-----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, UReoJNqwV+Ekbi8U7fKx5ytXV7mykT+9vNq0LaaBIyQfJmq7s7rcXVImU2MDPeNu 2UxF9T+OdrUpvMj0Npzt3g== 0001047469-99-020155.txt : 19990517 0001047469-99-020155.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020155 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621044 BUSINESS ADDRESS: STREET 1: 101 TOURNAMENT DRIVE CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2153231000 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 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, 1999 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 (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, 1999, there were 172,614,224 shares of Common Stock outstanding. GENERAL INSTRUMENT CORPORATION INDEX TO FORM 10-Q
PAGES ----- PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statement of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7-15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16-23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 PART II. OTHER INFORMATION ----------------- ITEM 1. Legal Proceedings 24-25 ITEM 2. Changes in Securities and Use of Proceeds 26 ITEM 6. Exhibits and Reports on Form 8-K 26 SIGNATURE 27
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ ASSETS Cash and cash equivalents $ 424,700 $ 148,675 Short-term investments 10,850 4,865 Accounts receivable, less allowance for doubtful accounts of $3,311 and $3,833, respectively (includes accounts receivable from related party of $59,704 and $81,075, respectively) 291,169 340,039 Inventories 261,481 281,451 Deferred income taxes 89,339 100,274 Other current assets 13,798 15,399 ----------- ----------- Total current assets 1,091,337 890,703 Property, plant and equipment, net 235,810 237,131 Intangibles, less accumulated amortization of $101,089 and $97,630, respectively 494,237 497,696 Excess of cost over fair value of net assets acquired, less accumulated amortization of $125,686 and $122,110, respectively 451,766 455,466 Deferred income taxes 1,979 1,999 Investments and other assets 112,977 104,765 ----------- ----------- TOTAL ASSETS $ 2,388,106 $ 2,187,760 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 237,327 $ 267,565 Other accrued liabilities 170,692 186,113 ----------- ----------- Total current liabilities 408,019 453,678 Deferred income taxes 14,118 15,913 Other non-current liabilities 69,277 67,998 ----------- ----------- Total liabilities 491,414 537,589 ----------- ----------- 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; 180,894,275 and 173,393,275 shares issued, respectively 1,809 1,734 Additional paid-in capital 1,942,053 1,742,824 Note receivable from stockholder (38,715) (40,615) Retained earnings 64,702 36,214 Accumulated other comprehensive income, net of taxes of $471 and $1,020, respectively 1,669 2,845 ----------- ----------- 1,971,518 1,743,002 Less - Treasury Stock, at cost, 3,724,354 and 4,619,069 shares, respectively (74,826) (92,831) ----------- ----------- Total stockholders' equity 1,896,692 1,650,171 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,388,106 $ 2,187,760 =========== ===========
See notes to consolidated financial statements. 3 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---------- ---------- NET SALES $ 519,061 $ 416,920 Cost of sales 381,015 323,932 ---------- ---------- GROSS PROFIT 138,046 92,988 ---------- ---------- OPERATING EXPENSES: Selling, general and administrative 50,917 55,885 Research and development 40,985 115,903 Amortization of excess of cost over fair value of net assets acquired 3,582 3,562 ---------- ---------- Total operating expenses 95,484 175,350 ---------- ---------- OPERATING INCOME (LOSS) 42,562 (82,362) Other expense - net (including equity interest in Partnership losses of $5,610 and $11,290, respectively) (1,026) (9,008) Interest income (expense) - net 3,683 (979) ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 45,219 (92,349) (Provision) benefit for income taxes (16,731) 32,458 ---------- ---------- NET INCOME (LOSS) $ 28,488 $ (59,891) ========== ========== Earnings (Loss) Per Share - Basic $ 0.16 $ (0.40) ========== ========== Earnings (Loss) Per Share - Diluted $ 0.15 $ (0.40) ========== ========== Weighted-Average Shares Outstanding - Basic 175,204 149,666 Weighted-Average Shares Outstanding - Diluted 189,071 149,666
See notes to consolidated financial statements. 4 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED - IN THOUSANDS)
NOTE ACCUMULATED ADDITIONAL RECEIVABLE OTHER COMMON TOTAL COMMON STOCK PAID-IN FROM RETAINED COMPREHENSIVE STOCK IN STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS INCOME TREASURY EQUITY -------- ------ ---------- ----------- -------- ------------- -------- ------------- BALANCE, JANUARY 1, 1999 173,393 $1,734 $1,742,824 $ (40,615) $ 36,214 $ 2,845 $(92,831) $1,650,171 Net income -- -- -- -- 28,488 -- -- 28,488 Other comprehensive income, net-of-tax: Unrealized losses on available-for-sale securities -- -- -- -- -- (858) -- (858) Foreign currency translation adjustments -- -- -- -- -- (318) -- (318) ---------- Comprehensive income 27,312 Exercise of stock options and related tax benefit (895 shares issued from Treasury) -- -- 3,468 -- -- -- 18,005 21,473 Issuances of shares 7,501 75 187,425 -- -- -- -- 187,500 Payment of note receivable from stockholder -- -- -- 1,900 -- -- -- 1,900 Warrant costs related to customer purchases -- -- 8,336 -- -- -- -- 8,336 -------- ------ ---------- --------- -------- ------- -------- ---------- BALANCE, MARCH 31, 1999 180,894 $1,809 $1,942,053 $ (38,715) $ 64,702 $ 1,669 $(74,826) $1,896,692 ======== ====== ========== ========= ======== ======= ======== ==========
See notes to consolidated financial statements. 5 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ 28,488 $ (59,891) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 21,221 18,266 Warrant costs related to customer purchases 8,336 3,137 Gain on sale of short-term investment (5,035) (3,025) Losses from asset sales and write-downs, net 9,950 4,328 Loss from equity investment 5,610 11,290 Changes in assets and liabilities: Accounts receivable 48,870 (36,915) Inventories 13,870 20,369 Prepaid expenses and other current assets 1,601 (2,013) Deferred income taxes 9,709 (38,772) Non-current assets 3,272 1,246 Accounts payable and other accrued liabilities (38,516) 16,290 Other non-current liabilities 1,279 (764) Other (200) (66) --------- --------- Net cash provided by (used in) operating activities 108,455 (66,520) --------- --------- INVESTING ACTIVITIES: Additions to property, plant and equipment (16,695) (17,825) Investments in other assets (24,500) (1,995) Proceeds from sale of short-term investment 5,035 3,025 --------- --------- Net cash used in investing activities (36,160) (16,795) --------- --------- FINANCING ACTIVITIES: Proceeds from stock option exercises 14,330 34,802 Proceeds from issuance of shares 187,500 -- Payment of note receivable from stockholder 1,900 -- Net borrowings under Credit Agreement -- 40,000 --------- --------- Net cash provided by financing activities 203,730 74,802 --------- --------- Change in cash and cash equivalents 276,025 (8,513) Cash and cash equivalents, beginning of period 148,675 35,225 --------- --------- Cash and cash equivalents, end of period $ 424,700 $ 26,712 ========= =========
See notes to consolidated financial statements. 6 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 provider of integrated and interactive broadband access solutions and, with its strategic partners and customers, is advancing the convergence of the Internet, telecommunications and video entertainment industries. The Company is the world's leading supplier of digital and analog set-top terminals and 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 provider of digital satellite television systems for programmers, direct-to-home ("DTH") satellite networks 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 next-generation broadband access solutions for local telephone companies with the Partnership's NLevel3(R) Switched Digital Access System ("NLevel3"). 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, at the Distributing Company's historical cost, 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"), at the Distributing Company's historical cost, 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, par value $.01 per share (the "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 "Distribution"). 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 the Company. The consolidated balance sheet as of March 31, 1999, the consolidated statements of operations for the three months ended March 31, 1999 and 1998, the consolidated statement of stockholders' equity for the three months ended March 31, 1999 and the consolidated statements of cash flows for the three months ended March 31, 1999 and 1998 of the Company are unaudited and reflect all adjustments of a normal recurring nature (except for those charges disclosed in Notes 7, 8 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 statements should be read in conjunction with the accounting policies and notes to the consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K. 3. INVENTORIES Inventories consist of:
MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- Raw materials $105,316 $103,807 Work in process 22,611 19,236 Finished goods 133,554 158,408 -------- -------- $261,481 $281,451 ======== ========
7 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) 4. INVESTMENTS At March 31, 1999 and December 31, 1998, all of the Company's marketable equity securities were classified as available-for-sale. Proceeds and the related realized gains from the sales of available-for-sale securities for the three months ended March 31, 1999 and 1998 were $5 million and $3 million respectively. Realized gains were determined using the securities' cost. Short-term investments consisted of the following at March 31, 1999 and December 31, 1998:
MARCH 31, 1999 DECEMBER 31, 1998 ------------------------------------------- ------------------------------------------- GROSS GROSS GROSS GROSS FAIR UNREALIZED UNREALIZED COST FAIR UNREALIZED UNREALIZED COST VALUE GAINS LOSSES BASIS VALUE GAINS LOSSES BASIS ------- ---------- ---------- ------- ------- ---------- ---------- ------- Marketable Equity Securities $10,850 $ 3,550 $(1,092) $ 8,392 $ 4,865 $ 3,865 $ -- $ 1,000 ======= ======= ======= ======= ======= ======= ==== =======
5. COMMITMENTS AND CONTINGENCIES 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 Exchange Act of 1934, as amended (the "Exchange Act"), prior to the Distribution, by allegedly making false and misleading statements and failing to disclose material facts about the Distributing Company's planned shipments in 1995 of its CFT2200 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 Distribution, 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. Both actions seek unspecified damages and attorneys' fees and costs. The court granted the defendants' motion 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 answered the amended consolidated complaint in the class actions, denying liability, and filed a renewed motion to dismiss the derivative action. On September 22, 1998, defendants' motion to dismiss the derivative action was denied. In November 1998, the defendants filed an answer to the derivative action, denying liability. On January 21, 1999, the plaintiffs in the class actions filed their motion for class certification, including the defendants' opposition. 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 Next Level Communications ("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 filed a motion to dismiss parts of the amended complaint and answered the balance of the amended complaint, denying liability. On September 22, 1998, the district court dismissed with prejudice the portion of the complaint alleging violations of Section 14(a) of the Exchange Act, and denied the remainder of the defendants' motion to dismiss. In November, 1998, the defendants filed an answer to the remaining parts of the amended complaint, denying liability. The Company intends to vigorously contest this action. In connection with the Distribution, the Company has agreed to indemnify General Semiconductor with respect to its obligations, if any, arising out of or in connection with the matters discussed in the preceding two paragraphs. 8 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) 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. The complaint seeks damages in an unspecified amount. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants moved to dismiss the remaining counts of the complaint. That motion was denied on March 31, 1999 and defendants' answer is currently due on June 4, 1999. The Company intends to vigorously contest this action. On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS L.P., KK MANAGER, L.L.C., GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the Superior Court of the State of Delaware in and for New Castle County (the "Delaware Action"). In that action, DSC Communications Corporation and DSC Technologies Corporation (collectively, "DSC") alleged that in connection with the formation of the Partnership and the transfer to it of NLC's switched digital video technology, the Partnership and KK Manager, L.L.C. misappropriated DSC's trade secrets; that the Company improperly disclosed trade secrets when it conveyed such technology to the Partnership; and that Spencer Trask & Co., Inc. conspired to misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the defendants' purported unjust enrichment, disgorgement of consideration, exemplary damages and attorney's fees, all in unspecified amounts. In April 1998, the Company and the other defendants filed an action in the United States District Court for the Eastern District of Texas, requesting that the federal court preliminarily and permanently enjoin DSC from prosecuting the Delaware Action because by pursuing such action, DSC effectively was trying to circumvent and relitigate the Texas federal court's November 1997 judgment in a previous lawsuit involving DSC, pursuant to which NLC had paid over $140 million. On May 14, 1998, the Texas court granted a preliminary injunction preventing DSC from proceeding with the Delaware Action. That injunction order is now on appeal to the United States Court of Appeals for the Fifth Circuit where the case has been briefed and argued and awaits determination. On July 6, 1998, the Delaware defendants filed a motion for summary judgment with the Texas federal court requesting that the preliminary injunction be converted into a permanent injunction preventing DSC from proceeding with this litigation. That motion also has been briefed and awaits determination. As a result of the preliminary injunction, the Delaware Action has been stayed in its entirety. The Company intends to vigorously contest this action. In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for Arbitration against the Company alleging that the Company breached the terms of a license agreement with StarSight by (a) developing a competing product that wrongfully incorporates StarSight's technology and inventions claimed within a certain StarSight patent, (b) failing to promote and market the StarSight product as required by the license agreement, and (c) wrongfully using StarSight's technical information, confidential information and StarSight's graphical user interface in breach of the license agreement. StarSight is seeking injunctive relief as well as damages (as specified below). The first part of a bifurcated arbitration proceeding, relating to the Company's advanced analog products, began on March 22, 1999 before an arbitration panel of the American Arbitration Association in San Francisco, California. The Company expects to receive a decision from the panel by late June, 1999. At the arbitration proceeding, StarSight identified purported damages arising from the sale by the Company of advanced analog set top boxes containing a native electronic program guide. StarSight alleged that it is entitled to collect $52 million to $177 million in compensatory damages and an unspecified amount of punitive damages. The Company has denied liability and presented evidence disputing both StarSight's damages theories and amounts in the event that liability were to be found. A separate hearing relating to certain of the Company's digital set top boxes and satellite products is scheduled for mid-September, 1999. The Company continues to vigorously contest this action. On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United States District Court for the Northern District of California. The complaint alleges infringement by the Company of two U.S. patents allegedly covering electronic program guides. The complaint seeks unspecified damages and an injunction. The plaintiffs sought to consolidate discovery for this action with other program guide related patent infringement actions pending against Pioneer Electronics Corp., Scientific-Atlanta, Inc., and Prevue Networks, Inc. On April 26, 1999, the Judicial Panel on Multidistrict Litigation ordered the transfer of this action to the Northern District of Georgia for consolidated pretrial proceedings with the Pioneer Electronics Corp. and Scientific-Atlanta, Inc. actions. The Company denies that it infringes the subject patents and intends to vigorously defend this action. 9 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) 6. 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. Significant financial ratios include (i) maintenance of consolidated net worth above $600 million adjusted for 50% of cumulative positive quarterly net income subsequent to June 30, 1997; (ii) maintenance of an interest coverage ratio based on EBITDA in comparison to net interest expense of greater than 5 to 1; and (iii) maintenance of a leverage ratio comparing total indebtedness to EBITDA of less than 3 to 1. 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, and as of March 31, 1999, the Company was in compliance with all financial and operating covenants under the Credit Agreement. At March 31, 1999, the Company had available credit of $500 million under the Credit Agreement. The Company had approximately $106 million of letters of credit outstanding at March 31, 1999. 7. RESTRUCTURINGS In the fourth quarter of 1997, with the change in senior management, the Company undertook an effort to assess the future viability of its satellite business. As the satellite business had been in a state of decline, management of the Company made a decision to streamline the cost structure of its San Diego-based satellite business by reducing this unit's headcount by 225. In conjunction with the assessment of the satellite business, the Company also made a strategic decision with respect to its worldwide consolidated manufacturing operations that resulted in the closure of 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. The Company also decided to close its corporate office and move from Chicago, Illinois to Horsham, Pennsylvania, which was completed during the first quarter of 1998. Costs associated with the closure of facilities ("Facility Costs") include vacated long-term leases which are payable through the end of the lease terms which extend through the year 2008. As a result of the above actions, the Company recorded a pre-tax charge of $36 million during the fourth quarter of 1997. As part of the restructuring plan, the Company recorded an additional $16 million of pre-tax charges in the first quarter of 1998 which primarily included $8 million for severance and other employee separation costs, $3 million of facility exit costs, including the early termination of a leased facility which the Company decided to close in the quarter ended March 31, 1998, and $5 million related to the write-down of fixed assets to their estimated fair values. Of these charges, $9 million were recorded as cost of sales, $6 million as SG&A expense and $1 million as R&D expense. On April 29, 1999, PRIMESTAR, Inc. ("PRIMESTAR") announced that it had completed the previously announced sale of its direct broadcast satellite ("DBS") medium-power business and assets to Hughes Electronics Corporation ("Hughes"). Sales to PRIMESTAR accounted for 11% of the Company's sales in 1998. The Company currently expects future PRIMESTAR purchases of medium-power equipment from the Company to be minimal. Further, as a result of the previously announced purchase by Hughes of PRIMESTAR's rights to acquire certain high-power satellite assets, the Company does not expect to supply any high-power equipment to PRIMESTAR. In the first quarter of 1999, in connection with the announcement of the PRIMESTAR developments, the Company evaluated its overhead structure and has taken steps to further consolidate its San Diego, California and Horsham, Pennsylvania operations, including reducing headcount by approximately 200. The Company recorded a pre-tax charge of approximately $15 million during the first quarter of 1999 which primarily included $6 million for severance costs, $6 million for the write-down of PRIMESTAR related inventory to its lower of cost or market, $2 million for the write-down of fixed assets used to manufacture PRIMESTAR products to their estimated fair values and $1 million of facility costs. Of these charges, $8 million were recorded as cost of sales and $7 million were recorded as SG&A expense. 10 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) The following tabular reconciliation summarizes the restructuring activity from January 1, 1998 through March 31, 1999:
1998 1999 BALANCE AT -------------------- BALANCE AT ------------------- BALANCE AT JANUARY 1, AMOUNTS DECEMBER 31, AMOUNTS MARCH 31, 1998 ADDITIONS UTILIZED 1998 ADDITIONS UTILIZED 1999 ---------- --------- -------- ------------- --------- -------- --------- (in millions) Inventory (1) $ -- $ -- $ -- $ -- $ 6.1 $ -- $ 6.1 Property, Plant & Equipment (1) 7.8 4.6 (12.4) -- 2.2 -- 2.2 Facility Costs 10.5 3.3 (10.0) 3.8 0.8 (0.2) 4.4 Severance 19.9 7.6 (26.7) 0.8 5.7 (1.0) 5.5 -------- ------ ------- ------- ------ ------ ------ Total $ 38.2 $ 15.5 $ (49.1) $ 4.6 $ 14.8 $ (1.2) $ 18.2 ======== ====== ======= ======= ====== ====== ======
(1) The amount provided represents a direct reduction to the inventory and property, plant and equipment balances to reflect the identified impaired assets at their lower of cost or market and fair values, respectively. The amounts utilized reflect the disposition of such identified impaired assets. 8. OTHER CHARGES The Company incurred certain other pre-tax charges during the first quarter of 1998 primarily related to management's decision to close a satellite manufacturing facility due to reduced demand for the products manufactured by that facility. Concurrent with this decision, the Company determined that the carrying value of the inventory would not be recoverable and, accordingly, the Company wrote down the inventory to its lower of cost or market. In addition, the Company incurred moving costs associated with relocating certain fixed assets to other facilities, shutdown expenses and legal fees. The above charges totaled $25 million, of which $18 million are included in cost of sales and $7 million are included in SG&A expense. In addition, the Company incurred $8 million of charges, which are included in "other expense-net," related to costs incurred by the Partnership, which the Company accounts for under the equity method. Such costs are primarily related to a $5 million litigation settlement and compensation expense related to key executives of an acquired company. The following tabular reconciliation summarizes the other charge activity discussed above:
1998 1999 BALANCE AT --------------------- BALANCE AT -------- BALANCE AT JANUARY 1, AMOUNTS DECEMBER 31, AMOUNTS MARCH 31, 1998 ADDITIONS UTILIZED 1998 UTILIZED 1999 ---------- --------- -------- ------------ -------- --------- (in millions) Inventory (1) $ 43.3 $ 15.0 $ (43.3) $ 15.0 $ (4.4) $ 10.6 Property, Plant & Equipment (1) 8.4 -- (1.1) 7.3 (7.3) -- Professional Fees & Other Costs 3.2 10.1 (13.3) -- -- -- Partnership Related Costs -- 8.4 (8.4) -- -- -- ------- ------ ------- ------- ------- ------- Total $ 54.9 $ 33.5 $ (66.1) $ 22.3 $ (11.7) $ 10.6 ======= ====== ======= ======= ======= =======
(1) These charges represent a direct reduction to the inventory and property, plant and equipment balances to reflect these assets at their lower of cost or market and fair values, respectively. The amounts utilized reflect the disposition of such identified assets. 11 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) 9. OTHER EXPENSE - NET Other expense-net for the three months ended March 31, 1999 primarily includes $6 million related to the Company's share of the Partnership losses, partially offset by $5 million related to gains on the sale of the Company's remaining investment in Ciena Corporation. Other expense-net for the three months ended March 31, 1998 primarily reflects $11 million related to the Company's share of the Partnership losses, including the Company's share of a $5 million litigation settlement and compensation expense related to key executives of an acquired company, partially offset by $3 million related to gains on the sale of a portion of the Company's investment in Ciena Corporation. 10. THE PARTNERSHIP In January 1998, the Company transferred at historical cost the net assets, the underlying NLC 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). Such transaction was accounted for at historical cost. The limited partnership interest is included in "investments and other assets" in the accompanying consolidated balance sheet at March 31, 1999. The operating general partner, which was formed by Spencer Trask & Co., an unrelated third party, has acquired approximately an 11% interest in the Partnership and has the potential to acquire up to an additional 11% in the future. The Company does not have the option to acquire the operating general partner's interest in the Partnership. Net assets transferred to the Partnership of $45 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, has 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 and a change in the limited partner's financial interests in the Partnership. The Company can not remove the general partner, except for cause; however, it has the right to approve a change in the general partner. 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, including the execution of agreements on all material matters affecting the Partnership's business, the Partnership's operating results have not been consolidated with the operating results of the Company subsequent to the January 1998 transfer. The technology transferred to the Partnership related to in-process R&D, which was originally purchased by the Company in connection with the acquisition of NLC in September 1995, for the design and marketing of a highly innovative next-generation telecommunication broadband access system for the delivery of telephony, video and data from a telephone company central office to the home. The in-process technology, at the date of the 1995 acquisition and at the date of the transfer to the Partnership, had not reached technological feasibility and had no alternative future use. The Company does not expect widespread commercial deployment of this technology until the latter part of 1999 or early in 2000; however, there can be no assurance that the development activities currently being undertaken will result in successful commercial deployment. 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 commercial success of its product development, the Company recorded a charge to R&D expense during the quarter ended March 31, 1998 to fully reserve for the Note concurrent with the funding. The proceeds of the Note are being utilized to fund the R&D activities of the Partnership to develop the aforementioned telecommunication technology for widespread commercial deployment. During 1998, the Company agreed to make additional equity investments in the Partnership, aggregating $50 million, beginning in November 1998, to fund the Partnership's growth and assist the Partnership in meeting its forecasted working capital requirements. Through March 31, 1999, the Company has made $40 million of this $50 million investment and expects to make the remaining equity investment during the second quarter of 1999. 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 R&D activities will be offset against the $75 million reserve discussed above. For the three months ended March 31, 1999 and 1998, the Company's share of the Partnership's losses was $6 million and $11 million, respectively, (net of the Company's share of R&D expenses of $10 12 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) million and $9 million, respectively). The Company has eliminated its interest income from the Note against its share of the Partnership's related interest expense on the Note. The Company's net equity investment in the Partnership was $54 million at March 31, 1999. The following summarized financial information is provided for the Partnership for the three months ended March 31, 1999 and 1998:
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ---------- ---------- Net sales $ 8,777 $ 2,739 Gross profit 572 (1,116) Loss before income taxes (19,057) (24,310) Net cash used in operating activities (15,680) (22,270)
11. RELATED PARTY TRANSACTIONS The Company entered into an Asset Purchase Agreement with two affiliates of Tele-Communications, Inc. ("TCI"), which was consummated on July 17, 1998, pursuant to which the Company acquired from TCI, in exchange for 21.4 million shares of the Company's Common Stock, certain assets consisting primarily of a license to certain intellectual property which will enable the Company to conduct authorization services. Following the merger of a wholly-owned subsidiary of AT&T Corp. with and into TCI, Liberty Media Corporation, a wholly-owned subsidiary of TCI, became the beneficial owner of such 21.4 million shares of the Company's Common Stock. TCI is a significant customer of the Company. Sales to TCI represented 33% and 31% of total Company sales for the three months ended March 31, 1999 and the year ended December 31, 1998, respectively. Management believes the transactions with TCI are at arms length and are under terms no less favorable to the Company than those with other customers. At March 31, 1999 and December 31, 1998 accounts receivable from TCI totaled $60 million and $81 million, respectively. 13 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) 12. SEGMENT INFORMATION Selected information regarding the Company's reportable segments follows:
SATELLITE BROADBAND AND BROADCAST CORPORATE NETWORKS NETWORK UNALLOCATED TOTAL SYSTEMS SYSTEMS AND OTHER COMPANY --------- ------------- ----------- ------- THREE MONTHS ENDED MARCH 31, 1999 ------------------------------------------------- Net sales $435,189 $83,872 $ -- $519,061 Operating income (loss) 52,495 11,425 (21,358) (b) 42,562 Other expense - net (including equity interest in Partnership losses of $5,610) -- -- (1,026) (1,026) Interest income (expense) - net -- -- 3,683 3,683 Income (loss) before income taxes -- -- 45,219 45,219 Segment assets (a) 622,198 154,140 12,122 (c) 788,460 THREE MONTHS ENDED MARCH 31, 1998 ------------------------------------------------- Net sales $310,134 $106,786 $ -- $416,920 Operating income (loss) 38,408 5,257 (126,027) (b) (82,362) Other expense - net (including equity interest in Partnership losses of $11,290) -- -- (9,008) (9,008) Interest income (expense) - net -- -- (979) (979) Income (loss) before income taxes -- -- (92,349) (92,349) Segment assets (a) 570,302 252,844 22,648 (c) 845,794
------------------------------------------------- (a)Segment assets include accounts receivable, inventories and property, plant and equipment. Other balance sheet items are not allocated to the segments. (b)Primarily reflects unallocated costs, including amortization of excess of cost over fair value of net assets acquired of $4 million for the three months ended March 31, 1999 and 1998, and restructuring and other charges of $15 million and $115 million for the three months ended March 31, 1999 and 1998, respectively (see Notes 7 and 8). The remaining reconciling amounts reflect unallocated corporate selling, general and administrative expenses. (c)Primarily reflects non-trade accounts receivable of $4 million and $24 million at March 31, 1999 and 1998, respectively, and certain unallocated property, plant and equipment balances of $16 million at March 31, 1999 and 1998 offset by write-downs related to restructuring and other charges not allocated to the segments for internal management reporting purposes. 13. OTHER INFORMATION EARNINGS (LOSS) PER SHARE. For the three months ended March 31, 1999, the calculation of diluted weighted-average shares outstanding included the dilutive effects of stock options and warrants of 3,878 shares and 9,989 shares, respectively. 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. SHARE ACTIVITY. In January 1999 Sony Corporation of America purchased 7.5 million new shares of the Company's Common Stock for $188 million. In April 1999, the Company repurchased 5.3 million shares of its Common Stock from two partnerships affiliated with Forstmann Little & Co. for $148 million. LICENSE AMORTIZATION. Intangible assets consist primarily of a license, which is being amortized over its 20-year term based on the expected revenue stream. The revenue earned from the license is solely dependent on the Company's deployment of digital terminals and such deployment is expected to rise significantly during the 20-year term. The Company believes the expected revenue stream is a reliable measure of the future benefit of the license both in the aggregate and in terms of the periods to which such benefit will be realized. Accordingly, the Company believes this method of amortization is a more appropriate method than straight-line. At each reporting date, the Company's method of 14 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, UNLESS OTHERWISE NOTED) amortization requires the determination of a fraction, the numerator of which is the actual revenues for the period and the denominator of which is the expected revenues from the license during its 20-year term. Under the Company's method, amortization for the three months ended March 31, 1999 was approximately $0.8 million and amortization for the period from July 17, 1998 to March 31, 1999 was approximately $1.5 million. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial statements. 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, 1999 were $519 million, an increase of $102 million, or 24%, over net sales of $417 million for the three months ended March 31, 1998. This increase in net sales for the three-month period reflects higher sales of digital cable systems and transmission products, partially offset by lower sales of analog cable products and satellite products. Analog and digital products represented 36% and 64%, respectively, of total sales for the three months ended March 31, 1999 compared to 51% and 49%, respectively, of total sales for the three months ended March 31, 1998. Worldwide broadband sales (consisting of digital and analog cable and wireless television systems and transmission network systems) of $435 million for the three months ended March 31, 1999 increased $125 million, or 40%, from the comparable 1998 period, primarily as a result of increased U.S. sales volume of digital cable terminals and headends and transmission product sales, partially offset by lower sales of analog cable systems. These sales reflect the increasing commitment of cable television operators to deploy interactive digital systems in order to offer advanced entertainment, interactive services and Internet access to their customers. During the three months ended March 31, 1999 and 1998, broadband sales in the U.S. were 88% and 81%, respectively, combined U.S. and Canadian sales were 90% and 83%, respectively, and all other international sales were 10% and 17%, respectively, of total worldwide broadband sales. The decrease in international sales from the first quarter of 1998 was experienced primarily in the Latin American region and international sales are not expected to return to historical levels in the near-term. Worldwide satellite sales of $84 million for the three months ended March 31, 1999 decreased $23 million from the comparable 1998 period, primarily as a result of lower sales to PRIMESTAR, Inc. ("PRIMESTAR"), as described further below. During the three months ended March 31, 1999 and 1998, satellite sales in the U.S. were 77% and 93%, respectively, combined U.S. and Canadian sales were 94% and 99%, respectively, and all other international sales were 6% and 1%, respectively, of total worldwide satellite sales. TCI accounted for approximately 33% of the Company's consolidated net sales for the three months ended March 31, 1999. For the year ended December 31, 1998, TCI and PRIMESTAR represented approximately 31% and 11%, respectively, of total Company sales. On April 29, 1999, PRIMESTAR, Inc. ("PRIMESTAR") announced that it had completed the previously announced sale of its direct broadcast satellite ("DBS") medium-power business and assets to Hughes Electronics Corporation ("Hughes"). The Company currently expects future PRIMESTAR purchases of medium-power equipment from the Company to be minimal. Further, as a result of the previously announced purchase by Hughes of PRIMESTAR's rights to acquire certain high-power satellite assets, the Company does not expect to supply any high-power equipment to PRIMESTAR. GROSS PROFIT Gross profit was $138 million and $93 million for the three months ended March 31, 1999 and 1998, respectively. Gross profit was 27% and 22% of sales for the three months ended March 31, 1999 and 1998, respectively. Gross profit for the three months ended March 31, 1999 included $8 million of restructuring charges (see Note 7 and "Restructurings" below) primarily related to the write-down of PRIMESTAR related inventory to its lower of cost or market and the write-down of fixed assets used to manufacture PRIMESTAR products to their estimated fair values. Gross profit for the three months ended March 31, 1998 included $9 million of restructuring charges (see Note 7 and "Restructurings" below) and $18 million of other charges (see Note 8 and "Other Charges" below), primarily related to severance and other employee separation costs, costs associated with the closure of various facilities, the write-down of fixed assets to their estimated fair values and the write-down of inventories to their lower of cost or market. SELLING, GENERAL AND ADMINISTRATIVE Selling, general & administrative ("SG&A") expense was $51 million and $56 million for the three months ended March 31, 1999 and 1998, respectively. SG&A expense decreased as a percentage of sales to 10% for the three months ended March 31, 1999 from 13% for the three months ended March 31, 1998. SG&A for the three months ended March 31, 1999 included $7 million of restructuring charges (see Note 7 and "Restructurings" below) primarily related to 16 severance costs and facility costs recorded in connection with the announcement of the PRIMESTAR developments. SG&A for the three months ended March 31, 1998 included $6 million of restructuring charges (see Note 7 and "Restructurings" below) and $7 million of other charges (see Note 8 and "Other Charges" below) primarily related to severance and other employee separation costs, costs associated with the closure of various facilities, including moving costs and costs associated with changing the Company's corporate name. RESEARCH AND DEVELOPMENT Research and development ("R&D") expense was $41 million and $116 million for the three months ended March 31, 1999 and 1998, 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). Proceeds of the Partnership Note are being utilized by the Partnership to fund research and development activities to develop, for widespread commercial deployment, the next-generation telecommunications technology for the delivery of telephony, video, and data from the telephone company central office to the home. Such widespread deployment is not expected until the latter part of 1999 or early in 2000, however, there can be no assurance that the development activities currently being undertaken will result in successful commercial deployment. R&D spending in 1999 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-net was $1 million and $9 million for the three months ended March 31, 1999 and 1998, respectively. Other expense decreased in the first quarter of 1999 from the comparable 1998 period primarily due to a reduction in the Partnership's losses (see Note 10). Other expense-net for the three months ended March 31, 1999 primarily includes $6 million related to the Company's share of the Partnership losses, partially offset by $5 million related to gains on the sale of the Company's remaining investment in Ciena Corporation. Other expense-net for the three months ended March 31, 1998 primarily reflects $11 million related to the Company's share of the Partnership's losses (see Note 10), including the Company's share of a $5 million litigation settlement and compensation expense related to key executives of an acquired company, partially offset by $3 million related to gains on the sale of a portion of the Company's investment in Ciena Corporation. INTEREST INCOME (EXPENSE)--NET Net interest income was $4 million for the three months ended March 31, 1999 compared to net interest expense of $1 million for the three months ended March 31, 1998. The increase in interest income reflects the higher average cash balance and debt free position during the three months ended March 31, 1999. INCOME TAXES The Company recorded a provision for income taxes of $17 million and a benefit for income taxes of $32 million for the three months ended March 31, 1999 and 1998, respectively. Excluding the restructuring and other charges recorded during these periods, the effective tax rate was approximately 37% and 38% for the three months ended March 31, 1999 and 1998, respectively. RESTRUCTURINGS In the fourth quarter of 1997, with the change in senior management, the Company undertook an effort to assess the future viability of its satellite business. As the satellite business had been in a state of decline, management of the Company made a decision to streamline the cost structure of its San Diego-based satellite business by reducing this unit's headcount by 225. In conjunction with the assessment of the satellite business, the Company also made a strategic decision with respect to its worldwide consolidated manufacturing operations that resulted in the closure of 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. The Company also decided to close its corporate office and move from Chicago, Illinois to Horsham, Pennsylvania, which was completed during the first quarter of 1998. Costs associated with the closure of facilities include vacated long-term leases which are payable through the end of the lease terms which extend through the year 2008. As a result of the above actions, the Company recorded a pre-tax charge of $36 million during the fourth quarter of 1997 (see Note 7). These restructuring 17 costs provided cost savings in certain satellite production processes; however, declining demand for certain satellite products has substantially offset the cost reductions. As part of the restructuring plan, the Company recorded an additional $16 million of pre-tax charges in the first quarter of 1998 which primarily included $8 million for severance and other employee separation costs, $3 million of facility exit costs, including the early termination of a leased facility which the Company decided to close in the quarter ended March 31, 1998, and $5 million related to the write-down of fixed assets to their estimated fair values (see Note 7). Of these charges, $9 million were recorded as cost of sales, $6 million as SG&A expense and $1 million as R&D expense. In the first quarter of 1999, in connection with the announcement of the PRIMESTAR developments, the Company evaluated its overhead structure and has taken steps to further consolidate its San Diego, California and Horsham, Pennsylvania operations, including reducing headcount by approximately 200. The Company recorded a pre-tax charge of approximately $15 million during the first quarter of 1999 which primarily included $6 million for severance costs, $6 million for the write-down of PRIMESTAR related inventory to its lower of cost or market, $2 million for the write-down of fixed assets used to manufacture PRIMESTAR products to their estimated fair values and $1 million of facility costs (see Note 7). Of these charges, $8 million were recorded as cost of sales and $7 million were recorded as SG&A expense. OTHER CHARGES The Company incurred certain other pre-tax charges during the first quarter of 1998 primarily related to management's decision to close a satellite manufacturing facility due to reduced demand for the products manufactured by that facility. Concurrent with this decision, the Company determined that the carrying value of the inventory would not be recoverable and, accordingly, the Company wrote down the inventory to its lower of cost or market. In addition, the Company incurred moving costs associated with relocating certain fixed assets to other facilities, shutdown expenses and legal fees. The above charges totaled $25 million, of which $18 million are included in cost of sales and $7 million are included in SG&A expense. In addition, the Company incurred $8 million of charges, which are included in "other expense-net," related to costs incurred by the Partnership, which the Company accounts for under the equity method. Such costs are primarily related to a $5 million litigation settlement and compensation expense related to key executives of an acquired company. The balance of these reserves was $11 million at March 31, 1999 and relates to inventory (see Note 8). LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1999 and 1998, cash provided by operations was $108 million and cash used in operations was $67 million, respectively. Cash provided by operations in the first quarter of 1999 primarily represents cash generated by the broadband business. Cash used in 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. At March 31, 1999, working capital (current assets less current liabilities) was $683 million compared to $437 million at December 31, 1998. The Company believes that working capital levels are appropriate to support the growth of the business; however, there can be no assurance that future industry-specific developments or general economic trends will not alter the Company's working capital requirements. During the three months ended March 31, 1999 and 1998, the Company invested $17 million and $18 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 $90 million. The Company's R&D expenditures were $41 million and $116 million (including the $75 million funding related to the Partnership's R&D activities) during the first quarter of 1999 and 1998, respectively. The Company expects total R&D expenditures to approximate $165 million for the year ending December 31, 1999. 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. Significant financial ratios include (i) maintenance of consolidated net worth above $600 million adjusted for 50% of cumulative positive quarterly net income subsequent to June 30, 1997; (ii) maintenance of an interest coverage ratio based on EBITDA in comparison to net interest expense of greater than 5 to 1; and (iii) maintenance of a leverage ratio comparing total indebtedness to EBITDA of less than 3 to 1. None of the restrictions contained in the Credit 18 Agreement is expected to have a significant effect on the Company's ability to operate. As of March 31, 1999, the Company was in compliance with all financial and operating covenants contained in the Credit Agreement and had available credit of $500 million. In January 1999 Sony Corporation of America purchased 7.5 million new shares of the Company's Common Stock for $188 million. In April 1999, the Company repurchased 5.3 million shares of its Common Stock from two partnerships affiliated with Forstmann Little & Co. for $148.4 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. The technology transferred to the Partnership related to in-process research and development for the design and marketing of a highly innovative next-generation telecommunication broadband access system for the delivery of telephony, video and data from a telephone company central office to the home. 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 (see Note 10). The Partnership is a leading provider of next-generation integrated full service digital loop carrier and fiber-to-the-curb systems that deliver telephony, video and data for local telephone companies. The Partnership's product, NLevel3(R), is designed to permit the cost effective delivery of a suite of standard and advanced telephony services over twisted pair networks, including high-speed data/Internet, distance learning, video services as well as basic telephone services, to the home from a single access platform. The Partnership has incurred net losses since inception and expects to continue to operate at a loss through the year 2000 as the market for its products develops. In order to position its products for mass commercial deployment, the Partnership expects that product development efforts will continue to require substantial investments. As such, during 1998, the Company agreed to make additional equity investments in the Partnership, aggregating $50 million, beginning in November 1998, to fund the Partnership's growth and assist the Partnership in meeting its forecasted working capital requirements. Through March 31, 1999, the Company has made $40 million of this $50 million investment and expects to make the remaining equity investment during the second quarter of 1999. The Company accounts for its investment in the Partnership using the equity method and records such investment in other assets. As of March 31, 1999, the Company believes its recorded investment in the Partnership is recoverable. Based on the Partnership's current cash flow projections for 1999, additional capital will be required in the latter part of 1999 to fund its operations. The Partnership has several alternatives to obtain the required capital, including additional equity contributions from its partners, private placement financing and/or an initial public offering. 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 and capital expenditures. 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 to develop, using U.S. architecture and systems, 19 international markets where cable penetration is low and demand for entertainment programming is growing. However, management expects that demand in North America for its 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. For example, sales of analog cable products have been impacted by a shift to digital deployment in North America. 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 during 1998, and there can be no assurance that international sales will increase to historical levels in the near future. 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 is preparing for the impact of the arrival of the Year 2000 on its business, as well as on the businesses of its customers, suppliers and business partners. The "Year 2000 Issue" is a term used to describe the problems created by systems that are unable to accurately interpret dates after December 31, 1999. These problems are derived predominantly from the fact that many software programs have historically categorized the "year" in a two-digit format. The Year 2000 Issue creates potential risks for the Company, including potential problems in the Company's products as well as in the Information Technology ("IT") and non-IT systems that the Company uses in its business operations. The Company may also be exposed to risks from third parties with whom the Company interacts who fail to adequately address their own Year 2000 Issues. THE COMPANY'S STATE OF READINESS While the Company's Year 2000 efforts have been underway for several years, the Company centralized its focus on addressing the Year 2000 Issue in 1998 by forming a Year 2000 cross-functional project team of senior managers, chaired by the Company's Vice President of Information Technology who reports directly to the Company's Chief Executive Officer on this issue. The Audit Committee of the Board of Directors is advised periodically on the status of the Company's Year 2000 compliance program. The Year 2000 project team has developed a phased approach to identifying and remediating Year 2000 Issues, with many of these phases overlapping with one another or conducted simultaneously. The first phase was to develop a corporate-wide, uniform strategy for addressing the Year 2000 Issue and to assess the Company's current state of Year 2000 readiness. This included a review of all IT and non-IT systems, including Company products and internal operating systems for potential Year 2000 Issues. The Company completed this phase for its IT and non-IT systems prior to the end of 1998. In addition, during this phase the Company developed its Year 2000 Policy Statement which was released to the Company's customers, suppliers and business partners. The second phase of the Company's Year 2000 compliance program (begun simultaneously with the first phase) was to define a Year 2000 "Compliance" standard and to develop uniform test plans and test methodologies, building on work already done by one of the Company's engineering groups. The Company developed a comprehensive Year 2000 test plan and test methodologies for the testing of its products, as well as third-party products. The Company has adopted the following six compliance categories for its products: "Compliant," "Compliant with Upgrade," "Compliant with Minor Issues," "Not Compliant or End of Life Product," "Testing to be Completed" and "Testing not Required." The creation of these six categories has assisted the Company in communicating with its customers, suppliers and business partners regarding the Year 2000 status of the Company's products. 20 To aid in communication with the Company's customers, suppliers and business partners, the Company has developed an Internet web site that identifies the current Year 2000 status for each of the Company's products in accordance with the Company's Year 2000 compliance standard. The web site, which is updated periodically, also identifies available upgrades, as well as the contemplated completion date of testing and remediation for such products. In addition, the Company has provided detailed, customer-specific inventory information to major customers on a product-by-product basis in order to further assist such customers with their own Year 2000 compliance programs. In furtherance of providing information about its Year 2000 testing and remediation program, the Company has disclosed its test plan and methodologies to certain of its customers, strategic vendors and business partners. The Company is also participating in industry-wide joint system testing efforts and has participated in industry-wide forums with the Federal Communications Commission in order to facilitate awareness in the industry of Year 2000 Issues. The Company has also undertaken a review of its internal IT and non-IT systems to identify potential Year 2000 Issues. In 1996, the Company began the process of implementing a uniform worldwide business and accounting information system to improve internal reporting processes. The internal IT systems being replaced include order entry systems, purchasing and inventory management systems, and the Company's general financial systems. Based upon representations from the manufacturer and the Company's own internal testing, the Company believes that this uniform information system is Year 2000 compliant. The Company also has plans to identify and replace and/or upgrade legacy business systems that are not Year 2000 compliant and are not part of the uniform worldwide business and accounting information system. In conjunction with the Company's review of internal IT systems, the Company engaged an outside consulting firm with Year 2000 consulting experience to perform an assessment of the Company's test plans and test methodologies and to benchmark such plans and methodologies against the practices of other companies. Based on these benchmark comparisons, certain recommendations were made related to the test plans. The Company is currently addressing these recommendations. In addition, the outside consulting firm is continuing to provide assistance in monitoring the Company's Year 2000 status and progress in areas such as: testing, internal and external communication and contingency planning. With respect to non-IT systems, the Company is actively analyzing its in-line manufacturing equipment in order to assess any Year 2000 issues. To date, no material problems have been discovered, and the Company will continue to review, test and remediate (if necessary) such equipment. The Company is also evaluating its other critical non-IT facility and internal systems with date sensitive operating controls for Year 2000 Issues. While the Company believes that most of these systems will function without substantial Year 2000 compliance problems, the Company will continue to review, test and remediate (if necessary) such systems. The third phase of the Company's Year 2000 compliance program is the actual testing and remediation (if necessary) of the Company's IT and non-IT products and systems. The Company has prioritized its testing and remediation work, focusing on products which the Company believes are more likely to be impacted by Year 2000 Issues. The Company has completed the testing and remediation (as necessary) of the majority of its products in accordance with its adopted test plans and methodologies and is diligently working to complete testing and remediation (if necessary) of the remainder of its products (except for end of life products) by the end of the third quarter of 1999. As of March 31, 1999, the Company estimates that it has completed approximately 95% of the Year 2000 readiness analysis required for its Advanced Network Systems, Digital Network Systems and Transmission Network Systems products. As of March 31, 1999, the Company estimates that it has completed approximately 60% of the Year 2000 readiness analysis for its Satellite and Broadcast Network Systems products. For certain of the Company's satellite and broadcast products and the Company's national authorization center, testing and remediation (if necessary) is currently anticipated to be completed by the end of the third quarter of 1999. The Company has completed testing and remediation of substantially all of its IT and non IT internal systems, with the exception of certain minor systems which the Company expects to complete by the end of the third quarter of 1999. The Company is presently evaluating each of its principal suppliers, service providers and other business partners to determine each of such party's Year 2000 status. The Company has developed a questionnaire and a Year 2000 certification for use with such third parties, and, as of March 31, 1999, the Company had contacted approximately 300 vendors about their Year 2000 compliance, including many of the vendors that the Company has identified as critical vendors. The Company is currently focused on obtaining Year 2000 Certifications or assurances from approximately 150 of these suppliers. The Company anticipates that this evaluation will be on-going through the remainder of 1999. The Company is working jointly with customers, strategic vendors and business partners to identify and resolve any Year 2000 issues that may impact the Company. However, there can be no assurance that the companies with which the Company does business will achieve a Year 2000 conversion in a timely fashion, or that such failure to convert by another company will not have a material adverse effect on the Company. 21 THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The total cost associated with the Company's Year 2000 remediation is not expected to be material to the Company's financial condition or results of operations. The estimated total cost of the Company's Year 2000 remediation is not expected to exceed $5 million. Through March 31, 1999, the Company has spent approximately $2 million in connection with Year 2000 Issues. The cost of implementing the uniform worldwide business and accounting information system has not been included in this figure since the replacement of the previous systems was not accelerated due to Year 2000 Issues. All Year 2000 expenditures are made from the respective departments' budgets. The percentage of the IT budget during 1998 used for Year 2000 remediation was less than 3% and is expected to represent less than 3% of the IT budget for 1999. No IT projects have been deferred due to Year 2000 efforts. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES There can be no assurance that the Company will be completely successful in its efforts to address Year 2000 Issues. If some of the Company's products are not Year 2000 compliant, the Company could suffer lost sales or other negative consequences, including, but not limited to, diversion of resources, damage to the Company's reputation, increased service and warranty costs and litigation, any of which could materially adversely affect the Company's business operations or financial statements. The Company is also dependent on third parties such as its customers, suppliers, service providers and other business partners. If these or other third parties fail to adequately address Year 2000 Issues, the Company could experience a negative impact on its business operations or financial statements. For example, the failure of certain of the Company's principal suppliers to have Year 2000 compliant internal systems could impact the Company's ability to manufacture and/or ship its products or to maintain adequate inventory levels for production. THE COMPANY'S CONTINGENCY PLANS The Company is evaluating the need for certain contingency plans to address situations that may result if the Company or any of the third parties upon which the Company is dependent is unable to achieve Year 2000 readiness. For example, the Company is in the process of developing plans and procedures for its customer service division to assist customers with the transition through the Year 2000. Part of this plan will include processes and procedures recently used by the Company in connection with a program to upgrade a substantial number of analog addressable controllers to solve a date rollover issue prior to the year 1999. The Company is also evaluating the need for increasing inventory levels of key components of its manufactured products. Since the Company's Year 2000 compliance program is ongoing, its ultimate scope, as well as the consideration of additional contingency plans, will continue to be evaluated as new information becomes available. YEAR 2000 FORWARD-LOOKING STATEMENTS The foregoing Year 2000 discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, including without limitation, anticipated costs and the dates by which the Company expects to complete certain actions, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to identify and remediate all relevant IT and non-IT systems, results of Year 2000 testing, adequate resolution of Year 2000 Issues by businesses and other third parties who are service providers, suppliers or customers of the Company, unanticipated system costs, the adequacy of and ability to develop and implement contingency plans and similar uncertainties. The "forward-looking statements" made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 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 22 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 capital spending, Year 2000 readiness, 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 limit 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, 1999, a hypothetical 10% fluctuation in the exchange rate of foreign currencies applicable to the Company, principally the Canadian dollar, would result in a net $1 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. 23 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 Exchange Act of 1934, as amended (the "Exchange Act"), prior to the Distribution, by allegedly making false and misleading statements and failing to disclose material facts about the Distributing Company's planned shipments in 1995 of its CFT2200 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 Distribution, 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. Both actions seek unspecified damages and attorneys' fees and costs. The court granted the defendants' motion 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 answered the amended consolidated complaint in the class actions, denying liability, and filed a renewed motion to dismiss the derivative action. On September 22, 1998, defendants' motion to dismiss the derivative action was denied. In November 1998, the defendants filed an answer to the derivative action, denying liability. On January 21, 1999, the plaintiffs in the class actions filed their motion for class certification, including the defendants' opposition. 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 filed a motion to dismiss parts of the amended complaint and answered the balance of the amended complaint, denying liability. On September 22, 1998, the district court dismissed with prejudice the portion of the complaint alleging violations of Section 14(a) of the Exchange Act, and denied the remainder of the defendants' motion to dismiss. In November, 1998, the defendants filed an answer to the remaining parts of the amended complaint, denying liability. The Company intends to vigorously contest this action. In connection with the Distribution, the Company has agreed to indemnify General Semiconductor with respect to 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. The complaint seeks damages in an unspecified amount. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants moved to dismiss the remaining counts of the complaint. That motion was denied on March 31, 1999 and defendants' answer is currently due on June 4, 1999. The Company intends to vigorously contest this action. 24 On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS L.P., KK MANAGER, L.L.C., GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the Superior Court of the State of Delaware in and for New Castle County (the "Delaware Action"). In that action, DSC Communications Corporation and DSC Technologies Corporation (collectively, "DSC") alleged that in connection with the formation of the Partnership and the transfer to it of NLC's switched digital video technology, the Partnership and KK Manager, L.L.C. misappropriated DSC's trade secrets; that the Company improperly disclosed trade secrets when it conveyed such technology to the Partnership; and that Spencer Trask & Co., Inc. conspired to misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the defendants' purported unjust enrichment, disgorgement of consideration, exemplary damages and attorney's fees, all in unspecified amounts. In April 1998, the Company and the other defendants filed an action in the United States District Court for the Eastern District of Texas, requesting that the federal court preliminarily and permanently enjoin DSC from prosecuting the Delaware Action because by pursuing such action, DSC effectively was trying to circumvent and relitigate the Texas federal court's November 1997 judgment in a previous lawsuit involving DSC, pursuant to which NLC had paid over $140 million. On May 14, 1998, the Texas court granted a preliminary injunction preventing DSC from proceeding with the Delaware Action. That injunction order is now on appeal to the United States Court of Appeals for the Fifth Circuit where the case has been briefed and argued and awaits determination. On July 6, 1998, the Delaware defendants filed a motion for summary judgment with the Texas federal court requesting that the preliminary injunction be converted into a permanent injunction preventing DSC from proceeding with this litigation. That motion also has been briefed and awaits determination. As a result of the preliminary injunction, the Delaware Action has been stayed in its entirety. The Company intends to vigorously contest this action. In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for Arbitration against the Company alleging that the Company breached the terms of a license agreement with StarSight by (a) developing a competing product that wrongfully incorporates StarSight's technology and inventions claimed within a certain StarSight patent, (b) failing to promote and market the StarSight product as required by the license agreement, and (c) wrongfully using StarSight's technical information, confidential information and StarSight's graphical user interface in breach of the license agreement. StarSight is seeking injunctive relief as well as damages (as specified below). The first part of a bifurcated arbitration proceeding, relating to the Company's advanced analog products, began on March 22, 1999 before an arbitration panel of the American Arbitration Association in San Francisco, California. The Company expects to receive a decision from the panel by late June, 1999. At the arbitration proceeding, StarSight identified purported damages arising from the sale by the Company of advanced analog set top boxes containing a native electronic program guide. StarSight alleged that it is entitled to collect $52 million to $177 million in compensatory damages and an unspecified amount of punitive damages. The Company has denied liability and presented evidence disputing both StarSight's damages theories and amounts in the event that liability were to be found. A separate hearing relating to certain of the Company's digital set top boxes and satellite products is scheduled for mid-September, 1999. The Company continues to vigorously contest this action. On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United States District Court for the Northern District of California. The complaint alleges infringement by the Company of two U.S. patents allegedly covering electronic program guides. The complaint seeks unspecified damages and an injunction. The plaintiffs sought to consolidate discovery for this action with other program guide related patent infringement actions pending against Pioneer Electronics Corp., Scientific-Atlanta, Inc., and Prevue Networks, Inc. On April 26, 1999, the Judicial Panel on Multidistrict Litigation ordered the transfer of this action to the Northern District of Georgia for consolidated pretrial proceedings with the Pioneer Electronics Corp. and Scientific-Atlanta, Inc. actions. The Company denies that it infringes the subject patents and intends to vigorously defend this action. 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The information required by Item 2(c) of this Report was included in Item 5 of the Company's Current Report on Form 8-K dated January 22, 1999, and such information is incorporated by reference in this Item. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1* Employment Agreement dated as of April 2, 1999, between General Instrument Corporation and Edward D. Breen Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information * Management contract or compensatory plan. (b) Reports of Form 8-K The Company filed a Current Report on Form 8-K dated January 22, 1999, reporting in Item 5 of such report the sale by the Company to Sony Corporation of America of 7,500,000 shares of the Company's common stock for an aggregate cash purchase price of $187,500,000. The Company filed on April 2, 1999 a Current Report on Form 8-K dated July 31, 1998, including in Item 7 of such report the following financial statements related to an acquisition of certain assets: (i) Hits Access and Control Division Combined Financial Statements as of and for the years ended December 31, 1997 and 1996 and as of and for the six months ended June 30, 1998 and 1997; and (ii) Unaudited Pro Forma Consolidated Financial Statements of the Company to reflect the acquisition of certain assets of the Hits Access and Control Division. The Company filed a Current Report on Form 8-K dated April 5, 1999, reporting in Item 5 of such report the signing of a definitive agreement to repurchase 5.3 million shares of the Company's common stock from two partnerships affiliated with Forstmann Little & Co for an aggregate cash purchase price of $148,400,000. 26 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/ Marc E. Rothman ----------------------------------------------- Marc E. Rothman Vice President, Financial Planning & Controller (Signing both in his capacity as Vice President on behalf of the Registrant and as chief accounting officer of the Registrant) May 13, 1999 - ------------ Date 27 INDEX TO EXHIBITS EXHIBIT DESCRIPTION Exhibit 10.1 Employment Agreement dated as of April 2, 1999, between General Instrument Corporation and Edward D. Breen Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information 28 EX-10.1 2 EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of April 2, 1999, by and between General Instrument Corporation, a Delaware corporation (the "Company"), with its principal office in Horsham, PA, and Edward D. Breen ("Executive"). WHEREAS, both parties desire to enter into an agreement to reflect Executive's executive capacities in the Company's business and to provide for Executive's continued employment by the Company, upon the terms and conditions set forth herein. WHEREAS, the Company and Executive are parties to a Severance Protection Agreement dated as of February 18, 1998 (the "Severance Agreement"), and the parties intend that this Agreement shall supersede in all respects the Severance Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. The parties agree that the Severance Agreement is hereby terminated as of the date of this Agreement. 1.1. EMPLOYMENT TERM. The term of Executive's employment under this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue for a three-year period, unless the Agreement is terminated sooner in accordance with Section 3 or Section 4. In addition, the term of Executive's employment under this Agreement shall be automatically extended on each day during the term of this Agreement, so that the Agreement shall at all times have a three-year term, unless the Agreement is terminated sooner as described below or in accordance with Section 3. Either party may give written notice to the other party that the Agreement shall not continue to be automatically extended as described above, in which case the Agreement shall terminate on the third anniversary of the date on which such notice is given. The period commencing on the Effective Date and ending on the date on which this Agreement shall terminate is hereinafter referred to as the "Employment Term". 1.2. DUTIES AND RESPONSIBILITIES. Executive shall serve as Chief Executive Officer of the Company and in such other senior positions, if any, to which he may be elected during the Employment Term. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to him by the Company's Board of Directors (the "Board"). 1.3. EXTENT OF SERVICE. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. The foregoing shall not be construed as preventing Executive from making investments in other businesses or enterprises provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Board, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. BASE SALARY. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate of at least $600,000, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate increases by the Board pursuant to the Board's normal performance review policies for senior level executives. Executive's Base Salary shall not be reduced without Executive's written consent. 1.5. RETIREMENT AND WELFARE PLANS. (a) During the Employment Term, Executive shall be entitled to participate in all (i) employee pension and retirement plans and programs and (ii) welfare benefit plans and programs, in each case made available to the Company's senior level executives as a group or to its employees generally, as such retirement plans or welfare plans may be in effect from time to time. Notwithstanding anything in this Agreement to the contrary, nothing in this Agreement shall prevent the Company from amending or terminating any retirement plans, welfare plans or other employee benefit plans or programs from time to time as the Company deems appropriate. (b) The Company will provide Executive with supplemental life insurance coverage of at least $7,500,000 during the Employment Term. Executive shall have the right to designate the beneficiary of such life insurance. 1.6. REIMBURSEMENT OF EXPENSES AND DUES; VACATION. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to vacation in accordance with the Company's vacation, holiday and other pay for time not worked policies. 1.7. ANNUAL INCENTIVE COMPENSATION. Executive shall be entitled to participate in any short-term incentive compensation programs established by the Company for its senior level executives generally, at levels commensurate with the benefits provided to other senior executives and with adjustments appropriate for the chief executive officer; provided, however, that Executive's target for determining the annual bonus under any such program shall be at least 84% of Executive's Base Salary. Executive's bonus shall be subject to the terms of the Company's annual incentive plan and shall be determined based upon Executive's individual performance and Company performance as determined by the Board (or a committee of the Board). 1.8. LONG-TERM INCENTIVE COMPENSATION. (a) Executive shall be entitled to participate in any long-term incentive compensation programs (including without limitation stock option plans) established by the Company for its senior level executives generally, at levels commensurate with the benefits provided to other senior level executives and with adjustments appropriate for the chief executive officer. (b) Stock options granted to Executive after the Effective Date of this Agreement will provide for full vesting in the event that Executive's employment is terminated by the Company (other than for Cause as defined in Section 3.7), in the event that Executive terminates employment for Good Reason (as defined in Section 3.7), or in the event of death or Disability (as defined in Section 3.3). Such stock options will also provide that in the event that Executive's employment terminates for any reason other than Cause, the options shall be exercisable for a period of at least one year after such termination of employment (but not after expiration of the option term). 2. CONFIDENTIAL INFORMATION. Executive agrees to be bound by the terms of the Employee Confidentiality Agreement in effect from time to time between the Company and Executive. 3. TERMINATION. The Employment Term shall terminate upon the occurrence of any one of the following events: 3.1. TERMINATION WITHOUT CAUSE; CONSTRUCTIVE TERMINATION. (a) The Company may remove Executive at any time without Cause (as defined in Section 3.7) from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and shall be allowed to seek other employment. In addition, Executive may initiate termination of employment by resigning under this Section 3.1 for Good Reason (as defined in Section 3.7). Executive shall give the Company not less than 30 days' prior written notice of such resignation. (b) Upon any removal or resignation described in Section 3.1(a) above, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive according to the terms of this Agreement, only the amount due to Executive under the Company's then current severance pay plan for employees. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. (c) Notwithstanding the provisions of Section 3.1(b), in the event that Executive executes and does not revoke a written release upon such removal or resignation, substantially in the form attached hereto as Annex 1 (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in Section 3.1(b), which Executive agrees to waive, the following: (i) Executive shall receive, as liquidated damages for the failure of the Company to continue to employ Executive according to the terms of this Agreement, a continuation of Executive's Compensation (as defined in Section 3.7), in installments, for the three year period following the date of termination. Payments shall be made at such times as the Company customarily pays its other senior level executives (but in any event not less often than monthly), commencing within 30 days after the effective date of the termination (or the end of the revocation period for the Release, if later). If Executive's employment terminates under this Section 3.1 after a Change of Control (as defined in Section 3.7), Executive's Compensation under this Section 3.1(c)(i) shall be paid in a lump sum cash payment on the effective date of Executive's termination of employment (or the end of the revocation period for the Release, if later). (ii) For a period of three years following the date of termination, Executive shall receive continued coverage, or cash in lieu of such coverage, with respect to the medical, dental, life insurance, pension and 401(k) plans in effect for Executive at the time of his termination, as follows: (A) Executive shall continue to receive the medical, dental and life insurance coverage (other than the life insurance required by Section 1.5(b) of this Agreement) in effect at the date of his termination (or generally comparable coverage) for himself and, where applicable, his spouse and dependents, as the same may be changed from time to time for employees generally, as if Executive had continued in employment during such period; or, as an alternative, the Company may pay Executive cash in lieu of such coverage in an amount equal to Executive's after-tax cost of continuing such coverage, where such coverage may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the coverage is provided). The COBRA health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code") shall run concurrently with the foregoing three-year benefit period. (B) Executive shall accrue a benefit under the Company's supplemental benefit plan equal to the benefit that Executive would have accrued under the Company's pension plan and supplemental benefit plan in which Executive participates at his termination of employment had Executive continued in employment for the three-year period, receiving annual compensation equal to the annual Compensation payable under Section 3.1(c)(i) above (without regard to whether such Compensation is paid in a lump sum payment). This benefit shall be paid at the same time and in the same manner as benefits are payable to Executive under the Company's supplemental benefit plan. (C) The Company shall pay Executive a lump sum cash payment equal to the matching contributions that the Company would have made for Executive under the Company's 401(k) plan and any related supplemental defined contribution plan in which Executive participates at his termination of employment had Executive continued in employment for the three-year period, receiving annual compensation equal to the annual Compensation payable under Section 3.1(c)(i) above (without regard to whether such Compensation is paid in a lump payment) and making the same level of contributions to the 401(k) plan as in effect at Executive's termination of employment. This payment shall be made on the effective date of Executive's termination of employment (or the end of the revocation period for the Release, if later). (iii) If Executive's employment terminates under this Section 3.1 before April 2, 2002 and before a Change of Control has occurred, the Company will pay Executive an additional lump sum cash payment of $9,000,000, as additional severance compensation. Payment will be made on the effective date of Executive's termination of employment (or the end of the revocation period for the Release, if later). (iv) The Company shall pay or reimburse Executive for the costs, fees and expenses of outplacement assistance services (not to exceed 25% of Executive's Compensation) provided by any outplacement agency selected by the Executive. (v) The Company shall pay or reimburse Executive up to $15,000 for tax and financial planning services with respect to each of the three years following Executive's termination of employment. The Company shall also pay Executive a tax gross-up payment to cover the income taxes resulting from the Company's payment or reimbursement of such tax and financial planning services and the gross-up payment. (vi) Executive shall receive any other amounts earned, accrued or owing but not yet paid under Section 1 above and any other benefits in accordance with the terms of any applicable plans and programs of the Company. 3.2. VOLUNTARY TERMINATION. Executive may voluntarily terminate the Employment Term upon 30 days' prior written notice for any reason. In such event, after the effective date of such termination, except as provided in Section 3.1 with respect to a resignation described therein, no further payments shall be due under this Agreement except that Executive shall be entitled to any benefits due in accordance with the terms of any applicable plan and programs of the Company. 3.3. DISABILITY. The Company may terminate the Employment Term if Executive incurs a long-term disability under the Company's long-term disability plan ("Disability"); provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. Executive agrees, in the event of a dispute under this Section 3.3 relating to Executive's Disability, to submit to a physical examination by a licensed physician selected by the Board. If the Company terminates Executive's employment for Disability, Executive shall be entitled to receive the following: (a) The Company shall pay to Executive any amounts earned, accrued or owing but not yet paid under Section 1 above. (b) If Executive executes and does not revoke a Release as described in Section 3.1(c) above, (i) Executive shall receive, as severance compensation, continued Compensation for three years after his termination of employment as described in Section 3.1(c)(i) above, reduced by the amount of any disability benefits Executive receives under a plan maintained by or contributed to by the Company, and (ii) Executive shall receive continued benefit coverage or cash in lieu of such coverage, as described in Section 3.1(c)(ii), for a period of three years following the date of termination. (c) If Executive's employment terminates under this Section 3.3 before April 2, 2002 and before a Change of Control has occurred, and Executive executes and does not revoke a Release as described in Section 3.1(c) above, the Company will pay Executive an additional lump sum cash payment of $9,000,000, as additional severance compensation. Payment will be made on the effective date of Executive's termination of employment (or the end of the revocation period for the Release, if later). (d) Executive shall receive any other benefits payable to Executive in accordance with the terms of any applicable plans and programs of the Company. 3.4. DEATH. (a) The Employment Term shall terminate in the event of Executive's death while employed by the Company. In such event, the Company shall provide the following: (i) The Company shall pay to Executive's executors, legal representatives or administrators, as applicable, any amounts earned, accrued or owing but not yet paid under Section 1 above. (ii) Executive's estate shall be entitled to receive any life insurance and other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 3.5. CAUSE. The Company may terminate the Employment Term at any time for Cause upon written notice to Executive, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued. Executive shall remain entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. 3.6. NOTICE OF TERMINATION. Any termination of Executive's employment shall be communicated by a written notice of termination to the other party hereto given in accordance with Section 9. The notice of termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) briefly summarize the facts and circumstances deemed to provide a basis for a termination of employment and the applicable provision hereof, and (iii) specify the termination date in accordance with the requirements of this Agreement. 3.7. DEFINITIONS. (a) "BENEFICIAL OWNER", "Beneficially Owned" and "Beneficially Owning" shall have the meanings applicable under Rule 13d-3 promulgated under the Exchange Act. (b) "CAUSE" shall mean any of the following grounds for termination of Executive's employment: (i) Executive shall have been convicted of a felony, or (ii) The termination is evidenced by a resolution adopted in good faith by at least two-thirds of the members of the Board concluding that Executive: (A) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company (other than a failure resulting from Executive's incapacity due to physical or mental illness or from the assignment to Executive of duties that would constitute Good Reason (as defined in Section 3.7(f)), which failure has continued for a period of at least 30 days after a written notice of demand for substantial performance, signed by a duly authorized officer of the Company, has been delivered to Executive specifying the manner in which Executive has failed substantially to perform, or (B) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, however, that no termination of Executive's employment shall be for Cause as set forth in subsection (B) until (1) there shall have been delivered to Executive a copy of a written notice, signed by a duly authorized officer of the Company, stating that Executive was guilty of the conduct set forth in subsection (B) and specifying the particulars thereof in detail, and (2) Executive shall have been provided an opportunity to be heard in person by the Board (with the assistance of Executive's counsel if Executive so desires). No act, nor failure to act, on Executive's part, shall be considered "intentional" unless Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that Executive's action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a notice of termination of employment is given to the Company by Executive shall constitute Cause for purposes of this Agreement. (c) "CHANGE OF CONTROL" shall mean the happening of any of the following: (i) The acquisition by any Person of Beneficial Ownership of Voting Securities which, when added to the Voting Securities then Beneficially Owned by such Person, would result in such Person Beneficially Owning 33% or more of the combined Voting Power of the Company's then outstanding Voting Securities; PROVIDED, HOWEVER, that for purposes of this paragraph (i), a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (1) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (2) acquires the Voting Securities directly from the Company; (3) becomes the Beneficial Owner of 33% or more of the combined Voting Power of the Company's then outstanding Voting Securities solely as a result of the acquisition of Voting Securities by the Company or any Subsidiary which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by such Person, provided that if (x) a Person would own at least such percentage as a result of the acquisition by the Company or any Subsidiary and (y) after such acquisition by the Company or any Subsidiary, such Person acquires Voting Securities, then an acquisition of Voting Securities shall have occurred; (4) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Controlled Entity"); or (5) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined in paragraph (iii) below); or (ii) The individuals who, as of the date of this Agreement, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; PROVIDED, HOWEVER, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two-thirds of the Incumbent Board prior to such election or nomination, such new director shall be considered as a member of the Incumbent Board; PROVIDED FURTHER, HOWEVER, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (iii) Approval by stockholders of the Company of: (A) a merger, consolidation or reorganization involving the Company (a "Business Combination"), unless (1) the stockholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination, and (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for the Business Combination constitute at least a majority of the members of the Board of Directors of the Surviving Corporation, and (3) no Person (other than the Company or any Controlled Entity, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Controlled Entity, or any Person who, immediately prior to the Business Combination, had Beneficial Ownership of 33% or more of the then outstanding Voting Securities) has Beneficial Ownership of 33% or more of the combined voting power of the Surviving Corporation's then outstanding voting securities (a Business Combination satisfying the conditions of clauses (1), (2) and (3) of this subparagraph (A) shall be referred to as a "Non-Control Transaction"); (B) a complete liquidation or dissolution of the Company; or (C) the sale or other disposition of all or substantially all of the assets of the Company (other than a transfer to a Controlled Entity). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33% or more of the then outstanding Voting Securities is Beneficially Owned by (x) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Controlled Entity or (y) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (d) "COMPENSATION" shall mean Executive's annualized Base Salary in effect at the date of Executive's termination of employment (or immediately before a Change of Control, if greater) and short-term incentive compensation at the target level to be paid to Executive for the year in which the termination occurs (or the year in which a Change of Control occurs, if greater). "Compensation" shall not include the value of any stock options or any exercise thereunder. (e) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (f) "GOOD REASON" shall mean the occurrence of any of the following events or conditions: (i) a change in Executive's status, title, position or responsibilities (including reporting responsibilities) which represents an adverse change from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to Executive of any duties or responsibilities which are inconsistent with his status, title, position or responsibilities described in Section 1.2; or any removal of Executive from or failure to reappoint or reelect him to any of such offices or positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by Executive other than for Good Reason; (ii) a reduction in Executive's Base Salary; (iii) the relocation of the offices of the Company at which Executive is principally employed to a location more than 50 miles from the location of such offices immediately prior to the relocation, or the Company's requiring Executive to be based anywhere other than such offices, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the date of this Agreement; (iv) the failure by the Company to pay to Executive any portion of Executive's current compensation or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company in which Executive participated, within seven days of the date such compensation is due; (v) the failure by the Company to provide Executive with salary, incentive compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and reward opportunities) to those provided, in the aggregate, under the compensation and employee benefit plans, programs and practices in which Executive was participating immediately prior to such change; (vi) the failure of the Company to obtain from its successors the express assumption and agreement required under Section 10(b) hereof; or (vii) any material breach of this Agreement by the Company. (g) "PERSON" shall mean a person within the meaning of Sections 13(d) and 14(d) of the Exchange Act. (h) "VOTING POWER" shall mean the combined voting power of the then outstanding Voting Securities. (i) "VOTING SECURITIES" shall mean, with respect to the Company or any subsidiary, any securities issued by the Company or such subsidiary, respectively, which generally entitle the holder thereof to vote for the election of directors of the Company or such subsidiary, respectively. 4. CHANGE OF CONTROL. This Agreement shall continue in effect according to its terms in the event of a Change of Control of the Company. 4.1. STOCK OPTIONS. In the event of a Change of Control, all stock options held by Executive at the date of the Change of Control shall be fully vested and exercisable pursuant to the applicable Long-Term Incentive Plan. 4.2. PARACHUTE PAYMENTS. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 4.2 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and the Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to contest effectively such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax, including interest and penalties, with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.2, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearing and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a termination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, however, that if the Company directs Executive to pay such claim and sue for a refund the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section, Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of subsection (b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (a) and (b) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (a) and (b) above, except for claims, damages or expenses resulting from the gross negligence or wilful misconduct of the Accounting Firm. 5. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6. SURVIVORSHIP. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 7. MITIGATION. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 8. ARBITRATION; EXPENSES. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in Montgomery County, Pennsylvania accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 9. NOTICES. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: General Instrument Corporation 101 Tournament Drive Horsham, PA 19044 Attention: General Counsel With a required copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 Attention: Mims Maynard Zabriskie, Esquire If to Executive, to: Edward D. Breen or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 10. CONTENTS OF AGREEMENT; AMENDMENT AND ASSIGNMENT. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 11. SEVERABILITY. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 12. REMEDIES CUMULATIVE; NO WAIVER. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 13. BENEFICIARIES/REFERENCES. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 14. MISCELLANEOUS. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 15. WITHHOLDING. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Except as specifically provided otherwise in this Agreement, Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 16. GOVERNING LAW. This Agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. GENERAL INSTRUMENT CORPORATION BY: /s/ Scott A. Crum ---------------------------- /s/ Edward D. Breen ---------------------------- Edward D. Breen ANNEX 1 TO EDWARD D. BREEN EMPLOYMENT AGREEMENT CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE THIS AGREEMENT, entered into on this ____ day of ________________, by and between General Instrument Corporation (the "Company") and Edward D. Breen ("Employee"). WHEREAS, the Company heretofore employed Employee under an Employment Agreement originally entered into as of April 2, 1999 (the "Employment Agreement"); and WHEREAS, Employee has terminated employment and the Employment Agreement has been terminated as of ____________________; and WHEREAS, the Company and Employee wish to enter into an Agreement to provide for a release by Employee as to any claims including, without limitation, claims that might be asserted by Employee under the Employment Agreement and the Age Discrimination in Employment Act, as further described herein; NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Company and Employee hereby agree that Employee's termination of employment shall be effective on __________________, and that the Employment Agreement, except as otherwise provided therein as to obligations that continue beyond its term, shall terminate on that date. 2. Notwithstanding Employee's termination of employment and the termination of the Employment Agreement, in consideration of the release provided by Employee under paragraph 4 below, the Company shall pay or cause to be paid or provided to Employee, subject to applicable employment and income tax withholdings and deductions and subject to the terms of the Employment Agreement, all amounts and benefits required under Section 3 and, if applicable, Section 4 of the Employment Agreement. 3. Employee agrees and acknowledges that the Company, on a timely basis, has paid, or agreed to pay, to Employee all other amounts due and owing based on his prior services in accordance with the terms of the Employment Agreement and that the Company has no obligation, contractual or otherwise, to Employee, except as provided herein, nor does it have any obligation to hire, rehire or re-employ Employee in the future. 4. In full and complete settlement of any claims that Employee may have against the Company, including any possible violations of the Age Discrimination in Employment Act, 29 U.S.C. ss.621 eT Seq., ("ADEA") in connection with his termination of employment, and for and in consideration of the undertakings of the Company described herein, Employee does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the Company, and each of its subsidiaries and affiliates, their officers, directors, shareholders, partners, employees and agents, and their respective successors and assigns, heirs, executors and administrators (hereinafter all included within the term "the Company"), of and from any and all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which he ever had, now has, or hereafter may have, or which Employee's heirs, executors or administrators hereafter may have, by reason of any matter, cause or thing whatsoever from the beginning of Employee's employment to the date of this Agreement; and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Employee's employment relationship or the Employment Agreement, his termination from that employment relationship and the termination of the Employment Agreement, including but not limited to, any claims which have been asserted, could have been asserted, or could be asserted now or in the future under any federal, state or local laws, including any claims under ADEA, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss.2000E eT Seq. ("Title VII"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Family and Medical Leave Act, the Energy Reorganization Act of 1974, as amended, Section 11(c) of the Occupational Safety and Health Act, the Energy Policy Act, any state laws against discrimination, and any common law claims now or hereafter recognized and all claims for counsel fees and costs; provided, however, that nothing herein shall preclude Employee from joining the Company, and the Company shall defend Employee, in any action brought against him which arises out of actions taken within the scope of his employment by the Company and for which he would have been indemnified pursuant to the bylaws of the Company as of the date hereof, unless later limited in accordance with applicable law, or under applicable law (in which case he shall notify the Company within five business days after receiving service of process as to the commencement of the action and give the Company the right to control the defense of any such action). Notwithstanding the foregoing, nothing contained herein shall prevent Employee from requiring the Company to fulfill its obligations hereunder, under the Employment Agreement or under any employee benefit plan, as defined in Section 3(3) of ERISA, maintained by the Company and in which Employee participated. 5. Employee further agrees and covenants that neither he, nor any person, organization or other entity on his behalf, will file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action, suit or legal proceeding for personal relief (including without limitation any action for damages, injunctive, declaratory, monetary or other relief) against the Company, involving any matter occurring at any time in the past up to and including the date of this Agreement, or involving any continuing effects of any actions or practices which may have arisen or occurred prior to the date of this Agreement, including without limitation any charge of discrimination under ADEA, Title VII, the Workers' Compensation Act or state or local laws. In addition, Employee further agrees and covenants that should he, or any other person, organization or entity on his behalf, file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief, despite his agreement not to do so hereunder, or should he otherwise fail to abide by any of the terms of this Agreement, then the Company will be relieved of all further obligations owed hereunder, he will forfeit all monies paid to him hereunder (including without limitation all amounts and benefits required under Section 3 and, if applicable, Section 4 of the Employment Agreement) and he will pay all of the costs and expenses of the Company (including reasonable attorneys' fees) incurred in the defense of any such action or undertaking. 6. Employee hereby agrees and acknowledges that under this Agreement, the Company has agreed to provide him with compensation and benefits that are in addition to any amounts to which he otherwise would have been entitled in the absence of this Agreement, and that such additional compensation is sufficient to support the covenants and agreements by Employee herein. 7. Employee further agrees and acknowledges that the undertakings of the Company as provided in this Agreement are made to provide an amicable conclusion of Employee's employment by the Company and, further, that Employee will not require the Company to publicize anything to the contrary. Employee and the Company, its officers and directors, will not disparage the name, business reputation or business practices of the other. In addition, by signing this Agreement, Employee agrees not to pursue any internal grievance with the Company. 8. Employee hereby certifies that he has read the terms of this Agreement, that he has been advised by the Company to consult with an attorney and that he understands its terms and effects. Employee acknowledges, further, that he is executing this Agreement of his own volition, without any threat, duress or coercion and with a full understanding of its terms and effects and with the intention, as expressed in Section 4 hereof, of releasing all claims recited herein in exchange for the consideration described herein, which he acknowledges is adequate and satisfactory to him provided the Company meets all of its obligations under this Agreement. The Company has made no representations to Employee concerning the terms or effects of this Agreement other than those contained in this Agreement. 9. Employee hereby acknowledges that he was presented with this Agreement on ___________________, and that he was informed that he had the right to consider this Agreement and the release contained herein for a period of twenty-one (21) days prior to execution. Employee also understands that he has the right to revoke this Agreement for a period of seven (7) days following execution, by giving written notice to the Company at General Instrument Corporation, 101 Tournament Drive, Horsham, PA 19044, in which event the provisions of this Agreement shall be null and void, and the parties shall have the rights, duties, obligations and remedies afforded by applicable law. 10. Employee and the Company agree that if any part of this Agreement is determined to be invalid, illegal or otherwise unenforceable, the remaining provisions of this Agreement shall not be affected and will remain in full force and effect. 11. This Agreement shall be interpreted and enforced under the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. GENERAL INSTRUMENT CORPORATION By: -------------------------------- - ------------------------------- Employee EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GENERAL INSTRUMENT CORPORATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 424,700 10,850 298,480 (3,311) 261,481 1,091,337 524,458 (288,648) 2,388,106 408,019 0 0 0 1,809 1,894,883 2,388,106 519,061 519,061 381,015 381,015 0 0 3,683 45,219 (16,731) 28,488 0 0 0 28,488 0.16 0.15
EX-99 4 EXHIBIT 99 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. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. 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, uncertainties relating to general political, economic and competitive conditions in the United States and other markets where the Company operates; 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 capital spending; Year 2000 readiness; 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; authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities Exchange Commission; and the factors as set forth below. FACTORS RELATING TO THE DISTRIBUTION In a transaction that was consummated on July 28, 1997, 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 (which was then named "NextLevel Systems, Inc." and was 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 CommScope to its stockholders on a pro rata basis as a dividend (the "Distribution"). Immediately following the Distribution, the Distributing Company changed its corporate name to "General Semiconductor, Inc." ("General Semiconductor"). Effective February 2, 1998, the Company changed its corporate name from "NextLevel Systems, Inc." to "General Instrument Corporation." 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 (either because of the nature of the Distribution or because of events occurring after the Distribution) 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 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. 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 system operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore the Company's sales and profitability, may be affected by a variety of factors, including general economic conditions, the continuing trend of cable system consolidation within the industry, the financial condition of domestic cable television system operators and their access to financing, competition from direct-to-home ("DTH"), satellite, wireless television providers and telephone companies offering video programming, technological developments that impact the deployment of equipment and new legislation and regulations affecting the equipment used by cable television system operators and their customers. There can be no assurance that cable television capital spending will increase from historical levels or that existing levels of cable television capital spending will be maintained. Although the domestic cable television industry is comprised of thousands of cable systems, a small number of large cable television multiple systems operators ("MSOs") own a majority of cable television systems. As a result, a relatively small number of customers has historically accounted for a large portion of the Company's revenues, and this trend is expected to continue. Sales to the Company's single largest customer represented 33% and 31% of total Company sales for the three months ended March 31, 1999 and the year ended December 31, 1998, respectively. For the same periods, the Company's top five MSO customers accounted for 55% and 54%, respectively, of the Company's total sales. Because a small number of MSOs account for a majority of the Company's revenues, the Company's future success will depend on its ability to develop and maintain relationships with these companies. The loss of business from a significant MSO could have a material adverse effect on the business of the Company. Because significant consolidation is occurring among cable television operators, the risk to the Company from the concentration of its customer base is increasing. THE IMPACT OF REGULATION AND GOVERNMENT ACTION In recent years, cable television capital spending has 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 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. The FCC is continuing its implementation of the Telecom Act which, when fully implemented, 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. On June 24, 1998, the FCC released a Report and Order entitled IN THE MATTER OF IMPLEMENTATION OF SECTION 304 OF THE TELECOMMUNICATIONS ACT OF 1996 - COMMERCIAL AVAILABILITY OF NAVIGATION DEVICES (the "Retail Sales Order"), which promulgates rules providing for the commercial availability of navigation devices, including set-top devices and other consumer equipment, used to receive video signals and other services from multichannel video programming distributors ("MVPDs"), including cable television system operators. The Retail Sales Order mandates that (i) subscribers have a right to attach any compatible navigation device to an MVPD system regardless of its source and (ii) service providers are prohibited from taking actions which would prevent navigation devices that do not perform conditional access functions from being made available by retailers, manufacturers, or other affiliated vendors. To accomplish subscribers' right to attach, the FCC has ordered that (i) MVPDs must provide technical information concerning interface parameters necessary to permit navigation devices to operate with their systems; (ii) MVPDs must separate out security functions from non-security functions by July 1, 2000; and (iii) after January 1, 2005, MVPDs may not provide new navigation devices for sale, lease or use that perform both conditional access functions and other functions in a single integrated device. Unless modified or overturned, the Retail Sales Order will require set-top device manufacturers, such as the Company, to develop a separate security module to be available for sale to other manufacturers who want to build set-top devices, as well as ultimately prevent the Company from offering set-top devices in which the security and non-security functions are integrated. In addition, the Retail Sales Order may require the Company to offer its set-top devices through retail distribution channels, an area in which the Company has limited experience. The competitive impact of the Retail Sales Order is still uncertain, and there can be no assurance that the Company will be able to compete successfully with other consumer electronics manufacturers interested in manufacturing set-top devices, many of which have greater resources and retail sales experience than the Company. There can be no assurance that future legislation, regulations or government action will not have a material adverse effect on the operations and financial condition of the Company. TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING THE COMPANY The Company will be significantly affected by the competition among cable television system 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, 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 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. The future success of the Company will also be dependent on the ability of cable and satellite television operators to successfully market the services provided by the Company's advanced digital terminals to their customers. Further, there can be no assurance that the development of products using new technologies or the increased deployment of new products will not have an adverse impact on sales by the Company of certain of its other products. For example, sales of analog cable products have been impacted by a shift to digital deployment in North America. INTELLECTUAL PROPERTY Because the Company's products are based on complex, rapidly-developing technologies, the Company has been and could in the future be made a party to litigation regarding intellectual property matters. The Company has from time to time been notified of allegations that it may be infringing certain patents and other intellectual property rights of others. The adverse resolution of any third party infringement claim could subject the Company to substantial liabilities and could require the Company to refrain from manufacturing or selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial, regardless of the outcome. It may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and there can be no assurance that the Company will be able to obtain these licenses or other rights or obtain such licenses or rights on commercially reasonable terms. COMPETITION The Company's products 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. For a discussion of competitive factors in regards to retail consumer electronic manufacturers see "The Impact of Regulation and Government Action". 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 system operators, its technological leadership and new product development capabilities, and the likely need for compatibility of new technologies with currently installed systems. However, the focus by several industry groups and the Federal government on uniform standards for interoperability of devices will likely increase competition for the Company's products by enabling competitors to develop systems compatible with, or that are alternatives to, the Company's products. INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS U.S. broadband system designs and equipment are being employed in international markets, where cable television penetration is low. In addition, the Company is developing new products to address international market opportunities. However, the impact of the economic crises in Asia and Latin America has significantly affected the Company's results in these markets. There can be no assurance that international markets will rebound to historical levels or that such markets will continue to develop or that the Company will receive additional contracts to supply systems and equipment in international markets. International exports of certain of the Company's products require export licenses issued by the U.S. Department of Commerce prior to shipment in accordance with export control regulations. The Company has made a voluntary disclosure to the U.S Department of Commerce with respect to several violations by the Company of these export control regulations. While the Company does not expect these violations to have a material adverse effect on the Company's operations or financial condition, there can be no assurance that these violations will not result in the imposition of sanctions or restrictions on the Company. A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. In addition, the Company's operations are expanding into new international markets. 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 Company's cost-competitive status relative to other competitors could be adversely affected if the New Taiwan dollar, Mexican peso or another relevant currency appreciates relative to the U.S. dollar because this appreciation will make the Company's products manufactured and assembled in Taiwan or Mexico more expensive when priced in U.S. Dollars. YEAR 2000 READINESS The Company is preparing for the impact of the arrival of the Year 2000 on its business, as well as on the businesses of its customers, suppliers and business partners. The "Year 2000 Issue" is a term used to describe the problems created by systems that are unable to accurately interpret dates after December 31, 1999. These problems are derived predominantly from the fact that many software programs have historically categorized the "year" in a two-digit format. The Year 2000 Issue creates potential risks for the Company, including potential problems in the Company's products as well as in the Information Technology ("IT") and non-IT systems that the Company uses in its business operations. The Company may also be exposed to risks from third parties with whom the Company interacts who fail to adequately address their own Year 2000 issues. There can be no assurance that the Company will be successful in its efforts to address all of its Year 2000 issues. If some of the Company's products are not Year 2000 compliant, the Company could suffer lost sales or other negative consequences, including, but not limited to, diversion of resources, damage to the Company's reputation, increased service and warranty costs and litigation, any of which could materially adversely affect the Company's business operations or financial condition. The Company is also dependent on third parties such as its customers, suppliers, service providers and other business partners. If these or other third parties fail to adequately address Year 2000 Issues, the Company could experience a negative impact on its business operations or financial condition. For example, the failure of certain of the Company's principal suppliers to have Year 2000 compliant internal systems could impact the Company's ability to manufacture and/or ship its products or to maintain adequate inventory levels for production. The Company's Year 2000 statements, including without limitation, anticipated costs and the dates by which the Company expects to complete certain actions, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to identify and remediate all relevant IT and non-IT systems, results of Year 2000 testing, adequate resolution of Year 2000 Issues by businesses and other third parties who are service providers, suppliers or customers of the Company, unanticipated system costs, the adequacy of and ability to develop and implement contingency plans and similar uncertainties. 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. -----END PRIVACY-ENHANCED MESSAGE-----