AFCI Advanced Fibre Communications (MM)

AFC Reports Second Quarter 2004 Financial Results PETALUMA, Calif., July 20 /PRNewswire-FirstCall/ -- AFC(R) (NASDAQ:AFCI), The Acronym for Access(SM), today reported financial results for the second quarter ended June 30, 2004. Revenues for the second quarter of 2004 were $118.6 million on a generally accepted accounting principles (GAAP) basis. Revenues in the first quarter of 2004 were $92.8 million. Revenues for the second quarter of 2003 were $83.0 million. Net income for the second quarter of 2004 was $0.9 million, or $0.01 per share. The second quarter of 2004 included amortization of acquired intangibles, costs associated with the proposed merger with Tellabs, Inc. and leased facility write-offs, partially offset by an arbitration award. Net loss for the first quarter of 2004 was $2.7 million, or $.03 loss per share. The first quarter of 2004 included costs associated with acquiring North American Access (NAA), a business unit of Marconi Communications, Inc. Net income for the second quarter of 2003 was $3.3 million, or $0.04 per share. Revenues for the first half of 2004 were $211.4 million compared with $163.5 million for the first half of 2003. Net loss for the first half of 2004 was $1.8 million, or $0.02 loss per share. The first half of 2004 included costs related to the write-off of in-process research and development costs arising from the NAA acquisition, amortization of acquired intangibles, the proposed merger with Tellabs and leased facility write-offs, partially offset by an arbitration award. Net income for the first half of 2003 was $11.7 million, or $0.14 per share. Net income for the core business, which excludes certain merger and acquisition-related items, amortization of intangibles, leased facilities write-offs and an arbitration award, was $5.4 million, or $0.06 per share, for the second quarter of 2004, compared with $8.5 million, or $0.09 per share, for the first quarter of 2004. Core business net income for the second quarter of 2003 was $7.9 million, or $0.09 per share. Core business net income for the first half of 2004 was $13.8 million, or $0.15 per share. Core business net income for the first half of 2003 was $15.8 million, or $0.18 per share. Reconciliations between GAAP and core business results are provided immediately following the condensed consolidated statements of cash flows. The reconciling items between GAAP results and core business results in the first half of 2004 were related to the write-off of in-process research and development costs arising from the NAA acquisition, amortization of intangible assets from the NAA acquisition and AccessLan Communications, Inc. acquisition in 2002, costs associated with the proposed merger with Tellabs, leased facility write-offs and an arbitration award. These core business measures are not in accordance with, or alternatives to, GAAP, and may be different from measures used by other companies. We believe core business results help investors better understand the financial performance of our core business. We also believe core business results provide a more consistent and useful basis for comparison between periods and for making projections. AFC management primarily uses core business results for budgeting purposes, reviewing business performance and making investment decisions. "Our revenues came in somewhat lighter than we had anticipated," said John Schofield, chairman, president and chief executive officer at AFC. "This was primarily due to a supply constraint of a key component that impacted FTTP shipments which we expect to be resolved in the current quarter, a large customer's work force issue that limited the flow of orders from that customer and the timing of certain international orders in the quarter. On a positive note we had three customers contribute over 10% of revenues during the quarter: BellSouth, Sprint and Verizon. I believe this development signals our progress in becoming a leading supplier of access equipment to large carriers, our stated goal for some time. "Order flow across our customer base remained solid throughout the quarter, with strong interest in FTTP, which resulted in a book to bill ratio greater than one. Of course, the most important news of the quarter was our announcement in May of our proposed merger with Tellabs. We anticipate closing the merger before the end of October of this year." In addition to the business results discussed above, an income tax receivable of $210 million is reported on the balance sheet based on the receipt of a Private Letter Ruling from the Internal Revenue Service. This ruling addressed the tax treatment of settling with borrowed shares the two hedge contracts on 10.6 million Cisco Systems, Inc. shares that matured in 2003. The cash proceeds received from the settlement were approximately $690 million. Because AFC used borrowed shares rather than its existing Cisco shares to settle the hedge contracts, AFC believes that current law allows the deferral of taxes on the gain attributable to the hedge contracts until the new Cisco stock loan is settled. The total tax liability related to the gain on the Cisco stock and hedge contracts assuming no deferral would be approximately $265 million. During 2003, estimated federal and state taxes net of applicable credits were paid on the full amount of the gain because of concern that the tax authorities could challenge the tax deferral position, and payment of these taxes were accounted for on the balance sheet. In response to AFC's request, the Internal Revenue Service issued a Private Letter Ruling that was favorable to deferring taxes on the settlement of the hedge contracts with borrowed shares. Although a Private Letter Ruling from the Internal Revenue Service is not conclusive of all issues, based upon the strength of the ruling, AFC will file federal and state income tax returns requesting refunds that total $210 million. In addition to the income tax receivable, a deferred tax liability of $210 million has been recorded. Taxes will be due on the gain from the hedge contracts upon termination of the Cisco share loan. AFC intends to maintain the stock loan for an extended period of time, however, there is no assurance that AFC will be able to do so. Today's Earnings Conference Call and Webcast AFC will discuss its second quarter 2004 results on a conference call and audio webcast scheduled today, July 20, at approximately 1:30 p.m. Pacific time. U.S. callers can access the conference call at 800-243-6403 and international callers may dial 312-461-0285. The audio webcast will be simultaneously available online at: http://www.afc.com/investors/investors.asp . The conference call replay will be available for approximately 72 hours following the call. U.S. callers can access the replay by dialing 800-839-6713 and entering pass code 6449849. International callers may dial 402-220-2306 and enter pass code 6449849. An audio webcast replay will also be available at http://www.afc.com/investors/investors.asp for approximately 12 months following the original call. About AFC Headquartered in Petaluma, Calif., AFC is a leading provider of broadband access solutions for the global telecommunications industry. With a customer base of more than 800 service providers worldwide, AFC continues to build and support the world's evolving broadband access network architecture. Advanced Fibre Communications, Inc., AFC, and the AFC logo are registered trademarks of Advanced Fibre Communications, Inc. The Acronym for Access is a service mark of Advanced Fibre Communications, Inc. Copyright 2004. All rights reserved. Any other trademarks are the property of their respective owners. For more information, visit AFC online at http://www.afc.com/ or call 1-800-690-AFCI. Forward-Looking Statements Except for historical information contained in this press release, the foregoing contains forward-looking statements, including statements concerning our ability to remain a leading supplier of access equipment to large carriers and the strength of our order flow and book to bill ratio. These statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements based on a variety of risks and uncertainties, including the risks and uncertainties relating to growth in demand for broadband services; the potential for business disruption and other risks associated with AFC's pending merger with Tellabs, Inc.; AFC's ability to sustain its tax position with respect to deferral of gain on the Cisco hedge contracts; AFC's ability to remedy the supply constraint issues relating to a key component for FTTP products; and AFC's expanded product offering and the potential for increased competition related thereto. Information about potential factors that could affect AFC's financial results is included in AFC's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which have been filed with the Securities and Exchange Commission. We undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events. Additional Information and Where to Find it This communication is not a solicitation of a proxy from any security holder of Tellabs, Inc. or Advanced Fibre Communications, Inc. Tellabs, Inc. has filed with the Securities and Exchange Commission a Registration Statement on Form S-4 (File No. 333-116794), which contains a Preliminary Joint Proxy Statement/Prospectus. Tellabs, Inc. and Advanced Fibre Communications, Inc. expect to mail a Definitive Joint Proxy Statement/Prospectus to their respective stockholders concerning the proposed merger of Advanced Fibre Communications, Inc. with a subsidiary of Tellabs, Inc. WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders will be able to obtain the documents free of charge at the SEC's website, http://www.sec.gov/. In addition, documents filed with the SEC by Tellabs, Inc. will be available free of charge from Tellabs Investor Relations, 1415 West Diehl Road, Naperville, IL 60563, 630-798-8800. Documents filed with the SEC by Advanced Fibre Communications, Inc. will be available free of charge from Advanced Fibre Communications Investor Relations, 1465 North McDowell Blvd., Petaluma, CA, USA 94954, 707-792-3500. Interest of Certain Persons in the Merger Tellabs, Inc. and Advanced Fibre Communications, Inc., and their respective directors and executive officers and other members of their management and employees, may be deemed to be participants in the solicitation of proxies from the stockholders of Tellabs, Inc. and Advanced Fibre Communications, Inc. in connection with the merger. The directors and executive officers of Tellabs, Inc. and Advanced Fibre Communications, Inc. have interests in the merger, some of which may differ from, or may be in addition to, those of the respective stockholders of Tellabs, Inc. and Advanced Fibre Communications, Inc. generally. Those interests will be described in greater detail in the Definitive Joint Proxy Statement/Prospectus with respect to the merger, which may include potential membership on the Tellabs, Inc. Board of Directors, option and stock holdings and indemnification. Information about the directors and executive officers of Tellabs, Inc. and their ownership of Tellabs, Inc. stock is set forth in the proxy statement for Tellabs, Inc.'s 2004 annual meeting of stockholders. Information about the directors and executive officers of Advanced Fibre Communications, Inc. and their ownership of Advanced Fibre Communications, Inc. stock is set forth in the proxy statement for Advanced Fibre Communications, Inc.'s 2004 annual meeting of stockholders. Investors may obtain additional information regarding the interests of the participants by reading the joint proxy statement/prospectus. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 Revenues $118,591 $83,038 $211,375 $163,490 Cost of revenues 70,397 41,914 115,901 82,767 Gross profit 48,194 41,124 95,474 80,723 Operating expenses: Research and development 22,772 19,392 40,397 35,336 Sales and marketing 13,319 11,065 24,457 20,841 General and administrative 13,202 8,875 21,265 14,815 Amortization of acquired intangibles 4,357 651 6,306 1,444 Integration costs 1,438 -- 2,551 -- Securities litigation settlement costs (5,787) -- (5,787) -- In-process research and development -- -- 14,000 -- Total operating expenses 49,301 39,983 103,189 72,436 Operating income (loss) (1,107) 1,141 (7,715) 8,287 Other income: Interest income, net 1,834 3,311 4,750 5,862 Unrealized gains on Cisco investment -- 30 -- 1,386 Other 59 (36) 73 4 Total other income, net 1,893 3,305 4,823 7,252 Income (loss) before income taxes 786 4,446 (2,892) 15,539 Income taxes (benefit) (135) 1,112 (1,128) 3,885 Net income (loss) $921 $3,334 $(1,764) $11,654 Basic net income (loss) per share $0.01 $0.04 $(0.02) $0.14 Shares used in basic per share computations 88,125 85,287 87,876 85,094 Diluted net income (loss) per share $0.01 $0.04 $(0.02) $0.14 Shares used in diluted per share computations 89,405 86,388 87,876 86,280 ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) June 30, December 31, 2004 2003 Assets Current assets: Cash and cash equivalents $134,607 $246,552 Cisco marketable securities 247,407 250,786 Other marketable securities 478,316 594,230 Accounts receivable, net 68,436 54,464 Income taxes receivable 210,100 -- Inventories, net 44,714 18,959 Other current assets 5,538 27,026 Total current assets 1,189,118 1,192,017 Property and equipment, net 58,457 43,762 Goodwill 189,612 55,883 Other acquired intangible assets, net 77,552 1,639 Other assets 29,549 24,415 Total assets $1,544,288 $1,317,716 Liabilities & stockholders' equity Current liabilities: Accounts payable $22,410 $11,112 Accrued liabilities 56,925 39,605 Cisco securities loans payable 247,407 250,786 Current taxes payable 34,621 26,989 Deferred tax liabilities 174,457 -- Total current liabilities 535,820 328,492 Long-term liabilities 5,112 4,068 Commitments and contingencies Stockholders' equity: Preferred stock -- -- Common stock 883 871 Additional paid-in capital 398,054 376,394 Deferred compensation (11) (29) Accumulated other comprehensive income (166) 1,560 Retained earnings 605,436 607,200 Treasury stock (840) (840) Total stockholders' equity 1,003,356 985,156 Total liabilities and stockholders' equity $1,544,288 $1,317,716 ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30 2004 2003 Cash flows from operating activities: Net income (loss) $(1,764) $11,654 Adjustments to reconcile net income to net cash provided by operating activities: Current income taxes (202,468) 105,905 Deferred income taxes 197,367 (239,119) Depreciation and amortization 15,944 10,026 In-process research and development 14,000 -- Increase in reserve for returns, rebates and credits 4,654 324 Tax benefit from option exercises 3,905 3,850 Interest receivable 983 (3,512) Reduction in reserve for purchase commitments (836) (2,196) Increase in reserve for write- down of inventories 635 2,432 Allowance for doubtful accounts 16 350 Other non-cash adjustments to operating income 6 2,881 Cash proceeds from settlement of Cisco hedge contracts -- 690,226 Unrealized gains on Cisco investment -- (1,386) Changes in operating assets and liabilities: Accounts receivable (1,570) (19,038) Inventories (13,291) 5,490 Other current assets 221 19,358 Other assets 8 61 Accounts payable (5,142) 2,983 Accrued and other liabilities 3,358 (6,161) Net cash provided by operating activities 16,026 584,128 Cash flows from investing activities: Purchases of other marketable securities (1,971,694) (1,875,903) Sales of other marketable securities 1,712,121 1,514,662 Maturities of other marketable securities 371,646 31,007 Payment for purchase of business (245,746) -- Purchases of property and equipment (7,015) (5,874) Restricted investment (3,050) -- Investment in privately-held company (2,000) -- Net cash used in investing activities (145,738) (336,108) Cash flows from financing activities: Proceeds from common stock issuances 17,767 10,827 Purchase of treasury stock -- (701) Net cash provided by financing activities 17,767 10,126 Increase (decrease) in cash and cash equivalents (111,945) 258,146 Cash and cash equivalents, beginning of period 246,552 94,754 Cash and cash equivalents, end of period $134,607 $352,900 ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Three Months Ended June 30, 2004 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $118,591 $118,591 Cost of revenues 70,397 70,397 Gross profit 48,194 48,194 Operating expenses: Research and development 22,772 (293)(1) 22,479 Sales and marketing 13,319 (42)(2) 13,277 General and administrative 13,202 (4,917)(2,3) 8,285 Amortization of acquired intangibles 4,357 (4,357)(4) -- Integration costs 1,438 1,438 Securities litigation settlement costs (5,787) 5,787(5) -- Total operating expenses 49,301 (3,822) 45,479 Operating income (loss) (1,107) 3,822 2,715 Other income: Interest income, net 1,834 1,834 Other 59 59 Total other income, net 1,893 1,893 Income before income taxes 786 3,822 4,608 Income taxes (benefit) (135) (631) (766) Net income $921 4,453 $5,374 Basic net income per share $0.01 $0.06 Shares used in basic per share computations 88,125 88,125 Diluted net income per share $0.01 $0.06 Shares used in diluted per share computations 89,405 89,405 Notes: 1) Adjustment arose from a leased facility write-off. 2) Adjustments arose from additional leased facility write-offs stemming from a workforce reduction initiated in 2003. 3) Adjustment of $3,510 for Tellabs merger-related costs. 4) Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions. 5) Adjustment for an arbitration award for compensatory damages and interest from a former insurer. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Three Months Ended March 31, 2004 Adjustments Core GAAP from GAAP Business Results to Core Results Results Revenues $92,784 $92,784 Cost of revenues 45,504 45,504 Gross profit 47,280 47,280 Operating expenses: Research and development 17,625 17,625 Sales and marketing 11,138 11,138 General and administrative 8,063 8,063 In-process research and development 14,000 (14,000)(1) -- Amortization of acquired intangibles 1,949 (1,949)(2) -- Integration costs 1,113 1,113 Total operating expenses 53,888 (15,949) 37,939 Operating income (loss) (6,608) 15,949 9,341 Other income (expense): Interest income, net 2,916 2,916 Other 14 14 Total other income 2,930 2,930 Income (loss) before income taxes (3,678) 15,949 12,271 Income taxes (benefit) (993) 4,797 3,804 Net income (loss) $(2,685) 11,152 $8,467 Basic net income (loss) per share $(0.03) $0.10 Shares used in basic per share computations 87,628 87,628 Diluted net income (loss) per share $(0.03) $0.09 Shares used in diluted per share computations 87,628 90,156 Notes: 1) Adjustment arose from the write-off of in-process research and development costs upon acquisition of NAA in February 2004. 2) Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Three Months Ended June 30, 2003 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $83,038 $83,038 Cost of revenues 41,914 (778)(1) 41,136 Gross profit 41,124 778 41,902 Operating expenses: Research and development 19,392 (1,887)(1,2) 17,505 Sales and marketing 11,065 (471)(1) 10,594 General and administrative 8,875 (2,338)(1) 6,537 Amortization of acquired intangibles 651 (651)(3) -- Total operating expenses 39,983 (5,347) 34,636 Operating income 1,141 6,125 7,266 Other income: Interest income, net 3,311 3,311 Unrealized gains on Cisco investment 30 (30)(4) -- Other (36) (36) Total other income 3,305 (30) 3,275 Income before income taxes 4,446 6,095 10,541 Income taxes 1,112 1,524 2,636 Net income $3,334 4,571 $7,905 Basic net income per share $0.04 $0.09 Shares used in basic per share computations 85,287 85,287 Diluted net income per share $0.04 $0.09 Shares used in diluted per share computations 86,388 86,388 Notes: 1) Adjustments related to severance and leased facility write-offs resulting from a workforce reduction initiated in 2003. 2) Adjustment for $292 arose from a leased facility write-off. 3) Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002. 4) Adjustment arose from income generated by the Cisco securities holdings and related hedge contract. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Six Months Ended June 30, 2004 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $211,375 $211,375 Cost of revenues 115,901 115,901 Gross profit 95,474 95,474 Operating expenses: Research and development 40,397 (293)(1) 40,104 Sales and marketing 24,457 (42)(2) 24,415 General and administrative 21,265 (4,917)(2,3) 16,348 In-process research and development 14,000 (14,000)(4) -- Amortization of acquired intangibles 6,306 (6,306)(5) -- Integration costs 2,551 2,551 Securities litigation settlement costs (5,787) 5,787(6) -- Total operating expenses 103,189 (19,771) 83,418 Operating income (loss) (7,715) 19,771 12,056 Other income: Interest income, net 4,750 4,750 Other 73 73 Total other income, net 4,823 4,823 Income (loss) before income taxes (2,892) 19,771 16,879 Income taxes (benefit) (1,128) 4,166 3,038 Net income (loss) $(1,764) 15,605 $13,841 Basic net income (loss) per share $(0.02) $0.16 Shares used in basic per share computations 87,876 87,876 Diluted net income (loss) per share $(0.02) $0.15 Shares used in diluted per share computations 87,876 89,784 Notes: 1) Adjustment arose from a leased facility write-off. 2) Adjustments arose from additional leased facility write-offs stemming from a workforce reduction initiated in 2003. 3) Adjustment of $3,510 for Tellabs merger-related costs. 4) Adjustment arose from the write-off of in-process research and development costs upon acquisition of NAA in February 2004. 5) Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions. 6) Adjustment for an arbitration award for compensatory damages and interest from a former insurer. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Six Months Ended June 30, 2003 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $163,490 $163,490 Cost of revenues 82,767 (778)(1) 81,989 Gross profit 80,723 778 81,501 Operating expenses: Research and development 35,336 (1,887)(1,2) 33,449 Sales and marketing 20,841 (471)(1) 20,370 General and administrative 14,815 (2,338)(1) 12,477 Amortization of acquired intangibles 1,444 (1,444)(3) -- Total operating expenses 72,436 (6,140) 66,296 Operating income 8,287 6,918 15,205 Other income: Interest income, net 5,862 5,862 Unrealized gains on Cisco investment 1,386 (1,386)(4) -- Other 4 4 Total other income 7,252 (1,386) 5,866 Income before income taxes 15,539 5,532 21,071 Income taxes 3,885 1,383 5,268 Net income $11,654 $4,149 $15,803 Basic net income per share $0.14 $0.19 Shares used in basic per share computations 85,094 85,094 Diluted net income per share $0.14 $0.18 Shares used in diluted per share computations 86,280 86,280 Notes: 1) Adjustments related to severance and leased facility write-offs resulting from a workforce reduction initiated in 2003. 2) Adjustment for $292 arose from a leased facility write-off. 3) Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002. 4) Adjustment arose from income generated by the Cisco securities holdings and related hedge contract. DATASOURCE: Advanced Fibre Communications, Inc. CONTACT: Jeff Finn, AFC, +1-707-794-7555, or 1-888-875-7555, or Web site: http://www.afc.com/

Copyright