-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GwJVaDmpbP4pNNmhq514lbRgHw+oyDK1s5wh0V+XILcuZZT+/zASVjkY2uXrxX0y jvO/fhU/okelsOn0NKh4xQ== 0000893220-98-000970.txt : 19980518 0000893220-98-000970.hdr.sgml : 19980518 ACCESSION NUMBER: 0000893220-98-000970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL INSTRUMENT CORP CENTRAL INDEX KEY: 0001035881 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 364134221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12925 FILM NUMBER: 98622405 BUSINESS ADDRESS: STREET 1: 101 TOURNAMENT DRIVE CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: (215)323-1 MAIL ADDRESS: STREET 1: 101 TOURNAMENT DRIVE CITY: HORSHAM STATE: PA ZIP: 19044 FORMER COMPANY: FORMER CONFORMED NAME: NEXTLEVEL SYSTEMS INC DATE OF NAME CHANGE: 19970314 10-Q 1 FORM 10-Q FOR GENERAL INSTRUMENT CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to __________ Commission file number 001-12925 GENERAL INSTRUMENT CORPORATION (FORMERLY, NEXTLEVEL SYSTEMS, INC.) (Exact name of registrant as specified in its charter) DELAWARE 36-4134221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
101 TOURNAMENT DRIVE, HORSHAM, PENNSYLVANIA, 19044 (Address of principal executive offices) (Zip Code) (215) 323-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of April 30, 1998, there were 150,882,770 shares of Common Stock outstanding. 1 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
(UNAUDITED) MARCH 31, DECEMBER 31, 1998 1997 ---------- ----------- Cash and cash equivalents $ 26,712 $ 35,225 Short-term investments 18,259 30,346 Accounts receivable, less allowance for doubtful accounts of $2,822 and $3,566, respectively 371,683 343,625 Inventories 253,795 288,078 Deferred income taxes 116,800 105,582 Other current assets 18,507 21,862 ------- ------- Total current assets 805,756 824,718 Property, plant and equipment, net 220,316 236,821 Intangibles, less accumulated amortization of $88,838 and $86,333, respectively 78,879 82,546 Excess of cost over fair value of net assets acquired, less accumulated amortization of $111,357 and $108,123, respectively 460,979 471,186 Deferred income taxes 37,901 5,634 Investments and other assets 87,895 54,448 ---------- ---------- TOTAL ASSETS $1,691,726 $1,675,353 ========== ==========
See notes to consolidated financial statements. 2 3 GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------ Accounts payable $ 213,254 $ 200,817 Other accrued liabilities 179,138 188,250 ---------- ---------- Total current liabilities 392,392 389,067 Deferred income taxes 5,745 5,745 Long-term debt 40,000 -- Other non-current liabilities 64,967 65,730 ---------- ---------- Total liabilities 503,104 460,542 ---------- ---------- Commitments and contingencies (See Note 5) Stockholders' Equity: Preferred Stock, $.01 par value; 20,000,000 shares authorized; no shares issued -- -- Common Stock, $.01 par value; 400,000,000 shares authorized; 150,628,270 shares and 148,358,188 shares issued at March 31, 1998 and December 31, 1997, respectively 1,506 1,484 Additional paid-in capital 1,254,619 1,213,566 Accumulated deficit (79,127) (19,236) Accumulated other comprehensive income, net of taxes of $6,633 and $11,347, respectively 11,626 18,999 ---------- ---------- 1,188,624 1,214,813 Less -- Treasury Stock, at cost, 4,309 shares of Common Stock (2) (2) ---------- ---------- Total stockholders' equity 1,188,622 1,214,811 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,691,726 $1,675,353 ========== ==========
See notes to consolidated financial statements. 3 4 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 --------- --------- NET SALES $416,920 $408,028 Cost of sales 323,932 294,514 -------- -------- GROSS PROFIT 92,988 113,514 -------- -------- OPERATING EXPENSES: Selling, general and administrative 55,885 42,754 Research and development 115,903 51,045 Amortization of excess of cost over fair value of net assets acquired 3,562 3,558 -------- -------- Total operating expenses 175,350 97,357 -------- -------- OPERATING INCOME (LOSS) (82,362) 16,157 Other expense -- net (9,008) (529) Interest expense -- net (979) (7,091) -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (92,349) 8,537 Benefit (Provision) for income taxes 32,458 (3,577) -------- -------- NET INCOME (LOSS) $(59,891) $ 4,960 ======== ======== PRO FORMA EARNINGS PER SHARE -- BASIC AND DILUTED $ 0.03 ======== LOSS PER SHARE -- BASIC AND DILUTED $ (0.40) ======== PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING 148,700 WEIGHTED-AVERAGE SHARES OUTSTANDING 149,666
See notes to consolidated financial statements. 4 5 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED - IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT ------- ------- ----------- ----------- BALANCE, DECEMBER 31, 1997 148,358 $1,484 $1,213,566 $(19,236) Net loss (59,891) Exercise of stock options and related tax benefit 2,270 22 37,916 Amortization of warrants cost 3,137 Net change in investments ------- ------ ---------- -------- BALANCE, MARCH 31, 1998 150,628 $1,506 $1,254,619 $(79,127) ======= ====== ========== ========
ACCUMULATED OTHER COMMON TOTAL COMPREHENSIVE STOCK IN STOCKHOLDERS' INCOME TREASURY EQUITY ------------- -------- ------------- BALANCE, DECEMBER 31, 1997 $18,999 $(2) $1,214,811 Net loss (59,891) Exercise of stock options and related tax benefit 37,938 Amortization of warrants cost 3,137 Net change in investments (7,373) (7,373) ------- --- ---------- BALANCE, MARCH 31, 1998 $11,626 $(2) $1,188,622 ======= === ==========
See notes to consolidated financial statements. 5 6 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED -- IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------------- 1998 1997 --------- -------- OPERATING ACTIVITIES: Net income (loss) $(59,891) $ 4,960 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 21,403 23,048 Gain on sale of short-term investment (3,025) -- Losses from asset sales and write-downs, net 4,328 -- Loss from equity investment 11,290 -- Changes in assets and liabilities: Accounts receivable (36,915) 46,839 Inventories 20,369 (13,257) Prepaid expenses and other current assets (2,013) (3,189) Deferred income taxes (38,772) 1,503 Non-current assets 1,246 -- Accounts payable and other accrued liabilities 16,290 (23,015) Other non-current liabilities (764) 4,781 Other (66) (3,244) --------- --------- Net cash provided by (used in) operating activities (66,520) 38,426 --------- --------- INVESTING ACTIVITIES: Additions to property, plant and equipment (17,825) (17,169) Investments in other assets (1,995) (17,374) Proceeds from sale of short-term investment 3,025 -- ---------- --------- Net cash used in investing activities (16,795) (34,543) ---------- --------- FINANCING ACTIVITIES; Transfers to Distributing Company -- (3,883) Proceeds from stock option exercises 34,802 -- Net borrowings under Credit Agreement 40,000 -- --------- --------- Net cash provided by (used in) financing activities 74,802 (3,883) --------- --------- Change in cash and cash equivalents (8,513) -- Cash and cash equivalents, beginning of period 35,225 -- --------- --------- Cash and cash equivalents, end of period $ 26,712 $ -- ========= =========
See notes to consolidated financial statements. 6 7 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) 1. COMPANY BACKGROUND General Instrument Corporation ("General Instrument" or the "Company"), formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and components for high-performance networks, delivering video, voice and Internet/data services to the cable, satellite and telephony markets. General Instrument is the world leader in digital and analog set-top systems for wired and wireless cable television networks, as well as hybrid fiber/coaxial network transmission systems used by cable television operators and is a leading provider of digital satellite systems for programmers, direct-to-home satellite network providers and private networks for business communications. Through its limited partnership interest in Next Level Communications, L.P. ("the Partnership")(see Note 10), the Company provides telephone network solutions through the Partnership's NLevel3(R) Switched Digital Access system. The Company was formerly the Communications Business of the former General Instrument Corporation (the "Distributing Company"). In a transaction that was consummated on July 28, 1997, the Distributing Company (i) transferred all the assets and liabilities relating to the manufacture and sale of broadband communications products used in the cable television, satellite, and telecommunications industries to the Company (then a wholly-owned subsidiary of the Distributing Company) and all the assets and liabilities relating to the manufacture and sale of coaxial, fiber optic and other electric cable used in the cable television, satellite and other industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii) distributed all of its outstanding shares of capital stock of each of the Company and CommScope to its stockholders on a pro rata basis as a dividend. Approximately 147.3 million shares of the Company's Common Stock, based on a ratio of one for one, were distributed to the Distributing Company's stockholders of record on July 25, 1997 (the "Communications Distribution"). On July 28, 1997, approximately 49.1 million shares of CommScope Common Stock, based on a ratio of one for three, were distributed to the Company's stockholders of record on that date (the "CommScope Distribution" and, together with the Communications Distribution, the "Distributions"). On July 28, 1997, the Company and CommScope began operating as independent entities with publicly traded common stock, and the Distributing Company retained no ownership interest in either the Company or CommScope. Additionally, immediately following the Communications Distribution, the Distributing Company was renamed General Semiconductor, Inc. ("General Semiconductor") and effected a one for four reverse stock split. 2. BASIS OF PRESENTATION The accompanying interim consolidated financial statements reflect the results of operations, financial position, changes in stockholders' equity and cash flows of General Instrument Corporation. The consolidated balance sheet as of March 31, 1998, the consolidated statements of operations for the three months ended March 31, 1998 and 1997, the consolidated statement of stockholders' equity for the three months ended March 31, 1998 and the consolidated statements of cash flows for the three months ended March 31, 1998 and 1997 of General Instrument Corporation are unaudited and reflect all adjustments of a normal recurring nature (except for those charges disclosed in Notes 5, 8, 9 and 10) which are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The consolidated statements of operations for the three months ended March 31, 1997 include an allocation of general corporate expenses from the Distributing Company. In the opinion of management, general corporate administrative expenses have been allocated to the Company on a reasonable and consistent basis using management's estimate of services provided to the Company by the Distributing Company. However, such allocation is not necessarily indicative of the level of expenses which would have been incurred had the Company been operating as a separate stand-alone entity during the periods presented. Prior to the Distributions, the Company participated in the Distributing Company's cash management program, and the accompanying consolidated statement of operations for the three months ended March 31, 1997 7 8 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) includes an allocation of net interest expense from the Distributing Company. To the extent the Company generated positive cash, such amounts were remitted to the Distributing Company. To the extent the Company experienced temporary cash needs for working capital purposes or capital expenditures, such funds were historically provided by the Distributing Company. Net interest expense has been allocated based upon the Company's net assets as a percentage of the total net assets of the Distributing Company. The allocations were made consistently in each period, and management believes the allocations are reasonable. However, these interest costs would not necessarily be indicative of what the actual costs would have been had the Company operated as a separate, stand-alone entity. Subsequent to the Distributions, the Company is responsible for all cash management functions using its own resources or purchased services and is responsible for the costs associated with operating as a public company. Prior to the Distributions, the Company's financial results included the costs incurred under the Distributing Company's pension and postretirement benefit plans for employees and retirees of the Company. Subsequent to the Distributions, the Company's financial results include the costs incurred under the Company's own pension and postretirement benefit plans. The provision for income taxes for the periods prior to the Distributions was based on the Company's expected annual effective tax rate calculated assuming the Company had filed separate tax returns under its then existing structure. For the three months ended March 31, 1998, the income tax benefit was computed based upon the expected annual effective tax rate. The financial information included herein, related to the periods prior to the Distributions, may not necessarily reflect the consolidated results of operations, financial position and cash flows of the Company since the Company was not a separate stand-alone entity. 8 9 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) 3. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated statement of operations presented below gives effect to the Distributions as if they had occurred on January 1, 1997. The unaudited pro forma statement of operations set forth below does not purport to represent what the Company's operations actually would have been had the Distributions occurred on January 1, 1997 or to project the Company's operating results for any future period. The unaudited pro forma information has been prepared utilizing the historical consolidated statements of operations of the Company which were adjusted to reflect: (i) an additional $1.8 million of selling, general and administrative costs for the three months ended March 31, 1997 to eliminate the allocation of corporate expenses to CommScope and General Semiconductor, as such costs subsequent to the Distributions are no longer allocable and are expected to be incurred by the Company in the future; and (ii) a net debt level of $100 million at the beginning of the year.
THREE MONTHS ENDED MARCH 31, 1997 ------------------ Net sales $408,028 Cost of sales 294,514 -------- Gross profit 113,514 -------- Operating expenses: Selling, general and administrative 44,554 Research and development 51,045 Amortization of excess of cost over fair value of net assets acquired 3,558 -------- Total operating expenses 99,157 -------- Operating income 14,357 Other expense - net (529) Interest expense - net (1,899) -------- Income before income taxes 11,929 Provision for income taxes (4,866) -------- Net income $7,063 ======== Earnings per share - basic and diluted $0.05 ======== Weighted-average shares outstanding 148,700
9 10 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) 4. INVENTORIES Inventories consist of:
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- Raw materials $98,230 $111,148 Work in process 23,112 19,676 Finished goods 132,453 157,254 -------- -------- Total inventories $253,795 $288,078 ======== ========
5. COMMITMENTS AND CONTINGENCIES The Company is either a plaintiff or a defendant in several pending legal matters. In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had, and is not expected to have, a material adverse effect on the Company's financial statements. An action entitled BroadBand Technologies, Inc. v. General Instrument Corp. was brought in March 1997 in the United States District Court for the Eastern District of North Carolina. The complaint alleged that the Company infringes BroadBand Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560 (the "560 Patent"), covering an electronic communications system which delivers television signals, and sought monetary damages and injunctive relief. In March 1997, the Company's Next Level Communications ("NLC") subsidiary commenced an action against BBT entitled Next Level Communications v. BroadBand Technologies, Inc. in the United States District Court for the Northern District of California for a declaratory judgment that BBT's 560 Patent is invalid and unenforceable; for patent infringement; and for violation of the antitrust laws of the United States. On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General Instrument Corp. was dismissed with prejudice. In addition, on May 4, 1998, the action entitled Next Level Communications v. BroadBand Technologies, Inc., was dismissed with prejudice. These dismissals were entered pursuant to a settlement agreement under which, among other things, the Partnership has paid BroadBand Technologies $5 million and BroadBand Technologies and the Partnership have entered into a perpetual cross-license of patents applied for or issued currently or during the next five years. The Partnership recorded a $5 million charge with respect to this matter. The Company accounts for its interest in the Partnership under the equity method and, accordingly, its share of the Partnership's loss, including the aforementioned settlement costs, are reflected in "other expense - net" in the accompanying statement of operations for the three months ended March 31, 1998. The Company also has granted BroadBand Technologies a covenant not to sue on all Company patents applied for or issued currently or during the next five years. A securities class action is presently pending in the United States District Court for the Northern District of Illinois, Eastern Division, In re General Instrument Corporation Securities Litigation. This action, which consolidates numerous class action complaints filed in various courts between October 10 and October 27, 1995, is brought by plaintiffs, on their own behalf and as representatives of a class of purchasers of the Distributing Company's common stock during the period March 21, 1995 through October 18, 1995. The complaint alleges that the Distributing Company and certain of its officers and directors, as well as Forstmann Little & Co. and certain related entities, violated the federal securities laws, namely, Sections 10(b) and 20(a) of the Securities 10 11 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) Exchange Act of 1934, as amended (the "Exchange Act"), prior to the Distributions, by allegedly making false and misleading statements and failing to disclose material facts about the Distributing Company's planned shipments in 1995 of its CFT 2200 and DigiCipher(R) products. Also pending in the same court, under the same name, is a derivative action brought on behalf of the Distributing Company. The derivative action alleges that, prior to the Distributions, the members of the Distributing Company's Board of Directors, several of its officers and Forstmann Little & Co. and related entities have breached their fiduciary duties by reason of the matter complained of in the class action and the defendants' alleged use of material non-public information to sell shares of the Distributing Company's stock for personal gain. The court had granted the defendants' motions to dismiss the original complaints in both of these actions, but allowed the plaintiffs in each action an opportunity to file amended complaints. Amended complaints were filed on November 7, 1997. The defendants have answered the amended consolidated complaint in the class actions, denying liability, and have filed a renewed motion to dismiss the derivative action. The Company intends to vigorously contest these actions. An action entitled BKP Partners, L.P. v. General Instrument Corp. was brought in February 1996 by certain holders of preferred stock of NLC, which merged into a subsidiary of the Distributing Company in September 1995. The action was originally filed in the Northern District of California and was subsequently transferred to the Northern District of Illinois. The plaintiffs allege that the defendants violated federal securities laws by making misrepresentations and omissions and breached fiduciary duties to NLC in connection with the acquisition of NLC by the Distributing Company. Plaintiffs seek, among other things, unspecified compensatory and punitive damages and attorneys' fees and costs. On September 23, 1997, the district court dismissed the complaint, without prejudice, and the plaintiffs were given until November 7, 1997 to amend their complaint. On November 7, 1997, plaintiffs served the defendants with amended complaints, which contain allegations substantially similar to those in the original complaint. The defendants have filed a motion to dismiss parts of the amended complaint and have answered the balance of the amended complaint, denying liability. The Company intends to vigorously contest this action. In connection with the Distributions, the Company has agreed to indemnify General Semiconductor in respect of its obligations, if any, arising out of or in connection with the matters discussed in the preceding two paragraphs. On February 19, 1998, a consolidated securities class action complaint entitled In re NextLevel Systems, Inc. Securities Litigation was filed in the United States District Court for the Northern District of Illinois, Eastern Division, naming the Company and certain former officers and directors as defendants. The complaint was filed on behalf of stockholders who purchased or otherwise acquired stock of the Company between July 25, 1997 and October 15, 1997. The complaint alleged that the defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false and misleading statements about the Company's business, finances and future prospects. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants served upon the plaintiffs a motion to dismiss the remaining counts of the complaint. On March 5, 1998, an action entitled DSC Communications Corporation v. Next Level Communications, L.P. was filed in the Superior Court of the State of Delaware in and for New Castle County. DSC alleges that the defendants have misappropriated trade secrets relating to a switched digital video product, and that the defendants have conspired to misappropriate the trade secrets. The plaintiffs seek monetary and exemplary damages and attorney fees. On April 4, 1998, the defendants filed an application to the United States District Court for the Eastern District of Texas requesting a preliminary injunction preventing DSC from proceeding with this litigation. At a hearing on May 8, 1998, the district court ruled from the bench that it would issue such a preliminary injunction against DSC. 11 12 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) While the ultimate outcome of the matters described above cannot be determined, management does not believe that the final disposition of these matters will have a material adverse effect on the Company's financial statements. 6. EARNINGS (LOSS) PER SHARE AND PRO FORMA EARNINGS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding adjusted for the dilutive effect of stock options and warrants (unless such common stock equivalents would be anti-dilutive), and the computation of diluted earnings (loss) per share assumes the exercise of stock options and warrants using the treasury stock method. Further, since the computation of diluted loss per share is anti-dilutive for the three months ended March 31, 1998, the amounts reported for basic and diluted loss per share are the same. Prior to the Distributions, the Company did not have its own capital structure, and pro forma per share information has been presented for the three months ended March 31, 1997. The pro forma weighted-average number of shares outstanding used in the pro forma per share calculation for the three months ended March 31, 1997 equaled the number of common shares issued and common equivalent shares existing on the the date of the Distributions. 7. LONG-TERM DEBT In July 1997, the Company entered into a bank credit agreement (the "Credit Agreement") which provides a $600 million unsecured revolving credit facility and matures on December 31, 2002. The Credit Agreement permits the Company to choose between two interest rate options: an Adjusted Base Rate (as defined in the Credit Agreement), which is based on the highest of (i) the rate of interest publicly announced by The Chase Manhattan Bank as its prime rate, (ii) 1% per annum above the secondary market rate for three-month certificates of deposit and (iii) the federal funds effective rate from time to time plus 0.5%, and a Eurodollar rate (LIBOR) plus a margin which varies based on certain performance criteria. The Company is also able to set interest rates through a competitive bid procedure. In addition, the Credit Agreement requires the Company to pay a facility fee on the total loan commitment. The Credit Agreement contains financial and operating covenants, including limitations on guarantee obligations, liens and sale of assets, and requires the maintenance of certain financial ratios. In addition, under the Credit Agreement, certain changes in control of the Company would result in an event of default, and the lenders under the Credit Agreement could declare all outstanding borrowings under the Credit Agreement immediately due and payable. None of the restrictions contained in the Credit Agreement is expected to have a significant effect on the Company's ability to operate. As of March 31, 1998, the Company was in compliance with all financial and operating covenants under the Credit Agreement. At March 31, 1998, the Company had available credit of $460 million under the Credit Agreement. The Company had approximately $100 million of letters of credit outstanding at March 31, 1998. 8. RESTRUCTURINGS In the fourth quarter of 1997, the Company announced it would develop a multifaceted plan to improve its financial performance and achieve the full strategic potential of its world-class communications technologies and market leadership positions. As part of this plan, the Company streamlined the cost structure of its San Diego-based satellite business and reduced this unit's headcount by approximately 225. Additionally, the Company closed its Puerto Rico satellite TV manufacturing facility, which manufactured receivers used in the private network, commercial and consumer satellite markets for the reception of analog and digital television signals, and reduced headcount by 1,100. Future satellite receiver manufacturing will be subcontracted or produced at the Company's other manufacturing facilities. The Company recorded a pre-tax charge of $36 million during the fourth quarter related to the restructuring. 12 13 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) As part of the restructuring plan, the Company recorded an additional $16 million of pre-tax charges in the first quarter of 1998 primarily related to severance and other employee separation costs, costs associated with the closure of various facilities and the write-down of certain assets to their estimated net realizable values. Of these charges, $9 million were recorded as cost of sales, $6 million as SG&A expense and $1 million as research and development expense. Through March 31, 1998, the Company has made severance payments of $12 million and substantially all of the remaining severance and other employee separation costs are expected to be paid during 1998. Also, during the first quarter of 1998, the Company moved its corporate headquarters from Chicago, Illinois to Horsham, Pennsylvania. In connection with the Distributions (see Note 1), during the first quarter of 1997, the Company recorded a pre-tax charge to cost of sales of $3 million for employee costs related to dividing the Distributing Company's Taiwan operations between the Company and General Semiconductor. 9. OTHER CHARGES The Company has incurred approximately $33 million of certain other pre-tax charges during the three months ended March 31, 1998. Of these charges, $18 million has been reflected in cost of sales and $7 million has been reflected in SG&A expense. These charges relate to the write-down of inventories and certain other assets to their net realizable value, and moving costs associated with relocating certain assets to other facilities owned by the Company. The remaining $8 million of charges are included in "other expense-net" since they relate to costs incurred by the Partnership, which the Company accounts for under the equity method. Such costs are primarily related to the BBT litigation settlement (see Note 5) and compensation expense related to key executives of an acquired company. 10. THE PARTNERSHIP In January 1998, the Company transferred the net assets, principally technology, and the management and workforce of NLC to a newly formed limited partnership (the "Partnership") in exchange for approximately an 89% limited partnership interest (subject to additional dilution). The limited partnership interest is included in "investments and other assets" in the accompanying consolidated balance sheet at March 31, 1998. The operating general partner, which was formed by Spencer Trask & Co., has acquired approximately an 11% interest in the Partnership and has the potential to acquire up to an additional 11% in the future. Net assets transferred to the Partnership of $44 million primarily included property, plant and equipment, inventories and accounts receivable partially offset by accounts payable and accrued expenses. Pursuant to the Partnership agreement, the operating general partner controls the Partnership and is responsible for developing the business plan and infrastructure necessary to position the Partnership as a stand-alone company. The Company, as the limited partner, will have certain protective rights, including the right to approve an alteration of the legal structure of the Partnership, the sale of the Partnership's principal assets, the sale of the Partnership, a change in the general partner and a change in the limited partner's financial interests in the Partnership. Since the operating general partner controls the day-to-day operations of the Partnership and has the ability to make decisions typical of a controlling party, the Partnership's operating results will not be consolidated with the operating results of the Company subsequent to the January 1998 transfer. In addition, in January 1998, the Company advanced $75 million to the Partnership in exchange for an 8% debt instrument (the "Note"), and the Note contains normal creditor security rights, including a prohibition against incurring amounts of indebtedness for borrowed money in excess of $10 million. Since the repayment of the Note is solely dependent upon the results of the Partnership's research and development activities and the 13 14 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, unless otherwise noted) commercial success of its product development, the Company recorded a charge to research and development expense during the quarter ended March 31, 1998 to fully reserve for the Note concurrent with the funding. The Company is accounting for its interest in the Partnership as an investment under the equity method of accounting. Further, the Company's share of the Partnership's losses related to future research and development activities will be offset against the $75 million reserve discussed above. For the three months ended March 31, 1998, the Company's share of the Partnership's losses were $11 million (net of the Company's share of research and development expenses of $9 million). The Company has eliminated its interest income from the Note against its share of the Partnership's related interest expense on the Note. 11. COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement requires that an enterprise report the change in its net assets during the period from nonowner sources. Since this statement only requires additional disclosures, it had no impact on the Company's consolidated financial position or cash flows. For the three months ended March 31, 1998 and 1997, other comprehensive income comprised unrealized gains and losses on investments. Comprehensive income is summarized below:
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 ----------- -------- Net Income (loss) $(59,891) $ 4,960 Other comprehensive income (loss) (4,348) 11,180 --------- -------- Total comprehensive income (loss) $(64,239) $16,140 ========= ========
12. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED Segment Reporting - In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and is effective for fiscal periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the reporting of information about operating segments, including related disclosures about products and services, geographic areas and major customers, and requires the reporting of selected information about operating segments in interim financial statements. The Company is currently evaluating the disclosure requirements of this statement and will include the necessary disclosures in the year-end financial statements as required in the initial year of adoption. Pension and Other Postretirement Disclosures - In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106." This statement, which is effective for fiscal years beginning after December 15, 1997, requires revised disclosures about pension and other postretirement benefit plans. Since this statement only revises financial statement disclosures, its adoption will not have any impact on the Company's consolidated financial position, results of operations or cash flows. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES Net sales for the three months ended March 31, 1998 were $417 million, an increase of $9 million, or 2%, over net sales of $408 million for the three months ended March 31, 1997. This increase in net sales for the three-month period reflects increased sales of digital cable systems and interactive advanced analog systems, partially offset by lower sales of basic analog cable terminals and satellite systems for private and commercial networks. Analog and digital products represented 51% and 49%, respectively, of total sales for the three months ended March 31, 1998 compared to 64% and 36%, respectively, of total sales for the three months ended March 31, 1997. Broadband sales (consisting of digital and analog cable and wireless television systems and network transmission systems) were $309 million and $299 million for the three months ended March 31, 1998 and 1997, respectively. Broadband sales increased $10 million, or 3% for the 1998 period from the comparable 1997 period. The increases were primarily a result of increased U.S. sales volume of digital cable terminals and headends and advanced analog set-top terminals, partially offset by the expected decline in sales of basic analog cable network systems. These sales reflect the increasing commitment of cable television operators to deploy state-of-the-art digital and interactive advanced analog systems in order to offer advanced entertainment, interactive services and Internet access to their customers. During the three months ended March 31, 1998 and 1997, net broadband sales in the U.S. were 81% and 67%, respectively, combined U.S. and Canadian sales were 83% and 74%, respectively, and all other international sales were 17% and 26%, respectively, of total worldwide broadband sales. The decrease in international sales from the first quarter of 1997 was experienced in all international regions and international sales are not expected to return to 1997 levels in the near-term. The largest decrease in sales from the first quarter of 1997 was experienced in the Asia/Pacific region. Satellite sales of $108 million for the three months ended March 31, 1998 decreased $1 million from the comparable 1997 period primarily as a result of lower private and commercial network sales. During the three months ended March 31, 1998 and 1997, net satellite sales in the U.S. were 93% and 83%, respectively, combined U.S. and Canadian sales were 99% and 87%, respectively, and all other international sales were 1% and 13%, respectively, of total worldwide satellite sales. TCI and Time Warner, including affiliates, each represented approximately 14% of the revenues of the Company for the year ended December 31, 1997. For the three months ended March 31, 1998, TCI, Primestar and Time Warner accounted for approximately 21%, 16% and 11% of total Company sales, respectively. GROSS PROFIT Gross profit was $93 million and $114 million for the three months ended March 31, 1998 and 1997, respectively. Gross profit was 22% and 28% of sales for the three months ended March 31, 1998 and 1997, respectively. Gross profit for the three months ended March 31, 1998 was reduced by $27 million of charges, primarily related to severance and other employee separation costs, costs associated with the closure of various facilities and the write-down of certain assets to their net realizable values. Gross profit for the three months ended March 31, 1997 was reduced by $3 million of charges in connection with the Distributions for employee costs related to dividing the Distributing Company's Taiwan operations between the Company and General Semiconductor. SELLING, GENERAL AND ADMINISTRATIVE Selling, general & administrative ("SG&A") expense was $56 million and $43 million for the three months ended March 31, 1998 and 1997, respectively. SG&A expense increased as a percentage of sales to 13% for the three months ended March 31, 1998 from 10% for the three months ended March 31, 1997. SG&A spending for the three months ended March 31, 1998 was greater than the comparable 1997 period as a result of $13 million of charges primarily related to severance and other employee separation costs, costs associated with the 15 16 closure of various facilities, including moving costs and costs associated with changing the Company's corporate name. Pro forma SG&A costs for the three months ended March 31, 1997 reflect an additional $2 million of corporate costs previously allocated to CommScope and General Semiconductor, as such costs are no longer allocable and are expected to be incurred by the Company in the future. RESEARCH AND DEVELOPMENT Research and development ("R&D") expense was $116 million and $51 million for the three months ended March 31, 1998 and 1997, respectively. R&D expense for the three months ended March 31, 1998 included a $75 million charge to fully reserve the Partnership Note (see Note 10). R&D spending in 1998 is focused on new product opportunities, including advanced digital services, high-speed internet and data systems, and next generation transmission network systems. In addition, the Company is incurring R&D expense to develop analog and digital products for international markets, reduce costs and expand the features of its digital cable and satellite systems. OTHER EXPENSE -NET Other expense was $9 million and $1 million for the three months ended March 31, 1998 and 1997, respectively. Other expense increased in the first quarter of 1998 from the comparable 1997 period primarily due to the Company's equity interest in the Partnership's loss (see Note 10), which includes the BBT litigation settlement (see Note 5) and compensation expense related to key executives of an acquired company, partially offset by a gain on the sale of certain short-term investments. INTEREST EXPENSE-NET Net interest expense for the three months ended March 31, 1997 represents an allocation of interest expense from the Distributing Company and was allocated based upon the Company's net assets as a percentage of the total net assets of the Distributing Company for the period prior to the date of the Distribution. Net interest expense allocated to the Company was $7 million for the three months ended March 31, 1997. Subsequent to July 25, 1997, the date of the Distribution, net interest represents actual interest expense incurred by the Company, partially offset by interest earned on the Company's cash balance. Pro forma interest expense for the three months ended March 31, 1997 includes a reduction of interest expense of $5 million to reflect a net debt level of $100 million at the beginning of 1997. INCOME TAXES Through the date of the Distributions, income taxes were determined as if the Company had filed separate tax returns under its existing structure for the periods presented. Accordingly, future tax rates could vary from the historical effective tax rates depending on the Company's future tax elections. The Company recorded a benefit for income taxes of $32 million and a provision for income taxes of $4 million for the three months ended March 31, 1998 and 1997, respectively. Excluding the restructuring and other charges recorded during the three months ended March 31, 1998 and the charges related to the Distributions recorded in the three months ended March 31, 1997, the effective tax rate was approximately 38% for both periods. 16 17 LIQUIDITY AND CAPITAL RESOURCES Prior to the Distributions, the Company participated in the Distributing Company's cash management program. To the extent the Company generated positive cash, such amounts were remitted to the Distributing Company. To the extent the Company experienced temporary cash needs for working capital purposes or capital expenditures, such funds were historically provided by the Distributing Company. At the date of the Distributions, $125 million of cash was transferred to the Company. For the three months ended March 31, 1998 and 1997, cash used by operations was $67 million and cash provided by operations was $38 million, respectively. Cash used by operations in the first quarter of 1998 primarily reflects the funding provided to the Partnership related to its R&D activities, payments related to the restructuring and increased working capital requirements, partially offset by cash generated by the broadband and satellite businesses. Cash provided by operations in the first quarter of 1997 primarily represents cash generated by the broadband business. At March 31, 1998, working capital was $413 million compared to $436 million at December 31, 1997. The Company believes that working capital levels will increase to support the growth of the digital business and there can be no assurance that future industry-specific developments or general economic trends will not continue to alter the Company's working capital requirements. During the three months ended March 31, 1998 and 1997, the Company invested $18 million and $17 million, respectively, in equipment and facilities. The Company expects to continue to expand its capacity to meet increased current and anticipated future demands for digital products, with capital expenditures for the year expected to approximate $120 million. The Company's R&D expenditures were $116 million (including the $75 million funding related to the Partnership's R&D activities) and $51 million during the first quarter of 1998 and 1997, respectively. The Company expects total R&D expenditures to approximate $245 million (including the $75 million funding related to the Partnership) for the year ending December 31, 1998. The Company has a bank credit agreement (the "Credit Agreement") which provides a $600 million unsecured revolving credit facility and matures on December 31, 2002. The Credit Agreement permits the Company to choose between two competitive interest rate options. The Credit Agreement contains financial and operating covenants, including limitations on guarantee obligations, liens and the sale of assets, and requires the maintenance of certain financial ratios. None of the restrictions contained in the Credit Agreement is expected to have a significant effect on the Company's ability to operate. As of March 31, 1998, the Company was in compliance with all financial and operating covenants contained in the Credit Agreement and had available credit of $460 million. In January 1998, the Company announced that, subject to the completion of definitive agreements, Sony Corporation of America will purchase 7.5 million new shares of common stock of the Company for $188 million. In January 1998, the Company transferred the net assets, principally technology, and the management and workforce of NLC to a newly formed limited partnership in exchange for approximately an 89% (subject to additional dilution) limited partnership interest. Additionally, the Company advanced to the Partnership $75 million, utilizing available operating funds and borrowings under its Credit Agreement, in exchange for the Note. Since the repayment of the Note is solely dependent upon the results of the Partnership's research and development activities and the commercial success of its product development, the Company recorded a charge to fully reserve for the Note concurrent with the funding. The Company's management assesses its liquidity in terms of its overall ability to obtain cash to support its ongoing business levels and to fund its growth objectives. The Company's principal sources of liquidity both on a short-term and long-term basis are cash flows provided by operations and borrowings under the Credit Agreement. The Company believes that based upon its analysis of its consolidated financial position and its expected operating cash flows from future operations, along with available funding under the Credit Agreement, cash flows will be adequate to fund operations, research and development, capital expenditures and strategic 17 18 restructuring costs. There can be no assurance, however, that future industry-specific developments or general economic trends will not adversely affect the Company's operations or its ability to meet its cash requirements. NEW TECHNOLOGIES The Company operates in a dynamic and competitive environment in which its success will be dependent upon numerous factors, including its ability to continue to develop appropriate technologies and successfully implement applications based on those technologies. In this regard, the Company has made significant investments to develop advanced systems and equipment for the cable and satellite television, Internet/data delivery and local telephone access markets. Additionally, the future success of the Company will be dependent on the ability of the cable and satellite television operators to successfully market the services provided by the Company's advanced digital terminals to their customers. Furthermore, as a result of the higher costs of initial production, digital products presently being shipped carry lower margins than the Company's mature analog products. Management of the Company expects cable television operators in the United States and abroad to continue to purchase analog products to upgrade their basic networks and invest in new system construction primarily to compete with other television programming sources and to develop, using U.S. architecture and systems, international markets where cable penetration is low and demand for entertainment programming is growing. However, management expects that demand in North America for its basic analog cable products will continue to decline. As the Company continues to introduce new products and technologies and such technologies gain market acceptance, there can be no assurance that sales of products based on new technologies will not affect the Company's product sales mix and/or will not have an adverse impact on sales of certain of the Company's other products. FOREIGN EXCHANGE AND MARKET RISK A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. These foreign operations are subject to market risk changes with respect to currency exchange rate fluctuations, which could impact the Company's consolidated financial statements. The Company monitors its underlying exchange rate exposures on an ongoing basis and continues to implement selective hedging strategies to reduce the market risks from changes in exchange rates. On a selective basis, the Company enters into contracts to hedge the currency exposure of monetary assets and liabilities, contractual and other firm commitments denominated in foreign currencies and the currency exposure of anticipated, but not yet committed, transactions expected to be denominated in foreign currencies. The use of these derivative financial instruments allows the Company to reduce its overall exposure to exchange rate movements since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. Foreign currency exchange contracts are sensitive to changes in exchange rates. As of March 31, 1998, a hypothetical 10% fluctuation in the exchange rate of foreign currencies applicable to the Company, principally the new Taiwan and Canadian dollars, would result in a net $3 million gain or loss on the contracts the Company has outstanding, which would offset the related net loss or gain on the assets, liabilities and transactions being hedged. INTERNATIONAL MARKETS Management of the Company believes that additional growth for the Company will come from international markets, although the Company's international sales decreased from the three months ended March 31, 1997 to the three months ended March 31, 1998, and there can be no assurance that international sales will increase to 1997 levels in the near future. In order to support the Company's international product and marketing strategies, it is currently expected that the Company will add operations in foreign markets in the following areas, among others: customer service, sales, finance and product warehousing. Although no assurance can be given, management expects that the expansion of international operations will not require significant capital expenditures and that increased costs will be offset by increased sales in such markets. 18 19 EFFECT OF INFLATION The Company continually attempts to minimize any effect of inflation on earnings by controlling its operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material impact on the Company's results of operations. READINESS FOR YEAR 2000 The Company has identified and evaluated the changes to its computer systems and products necessary to achieve a year 2000 date conversion, and required conversion efforts are currently underway. The Company is also communicating with its suppliers, financial institutions and others with which it does business to understand the impact of any year 2000 issues on the Company. The Company does not believe the cost of achieving year 2000 compliance to be material. Additionally, the Company believes, based on available information, that it will be able to manage its total year 2000 transition without any material adverse effect on its business operations, products or financial prospects. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q may include forward-looking statements concerning, among other things, the Company's prospects, developments and business strategies. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "subject to" and "scheduled." These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These risks include, but are not limited to, uncertainties relating to general political and economic conditions, uncertainties relating to government and regulatory policies, uncertainties relating to customer plans and commitments, the Company's dependence on the cable television industry and cable television spending, signal security, the pricing and availability of equipment, materials and inventories, technological developments, the competitive environment in which the Company operates, changes in the financial markets relating to the Company's capital structure and cost of capital, the uncertainties inherent in international operations and foreign currency fluctuations and authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission. Reference is made to Exhibit 99 in this Form 10-Q for a further discussion of such factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. These foreign operations are subject to market risk changes with respect to currency exchange rate fluctuations, which could impact the Company's consolidated financial statements. The Company monitors its underlying exchange rate exposures on an ongoing basis and continues to implement selective hedging strategies to reduce the market risks from changes in exchange rates. On a selective basis, the Company enters into contracts to hedge the currency exposure of monetary assets and liabilities, contractual and other firm commitments denominated in foreign currencies and the currency exposure of anticipated, but not yet committed, transactions expected to be denominated in foreign currencies. The use of these derivative financial instruments allows the Company to reduce its overall exposure to exchange rate movements since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. 19 20 Foreign currency exchange contracts are sensitive to changes in exchange rates. As of March 31, 1998, a hypothetical 10% fluctuation in the exchange rate of foreign currencies applicable to the Company, principally the new Taiwan and Canadian dollars, would result in a net $3 million gain or loss on the contracts the Company has outstanding, which would offset the related net loss or gain on the assets, liabilities and transactions being hedged. 20 21 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General Instrument Corp., pending in the United States District Court for the Eastern District of North Carolina, was dismissed with prejudice. In addition, on May 4, 1998, the action entitled Next Level Communications v. BroadBand Technologies, Inc., was dismissed with prejudice. These dismissals were entered pursuant to a settlement agreement under which, among other things, the Partnership has paid BroadBand Technologies $5 million and BroadBand Technologies and the Partnership have entered into a perpetual cross-license of patents applied for or issued currently or during the next five years. The Company also has granted BroadBand Technologies a covenant not to sue on all Company patents applied for or issued currently or during the next five years. On February 19, 1998, a consolidated securities class action complaint entitled In re NextLevel Systems, Inc. Securities Litigation was filed in the United States District Court for the Northern District of Illinois, Eastern Division, naming the Company and certain former officers and directors as defendants. The complaint was filed on behalf of stockholders who purchased or otherwise acquired stock of the Company between July 25, 1997 and October 15, 1997. The complaint alleged that the defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5 thereunder by making false and misleading statements about the Company's business, finances and future prospects. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants served upon the plaintiffs a motion to dismiss the remaining counts of the complaint. On March 5, 1998, an action entitled DSC Communications Corporation v. Next Level Communications, L.P. was filed in the Superior Court of the State of Delaware in and for New Castle County. DSC alleges that the defendants have misappropriated trade secrets relating to a switched digital video product, and that the defendants have conspired to misappropriate the trade secrets. The plaintiffs seek monetary and exemplary damages and attorney fees. On April 4, 1998, the defendants filed an application to the United States District Court for the Eastern District of Texas requesting a preliminary injunction preventing DSC from proceeding with this litigation. At a hearing on May 8, 1998, the district court ruled from the bench that it would issue such a preliminary injunction against DSC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 First Amendment, dated as of March 18, 1998, to the Credit Agreement, dated as of July 23, 1997, among the Company, certain banks, the Chase Manhattan Bank as Administrative Agent, and certain other banks as Co-Agents. Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information (b) Report on Form 8-K The Company filed a report on Form 8-K dated February 2, 1998 announcing the name change from NextLevel Systems, Inc. to General Instrument Corporation. 21 22 SIGNATURE Pursuant to the requirements of 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. GENERAL INSTRUMENT CORPORATION /s/Paul J. Berzenski ------------------------------------ Paul J. Berzenski Vice President and Controller Signing both in his capacity as Vice President on behalf of the Registrant and as chief accounting officer of the Registrant May 14, 1998 Date 22 23 INDEX TO EXHIBITS EXHIBIT DESCRIPTION 10.1 First Amendment, dated as of March 18, 1998, to the Credit Agreement, dated as of July 23, 1997, among the Company, certain banks, the Chase Manhattan Bank as Administrative Agent and certain other banks as Co-Agents. 27 Financial Data Schedule 99 Forward-Looking Information 23 EX-10.1 2 FIRST AMENDMENT TO THE CREDIT AGREEMENT 1 FIRST AMENDMENT TO THE CREDIT AGREEMENT FIRST AMENDMENT, dated as of March 18, 1998 (this "First Amendment"), to the Credit Agreement, dated as of July 23, 1997 (as amended, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among GENERAL INSTRUMENT CORPORATION, a Delaware corporation formerly known as Next Level Systems, Inc. (the "Company"), the several lenders from time to time parties thereto (the "Banks"), THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Banks (in such capacity, the "Administrative Agent"), and the financial institutions named therein as co-agents for the Banks (in such capacity, collectively, the "Co-Agents"; each, individually, a "Co-Agent"). W I T N E S S E T H: WHEREAS, the Company, the Banks, the Administrative Agent and the Co-Agents are parties to the Credit Agreement. WHEREAS, the Company has requested that the Banks amend the Credit Agreement as set forth herein; WHEREAS, the Banks, the Administrative Agent and the Co-Agents are willing to agree to such amendment to the Credit Agreement, subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the Company, the Banks, the Administrative Agent and the Co-Agents hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement are used herein as therein defined. 2. Amendment to Subsection 1.1 (Defined Terms). Susbsection 1.1 of the Credit Agreement is hereby amended by inserting a new clause at the end of the definition of "Consolidated EBITDA" and prior to the first proviso appearing therein and by amending the words "and (e)" appearing therein to read ", (e)"; such new clause to read in full as follows: "and (f) all of the Company's restructuring and other charges associated with the restructuring of the Company's satellite business, the transfer of the Company's Next Level Communication business to a separate joint venture and miscellaneous other charges associated principally with the change of the Company's name, the Fuba acquisition and the reduction of the Company's overhead expense through consolidation of the Company's corporate facilities in its Horsham, Pennsylvania facilities (collectively, the "Restructuring") in an aggregate amount not to exceed $87 million for the quarter ended December 31, 1997 and in an aggregate amount not to exceed $116 million for the quarter ended March 31, 1998;" 2 3. Representations and Warranties. The Company hereby confirms, reaffirms and restates the representations and warranties set forth in Section 4 of the Credit Agreement. The Company represents and warrants that, after giving effect to this First Amendment, no Default or Event of Default has occurred and is continuing. 4. Effectiveness. This First Amendment shall become effective as of the date upon which the Administrative Agent receives counterparts of this First Amendment duly executed by the Company and the Required Banks. 5. Continuing Effect of the Credit Agreement. This First Amendment shall not constitute an amendment of any other provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent of the Banks, the Administrative Agent or the Co-Agents. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. 6. Counterparts. This First Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to constitute one and the same instrument. 7. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 3 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered in New York, New York by their respective proper and duly authorized officers as of the day and year first above written. GENERAL INSTRUMENT CORPORATION By: /s/ Richard C. Smith Title: Vice President THE CHASE MANHATTAN BANK, as Administrative Agent, as a Co-Agent and as a Bank By: /s/ Leonard Weiner Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Co-Agent and as a Bank By: /s/ Kevin McMahon Title: Managing Director BANKBOSTON, N.A., as a Co-Agent and as a Bank By: /s/ Robert A. MacElling Title: Vice President THE BANK OF NOVA, as a Co-Agent and as a Bank By: /s/[Name Illegible] Title: Senior Manager Loan Operations 4 BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Co-Agent and as a Bank By: /s/ Pamela Donnelly Title: Vice President CAISSE NATIONALE DE CREDIT AGRICOLE, as a Co-Agent and as a Bank By: /s/ David Bouhl Title: By: /s/ Dean Balice Title: Senior Vice President CIBC INC., as a Co-Agent and as a Bank By: /s/ Timothy F. Doyle Title: Managing Director CIBC Oppenheimer Corp., AS AGENT DEUTSCHE BANK, AG, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, as a Co-Agent and as a Bank By: /s/ Andre [Last Name Illegible] Title: Associate By: /s/ Belinda Wheeler Title: Vice President THE FUJI BANK, LIMITED, as a Co-Agent and as \ a Bank By: 5 NATIONSBANK, N.A., as a Co-Agent and as a Bank By: [Name Illegible] Title: Vice President THE BANK OF NEW YORK By: [Name Illegible] Title: Vice President BANQUE NATIONALE DE PARIS By: [Name Illegible] Title: Senior Vice President THE DAI-ICHI KANGYO BANK, LTD. By: /s/ Ronald Wolinsky Title: Vice President and Group Leader THE INDUSTRIAL BANK OF JAPAN, LIMITED By: [Name Illegible] Title: Senior Vice President/ Deputy General Manager THE NORTHERN TRUST COMPANY By: /s/ Michelle M. Wink Title: Vice President THE SANWA BANK LIMITED, CHICAGO BRANCH By: [Name Illegible] Title: Assistant General Manager 6 THE SUMITOMO BANK, LTD., CHICAGO BRANCH By: /s/ Ken-Ichiro Kobayashi Title: Joint General Manager THE SUMITOMO TRUST AND BANKING CO., LTD., NEW YORK BRANCH By: /s/ Stephen Stratico Title: Vice President EX-99 3 FORWARD-LOOKING INFORMATION 1 EXHIBIT 99 GENERAL INSTRUMENT CORPORATION EXHIBIT 99 -- FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company's Form 10-K, the Company's Annual Report to Stockholders, any Form 10-Q or Form 8-K of the Company, or any other oral or written statements made by or on behalf of the Company, may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," and "scheduled" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The actual results of the Company may differ significantly from the results discussed in forward-looking statements. Factors that might cause such a difference include, but are not limited to, (a) the general political, economic and competitive conditions in the United States and other markets where the Company operates; (b) change in capital availability or costs, such as changes in interest rates, market perceptions of the industry in which the Company operates, or security ratings; (c) employee workforce factors; and (d) authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission, and the factors as set forth below. FACTORS RELATING TO THE DISTRIBUTION The former General Instrument Corporation (the "Distributing Company") (i) transferred all the assets and liabilities relating to the manufacture and sale of broadband communications products used in the cable television, satellite, and telecommunications industries to the Company (then a wholly-owned subsidiary of the Distributing Company) and transferred all the assets and liabilities relating to the manufacture and sale of coaxial, fiber optic and other electric cable used in the cable television, satellite and other industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii) then distributed all of the outstanding shares of capital stock of each of the Company and 2 CommScope to its stockholders on a pro rata basis as a dividend (the "Distribution"), in a transaction that was consummated on July 28, 1997. Immediately following the Distribution, the Distributing Company changed its corporate name to "General Semiconductor, Inc." Effective February 2, 1998, the Company changed its corporate name from "NextLevel Systems, Inc." to "General Instrument Corporation." The Company is a smaller and less diversified company than the Distributing Company was prior to the Distribution and has limited operating history as a separate entity. The ability of the Company to satisfy its obligations and maintain profitability will be solely dependent upon its own future performance, and the Company will no longer be able to rely on the capital resources and cash flows of the businesses of CommScope or General Semiconductor. In particular, in recent years, the Company has invested heavily in the development of new technologies and products and relied on the cash flows of the Distributing Company's other businesses to help fund these expenditures. Although this source of funding is no longer available, the Company believes that its expected cash flow, as well as other sources of funding available to it, will be sufficient to finance its planned expenditures. The future performance and cash flows of the Company will be subject to prevailing economic conditions and to financial, business and other factors affecting the business operations of the Company, including factors beyond its control. The Distribution Agreement dated as of June 12, 1997, among the Company, CommScope and the Distributing Company (the "Distribution Agreement") and certain other agreements executed in connection with the Distribution (collectively, the "Ancillary Agreements") allocate among the Company, CommScope, and General Semiconductor and their respective subsidiaries responsibility for various indebtedness, liabilities and obligations. It is possible that a court would disregard this contractual allocation of indebtedness, liabilities and obligations among the parties and require the Company or its subsidiaries to assume responsibility for obligations allocated to another party, particularly if such other party were to refuse or was unable to pay or perform any of its allocated obligations. Pursuant to the Distribution Agreement and certain of the Ancillary Agreements, the Company has agreed to indemnify the other parties (and certain related persons) from and after consummation of the Distribution with respect to certain indebtedness, liabilities and obligations, which indemnification obligations could be significant. Although the Distributing Company has received a favorable ruling from the Internal Revenue Service, if the Distribution were not to qualify as a tax free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended, then, in general, a corporate tax would be payable by the consolidated group of which the Distributing Company was the common parent based upon the difference between the fair market 3 value of the stock distributed and the Distributing Company's adjusted basis in such stock. The corporate level tax would be payable by General Semiconductor and could substantially exceed the net worth of General Semiconductor. However, under certain circumstances, the Company and CommScope have agreed to indemnify General Semiconductor for such tax liability. In addition, under the consolidated return rules, each member of the consolidated group (including the Company and CommScope) is severally liable for such tax liability. CERTAIN RESTRICTIONS UNDER CREDIT FACILITIES The Credit Agreement dated as of July 23, 1997 and amended on March 18, 1998, among the Company, certain banks, and The Chase Manhattan Bank, as Administrative Agent, contains certain restrictive financial and operating covenants, including, among others, requirements that the Company satisfy certain financial ratios. The failure of the Company to satisfy such covenants would cause the Company to seek alternative sources of working capital financing and, depending upon the Company's degree of leverage at such time, could have a material adverse effect on the operations and financial condition of the Company. DEPENDENCE OF THE COMPANY ON THE CABLE TELEVISION INDUSTRY AND CABLE TELEVISION CAPITAL SPENDING The majority of the Company's revenues come from sales of systems and equipment to the cable television industry. Demand for these products depends primarily on capital spending by cable television operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore the Company's sales and profitability will be affected by a variety of factors, including general economic conditions, consolidation in the industry, the financial condition of domestic cable television operators and their access to financing, competition from satellite and wireless television providers and telephone companies, technological developments in the broadband communications industry and new legislation and regulation of cable television operations as described below. Capital spending in the cable television industry fell sharply in the middle of 1990 compared to 1989 and remained at a low level until it began to recover in mid-1992. Although the Company believes that the constraining pressures on domestic cable television capital spending eased and that cable television capital spending generally increased from mid-1992 through 1996, there can be no assurance that such increases will continue or that such increased level of cable television capital spending will be maintained. In recent years, cable television capital spending has also been affected by new legislation and regulation, on the federal, state and local level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or 4 legislative proposals. During 1993 and 1994, the Federal Communications Commission (the "FCC") adopted rules under the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), regulating rates that cable television operators may charge for lower tiers of service and generally not regulating the rates for higher tiers of service. In 1996, the Telecommunications Act of 1996 (the "Telecom Act") was enacted to eliminate certain governmental barriers to competition among local and long distance telephone, cable television, broadcasting and wireless services. When fully implemented by the FCC, the Telecom Act may significantly impact the communications industry and alter federal, state and local laws and regulations regarding the provision of cable and telephony services. Among other things, the Telecom Act eliminates substantially all restrictions on the entry of telephone companies and certain public utilities into the cable television business. Telephone companies may now enter the cable television business as traditional cable operators, as common carrier conduits for programming supplied by others, as operators of wireless distribution systems, or as hybrid common carrier/cable operator providers of programming on so-called "open video systems." The economic impact of the 1992 Cable Act, the Telecom Act and the rules thereunder on the cable television industry and the Company is still uncertain. Although the domestic cable television industry is comprised of approximately 11,200 cable systems, a small number of cable television operators own a majority of cable television systems and account for a majority of the capital expenditures made by cable television operators. The loss of some or all of the Company's principal cable television customers could have a material adverse effect on the business of the Company. TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING THE COMPANY The Company will be significantly affected by the competition among cable television operators, satellite television providers and telephone companies to provide video, voice and data/Internet services. In particular, although cable television operators have historically provided television services to the majority of U.S. households, direct-to-home ("DTH") satellite television has attracted a growing number of subscribers and the regional telephone companies have begun to offer competing cable and wireless cable services. This competitive environment is characterized by rapid technological changes, particularly with respect to developments in digital compression and broadband access technology. The Company believes that, as a result of its development of new products based on emerging technologies and the diversity of its product offerings, it is well positioned to supply each of the cable, satellite and telephone markets. The future success of the Company, however, will be dependent on its ability to market and deploy these new 5 products successfully and to continue to develop and timely exploit new technologies and market opportunities both in the United States and internationally. There can be no assurance that the Company will be able to continue to successfully introduce new products and technologies, that it will be able to deploy them successfully on a large-scale basis or that its technologies and products will achieve significant market acceptance. Further, there can be no assurance that the development of products using new technologies will not have an adverse impact on sales by the Company of certain of its other products. In addition, because of the competitive environment and the nature of the Company's business, there have been and may continue to be legal challenges to its new technologies. COMPETITION The Company's products and services compete with those of a substantial number of foreign and domestic companies, some with greater resources, financial or otherwise, than the Company, and the rapid technological changes occurring in the Company's markets are expected to lead to the entry of new competitors. The Company's ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in the Company's ability to expand and remain competitive. Existing competitors' actions and new entrants may have an adverse impact on the Company's sales and profitability. The Company believes that it enjoys a strong competitive position because of its large installed cable television equipment base, its strong relationships with the major cable television operators, its technological leadership and new product development capabilities, and the likely need for compatibility of new technologies with currently installed systems. There can be no assurance, however, that competitors will not be able to develop systems compatible with, or that are alternatives to, the Company's proprietary technology or systems. INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS U.S. broadband system designs and equipment are increasingly being employed in international markets, where cable television penetration is low. However, there can be no assurance that international markets will continue to develop or that the Company will receive additional contracts to supply its systems and equipment in international markets. A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. These foreign operations are subject to the usual risks inherent in situating operations abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions by foreign governments, nationalizations, the laws and policies of the United States affecting trade, foreign investment and loans, and foreign tax laws. The 6 Company's cost-competitive status relative to other competitors could be adversely affected if the New Taiwan dollar or another relevant currency appreciates relative to the U.S. dollar. ENVIRONMENT The Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on the Company's financial condition. The Company's present and past facilities have been in operation for many years, and over that time in the course of those operations, such facilities have used substances which are or might be considered hazardous, and the Company has generated and disposed of wastes which are or might be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future, which the Company cannot now predict. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GENERAL INSTRUMENT CORPORATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 MAR-31-1998 26,712 18,259 374,505 (2,822) 253,795 805,756 456,534 (236,218) 1,691,726 392,392 40,000 0 0 1,506 1,187,116 1,691,726 416,920 416,920 323,932 323,932 0 0 (979) (92,349) 32,458 (59,891) 0 0 0 (59,891) (0.40) (0.40)
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