** **

**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, 2002**

 

**OR**

** **
| o | **TRANSACTION REPORT PURSUANT TO SECTION 13  or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|------------------------------------------------------------------------------------------------|

 

**For the transition period from N/A to N/A**

 

**Commission file number 0-1424**

 

**ADC Telecommunications, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Minnesota**

(State or other jurisdiction of incorporation or organization) | **41–0743912**

(I.R.S. Employer Identification No.) |
|-------------------------------------------------------------------------------|-----------------------------------------------------------|

 

**13625 Technology Drive, Eden Prairie, MN 55344-2252**

(Address of principal executiveoffices) (Zip code)

 

**(952) 938-8080**

(Registrant’s telephone number,including area code)

 

**N/A**

(Former name, former address andformer fiscal year, if changed since last report)

 

                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

 

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

                Common stock, $.20par value:  796,425,078 shares as ofJune 10, 2002

 

# ****

# **PART I. FINANCIAL INFORMATION**

 

**ITEM 1.FINANICAL STATEMENTS**

 

**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS—UNAUDITED(In millions)**
|                                                                                                                     |   | **April 30,  2002** |    | **October  31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-----------------------|--------|
| **                   ASSETS:** |   |                |    |                  |   |
| CURRENT ASSETS:                                                                                                     |   |                |    |                  |   |
| Cash and cash  equivalents                                                                                          |   | $                   | 309.5   |                  | $      | 348.6 |   |
| Available-for-sale  securities                                                                                      |   | 37.3                |    | 73.2                  |   |
| Accounts  receivable, net                                                                                           |   | 170.3               |    | 280.7                 |   |
| Inventories, net                                                                                                    |   | 192.2               |    | 253.6                 |   |
| Prepaid income  taxes                                                                                               |   | 41.7                |    | 208.4                 |   |
| Current deferred  tax assets                                                                                        |   | 106.7               |    | 107.0                 |   |
| Prepaid and  other current assets                                                                                   |   | 49.0                |    | 33.7                  |   |
|                                                                                                                |   |                |    |                  |   |
| Total current  assets                                                                                               |   | 906.7               |    | 1,305.2               |   |
|                                                                                                                |   |                |    |                  |   |
| PROPERTY AND  EQUIPMENT, net                                                                                        |   | 540.8               |    | 614.0                 |   |
| RESTRICTED CASH                                                                                                     |   | 260.1               |    | —                |   |
| OTHER ASSETS:                                                                                                       |   |                |    |                  |   |
| Deferred tax  assets                                                                                                |   | 371.5               |    | 367.1                 |   |
| Goodwill                                                                                                            |   | 144.0               |    | 140.1                 |   |
| Other                                                                                                               |   | 66.9                |    | 73.3                  |   |
|                                                                                                                |   |                |    |                  |   |
|                                                                                                                |   | $                   | 2,290.0 |                  | $      | 2,499.7 |   |
|                                                                                                                |   |                |    |                  |   |
| **LIABILITIES AND SHAREOWNERS’  INVESTMENT:**                                                                  |   |                |    |                  |   |
| CURRENT  LIABILITIES:                                                                                               |   |                |    |                  |   |
| Accounts payable                                                                                                    |   | $                   | 105.4   |                  | $      | 162.0 |   |
| Accrued  compensation and benefits                                                                                  |   | 88.6                |    | 109.1                 |   |
| Restructuring  accrual                                                                                              |   | 106.9               |    | 120.8                 |   |
| Other accrued  liabilities                                                                                          |   | 226.7               |    | 205.8                 |   |
| Notes payable  and current maturities of long-term debt                                                             |   | 16.7                |    | 1.7                   |   |
|                                                                                                                |   |                |    |                  |   |
| Total current  liabilities                                                                                          |   | 544.3               |    | 599.4                 |   |
|                                                                                                                |   |                |    |                  |   |
| LONG-TERM DEBT,  less current maturities                                                                            |   | 1.0                 |    | 3.0                   |   |
| OTHER LONG-TERM  LIABILITIES                                                                                        |   | 3.7                 |    | 3.9                   |   |
|                                                                                                                |   |                |    |                  |   |
| Total  liabilities                                                                                                  |   | 549.0               |    | 606.3                 |   |
|                                                                                                                |   |                |    |                  |   |
| SHAREOWNERS’  INVESTMENT                                                                                       |   |                |    |                  |   |
| (796.3 and 792.0  shares outstanding, respectively)                                                                 |   | 1,741.0             |    | 1,893.4               |   |
|                                                                                                                |   |                |    |                  |   |
|                                                                                                                |   | $                   | 2,290.0 |                  | $      | 2,499.7 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

2

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**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED  (In millions, except per share amounts)**

 
|                                                        |   | **Three  Months Ended April 30,** |   | **Six Months  Ended April 30,** |   |
|--------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|
|                                                   |   | **2002**                          |   | **2001**                             |   | **2002** |   | **2001** |   |
| NET SALES                                              |   | $                                 | 298.3  |                                 | $      | 652.4 |   | $ | 591.8 |   | $ | 1,463.7 |   |
| COST OF PRODUCT  SOLD                                  |   | 224.6                             |   | 530.1                                |   | 423.3 |   | 1,030.6 |   |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| GROSS PROFIT                                           |   | 73.7                              |   | 122.3                                |   | 168.5 |   | 433.1 |   |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| EXPENSES:                                              |   |                              |   |                                 |   |   |   |   |   |
| Research and  development                              |   | 49.8                              |   | 82.6                                 |   | 92.3 |   | 162.9 |   |
| Selling and  administration                            |   | 106.0                             |   | 235.1                                |   | 215.1 |   | 415.2 |   |
| Goodwill  amortization                                 |   | —                            |   | 17.0                                 |   | — |   | 34.7 |   |
| Impairment  charges                                    |   | 7.7                               |   | 401.5                                |   | 9.6 |   | 409.0 |   |
| Non-recurring  charges                                 |   | 67.0                              |   | 75.4                                 |   | 70.0 |   | 108.7 |   |
| Non-cash stock  compensation (1)                       |   | 3.7                               |   | 4.9                                  |   | 7.4 |   | 9.8 |   |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| Total expenses                                         |   | 234.2                             |   | 816.5                                |   | 394.4 |   | 1,140.3 |   |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| OPERATING LOSS                                         |   | (160.5                            | )      | (694.2                               | )      | (225.9 | ) | (707.2 | ) |
| OTHER INCOME  (EXPENSE), NET:                          |   |                              |   |                                 |   |   |   |   |   |
| Interest                                               |   | 2.2                               |   | (0.7                                 | )      | 3.0 |   | (0.1 | ) |
| Gain (loss) on  write-down or sale of investments      |   | 4.3                               |   | (754.1                               | )      | 8.9 |   | (745.2 | ) |
| Gain (loss) on  sale of fixed assets                   |   | 1.4                               |   | (0.2                                 | )      | (2.3 | ) | (0.3 | ) |
| Gain on patent  infringement settlement                |   | 26.2                              |   | —                               |   | 26.2 |   | — |   |
| Loss on equity  investment                             |   | (0.1                              | )      | (6.3                                 | )      | (3.5 | ) | (11.5 | ) |
| Other                                                  |   | (6.5                              | )      | (3.7                                 | )      | (9.3 | ) | (5.5 | ) |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| LOSS BEFORE  INCOME TAXES                              |   | (133.0                            | )      | (1,459.2                             | )      | (202.9 | ) | (1,469.8 | ) |
| BENEFIT FOR  INCOME TAXES                              |   | (43.8                             | )      | (414.0                               | )      | (68.9 | ) | (417.0 | ) |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| NET LOSS                                               |   | $                                 | (89.2  | )                                    | $      | (1,045.2 | ) | $ | (134.0 | ) | $ | (1,052.8 | ) |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| AVERAGE COMMON  SHARES OUTSTANDING (BASIC AND DILUTED) |   | 794.9                             |   | 786.0                                |   | 794.2 |   | 783.9 |   |
|                                                   |   |                              |   |                                 |   |   |   |   |   |
| LOSS PER SHARE  (BASIC AND DILUTED)                    |   | $                                 | (0.11  | )                                    | $      | (1.33 | ) | $ | (0.17 | ) | $ | (1.34 | ) |

 

----

(1) Non-cash stock compensation expense resultedprimarily from stock options and restricted stock converted in connection withour acquisition of Broadband Access Systems. If we had reported this non-cashstock compensation in existing expense categories, research and developmentexpense and selling and administration expense would have increased by $2.3million and $1.4 million, respectively, for the three months ended April 30,2002, $1.8 million and $3.1 million, respectively, for the three months ended April30, 2001, $4.6 million and $2.8 million, respectively, for the six months endedApril 30, 2002 and $3.6 million and $6.2 million, respectively, for the sixmonths ended April 30, 2001.

See accompanying notes tocondensed consolidated financial statements.

 

3

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED****(In millions)**
|                                                                                         |   | **Six Months  Ended  April 30,** |   |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                    |   | **2002**                              |   | **2001** |   |
| OPERATING  ACTIVITIES:                                                                  |   |                                  |   |   |   |
| Net loss                                                                                |   | $                                     | (134.0 | ) | $ | (1,052.8 | ) |
| Adjustments to  reconcile net income (loss) to net cash from operating activities— |   |                                  |   |   |   |
| Depreciation and  amortization                                                          |   | 58.0                                  |   | 104.0 |   |
| Inventory and  fixed asset impairment charges                                           |   | 19.4                                  |   | 481.6 |   |
| Write off  purchased IPR&D                                                          |   | 10.5                                  |   | — |   |
| Increase in  accounts receivable reserves                                               |   | 11.2                                  |   | 60.4 |   |
| Increase in  inventory reserves                                                         |   | 18.3                                  |   | 52.0 |   |
| Non-cash stock  compensation                                                            |   | 7.4                                   |   | 9.8 |   |
| Change in  deferred income taxes                                                        |   | (1.5                                  | )      | (317.6 | ) |
| Investment  impairments                                                                 |   | 22.3                                  |   | 788.1 |   |
| Gain on  ownership of investments                                                       |   | —                                |   | (3.7 | ) |
| Gain on sale of  investments                                                            |   | (31.2                                 | )      | (34.0 | ) |
| Loss on sale of  fixed assets                                                           |   | 2.3                                   |   | — |   |
| Other                                                                                   |   | (0.6                                  | )      | 4.9 |   |
| Changes in  operating assets and liabilities, net of acquisitions and divestitures:     |   |                                  |   |   |   |
| Accounts  receivable                                                                    |   | 108.5                                 |   | 181.6 |   |
| Inventories                                                                             |   | 42.0                                  |   | (45.8 | ) |
| Prepaid and  other assets                                                               |   | 152.5                                 |   | (176.2 | ) |
| Accounts payable                                                                        |   | (57.0                                 | )      | (15.6 | ) |
| Accrued  liabilities                                                                    |   | (13.6                                 | )      | (96.2 | ) |
|                                                                                    |   |                                  |   |   |   |
| Total cash  provided by (used for) operating activities                                 |   | 214.5                                 |   | (59.5 | ) |
|                                                                                    |   |                                  |   |   |   |
| INVESTING  ACTIVITIES:                                                                  |   |                                  |   |   |   |
| Acquisitions                                                                            |   | (4.3                                  | )      | (48.7 | ) |
| Property and  equipment additions, net of disposals                                     |   | (21.8                                 | )      | (175.2 | ) |
| Increase in  restricted cash                                                            |   | (260.1                                | )      | — |   |
| Sale of  available-for-sale securities, net                                             |   | 32.2                                  |   | 59.4 |   |
| (Purchase) sale  of long-term investments, net                                          |   | (1.8                                  | )      | 0.5 |   |
|                                                                                    |   |                                  |   |   |   |
| Total cash used  for investing activities                                               |   | (255.8                                | )      | (164.0 | ) |
|                                                                                    |   |                                  |   |   |   |
| FINANCING  ACTIVITIES:                                                                  |   |                                  |   |   |   |
| (Repayments)  borrowing of debt                                                         |   | (3.9                                  | )      | 91.4 |   |
| Common stock  issued                                                                    |   | 6.3                                   |   | 32.7 |   |
|                                                                                    |   |                                  |   |   |   |
| Total cash  provided by financing activities                                            |   | 2.4                                   |   | 124.1 |   |
|                                                                                    |   |                                  |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                |   | (0.2                                  | )      | (0.8 | ) |
|                                                                                    |   |                                  |   |   |   |
| DECREASE IN CASH  AND CASH EQUIVALENTS                                                  |   | (39.1                                 | )      | (100.2 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                                         |   | 348.6                                 |   | 217.3 |   |
|                                                                                    |   |                                  |   |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                               |   | $                                     | 309.5  |   | $ | 117.1 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

 

 

 

 

4

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**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION—UNAUDITED (In millions, except earnings per share)**

 
|                                                        |   | **2ndQuarter  2002** |   | **1st  Quarter 2002** |   | **4thQuarter  2001** |   | **3rd  Quarter 2001** |   |
|--------------------------------------------------------|--------|----------------------|--------|-----------------------|--------|----------------------|--------|-----------------------|--------|
| NET SALES                                              |   | $                    | 298.3  |                  | $      | 293.5                |   | $                     | 391.6  |   | $ | 547.5 |   |
| COST OF PRODUCT  SOLD                                  |   | 224.6                |   | 198.7                 |   | 277.4                |   | 369.8                 |   |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| GROSS PROFIT                                           |   | 73.7                 |   | 94.8                  |   | 114.2                |   | 177.7                 |   |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| EXPENSES:                                              |   |                 |   |                  |   |                 |   |                  |   |
| Research and  development                              |   | 49.8                 |   | 42.5                  |   | 49.6                 |   | 66.1                  |   |
| Selling and  administration                            |   | 106.0                |   | 109.1                 |   | 137.8                |   | 152.3                 |   |
| Goodwill  amortization                                 |   | —               |   | —                |   | 10.6                 |   | 11.3                  |   |
| Impairment  charges                                    |   | 7.7                  |   | 1.9                   |   | 32.8                 |   | 6.5                   |   |
| Non-recurring  charges                                 |   | 67.0                 |   | 3.0                   |   | 104.6                |   | 35.5                  |   |
| Non-cash stock  compensation                           |   | 3.7                  |   | 3.7                   |   | 4.4                  |   | 4.5                   |   |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| Total expenses                                         |   | 234.2                |   | 160.2                 |   | 339.8                |   | 276.2                 |   |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| OPERATING INCOME  (LOSS)                               |   | (160.5               | )      | (65.4                 | )      | (225.6               | )      | (98.5                 | )      |
| OTHER INCOME  (EXPENSE), NET:                          |   |                 |   |                  |   |                 |   |                  |   |
| Interest                                               |   | 2.2                  |   | 0.8                   |   | 1.8                  |   | (3.9                  | )      |
| Gain (loss) on  write-down or sale of investments      |   | 4.3                  |   | 4.6                   |   | (47.2                | )      | 15.6                  |   |
| Gain (loss) on  sale of fixed assets                   |   | 1.4                  |   | (3.7                  | )      | —               |   | —                |   |
| Gain (loss) on  divestiture                            |   | (0.8                 | )      | —                |   | (87.8                | )      | 5.9                   |   |
| Gain on patent  infringement settlement                |   | 26.2                 |   | —                |   | —               |   | —                |   |
| Loss on equity  investment                             |   | (0.1                 | )      | (3.4                  | )      | (3.5                 | )      | (3.2                  | )      |
| Other                                                  |   | (5.7                 | )      | (2.8                  | )      | (1.8                 | )      | (2.7                  | )      |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                     |   | (133.0               | )      | (69.9                 | )      | (364.1               | )      | (86.8                 | )      |
| PROVISION  (BENEFIT) FOR INCOME TAXES                  |   | (43.8                | )      | (25.1                 | )      | (187.3               | )      | (28.7                 | )      |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| NET LOSS                                               |   | $                    | (89.2  | )                     | $      | (44.8                | )      | $                     | (176.8 | ) | $ | (58.1 | ) |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| AVERAGE COMMON  SHARES OUTSTANDING (BASIC AND DILUTED) |   | 794.9                |   | 793.4                 |   | 789.7                |   | 787.8                 |   |
|                                                   |   |                 |   |                  |   |                 |   |                  |   |
| LOSS PER SHARE  (BASIC AND DILUTED)                    |   | $                    | (0.11  | )                     | $      | (0.06                | )      | $                     | (0.22  | ) | $ | (0.07 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIESNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED**

 

**Note 1Basis of Presentation:**

 

                The interim informationfurnished in this report is unaudited but reflects all adjustments which arenecessary, in the opinion of our management, for a fair statement of theresults for the interim periods. Prior year financial information has beenrestated to reflect the acquisition of CommTech Corporation, which wascompleted in the first quarter of fiscal 2001 and accounted for as a pooling ofinterests. The operating results for the quarter ended April 30, 2002 are notnecessarily indicative of the operating results to be expected for the fullfiscal year. These statements should be read in conjunction with our mostrecent Annual Report filed on Form 10-K.

 

                *RecentlyIssued Accounting Pronouncements.* In October 2001, the Financial Accounting Standards Board issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” SFAS 144 supersedes SFAS 121. SFAS 144 primarilyaddresses significant issues relating to the implementation of SFAS 121and develops a single accounting model for long-lived assets to be disposed of,whether primarily held, used or newly acquired. The provisions of SFAS 144will be effective for fiscal years beginning after December 15, 2001. Wewill apply this standard beginning in our 2003 fiscal year, which beginsNovember 1, 2002. If this standard were applied presently it would notmaterially impact our financial results for the three and six months endedApril 30, 2002.

 

**Note 2Inventories:**

 

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,  2002** |       | **October  31, 2001** |       |
|------------------------------------------------|--------|---------------------|------------|-----------------------|------------|
|                                           |   |                | ** ** |                  | ** ** |
| Purchased  materials and manufactured products |   | $                   | 174.5      |                  | $          | 226.5 |   |
| Work-in-process                                |   | 17.7                |       | 27.1                  |       |
|                                           |   |                |       |                  |       |
|                                           |   | $                   | 192.2      |                  | $          | 253.6 |   |

** **

**Note 3 Other Assets:**

 

*                Goodwill.*  On November 1, 2001, we adopted SFASNo. 142, “Goodwill and Other Intangible Assets.” Under this standard,purchased goodwill is no longer amortized over its useful life. Rather,goodwill is subject to a periodic impairment test based on its fair value. Aspart of adopting this standard, we obtained an independent appraisal to assessthe fair value of our business units to determine whether goodwill carried onour books was impaired and the extent of such impairment, if any. Theindependent appraisal used the income approach to measure the value of ourbusiness units. Under the income approach, value is dependent on the presentvalue of future economic benefits to be derived from ownership. Future net cashflows available for distribution are discounted at market–based rates ofreturn to provide indications of value. We used a discount rate of 19.9% in ourcalculations. Based upon this independent appraisal, we determined that ourcurrent goodwill balances were not impaired as of November 1, 2001. We willcontinue to reassess the value of our business units and related goodwillbalances at the beginning of the fourth quarter of each fiscal year or at othertimes if events have occurred or circumstances exist that indicates thecarrying amount of goodwill may warrant revision or may not be recoverable.

 

                The following table reconcilesnet income for the three and six months ended April 30, 2002 and 2001,excluding amortization expense recognized in those periods related to goodwill(in millions, except for earnings (loss) per share):

 

6

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|                                               |   | **Three Months Ended**** April 30,** |   | **Six Months Ended**** April 30,** |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                          |   | **2002**                                  |   | **2001**                                |   | **2002** |   | **2001** |   |
|                                          |   |                                      |   |                                    |   |   |   |   |   |
| Reported net loss                             |   | $                                         | (89.2  | )                                       | $      | (1,045.2 | ) | $ | (134.0 | ) | $ | (1,052.8 | ) |
| Add back: Goodwill amortization, net of taxes |   | —                                    |   | 17.5                                    |   | — |   | 25.4 |   |
|                                          |   |                                      |   |                                    |   |   |   |   |   |
| Adjusted net income (loss)                    |   | $                                         | (89.2  | )                                       | $      | (1,027.7 | ) | $ | (134.0 | ) | $ | (1,027.4 | ) |
|                                          |   |                                      |   |                                    |   |   |   |   |   |
| Basic and diluted earnings per share:         |   |                                      |   |                                    |   |   |   |   |   |
| Reported net loss                             |   | $                                         | (0.11  | )                                       | $      | (1.33 | ) | $ | (0.17 | ) | $ | (1.34 | ) |
| Goodwill amortization                         |   | —                                    |   | 0.02                                    |   | — |   | 0.03 |   |
|                                          |   |                                      |   |                                    |   |   |   |   |   |
| Adjusted net income (loss)                    |   | $                                         | (0.11  | )                                       | $      | (1.31 | ) | $ | (0.17 | ) | $ | (1.31 | ) |

 

 

                 *Deferred tax assets.* As of April 30, 2002, we had recorded a deferred tax asset of $478.2million, of which $371.5 million is non-current. This asset generallyrepresents future tax benefits we will receive when certain expenses previouslyincurred become deductible under applicable income tax laws. The realizabilityof this asset is dependent on the existence of taxable income in future periodsagainst which these deductions can be applied. We regularly assess theprospects for future taxable income to determine whether the carrying value ofthis deferred tax asset is recoverable. If we determine the full amount is notrecoverable, an appropriate reduction in the carrying value of this asset willbe taken.  In light of current industryconditions, it is possible that we will conclude that we will not be able togenerate sufficient taxable income in future periods within the time framerequired to fully utilize the benefit of our deferred tax assets.

 

 

**Note 4Comprehensive Loss:**

 

The following tablepresents the calculation of comprehensive income (loss) as required by SFASNo. 130. Comprehensive income (loss) has no impact on ADC’s net income(loss), balance sheet or shareowners’ equity. The components of comprehensiveloss are as follows (in millions):

 
|                                                                                                                      |   | **Three  Months Ended April 30,** |       | **Six Months  Ended April 30,** |       |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                                                                                                 |   | **2002**                          |       | **2001**                        |       | **2002** |   | **2001** |   |
|                                                                                                                 |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Net loss                                                                                                             |   | $                                 | (89.2      | )                               | $          | (1,045.2 | ) | $ | (134.0 | ) | $ | (1,052.8 | ) |
| Changes in  cumulative translation adjustments                                                                       |   | 2.0                               |       | (1.9                            | )          | (6.4 | ) | 1.7 |   |
| Changes in  market value of derivative financial instruments classified as cash flow  hedges, net of tax             |   | —                            |       | 0.8                             |       | — |   | 2.6 |   |
| Reclassification  adjustment for realized (gains) losses on securities classified as available  for sale, net of tax |   | (15.2                             | )          | 473.5                           |       | (19.6 | ) | 473.5 |   |
| Unrealized loss  from securities classified as available for sale, net of tax                                        |   | (1.5                              | )          | (114.8                          | )          | (2.4 | ) | (480.8 | ) |
|                                                                                                                 |   |                              |       |                            |       |   |   |   |   |
| Comprehensive  loss                                                                                                  |   | $                                 | (103.9     | )                               | $          | (687.6 | ) | $ | (162.4 | ) | $ | (1,055.8 | ) |

 

In accordance with our policy toreview our investment portfolio for declines in value that may be other thantemporary, we recorded $19.9 million ($12.3 million net of tax) and $22.3million ($13.8 million net of tax) of non-cash losses on alower-of-cost-or-market write-down for various equity investments in ourportfolio of marketable equity securities during the three and six months endedApril 30, 2002, respectively.  Thiswrite down is a result of the downturn in market conditions in the technologyand telecommunication sectors.

 

                We maintain investments ofcommon stock in five publicly held companies in the telecommunications andtechnology industries. The investments in two of these companies,Vyyo, Inc. and Interwave Communications 

 

7

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InternationalLtd., have been written down to a nominal value. The common stock investmentsin two other of these companies, ONI Systems Corp. and RedbackNetworks, Inc., where our ownership interest is less than 20%, areclassified as available-for-sale securities and, consequently, are recorded onthe balance sheet at their fair value with unrealized gains and losses reportedas a separate component of shareowners’ investment in accumulated othercomprehensive income (loss). As of April 30, 2002 the market value ofthese two investments was as follows (in millions):

 
| ONI Systems Corp.       |   | $      | 6.0    |   |
|-------------------------|--------|--------|--------|--------|
| Redback  Networks, Inc. |   | 2.0    |   |
|                    |   |   |   |
| Total                   |   | $      | 8.0    |   |

 

In addition, we own an approximate 21.9% interest inMIND C.T.I. Ltd.  As of April 30, 2002,our investment in MIND had a market value of approximately $5.2 million. Thisinvestment is accounted for using the equity method. Under the equity method, apro rata portion of MIND’s profits or losses is reflected in our consolidatedincome statement.

 

During the three and six months ended April 30, 2002,we sold 0.9 million and 1.2 million shares respectively of ONI Systems andpartially settled a related hedging arrangement for an aggregate pre-tax gainof $24.2 million and $31.2 million, respectively.

 

As of April 30, 2002, we continue to maintain acashless collar arrangement to minimize the impact of a potential decrease inthe market value of our investment in ONI Systems. This cashless collararrangement originally was entered into in the third quarter of fiscal2001.  Our investment in the shares ofONI Systems has a cost basis of approximately $1.1 million. The ONI Systemscollar provides us with an aggregate floor value of approximately $43.0 millionif held to maturity while allowing us to participate in up to approximately$57.0 million in further appreciation above the floor value. This collar limitsour exposure to, and benefits from, price fluctuations in the underlying ONISystems stock. The collar is designated as a cash flow hedge of the underlyingstock. All changes in the market value of the collar and the underlying stockare included as a component of comprehensive income (loss) and are reflected inshareowners’ investment.  As of April30, 2002, the market value of this collar arrangement was $29.3 million.

 

                In February 2002, CienaCorporation and ONI Systems entered into a definitive merger agreement.Pursuant to the merger agreement, each outstanding share of ONI Systems will beexchanged for .7104 shares of Ciena Corporation. We expect to record a gain asa result of the conversion of our 1.3 million shares in ONI Systems intoshares of Ciena Corporation assuming the proposed merger is finalized.

 

**Note 5Loss Per Share:**

 

Basicloss per common share was calculated by dividing net loss by the weightedaverage number of common shares outstanding during the period. Diluted loss pershare was calculated by dividing net loss by the sum of the weighted averagenumber of common shares outstanding plus all additional common shares thatwould have been outstanding if potentially dilutive common shares had beenissued. The following table reconciles the number of shares utilized in theloss per share calculations for the periods ended April 30, 2002 and 2001(inmillions, except loss per share):

 

8

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|                                                       |   | **Three Months Ended April 30,** |       | **Six Months Ended April 30,** |       |
|-------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                  |   | **2002**                         |       | **2001**                       |       | **2002** |   | **2001** |   |
|                                                  |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net loss                                              |   | $                                | (89.2      | )                              | $          | (1,045.2 | ) | $ | (134.0 | ) | $ | (1,052.8 | ) |
| Loss per common share  (basic)                        |   | $                                | (0.11      | )                              | $          | (1.33 | ) | $ | (0.17 | ) | $ | (1.34 | ) |
| Loss per common share  (diluted)                      |   | $                                | (0.11      | )                              | $          | (1.33 | ) | $ | (0.17 | ) | $ | (1.34 | ) |
| Weighted average common  shares outstanding (basic)   |   | 794.9                            |       | 786.0                          |       | 794.2 |   | 783.9 |   |
| Effect of dilutive  securities—stock options     |   | —                           |       | —                         |       | — |   | — |   |
|                                                  |   |                             |       |                           |       |   |   |   |   |
| Weighted average common  shares outstanding (diluted) |   | 794.9                            |       | 786.0                          |       | 794.2 |   | 783.9 |   |

 

**Note 6Segment Reporting:**

 

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

 

**Segment Information (In millions)**

 
|                                  |   | **Broadband  Infrastructure and Access** |   | **Integrated  Solutions** |   | **Unallocated  Items(1)** |   | **Consolidated** |   |
|---------------------------------------|--------|------------------------------------------|--------|---------------------------|--------|---------------------------|--------|------------------|--------|
| **Three Months Ended April 30, 2002** |   |                                     |   |                      |   |                      |   |             |   |
| External sales                        |   | $                                        | 205.4  |                      | $      | 92.9                      |   | $                | — |   | $ | 298.3 |   |
| Operating loss                        |   | (74.1                                    | )      | (6.1                      | )      | (80.3                     | )      | (160.5           | )      |
|                                  |   |                                     |   |                      |   |                      |   |             |   |
| **Three Months Ended April 30, 2001** |   |                                     |   |                      |   |                      |   |             |   |
| External sales                        |   | $                                        | 496.8  |                      | $      | 155.6                     |   | $                | — |   | $ | 652.4 |   |
| Operating loss                        |   | (120.3                                   | )      | (30.4                     | )      | (543.5                    | )      | (694.2           | )      |

 

**Segment Information (In millions)**

 
|                                     |   | **Broadband  Infrastructure and Access** |    | **Integrated  Solutions** |   | **Unallocated  Items(2)** |   | **Consolidated** |   |
|-------------------------------------|--------|------------------------------------------|---------|---------------------------|--------|---------------------------|--------|------------------|--------|
| **Six Months Ended April 30, 2002** |   |                                     |    |                      |   |                      |   |             |   |
| External sales                      |   | $                                        | 402.5   |                      | $      | 189.3                     |   | $                | — |   | $ | 591.8 |   |
| Operating loss                      |   | (130.9                                   | )       | (11.6                     | )      | (83.4                     | )      | (225.9           | )      |
| **Six Months Ended April 30, 2001** |   |                                     |    |                      |   |                      |   |             |   |
| External sales                      |   | $                                        | 1,146.6 |                      | $      | 317.1                     |   | $                | — |   | $ | 1,463.7 |   |
| Operating loss                      |   | (7.4                                     | )       | (55.6                     | )      | (644.2                    | )      | (707.2           | )      |

 

(1)  Includes non-cash stockcompensation charges of $3.7 million and $4.9 million, non-recurring and otherrestructuring related charges of $74.1 million and $124.3 million and otheritems not allocated to a specific segment for the three months endedApril 30, 2002 and 2001, respectively. In addition, the 2001 amountincludes goodwill amortization of $17.0 million as well as impairment chargestotaling $401.5 million.

 

(2)  Includes non-cash stock compensation chargesof $7.4 million and $9.8 million, non-recurring and other restructuring relatedcharges of $79.0 million and $200.8 million and other items not allocated to aspecific segment for the six months ended April 30, 2002, and 2001respectively. In addition, the 2001 amount includes goodwill amortization of$34.7 million as well as impairment charges totaling $409.0 million.

 

9

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**Note 7 Non-Recurring and Other RestructuringRelated Charges:**

 

                During fiscal 2001 andcontinuing into fiscal 2002, we launched an initiative to discontinue productlines that no longer fit our current focus and growth strategy and toconsolidate unproductive and duplicative facilities. The non-recurring andrestructuring related charges associated with this program totaled $63.7million ($41.8 million net of tax) and $117.4 million ($76.1 million net oftax) for the three months ended April 30, 2002 and 2001, respectively, and$68.5 million ($45.0 million net of tax) and $192.8 million ($125.3 million netof tax) for the six months ended April 30, 2002 and 2001, respectively.   In addition, during the three and sixmonths ended April 30, 2002 we incurred $10.5 million ($10.5 million net of tax)of in-process research and development charges as a result of finalizing thepurchase of two technology joint ventures. Acquisition costs totaling $6.9 million ($5.8 million net of tax) and$8.0 million ($6.5 million net of tax) were incurred during the three and sixmonths ended April 30, 2001, respectively.

 

                Non-recurring and restructuringrelated charges by category of expenditures are as follows for the three andsix months ended April 30, 2002 and 2001, respectively (in millions):

 
| **Three  Months Ended April 30, 2002**         |   | **Cost of  Products Sold** |   | **Non-recurring  Charges** |   | **Selling  and Administrative Charges** |   | **Total** |   |
|------------------------------------------------|--------|----------------------------|--------|----------------------------|--------|-----------------------------------------|--------|-----------|--------|
| Employee  severance costs                      |   | $                          | — |                       | $      | 10.4                                    |   | $         | — |   | $ | 10.4 |   |
| Facilities  consolidation                      |   | —                     |   | 35.8                       |   | —                                  |   | 35.8      |   |
| Inventory and  committed sales contracts       |   | 0.7                        |   | —                     |   | —                                  |   | 0.7       |   |
| Fixed asset  write-downs                       |   | —                     |   | 16.9                       |   | —                                  |   | 16.9      |   |
| Committed sales  contracts—administrative |   | —                     |   | —                     |   | (1.3                                    | )      | (1.3      | )      |
| In process  research and development           |   | —                     |   | 10.5                       |   | —                                  |   | 10.5      |   |
| Other                                          |   | —                     |   | 1.1                        |   | —                                  |   | 1.1       |   |
|                                           |   |                       |   |                       |   |                                    |   |      |   |
| Total                                          |   | $                          | 0.7    |                       | $      | 74.7                                    |   | $         | (1.3   | ) | $ | 74.1 |   |

 
| **Three  Months Ended April 30, 2001**         |   | **Cost of  Products Sold** | ** ** | **Non-recurring  Charges** | ** ** | **Selling  and Administrative Charges** | ** ** | **Total** | ** ** |
|------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|-----------------------------------------|------------|-----------|------------|
| Employee  severance costs                      |   | $                          | —     |                       | $          | 25.2                                    |       | $         | —     |   | $ | 25.2 |   |
| Facilities  consolidation                      |   | —                     |       | 36.5                       |       | —                                  |       | 36.5      |       |
| Inventory and  committed sales contracts       |   | 28.2                       |       | —                     |       | —                                  |       | 28.2      |       |
| Fixed asset  write-downs                       |   | —                     |       | 6.8                        |       | —                                  |       | 6.8       |       |
| Committed sales  contracts—administrative |   | —                     |       | —                     |       | 19.0                                    |       | 19.0      |       |
| Integration and  acquisition costs             |   | —                     |       | 6.9                        |       | —                                  |       | 6.9       |       |
| Other                                          |   | —                     |       | —                     |       | 1.7                                     |       | 1.7       |       |
|                                           |   |                       |       |                       |       |                                    |       |      |       |
| Total                                          |   | $                          | 28.2       |                       | $          | 75.4                                    |       | $         | 20.7       |   | $ | 124.3 |   |

 
| **Six Months  Ended April 30, 2002**           |   | **Cost of  Products Sold** | ** ** | **Non-recurring  Charges** | ** ** | **Selling  and Administrative Charges** | ** ** | **Total** | ** ** |
|------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|-----------------------------------------|------------|-----------|------------|
| Employee  severance costs                      |   | $                          | —     |                       | $          | 11.9                                    |       | $         | —     |   | $ | 11.9 |   |
| Facilities  consolidation                      |   | —                     |       | 35.9                       |       | —                                  |       | 35.9      |       |
| Inventory and  committed sales contracts       |   | 0.7                        |       | —                     |       | —                                  |       | 0.7       |       |
| Fixed asset  write-downs                       |   | —                     |       | 18.7                       |       | —                                  |       | 18.7      |       |
| Committed sales  contracts—administrative |   | —                     |       | —                     |       | (1.3                                    | )          | (1.3      | )          |
| In process  research and development           |   | —                     |       | 10.5                       |       | —                                  |       | 10.5      |       |
| Other                                          |   | —                     |       | 2.6                        |       | —                                  |       | 2.6       |       |
|                                           |   |                       |       |                       |       |                                    |       |      |       |
| Total                                          |   | $                          | 0.7        |                       | $          | 79.6                                    |       | $         | (1.3       | ) | $ | 79.0 |   |

 

10

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| **Six Months Ended April 30, 2001**            |   | **Cost of  Products Sold** |   | **Non-recurring  Charges** |   | **Selling  and Administrative Charges** |   | **Total** | ** ** |
|------------------------------------------------|--------|----------------------------|--------|----------------------------|--------|-----------------------------------------|--------|-----------|------------|
| Employee severance  costs                      |   | $                          | — |                       | $      | 43.2                                    |   | $         | —     |   | $ | 43.2 |   |
| Facilities  consolidation                      |   | —                     |   | 41.3                       |   | —                                  |   | 41.3      |       |
| Inventory and  committed sales contracts       |   | 64.5                       |   | —                     |   | —                                  |   | 64.5      |       |
| Fixed asset  write-downs                       |   | —                     |   | 16.2                       |   | —                                  |   | 16.2      |       |
| Committed sales  contracts—administrative |   | —                     |   | —                     |   | 24.4                                    |   | 24.4      |       |
| Integration and  acquisition costs             |   | —                     |   | 8.0                        |   | —                                  |   | 8.0       |       |
| Other                                          |   | —                     |   | —                     |   | 3.2                                     |   | 3.2       |       |
|                                           |   |                       |   |                       |   |                                    |   |      |       |
| Total                                          |   | $                          | 64.5   |                       | $      | 108.7                                   |   | $         | 27.6       |   | $ | 200.8 |   |

 

                Employee severance costs relateto headcount reductions resulting from the closure of facilities and generalterminations attributed to reduced sales forecasts. The workforce was reducedby approximately 400 employees during the three months ended April 30,2002. The costs of these reductions will be funded through cash fromoperations. These reductions have impacted both business segments. Additionalworkforce reductions are expected throughout fiscal 2002 at levels not yetdetermined.

 

                The write-down of fixed assetsprimarily relates to fixtures and equipment that were written down to theirestimated realizable value and will no longer be used as a result ofdiscontinuation of certain product lines and facility closures.

 

                Inventory and committed sales contract related chargesrepresent losses incurred to write down the carrying value of inventory and thedirect costs of exiting and maintaining certain committed sales contracts forproduct lines that have been discontinued. Revenues and gross margins fromthese product lines are not material to our consolidated operations.

 

Facility consolidation costs represent leasetermination costs and other costs associated with our decision to consolidateand close unproductive, duplicative or excess manufacturing and officefacilities.

 

Committed salescontracts—administrative represents the administrative expenses necessary tocomplete or negotiate settlements with respect to certain committed salescontracts, which costs would normally be classified as selling andadministration expenses.  These costsare a direct result of our decision to exit certain product lines.

 

The following table provides detail on the activityand remaining restructuring accrual balance by category as of April 30, 2002.(in millions)
|                                               |   |                                   |   |              |   |                |   |                    |   |                         |   |
|-----------------------------------------------|--------|----------------------------------------|--------|-------------------|--------|---------------------|--------|-------------------------|--------|------------------------------|--------|
| **Type of Charge**                            |   | **Reserve**

**October 31,**

**2001** |   | **Net Additions** |   | **Cash****Charges** |   | **Non-cash****Charges** |   | **Reserve****April 30,2002** |   |
|                                          |   |                                   |   |              |   |                |   |                    |   |                         |   |
| Employee severance costs                      |   | $                                      | 22.3   |              | $      | 9.4                 |   | $                       | 18.3   |                         | — |   | $ | 13.4 |   |
| Facilities consolidation                      |   | 83.6                                   |   | 46.7              |   | 17.3                |   | $                       | 30.6   |                         | 82.4   |   |
| Inventory and committed sales contracts       |   | 3.8                                    |   | 0.7               |   | —              |   | 4.5                     |   | —                       |   |
| Committed sales contracts—administrative |   | 11.1                                   |   | —            |   | —              |   | —                  |   | 11.1                         |   |
| Fixed asset write downs                       |   | —                                 |   | 4.3               |   | —              |   | 4.3                     |   | —                       |   |
|                                          |   |                                   |   |              |   |                |   |                    |   |                         |   |
| Total                                         |   | $                                      | 120.8  |              | $      | 61.1                |   | $                       | 35.6   |                         | $      | 39.4 |   | $ | 106.9 |   |

 

                Thetotal adjustment made to these accruals was a $15.3 million decrease as ofApril 30, 2002.  The adjustment wasprimarily related to changes in the assumptions related to divested productlines.

 

We expect that substantially allof the remaining $13.4 million of cash expenditures relating to employeeseverance costs will be paid by the end of fiscal 2002. Restructuring costsresulting from the consolidation of facilities

 

11

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in the amount of $82.4 million at April 30,2002, which were also accrued in fiscal 2001, will be paid over the respectivelease terms of the facilities ending through 2006. The remaining balance of$11.1 million for committed sales contracts—administrative will be paid outthrough fiscal 2002 as the committed sales contracts are completed.

 

**Note 8Securitization of Accounts Receivable:**

 

                In December 2001, weentered into a $160 million accounts receivable securitization arrangementwith a financial institution. Pursuant to this arrangement, we may sell certainof our U.S. sourced accounts receivable to the financial institution withoutrecourse to us. The sales may occur either on a one-time basis or on acontinuous basis, provided that the aggregate sales proceeds less theuncollected receivables may not exceed the $160 million limit at any pointin time. We will continue to service, administer and collect the receivableswith respect to this arrangement. The receivables are sold at a discount totheir face amounts, with such discount representing a financing charge. Thefinancing charge is based on an A1-P1 Commercial Paper rate plus an interestspread for the used and unused portion of the amount available under thisarrangement. The actual amount of receivables that can be sold depends oncertain attributes of the underlying receivables, therefore the actual amountthat may be available under this arrangement may be less than the maximum of$160 million. During the six months ended April 30, 2002, the amountavailable under this arrangement ranged from $12 million to$54 million.

 

                The purpose of this arrangementis to allow us to accelerate the cash realized from our receivables. We intendto account for any sales of receivables to the financial institution as a sale,and accordingly any discount from the face value of such receivables as well ascertain fees will be included in interest and other financing expense. Costsassociated with the origination of the arrangement were included in interestexpense in the quarter ended January 31, 2002. As of April 30, 2002,there have been no sales of receivables under this arrangement. Thisarrangement expires on December 12, 2004, subject to possible earliertermination under certain circumstances.

 

**Note 9Joint Ventures:**

 

                In January 2001, we enteredinto two joint ventures with Competence Research and Development Ltd., anindependent company. The joint ventures were established to share developmentrisk and capital resources associated with the ongoing development oftechnology used in our iANTM, BroadAccessTM and Small Subscriber product lines.The joint ventures have been successful in advancing the development oftechnology related to these product lines.

 

                When the joint ventures wereestablished we held 34% and 20% interests, respectively, in the two jointventure entities. In December 2001, we purchased Competence’s 66% interestin one of the joint ventures for $3.9 million in cash and we assumedapproximately $16.5 million in debt owed by that joint venture, theproceeds of which were being used to fund the development of technology. Wethen entered into a new joint venture with Competence in which our ownershipinterest was 49%. Because we did not have majority control over the jointventures, these investments were accounted for using the equity method.Therefore, a pro rata portion of the joint ventures’ profits or losses isreflected in our consolidated income statement as Other Income (Expense).  For the six months ended April 30, 2001 weincurred approximately $6.0 million in charges related to these joint ventures.

 

                In February 2002 wepurchased Competence’s remaining interests in both joint ventures forapproximately $350,000 in cash and assumed approximately $4.2 million indebt, the proceeds of which were used to fund the development of thetechnology.  The debt was paid offimmediately following the purchase.  Werecorded expense for in-process research and development projects associatedwith the purchase of Competence’s interest in these ventures in the secondquarter of fiscal 2002 of $10.5 million based on the results ofindependent appraisals.  In addition,$10.3 million was allocated to developed technology, which will be amortizedover 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 will succeed.   Since the purchase we have incurred an additional $6.0 millionof research and development expense to further develop this technology.

 

12

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**Note 10   LeaseCommitments**

 

                We are a party to four long-termoperating lease agreements related to certain of our facilities. These leaseshave expiration dates ranging from 2004 to 2009, depending on whether weexercise our renewal options. These operating leases contain purchase optionsand minimum residual value guarantees at the end of the lease term. If wechoose to retain the property at the end of the lease term, we must pay thepurchase option price. If we dispose of the property at the end of the leaseterm, we must pay any shortfall of the sales proceeds as compared to theresidual value guarantee to the lessor. The aggregate purchase option price andminimum residual value guarantees from all of these leases are approximately$252 million and $206 million, respectively.  In April 2002 we agreed to pledge cashcollateral in the aggregate amount of $254.0 million under these fourleases.  In exchange for this, thelessors agreed to amend, and in certain circumstances delete, various financialand operating covenants and to reduce the minimum lease payments.

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

## **BUSINESS**

 

                We are a leading global supplierof broadband network equipment, fiber optics, software and systems integrationservices that enable communications service providers to deliver high-speedInternet, data, video and voice services to consumers and businesses worldwide.Our products enable telephone companies, cable television operators, Internetand data service providers, wireless service providers and other communicationsservice providers to build and upgrade 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 customers include local andlong-distance telephone companies, cable television operators, wireless serviceproviders, new competitive service providers, broadcasters, governments,businesses, system integrators and communications equipment manufacturers anddistributors. We offer optical– and copper–connectivity componentsand systems, 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 andAccess focuses on Internet Protocol (IP)–based offerings for the cableindustry, Digital Subscriber Line (DSL) offerings for the communicationsequipment industry, and optics and broadband connectivity products for avariety of communications network applications. Integrated Solutions focuses onsoftware and systems integration services. Broadband Infrastructure and Accessproducts consist of:

 

                                                •               connectivitydevices that provide the physical contact points needed to connect differentcommunications network elements and gain access to communications systemchannels, and

 

                                                •               accessand transport systems that provide broadband, multiservice deliverycapabilities within service provider networks.

 

                Connectivity devices assist inthe installation, testing, monitoring, accessing, managing, reconfiguring,splitting and multiplexing of communications systems channels within serviceproviders’ serving offices and the last mile/kilometer portion ofcommunications networks. These products include broadband connection and accessdevices

 

13

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forcopper, coaxial cable, optical, wireless and broadcast communications networksand also include passive and active optical components. Access and transportsystems deliver broadband, multiservice communications to consumers andbusinesses over copper, coaxial cable and optical networks. BroadbandInfrastructure and Access products are used throughout the world in telephone,cable television, Internet and wireless communications networks to deliverInternet, data, video and voice services to businesses and consumers.

 

                Integrated Solutions productsand services consist of systems integration services and operations supportsystems (OSS) software that is designed to aid communications service providersin the provisioning, delivery and billing of broadband, multiservicecommunications over wireline and wireless networks. Systems integrationservices are used to design, equip and build communications networks thatdeliver Internet, data, video and voice services to consumers and businesses.OSS software includes communications provisioning, activation, billing,customer management, network performance and service–level assurancesoftware used by service providers to operate communications networks.

 

## **MARKETPLACE CONDITIONS**

 

                Our operating results during thethree and six months ended April 30, 2002 continued to be adverselyaffected by the downturn in general economic conditions, and adverse conditionsin the communications equipment industry in particular. In this economicenvironment, many of our communications service provider customers havedeferred capital spending, reduced their telecommunications equipmentpurchases, and announced plans to further reduce capital expenditures. Theeffect of these developments has been most pronounced in the U.S. market. As aresult of these economic conditions, we expect that our future net sales willnot grow at previously experienced rates, and may experience volatility fromquarter to quarter. Throughout fiscal 2001, we implemented a cost restructuringplan through which we took steps to reduce operating expenses and capitalspending as it became evident our industry was entering a prolonged economicdownturn. Additional cost restructuring measures have been taken and areexpected in fiscal 2002 relating to further cost saving efforts. Ourcost-saving actions to date have included the sale of non-strategic productlines, the disposition of certain assets and consolidation of facilities aswell as reductions in our employee base, elimination of contractor positionsand unreplaced employee attrition. Despite these actions, if we are unable tomeet expected revenue levels in any particular quarter, there may be a materialadverse impact on our operating results for that period because we may not beable to further reduce our expenses quickly in response to short-term businesschanges. Our expense levels are based in part on our expectations of futurerevenues. Although our management has and will continue to take measures toadjust expense levels, if revenue levels in a particular period fluctuate, ouroperating results may be affected adversely.

 

                Our ability to grow our businessis dependent on our ability to develop and commercially introduce new productssuccessfully and on the growth of the communications equipment and servicesmarket. The communications equipment industry is highly competitive, and wecannot guarantee that any new or enhanced products and services we develop willmeet with market acceptance or be profitable. Growth in the market forbroadband communications products and services depends on a number of factors,including the availability of capital to communications service providers, theamount of capital expenditures by communications service providers, new andrevised regulatory and legal requirements, and end-user demands for Internet,data, video, voice and other communications services.

 

                Our results of operations havehistorically been subject to seasonal factors. Prior to fiscal 2001, we  experienced a stronger demand for ourproducts during the fourth fiscal quarter ending October 31, primarily asa result of customer budget cycles and our fiscal year-end incentives, and haveexperienced a 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 and a general industry slowdown during thatperiod. There can be no assurance that these historical seasonal trends willcontinue in the future. For instance, these historical trends were not evidentin fiscal 2001 as our revenue levels dropped sequentially each quarter.Further, based upon the announced intentions of many of our customers to reduceor defer future capital spending, as well as the financial difficulties some ofour customers are facing, there is currently no evidence that this historicaltrend will resume during fiscal 2002. A more detailed description of the risksto our business related to seasonality, along with other risk factorsassociated with our business, can be found in Exhibit 99-a to our AnnualReport on Form 10-K for fiscal 2001.

 

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**NON-RECURRINGAND OTHER RESTRUCTURING RELATED CHARGES**

 

                In connection with our prior andcurrent fiscal year initiative to focus our business on strategic and coreoperations and improve our operating performance by restructuring andstreamlining our operations, we recorded charges to earnings of $63.7 million($41.8 million net of tax) and $117.4 million ($76.1 million net of tax) duringthe three months ended April 30, 2002 and 2001, respectively.  For the six months ended April 30, 2002 and2001 we recorded charges to earnings of $68.5 million ($45.0 million net oftax) and $192.8 million ($125.3 million net of tax), respectively.  During the three and six months ended April30, 2002, we also incurred $10.5 million ($10.5 million net of tax) of in-processresearch and development charges as a result of finalizing the purchases of twotechnology joint ventures.  Anadditional $6.9 million ($5.8 million net of tax) and $8.0 million ($6.5million net of tax) of acquisition costs were incurred during the three and sixmonths ended April 30, 2001, respectively. The non-cash portion of thesecharges before tax was $39.8 million and $35.8 million for the three monthsended April 30, 2002 and 2001, and $41.7 million and $75.4 million for thesix months ended April 30, 2002 and 2001, respectively.

 

                For the three months endedApril 30, 2002, our restructuring costs primarily related to involuntaryworkforce reduction costs of $10.4 million for approximately 400 employees,facility consolidation costs of $35.8 million, fixed asset write–downs of$16.9 million and other costs of $0.5 million primarily related to inventory,relocation costs and consultancy fees. For the three months endedApril 30, 2001, our restructuring costs primarily related to involuntaryworkforce reduction costs of $25.2 million for approximately 2,600 employees,facility consolidation costs of $36.5 million, inventory and committed salescontract related charges of $28.2 million, fixed asset write–downs of$6.8 million, committed sales contracts–administrative costs of $19.0 million,acquisition and related integration costs of $6.9 million and other costs of$1.7 million.

 

                For the six months endedApril 30, 2002, our restructuring costs primarily related to involuntaryworkforce reduction costs of $11.9 million for approximately 600 employees,facility consolidation costs of $35.9 million, fixed asset write–downs of$18.7 million and other costs of $2.0 million primarily related to inventory,relocation costs and consultancy fees. For the six months ended April 30,2001, our restructuring costs primarily related to involuntary workforcereduction costs of $43.2 million for approximately 3,600 employees, facilityconsolidation costs of $41.3 million, inventory and committed sales contractrelated charges of $64.5 million, fixed asset write–downs of $16.2million, committed sales contracts–administrative costs of $24.4 million,acquisition and related integration costs of $8.0 million and other costs of$3.2 million.

 

                Restructuring charges that wereexpensed in fiscal 2001 and 2002, but will be paid in subsequent years, were$106.9 million as of April 30, 2002. Of this amount, we expect thatsubstantially all of the remaining $13.4 million and $11.1 million of cashexpenditures relating to our workforce reductions in fiscal 2001 and 2002 andcommitted sales contracts, respectively, will be paid by the end of fiscal2002. The remaining amount of $82.4 million, which relates to the costs ofconsolidating facilities, will be paid over the respective lease terms of thefacilities ending through 2006. See Note 7 to the Condensed ConsolidatedFinancial Statements for a further discussion of these charges.

 

                We expect to realize significantcash savings from our restructuring plan initiated in fiscal 2001. Therestructuring plan presently is expected to yield cash savings of approximately$450.0 million annually, a portion of which was realized in the three andsix month periods ended April 30, 2002. These savings, which are expectedto be realized primarily in the form of lower manufacturing costs and operatingexpenses, largely relate to reduced labor costs and more focused operations. Weintend to continue our initiative to achieve more cost-efficient operationsthroughout fiscal 2002. Our overall restructuring initiative is expected to resultin additional restructuring expenses in amounts that have not yet beendetermined.

 

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**RESULTS OF OPERATIONS**

 

Thefollowing table contains information regarding the percentage to net sales ofcertain income and expense items for the three and six months ended April 30,2002 and 2001 and the percentage changes in these income and expense itemsbetween periods:

 
|                                             |   | **Percentage of Net Sales**      |       | **Percentage Increase (Decrease) Between Periods** |       |
|--------------------------------------------------|--------|----------------------------------|------------|----------------------------------------------------|------------|
|                                             |   | **Three Months Ended April 30,** |       | **Six Months Ended April 30,**                     |       | **Three Months Ended April 30, 2002** |   | **Six Months Ended April 30, 2002** |   |
|                                             |   | **2002**                         |       | **2001**                                           |       | **2002** |   | **2001** |   |   |   |
|                                             |   |                             | ** ** |                                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net sales**                                    |   | 100.0                            | %          | 100.0                                              | %          | 100.0 | % | 100.0 | % | (54.3) | % | (59.6) | % |
| **Cost of product sold**                         |   | (75.3                            | )          | (81.3                                              | )          | (71.5 | ) | (70.4 | ) | (57.6 | ) | (58.9 | ) |
|                                             |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| **Gross profit**                                 |   | 24.7                             |       | 18.7                                               |       | 28.5 |   | 29.6 |   | (39.7 | ) | (61.1 | ) |
| **Expenses:**                                    |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| Research and  development                        |   | (16.7                            | )          | (12.7                                              | )          | (15.6 | ) | (11.1 | ) | (39.7 | ) | (43.3 | ) |
| Selling and  administration                      |   | (35.5                            | )          | (36.0                                              | )          | (36.4 | ) | (28.4 | ) | (54.9 | ) | (48.2 | ) |
| Goodwill amortization                            |   | —                           |       | (2.6                                               | )          | — |   | (2.4 | ) | (100.0 | ) | (100.0 | ) |
| Impairment charges                               |   | (2.6                             | )          | (61.5                                              | )          | (1.6 | ) | (27.9 | ) | (98.1 | ) | (97.7 | ) |
| Non-recurring charges                            |   | (22.5                            | )          | (11.6                                              | )          | (11.8 | ) | (7.4 | ) | (11.1 | ) | (35.6 | ) |
| Non-cash stock  compensation                     |   | (1.2                             | )          | (0.7                                               | )          | (1.3 | ) | (0.7 | ) | (24.5 | ) | (24.5 | ) |
|                                             |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| **Total expenses**                               |   | (78.5                            | )          | (125.1                                             | )          | (66.7 | ) | (77.9 | ) | (71.3 | ) | (65.4 | ) |
|                                             |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| **Operating loss**                               |   | (53.8                            | )          | (106.4                                             | )          | (38.2 | ) | (48.3 | ) | 76.9 |   | 68.1 |   |
| **Other income (expense), net:**                 |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest                                         |   | 0.7                              |       | (0.1                                               | )          | 0.5 |   | — |   | 414.3 |   | N/A |   |
| Gain (loss) on  write-down or sale of investment |   | 1.4                              |       | (115.6                                             | )          | 1.5 |   | (50.9 | ) | 100.6 |   | 101.2 |   |
| Gain on sale of fixed  assets                    |   | 0.5                              |       | —                                             |       | (0.4 | ) | — |   | N/A |   | N/A |   |
| Gain on patent  infringement settlement          |   | 8.8                              |       | —                                             |       | 4.4 |   | — |   | N/A |   | N/A |   |
| Loss on equity  investment                       |   | —                           |       | (1.0                                               | )          | (0.6 | ) | (0.8 | ) | (98.4 | ) | (69.6 | ) |
| Other                                            |   | (2.2                             | )          | (0.6                                               | )          | (1.5 | ) | (0.4 | ) | (75.7 | ) | (69.1 | ) |
|                                             |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| **Loss before income taxes**                     |   | (44.6                            | )          | (223.7                                             | )          | (34.3 | ) | (100.4 | ) | 90.9 |   | 86.2 |   |
| **Benefit for income taxes**                     |   | (14.7                            | )          | (63.5                                              | )          | (11.7 | ) | (28.5 | ) | (89.4 | ) | (83.5 | ) |
|                                             |   |                             |       |                                               |       |   |   |   |   |   |   |   |   |
| **Net loss**                                     |   | (29.9)                           | %          | (160.2)                                            | %          | (22.6) | % | (71.9) | % | 91.5 |   | 87.3 |   |

** **

**NetSales:** Thefollowing table sets forth ADC’s net sales for the three and six months endedApril 30, 2002 and 2001, respectively, for each of ADC’s functional product andservice segments described above (in millions):

 

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|                                     |   | **Three Months Ended April 30,** |   | **Six Months Ended April 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                     |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| **Product Group**                        |   | **Net Sales**                    |   | **%**                          |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   | **Net Sales** |   | **%** |   |
| **Broadband  Infrastructure and Access** |   | 205.4                            |   | 68.9                           |   | 496.8 |   | 76.1 |   | 402.5 |   | 68.0 |   | 1,146.6 |   | 78.3 |   |
| **Integrated  Solutions**                |   | 92.9                             |   | 31.1                           |   | 155.6 |   | 23.9 |   | 189.3 |   | 32.0 |   | 317.1 |   | 21.7 |   |
| **Other**                                |   | ——                     |   | ——                   |   | — |   | — |   | — |   | — |   | — |   |   |   |
|                                     |   |                             |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total**                                |   | $                                | 298.3  |                           | 100.0  | % | $ | 652.4 |   | 100.0 | % | $ | 591.8 |   | 100.0 | % | $ | 1,463.7 |   | 100.0 | % |
|                                          |        |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Net sales for the three and six months ended April 30,2002 were $298.3 million and $591.8 million, respectively, reflecting a 54.3%and 59.6% decrease over the comparable 2001 time periods.  Additionally,prior year amounts for the three and six-month periods include $97.9 millionand $220.0 million, respectively, of net sales from product lines divested infiscal 2001. International revenues comprised approximately 27.2% and 27.4% ofADC’s sales for the three and six month periods ended April 30, 2002 and31.1% and 28.8% for the comparable 2001 time periods.

 

During the three and six months ended April 30, 2002,net sales of Broadband Infrastructure and Access products declined by 58.7% and64.9% over the comparable 2001 time periods. Thedecrease primarily resulted from lower sales for copper– and fiber–connectivitysystems due to a weakened communications equipment industry and lower carrierspending budgets. Sales of most other products, except our CudaTM 12000 IPAccess Switch which had increased sales, declined by smaller dollar amounts andpercentages. Prior year amounts include $75.7 million and $167.5 million of netsales from product lines divested or discontinued during fiscal 2001, whichrepresented 15.2% and 14.6% of net sales, respectively. For the three monthsended April 30, 2002, Broadband Infrastructure and Access sales representapproximately 69% of our total net sales. We expect that future sales of BroadbandInfrastructure and Access products will continue to account for a substantialportion of our net sales.

 

                During the three and six months ended April 30, 2002,Integrated Solutions net sales decreased by 40.3% and 40.3% over the comparable2001 time periods. This decrease wassubstantially the result of lower sales in system integration services. Prioryear amounts include $22.3 million and $52.6 million of net sales from productlines divested or discontinued during fiscal 2001, which represented 14.3% and16.6% of net sales, respectively.

 

                During the three–monthperiods ended April 30, 2002 and 2001, gross profit percentages were 24.7% and18.7%, respectively. The decrease in gross profits, in actual dollars, isprimarily due to a decrease in sales volume and a shift in sales mix to lowermargin products and services. Also, in the three–month periods endingApril 30, 2002 and 2001, $0.7 million and $28.2 million of inventory write-offsand other costs to exit certain sales contracts in connection with ourrestructuring efforts were included in cost of product sold, respectively.  During the six–month periods endedApril 30, 2002 and 2001, gross profit percentages were 28.5% and 29.6%,respectively. The decrease in gross profits, in actual dollars, is primarilydue to a decrease in sales volume and a shift in sales mix to lower marginproducts and services. Also, in the six–month periods ending April 30,2002 and 2001, $0.7 million and $64.5 million of inventory write-offs and othercosts to exit certain sales contracts in connection with our restructuringefforts were included in cost of product sold. We anticipate that our futuregross profit percentage will continue to be affected by many factors, includingsales mix, competitive pricing, timing of new product introductions andmanufacturing volume.

 

                Total operating expenses for thethree months ended April 30, 2002 and 2001 were $234.2 million and $816.5million, representing 78.5% and 125.1% of net sales, respectively. Theseoperating expenses included non-recurring and restructuring related charges andnon-cash stock compensation charges of $77.1 million and $502.5 million for thethree months ended April 30, 2002 and 2001, respectively.  Total operating expenses for the six monthsended April 30, 2002 and 2001 were $394.4 million and $1,140.3 million,representing 66.7% and 77.9% of net sales, respectively. These operatingexpenses included non-recurring and restructuring related charges and non-cashstock compensation charges of $85.7 million and $555.1 million for the sixmonths ended April 30, 2002 and 2001, respectively. The 2002 and 2001non-recurring charges represent costs associated with initiatives to reduceworkforce headcount, discontinue product lines that no longer fit our currentfocus and growth strategy and consolidate unproductive and duplicativefacilities.  Included in operatingexpenses for 2002 and 2001 are non-cash stock compensation charges associatedwith

 

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ouracquisition of Broadband Access Systems. The 2001 operating expenses includenon-cash stock compensation charges related to our acquisition of CentigramCommunications Corporation.  Centigramrelated costs are not included in operating expenses for the three andsix-month periods ended April 30, 2002 because we divested the Centigramoperations through the sale of our Enhanced Services Division in fiscal 2001.

 

                Operatingexpenses, before non-recurring and restructuring related charges and non-cashstock compensation charges, for the three months ended April 30, 2002 and2001 were $157.1 million and $314.0 million, representing 52.7% and 48.1% ofnet sales, respectively.  For the sixmonths ended April 30, 2002 and 2001, operating expenses, before non-recurringand restructuring related charges and non-cash stock compensation charges, were$308.7 million and $585.2 million, representing 52.2% and 40.0% of net salesrespectively.  The decrease in absolutedollars of operating expenses, before non-recurring and restructuring related chargesand non-cash stock compensation charges, was primarily due to restructuringefforts as well as the divestiture of certain business units and product lines.The increase in operating expenses as a percentage of net sales was primarilydue to fixed and variable costs incurred by us that are not easily adjustablegiven a swift downturn in net sales. We currently are evaluating these costsand will take further action to reduce these costs through additionalrestructuring efforts throughout fiscal 2002.

 

                Research and developmentexpenses were $49.8 million for the three months ended April 30, 2002,representing a decrease of 39.7% from $82.6 million for the three months endedApril 30, 2001. For the six months ended April 30, 2002 and 2001, research anddevelopment expenses were $92.3 million and $162.9 million, representing a43.3% year-over-year decrease. We believe that, given the rapidly changingtechnology and competitive environment in the communications equipmentindustry, continued commitment to product development efforts will be requiredfor us to remain competitive. Accordingly, we intend to continue to allocatesubstantial resources to product development for each of our productgroups.  In connection with thediscontinuance of our joint ventures related to our iAN, BroadAccess, and SmallSubscriber product lines, we expect to incur additional research anddevelopment expenses of approximately $15.0 million during the remainingquarters of fiscal 2002.

 

                Selling and administrationexpenses were $106.0 million for the three months ended April 30, 2002,representing a decrease of 54.9% from $235.1 million for the three months endedApril 30, 2001. For the six months ended April 30, 2002 and 2001 sellingand administrative expenses were $215.1 million and $415.2 million, representinga 48.2% year-over-year decrease.  Thisdecrease reflects a beneficial realization of our restructuring efforts, whichwere initiated in the prior fiscal year. In addition, selling andadministration expenses decreased $72.3 million and $123.3 million from the comparable2001 three and six month periods due to the divestiture or discontinuance ofcertain business units and product lines in fiscal 2001.  Also included in the 2001 amounts were $20.7million and $27.6 million, respectively, in selling and administration expensesincurred to complete certain non-cancelable sales contracts and contractcancellation payments to customers as a result of our decision to exit certainproduct lines.

 

                On November 1, 2001, weadopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under thisstandard, purchased goodwill is no longer amortized over its useful life.Rather, goodwill is subject to a periodic impairment test based on its fairvalue. Therefore, we did not recognize any goodwill amortization during thethree month and six months ended April 30, 2002 compared to $17.0 millionand $34.7 million in goodwill amortization for the three and six months endedApril 30, 2001, respectively.

 

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

 

                For the three and six monthsended April 30, 2002 and 2001, the net interest income (expense) categoryrepresented net interest income on cash and cash equivalents.  During the three and six months endedApril 30, 2002, interest income was partially offset by fees associatedwith the establishment of an accounts receivable securitization arrangement,and restructuring of some of our operating lease agreements.  See “Liquidity and Capital Resources” belowfor a discussion of cash levels.

 

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Otherexpense primarily represents the gain or loss on foreign exchange transactions,the gain or loss on the sale of fixed assets and investments, investmentimpairment charges and our share of the net operating results of ourinvestments in other companies accounted for under the equity method.

 

**Income Taxes:**

 

**               **The effective income tax rate for thethree and six months ended April 30, 2002 and 2001 was affected by lowermarginal tax rates applied to restructuring expenses. Excluding the impact ofthe lower rates used for the restructuring charges, the effective income taxrate was 38% for the three and six month periods ended on April 30, 2002and 2001.

 

**Net Loss:**

 

Net loss was $89.2 million (or $0.11 per dilutedshare) for the three months ended April 30, 2002, compared to net loss of$1,045.2 million (or $1.33 per diluted share) for the three months ended April30, 2001. Net loss was $134.0 million (or $0.17 per diluted share) for the sixmonths ended April 30, 2002, compared to net loss of $1,052.8 million (or $1.34per diluted share) for the six months ended April 30, 2001. Excluding thenon-recurring charges, restructuring related charges, in-process research anddevelopment charges, asset impairment charges, non-cash compensation charges,and a patent infringement settlement totaling $39.6 million and $46.4 million,respectively, net of tax, net loss for the three and six months ended April 30,2002 was $49.6 million (or $0.06 per diluted share) and $87.6 million (or $0.11per diluted share), respectively.  Forfiscal 2001, excluding the non-recurring charges, restructuring relatedcharges, asset impairment charges, non-cash compensation charges, gains on saleof certain investments and goodwill amortization charges, net loss for thethree and six months ended April 30, 2001 was $97.6 million (or $0.12 per dilutedshare) and $38.1 million (or $0.05 per diluted share), respectively.

### ** **

**APPLICATION OFCRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

                Our consolidated financial statements arebased on the selection and application of accounting principles generallyaccepted in the United States, which require us to make estimates andassumptions about future events that affect the amounts reported in ourfinancial statements and the accompanying notes. Future events and theireffects cannot be determined with absolute certainty. Therefore, thedetermination of estimates requires the exercise of judgment. Actual resultscould differ from those estimates, and any such differences may be material tothe financial statements. A description of all of our significant accounting policiesused are described in Note 1 of the Notes to Consolidated Financial Statementsincluded in our Annual Report on Form 10-K for the fiscal year ended October31, 2001. We believe that the following accounting policies may involve ahigher degree of judgment and complexity in their application and represent thecritical accounting policies used in the preparation of our financialstatements. If different assumptions or conditions were to prevail, the resultscould be materially different from our reported results.

 

**Revenue recognition and sales returns:**

 

We recognize revenue when persuasive evidence of afinal agreement exists, delivery has occurred, the selling price is fixed ordeterminable and collectibility is reasonably assured.  Revenue from product sales is primarilyrecognized at the time of delivery and acceptance, and after consideration ofall the terms and conditions of the customer contract.  Revenue from services consists of fees forsystems requirements, system design and analysis, customization andinstallation services, ongoing system management, system enhancements, servicebureau processing, facilities management and maintenance.  Services revenue is recognized as theservices are performed, primarily on a time and materials basis and to a lesserextent on a fixed fee basis over the term of the services provided.  Revenue from maintenance contracts isrecognized ratably over the term of the agreement, generally one year.  Revenue from the licensing of softwarerights is recognized at the time of delivery of the software to the customer,provided that we have no remaining service obligations, collectibility isreasonably assured and the fees are fixed and determinable.  Where there are service obligations that areessential to the functionality of the software installed, license fees arerecorded over the term of the initial customization period.

 

The assessment of collectibility is particularlycritical in determining whether or not revenue should be recognized in thecurrent market environment. As part of the revenue recognition process, wedetermine whether

 

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trade and notes receivable are reasonably assured of collection basedon various factors, including an evaluation of whether there has beendeterioration in the credit quality of our customers, which could result in usbeing unable to collect or sell the receivables.  In situations where it is unclear as to whether we will be ableto sell or collect the receivable, revenue and related costs are deferred.Revenue is deferred and costs are recognized when it has been determined thatthe collection or sale of the receivable is unlikely.  At April 30, 2002 we had deferred revenues of $39.8 million.

 

We record provisions against our gross revenue forestimated product returns and allowances in the period when the related revenueis recorded. These estimates are based on factors that include, but are notlimited to, historical sales returns, analyses of credit memo activities,current economic trends and changes in our customers’ demand. Should our actualproduct returns and allowances exceed our estimates, additional reductions toour revenue would result.

 

**Allowance for uncollectibleaccounts:**

 

We are required to estimate the collectibility of ourtrade receivables and notes receivable. A considerable amount of judgment isrequired in assessing the realization of these receivables including thecurrent credit-worthiness of each customer and related aging of the past duebalances. In order to assess the collectibility of these receivables, weperform ongoing credit evaluations of our customers’ financial condition.  Through these evaluations, we may becomeaware of a situation where a customer may not be able to meet its financialobligations due to a deterioration of its financial viability, credit ratingsor bankruptcy. The reserve requirements are based on the best facts availableto us and reevaluated and adjusted as additional information is received. Ourreserves are also based on amounts determined by using percentages applied tocertain aged receivable categories. These percentages are determined by avariety of factors including, but are not limited to, current economic trends,historical payment and bad debt write-off experience. Significant increases inreserves have been recorded in recent periods and may occur in the future dueto the current market environment.  Weare not able to predict changes in the financial condition of our customers,and if circumstances related to our customers deteriorate, our estimates of therecoverability of our receivables could be materially affected and we may berequired to record additional allowances. Alternatively, if we provide moreallowances than we need, we may reverse a portion of such provisions in futureperiods based on our actual collection experience.  As of April 30, 2002 we had $77.2 million of our accountreceivables and note receivables reserved.

 

**Inventories:**

 

We are required to state our inventories at the lowerof cost or market. In assessing the ultimate realization of inventories, we arerequired to make judgments as to future demand requirements and compare thatwith the current or committed inventory levels. Our reserve requirementsgenerally increase as our projected demand requirements decrease due to marketconditions, technological and product life cycle changes as well as longer thanpreviously expected usage periods. We have experienced significant changes inrequired reserves in recent periods due primarily to declining marketconditions.  It is possible thatsignificant changes in required inventory reserves may continue to occur in thefuture if there is a further decline in market conditions.  As of April 30, 2002 we had $80.0 million ofour inventory reserved.

 

**Investments:**

 

We hold equity interests in both publicly traded andprivately held companies. When the carrying value of an investment exceeds itsfair value and the decline in value is deemed to be other-than-temporary, wewrite down the value of the investment and establish a new cost basis. Fairvalues for investments in public companies are determined using quoted marketprices. Fair values for investments in privately held companies are estimatedbased upon one or more of the following factors: the values of the most recentround of financing, quoted market prices of comparable public companies, oranalyses of historical and forecasted financial information. We regularlyevaluate our investments based on criteria that include, but are not limitedto, the duration and extent to which the fair value has been less than thecarrying value, the current economic environment and the duration of any marketdecline, and the financial health and business outlooks of the portfolio’scompanies. We generally believe an other-than-temporary decline occurs when thefair value of a publicly traded investment is below the carrying value for nine

 

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consecutive months. Future adverse changes in these or other factorscould result in an other-than-temporary decline in the value of ourinvestments, thereby requiring us to write down such investments. Our abilityto liquidate our positions in the investments in privately held companies willbe affected to a significant degree by the lack of an actively traded market,and we may not be able to dispose of these investments in a timely manner.

 

**Warranty:**

 

Weprovide reserves for the estimated costs of product warranties at the timerevenue is recognized. We estimate the costs of our warranty obligations basedon our warranty policy or applicable contractual warranty, our historical experienceof known product failure rates, and use of materials and service delivery costsincurred in correcting product failures. In addition, from time to time,specific warranty accruals may be made if unforeseen technical problems arise.Should our actual experience relative to these factors differ from ourestimates, we may be required to record additional warranty reserves.Alternatively, if we provide more reserves than we need, we may reverse aportion of such provisions in future periods. As of April 30, 2002 we reserved $19.1 million related to futureestimated warranty costs.

 

**Deferred taxes:**

 

We regularly assess the likelihood that our deferredtax assets will be recovered from future taxable income, and we record avaluation allowance to reduce our deferred tax assets to the amount we believeto be realizable. We consider projected future taxable income and ongoing taxplanning strategies in assessing the amount of the valuation allowance. If wedetermine we will not realize all or part of our deferred tax assets, anadjustment to the deferred tax asset will be charged to earnings in the periodsuch determination is made.  In light of current industry conditions, it ispossible that we will conclude that we will not be able to generate sufficienttaxable income in future periods within the time frame required to fullyutilize the benefit of our deferred tax assets.

 

**Long-lived assets and goodwill:**

 

Weevaluate the carrying value of our long-lived assets, consisting primarily ofgoodwill and identifiable intangible assets, and property, plant and equipment,whenever certain events or changes in circumstances indicate that the carryingamount of these assets may not be recoverable. We reassess the value of our business units and related goodwill balancesat the beginning of the fourth quarter of each fiscal year or at other times ifcertain events or circumstances have occurred. Such events or circumstances include, but are not limited to, aprolonged industry downturn, a significant decline in our market value, orsignificant reductions in projected future cash flows. In assessing therecoverability of our long-lived assets, we compare the carrying value to theundiscounted future cash flows the assets are expected to generate. If thetotal of the undiscounted future cash flows is less than the carrying amount ofthe assets, we write down such assets based on the excess of the carryingamount over the fair value of the assets. Fair value is generally determined bycalculating the discounted future cash flows using a discount rate based uponour weighted average cost of capital. Significant judgments and assumptions arerequired in the forecast of future operating results used in the preparation ofthe estimated future cash flows, including long-term forecasts of the amountsand timing of overall market growth and our percentage of that market,groupings of assets, discount rate and terminal growth rates. Changes in theseestimates could have a material adverse effect on the assessment of our long-livedassets, thereby requiring us to write down the assets.

 

**Restructuring:**

 

During fiscal year 2001 and for the six months endedApril 30, 2002, we recorded significant charges in connection with ourrestructuring program. The related reserves reflect many estimates includingthose pertaining to involuntary workforce reduction and facility consolidationcosts, fixed assets, inventory, and settlements of contractual obligations. Wereassess the reserve requirements to complete each individual plan under our restructuringprogram at the end of each reporting period. Actual experience has and maycontinue to be different from these estimates.

 

**Commitments and contingencies:**

 

We are subject to the possibility of various losscontingencies arising in the ordinary course of business. We consider thelikelihood of the loss or impairment of an asset or the incurrence of aliability as well as our ability to reasonably estimate the amount of loss indetermining loss contingencies. An estimated loss contingency is accrued whenit is probable that a liability has been incurred or an asset has been impairedand the amount of loss 

 

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can be reasonably estimated. We regularly evaluate current informationavailable to us to determine whether such accruals should be adjusted.

 

Theimpact of changes in the estimates and judgments pertaining to revenuerecognition, receivables, inventories and warranties are directly reflected inour segments’ operating income (loss). Although any charges related to our netdeferred tax assets, investments, restructuring and goodwill and other acquiredintangibles are not reflected in the segment results, the long-term forecastssupporting the realization of those assets and changes in them aresignificantly impacted by the actual and expected results of each segment.  We have discussed the application of thesecritical accounting policies with our Board of Directors and Audit Committee.During the six months ended April 30, 2002, we initially adopted SFAS No. 142,“Goodwill and Other Intangible Assets” which is further described in Note 3 tothe condensed consolidated financial statements.  There was no initial adoption of any other accounting policiesduring this period.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Cash From Operations**

 

                Cash and cash equivalents, primarily short-terminvestments in commercial paper with maturities of less than 90 days and othershort-term investments, decreased $39.1 million and $100.2 million during thesix months ended April 30, 2002 and 2001, respectively. The major elements of the 2002 change included $232.4 million inpositive cash flow from improved working capital management in addition toincome tax refunds and a patent infringement settlement, which were offset by a$260.1 million increase in restricted cash. The major elements of the 2001change included a $91.4 million increase in debt, $32.7 million from issuanceof common stock to employees pursuant to our stock option and employee stockpurchase plans and $59.4 million in proceeds from the sale of certain short-termequity investments.  This was offset by$59.5 million used for operations, $48.7 million used for acquisitions and$175.2 million used for property and equipment additions during the six monthsended April 30, 2001.

 

As of April 30, 2002, wehad restricted cash of $260.1 million. This primarily represents cash pledged to various financial institutionsto secure certain of our obligations. Two hundred fifty-four ($254) million dollars of this restricted cashrelates to four long term operating leases, with the remainder representingcash collateral for letters of credit, guarantees relating to vendor financingtransactions, and foreign currency hedging activities.

 

**Investments**

 

                We maintain investments ofcommon stock in five publicly held companies. The investments in two of thesecompanies, Vyyo, Inc. and Interwave Communications International Ltd.,have been written down to a nominal value. Two of these investments in which wehold less than 20% interest are classified as available-for-sale securitiesand, consequently, are recorded on our balance sheet at their fair value, withunrealized gains and losses reported as a separate component of shareholders’investment in accumulated other comprehensive income (loss). As ofApril 30, 2002, the market value of our available for sale securities wasas follows: (in millions)
|                        |   |   |   |
|------------------------|--------|--------|--------|
| ONI Systems Corp.      |   | $      | 6.0    |   |
| Redback Networks, Inc. |   | 2.0    |   |
|                   |   |   |   |
| Total                  |   | $      | 8.0    |   |

 

Inaddition we own an approximate 21.9% interest in MIND C.T.I. Ltd. As ofApril 30, 2002, our investment in MIND had a market value of approximately$5.2 million. This investment is accounted for using the equity method.

 

                During the three and six monthsended April 30, 2002, we sold 0.9 million and 1.2 million shares of ONI Systemsand partially settled a corresponding hedging arrangement for an aggregatepre-tax gain of $24.2 million and $31.2 million respectively. As of April 30,2002, we continued to maintain a cashless collar arrangement to minimize theimpact of a potential decrease in the market value of our investment in ONISystems. This cashless collar arrangement originally was entered into in thethird quarter of fiscal 2001. Our investment in the shares of ONI

 

22

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Systemshas a cost basis of approximately $1.1 million. The ONI Systems collar providesus with an aggregate floor value of approximately $43.0 million if held tomaturity while allowing us to participate in up to approximately $57.0 millionin further appreciation above the floor value. This collar limits our exposureto, and benefits from, price fluctuations in the underlying ONI Systems stock.The collar is designated as a cash flow hedge of the underlying stock;consequently, all changes in the market value of the collar and the underlyingstock are included as a component of comprehensive income (loss) and arereflected in shareowners’ investment. As of April 30, 2002, the fair market value of this collar arrangementwas $29.3 million.

 

                We also maintain a venture capital fund that isfocused on investing in emerging and start-up companies throughout the worldthat are engaged in the development of high-performance broadband communicationtechnologies. This fund is recorded as a long-term asset on our balance sheet.The fund’s investments are stated at cost (subject to periodic review forimpairment) until a public market develops for the investments, at which timethe investments are stated at market value with the aggregate valuationadjustments classified as shareowners’ investment.  During the three and six months ended April 30, 2002, we incurred$19.9 million ($12.3 million net-of-tax) and $22.3 million ($13.8 millionnet-of-tax) in other than temporary non-cash write downs of our venture capitalfund.  This was a result of the downturnin market conditions in the technology and telecommunications sectors of themarket.  As of April 30, 2002, thefund had a balance of $16.5 million after write-downs.

 

**Finance–relatedTransactions**

 

                At April 30, 2002, we hadapproximately $17.7 million of debt outstanding. We are also a party to fouroperating lease agreements related to certain of our facilities. These leaseshave expiration dates ranging from 2004 to 2009, depending on whether weexercise our renewal options. These operating leases contain minimum residual valueguarantees by us at the end of the lease term and also give us a purchaseoption at the end of the lease term. If we choose to retain the property at theend of the lease term, 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 residual value guarantee to the lessor. Theaggregate purchase option price and minimum residual value guarantees from allof these leases are approximately $252 million and $206 million,respectively. During the second quarter of fiscal 2002, we agreed to pledge$254.0 million in cash collateral to the lessors, equal to the full amount ofthese lease obligations.  In exchangefor this pledge of cash collateral, the lessors agreed to amend and in certaincircumstances delete various financial and operating covenants under suchleases and to reduce the minimum lease payments under such leases.

 

                In December 2001, weentered into a $160 million accounts receivable securitization arrangementwith a financial institution. This arrangement functions much like a revolvingline of credit, but has a lower cost of funds than a traditional revolving lineof credit. Pursuant to this arrangement we may sell certain of our U.S. sourcedaccounts receivable to the financial institution without recourse to us. Thesales may occur either on a one-time basis or on a continuous basis, providedthat the aggregate sales proceeds less the uncollected receivables may notexceed the $160 million limit at any point in time. We will continue toservice, administer and collect the receivables with respect to thisarrangement. The receivables are sold at a discount to their face amount, withsuch discount representing a financing charge. The financing charge is based onan A1-P1 Commercial Paper rate plus an interest spread for the used and unusedportion of the amount available under this arrangement. The actual amount ofreceivables that can be sold depends on certain attributes of the underlyingreceivables, thus the actual amount that may be available under thisarrangement may be less than the maximum of $160 million. During the sixmonths ended April 30, 2002, the amount available under this arrangementranged from $12 million to $54 million.

 

                The purpose of thissecuritization arrangement is to allow us to accelerate the cash realized fromour receivables, and to provide an additional liquidity resource. We willaccount for any sales of receivables to the financial institution as a sale,and accordingly any discount from the face value of such receivables as well ascertain fees will be included in interest and other financing expense. As iscustomary with these arrangements, we utilize a wholly owned special purposeentity to facilitate these sales, the purpose of which is to isolate and holdtitle to the receivables for the benefit of the financial institution. As ofApril 30, 2002, there have been no sales of receivables under thisarrangement. This arrangement expires on December 12, 2004, subject topossible earlier termination under certain circumstances.

 

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**Capital Commitments**

 

                As of April 30, 2002 we hadcommitments (both cancelable and non-cancelable) for capital expendituresrelated to the ongoing operation of our business of approximately $32.5million. These commitments primarily reflect future equipment purchases as wellas improvements for existing buildings and facilities. The commitments arepayable over three years with approximately $2.5 million to become due andpayable during the third quarter of fiscal 2002, and $1.8 million isexpected to become due and payable during the remainder of fiscal 2002. Weintend to fund these expenditures from cash on hand.

 

**Vendor Financing**

 

                We have worked with customersand third–party financiers to find a means of financing projects bynegotiating financing arrangements. As of April 30, 2002 and 2001, we hadcommitments to extend credit of approximately $56****million and $173.0 million, respectively, for sucharrangements. The total amount drawn and outstanding under the commitments,including guarantees totaling $21.1 million that we made to third-partyfinanciers on behalf of customers, was approximately $45 million and $66.0million as of April 30, 2002 and 2001, respectively. The commitments toextend credit are conditional agreements generally having fixed expiration ortermination dates and specific interest rates, conditions and purposes. Thesecommitments may exist and expire without being drawn. Accordingly, amountscommitted but not drawn will not necessarily affect future cash flows. Weregularly review all outstanding commitments, and the results of these reviewsare considered in assessing the overall risk for possible credit losses. AtApril 30, 2002, we have recorded approximately $38 million in lossreserves in the event of non-performance related to these financingarrangements. We consider these loss reserves to be adequate.

 

**Working CapitalRequirements**

 

                We believe that current cash onhand, cash generated from operating activities, cash from investments andavailable credit facilities should be adequate to fund our working capitalrequirements, planned capital expenditures and restructuring costs throughfiscal 2002 and beyond. However, if our operating losses are significantly moresevere than expected and continue significantly longer than expected, we mayfind it necessary or desirable to seek other sources of financing to supportour capital needs and provide available funds for working capital.  In addition, should we determine to make anysignificant acquisitions, additional sources of capital may be required.  Given the current state of thecommunications equipment industry, there are few sources of debt financingavailable.  Commercial bank financing isparticularly difficult to obtain at this time for companies in ourindustry.  Accordingly, any plan toraise additional capital would likely involve an equity-based or equity-linkedfinancing, such as the issuance of convertible debt, common stock or preferredstock, which would be dilutive to existing shareholders.

 

**Euro Conversion**

 

On January 1, 1999, several member countries of theEuropean Union established fixed conversion rates and adopted the Euro as theirnew common legal currency. Beginning on this date, the Euro began trading oncurrency exchanges, while the legacy currencies remain legal tender in theparticipating countries for a transition period between January 1, 1999 andJanuary 1, 2002. During this transition period, parties can elect to pay forgoods and services and transact business using either the Euro or a legacycurrency. Between January 1, 2002 and July 1, 2002, the participating countrieswill introduce Euro hard currency and withdraw all legacy currencies.

 

The Euro conversion may affect cross-bordercompetition by creating cross-border price transparency. We are assessing ourpricing and marketing strategy in order to ensure that we remain competitive ina broader European market. We also are modifying our information technologysystems to permit transactions to take place in both the legacy currencies andthe Euro and provide for the eventual elimination of the legacy currencies. Inaddition, we are reviewing whether certain existing contracts will need to bemodified. Our currency risks and risk management for operations inparticipating countries may be reduced as the legacy currencies are convertedto the Euro. We will continue to evaluate issues involving the introduction ofthe Euro. Based on current information and assessments, we do not expect thatthe Euro conversion will have a material adverse effect on our business,financial condition or results of operations.

 

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**CAUTIONARY STATEMENT FORPURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995**

 

The foregoing Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended.Forward-looking statements represent our expectations or beliefs concerningfuture events, including the following: any statements regarding future sales,profit percentages, earnings per share and other results of operations, anystatements regarding the continuation of historical trends, any statementsregarding the sufficiency of our cash balances and cash generated fromoperating and financing activities for our future liquidity and capitalresource needs, any statements regarding the effect of regulatory changes andany statements regarding the future of the communications equipment industryand communications services on our business.  We caution that any forward-looking statements made by us in this reportor in other announcements made by us are further qualified by important factorsthat could cause actual results to differ materially from those in theforward-looking statements.  Theseinclude, without limitation, demand for our products or services, availabilityof materials to make products, changing market conditions within our industryor generally within the economy, new competition and technologies, increasedcosts associated with protecting intellectual property rights, fluctuations inour operating results, pressures on the pricing of the products and services weoffer, and the factors set forth on Exhibit 99-a to our Form 10-K for thefiscal year ended October 31, 2001.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

                We are exposed to market riskfrom changes in security prices, foreign exchange rates and interest rates.Market fluctuations could affect our results of operations and financialcondition adversely. We reduce this risk through the use of derivativefinancial instruments. We do not enter into derivative financial instrumentsfor the purpose of speculation. Changes in interest rates are not expected tohave a material adverse effect on our financial condition or results ofoperations.

 

                As described in “Liquidity andCapital Resources” and Note 4 to the Condensed Consolidated FinancialStatements, we maintain an investment portfolio of common stock in fivepublicly held companies in the telecommunications or technology industries.This portfolio was developed primarily through investments in privately-heldcompanies which later became publicly traded. The common stock investments intwo of these companies, Vyyo, Inc. and Interwave CommunicationsInternational, Ltd., have been written down to a nominal value. The commonstock investments in two of the other companies where we hold less than 20%interest, Redback Networks and ONI Systems, are classified asavailable-for-sale securities and, consequently, are recorded on the balancesheet at their fair value, with unrealized gains and losses reported as aseparate component of shareowners’ investment in accumulated othercomprehensive income (loss). The investment in the last company, MIND, isaccounted for using the equity method and a pro-rata portion of MIND’s profitsor loss is reflected in our consolidated income statement. The values recordedfor the publicly traded companies are subject to market price volatility.Assuming an immediate decrease of 20%, 50% and 80% in our publicly tradedinvestments, the hypothetical reduction in shareowners’ investment related tothese holdings is estimated to be $4.7 million, $11.7 million and $18.8million, respectively, as of April 30, 2002. As a result of changes in thefair value of these investments since acquisition, we recorded a $29.9 millionunrealized gain, $18.9 million net of tax, in shareowners’ investment as ofApril 30, 2002. In fiscal 2001, we entered into an equity collararrangement with respect to holdings in ONI Systems that locks in a price rangefor the sale of these shares, thereby guaranteeing minimum selling prices. Asof April 30, 2002, the fair market value of this collar arrangement wasapproximately $29.3 million. This equity collar arrangement is designated as acash flow hedge of a forecasted investment sale. Changes in the value of thisderivative are reported as a separate component of shareowners’ investment inaccumulated other comprehensive income (loss). We also hold minorityinvestments in a number of companies that are not publicly traded. Theseinvestments are included in long-term assets and are carried at cost. Wemonitor these investments for impairment and make appropriate reductions incarrying value when necessary.

 

We areexposed to market risk from changes in foreign exchange rates. To mitigate therisk from these exposures, we have instituted a balance sheet hedging program.The objective of this program is to protect our net

 

25

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monetary assets and liabilitiesfrom fluctuations due to movements in foreign exchange rates. This programoperates in markets where hedging costs are beneficial. We attempt to minimizeexposure to currencies in which hedging instruments are unavailable orprohibitively expensive by managing our operating activities and net assetpositions. The majority of hedging instruments utilized are forward contractswith maturities of less than one year. Foreign exchange contracts reduce our overall exposure to exchange ratemovements, since gains and losses on these contracts offset losses and gains onthe underlying exposure. Our hedging program prohibits the use of derivativefinancial instruments for trading and other speculative purposes.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We area defendant in various suits, claims, proceedings and investigations arising inthe ordinary course of business.  Atthis time, we cannot determine our total aggregate amount of monetary liabilityor the financial impact of these matters. Therefore, we do not know whetherthese actions, suits, claims, proceedings and investigations will, individuallyor collectively, have a material adverse effect on our business, results ofoperations, and financial condition. We intend to vigorously defend theseactions, suits, claims, proceedings and investigations.

 

**ITEM 2. CHANGES IN SECURITIES**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

                a.  An annual meeting of our shareowners (the “Annual Meeting”) washeld on February 19, 2002. Proxies for the Annual Meeting were solicitedpursuant to Regulation 14 under the Securities and Exchange Act of 1934.There was no solicitation in opposition to the management’s nominees fordirector as listed in the proxy statement, and all such nominees were elected.

 

                b.  At the Annual Meeting, Robert Annunziata and Larry W. Wangbergwere elected as directors for terms expiring at the annual meeting of ourshareowners in 2004 and James C. Castle, Ph.D., Richard R. Roscitt and John D.Wunsch were elected as directors for terms expiring at the annual meeting ofour shareowners in 2005. The following table shows the vote totals with respectto the election of these directors: 
|                        |   |          |       |                   |       |
|------------------------|--------|---------------|------------|------------------------|------------|
| **Name**               |   | **Votes For** | ** ** | **Authority Withheld** | ** ** |
| Robert Annunziata      |   | 641,223,779   |       | 14,482,960             |       |
| Larry W. Wangberg      |   | 645,562,250   |       | 10,144,489             |       |
| James C. Castle, Ph.D. |   | 645,852,146   |       | 9,854,593              |       |
| Richard R. Roscitt     |   | 645,635,102   |       | 10,071,637             |       |
| John D. Wunsch         |   | 633,793,632   |       | 21,913,107             |       |

 

                John A. Blanchard III, B.Kristine Johnson and Jean-Pierre Rosso continued as directors for termsexpiring at the annual meeting of shareowners in 2003, and John J. Boyle IIIand Charles D. Yost continued as directors for terms expiring at the annualmeeting of shareowners in 2004.

 

                c.  At the Annual Meeting, the shareowners also approved an amendmentto our Global Employee Stock Purchase Plan to increase the total number ofauthorized shares of our common stock available for sale under the plan by15,000,000 shares. The following table shows the vote totals with respect tothe amendment to our Global Employee Stock Purchase Plan: 

 

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|               |   |              |       |        |       |
|---------------|--------|-------------------|------------|-------------|------------|
| **Votes For** |   | **Votes Against** | ** ** | **Abstain** | ** ** |
|          |   |              |       |        |       |
| 624,768,751   |   | 26,988,517        |       | 3,949,469   |       |

 

                At the Annual Meeting, theshareowners also approved the combination of our Nonemployee Director StockOption Plan and our Global Stock Incentive Plan for key employees as describedin our proxy statement. The following table shows the vote totals with respectto the combination of our Nonemployee Director Stock Option Plan and our GlobalStock Incentive Plan for key employees: 

|               |   |              |       |        |       |
|---------------|--------|-------------------|------------|-------------|------------|
| **Votes For** |   | **Votes Against** | ** ** | **Abstain** | ** ** |
|          |   |              |       |        |       |
| 583,493,680   |   | 67,860,234        |       | 4,352,822   |       |

 

                At the Annual Meeting, theshareowners also approved the material terms of our Executive ManagementIncentive Plan so that payments under this plan will be deductible for U.S.federal income tax purposes under Section 162 (m) of the InternalRevenue Code. The following table shows the vote totals with respect to theapproval of the material terms of our Executive Management Incentive Plan: 

|               |   |              |       |        |       |
|---------------|--------|-------------------|------------|-------------|------------|
| **Votes For** |   | **Votes Against** | ** ** | **Abstain** | ** ** |
|          |   |              |       |        |       |
| 607,789,764   |   | 42,836,450        |       | 5,080,521   |       |

** **

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K**

 

a. Exhibits

 
| 4-a |   | Form  of certificate for shares of Common Stock of ADC  Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a  to ADC’s Form 10-Q for the quarter ended January 31, 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 |   | Restated  Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by  reference to Exhibit 4.2 to ADC’s Registration Statement on  Form S-3 dated April 15, 1997.)                                                                                                                                                                                                                                                                                                     |
| 4-d |   | Second  Amended and Restated Rights Agreement, amended and restated as of  November 28, 1995, between ADC Telecommunications, Inc. and Norwest  Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of  September 23, 1986, as amended and restated as of August 16, 1989),  which includes as Exhibit A thereto the form of Right Certificate.  (Incorporated by reference to Exhibit 4 to ADC’s Form 8-K dated  December 11, 1995.) |
| 4-e |   | 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-f |   | 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-g |   | 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-h |   | 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 Quarterly Report on Form 10-Q for  the quarter ended                                                                                                                                                                                                                                                            |

 

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|   |   |  July 31, 2000.)                                                                                                                                                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10-a   |   | Sixth  Amendment to Participation Agreement, dated as of April 18, 2002, among ADC  Telecommunications, Inc., Lease Plan North America, Inc., ABN AMRO Bank N.V.  and the Participants named on Schedule I thereto (Incorporated by reference  to Exhibit 10-a to ADC’s Form 8-K dated May 1, 2002. |

 

                b.Reports on Form 8-K

 

                None.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this amended report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| Dated: June 13, 2002 | ADC TELECOMMUNICATIONS, INC. |
|----------------------|------------------------------|
|                 |                         |   |
|                 | By:                          | /s/ Robert E. Switz |
|                 |                         | Robert E. Switz

Senior Vice President, Chief Financial Officer |

 

**ADC TELECOMMUNICATIONS, INC.EXHIBIT INDEX TO FORM 10-QFOR THE THREE MONTHS ENDED APRIL 30, 2002**
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **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             |   | Restated  Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by  reference to Exhibit 4.2 to ADC’s Registration Statement on  Form S-3 dated April 15, 1997.)                                                                                                                                                                                                                                                                                                     |
| 4-d             |   | Second  Amended and Restated Rights Agreement, amended and restated as of  November 28, 1995, between ADC Telecommunications, Inc. and Norwest  Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of  September 23, 1986, as amended and restated as of August 16, 1989),  which includes as Exhibit A thereto the form of Right Certificate.  (Incorporated by reference to Exhibit 4 to ADC’s Form 8-K dated  December 11, 1995.) |
| 4-e             |   | 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-f             |   | 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-g             |   | 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-h             |   | 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 Quarterly Report on Form 10-Q for  the quarter ended July 31, 2000.)                                                                                                                                                                                                                                       |
| 10-a            |   | Sixth  Amendment to Participation Agreement, dated as of April 18, 2002, among ADC  Telecommunications, Inc., Lease Plan North America, Inc., ABN AMRO Bank N.V.  and the Participants named on Schedule I thereto (Incorporated by reference  to Exhibit 10-a to ADC’s Form 8-K dated May 1, 2002.                                                                                                                                                                                                  |

 

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