**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                                       |
|------------------------------------------------------|
|                                                 |
| **ý**                                           | **QUARTERLY REPORT PURSUANT TO SECTION  13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                 |
| **For the  quarterly period ended January 31, 2003** |
|                                                 |
| **OR**                                               |
|                                                 |
| **o**                                                | **TRANSACTION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from N/A to N/A**

 

**Commission filenumber 0-1424**

 

**ADC Telecommunications, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Minnesota**                                                                       |   | **41-0743912**                       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                      |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |                                 |
| **13625  Technology Drive, Eden Prairie, MN 55344-2252**                            |
| (Address of principal executive offices) (Zip code)                                 |
|                                                                                |   |                                 |
| **(952) 938-8080**                                                             |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                                 |
| **N/A**                                                                             |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check markwhether the 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 ONLYTO CORPORATE ISSUERS:**

 

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

 

Common stock, $.20 parvalue:  801,929,103 shares as of March10, 2003

 

 

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS—UNAUDITED**

 

**(Inmillions)**

 
|                                                                              |   | **January  31,  2003** |       | **October  31,  2002** |       |
|-----------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
| **ASSETS:**                                                                       |   |                   | ** ** |                   | ** ** |
|                                                                              |   |                   |       |                   |       |
| CURRENT ASSETS:                                                                   |   |                   |       |                   |       |
| Cash and cash  equivalents                                                        |   | $                      | 366.3      |                   | $          | 278.9 |   |
| Available-for-sale  securities                                                    |   | 2.7                    |       | 0.5                    |       |
| Accounts  receivable, net                                                         |   | 105.0                  |       | 115.1                  |       |
| Unbilled revenue                                                                  |   | 22.7                   |       | 25.8                   |       |
| Inventories, net                                                                  |   | 91.8                   |       | 94.9                   |       |
| Prepaid income  taxes                                                             |   | 43.9                   |       | 126.6                  |       |
| Prepaid and  other current assets                                                 |   | 31.8                   |       | 44.5                   |       |
|                                                                              |   |                   |       |                   |       |
| Total current  assets                                                             |   | 664.2                  |       | 686.3                  |       |
|                                                                              |   |                   |       |                   |       |
| PROPERTY AND  EQUIPMENT, net                                                      |   | 190.7                  |       | 206.8                  |       |
| ASSETS HELD FOR  SALE                                                             |   | 15.7                   |       | 20.0                   |       |
| RESTRICTED CASH                                                                   |   | 142.5                  |       | 177.0                  |       |
| OTHER ASSETS                                                                      |   | 50.3                   |       | 54.1                   |       |
|                                                                              |   |                   |       |                   |       |
| Total assets                                                                      |   | $                      | 1,063.4    |                   | $          | 1,144.2 |   |
|                                                                              |   |                   |       |                   |       |
| **LIABILITIES  AND SHAREOWNERS’ INVESTMENT:**                                |   |                   |       |                   |       |
|                                                                              |   |                   |       |                   |       |
| CURRENT  LIABILITIES:                                                             |   |                   |       |                   |       |
| Accounts payable                                                                  |   | $                      | 62.3       |                   | $          | 73.0 |   |
| Accrued  compensation and benefits                                                |   | 66.1                   |       | 74.1                   |       |
| Restructuring  accrual                                                            |   | 81.0                   |       | 124.2                  |       |
| Other accrued  liabilities                                                        |   | 128.4                  |       | 110.8                  |       |
| Notes payable                                                                     |   | 15.8                   |       | 15.7                   |       |
|                                                                              |   |                   |       |                   |       |
| Total current  liabilities                                                        |   | 353.6                  |       | 397.8                  |       |
|                                                                              |   |                   |       |                   |       |
| LONG-TERM NOTES  PAYABLE                                                          |   | 14.3                   |       | 10.8                   |       |
| OTHER LONG-TERM  LIABILITIES                                                      |   | 3.2                    |       | 3.4                    |       |
|                                                                              |   |                   |       |                   |       |
| Total  liabilities                                                                |   | 371.1                  |       | 412.0                  |       |
|                                                                              |   |                   |       |                   |       |
| SHAREOWNERS’  INVESTMENT  (801.8 and 799.6 shares outstanding, respectively) |   | 692.3                  |       | 732.2                  |       |
|                                                                              |   |                   |       |                   |       |
| Total  liabilities and shareowners’ investment                               |   | $                      | 1,063.4    |                   | $          | 1,144.2 |   |

 

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  January 31,** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|
|                                                   |   | **2003**                             |   | **2002** |   |
| NET SALES:                                             |   |                                 |   |   |   |
| Product                                                |   | $                                    | 151.8  |   | $ | 228.6 |   |
| Service                                                |   | 48.1                                 |   | 64.9 |   |
| TOTAL NET SALES                                        |   | 199.9                                |   | 293.5 |   |
|                                                   |   |                                 |   |   |   |
| COST OF SALES:                                         |   |                                 |   |   |   |
| Product                                                |   | 86.7                                 |   | 156.7 |   |
| Service                                                |   | 42.4                                 |   | 42.0 |   |
| TOTAL COST OF  SALES                                   |   | 129.1                                |   | 198.7 |   |
|                                                   |   |                                 |   |   |   |
| GROSS PROFIT                                           |   | 70.8                                 |   | 94.8 |   |
|                                                   |   |                                 |   |   |   |
| EXPENSES:                                              |   |                                 |   |   |   |
| Research and development                               |   | 32.3                                 |   | 44.2 |   |
| Selling and  administration                            |   | 64.0                                 |   | 111.1 |   |
| Impairment  charges                                    |   | 10.3                                 |   | 1.9 |   |
| Non-recurring  charges                                 |   | 8.2                                  |   | 3.0 |   |
|                                                   |   |                                 |   |   |   |
| Total expenses                                         |   | 114.8                                |   | 160.2 |   |
|                                                   |   |                                 |   |   |   |
| OPERATING LOSS                                         |   | (44.0                                | )      | (65.4 | ) |
|                                                   |   |                                 |   |   |   |
| OTHER INCOME  (EXPENSE), NET                           |   | 2.5                                  |   | (4.5 | ) |
|                                                   |   |                                 |   |   |   |
| LOSS BEFORE  INCOME TAXES                              |   | (41.5                                | )      | (69.9 | ) |
| BENEFIT FOR  INCOME TAXES                              |   | —                               |   | (25.1 | ) |
|                                                   |   |                                 |   |   |   |
| NET LOSS                                               |   | $                                    | (41.5  | ) | $ | (44.8 | ) |
|                                                   |   |                                 |   |   |   |
| AVERAGE COMMON  SHARES OUTSTANDING (BASIC AND DILUTED) |   | 801.1                                |   | 793.4 |   |
|                                                   |   |                                 |   |   |   |
| LOSS PER SHARE  (BASIC AND DILUTED)                    |   | $                                    | (0.05  | ) | $ | (0.06 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED**

**(Inmillions)**

 
|                                                                                |   | **Three  Months Ended  January 31,** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                |   | **2003**                             |   | **2002** |   |
| OPERATING  ACTIVITIES:                                                              |   |                                 |   |   |   |
| Net loss                                                                            |   | $                                    | (41.5  | ) | $ | (44.8 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities:           |   |                                 |   |   |   |
| Depreciation and  amortization                                                      |   | 15.3                                 |   | 27.7 |   |
| Fixed asset  impairment charges                                                     |   | 10.3                                 |   | 1.9 |   |
| Provision for  losses on receivables                                                |   | 1.1                                  |   | — |   |
| Inventory  reserves                                                                 |   | 1.1                                  |   | — |   |
| Non-cash stock  compensation                                                        |   | 2.1                                  |   | 2.8 |   |
| Change in  deferred income taxes                                                    |   | —                               |   | (0.9 | ) |
| Loss on  write-down of investments                                                  |   | 2.7                                  |   | 2.4 |   |
| Gain on sale of  investments                                                        |   | (4.7                                 | )      | (7.0 | ) |
| Loss on sale of  business                                                           |   | 2.8                                  |   | — |   |
| (Gain) loss on  sale of fixed assets                                                |   | (0.5                                 | )      | 3.7 |   |
| Other                                                                               |   | 0.3                                  |   | — |   |
| Changes in  operating assets and liabilities, net of acquisitions and divestitures: |   |                                 |   |   |   |
| Accounts and  unbilled receivables                                                  |   | 24.1                                 |   | 79.9 |   |
| Inventories                                                                         |   | 0.6                                  |   | 21.6 |   |
| Prepaid and  other assets                                                           |   | 105.3                                |   | 149.2 |   |
| Accounts payable                                                                    |   | (17.4                                | )      | (54.6 | ) |
| Accrued  liabilities                                                                |   | (51.4                                | )      | (49.8 | ) |
|                                                                                |   |                                 |   |   |   |
| Total cash  provided by operating activities                                        |   | 50.2                                 |   | 132.1 |   |
|                                                                                |   |                                 |   |   |   |
| INVESTING  ACTIVITIES:                                                              |   |                                 |   |   |   |
| Acquisitions,  net of cash acquired                                                 |   | —                               |   | (3.9 | ) |
| Divestitures,  net of cash disposed                                                 |   | 0.5                                  |   | — |   |
| Property and  equipment additions, net of disposals                                 |   | (5.7                                 | )      | (16.6 | ) |
| Change in  restricted cash                                                          |   | 34.5                                 |   | — |   |
| Sale of available-for-sale  securities, net                                         |   | —                               |   | 7.2 |   |
| Sale (purchase)  of long-term investments, net                                      |   | 4.0                                  |   | (0.6 | ) |
|                                                                                |   |                                 |   |   |   |
| Total cash  provided by (used) for investing activities                             |   | 33.3                                 |   | (13.9 | ) |
|                                                                                |   |                                 |   |   |   |
| FINANCING  ACTIVITIES:                                                              |   |                                 |   |   |   |
| Proceeds  (repayments) of debt                                                      |   | 3.1                                  |   | (2.0 | ) |
| Common stock  issued                                                                |   | 0.3                                  |   | 0.6 |   |
|                                                                                |   |                                 |   |   |   |
| Total cash  provided by (used for) financing activities                             |   | 3.4                                  |   | (1.4 | ) |
|                                                                                |   |                                 |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                            |   | 0.5                                  |   | 0.3 |   |
|                                                                                |   |                                 |   |   |   |
| INCREASE IN CASH  AND CASH EQUIVALENTS                                              |   | 87.4                                 |   | 117.1 |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                     |   | 278.9                                |   | 348.6 |   |
|                                                                                |   |                                 |   |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                           |   | $                                    | 366.3  |   | $ | 465.7 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION—UNAUDITED**

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

 
|                                                   |   | **1st  Quarter  2003** |   | **4th  Quarter  2002** |   | **3rd  Quarter  2002** |   | **2nd  Quarter  2002** |   |
|--------------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
| NET SALES                                              |   |                   |   |                   |   |                   |   |                   |   |
| Product                                                |   | $                      | 151.8  |                   | $      | 167.8                  |   | $                      | 177.7  |   | $ | 235.1 |   |
| Service                                                |   | 48.1                   |   | 52.9                   |   | 57.4                   |   | 63.2                   |   |
| TOTAL NET SALES                                        |   | 199.9                  |   | 220.7                  |   | 235.1                  |   | 298.3                  |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| COST OF SALES                                          |   |                   |   |                   |   |                   |   |                   |   |
| Product                                                |   | 86.7                   |   | 132.6                  |   | 149.1                  |   | 170.9                  |   |
| Service                                                |   | 42.4                   |   | 43.1                   |   | 53.0                   |   | 53.7                   |   |
| TOTAL COST OF  SALES                                   |   | 129.1                  |   | 175.7                  |   | 202.1                  |   | 224.6                  |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| GROSS PROFIT                                           |   | 70.8                   |   | 45.0                   |   | 33.0                   |   | 73.7                   |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| EXPENSES:                                              |   |                   |   |                   |   |                   |   |                   |   |
| Research and  development                              |   | 32.3                   |   | 35.0                   |   | 52.2                   |   | 51.4                   |   |
| Selling and  administration                            |   | 64.0                   |   | 59.7                   |   | 94.9                   |   | 108.2                  |   |
| Impairment  charges                                    |   | 10.3                   |   | 169.5                  |   | 160.1                  |   | 16.8                   |   |
| Non-recurring  charges                                 |   | 8.2                    |   | 139.5                  |   | 19.3                   |   | 57.8                   |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| Total expenses                                         |   | 114.8                  |   | 403.7                  |   | 326.5                  |   | 234.2                  |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| OPERATING LOSS                                         |   | (44.0                  | )      | (358.7                 | )      | (293.5                 | )      | (160.5                 | )      |
| OTHER INCOME  (EXPENSE), NET:                          |   |                   |   |                   |   |                   |   |                   |   |
| Interest                                               |   | 1.1                    |   | 3.1                    |   | 2.3                    |   | 2.2                    |   |
| Loss on sale of  product lines                         |   | (2.8                   | )      | (1.2                   | )      | (4.8                   | )      | (0.8                   | )      |
| Gain (loss) on  write-down or sale of investments      |   | 2.0                    |   | (5.7                   | )      | 13.7                   |   | 4.3                    |   |
| Gain (loss) on  sale of fixed assets                   |   | 0.5                    |   | (11.6                  | )      | (5.3                   | )      | 1.4                    |   |
| Loss on equity  investment                             |   | —                 |   | —                 |   | (3.0                   | )      | (0.1                   | )      |
| Gain on patent  infringement settlement                |   | —                 |   | —                 |   | —                 |   | 26.2                   |   |
| Other                                                  |   | 1.7                    |   | (7.7                   | )      | (6.9                   | )      | (5.7                   | )      |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| LOSS BEFORE  INCOME TAXES                              |   | (41.5                  | )      | (381.8                 | )      | (297.5                 | )      | (133.0                 | )      |
| PROVISION (BENEFIT)  FOR INCOME TAXES                  |   | —                 |   | —                 |   | 331.6                  |   | (43.8                  | )      |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| NET LOSS                                               |   | $                      | (41.5  | )                      | $      | (381.8                 | )      | $                      | (629.1 | ) | $ | (89.2 | ) |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| AVERAGE COMMON  SHARES OUTSTANDING (BASIC AND DILUTED) |   | 801.1                  |   | 797.6                  |   | 796.4                  |   | 794.9                  |   |
|                                                   |   |                   |   |                   |   |                   |   |                   |   |
| LOSS PER SHARE  (BASIC AND DILUTED)                    |   | $                      | (0.05  | )                      | $      | (0.48                  | )      | $                      | (0.79  | ) | $ | (0.11 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS—UNAUDITED**

 

**Note 1Basis of Presentation:**

 

The interim information furnishedin this report is unaudited but reflects all normal recurring adjustments whichare necessary, in the opinion of our management, for a fair statement of theresults for the interim periods.  Theoperating results for the quarter ended January 31, 2003 are not necessarilyindicative of the operating results to be expected for the full fiscal year.These statements should be read in conjunction with our most recent AnnualReport filed on Form 10-K.

 

*Reclassifications.*  Certain prior year amounts havebeen reclassified to conform to the current year presentation.

 

*Recently Issued Accounting Pronouncements.*  In June2002, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”  SFASNo. 146 superseded Emerging Issues Task Force (EITF) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  The principal difference between SFAS. No.146 and EITF No. 94-3 relates to when an entity can recognize a liabilityrelated to exit or disposal activities. SFAS No. 146 requires that a liability be recognized for a costassociated with an exit or disposal activity when the liability isincurred.  EITF No. 94-3 allowed aliability related to an exit or disposal activity to be recognized on the datean entity commits to an exit plan.  Weadopted this standard on January 1, 2003, which was the standard’s effectivedate.  The standard did not materiallyimpact our consolidated financial results or financial position upon adoption.

 

In November 2002, the FASB issuedInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of the Indebtedness of Others,” whichrequires a guarantor to recognize and measure certain types of guarantees atfair value.  In addition, InterpretationNo. 45 requires the guarantor to make new disclosures for these guarantees andother types of guarantees that are not subject to the initial recognition andinitial measurement provisions.  Thedisclosure requirements are effective for financial statements with interim orannual periods ended after December 15, 2002, while the recognition andmeasurement provisions are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002.  We adopted the initial recognition and measurement provision aswell as the disclosure provision of Interpretation No. 45 during the firstquarter of fiscal 2003.  The initialrecognition and measurement provisions did not have a material impact on our consolidatedfinancial results or financial position. See Note 10 for guarantee disclosure information.

 

In December 2002, the FASB issuedSFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  The provisions of SFAS No.148 amend SFAS No. 123, “Accounting for Stock Based Compensation,” to providealternative methods of transitioning to a fair value-based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 also expands the disclosure requirements ofSFAS No. 123 by requiring more detailed disclosure in both annual and interimfinancial statements.  The transitionprovisions of SFAS No. 148 will not have a material impact on our financialresults, as we do not plan to adopt the fair value-based accounting provisionsof SFAS No. 123, which is commonly referred to as expensing of stockoptions.  The disclosure provisions ofSFAS No. 148 are effective for interim periods beginning after December 15,2002.  Accordingly, we will adopt thedisclosure provisions of this standard in the second quarter of fiscal 2003.

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51,” which requires companies to consolidate certaintypes of variable interest entities.  Avariable interest entity is an entity that has inadequate invested equity atrisk to meet expected future losses, or whose holders of the equity investmentslack any of the following three characteristics:  (i) the ability to make decisions about the entity’s activities;(ii) the obligation to absorb the entity’s losses if they occur; or (iii) theright to receive the entity’s future returns if they occur.  Interpretation No. 46 is applicableimmediately for all variable interests created after

 

6

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January 31, 2003.  For allvariable interest entities created before February 1, 2003, the provisions ofthis interpretation are effective in the first fiscal year or interim periodbeginning after June 15, 2003.  Inaccordance with Interpretation No. 46, we will be required to consolidate threeoperating leases related to certain of our facilities, generally known as“synthetic leases,” beginning in the fourth quarter of fiscal 2003.  Assuming there are no changes to theseleases, the carrying amounts of these assets will be recognized at the amountsthe assets would have been carried at in the consolidated financial statementsif the interpretation had been effective when we first entered into theseleases.  With the exception of theseoperating leases, Interpretation No. 46 is not expected to have a materialimpact on our consolidated financial position or results of operations.

 

**Note 2Inventories:**

 

Inventories includematerial, labor and overhead and are stated at the lower of first-in, first-outcost or market. Inventories consisted of (in millions):

 

|                                           |   | **January 31,  2003** |       | **October 31,  2002** |       |
|------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|
|                                           |   |                  | ** ** |                  | ** ** |
| Purchased  materials and manufactured products |   | $                     | 81.4       |                  | $          | 82.5 |   |
| Work-in-process                                |   | 10.4                  |       | 12.4                  |       |
|                                           |   |                  |       |                  |       |
|                                           |   | $                     | 91.8       |                  | $          | 94.9 |   |

 

**Note 3 Other Assets:**

 

*Goodwill.* We reassess the value of our business units and related goodwillbalances at the beginning of the fourth quarter of each fiscal year and atother times if events have occurred or circumstances exist that indicate thecarrying amount of goodwill may not be recoverable. Accordingly, in fiscal 2002we incurred $136.3 million of impairment charges as a result of our annualimpairment test and our decision to exit the optical components business. Therewere no events that occurred during the quarter ended January 31, 2003 thatindicated our remaining goodwill was not recoverable.  As of each of January 31, 2003 and October 31, 2002, we had $3.8million of goodwill related solely to the Integrated Solutions segment on ourcondensed consolidated balance sheet.

 

*Deferred tax assets.* A deferred tax asset generally represents futuretax benefits to be received when certain expenses previously recognized in ourU.S. GAAP-based income statement become deductible expenses under applicableincome tax laws.  Thus, realization of adeferred tax asset is dependent on future taxable income against which thesedeductions can be applied.  SFAS No.109, “Accounting for Income Taxes,” requires that a valuation allowance beestablished when it is more likely than not that all or a portion of deferredtax assets will not be realized.  Infiscal 2002 and for the three months ended January 31, 2003, we recorded a fullvaluation allowance against all our deferred tax assets. We expect to provide afull valuation allowance on any future tax benefits until we can sustain alevel of profitability that demonstrates our ability to utilize these assets.We will not record tax benefits or significant provisions for pre-tax income(loss) until either our deferred tax assets are fully utilized to reduce futureincome tax liabilities or the value of our deferred tax assets are restored onthe balance sheet.  As of January 31,2003 we had $725.0 million of deferred tax assets that have a full valuationallowance against them and thus are not reflected on the condensed consolidatedbalance sheet.

 

**Note 4Comprehensive Loss:**

 

The following table presents thecalculation of comprehensive loss as required by SFAS No. 130. Comprehensiveloss has no impact on our net loss, balance sheet or shareowners’ investment.The components of comprehensive loss are as follows (in millions):

 

7

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|                                                                                                                 |   | **Three Months Ended  January 31,** |       |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                                                 |   | **2003**                            |       | **2002** |   |
|                                                                                                                 |   |                                | ** ** |   | ** ** |
| Net  loss                                                                                                            |   | $                                   | (41.5      | ) | $ | (44.8 | ) |
| Changes  in cumulative translation adjustments                                                                       |   | (3.8                                | )          | (8.4 | ) |
| Reclassification  adjustment for realized (gains) losses on securities classified as available  for sale, net-of-tax |   | —                              |       | (4.4 | ) |
| Unrealized  gain (loss) from securities classified as available for sale, net-of-tax                                 |   | 2.2                                 |       | (0.9 | ) |
|                                                                                                                 |   |                                |       |   |   |
| Comprehensive  loss                                                                                                  |   | $                                   | (43.1      | ) | $ | (58.5 | ) |

 

**Note 5 Divestitures:**

 

During fiscal 2002 andfor the three months ended January 31, 2003, we sold or shut down non-strategicproduct lines.  The net sales andoperating income (loss) of the divested product lines are as follows (inmillions):

 

|                    |   | **Three Months Ended  January 31,** |       |
|-------------------------|--------|-------------------------------------|------------|
|                    |   | **2003**                            |       | **2002** |   |
|                    |   |                                | ** ** |   | ** ** |
| Net sales               |   | $                                   | 1.0        |   | $ | 6.7 |   |
| Operating income (loss) |   | $                                   | 0.6        |   | $ | (26.3 | ) |

 

**Note 6Segment Reporting:**

 

The “management approach” required by SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” requires us to disclose selected financial data by operatingsegment. This approach is based upon the way we organize segments within anenterprise for making operating decisions and assessing performance. We haveidentified two reportable segments based on our internal organizationalstructure, management of operations and performance evaluation. These segmentsare Broadband Infrastructure and Access, and Integrated Solutions. Segmentdetail is summarized as follows (in millions):

 
|                                     |   | **Broadband  Infrastructure  and Access** |   | **Integrated  Solutions** |   | **Unallocated  Items** |   | **Consolidated** |   |
|------------------------------------------|--------|-------------------------------------------|--------|---------------------------|--------|------------------------|--------|------------------|--------|
| **Three Months Ended January 31, 2003**  |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                          |   |                                      |   |                      |   |                   |   |             |   |
| Product                                  |   | $                                         | 132.5  |                      | $      | 19.3                   |   | $                | — |   | $ | 151.8 |   |
| Service                                  |   | —                                    |   | 48.1                      |   | —                 |   | 48.1             |   |
| Total external  sales                    |   | 132.5                                     |   | 67.4                      |   | —                 |   | 199.9            |   |
|                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment and  non-recurring charges(1) |   | —                                    |   | —                    |   | (18.5                  | )      | (18.5            | )      |
| Operating loss                           |   | (8.8                                      | )      | (8.7                      | )      | (26.5                  | )      | (44.0            | )      |
| Other income,  net                       |   | —                                    |   | —                    |   | 2.5                    |   | 2.5              |   |
| Pre-tax loss                             |   | (8.8                                      | )      | (8.7                      | )      | (24.0                  | )      | (41.5            | )      |
| Assets                                   |   | 325.8                                     |   | 275.8                     |   | 461.8                  |   | 1,063.4          |   |
|                                     |   |                                      |   |                      |   |                   |   |             |   |
| **Three Months Ended January 31, 2002**  |   |                                      |   |                      |   |                   |   |             |   |
| External sales                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                  |   | $                                         | 197.0  |                      | $      | 31.6                   |   | $                | — |   | $ | 228.6 |   |
| Service                                  |   | —                                    |   | 64.9                      |   | —                 |   | 64.9             |   |
| Total external  sales                    |   | 197.0                                     |   | 96.5                      |   | —                 |   | 293.5            |   |
|                                     |   |                                      |   |                      |   |                   |   |             |   |
| Impairment and  non-recurring charges(1) |   | —                                    |   | —                    |   | (4.9                   | )      | (4.9             | )      |
| Operating loss                           |   | (39.1                                     | )      | (5.5                      | )      | (20.8                  | )      | (65.4            | )      |
| Other expense,  net                      |   | —                                    |   | —                    |   | (4.5                   | )      | (4.5             | )      |
| Pre-tax loss                             |   | (39.1                                     | )      | (5.5                      | )      | (25.3                  | )      | (69.9            | )      |
| Assets                                   |   | 711.3                                     |   | 215.1                     |   | 1,414.5                |   | 2,340.9          |   |

 

8

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(1)          Includes $8.2 millionand $3.0 million of non-recurring charges and $10.3 million and $1.9 of millionimpairment charges not allocated to a specific segment for the three monthsended January 31, 2003 and 2002, respectively.

 

**Note 7 Impairment and Non-RecurringCharges:**

 

During the three months ended January 31, 2003 and 2002,we continued our plan to improve operating performance by restructuring andstreamlining our operations.  Thisincluded further workforce reductions and the disposal of excess equipment.  The impairment and non-recurring chargesresulting from our actions, by category of expenditures, are as follows for thethree months ended January 31, 2003 and 2002, respectively (in millions):

 

| **Three  Months Ended January 31, 2003**        |   | **Impairment  Charges** |   | **Non-recurring  Charges** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-----------|--------|
| Employee  severance costs                       |   | $                       | — |                       | $      | 11.7      |   | $ | 11.7 |   |
| Fixed asset  write-downs                        |   | 10.3                    |   | —                     |   | 10.3      |   |
| Facility  consolidation and lease termination   |   | —                  |   | (3.5                       | )      | (3.5      | )      |
| Total                                           |   | $                       | 10.3   |                       | $      | 8.2       |   | $ | 18.5 |   |
|                                            |   |                    |   |                       |   |      |   |
| **Three  Months Ended January 31, 2002**        |   | **Impairment  Charges** |   | **Non-recurring  Charges** |   | **Total** |   |
| Employee  severance costs                       |   | $                       | — |                       | $      | 1.5       |   | $ | 1.5 |   |
| Facilities  consolidation and lease termination |   | —                  |   | 0.1                        |   | 0.1       |   |
| Fixed asset  write-downs                        |   | 1.9                     |   | —                     |   | 1.9       |   |
| Other                                           |   | —                  |   | 1.4                        |   | 1.4       |   |
| Total                                           |   | $                       | 1.9    |                       | $      | 3.0       |   | $ | 4.9 |   |

 

***Non-recurring Charges:***  Employee severance costs relate to workforcereductions resulting from the closure of facilities and other workforcereductions attributable to our efforts to reduce costs.  During the three months ended January 31,2003, approximately 670 employees were impacted by reductions in force.  The costs of these reductions will be fundedthrough cash from operations. These reductions have impacted both businesssegments.

 

Facility consolidation costs represent leasetermination costs and other costs associated with our decision to consolidateand close unproductive, duplicative or excess manufacturing and officefacilities.  During the three monthsended January 31, 2003, we negotiated a favorable lease termination settlementwith a landlord of a leased facility and accordingly reversed $4.2 million ofour previous restructuring accrual for this lease settlement.

 

***Impairment Charges:*** As a result of ourintention to sell, scale-back or exit non-strategic businesses, we evaluatedour property and equipment assets for impairment. For the three months endedJanuary 31, 2003, we recognized a $10.3 million impairment charge in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” For the three months ended January 31, 2002, we recognized a $1.9 millionimpairment charge in accordance with SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets.”

 

***Effect of Restructuring Charges on Future Cash Flows:***The following table provides detail on the activity and our remainingrestructuring accrual balance by category as of January 31, 2003 (in millions):

 

9

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| **Type of Charge**                        |   | **Accrual****October 31, 2002** |   | **Net Additions** |   | **Cash Charges** |   | **Accrual****January 31, 2003** |   |
|-------------------------------------------|--------|---------------------------------|--------|-------------------|--------|------------------|--------|---------------------------------|--------|
|                                      |   |                            |   |              |   |             |   |                            |   |
| Employee severance costs                  |   | $                               | 17.0   |              | $      | 11.7             |   | $                               | 16.1   |   | $ | 12.6 |   |
| Facilities consolidation                  |   | 105.6                           |   | (3.5              | )      | 35.3             |   | 66.8                            |   |
| Committed sales  contracts-administrative |   | 1.6                             |   | —            |   | —           |   | 1.6                             |   |
| Total                                     |   | $                               | 124.2  |              | $      | 8.2              |   | $                               | 51.4   |   | $ | 81.0 |   |

 

The total adjustment madeto the restructuring accrual balance for changes in assumptions was a $(4.2)million reduction during the three months ended January 31, 2003.  The adjustment was primarily related to thetermination of a lease for a manufacturing facility used in our opticalcomponents business.  We were able toterminate this lease much earlier than our original estimate and at a lowersettlement cost than the original estimate. This adjustment was recorded as an offset to the additions to theaccrual, and thus is reflected in the “Net Additions” column in the tableabove.

 

We expect that substantially all of the remaining$12.6 million accrual relating to employee severance costs as of January 31,2003, will be paid from unrestricted cash by the end of fiscal 2003. We expectthat of the $66.8 million to be paid for the consolidation of facilities,approximately $38.1 million will be funded through the use of existingrestricted cash when the leased properties to which the restricted cash relatesare purchased, $18.2 million will be paid from unrestricted cash through theremainder of fiscal 2003, and the balance will be paid over the respectivelease terms of the facilities through 2008 from unrestricted cash. Theremaining balance of $1.6 million for committed sales contracts–administrativewill be paid through fiscal 2003 from unrestricted cash as the committed salescontracts are completed. Based on our intention to continue to reduce our coststructure, we may incur additional restructuring charges (both cash andnon-cash) in future periods, which may have a material effect on our operatingresults.

 

In addition to the restructuring accrual describedabove, we have $15.7 million of assets held for sale (of which $5.7 millionrelates to our Broadband Infrastructure and Access segment and $10.0 million wasnot allocated to either of our segments). We classified these assets as “Heldfor Sale” pursuant to our decision to exit non-strategic product lines and toreduce the size of global operations. We expect to sell or dispose of these assets before the end of fiscal2003.

 

**Note 8 Joint Ventures:**

 

In January 2001 and December2001, we entered into a total of three joint ventures with Competence Researchand Development Ltd., an independent company. The joint ventures were established to share development risk andcapital resources associated with the ongoing development of technology used inour iANTM, BroadAccessTM, and Small Subscriber product lines.  The joint ventures were successful inadvancing the development of technology related to these product lines.  When the joint ventures were established weheld 34%, 20%, and 49% interests, respectively, in the three joint ventureentities.  Because we did not havemajority control over the joint ventures, these investments were accounted forusing the equity method.  Therefore, apro rata portion of the joint ventures’ profits or losses is reflected in ourcondensed consolidated income statement as Other Income (Expense).  For the three months ended January 31, 2003and 2002, we incurred approximately $0.0 million and $2.6 million,respectively, in equity losses related to these joint ventures.

 

In December 2001, we purchasedCompetence’s 66% interest in one of the joint ventures for $3.9 million in cashand the assumption of $16.5 million in debt owed by that joint venture, theproceeds of which were being used to fund the development of technology.  In February 2002, we purchased Competence’sremaining interests in the other joint ventures for a total of approximately$350,000 in cash and the assumption of approximately $4.2 million in debt, theproceeds of which were used to fund the development of the technology.  The debt related to the February 2002purchases was paid off immediately following the purchases.  We recorded expenses of $10.5 million forin-process research and development projects associated with the purchase ofCompetence’s interests in these ventures in the second quarter of fiscal2002.  In addition, $10.3 million wasallocated to developed technology, which will be amortized over a period of sevenyears.  Appraisals for purchasedin–process and developed technology were

 

10

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determined using the income approach, discounted based on the estimatedlikelihood that the project ultimately would succeed.

 

## **Note 9 Variable InterestEntities:**

 

We are a party to three operatinglease agreements related to certain of our facilities, including our worldheadquarters facility in Eden Prairie, Minnesota. These leases have expirationdates ranging from 2004 to 2009, depending on whether we exercise our renewaloptions. These operating leases, which are sometimes referred to as “syntheticleases,” contain minimum residual value guarantees by us at the end of thelease term, and also give us a purchase option at the end of the lease term. Ifwe choose to retain the property at the end of the lease term, or if the leaseis terminated prematurely, we must pay the purchase option price. If we disposeof the property at the end of the lease term, we must pay any shortfall of thesales proceeds as compared to the purchase option price, not to exceed theresidual value guarantee to the lessor. The aggregate purchase option price andminimum residual value guarantees from all of these leases are approximately$103.0 million and $88.6 million, respectively.  Under these three leases, we have pledged cash collateral in theaggregate amount of $103.0 million, which is part of the restricted cashbalance on our condensed consolidated balance sheet.

 

We currently intend to sell twoof these leased facilities (other than our world headquarters facility) beforethe lease terms expire. In order for us to sell the leased facilities, we mustfirst purchase the facilities from the lessor for the purchase option price(which we expect to fund through the use of restricted cash).  As the fair market value of these facilitiesis likely to be less than the amount payable to the lessor for the purchaseoption price, we may incur non-recurring charges related to the disposal of theleased facilities, although we have already established significant reservesrelated to these facilities.  Therefore,the risk of incurring additional non-recurring charges is dependent on theaccuracy of our reserve estimate.  Wewill continue to monitor our reserve levels and will make additionaladjustments as more information about the facilities’ fair market values becomeavailable.  The net sales proceedsobtained from a buyer of these facilities would be available to us asunrestricted cash.  During the three monthsended January 31, 2003, we purchased two other leased properties (which hadsimilar lease financing arrangements) from the lessor for a total of $45.0million, using restricted cash pledged for these leases to pay for the purchaseprice, and immediately sold the facilities for a total of $15.3 million.  The $15.3 million sales proceeds becameavailable to us as unrestricted cash.

 

**Note 10 Guarantees:**

 

In connection with the sale of participation interestsin a customer note receivable we have guaranteed the payment obligation of thecustomer to the purchaser of the participation interests.  The term of this guarantee is equal to theterm of the related note receivable, which matures in October 2007.  The maximum potential amount of futurepayments that we could be required to make under this guarantee as of January31, 2003 is $14.3 million.  At January31, 2003, the carrying value of this guarantee, which is included in long-termnotes payable on our condensed consolidated balance sheet, was $14.3 million.  Our commitment under this guarantee issecured by $14.3 million in cash collateral, which is classified as restrictedcash on our condensed consolidated balance sheet.

 

**Note 11 Subsequent Events:**

 

On March 4, 2003, our shareownersapproved an amendment to our Global Stock Incentive Plan, which permits us tooffer a stock option exchange program to our employees.  Under this program, eligible employees willbe given a one-time opportunity to exchange all or some of the eligible stockoptions they currently hold for a lesser number of options at a new exerciseprice that is expected to be determined in late December 2003.  We currently plan to offer the exchangeopportunity to eligible employees in June 2003, although our Board of Directorshas reserved the right to temporarily postpone or terminate the program at anytime before the exchange offer is completed. Our five most highly compensated executive officers named in our proxystatement for our 2003 annual shareowners’ meeting, members of our Board ofDirectors, former employees and retirees will not be eligible to participate inthis program.  As of January 31, 2003,the employees eligible for the exchange program held options to purchase atotal of 81,778,530 shares, of which 49,370,183 are potentially eligible forthe exchange program.  Under theprogram, an exchange ratio will be established shortly before the offer iscommenced that will determine the precise number of existing options

 

11

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that will need to be surrendered in exchange for one new option.  The exchange program will not result incompensation expense under current accounting standards.

 

**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Business**

 

We are a leading global supplierof broadband network equipment, software and systems integration services thatenable communications service providers to deliver high-speed Internet, data,video and voice services to consumers and businesses worldwide. Telephonecompanies, cable television operators, Internet and data service providers,wireless service providers and other communications service providers arebuilding and upgrading the broadband network infrastructure required to offerhigh-speed Internet access as well as data, video, telephony and otherinteractive multimedia services. Our product offerings and development effortsare focused on increasing the speed and efficiency of the last mile/kilometerportion of broadband communications networks, and our product and serviceofferings help connect communications service providers’ offices to businessesand end users’ homes as well as to wireless communications devices.

 

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 broadband connectivity components and systems, broadbandaccess and network equipment, software and systems integration services to ourcustomers through the following two segments of product and service offerings:

 

•                                          Broadband Infrastructure and Access; and

 

•                                          Integrated Solutions.

 

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

 

•                                          connectivity systems and components that providethe infrastructure to wireline, cable and wireless service providers to connectInternet, data, video and voice services to the network over copper, coaxialand fiber-optic cables, and

 

•                                          access systems used by wireline, cable andwireless service providers to deliver high-speed Internet, data and voiceservices to consumers and businesses in the last mile/kilometer ofcommunication networks.

 

*Integrated Solutions* products and services consist of systemsintegration services and operations support systems (OSS) software forbroadband, multiservice communications over wireline, and wireless networks.Systems integration services are used to design, equip and build communicationsnetworks that deliver Internet, data, video and voice services to consumers andbusinesses. OSS software includes communications billing, customer management,network performance and service-level assurance software used by service providersto operate communications networks.

 

**Marketplace Conditions**

 

Our operating results during the three months endedJanuary 31, 2003, continued to be adversely affected by the downturn in generaleconomic conditions, and adverse conditions in the communications equipmentindustry in particular. The current geopolitical situation has causedadditional uncertainty with respect to the prospects for economic growthgenerally. In this economic environment, many of our communications serviceprovider customers have deferred capital spending, reduced theirtelecommunications equipment purchases, and announced plans to further reducecapital expenditures. A majority of our revenues continue to be derived fromtelecommunications service providers. These companies in particular have greatly reduced their spending oncommunications equipment, resulting in significant

 

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reductions in our revenues.  Wehave also been impacted by reduced or deferred capital spending by our cableindustry customers as these customers focus on the profitable deployment ofbroadband services, which has caused uncertainty with respect to the timing oftheir plans to expand their networks to offer voice-over Internet Protocolservices.  Moreover, some of ourcustomers, both in the telecommunications service industry and the cableindustry, have experienced serious financial difficulties, which in some caseshave resulted in bankruptcy filings or cessation of operations.

 

As the downturn in thecommunications service industry continues, we expect there to be someconsolidation among our customers in order for them to increase market share,diversify product portfolios and/or achieve greater economies of scale.  This activity is likely to have an impact onour results of operations during the time the consolidating companies focus onintegrating their operations and choose their equipment vendors.  There can be no assurance that we will be asupplier to the surviving service provider. An example of this trend became evident during the three month periodended January 31, 2003, with the acquisition of AT&T Broadband by ComcastCorporation, which has caused uncertainty with respect to our future IP cablerevenues as Comcast integrates AT&T Broadband’s operations.

 

When the downturn incommunications equipment spending first became evident in fiscal 2001, weimplemented a cost restructuring plan through which we took steps to reduceoperating expenses and capital spending. As it became evident in 2002 that our industry was experiencing a morepronounced and prolonged economic downturn, we took additional costrestructuring measures to realize further cost savings. Our actions to datehave included:

 

•                                          thesale of non-strategic product lines;

•                                          significantreductions in discretionary spending;

•                                          thedisposition of surplus equipment; and

•                                          substantialreductions in our workforce.

 

Despite theserestructuring actions, we may be unable to meet expected revenue levels in anyparticular quarter, in which case our operating results could be materiallyadversely affected for that period if we are unable to further reduce ourexpenses in time to counteract such a decline in revenue.

 

Our ability to grow ourbusiness is dependent on our ability to effectively compete with our currentproducts and services, our ability to develop and introduce new products, andon the growth of the communications equipment and services market.  The communications equipment industry ishighly competitive, and we cannot guarantee that our new or enhanced productsand services will meet with market acceptance or be profitable.  Growth in the market for broadbandcommunications products and services depends on a number of factors, includingthe availability of capital to communications service providers, the amount ofcapital expenditures by communications service providers, new regulatory andlegal requirements and end-user demand for Internet, data, video, voice andother communications services.

 

                During the quarter ended January 31, 2003, theFederal Communications Commission (FCC) released their adoption of a Report andOrder in its Triennial Review proceeding concerning incumbent local exchangecarriers' network unbundling obligations. The FCC released their preliminary findings concerning two main areasrelating to a carriers' unbundling obligations - UNE-P and Broadband.  The FCC essentially kept in place thecarriers' current UNE-P obligations, with state interpretations and decisions,and ruled not to require the unbundling of certain network elements in nextgeneration hybrid and fiber networks. Overall, we do not anticipate that this aspect of the decision willresult in increased capital spending by the incumbent carriers in the nearterm.  With respect to the Broadband portionof the ruling, although we believe that it may encourage long-term investmentand commitment to the deployment of broadband networks by incumbent carriers,it is too early to determine what the impact of this ruling may be.  Moreover, the FCC has yet to releasespecific details of its ruling, which could alter our views as to the effect ofthis ruling on our business.

 

Our results of operations havehistorically been subject to seasonal factors, with 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) andweaker demand for our products during the first fiscal quarter endingJanuary 31 (primarily as a result of the number of holidays in lateNovember, December and early January, the development of annual capital budgetsby our customers during that period, and a general industry slowdown duringthat period). There can be no assurance that these historical seasonal trendswill continue in the future. For instance, due to the economic downturn in thecommunications equipment and services market during fiscal 2002 and 2001, thetrend was not evident in either fiscal year. A more detailed description of therisks to our business related to seasonality, along with other risk factorsassociated with our business, can be found in Exhibit 99-a to our AnnualReport on Form 10-K for fiscal 2002.

 

**Impairment and Non-recurring Charges**

 

We recorded additionalimpairment and non-recurring charges during the three months ended January 31,2003 and 2002. Impairment charges represent a write-down of the carrying valueof property and equipment assets to their estimated fair market value.Non-recurring charges represent the direct costs of exiting certain productlines or businesses and the costs of downsizing our business. A briefexplanation of these charges follows, and a more thorough summary is containedin Note 7 to the Condensed Consolidated Financial Statements in Item 1 of thisForm 10-Q.

 

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***Three Months Ended January 31, 2003***

 

During the three monthsended January 31, 2003, we incurred the following charges (in millions):

 

| •             Impairment charges     |   | $   | 10.3   |   |
|-------------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| •             Non-recurring  charges |   | 8.2 |   |
|                                                                                                  |   | $   | 18.5   |   |

 

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

 

*Non-recurring Charges. *The $8.2 million of non-recurring charges consistprincipally of $11.7 million for employee severance costs related to workforcereductions and $(3.5) million for facility consolidation and lease terminationcosts.  The employee terminationsaffected both the Broadband Infrastructure and Access and Integrated Solutionssegments. Approximately 670 employees were impacted by reductions in forceduring the quarter.  The $(3.5) millionof facility consolidation costs reflects a $(4.2) million reversal of aprevious accrual related to the termination of a lease for a manufacturingfacility used in our optical component business.  We were able to terminate this lease much earlier than ourinitial estimate, and at a lower settlement cost than the original estimate.

 

***Three Months Ended January 31, 2002***

 

During the three monthsended January 31, 2002, we incurred the following charges (in millions):

 

| •             Impairment charges     |   | $   | 1.9    |   |
|-------------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| •             Non-recurring  charges |   | 3.0 |   |
|                                                                                                  |   | $   | 4.9    |   |

 

*Impairment Charges. *Theimpairment charges consisted solely of property and equipment impairments,which impacted both the Broadband Infrastructure and Access and IntegratedSolutions segments.  The impairmentcharges were the result of our plan to dispose of excess equipment thatresulted from our decision to streamline and reduce the size of ouroperations.  The fair market value wasdetermined using external sources, primarily proceeds received from previousequipment sales or estimates of discounted cash flows.

 

*Non-recurring Charges. *For the three months ended January 31, 2002, ournon-recurring charges primarily related to employee severance costs of $1.5million related to involuntary workforce reductions of approximately 200employees and other costs of $1.4 million primarily related to relocation costsand consultancy fees.

 

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

 

The following table providesdetail on the remaining restructuring accrual by category as of January 31,2003 and October 31, 2002 (in millions):

 

| **Type of Charge**                        |   | **Accrual****October 31, 2002** |   | **Accrual****January 31, 2003** |   |
|-------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                      |   |                            |   |                            |   |
| Employee severance costs                  |   | $                               | 17.0   |                            | $      | 12.6 |   |
| Facilities consolidation                  |   | 105.6                           |   | 66.8                            |   |
| Committed sales  contracts-administrative |   | 1.6                             |   | 1.6                             |   |
| Total                                     |   | $                               | 124.2  |                            | $      | 81.0 |   |

 

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We believe that our entirerestructuring accrual of $81.0 million as of January 31, 2003, will have to bepaid in cash.  Of this amount, $42.9million will be paid from our unrestricted cash (shown as cash and cash equivalentson our condensed consolidated balance sheet), and $38.1 million will be paidfrom our restricted cash (shown as restricted cash on our condensedconsolidated balance sheet), as follows:

 

•                  The $12.6 million of employee severance will bepaid through the remainder of fiscal 2003 from unrestricted cash;

•                  The $1.6 million of committed salescontracts–administrative will be paid through the remainder of fiscal 2003 fromunrestricted cash;

•                  $28.7 million of the facility consolidation costsrelates principally to excess leased facilities of which we estimate $18.2million will be paid through the remainder of fiscal 2003, with the remainderbeing paid over the respective lease terms ending through fiscal 2008, all fromunrestricted cash; and

•                  The balance of $38.1 million of facilityconsolidation costs will be paid from our restricted cash balance.  This amount represents the cash pledged tosecure our lease obligations on two long-term operating leases, and will beused to pay down the lease obligation in exchange for a reduced purchase optionprice, or to purchase the leased property at the end of the lease term (orsooner if we dispose of the property prior to the end of the lease term).  See “Liquidity and Capital Resources – Off-Balance Sheet Arrangements” below for a furtherdiscussion of these leases.

 

The restructuring accrual was established based on ourassumptions of the relevant costs at the time the restructuring decisions weremade.  The accrual is periodicallyadjusted based on new information and actual costs incurred.  The ultimate resolution of the accrual mayresult in further adjustments, which may have a material effect on ouroperating results.

 

**Results of Operations**

 

The following table contains information regarding thepercentage to net sales of certain income and expense items for the threemonths ended January 31, 2003 and 2002, and the percentage changes in theseincome and expense items between periods:

 

 

|                                 |   | **Percentage  of Net Sales** |   | **Percentage  Increase  (Decrease)  Between Periods** |   |
|--------------------------------------|--------|------------------------------|--------|-------------------------------------------------------|--------|
| **Three  Months Ended  January 31,** |
| **2003**                             |   | **2002**                     |
|                                 |   |                         |   |                                                  |   |   |   |
| **Net Sales:**                       |   |                         |   |                                                  |   |   |   |
| Product                              |   | 75.9                         | %      | 77.9                                                  | %      | (33.6 | %) |
| Service                              |   | 24.1                         |   | 22.1                                                  |   | (25.9 | ) |
| **Total Net Sales**                  |   | 100.0                        |   | 100.0                                                 |   | (31.9 | ) |
| **Cost of Sales:**                   |   |                         |   |                                                  |   |   |   |
| Product                              |   | (57.1                        | )      | (68.5                                                 | )      | (44.7 | ) |
| Service                              |   | (88.1                        | )      | (64.7                                                 | )      | 1.0 |   |
| **Total  Cost of Sales**             |   | (64.6                        | )      | (67.7                                                 | )      | (35.0 | ) |
| **Gross Profit**                     |   | 35.4                         |   | 32.3                                                  |   | (25.3 | ) |
| **Operating Expenses:**              |   |                         |   |                                                  |   |   |   |
| Research and  development            |   | (16.2                        | )      | (15.1                                                 | )      | (26.9 | ) |
| Selling and  administration          |   | (31.9                        | )      | (37.9                                                 | )      | (42.4 | ) |
| Impairment  charges                  |   | (5.2                         | )      | (0.6                                                  | )      | 442.1 |   |
| Non-recurring  charges               |   | (4.1                         | )      | (1.0                                                  | )      | 173.3 |   |
| **Operating Loss**                   |   | (22.0                        | )      | (22.3                                                 | )      | 32.7 |   |
| **Other Income (Expense), Net:**     |   |                         |   |                                                  |   |   |   |
| Interest income,  net                |   | 0.5                          |   | 0.3                                                   |   | 37.5 |   |
| Other, net                           |   | 0.7                          |   | (1.8                                                  | )      | 126.4 |   |
| **Loss Before Income Taxes**         |   | (20.8                        | )      | (23.8                                                 | )      | 40.6 |   |
| **Benefit for Income Taxes**         |   | —                       |   | (8.5                                                  | )      | N/A |   |
| **Net Loss**                         |   | (20.8                        | %)     | (15.3                                                 | %)     | 7.4 | % |

 

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***Net Sales***

 

The following table sets forth our net sales for thethree months ended January 31, 2003 and 2002, respectively, for each of ourfunctional product and service segments described above (in millions):

 

|                                     |   | **Three Months Ended January 31,** |   |
|------------------------------------------|--------|------------------------------------|--------|
|                                     |   | **2003**                           |   | **2002** |   |
| **Product Group**                        |   | **Net Sales**                      |   | **%** |   | **Net Sales** |   | **%** |   |
| **Broadband  Infrastructure and Access** |   | $                                  | 132.5  |   | 66.3 | % | $ | 197.0 |   | 67.1 | % |
| **Integrated  Solutions:**               |   |                               |   |   |   |   |   |   |   |
| Product                                  |   | 19.3                               |   | 9.6 |   | 31.6 |   | 10.8 |   |
| Service                                  |   | 48.1                               |   | 24.1 |   | 64.9 |   | 22.1 |   |
| **Total Integrated Solutions**           |   | 67.4                               |   | 33.7 |   | 96.5 |   | 32.9 |   |
| **Total**                                |   | $                                  | 199.9  |   | 100.0 | % | $ | 293.5 |   | 100.0 | % |

 

Net sales were $199.9 million and $293.5 million forthe three months ended January 31, 2003 and 2002, respectively, reflecting a31.9% decrease.  International salescomprised 40.2% and 27.6% of our net sales for the three months ended January31, 2003 and 2002, respectively.

 

The 31.9% decrease in net sales was largelyattributable to lower volumes of products sold due to significant reductions incommunication service provider capital budgets, as well as the lack of newnetwork build-outs or significant expansions of existing networks.  The decline was most pronounced for ourbroadband connectivity products, but occurred across all product lines with theexception of our IP cable products, which had increased sales over the prioryear.  As noted previously, future salesof our IP cable products may be adversely affected by the acquisition ofAT&T Broadband by Comcast and the other factors discussed in theMarketplace Conditions of this report. Sales of our software products also declined primarily as a result oflower volumes of new software licenses. Thethree-month period ended January 31, 2002 includes $5.6 million of net salesfrom product lines divested in fiscal 2002. Our future revenues remaindependent on the level of capital spending by our customers.

 

The increase in internationalsales as a percentage of total sales was largely attributed to the recognitionof $16.0 million of deferred revenue related to a European customer during thethree months ended January 31, 2003.  Atthe time of shipment and acceptance by this customer, we deferred revenuerecognition because the collectibility of our receivable was not reasonablyassured. During the three months ended January 31, 2003, the customer paid itsoutstanding obligation to us, which allowed us to recognize this revenue.  As a percentage of total sales,international sales increased across many regions in the first quarter of 2003including Canada, Europe, Japan and the Middle East/Africa region.  We attribute these increases to more pronouncedcapital spending reductions in the United States than in these other regions.

 

***Gross Profit***

 

During the three months endedJanuary 31, 2003 and 2002, gross profit percentages were 35.4% and 32.3%,respectively. The increase in gross profit percentage is primarily due to areduction in our fixed costs of sales as a result of our restructuringactivities aimed at downsizing our operation in response to the continueddownturn in the telecommunications industry. We also benefited from a morefavorable sales mix toward our higher margin product lines.  These benefits were partially offset byhigher contract labor charges in our Integrated Solutions segment.  We anticipate that our future gross profitpercentage will vary based on many factors, including sales mix, competitivepricing, timing of new product introductions, timing of customer acceptance andcollectability of large-scale sales transactions and manufacturing volume.

 

***Operating Expenses***

 

Total operating expenses for thethree months ended January 31, 2003 and 2002,, were $114.8 million and $160.2million, representing 57.4% and 54.6% of net sales, respectively. Included inthese operating expenses were non-recurring charges of $8.2 million and $3.0million and impairment charges of $10.3 million and $1.9 million for

 

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the three months ended January 31, 2003 and 2002, respectively, whichare discussed above.  In addition,operating expenses for the three months ended January 31, 2003 and 2002,include non-cash stock compensation expenses of $2.1 million and $2.8 million,respectively.  The non-cash stockcompensation expenses relate to our acquisition of Broadband AccessSystems.  Due to the significance of ourrestructuring activities and the fact that the non-cash stock compensation expensesrelated to a business acquisition, we believe that a more meaningfulpresentation of our year-over-year operating expense performance would excludethese impairment charges, non-recurring charges and non-cash stock compensationexpenses.

 

Operatingexpenses, excluding the impairment charges, non-recurring charges and non-cashstock compensation expenses, were $94.2 million for the three months endedJanuary 31, 2003, a 38.2% reduction from $152.5 million for the three monthsended January 31, 2002, representing 47.1% and 52.0% of net sales,respectively.  The decrease in absolutedollars and as a percentage of revenue of our operating expenses beforeimpairment, non-recurring and non-cash stock compensation expenses, wasprimarily due to the ongoing costs savings from our restructuring efforts aswell as the divestiture of certain business units and product lines. We willcontinue to monitor our operating expenses for opportunities to further reduceour operating costs.

 

Research and development expenseswere $32.3 million for the three months ended January 31, 2003, a decrease of26.9*%*from$44.2 million for the three months ended January 31, 2002. We believe, giventhe rapidly changing technological and competitive environment in thecommunications equipment industry, continued commitment to product developmentefforts will be required for us to remain competitive. Accordingly, we intendto continue to allocate substantial resources, as a percentage of our netsales, to product development for each of our operating segments.

 

Selling and administration expenses were $64.0 millionfor the three months ended January 31, 2003, a decrease of 42.4% from $111.1million for the three months ended January 31, 2002. This decrease reflects abeneficial realization of our restructuring efforts.  In addition, $8.8 million of the decrease from the comparable2002 three-month period was due to the divestiture or discontinuance of certainbusiness units and product lines in fiscal 2002.

 

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

 

Other income (expense), net includes net interestincome, loss on write-down or sale of investments, loss on sale of certainproduct lines, gain or (loss) on sale of fixed assets and other items.  For the three months ended January 31, 2003and 2002, other income (expense), net was $2.5 million and $(4.5) million,respectively.  Other income for thethree months ended January 31, 2003, included $1.1 million of interest income,$4.9 million of gain on sale of investments, $0.5 million of gain on sale offixed assets, and $1.7 million of other income.  These gains were partially offset by $2.9 million of investmentimpairments and a $2.8 million loss on divested product lines.  Other expense for the three months endedJanuary 31, 2002, included $2.4 million of investment impairments, $3.7 millionof loss on sale of fixed assets, $3.4 million loss on equity investments and$2.8 million of other expenses.  Theseexpenses were partially offset by $0.8 million of interest income and $7.0million of gain on sale of investments.

 

***Income Taxes***

 

As a result of our cumulative losses over the past twoyears and the full utilization of our loss carryback potential, we are notrecognizing a tax benefit on our pretax losses until we can sustain a level ofprofitability that demonstrates our ability to utilize our deferred tax assets.Therefore, the effective income tax rate for the three months ended January 31,2003 was zero. The effective income tax rate for the three months ended January31, 2002 was 36% which resulted in part from lower effective tax rates appliedto non-recurring charges as well as certain non-deductible impairmentcharges.  Excluding the impact of thelower rates used for the non-recurring and impairment charges, the effectiveincome tax rate was 38% for the three months ended January 31, 2002.

 

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***Net Loss***

 

Net loss was $41.5 million (or $0.05 per dilutedshare) for the three months ended January 31, 2003, compared to net loss of$44.8 million (or $0.06 per diluted share) for the three months ended January31, 2002.

 

**Application of Critical AccountingPolicies and Estimates**

 

There were no significant changesto our critical accounting policies during the three months ended January 31,2003.  See our Annual Report on Form10-K for fiscal 2002 for a discussion of our critical accounting policies.

 

**Liquidity and Capital Resources**

 

***Cash***

 

Cash and cash equivalents, primarily short-terminvestments in commercial paper with maturities of less than 90 days and othershort-term investments, had a balance of $366.3 million at January 31, 2003,which is an increase of $87.4 million compared to October 31, 2002. The majorsources of cash during the three months ended January 31, 2003, were a $103.4million income tax refund, $15.3 million in proceeds from the sale of twofacilities, $26.6 million from more effective working capital management suchas account receivable collections, lower inventory requirements and lowerprepaid assets, and other net cash gains from operations. These cash inflowswere partially offset by $68.8 million used to pay down current liabilities and$5.7 million of net property, plant and equipment additions.

 

As of January 31, 2003, we had restricted cash of$142.5 million.  Restricted cashrepresents cash pledged to various financial institutions to secure certain ofour obligations, and thus is not available to us for working capital.  The majority of this restricted cash relatesto three long-term operating lease obligations, with the remainder representingcash collateral for letters of credit, guarantees relating to vendor financingtransactions, and foreign currency hedging activities.  We expect that $103.0 million of ourrestricted cash will be used to settle the three long-term lease obligations itsecures, and accordingly may never become available to us for general workingcapital purposes.  The remainder of therestricted cash is expected to become available to us upon satisfaction of theobligations pursuant to which the letters of credit, guarantees or currencyhedging arrangement were issued.  We areentitled to the interest earnings on our restricted cash balances.

 

During the three months ended January 31, 2002, cashincreased $117.1 million compared to October 31, 2001.  In addition, as of January 31, 2002, we heldapproximately $64.5 million in marketable securities.  Our primary sources of cash for the three months ended January31, 2002, were a $156.0 million income tax refund and lower working capitalrequirements.  These cash inflows werepartially offset by a net loss of $44.8 million and $16.6 million of property,plant, and equipment additions.

 

***Finance-related Transactions***

 

In December 2001 we entered into an accountsreceivable securitization arrangement with a financial institution.  This arrangement functions much like arevolving line of credit, but has a lower cost of funds than a traditionalrevolving line of credit.  Pursuant tothis arrangement, we may sell certain of our U.S.-sourced accounts receivableto the financial institution without recourse to us.  As of January 31, 2003 and 2002, the aggregate sales proceedsless the uncollected receivables could not exceed $50 million and $160 million,respectively.  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. The purpose of this securitization arrangement is to allow us to acceleratethe cash realized from our receivables and to provide additional liquidityresources.  During the three monthsended January 31, 2003 and 2002, the amount available under this arrangementranged from $17 million to $40 million and $15 million to $54 million,respectively.  As of January 31, 2003,there have been no sales of receivables under this arrangement.  We have no current plans to utilize thisfacility and do not consider it a significant source of liquidity.

 

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***Vendor Financing***

 

We have worked with customers andthird-party financiers to find a means of financing projects by negotiatingfinancing arrangements. As of January 31, 2003 and 2002, we had commitments toextend credit of approximately $58.6 million and $88.4 million, respectively,for such arrangements. The total amount drawn and outstanding under thecommitments was approximately $23.9 million and $67.4 million as of January 31,2003 and 2002, respectively. The commitments to extend credit are conditionalagreements generally having fixed expiration or termination dates and specificinterest rates, conditions and purposes. These commitments may expire withoutbeing drawn.   Some of these commitmentsenable the customer to draw on the commitment after the customer has made paymentto us for the products we sold, up to the amount the customer previously paidto us.  Accordingly, amounts committedmay affect future cash flows. We regularly review all outstanding commitments,and the results of these reviews are considered in assessing the overall riskfor possible credit losses. At January 31, 2003, we have recorded approximately$16.9 million in loss reserves in the event of non-performance related to thesefinancing arrangements.

 

During the quarter endedJanuary 31, 2003, we sold a participation interest in one of our vendorfinancing notes receivable for cash equal to $3.8 million.  This sale was without any discount to theface amount of the receivable, was with full recourse to us, and our recourseobligation is secured by a letter of credit. As of January 31, 2003, our total outstanding recourse obligationsrelated to the sale of participation interests in vendor financing notesreceivable sold were $14.3 million.  Wehave pledged $14.3 million of cash collateral, which makes up a portion of ourrestricted cash, to secure our recourse obligations and have recognized $14.3million of long-term notes payable. These recourse obligations are included inthe amounts drawn and outstanding listed above.  See Note 10 to the Condensed Consolidated Financial Statements inItem 1 of this Form 10-Q for further information.

 

***Working CapitalOutlook***

 

Our main source of liquiditycontinues to be our unrestricted cash on hand. In addition, based on our recent operating losses, we expect to receivea federal income tax refund of approximately $30 million during the secondfiscal quarter of 2003.

 

Although we expect to continue to use our unrestrictedcash to fund operating losses in the near term and to pay $42.9 million of ourrestructuring accrual, we believe that our current unrestricted cash on handand cash from the expected federal income tax refund should be adequate to fundour working capital requirements, planned capital expenditures andrestructuring costs through fiscal 2003 and beyond. However, if our operatinglosses are more severe than expected or continue 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 alternatives available assources of financing.  Commercial bankfinancing is not available at this time to us or to many 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.

 

***Off-balance SheetArrangements***

 

We are a party to three operatinglease agreements related to certain of our facilities, including our worldheadquarters facility in Eden Prairie, Minnesota.  These leases have expiration dates ranging from 2004 to 2009,depending on whether we exercise our renewal options. These operating leases,which are sometimes referred to as “synthetic leases,” contain minimum residualvalue guarantees 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, or if the lease is terminated prematurely, we must paythe purchase option price. If we dispose of the property at the end of thelease term, we must pay any shortfall of the sales proceeds as compared to thepurchase option price, not to exceed the amount of the residual value guaranteeto the lessor. The aggregate purchase option price and minimum residual valueguarantees from all of these leases are approximately $103.0 million and$88.6 million, respectively. Our obligations under these leases aresecured by $103.0 million in cash collateral, which is classified as part ofthe restricted cash on our condensed consolidated balance sheet.

 

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These lease arrangements wereoriginally entered into as an economical means of financing the construction ofnew facilities or the acquisition of existing facilities.  Subsequently the purchase option prices forthese facilities were fully cash collateralized.  As a result, we do not currently receive any financing benefitsfrom these arrangements.  During thethree months ended January 31, 2003 and 2002, we incurred rent expense underthe leases in the aggregate amount of $0.9 million and $0.8 million,respectively, and cash outlays from our unrestricted cash (for payment of rent)of a like amount.

 

We currently intend to sell twoof these leased facilities (other than our world headquarters facility) beforethe full lease terms expire. In order to sell the leased facility we must firstpurchase the facilities from the lessor for the purchase option price (which wewill fund through the use of cash collateral currently reported as restrictedcash).  As the fair market value ofthese facilities is likely to be less than the amount payable to the lessor forthe purchase option price, we may incur additional non-recurring chargesrelated to the disposal of the leased facilities. We have already establishedsignificant reserves related to these facilities.  Therefore, the risk of incurring additional non-recurring chargesis dependent on the accuracy of our reserve estimate.  We will continue to monitor our reserve levels and will makeadditional adjustments, if necessary, as more information about the facilities’fair market values become available. The net sales proceeds obtained from a buyer of these facilities wouldbe available to us as unrestricted cash. During the three months ended January 31, 2003, we purchased two otherleased properties (which had similar lease financing arrangements) from thelessor for a total of $45.5 million, using restricted cash pledged for theseleases to pay the purchase price, and immediately sold the facilities for atotal of $15.3 million.  The $15.3million sales proceeds became available to us as unrestricted cash.

 

In connection with our investmentactivity, we invested in two independent venture capital funds in fiscal2000.  Our investments in these fundsare recorded as long-term assets on our condensed consolidated balancesheet.  We committed to invest anaggregate of $15.0 million in these funds as capital calls were made by the fundmanagers.  During the three months endedJanuary 31, 2003 and 2002, we contributed $0.7 million and $0.1 million,respectively, to these funds.  As ofJanuary 31, 2003, our outstanding unfunded commitment totalled $8.7 million.  We expect that our remaining commitment willbe funded through the use of unrestricted cash on hand over the course of thenext three years.

 

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

 

The foregoing Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, as well as the Notes to theCondensed Consolidated Financial Statements, 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, thecontinuation of historical trends, the sufficiency of our cash balances andcash generated from operating and financing activities for our future liquidityand capital resource needs, the effect of regulatory changes and the future ofthe communications equipment industry and communications services on ourbusiness.  We caution that anyforward-looking statements made by us in this report or in other announcementsmade by us are qualified by important factors that could cause actual resultsto differ materially from those in the forward-looking statements.  These include, without limitation:  significant difficulties in forecastingsales and market trends; uncertainties regarding the level of capital spendingby telecommunications service providers, as the majority of our revenues arederived from these companies; possible consolidation among our customers, whichcould result in delayed equipment purchases or the narrowing of equipmentvendors used by the combined company; the demand for particular products orservices within our overall mix of products sold, as our products and serviceshaving varying profit margins; changing market conditions and growth rateseither within our industry or generally within the economy; our ability torealize the cost savings expected from our restructuring initiative; ourability to dispose of excess assets on a timely and cost-effective basis; newcompetition and technologies; increased costs associated with protectingintellectual property rights; our ability to retain key employees; pressures onthe pricing of products or services we offer; the ability of contractmanufacturers to satisfy their obligations to us; the availability of materialsto make products; our ability to find alternate sources of supply, ifnecessary, without undue interruption to our business; variations in the valueof assets held or used by us in the

 

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operation of our business; and other risks and uncertainties, includingthose identified in Exhibit 99-a to our Report on Form 10-K for the fiscal yearended October 31, 2002.  We disclaim anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

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

 

We are exposed to marketrisk from changes in security prices, foreign exchange rates and interestrates. Market fluctuations could affect our results of operations and financialcondition adversely. We, at times, reduce this risk through the use ofderivative financial instruments. We do not enter into derivative financialinstruments for the purpose of speculation. Changes in interest rates are notexpected to have a material adverse effect on our consolidated financialcondition or results of operations because we have only $15.8 million ofinterest-bearing notes payable as of January 31, 2003.

 

We offer a non-qualified401(k) excess plan to allow certain executives to defer earnings in excess ofthe annual individual contribution and compensation limits on 401(k) plansimposed by the U.S. Internal Revenue Code. Under this plan, the salary deferrals and our matching contributions arenot placed in a separate fund or trust account. Rather, the deferrals representan unsecured general obligation of ADC to pay the balance owing to theexecutives upon termination of their employment.  In addition, the executives are able to elect to have their accountbalances indexed to a variety of diversified mutual funds (stock, bond andbalanced), as well as to ADC common stock. Accordingly, our outstanding deferred compensation obligation under thisplan is subject to market risk.  As ofJanuary 31, 2003, our outstanding deferred compensation obligation related tothe 401(k) excess plan was $8.2 million, of which approximately $1.5 millionwas indexed to ADC common stock. Assuming a 20%, 50% and 100% aggregate increase in the value of theinvestment alternatives to which the account balances may be indexed, ouroutstanding deferred compensation obligation would increase by $1.6 million,$4.1 million and $8.2 million, respectively, and we would incur an expense of alike amount.

 

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 monetary assets andliabilities in non-functional currencies from fluctuations due to movements inforeign exchange rates. The program operates in markets where hedging costs arebeneficial. We attempt to minimize exposure to currencies in which hedginginstruments are unavailable or prohibitively expensive by managing ouroperating activities and net asset positions. The majority of hedginginstruments utilized are forward contracts with maturities of less than oneyear.  Foreign exchange contracts reduceour overall exposure to exchange rate movements, since gains and losses onthese contracts offset losses and gains on the underlying exposure.

 

**ITEM 4.  DISCLOSURE CONTROLS AND PROCEDURES**

 

Withinthe 90-day period prior to the filing of this Quarterly Report on Form 10-Q, anevaluation was carried out under the supervision and with the participation ofour management, including our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”), of the effectiveness of our disclosure controls andprocedures.  Disclosure controls andprocedures are designed with the objective of ensuring that information requiredto be disclosed in our reports filed under the Securities Exchange Act of 1934,such as this Form 10-Q, is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.  Based on that evaluation,our CEO and CFO have concluded that our disclosure controls and procedures areeffective to satisfy the objectives for which they are intended.  Subsequent to the date of our management’sevaluation, there were no significant changes in our internal controls or inother factors that could significantly affect these controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

OnMarch 4, 2003, ADC was served with a shareholder lawsuit that has been filed inthe United States District Court for the District of Minnesota.  The lawsuit has been brought against ADC,William J. Cadogan, our

 

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former Chairman and Chief Executive Officer, and Robert E. Switz, ourExecutive Vice President and Chief Financial Officer, by an individualshareholder, Wanda Kinermon.  Thelawsuit purports to bring suit on behalf of a class of purchasers of our publiclytraded securities between November 28, 2000, and March 28, 2001.  The plaintiff alleges that defendantsviolated the securities laws and breached their fiduciary duties by makingfalse and misleading statements about ADC’s business prospects.  The complaint seeks unspecified compensatorydamages and/or rescission and other relief.

 

On March 10, 2003, ADC was served with a virtuallyidentical shareholder lawsuit.  Thelawsuit was filed in the same court and was brought against the same defendantsas the *Kinermon* lawsuit.  The lawsuit purports to bring suit on behalfof a class of purchasers of our publicly traded securities between November 2,2000 and March 28, 2001.  The lawsuitalleges a violation of the federal securities laws and seeks unspecified compensatorydamages.  ADC anticipates this lawsuitand the *Kinermon* lawsuit will beconsolidated in the near future.

 

We believe both of theselawsuits are without merit and intend to defend these actions vigorously.

 

We area party to various other suits, claims and proceedings arising in the ordinarycourse of business.  The amount ofmonetary liability, if any, resulting from an adverse result in any of suchsuits, proceedings and claims in which we are a defendant cannot be determinedat this time.  However, in the opinionof our management, the aggregate amount of liability under these suits,proceedings and claims will not have a material adverse effect on ourconsolidated results of operations or financial condition. We intend tovigorously defend these suits, claims and proceedings.

 

**ITEM 2. CHANGES IN SECURITIES**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

a.                                       Our annual meeting of shareowners was held onMarch 4, 2003.

 

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

 

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

 

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

 

At the annual meeting, ourshareowners also approved an amendment to our Global Stock Incentive Plan topermit a one-time exchange of certain outstanding stock options for a smallernumber of stock options with a new exercise price and vesting schedule.  The following table shows the vote totalswith respect to the amendment to our Global Stock Incentive Plan:

 

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

 

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**ITEM 5. OTHER INFORMATION**

 

None.

 

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

 

a.                                       Exhibits

 

See Exhibit Index on page 26 for a description of thedocuments that are filed as exhibits to this Quarterly Report on Form 10-Q orincorporated by reference herein.  Anydocument incorporated by reference is identified by a parenthetical referencingthe SEC filing which included the document. We will furnish to a securityholder upon request a copy of any Exhibitat cost.

 

b.                                      Reports on Form 8-K

 

None

 

**SIGNATURES**

 

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

 

 
| Dated: March 14, 2003 | ADC TELECOMMUNICATIONS, INC. |
|-----------------------|------------------------------|
|                  |                         |
|                  | By:                          | /s/ Robert E.  Switz |   |
|                  |                         | Robert E. Switz |
|                  |                         | Executive Vice President and Chief Financial Officer |

 

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**CERTIFICATIONS**

 

I, Richard R. Roscitt, the Chief Executive Officer ofADC Telecommunications, Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of ADC Telecommunications,Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

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

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  March 14, 2003

 

 
|   | /s/ Richard R. Roscitt  |   |
|--------|-------------------------|--------|
|   | Richard R. Roscitt      |
|   | Chief Executive Officer |

 

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

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of ADC Telecommunications,Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelated to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

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

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  March 14, 2003

 

 
|   | /s/ Robert E. Switz     |   |
|--------|-------------------------|--------|
|   | Robert E. Switz         |
|   | Chief Financial Officer |

 

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**ADC TELECOMMUNICATIONS, INC.**

 

**EXHIBIT INDEX TO FORM 10-QFOR THE THREE MONTHS ENDED JANUARY 31, 2003**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4-a              |   | Form  of certificate for shares of common stock of ADC  Telecommunications, Inc. (Incorporated by reference to Exhibit 4-a  to ADC’s Form 10-Q for the quarter ended April 30, 1996.)                                                                                                                                                                                                                                                                                                                                         |
| 4-b              |   | Restated  Articles of Incorporation of ADC Telecommunications, Inc., as amended  prior to January 20, 2000. (Incorporated by reference to  Exhibit 4.1 to ADC’s Registration Statement on Form S-3 dated  April 15, 1997.)                                                                                                                                                                                                                                                                                               |
| 4-c              |   | Articles  of Amendment to Restated Articles of Incorporation of ADC  Telecommunications, Inc. dated January 20, 2000. (Incorporated by  reference to Exhibit 4.6 to ADC’s Registration Statement on  Form S-8 dated March 14, 2000.)                                                                                                                                                                                                                                                                                     |
| 4-d              |   | Articles  of Amendment to Restated Articles of Incorporation of ADC  Telecommunications, Inc., dated June 30, 2000. (Incorporated by  reference to Exhibit 4-g to ADC’s Quarterly Report on Form 10-Q for  the quarter ended July 31, 2000.)                                                                                                                                                                                                                                                                             |
| 4-e              |   | Restated  Bylaws of ADC Telecommunications, Inc., as amended effective July 30,  2002.  (Incorporated by reference to  exhibit 4-e ADC’s Quarterly Report on Form 10-Q for the quarter ended July  31, 2002)                                                                                                                                                                                                                                                                                                                            |
| 4-f              |   | Second  Amended and Restated Rights Agreement, amended and restated as of  November 28, 1995, between ADC Telecommunications, Inc. and Wells  Fargo Bank Minnesota, N.A. (formerly Norwest Bank Minnesota, N.A.) (amending  and restating the Rights Agreement dated as of September 23, 1986, as  amended and restated as of August 16, 1989), which includes as  Exhibit A thereto the form of Right Certificate. (Incorporated by  reference to Exhibit 4 to ADC’s Form 8-K dated December 11,  1995.) |
| 4-g              |   | Amendment  to Second Amended and Restated Rights Agreement dated as of October 6,  1999. (Incorporated by reference to Exhibit 4-c to ADC’s Form 10-K  for the fiscal year ended October 31, 1999.)                                                                                                                                                                                                                                                                                                                           |
| 4-h              |   | Amendment  No. 2, dated as of November 15, 2000, to Second Amended and  Restated Rights Agreement among ADC Telecommunications, Inc., Wells  Fargo Bank Minnesota, N.A. (formerly Norwest Bank Minnesota, N.A.) and  Computershare Investment Services, LLC. (Incorporated by reference to  Exhibit 4.8 to ADC’s Registration Statement on Form S-8 dated  February 28, 2001.)                                                                                                                                      |
| 10-a             |   | Employment****Agreement  dated February 3, 2003, between ADC Telecommunications, Inc. and William F.  O’Brien.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10-b             |   | Second  Amendment to Receivables Purchase Agreement dated as of December 13, 2002, by  and among ADC Receivables Corp. I, ADC Telecommunications, Inc., Blue Ridge  Asset Funding Corporation and Wachovia Bank N.A.                                                                                                                                                                                                                                                                                                                                   |
| 99-a             |   | Certifications  pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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