a financial institution in December 2001, and the arrangementwas intended to function much like a revolving line of credit, but with a lowercost of funds than a traditional revolving line of credit.  Pursuant to this arrangement, we were ableto sell certain of our U.S.-sourced accounts receivable to the financialinstitution without recourse to us.  Theaccounts receivable securitization agreement was never utilized.

 

***Vendor Financing***

 

We have workedwith customers and third-party financiers to find a means of funding customerequipment purchases from us  bynegotiating financing arrangements. As of April 30, 2003 and 2002, we hadcommitments to extend credit of approximately $57.8 million and $56.0 million,respectively, under such arrangements. The total amount drawn and outstandingunder the commitments was approximately $21.6 million and $45.0 million as ofApril 30, 2003 and 2002, respectively. The commitments to extend credit areconditional agreements generally having fixed expiration or termination datesand specific interest rates, conditions and purposes. These commitments may expirewithout being drawn.   Some of thesecommitments enable the customer to draw on the commitment after the customerhas made payment to us for the products we sold, up to the amount the customerpreviously paid to us.  Accordingly,amounts committed may affect future cash flows. We regularly review alloutstanding commitments, and the results of these reviews are considered inassessing the overall risk for possible credit losses. At April 30, 2003, wehave recorded approximately $19.0 million in loss reserves in the event ofnon-performance under these financing arrangements.

 

In connection with the sale of a participation interest in a customernote receivable for $14.3 million, we guaranteed the payment obligation of thecustomer to the purchaser of the participation interest.  During the three months ended April 30, 2003the customer defaulted 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 amounton the note receivable at the time the customer defaulted.  Of the $14.5 million payment, we used $14.3million from our restricted cash that was previously pledged to secure ourguarantee with the remainder being paid from unrestricted cash. This notereceivable has been fully reserved for as part of our allowance for doubtfulaccounts reserve.

 

***Working CapitalOutlook***

 

Our mainsource of liquidity continues to be our unrestricted cash on hand.  We expect to receive a federal income taxrefund of approximately $10 million during the third fiscal quarter of2003.  In addition, On June 4, 2003, weissued $400 million of convertible unsecured subordinated notes in two separatetransactions pursuant to Rule 144A under the Securities Act of 1933, pursuantto which we realized net proceeds of $355.5 million.  See Note 11 to the Condensed Consolidated Financial Statementsfor a description of this transaction.

 

We expect tocontinue to use our unrestricted cash to fund operating losses in the near termand to pay our $40.1 million restructuring accrual.  We believe that our current unrestricted cash on hand, cash fromthe expected federal income tax refund, and cash proceeds from the recentconvertible note financing transaction should be adequate to fund our workingcapital requirements, planned capital expenditures, and restructuring coststhrough fiscal 2003 and beyond.

 

We believethat the additional liquidity provided by our recent convertible note financingtransaction will also enable us to pursue strategic opportunities, includingpossible product line or business acquisitions.  However, if one or more acquisition opportunities exceeds ourexisting capital resources, additional sources of capital may be required.  Given the current state of the communicationsequipment industry, there are few alternatives available as sources offinancing.  Commercial bank financing isnot available at this time to us or to many companies in our industry.  Accordingly, any plan to raise additionalcapital would likely involve an equity-based or equity-linked financing, suchas another issuance of convertible debt or the issuance of common stock orpreferred stock, which would be dilutive to existing shareholders.  Following the completion of our recentconvertible note financing transaction, we have only approximately 10 millionshares of common stock available for issuance under our articles ofincorporation after taking into account our share reserves for our stock optionplans and employee stock purchase plan. Accordingly, any plan to raise capital through the issuance of shares ofcommon stock or securities convertible into common stock may require anamendment to our articles of incorporation, which would require the approval ofshareowners.

 

***Off-balance Sheet Arrangements***

 

We are a partyto an operating lease agreement related to our world headquarters facility inEden Prairie, Minnesota.  This leaseexpires in October of fiscal 2006. This operating lease, which is sometimesreferred to as a “synthetic lease,” contains a minimum residual value guaranteeby us at the end of the lease term and also grants us a purchase option at theend of the lease term. If we choose to retain the property at the end of thelease term, or if the lease is terminated prematurely, we must pay the purchaseoption price. If we dispose of

 

19

----

 

the property at the end of thelease term, we must pay any shortfall of the sales proceeds as compared to thepurchase option price, not to exceed the amount of the residual value guaranteeto the lessor. The aggregate purchase option price and minimum residual valueguarantee from this lease is approximately $47.0 million and$41.3 million, respectively. Our obligations under the lease is secured by$47.0 million in cash collateral, which is classified as part of the restrictedcash on our condensed consolidated 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 do not currently receive any financing benefits from this arrangement.  During the three and six months ended April30, 2003, we incurred rent expense under this lease in the amount of $0.4million and $0.6 million, respectively. During the three and six months ended April 30, 2002, we incurred rentexpense under this lease in the amount of $1.3 million and $2.8 million,respectively.  During the three and sixmonths ended April 30, 2003 and 2002, we incurred cash outlays from ourunrestricted cash (for payment of rent) of like amounts.  We intend to purchase this facility prior toJuly 31, 2003, and intend to use the existing restricted cash of $47.0 millionto pay the purchase option price.

 

During thethree months ended April 30, 2003, we purchased two properties that weresubject to synthetic leases for $55.9 million. The properties were purchased using the restricted cash that was previouslypledged to secure our lease obligations. We recorded these assets at their fairmarket value of $15.7 million, which resulted in a $5.2 million impairmentcharge and a $35.0 million reduction in our restructuring accrual because wehad previously recognized this loss in a prior period. Both purchasedproperties are classified as assets held for sale on our condensed consolidatedbalance sheet as we intend to sell them within one year from the date ofpurchase.  The net sales proceedsobtained from a buyer of these facilities would be available to us asunrestricted cash.  During the threemonths ended January 31, 2003, we purchased two other leased properties (whichhad similar lease financing arrangements) for a total of $45.5 million, andused the restricted cash pledged for these leases to pay the purchaseprice.  The majority of the differencebetween the purchase price we paid to the lessor and the sales price wereceived was accrued as part of our restructuring accrual.  We immediately sold the facilities for atotal of $15.3 million, which became available to us as unrestricted cash.

 

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 six monthsended April 30, 2003, we contributed $0.0 million and $0.7 million,respectively, to these funds.  Duringthe three and six months ended April 30, 2002 we contributed $0.1 and $0.2million, respectively to these funds. As of April 30, 2003, our outstanding unfunded commitment totaled $8.7million.  We expect that our remainingcommitment will be funded through the use of unrestricted cash on hand over thecourse of the next three years.

 

**Cautionary Statementfor Purposes of the “Safe Harbor” Provisions of the Private SecuritiesLitigation Reform Act of 1995**

 

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, and Section 21E of theSecurities Exchange Act of 1934, as amended. Forward-looking statementsrepresent our expectations or beliefs concerning future events, including butnot limited to the following: any statements regarding future sales, profitpercentages, earnings per share and other results of operations, our estimatesof probable liabilities relating to pending litigation, the continuation ofhistorical trends, the sufficiency of our cash balances and cash generated fromoperating and financing activities for our future liquidity and capitalresource needs and the effect of regulatory changes.  We caution that any forward-looking statements made by us in thisreport or in other announcements made by us are qualified by important factorsthat could cause actual results to differ materially from those in theforward-looking statements.  Theseinclude, without limitation:    the magnitudeand duration of the significant downturn in the communications equipment industrywhich began in 2001, 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 25-35% of our sales come fromnon-U.S. jurisdictions; our ability to protect our intellectual property rightsand 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; potentialliabilities that could arise if there are design or manufacturing defects withrespect to any of our products;

 

20

----

 

our ability to obtain rawmaterials 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 this Form10-Q.  We disclaim any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events 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 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 each interestpayment date, which is June 15 and December 15 of each year until theirmaturity in fiscal 2013.  Assuminginterest rates rise 1%, 5% and 10%, our annual interest expense would increaseby $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 an unsecured general obligation of ADC to paythe balance 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 ADC common stock.  Accordingly, our outstanding deferred compensationobligation under this plan is subject to market risk.  As of April 30, 2003, our outstanding deferred compensationobligation related to the 401(k) excess plan was $6.6 million, of whichapproximately $1.4 million was indexed to ADC common stock.  Assuming a 20%, 50% and 100% aggregate increasein the value of the investment alternatives to which the account balances maybe indexed, our outstanding deferred compensation obligation would increase by$1.3 million, $3.3 million and $6.6 million, respectively, and we would incuran 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-functional currencies from fluctuations due to movements in foreignexchange rates. The program operates in markets where hedging costs arebeneficial. We attempt to minimize exposure to currencies in which hedginginstruments are unavailable or prohibitively expensive by managing ouroperating activities and net asset positions. The majority of hedginginstruments utilized are forward contracts with maturities of less than oneyear.  Foreign exchange contracts reduceour overall exposure to exchange rate movements, since gains and losses onthese contracts offset losses and gains on the underlying exposure.

 

**ITEM 4.  DISCLOSURE CONTROLS AND PROCEDURES**

 

Within the90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluationwas carried out under the supervision and with the participation of ourmanagement, including our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), of the effectiveness of our disclosure controls andprocedures.  Disclosure controls andprocedures are designed with the objective of ensuring that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, such as this Form 10-Q, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Based onthat evaluation, our CEO and CFO have concluded that our disclosure controlsand procedures are effective to satisfy the objectives for which they areintended.  Subsequent to the date of ourmanagement’s evaluation, there were no significant changes in our internalcontrols or in other factors that could significantly affect these controls,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

**PARTII. OTHER INFORMATION**

 

**ITEM 1. LEGALPROCEEDINGS**

 

On March 5,2003, we were served with a shareowner lawsuit brought by Wanda Kinermon thathas been filed in the United States District Court for the District ofMinnesota.  The complaint names ADC,William J. Cadogan, our former Chairman and Chief Executive Officer, and RobertE. Switz, our Executive Vice President and Chief Financial Officer, asdefendants.  This lawsuit purports tobring suit on behalf of a class of purchasers of our publicly traded securitiesfrom November 2000 to March 28, 2001. Since this lawsuit was served, we have been named as a defendant in 11other substantially similar lawsuits. The complaints allege

 

21

----

 

that we violated the securitieslaws and our fiduciary duties by making false and misleading statements aboutour financial performance and business prospects.  We anticipate that these shareowner class actions will beconsolidated in the near future.

 

On May 19,2003, we were served with a lawsuit brought by Lorraine Osborne that has beenfiled in the United States District Court for the District of Minnesota.  The complaint names ADC, the third party weutilize to administer and serve as trustee of our Retirement Savings Plan andseveral of our current and former officers and directors as defendants.  On May 21, 2003, we were served with asubstantially similar lawsuit.  Theselawsuits have been brought by individuals who seek to represent a class of participantsin our Retirement Savings Plan who purchased our common stock as one of theinvestment alternatives under the plan. The lawsuits allege a breach of fiduciary duties under the EmployeeRetirement Income Security Act.  Weanticipate that these two 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 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 of April30, 2003, we had recorded approximately $17.4 million in loss reserves in theevent of such adverse outcomes in these matters.  Litigation by its nature is uncertain.  Therefore, it is possible that unfavorable resolutions of theselawsuits, proceedings and claims could exceed the amount currently reserved andcould have a material adverse affect on our business, results of operations or financialcondition.

 

**ITEM 2. CHANGES INSECURITIES**

 

None.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

 

None.

 

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

 

a.                                       Ourannual meeting of shareowners was held on March 4, 2003.

 

b and c.      At the annual meeting, JohnA. Blanchard III, B. Kristine Johnson and Jean-Pierre Rosso were elected asdirectors for terms expiring at the annual meeting of our shareowners in 2006and Mickey P. Foret was elected as a director for a term expiring at the annualmeeting of our shareowners in 2005.  Thefollowing table shows the vote totals with respect to the election of thesedirectors:

 

| **Name**              |   | **Votes For** |   | **Authority Withheld** |   |
|-----------------------|--------|---------------|--------|------------------------|--------|
| John A. Blanchard III |   | 670,238,226   |   | 34,842,615             |   |
| B. Kristine Johnson   |   | 677,056,036   |   | 28,024,805             |   |
| Jean-Pierre Rosso     |   | 677,084,712   |   | 27,996,129             |   |
| Mickey P. Foret       |   | 690,952,435   |   | 14,128,406             |   |

 

James C.Castle, Richard R. Roscitt, and John D. Wunsch continued as directors for termsexpiring at the annual meeting of shareowners in 2005, and Robert Annunziata,John J. Boyle III, Larry W. Wangberg and Charles D. Yost continued as directorsfor terms expiring at the annual meeting of shareowners in 2004.

 

At the annualmeeting, our shareowners also approved an amendment to our Global StockIncentive Plan to permit a one-time exchange of certain outstanding stockoptions for a smaller number of stock options with a new exercise price andvesting schedule.  The following tableshows the vote totals with respect to the amendment to our Global StockIncentive Plan:

 

| **Votes For** |   | **Votes  Against** |   | **Abstentions** |   |
|---------------|--------|--------------------|--------|-----------------|--------|
| 600,832,899   |   | 97,116,785         |   | 7,131,155       |   |

 

22

----

 

**ITEM 5. OTHERINFORMATION**

 

None.

 

**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 the following Current Report on Form 8-K during the quarterended April 30, 2003:

 
| **Date**          |   | **Item Reported**                                                                                |
|-------------------|--------|--------------------------------------------------------------------------------------------------|
|              |   |                                                                                             |
| February 19, 2003 |   | Item 9 and Item 12 – February 19, 2003 news release announcing our  first quarter earnings. |

 

**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:  June 13, 2003 | ADC TELECOMMUNICATIONS, INC. |
|----------------------------|------------------------------|
|                       |                         |   |
|                       | By:                          | /s/ Robert E. Switz |
|                       |                         | Robert E. Switz |
|                       |                         | Executive Vice President and Chief Financial Officer,  Principal Financial Officer and Duly Authorized Officer |

 

23

----

 

**CERTIFICATIONS**

 

I, Richard R. Roscitt, the Chief Executive Officer of ADCTelecommunications, Inc., certify that:

 

1.                                       I have reviewedthis quarterly report on Form 10-Q of ADC Telecommunications, Inc.;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report.

 

4.                                       The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       The registrant’sother certifying officer and I have indicated in this quarterly report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  June 13, 2003 |                    |
|---------------------------|-------------------------|
|                      |                    |
|                      |                    |
|                      | /s/ Richard R. Roscitt  |
|                      | Richard R. Roscitt      |
|                      | Chief Executive Officer |

 

24

----

 

I, Robert E. Switz, the Chief Financial Officer of ADCTelecommunications, Inc., certify that:

 

1.                                       I have reviewedthis quarterly report on Form 10-Q of ADC Telecommunications, Inc.;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report.

 

4.                                       The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatedto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       The registrant’sother certifying officer and I have indicated in this quarterly report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  June 13, 2003 |                    |
|---------------------------|-------------------------|
|                      |                    |
|                      |                    |
|                      | /s/ Robert E. Switz     |
|                      | Robert E. Switz         |
|                      | Chief Financial Officer |

 

25

----

 

**ADCTELECOMMUNICATIONS, INC.**

 

**EXHIBITINDEX TO FORM 10-QFOR THE THREE MONTHS ENDED APRIL 30, 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              |   | Second Amended and Restated Rights Agreement, amended and restated as  of November 28, 1995, between ADC Telecommunications, Inc. and  Wells Fargo Bank Minnesota, N.A. (formerly Norwest Bank Minnesota, N.A.)  (amending and restating the Rights Agreement dated as of September 23,  1986, as amended and restated as of August 16, 1989), which includes as  Exhibit A thereto the form of Right Certificate. (Incorporated by  reference to Exhibit 4 to ADC’s Form 8-K dated December 11,  1995.) |
| 4-g              |   | Amendment to Second Amended and Restated Rights Agreement dated as of  October 6, 1999. (Incorporated by reference to Exhibit 4-c to ADC’s  Form 10-K for the fiscal year ended October 31, 1999.)                                                                                                                                                                                                                                                                                                                           |
| 4-h              |   | Amendment No. 2, dated as of November 15, 2000, to Second  Amended and Restated Rights Agreement among ADC  Telecommunications, Inc., Wells Fargo Bank Minnesota, N.A. (formerly  Norwest Bank Minnesota, N.A.) and Computershare Investment Services, LLC.  (Incorporated by reference to Exhibit 4.8 to ADC’s Registration  Statement on Form S-8 dated February 28, 2001.)                                                                                                                                      |
| 4-i              |   | Letter Agreement dated May 28, 2003, between ADC Telecommunications,  Inc., and Computershare Investor Services, LLC regarding Second Amended and  Restated Rights Agreement dated as of November 28, 1995, as amended.                                                                                                                                                                                                                                                                                                                               |
| 10-a             |   | ADC Telecommunications, Inc., Global Stock Incentive Plan (as amended  and restated through March 4, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10-b             |   | Letter dated April 18, 2003 to Asset Funding Corporation regarding  Termination of Receivables Purchase Agreement dated December 12, 2001, among  ADC Receivables Corp. I, ADC Telecommunications, Inc., Blue Ridge Asset Funding  Corporation and Wachovia Bank, N.A.                                                                                                                                                                                                                                                                                |
| 99-a             |   | Cautionary Statement Regarding Forward-Looking Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99-b             |   | Certifications pursuant to 18 U.S.C. 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

26

----