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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
FOR THE QUARTER ENDED MARCH 31, 2001
OF
ANTEC CORPORATION
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 36-3892082
SEC FILE NUMBER 000-22336
11450 TECHNOLOGY CIRCLE
DULUTH, GA 30097
(678) 473-2000
ANTEC (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
As of April 30, 2001, 38,167,314 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
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2
ANTEC CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 (as restated)............................. 1
b) Consolidated Statements of Operations for the Three
Months Ended March 31, 2001 and 2000 (as restated for
2000).................................................... 2
c) Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000 (as restated for
2000).................................................... 3
d) Notes to the Consolidated Financial Statements........... 4-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12-21
Item 3. Quantitative and Qualitative Disclosures on Market Risk..... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 23
Signatures.................................................. 24
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3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(RESTATED) (RESTATED)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,064 $ 8,788
Accounts receivable (net of allowance for doubtful
accounts of $7,399 in 2001 and $6,686 in 2000).......... 111,410 138,537
Accounts receivable from AT&T............................. 43,044 21,662
Inventories............................................... 277,264 263,683
Income taxes recoverable.................................. 20,725 17,895
Deferred income taxes..................................... 19,083 18,928
Investments held for resale............................... 1,202 1,561
Other current assets...................................... 24,552 19,098
-------- --------
Total current assets............................... 506,344 490,152
Property, plant and equipment (net of accumulated
depreciation of $58,968 in 2001 and $55,443 in 2000)...... 52,535 53,353
Goodwill (net of accumulated amortization of $52,788 in 2001
and $51,559 in 2000)...................................... 143,690 144,919
Investments................................................. 12,085 12,085
Deferred income taxes....................................... 6,773 6,773
Other assets................................................ 23,469 24,213
-------- --------
$744,896 $731,495
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $166,702 $138,774
Accrued compensation, benefits and related taxes.......... 16,245 17,350
Current portion of long-term debt......................... 79,000 --
Other accrued liabilities................................. 27,878 28,107
-------- --------
Total current liabilities.......................... 289,825 184,231
Long-term debt.............................................. 115,000 204,000
Deferred income taxes....................................... 1,362 1,362
-------- --------
Total Liabilities.................................. 406,187 389,593
Stockholders' equity:
Preferred stock, par value $1.00 per share, 5 million
shares authorized, none issued and outstanding.......... -- --
Common stock, par value $0.01 per share, 150 million
shares authorized; 38.2 million and 38.1 million shares
issued and outstanding in 2001 and 2000, respectively... 384 383
Capital in excess of par value............................ 267,737 266,216
Retained earnings......................................... 73,069 77,569
Unrealized holding loss on marketable securities.......... (1,668) (1,668)
Unearned compensation..................................... (802) (678)
Cumulative translation adjustments........................ (11) 80
-------- --------
Total stockholders' equity......................... 338,709 341,902
-------- --------
$744,896 $731,495
======== ========
See accompanying notes to the consolidated financial statements
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ANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- ----------
(RESTATED)
Net sales................................................... $212,788 $256,571
Cost of sales............................................... 180,697 205,291
-------- --------
Gross profit...................................... 32,091 51,280
Operating expenses:
Selling, general, administrative and development.......... 35,205 30,731
Amortization of goodwill.................................. 1,229 1,229
-------- --------
36,434 31,960
-------- --------
Operating (loss) income..................................... (4,343) 19,320
Interest expense............................................ 2,746 2,598
Other expense, net.......................................... 254 273
Loss on marketable securities............................... 359 --
-------- --------
(Loss) income before income taxes........................... (7,702) 16,449
Income tax (benefit) expense................................ (3,202) 6,722
-------- --------
Net (loss) income................................. $ (4,500) $ 9,727
======== ========
Net (loss) income per common share:
Basic..................................................... $ (0.12) $ 0.26
======== ========
Diluted................................................... $ (0.12) $ 0.24
======== ========
Weighted average common shares:
Basic..................................................... 38,252 37,691
======== ========
Diluted................................................... 38,252 44,513
======== ========
See accompanying notes to the consolidated financial statements.
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ANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- ----------
(RESTATED)
Operating activities:
Net (loss) income......................................... $ (4,500) $ 9,727
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization.......................... 5,138 4,803
Provision for doubtful accounts........................ 1,234 499
Deferred income taxes.................................. (155) (230)
Loss on marketable securities.......................... 359 --
Amortization of unearned compensation.................. 449 219
Changes in operating assets and liabilities:
Decrease in accounts receivable...................... 4,511 5,023
(Increase) in inventories............................ (13,581) (3,165)
Increase (decrease) in accounts payable and accrued
liabilities......................................... 23,993 (13,362)
(Increase) in other, net............................. (5,029) (5,839)
-------- --------
Net cash provided by (used in) operating
activities....................................... 12,419 (2,325)
Investing activities:
Purchases of property, plant and equipment................ (2,797) (4,258)
-------- --------
Net cash (used in) investing activities........... (2,797) (4,258)
Financing activities:
Borrowings under credit facilities........................ 44,500 87,500
Reductions in borrowings under credit facilities.......... (54,500) (79,500)
Deferred financing costs paid............................. (295) (289)
Proceeds from issuance of common stock.................... 949 2,233
-------- --------
Net cash (used in) provided by financing
activities....................................... (9,346) 9,944
-------- --------
Net increase in cash and cash equivalents......... 276 3,361
Cash and cash equivalents at beginning of period............ 8,788 2,971
-------- --------
Cash and cash equivalents at end of period.................. $ 9,064 $ 6,332
======== ========
Supplemental cash flow information:
Interest paid during the period........................... $ 1,231 $ 1,235
======== ========
Income taxes paid during the period....................... $ 37 $ 442
======== ========
See accompanying notes to the consolidated financial statements.
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
ANTEC Corporation (together with its consolidated subsidiaries, except as
the context otherwise indicates, "ANTEC" or the "Company") is an international
communications technology company, headquartered in Duluth, Georgia. ANTEC
specializes in the design and engineering of hybrid fiber-coax ("HFC")
architectures and the development and distribution of products for broadband
networks. The Company provides its customers with products and services that
enable reliable, high-speed, two-way broadband transmission of video, telephony,
and data.
ANTEC operates in one business segment, Communications, providing a range
of customers with network and system products and services, primarily HFC
networks and systems for the communications industry. This segment accounts for
100% of consolidated sales, operating profit and identifiable assets of the
Company. ANTEC provides a broad range of products and services to cable system
operators and telecommunication providers. ANTEC is a leading developer,
manufacturer and supplier of telephony, optical transmission, construction,
rebuild and maintenance equipment for the broadband communications industry.
ANTEC supplies most of the products required in a broadband communication
system, including headend, distribution, drop and in-home subscriber products.
The consolidated financial statements furnished herein reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the consolidated financial
statements for the periods shown. Additionally, certain prior year amounts have
been reclassified to conform to the 2001 financial statement presentation.
Interim results of operations are not necessarily indicative of results to be
expected from a twelve-month period. These interim financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K/A for the Company's year ended December 31, 2000 (as restated).
NOTE 2. LANCITY TRANSACTION AND RESTATEMENT
During the first quarter of 1999, ANTEC and Nortel Networks completed the
combination of the Broadband Technology Division of Nortel Networks, referred to
as LANcity, with Arris Interactive, L.L.C. ("Arris"), a joint venture between
ANTEC and Nortel Networks ("Nortel"). This combination was effected by the
contribution of the LANcity assets and business into Arris. ANTEC's interest in
the joint venture was reduced by 6.25% from 25.0% to 18.75% with potential
dilution to 12.50%, while Nortel's interest was increased from 75.0% to 81.25%
with the potential to increase to 87.5%.
In connection with the transaction, as previously disclosed in the first
quarter of 1999, ANTEC recorded a one-time, pre-tax, non-cash gain of $60.0
million, net of $2.5 million of transaction related expenses, based upon an
independent valuation of LANcity. The transaction was accounted for, in effect,
as if it were a gain on the sale of a 12.50% interest in Arris by ANTEC to
Nortel in exchange for a 12.50% interest in LANcity. ANTEC elected to recognize
gains or losses on the sale of previously unissued stock of a subsidiary or
investee based on the difference between the carrying amount of the equity
interest in the investee immediately before and after the transaction and
deferred income taxes were provided on such gain.
ANTEC's interest in Arris was subject to further dilution based upon its
performance over the eighteen-month period ended June 30, 2000. At the
expiration of the eighteen-month period, no further dilution of ANTEC's share of
the joint venture occurred, and, based upon the initial independent valuation,
ANTEC, as previously discussed, recorded an additional one-time, pre-tax,
non-cash gain of $31.25 million to reflect ANTEC's final ownership percentage in
the joint venture of 18.75%.
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has restated its consolidated financial statements for the
years ended December 31, 2000 and 1999 by eliminating the gain of $31.25 million
and $62.5 million, respectively, recorded on the LANcity transaction in the
second quarter of the year ended December 31, 2000 and the first quarter of the
year ended December 31, 1999. See the Company's restated consolidated financial
statements in its amended Form 10-K/A. The gains previously recorded for the
years ended December 31, 2000 and 1999 were based on the fair value of the
LANcity assets contributed to Arris by Nortel. Upon further review, in
connection with the pending acquisition of Nortel's interest in Arris, the
Company determined that Arris accounted for the contribution of LANcity into
Arris at historical cost in a manner similar to a pooling of interests since
LANcity and Arris were under the common control of Nortel. Accordingly, the
Company revised its accounting for the LANcity transaction to be consistent with
the accounting by Arris. As Arris continued to have a deficit in members' equity
subsequent to the LANcity transaction and the Company's accounting for the
transaction is predicated on the accounting by Arris, the Company has eliminated
its one-time, pre-tax, non-cash gain on the LANcity transaction. The effects of
the restatement on the Company's financial statements as of March 31, 2001 and
December 31, 2000 and for the quarter ended March 31, 2000 are as follows (in
thousands except for per share amounts):
MARCH 31, 2001 DECEMBER 31, 2000 MARCH 31, 2000
------------------- ------------------- -------------------
AS AS AS AS AS AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
Investments.................... $105,835 $12,085 $105,835 $12,085 * *
Non-current deferred income tax
assets....................... 5,292 6,773 5,292 6,773 * *
Total assets................... 837,165 744,896 823,764 731,495 * *
Non-current deferred income tax
liabilities.................. 36,912 1,362 36,912 1,362 * *
Total liabilities.............. 441,737 406,187 425,143 388,593 * *
Retained earnings.............. 129,788 73,069 134,288 77,569 * *
Income tax (benefit) expense... (3,202) (3,202) * * 6,423 6,722
Net (loss) income.............. (4,500) (4,500) * * 10,026 9,727
Net (loss) income per share --
basic........................ $ (0.12) $ (0.12) * * $ 0.27 $ 0.26
Net (loss) income per share --
diluted...................... $ (0.12) $ (0.12) * * $ 0.25 $ 0.24
---------------
* These items are not reported in this Form 10-Q/A filing and, therefore, are
not included in this table.
NOTE 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 2000, the Emerging Issues Task Force reached a consensus on EITF No.
00-10, Accounting for Shipping and Handling Fees and Costs ("EITF 00-10") that
states all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. Historically, ANTEC has not included amounts
billed to customers for shipping and handling as revenues. These amounts were
not previously recorded as revenue and the related costs as cost of sales
because they were netted as pass-through expenses, reimbursed in total by the
Company's customers. For the quarters ended March 31, 2001 and 2000, shipping
and handling costs, in aggregate, were approximately $1.8 million and $6.2
million, respectively, and are appropriately reflected in net sales and cost of
sales.
In June 1998, the Financial Accounting Standards Board issued FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
FASB Statement No. 133 was originally effective for fiscal years beginning June
15, 1999. However, on May 19, 1999, the FASB voted to delay the effective date
for one
5
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year, to fiscal years beginning after June 15, 2000 by issuing FASB Statement
No. 137. The Statement will require the Company to disclose certain information
regarding derivative financial instruments. The Company has adopted FASB
Statement No. 133 as of December 31, 2000 and other than additional disclosure
requirements, the effects were immaterial to the Company's financial statements.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1999, in conjunction with the announced
consolidation of the New Jersey facility to Georgia and the Southwest, coupled
with the discontinuance of certain product offerings, the Company recorded a
pre-tax charge of approximately $16.0 million. Included in the charge was
approximately $2.6 million related to personnel costs and approximately $3.0
million related to lease termination and other facility shutdown charges.
Included in the restructuring was the elimination of certain product lines
resulting in an inventory obsolescence charge totaling approximately $10.4
million, which has been reflected in the cost of sales. The personnel-related
costs included termination expenses for the involuntary dismissal of 87
employees, primarily engaged in engineering, inside sales and warehouse
functions performed at the New Jersey facility. ANTEC offered terminated
employees separation amounts in accordance with ANTEC's severance policy and
provided the employees with specific separation dates. In connection with
customer demand shifting to ANTEC's newer product offerings, such as the new
Total System Power ("TSP") and the Scaleable and Micro Node products, ANTEC
discontinued certain older product lines that were not consistent with ANTEC's
focus on two-way, high-speed Internet, voice and video communications equipment.
This discontinuance affected the UCF and SL powering products and included the
narrowing of ANTEC's RF and optical products.
During the second quarter of 2000, ANTEC further evaluated its powering and
RF products and recorded an additional pre-tax charge of $3.5 million to cost of
goods sold, bringing the total reorganization related charge to $19.5 million.
In addition to the charges totaling $19.5 million, ANTEC anticipated that
approximately $1.6 million of relocation and fixed asset depreciation expenses
would be incurred in connection with the New Jersey facility closure, of which
approximately $1.0 million has been recognized as of March 31, 2001. It is
anticipated that no additional costs will be incurred against this original
estimate of $1.6 million. As of March 31, 2001, of the $19.5 million pre-tax
charge, approximately $0.6 million related to personnel costs, $1.1 million
related to RF product warranties and approximately $0.7 million related to lease
termination and other facility shutdown expenses remain to be paid. The majority
of the personnel costs remaining were expended in May 2001 and the Company
anticipates that the remaining lease termination and facility shutdown charges
will be fully recognized during the second quarter of 2001. ANTEC undertook all
of these actions to structure itself into a more efficient organization and to
further integrate ANTEC's speed-to-market philosophy. ANTEC realigned its
manufacturing operations located in New Jersey in order to accelerate the
production transition from in-house design and tooling functions into the
manufacturing process. With the exception of saving approximately $1.5 million
in lease obligation and selling, general, administrative and development costs,
ANTEC has shifted the remaining costs related to the New Jersey facility to
Georgia and the Southwest.
During the first quarter of 2000, ANTEC expended approximately $0.6 million
in connection with its 1998 plan to consolidate certain facilities and move its
headquarters to Georgia. This amount represented the remaining balance of
accrued costs related to the obligations resulting from this restructuring.
6
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INVENTORIES
Inventories are stated at the lower of average, approximating first-in,
first-out, cost or market. The components of inventory are as follows (in
thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Raw material................................................ $ 65,473 $ 62,458
Work in process............................................. 8,622 9,119
Finished goods.............................................. 203,169 192,106
-------- --------
Total inventories................................. $277,264 $263,683
======== ========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost, consists of the following (in
thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Land........................................................ $ 2,549 $ 2,549
Building and leasehold improvements......................... 16,063 15,394
Machinery and equipment..................................... 92,891 90,853
-------- --------
111,503 108,796
Less: Accumulated depreciation.............................. (58,968) (55,443)
-------- --------
Total property, plant and equipment, net.......... $ 52,535 $ 53,353
======== ========
NOTE 7. LONG TERM DEBT
Long term debt consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Revolving Credit Facility -- long-term portion.............. $ -- $ 89,000
4.5% Convertible Subordinated Notes......................... 115,000 115,000
-------- --------
Total long term debt.............................. $115,000 $204,000
======== ========
In 1998, the Company issued $115.0 million of 4.5% Convertible Subordinated
Notes ("Notes") due May 15, 2003. The Notes are convertible, at the option of
the holder, at any time prior to the close of business on the stated maturity
date, into the Company's common stock ("Common Stock") at a conversion price of
$24.00 per share. The Notes are redeemable, in whole or in part, at the
Company's option, at any time on or after May 15, 2001. If the Notes are
redeemed during the twelve-month period commencing May 15, 2001, ANTEC will pay
a premium of 1.8% of the principal amount or approximately $2.1 million.
In April 1999, the Company amended its secured four-year credit facility
("Credit Facility") to increase the existing line from $85.0 million to $120.0
million. The Credit Facility was also amended to increase the assets eligible
for borrowings to be advanced against. None of the other significant terms,
including pricing, were changed with the amendment. The average annual interest
rate on borrowings was approximately 6.21% at March 31, 2001. The commitment fee
on unused borrowings is approximately 0.2%. The Credit Facility contains various
restrictions and covenants, including limits on payments to stockholders,
interest coverage, and net worth tests. As of March 31, 2001, ANTEC is in
technical default of the fixed charge coverage ratio
7
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenant of its Credit Agreement dated May 21, 1998 as amended and restated as
of April 28, 1999. The Company has obtained a waiver from its banks related to
this noncompliance for the period ended March 31, 2001. In accordance with
Financial Accounting Standards No. 6, Classification of Short-Term Obligations
Expected to be Refinanced, the $79.0 million outstanding balance on the
revolving line of credit has been reclassified from a long-term liability to a
current liability at March 31, 2001. Since the waiver is for the period ended
March 31, 2001 and not for subsequent periods, the reclassification is
consistent with current accounting guidance. As discussed below, upon the
consummation of the Arris transaction a new four-year revolving line of credit
will replace the existing facility and will be classified as long-term.
As of March 31, 2001, the Company had approximately $41.0 million of
available borrowings under the Credit Facility.
Currently, ANTEC has obtained a commitment for a new credit facility that
will replace the Company's current $120.0 million credit facility. The new
credit is needed because of ANTEC's proposed acquisition of Nortel Network's
ownership interest in Arris Interactive L.L.C. and the need to sufficiently fund
the working capital needs of the combined entity at the close of the proposed
transaction. It is anticipated that this transaction will close at the end of
the second quarter of 2001. It this transaction is delayed significantly beyond
the end of the second quarter, the Company believes that a similar waiver, as
previously discussed, would be required for the period ended June 30, 2001 (See
Note 12 of the Notes to the Consolidated Financial Statements.)
NOTE 8. COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income for the three-month periods ended March
31, 2001 and 2000 was $(4.9) million and $10.0 million, respectively.
Comprehensive income decreased approximately $370 thousand during the first
quarter of 2001 and decreased approximately $70 thousand during the first
quarter of 2000.
NOTE 9. SALES INFORMATION
As of March 31, 2001, Liberty Media Corporation, which is part of the
Liberty Media Group of AT&T whose financial performance is "tracked" by a
separate class of AT&T stock, effectively controlled approximately 20% of the
outstanding ANTEC common stock on a fully diluted basis. The effective ownership
includes options to acquire an additional 854,341 shares. A significant portion
of the Company's revenue is derived from sales to AT&T (including MediaOne
Communications, which was acquired by AT&T during 2000) aggregating $90.9
million and $119.7 million for the quarters ended March 31, 2001 and 2000,
respectively.
ANTEC operates globally and offers products and services that are sold to
cable system operators and telecommunications providers. ANTEC's products and
services are focused in four general product categories: optical and broadband
transmission, cable telephony and Internet access, outside plant and powering,
and supplies and services. Consolidated revenues by principal products and
services for the quarters ended March 31, 2001 and 2000, respectively were as
follows (in millions)(unaudited):
OPTICAL AND CABLE
BROADBAND TELEPHONY AND OUTSIDE PLANT SUPPLIES AND
TRANSMISSION INTERNET ACCESS AND POWERING SERVICES TOTAL
------------ --------------- ------------- ------------ ------
Revenues:
March 31, 2001............... $30.7 $103.0 $36.0 $43.1 $212.8
March 31, 2000............... $73.1 $ 81.6 $39.8 $62.1 $256.6
The Company sells its products primarily in the United States with its
international revenue being generated from Asia Pacific, Europe, Latin America
and Canada. The Asia Pacific market includes Australia,
8
11
ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand,
Philippines, Sampan, Singapore, Taiwan, and Thailand. The European market
includes France, Ireland, Italy, Portugal, Spain and the United Kingdom.
International sales for the quarters ended March 31, 2001 and 2000 are as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------
INTERNATIONAL REGION 2001 2000
-------------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Asia Pacific................................................ $ 3,640 $ 4,267
Europe...................................................... 1,828 7,187
Latin America............................................... 4,241 4,354
Canada...................................................... 469 1,382
------- -------
Total international sales......................... $10,178 $17,190
======= =======
NOTE 10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the periods
indicated (in thousands except per share data):
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- ----------
(RESTATED)
Basic:
Net (loss) income......................................... $(4,500) $ 9,727
======= =======
Weighted average shares outstanding....................... 38,252 37,691
======= =======
Basic (loss) earnings per share........................... $ (0.12) $ 0.26
======= =======
Diluted:
Net (loss) income......................................... $(4,500) $ 9,727
Add:
4.5% convertible subordinated notes interest and fees,
net of federal income tax effect...................... -- 887
------- -------
Total............................................. $(4,500) $10,614
======= =======
Weighted average shares outstanding....................... 38,252 37,691
Dilutive securities net of income tax benefit:
Add options/warrants................................... -- 2,030
Add assumed conversion of 4.5% convertible subordinated
notes................................................. -- 4,792
------- -------
Total............................................. 38,252 44,513
======= =======
Diluted (loss) earnings per share......................... $ (0.12) $ 0.24
======= =======
The 4.5% Convertible Subordinated Notes were antidilutive for the
three-month period ended March 31, 2001. The effects of the options and warrants
were not presented for the three months ended March 31, 2001 as the Company
incurred a net loss and inclusion of these securities would be antidilutive.
9
12
ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes ANTEC's quarterly consolidated financial
information (in thousands, except share data).
QUARTERS ENDED MARCH 31,
------------------------
2001 2000
---------- ----------
Net sales(3)................................................ $212,788 $256,571
Gross profit................................................ 32,091 51,280
Operating (loss) income(1).................................. (4,343) 19,320
(Loss) income before income taxes(1)(2)..................... (7,702) 16,449
Net (loss) income(4)........................................ $ (4,500) $ 9,727
======== ========
Net (loss) income per common share:
Basic(4).................................................. $ (0.12) $ 0.26
======== ========
Diluted(4)................................................ $ (0.12) $ 0.24
======== ========
Supplemental financial information (excluding mark-to-market
adjustment on investments in 2001 and excluding the
pension curtailment gain in 2000):
Gross profit.............................................. $ 32,091 $ 51,280
======== ========
Operating (loss) income(1)................................ $ (4,343) $ 17,212
======== ========
(Loss) income before income taxes(1)(2)................... $ (7,343) $ 14,341
======== ========
Net (loss) income(4)...................................... $ (4,295) $ 8,392
======== ========
Net (loss) income per common share:
Diluted(4)............................................. $ (0.11) $ 0.21
======== ========
Weighted average diluted share......................... 38,252 44,513
======== ========
---------------
(1) As of January 1, 2000, the Company froze the defined pension plan benefits
for 569 participants. These participants elected to participate in ANTEC's
enhanced 401(k) plan. Due to the cessation of plan accruals for such a large
group of participants, a curtailment was considered to have occurred. As a
result of the curtailment, as outlined under FASB Statement No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, the Company recorded a $2.1
million pre-tax gain on the curtailment during the first quarter 2000.
(2) During the first quarter of 2001, ANTEC calculated the fair market value of
its investments held for resale and recorded a pre-tax mark-to-market write
down on its Lucent and Avaya investments of approximately $0.4 million.
(3) Net sales and cost of sales for the quarter ended March 31, 2000 differ from
the amounts reported as net sales and cost of sales in the respective Form
10-Q due to the adoption of EITF No. 00-10, Accounting for Shipping and
Handling Fees and Costs, in the fourth quarter of 2000.
(4) During the year ANTEC provides for income taxes using anticipated effective
annual tax rates. The rates are based on expected operating results and
permanent differences between book and tax income. Due to the restatement of
the consolidated financial statements to eliminate the LANcity gain, the
Company also restated income tax expense (benefit) for each of the quarters
in the years ended December 31, 2000, to reflect the Company's effective
annual tax rate after restatement. Therefore, the income tax expense amount
for the first quarter in the year ended December 31, 2000, was adjusted to
maintain the Company's effective annual tax rate of 40.9% (for the year
ended December 31, 2000) on a quarterly basis.
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ANTEC CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. SUBSEQUENT EVENT
On October 18, 2000, ANTEC Corporation and Nortel Networks agreed to a
transaction in which, among other things, ANTEC would acquire Nortel Network's
ownership interest in Arris Interactive L.L.C., the joint venture between the
two companies. In general, Nortel Networks initially agreed to transfer its
81.25% stake in Arris Interactive L.L.C. in exchange for approximately 33
million new shares of Common Stock of a newly formed holding company and $325
million in cash, directly, and, through the repayment of a loan, indirectly.
As a result of changes in the industry and financial market conditions,
ANTEC and Nortel Networks amended the agreement on April 9, 2001 in order, among
other things, to:
- increase the number of shares to be received by Nortel Networks to 37
million,
- eliminate the $325 million in cash,
- eliminate approximately $124 million of existing indebtedness due
primarily to Nortel, and
- convert the remaining indebtedness of Arris Interactive to Nortel
Networks and outstanding accounts payable due to Nortel Networks,
estimated to be approximately $90 million, into a new redeemable
membership interest in Arris Interactive.
ANTEC has a conditional commitment for a new $175 million revolving credit
facility related to the amended transaction. The consummation of the
transaction, which is subject to the approval of ANTEC's stockholders, other
customary closing conditions and certain regulatory approvals, is expected to
occur in July of 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Net Sales. ANTEC's sales for the first quarter 2001 decreased by 17.1% to
$212.8 million as compared to the first quarter 2000 sales of $256.6 million.
The abrupt slowdown in spending on telecommunications industry infrastructure
that began in the fourth quarter of 2000 continued, as anticipated, into the
first quarter of 2001. While purchases of cable telephony equipment did resume
during the quarter, spending on other infrastructure products did not return to
past levels. Cable telephony & Internet access sales during the quarter of
$103.0 million, or approximately 48% of sales, were especially strong due to the
deferral of sales originally scheduled for the fourth quarter of 2000. ANTEC's
Cornerstone voice and data product sales grew from approximately $81.6 million,
or 32% of sales in the first quarter 2000 to approximately $103.0 million in the
first quarter of 2001. Reduced volumes in other product categories, however,
reflect the financial and market conditions that impacted the telecommunications
industry infrastructure spending in general.
- Optical and broadband transmission product revenues decreased by
approximately 58.0% to $30.7 million in the first quarter 2001 as
compared to $73.1 million in the same quarter last year. Optical and
broadband product revenue accounted for approximately 15% of sales in the
first quarter 2001 as compared to 28% for the same quarter last year.
These negative results reflect the general market's lower demand for
optical & broadband transmission products. Although all product lines
within this category experienced a decline in sales from the same quarter
last year, the areas with the most significant decreases included
optronics & nodes, RF, and taps, which decreased quarter over quarter by
approximately 68%, 73%, and 56%, respectively.
- Outside plant and powering product revenues decreased by approximately
9.4% to $36.0 million in the first quarter 2001 as compared to $39.8
million in the same quarter of last year. This decline stems primarily
from decreased sales of network interface devices ("NIDs"), which
experienced decreased revenues of approximately 30% when comparing first
quarter results for 2001 and 2000. Outside plant and powering product
revenue accounted for approximately 17% of sales in the first quarter
2001 as compared to 16% for the same quarter last year.
- Supplies and services revenue decreased by approximately 30.7% to $43.1
million in the first quarter 2001 as compared to $62.1 million the same
quarter last year. Supplies and services revenue accounted for
approximately 20% of sales in the first quarter 2001 as compared to 24%
for the same quarter last year. Sales of fiber optic cable products and
engineering services grew approximately 20%. However this increase was
entirely offset by decreased sales in other product lines within this
category, including outside plant, fiber apparatus, and installation
materials and tool.
Sales to ANTEC's largest customer, AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000), were approximately $90.9 million during
the first quarter 2001, or approximately 42.7% of the total quarterly volume.
This compares to first quarter 2000 when sales to AT&T were $112.3 million or
43.8% of the volume for the quarter. Giving effect to AT&T's acquisition of
MediaOne Communications, sales to the combined entity were $119.7 million for
the first quarter 2000 or 46.7% of the quarterly volume. This marks a $28.8
million decrease in revenue from the combined AT&T entity primarily resulting
from its fourth quarter 2000 decision to defer equipment shipments until later
in 2001. Significant improvement is not expected until at least the second half
of the year. However, ANTEC anticipates overall sales to AT&T in 2001 will be
reduced from the sales level achieved in 2000.
International sales for the three months ended March 31, 2001 decreased
40.8% to $10.2 million as compared to the first quarter of last year.
International revenue for the first quarter 2001 represented approximately 10.0%
of ANTEC's total revenue for the quarter, exclusive of the Cornerstone products,
which ANTEC does not sell internationally. This compares to international
revenue of 9.9% of ANTEC's total revenue for the first quarter 2000, also net of
the Cornerstone product sales.
Gross Profit. The abrupt decline of business, which began in the fourth
quarter 2000, adversely effected ANTEC's overall gross margin results for the
first quarter of 2001. Gross profit for the first quarter 2001 was $32.1 million
as compared to $51.3 million in the first quarter 2000. Gross profit margins for
2001 slipped
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4.9 percentage points to 15.1% versus 20.0% for the first quarter 2000. Cable
telephony & Internet access product revenue, which carry gross margins in the
15% range, accounted for approximately 48% of the total sales volume during the
first quarter 2001 as compared to 32% of total revenue during the first quarter
last year. As cable telephony and Internet access products become a larger part
of the Company's overall revenue stream, consolidated gross margin percentages
will trend toward the lower percentage range. Within ANTEC's product families,
gross profit results for 2001 as compared to 2000 were as follows:
- The cable telephony and Internet access gross margin percentage increased
approximately 0.6 percentage points to 15.7% for the first quarter 2001
as compared to 15.1% for the same quarter last year. The increase in
margin dollars of approximately $3.9 million during the first quarter
2001 as compared to the first quarter 2000, is reflective of the
quarter-over-quarter revenue growth within this product category.
- The optical and broadband transmission gross margin percentage decreased
approximately 19.8 percentage points to 7.5% for the first quarter 2001
as compared to 27.3% for the same quarter last year. Lower revenues for
network infrastructure products during the first quarter 2001 resulted in
significant unabsorbed overhead in cost of goods sold. Also negatively
impacting gross margins during the first quarter of 2001 were severance
costs of approximately $0.5 million related to layoffs at the factory
level in response to the market's lower demand, primarily for optical and
broadband transmission products.
- The outside plant and powering gross margin percentage decreased 6.2
percentage points to 12.8% for the quarter ended March 31, 2001 as
compared to 19.0% for the same quarter last year. Overall margin
performance within this category has been adversely affected by factory
absorption issues, industry pricing pressures and an increase in volume
of lower margin products, such as power supplies.
- The supplies and services gross margin percentage increased approximately
2.4 percentage points to 20.8% for the first quarter 2001 as compared to
18.4% for the same quarter last year.
Selling, General, Administrative, and Development ("SGA&D")
Expenses. SGA&D expenses for the first three months of 2001 were $35.2 million
compared to $30.7 million for the first three months of 2000. Expenses in the
first quarter 2001 included approximately $0.2 million of severance costs
related to workforce reductions reflected in operating expenses. It also should
be noted that the results for the first quarter 2000 included a one-time pre-tax
gain of $2.1 million realized as a result of employee elections associated with
a new and enhanced benefit plan and the resultant effect on the Company's
defined benefit pension plan. Excluding the effects of the severance costs and
the pension curtailment gain, the expenses for the first quarter 2001 and 2000
would have been $35.0 million and $32.8 million, respectively.
Reorganization. In the fourth quarter of 1999, in conjunction with the
announced consolidation of the New Jersey facility to Georgia and the Southwest,
coupled with the discontinuance of certain product offerings, the Company
recorded a pre-tax charge of approximately $16.0 million. Included in the charge
was approximately $2.6 million related to personnel costs and approximately $3.0
million related to lease termination and other facility shutdown charges.
Included in the restructuring was the elimination of certain product lines
resulting in an inventory obsolescence charge totaling approximately $10.4
million, which has been reflected in the cost of sales. The personnel-related
costs included termination expenses for the involuntary dismissal of 87
employees, primarily engaged in engineering, inside sales and warehouse
functions performed at the New Jersey facility. ANTEC offered terminated
employees separation amounts in accordance with ANTEC's severance policy and
provided the employees with specific separation dates. In connection with
customer demand shifting to ANTEC's newer product offerings, such as the new
Total System Power ("TSP") and the Scaleable and Micro Node products, ANTEC
discontinued certain older product lines that were not consistent with ANTEC's
focus on two-way, high-speed Internet, voice and video communications equipment.
This discontinuance affected the UCF and SL powering products and included the
narrowing of ANTEC's RF and optical products.
During the second quarter of 2000, ANTEC further evaluated its powering and
RF products and recorded an additional pre-tax charge of $3.5 million to cost of
goods sold, bringing the total reorganization related charge to $19.5 million.
In addition to the charges totaling $19.5 million, ANTEC anticipated that
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approximately $1.6 million of relocation and fixed asset depreciation expenses
would be incurred in connection with the New Jersey facility closure, of which
approximately $1.0 million has been recognized as of March 31, 2001. It is
anticipated that no additional costs will be incurred against this original
estimate of $1.6 million. As of March 31, 2001, of the $19.5 million pre-tax
charge, approximately $0.6 million related to personnel costs, $1.1 million
related to RF product warranties and $0.7 million related to lease termination
and other facility shutdown expenses remain to be paid. The majority of the
personnel costs remaining were expended in May 2001 and the Company anticipates
that the remaining lease termination and facility shutdown charges will be fully
recognized during the second quarter of 2001. ANTEC undertook all of these
actions to structure itself into a more efficient organization and to further
integrate ANTEC's speed-to-market philosophy. ANTEC realigned its manufacturing
operations located in New Jersey in order to accelerate the production
transition from in-house design and tooling functions into the manufacturing
process. With the exception of saving approximately $1.5 million in lease
obligation and selling, general, administrative and development costs, ANTEC has
shifted the remaining costs related to the New Jersey facility to Georgia and
the Southwest.
Loss on Marketable Securities. In 2000, the Company made a $1.0 million
strategic investment in Chromatis Networks, Inc., receiving shares of the
company's preferred stock. On June 28, 2000, Lucent Technologies announced it
had completed an acquisition of Chromatis, making it part of Lucent's Optical
Networking Group. As a result of this acquisition, the Company's shares of
Chromatis stock were converted into shares of Lucent stock. Additionally, as a
result of Lucent's spin off of Avaya, Inc., during the third quarter of 2000,
the Company was issued shares of Avaya stock.
Because these shares of Lucent and Avaya stock are considered trading
securities held for resale, they are required to be carried at their fair market
value with any gains or losses being included in earnings. In calculating the
fair market value of these investments as of March 31, 2001, the Company
recognized a $0.4 million pre-tax write down of the investments.
Interest Expense. Interest expense for the quarters ended March 31, 2001
and 2000 was $2.7 million and $2.6 million, respectively. Interest expense for
both quarters reflects the cost of borrowings on the Company's revolving line of
credit coupled with the full impact of the issuance of $115.0 million of 4.5%
Convertible Subordinated Notes completed during 1998. As of March 31, 2001, the
Company had a balance of $79.0 million outstanding under its Credit Facility in
floating debt. As of March 31, 2001, the average interest rate on its
outstanding line of credit borrowings was 6.21% with an overall blended rate of
approximately 5.20% when considering the subordinated debt. This compares to
$76.5 million outstanding in the first quarter 2000, of which $50.0 million was
hedged in swaps at a fixed rate and $26.5 million in floating debt. As of March
31, 2000, the average interest rate on the Company's outstanding line of credit
borrowings was 7.30%, with an overall blended rate of approximately 5.62%
including the subordinated debt.
Income Tax (Benefit) Expense. The income tax calculation for the quarter
ended March 31, 2001 generated a benefit of approximately $(3.2) million as
compared to an expense of approximately $6.7 million for the same period during
2000. The Company reported a pre-tax loss during the first quarter 2001 and
subsequently recognized the related tax benefit, whereas income tax expense on
pre-tax income was recorded during the first quarter 2000.
Net (Loss) Income. A net loss of $(4.5) million was recorded for the first
three months of 2001, as compared to net income of $9.7 million for the first
three months of 2000. First quarter results for 2000 included a pre-tax
curtailment gain on the Company's defined benefit pension plan of approximately
$2.1 million, whereas, included in the net loss for 2001, was a $0.4 million
pre-tax write down on the Company's investment in Lucent and Avaya. Exclusive of
the above transactions, the net loss for 2001 marked a decrease of 149% to
$(4.3) million or $(0.11) per share as compared to income of $8.4 million or
$0.21 per diluted share in the first quarter 2000.
Acquisition of Arris. On October 18, 2000, ANTEC Corporation and Nortel
Networks agreed to a transaction in which, among other things, ANTEC would
acquire Nortel Network's ownership interest in Arris Interactive L.L.C., the
joint venture between the two companies. In general, Nortel Networks initially
agreed to transfer its 81.25% stake in Arris Interactive L.L.C. in exchange for
approximately 33 million new
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shares of Common Stock of a newly formed holding company and $325 million in
cash, directly, and, through the repayment of a loan, indirectly.
As a result of changes in the industry and financial market conditions,
ANTEC and Nortel Networks amended the agreement on April 9, 2001 in order, among
other things, to:
- increase the number of shares to be received by Nortel Networks to 37
million,
- eliminate the $325 million in cash,
- eliminate approximately $124 million of existing indebtedness due
primarily to Nortel, and
- convert the remaining indebtedness of Arris Interactive to Nortel
Networks and outstanding accounts payable due to Nortel Networks,
estimated to be approximately $90 million, into a new redeemable
membership interest in Arris Interactive.
ANTEC has a conditional commitment for a new $175 million revolving credit
facility related to the amended transaction. The consummation of the
transaction, which is subject to the approval of ANTEC's stockholders, other
customary closing conditions and certain regulatory approvals, is expected to
occur in July of 2001.
Assuming that the transaction is completed, ANTEC and Arris will become
subsidiaries of a newly formed holding company tentatively named Arris Group,
Inc. The combined company will be substantially larger than ANTEC, and the
combined company's results of operations will differ significantly from ANTEC's
historical results. In general, in addition to its existing business, the
combined company will manufacture and distribute Arris' products, primarily the
Cornerstone line, on an international basis to all potential customers. By
contrast, ANTEC currently functions solely as a distributor of Arris products to
cable systems in the United States.
INDUSTRY CONDITIONS
ANTEC's performance is largely dependent on capital spending for
constructing, rebuilding, maintaining or upgrading broadband communications
systems. After a period of intense consolidation and rapid stock-price
acceleration within the industry during 1999, the fourth quarter of 2000 brought
a sudden tightening of credit availability throughout the telecom industry and a
broad-based and severe drop in market capitalization for the sector during the
period. This has caused broadband system operators to become more judicious in
their capital spending, adversely affecting ANTEC and other equipment providers,
generally.
In response to this downturn, ANTEC has reacted to cut costs and reduce
expense levels, including workforce reductions during the first quarter of 2001
and the more significant reductions announced and implemented in early April
2001. The action taken in April will result in a pre-tax charge of approximately
$5.0 million in the second quarter of 2001 for estimated severance and related
separation costs in connection with the workforce reduction program that reduced
overall employment levels by approximately 400 employees. ANTEC currently is
evaluating underperforming businesses and assets to assess their long-term
strategic role within the Company. Decisions based upon completion of these
evaluations could be made as early as the second quarter of 2001.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Financing
As of March 31, 2001, ANTEC had approximately $79.0 million outstanding
under its Credit Facility and $41.0 million of available borrowings. The
commitment fee on unused borrowings is approximately 0.2%. The average annual
interest rate on these outstanding borrowings was approximately 6.21% at March
31, 2001 as compared to 7.30% at March 31, 2000.
As of March 31, 2001, ANTEC is in technical default of the fixed charge
coverage ratio covenant of its Credit Agreement dated May 21, 1998 as amended
and restated as of April 28, 1999. The Company has obtained a waiver from its
banks related to this noncompliance for the period ended March 31, 2001. The
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Company has obtained a commitment for a new credit facility related to the
pending acquisition of Arris Interactive. It is anticipated that this
transaction will at the end of the second quarter 2001. If this transaction is
delayed significantly beyond the end of the second quarter, the Company believes
that a similar waiver would be required for the period ended June 30, 2001.
In accordance with Financial Accounting Standards No. 6, Classification of
Short-Term Obligations Expected to be Refinanced, the $79.0 million outstanding
balance on the revolving line of credit has been reclassified from a long-term
liability to a current liability at March 31, 2001. Since the waiver is for the
period ended March 31, 2001 and not for subsequent periods, the reclassification
is consistent with current accounting guidance. Upon the consummation of the
Arris transaction a new four-year revolving line of credit will replace the
existing facility and will be classified as long-term.
Financial Instruments
In the ordinary course of business, ANTEC, from time to time, will enter
into financing arrangements with customers. These financial instruments include
letters of credit, commitments to extend credit and guarantees of debt. These
agreements could include the granting of extended payment terms that result in a
longer collection period for accounts receivable and slower cash inflows from
operations and/or could result in the deferral of revenue.
Investments
In the ordinary course of business, ANTEC may make strategic investments in
the equity securities of various companies, both public and private. As of March
31, 2001, approximately 31% of the Company's investments were in marketable
securities, resulting in a pre-tax loss of approximately $0.4 million. Although
the Company's future earnings and investment yields, as well as its liquidity
and capital resources will be impacted by fluctuations in the market values of
these investments, historically, the net effect of the market fluctuations have
not been significant.
The remaining 69% of the Company's investments at March 31, 2001 consist of
securities that are not traded actively in a liquid market. Due to the nature of
these investments, the Company is subject to the earnings and liquidity risks of
the investees.
Capital Expenditures
The Company's capital expenditures were $2.8 million and $4.3 million in
the three months ended March 31, 2001 and 2000, respectively. The Company had no
significant commitments for capital expenditures at March 31, 2001.
CASH FLOW
Cash levels increased by approximately $0.3 million during the first
quarter of 2001 as compared to an increase of approximately $3.4 million during
the same period of the prior year. As discussed in more detail below, operating
activities in 2001 provided approximately $12.4 million in positive cash flow
while investing activities used approximately $2.8 million and financing
activities used approximately $9.3 million in cash flow.
Operating activities provided cash of $12.4 million during the first
quarter of 2001. A net loss used $4.5 million in cash flow during this period.
Other non-cash items such as depreciation, amortization, deferred income taxes,
provisions for doubtful accounts and losses on marketable securities accounted
for positive cash flow of approximately $7.0 million during the first quarter
2001, and a decrease in accounts receivable provided $4.5 million of positive
cash flow. An increase in inventory utilized cash of approximately $13.6
million, while an increase in other, net, utilized approximately $5.0 million in
cash. These net cash outlays were offset by an increase in accounts payable and
accrued liabilities, which provided approximately $24.0 million through March
31, 2001.
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Days sales outstanding ("DSO") was approximately 68 days at March 31, 2001
as compared to 69 days outstanding at the close of the first quarter 2000. The
first quarter of 2001 experienced a drop in receivable levels, primarily due to
the low revenue levels recorded during the quarter, which dropped the 2001 DSO
slightly below the range of 2000. First quarter 2001 sales were adversely
affected by the decline in customers' capital spending during that period.
Current inventory levels increased by $13.6 million during the quarter
ended March 31, 2001. This rise in inventory is comprised of approximately $3.0
million in raw material and approximately $11.1 million in finished goods,
offset by a $0.5 million decrease in work in process. This inventory increase is
reflective of the abrupt slow down in ANTEC's business late in 2000. During the
fourth quarter AT&T announced that it would delay equipment shipments until
later in 2001. Changes in both the financial markets in general and in the
telecom equipment market specifically, created a slow down in capital spending
by ANTEC's customers late in 2000. With these events unfolding at the close of
2000, ANTEC was unable to effect any significant change in its inventory levels.
ANTEC was unable to alter contractual purchasing obligations for some products,
which also contributed to this inventory growth. Significant improvement is not
expected until at least the second half of the year. As a result of the
increased inventory levels and the decreased sales volume, inventory turns
during the first quarter 2001 were recorded at 2.7 times as compared to 3.8
times recorded in the first quarter 2000.
An increase in accounts payable and accrued liabilities provided $24.0
million in cash during the first quarter 2001. This increase in the level of
payables and accrued expenses is related to the timing of the processing of
vendor invoices and the payment of same.
During the first quarter of 2000, net cash used in operating activities was
$2.3 million. This use of cash was primarily resultant of net income of $9.7
million and a decrease in accounts receivable of $5.0 million being offset by
increases of $3.2 million in inventory levels to support of the Company's 2000
growth, non-cash activities which utilized $5.3 million, and an increase in
other, net, which used $5.8 million. These operating cash outlays in 2000 were
offset by a decrease in accounts payable and accrued liabilities, which used
approximately $13.4 million in cash during the period.
ANTEC invested approximately $2.8 million in capital expenditures for the
first quarter 2001 as compared to $4.3 million spent during the same period in
2000.
Cash flows used in financing activities were $9.3 million for the quarter
ended March 31, 2001 as compared to a positive cash flow of $9.9 million in the
first quarter 2000. Both periods reflect their respective trends in operating
and investing activities. The results for both 2001 and 2000 were affected by
the exercise of stock options that provided positive cash flows of approximately
$0.9 million and $2.2 million, respectively. During the first quarter of 2001,
ANTEC paid down approximately $10.0 million on its credit facility while net
borrowings provided approximately $8.0 million during the first quarter 2000.
Based upon current levels of operations, ANTEC expects that sufficient cash
flow will be generated from operations so that, combined with other financing
alternatives available, including bank credit facilities, the Company will be
able to meet all of its current debt service, capital expenditure and working
capital requirements. Currently, ANTEC has obtained a commitment for a new
credit facility that will replace the Company's current $120 million credit
facility. The need for the new credit facility was facilitated by ANTEC's
proposed acquisition of Nortel Network's ownership interest in Arris Interactive
L.L.C. and the ability to sufficiently fund the working capital needs of the
combined entity at the close of the proposed transaction.
FORWARD-LOOKING STATEMENTS
Certain information and statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this report, including statements using terms such as "may,"
"expect," "anticipate," "intend," "estimate," "believe," "plan," "continue,"
"could be," or similar variations or the negative thereof constitute
forward-looking statements with respect to the financial condition, results of
operations, and business of ANTEC, including statements that are based on
current expectations,
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estimates, forecasts, and projections about the markets in which the Company
operates and management's beliefs and assumptions regarding these markets. These
and any other statements in this document that are not statements about
historical facts are "forward-looking statements." In order to comply with the
terms of the safe harbor, the Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that a variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. Important factors that
could cause results or events to differ from current expectations are described
in the risk factors below. These factors are not intended to be an
all-encompassing list of risks and uncertainties that may affect the operations,
performance, development and results of the Company's business. In providing
forward-looking statements, ANTEC is not undertaking any obligation to update
publicly or otherwise these statements, whether as a result of new information,
future events or otherwise.
RISK FACTORS
ANTEC'S BUSINESS HAS MAINLY COME FROM TWO KEY CUSTOMERS. THE LOSS OF ONE OR
BOTH OF THESE CUSTOMERS OR A SIGNIFICANT REDUCTION IN SERVICES TO ONE OR BOTH OF
THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON ANTEC'S BUSINESS.
ANTEC's two largest customers are AT&T and Cox Communications. For the
quarter ended March 31, 2001, sales to AT&T (including sales to MediaOne
Communications, which was acquired by AT&T during 2000) accounted for
approximately 42.7% of ANTEC's total sales, while Cox Communications accounted
for approximately 13.2%. Other than Adelphia Communications Corp., which
accounted for 7.9% of ANTEC's total revenues for the first quarter 2001, no
other customer provided more than 5.0% of ANTEC's total sales for this period.
ANTEC is the exclusive provider of all of Cox Communication's cable telephony
products currently being deployed in nine metro areas. Additionally, ANTEC is
the sole provider of cable telephony products for AT&T within nine additional
metro markets. Although ANTEC's relationships with AT&T and Cox Communications
are expected to continue, the loss of one or both of these customers, or a
significant reduction in services provided to one or both of them, would have a
material adverse impact on ANTEC.
On November 24, 2000, AT&T Broadband, a unit of AT&T Corp., announced that
it would not accept or pay for product shipments that it had previously ordered
until mid-January 2001. On the trading day following the AT&T Broadband
announcement, ANTEC's stock price fell $2.36 per share, or 21%, from its
previous closing price per share as indicated by the Nasdaq National Stock
Market System. The delayed shipments had a material adverse effect on ANTEC's
revenue and earnings in the fourth quarter of 2000 and the first quarter of
2001. ANTEC anticipates overall sales to AT&T in 2001 will be reduced from the
sales level achieved in 2000.
In addition, on October 25, 2000, AT&T announced that it will voluntarily
break itself up into four separate publicly traded companies that will bundle
each other's services through inter-company agreements. The immediate
consequences, if any, to ANTEC, regarding product orders from AT&T, as a result
of this split-up are not yet determinable. It is possible that the AT&T break-up
will have a future material adverse effect on ANTEC's business. Circumstances
significantly altering the relationship between ANTEC and AT&T or Cox
Communications may arise in the future.
ANTEC'S BUSINESS IS DEPENDENT ON CUSTOMERS' CAPITAL SPENDING ON BROADBAND
COMMUNICATIONS SYSTEMS, AND REDUCTIONS BY CUSTOMERS IN CAPITAL SPENDING COULD
ADVERSELY AFFECT ANTEC'S BUSINESS.
ANTEC's performance has been largely dependent on customers' capital
spending for constructing, rebuilding, maintaining or upgrading broadband
communications systems. Capital spending in the telecommunications industry is
cyclical. A variety of factors will affect the amount of capital spending, and
therefore, ANTEC's sales and profits, including:
- general economic conditions,
- availability and cost of capital,
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- other demands on and opportunities for capital,
- regulations,
- demands for network services,
- competition and technology, and
- real or perceived trends or uncertainties in these factors.
THE MARKETS IN WHICH ANTEC OPERATES ARE INTENSELY COMPETITIVE, AND
COMPETITIVE PRESSURES MAY ADVERSELY AFFECT ANTEC'S RESULTS OF OPERATIONS.
The markets for broadband communication systems are extremely competitive
and dynamic, requiring the companies that compete in these markets to react
quickly and capitalize on change. This will require ANTEC to retain skilled and
experienced personnel as well as deploy substantial resources toward meeting the
ever-changing demands of the industry. ANTEC competes with national and
international manufacturers, distributors and wholesales, including many
companies larger than ANTEC. ANTEC's major competitors include:
- ADC Telecommunications, Inc.,
- C-COR.net Corporation,
- General Instrument Corporation, now a part of Motorola, Inc.,
- Harmonic Inc.,
- Philips, and
- Scientific-Atlanta, Inc.
The rapid technological changes occurring in the broadband markets may lead
to the entry of new competitors, including those with substantially greater
resources than ANTEC. Since the markets in which the Company competes are
characterized by rapid growth and, in some cases, low barriers to entry, smaller
niche market companies and start-up ventures also may become principal
competitors in the future. Actions by existing competitors and the entry of new
competitors may have an adverse effect on ANTEC's sales and profitability. The
broadband communications industry is further characterized by rapid
technological change. In the future, technological advances could lead to the
obsolescence of some of ANTEC's current products, which could have a material
adverse effect on ANTEC's business.
Further, many of ANTEC's larger competitors are in a better position to
withstand any significant reduction in capital spending by customers in these
markets. They often have broader product lines and market focus and therefore
will not be as susceptible to downturns in a particular market. In addition,
several of ANTEC's competitors have been in operation longer than ANTEC and
therefore have more long-standing and established relationships with domestic
and foreign broadband service users. ANTEC may not be able to compete
successfully in the future, and competition may harm ANTEC's business.
PRODUCTS CURRENTLY UNDER DEVELOPMENT MAY FAIL TO REALIZE ANTICIPATED
BENEFITS.
Rapidly changing technologies, evolving industry standards, frequent new
product introductions and relatively short product life cycles characterize the
markets for ANTEC's products. The technology applications currently under
development by ANTEC may not be successfully developed. Even if the
developmental products are successfully developed, they may not be widely used
or ANTEC may not be able to successfully exploit these technology applications.
To compete successfully, ANTEC must quickly design, develop, manufacture and
sell new or enhanced products that provide increasingly higher levels of
perform-
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ance and reliability. However, ANTEC may not be able to successfully develop or
introduce these products if its products:
- are not cost effective;
- are not brought to market in a timely manner; or
- fail to achieve market acceptance.
Furthermore, ANTEC's competitors may develop similar or alternative new
technology solutions and applications that, if successful, could have a material
adverse effect on ANTEC. ANTEC's strategic alliances are based on business
relationships that have not been the subject of written agreements expressly
providing for the alliance to continue for a significant period of time. The
loss of a strategic partner could have a material adverse effect on the progress
of new products under development with that partner.
CONSOLIDATIONS IN THE TELECOMMUNICATIONS INDUSTRY COULD RESULT IN DELAYS OR
REDUCTIONS IN PURCHASES OF PRODUCTS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON ANTEC'S BUSINESS.
The telecommunications industry has experienced the consolidation of many
industry participants and this trend is expected to continue. ANTEC and one or
more of its competitors may each supply products to businesses that have merged
or will merge in the future. Consolidations could result in delays in purchasing
decisions by merged businesses, with ANTEC playing a greater or lesser role in
supplying the communications products to the merged entity. These purchasing
decisions of the merged companies could have a material adverse effect on
ANTEC's business.
Mergers among the supplier base also have increased, and this trend may
continue. The larger combined companies with pooled capital resources may be
able to provide solution alternatives with which ANTEC would be put at a
disadvantage to compete. The larger breadth of product offerings by these
consolidated suppliers could result in customers electing to trim their supplier
base for the advantages of one-stop shopping solutions for all of its product
needs. These consolidated supplier companies could have a material adverse
effect on ANTEC's business.
ANTEC'S SUCCESS DEPENDS IN LARGE PART ON ITS ABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL IN ALL FACETS OF ITS OPERATIONS.
Competition for qualified personnel is intense, and ANTEC may not be
successful in attracting and retaining key executives, marketing, engineering
and sales personnel, which could impact its ability to maintain and grow its
operations. ANTEC's future success will depend, to a significant extent, on the
ability of its management to operate effectively. In the past, competitors and
others have attempted to recruit ANTEC employees and in the future, these
attempts may continue. The loss of services of any key personnel, the inability
to attract and retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and other technical professionals,
could negatively affect ANTEC's business.
ANTEC'S INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY ANY DECLINE
IN THE DEMAND FOR BROADBAND SYSTEMS DESIGNS AND EQUIPMENT IN INTERNATIONAL
MARKETS.
Historically, sales of broadband communications equipment into
international markets have been an important part of ANTEC's business, a trend
that ANTEC expects to continue. In addition, United States broadband system
designs and equipment are increasingly being deployed in international markets,
where market penetration is relatively lower than in the United States. While
international operations are expected to comprise an integral part of ANTEC's
future business, there can be no assurances that international markets will
continue to develop or that ANTEC will receive additional contracts to supply
equipment in these markets. ANTEC's international operations may be adversely
affected by changes in the foreign laws or trade in the countries in which it
has manufacturing or assembly plants. A significant portion of ANTEC's products
are manufactured or assembled in Mexico and other countries outside the United
States.
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ANTEC's foreign operations are subject to risks inherent in conducting
operations abroad, including risks with respect to:
- currency exchange rates between the United States and Mexico and other
countries in which ANTEC has operations;
- economic and political destabilization;
- restrictive actions and taxation by foreign governments in countries
where ANTEC has operations;
- difficulty in converting earnings to U.S. dollars or moving funds out of
the country in which they were earned;
- longer accounts receivable payment cycles and difficulties in collecting
these accounts receivable in countries where ANTEC has operations;
- nationalization of ANTEC's businesses;
- the laws and policies of the United States affecting trade;
- foreign investment and loans; and
- foreign tax laws.
ANTEC'S PROFITABILITY HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH
COULD ADVERSELY AFFECT THE PRICE OF ANTEC'S STOCK.
For the first quarter of 2001, ANTEC failed to meet the level of
profitability expected by the investment community. Further, ANTEC has
experienced years with significant operating losses. Although ANTEC has been
profitable during recent years, ANTEC's business may not be profitable or meet
the level of expectations of the investment community in the future, which could
have a material adverse impact on ANTEC's stock price.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of ANTEC's risk-management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
ANTEC is exposed to various market risks, including interest rates and
foreign currency rates. Changes in these rates may adversely affect its results
of operations and financial condition. To manage the volatility relating to
these typical business exposures, ANTEC may enter into various derivative
transactions, when appropriate. ANTEC does not hold or issue derivative
instruments for trading or other speculative purposes. Taking into account the
effects of interest rate changes on the Company's revolving debt facility, a
hypothetical 100 basis point adverse change in interest rates would increase
interest expense by approximately $0.9 million annually. As of March 31, 2001,
the Company had no material contracts denominated in foreign currencies.
In the past, ANTEC has used interest rate swap agreements, with large
creditworthy financial institutions, to manage its exposure to interest rate
changes. These swaps would involve the exchange of fixed and variable interest
rate payments without exchanging the notional principal amount. At March 31,
2001 ANTEC did not have any outstanding interest rate swap agreements.
The Company is exposed to foreign currency exchange rate risk as a result
of sales of its products in various foreign countries and manufacturing
operations conducted in Juarez, Mexico. In order to minimize the risks
associated with foreign currency fluctuations, most sales contracts are issued
in U.S. dollars. The Company has previously used foreign currency contracts to
hedge the risks associated from foreign currency fluctuations for significant
sales contracts, however, no significant contracts were in place at March 31,
2001. ANTEC constantly monitors the exchange rate between the U.S. dollar and
Mexican peso to determine if any adverse exposure exists relative to its costs
of manufacturing. The Company does not maintain Mexican peso denominated
currency. Instead, U.S. dollars are exchanged for pesos at the time of payment.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INCORPORATED BY REFERENCE
EXHIBIT FROM ANTEC'S SEC FILINGS
NUMBER DESCRIPTION OF EXHIBIT UNLESS OTHERWISE INDICATED:
------- ---------------------- ---------------------------
2.1 -- First Amendment to Agreement and Plan of Reorganization.... April 13, 2001, Form 8-K,
Exhibit 2.1.
10.1 -- Amended and Restated Investor Rights Agreement............. April 13, 2001, Form 8-K,
Exhibit 10.1.
10.2 -- Form of Intellectual Property Rights Agreement............. April 13, 2001, Form 8-K,
Exhibit 10.2.
10.3 -- Release and Amendment Agreement............................ April 13, 2001, Form 8-K,
Exhibit 10.3.
10.4 -- First Amendment to Termination Agreement................... April 13, 2001, Form 8-K,
Exhibit 10.4.
(b) Reports on Form 8-K
On April 13, 2001 ANTEC filed a report on Form 8-K relating to Item 5,
Other Events, to describe the Company's amended agreement with Nortel Networks
pursuant to which ANTEC will acquire Nortel's ownership interest in Arris
Interactive L.L.C., the joint venture between the two companies.
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SIGNATURES
Pursuant to the requirements the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANTEC CORPORATION
/s/ LAWRENCE A. MARGOLIS
--------------------------------------
Lawrence A. Margolis
Executive Vice President
(Principal Financial Officer, duly
authorized to sign on behalf of
the registrant)
Dated: June 27, 2001
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