-----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, F/pWM4L/U1PXJ0V/kcVY/COCB464nBodwX9Zp0ve1/62TDfO+jF/KpLDGp3kX02x Yd/Py6WZRq9P8ydwHv3s4w== 0000912057-97-009685.txt : 19970327 0000912057-97-009685.hdr.sgml : 19970327 ACCESSION NUMBER: 0000912057-97-009685 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 DATE AS OF CHANGE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL INSTRUMENT CORP /DE/ CENTRAL INDEX KEY: 0000040656 STANDARD INDUSTRIAL CLASSIFICATION: 3663 IRS NUMBER: 133575653 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05442 FILM NUMBER: 97561012 BUSINESS ADDRESS: STREET 1: 8770 WEST BRYN MAWR AVE STREET 2: SUITE 1300 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 3125415000 MAIL ADDRESS: STREET 1: 8770 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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 1-5442 GENERAL INSTRUMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3575653 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 8770 WEST BRYN MAWR AVENUE 60631 CHICAGO, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code (773) 695-1000 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - - -------------------------------------------------------------- -------------------------------------------------------- Common Stock, par value $.01 per share New York Stock Exchange 5% Convertible Junior Subordinated Notes due 2000 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K / /. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.8 billion as of March 6, 1997 (based on the closing price of the stock on the New York Stock Exchange on that date). For purposes of this computation, shares held by affiliates and by directors and officers of the registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. Number of shares of Common Stock, par value $.01 per share, outstanding as of March 6, 1997: 136,934,426. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1996 are incorporated by reference in Parts I, II and IV. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Unless the context otherwise requires, references to the "Company" or "GI" include General Instrument Corporation and its direct or indirect subsidiaries, including General Instrument Corporation of Delaware ("GI Delaware"), the Company's principal operating subsidiary. GENERAL The Company is a leading worldwide supplier of systems and equipment for high-performance networks delivering video, voice and data/Internet services and a world leader in the design, manufacture and sale of discrete semiconductors. The Company's Broadband Communications segment, which is comprised of the Broadband Networks Group, Satellite Data Networks Group, Next Level Communications ("NLC") and CommScope, Inc. of North Carolina ("CommScope") business units, represented 87% of the Company's consolidated sales for the year ended December 31, 1996. Broadband Communications offers a variety of products and services for the cable and satellite television industries, including digital and analog set-top systems, hybrid fiber/coaxial network transmission systems, digital satellite systems, telephone network solutions and coaxial and other high-performance cable. The Power Semiconductor Division represented 13% of the Company's consolidated sales for the year ended December 31, 1996, and is a world leader in the sale of low- to medium-power rectifiers and transient voltage suppression components used in consumer electronics, computers, telecommunications, lighting ballasts, home appliances and automotive and industrial products. The Company was organized in 1990 in connection with the acquisition of General Instrument Corporation, then a publicly traded company, by affiliates of Forstmann Little & Co., a private investment firm. Additional information regarding the Company's industry segments appears in Note 14 to the Company's consolidated financial statements included in the Annual Report to Stockholders for the year ended December 31, 1996 (the "1996 Annual Report"), incorporated herein by reference. RECENT DEVELOPMENTS On January 7, 1997, the Company announced that its Board of Directors had approved a strategic restructuring plan to divide the Company into three separate public companies. The restructuring, expected to be completed in the third quarter of 1997 through a tax-free spin-off to stockholders (the "Distribution"), will create three independent companies: NextLevel Systems, Inc., which will be a leading worldwide supplier of systems and equipment for high-performance networks delivering video, voice and data/Internet services. CommScope, Inc., which will be the leading worldwide supplier of coaxial cable for broadband communications. General Semiconductor, Inc., now the Company's Power Semiconductor Division, which will be a world leader in the design, manufacture and sale of low- to medium-power rectifiers and transient voltage suppression components. The restructuring plan is subject to, among other things, the approval of the holders of a majority of the outstanding shares of the Company's Common Stock and the receipt of a ruling from the Internal Revenue Service that the separation of the three companies is not taxable to the Company or its stockholders. This Annual Report on Form 10-K presents information with respect to the business of the Company as a whole. In connection with the Distribution, a proxy statement will be mailed to the stockholders of the Company containing detailed information with respect to each of NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. 1 MARKET OVERVIEW The Company is a leading worldwide supplier of systems and equipment for high-performance networks delivering video, voice and data/Internet services. The Company is the only company currently providing such systems and equipment for broadband networks (i.e., networks having the capacity, or bandwidth, to transmit large volumes of information) using all of the following architectures: (i) wired systems including analog signals over the traditional hybrid fiber coaxial cable television plant ("HFC"), digital signals over the HFC plant, and switched-digital technology over fiber-to-the-curb architecture ("FTTC"); (ii) multichannel multipoint distribution systems ("wireless cable"); and (iii) direct-to-home ("DTH") satellite television systems. The Company believes that its technological leadership position and its ability to deliver any type of content over any type of network around the world makes it well positioned to continue to be a leading provider of broadband systems and equipment regardless of the network and architecture used. U.S. VIDEO NETWORKS. Historically, broadband video networks in the United States have been used predominantly by cable television operators in a wired cable television architecture. Accordingly, the Company has been focused primarily on supplying traditional analog systems and equipment to cable television multiple systems operators ("MSOs"). The Company believes that consumer demand for video entertainment is increasing, creating the need for more and varied types of programming. Based on data presented in industry trade publications and reports prepared by telecommunications industry analysts, the Company believes that the number of national cable programming networks has more than doubled since 1990. This expansion, however, is limited by the channel capacity of cable systems. Based on the sources indicated above, the Company estimates that of the more than 11,000 cable systems in the United States, only approximately 14% have the capacity to deliver 54 or more channels. Cable television operators are facing competition from DTH programmers using broadband networks to transmit television signals, via satellite, directly to subscribers' home receivers. Historically, most consumers had only one option for receiving multi-channel video entertainment--the local cable television operator. Currently, consumers also have access to national DTH digital television services which provide up to approximately 200 channels of programming, with high-quality digital video and audio. DIRECTV and PRIMESTAR Partners ("PRIMESTAR"), the two leading small dish DTH providers, have gained more than four million subscribers since the introduction of these digital services in 1994. The Company is the exclusive supplier of digital consumer receivers for PRIMESTAR, and is the exclusive supplier of encoders for both DIRECTV and PRIMESTAR. In addition, wireless cable television operators and local telephone companies have begun competing with existing cable television companies to offer video entertainment in many markets in the United States. Wireless cable is an architecture in which signals are sent from transmitter towers over the airwaves to small antennas that reside on customer homes. The Company is the leading supplier of set-top terminals for analog and digital wireless cable systems. Of the telephone companies offering video services, GTE Corporation ("GTE") has selected the Company to supply equipment for the first three sites of GTE's broadband network. In response to increasing consumer demand and competition, many cable television operators have increased, or are planning to increase, the number of channels they are capable of offering, either by upgrading the existing cable plant using an HFC architecture, or by implementing digital compression technology over the existing cable plant. HFC combines fiber optic and radio frequency technologies to increase the capacity, reliability and capability of a broadband network by connecting a headend to a neighborhood node using fiber optic cable and connecting the neighborhood node to the home subscriber using coaxial cable. Digital compression technology allows cable television operators to transmit the equivalent of four to ten channels of video information on the bandwidth used by one analog channel. In addition, digital signals are more resistant to noise and distortion than analog signals. Thus, digital systems 2 will allow cable television operators to offer a very large number of high-quality video and music channels and user-friendly features, such as interactive program guides and still leave capacity to offer near-video- on-demand services. As a leading provider of HFC systems and equipment, as well as the only company shipping digital cable headend equipment and terminals in volume, the Company believes that it is well positioned to serve its traditional customer base, whichever path to increasing capacity the cable television operators choose. INTERNATIONAL VIDEO NETWORKS. The Company believes that international markets represent a key growth opportunity for sales of broadband networks. In 1996, international sales by the the Broadband Communications segment represented 28% of its total sales, and management's goal is to increase that percentage to approach 50% over the next several years. Based on data presented in industry trade publications and reports prepared by telecommunications industry analysts, the Company estimates that more than 80% of the television households in the world are outside the United States; however, despite the growing demand for entertainment programming in these markets, the penetration of multichannel services is approximately 21% in these markets compared to approximately 72% in the United States. International markets employ the same types of broadband network architectures used in the United States: traditional wired cable television; wireless cable; and DTH systems. In certain countries, like the United Kingdom, operators have been using system architectures that are similar to systems used by U.S. cable networks, partly because many of these systems are being developed by affiliates of certain U.S. cable television operators and telephone companies. The Company believes that it has a competitive advantage in these markets because of its leadership in the cable equipment market in the United States, its relationship with the U.S. cable operators, its technological leadership and its fully integrated product line. The Company also believes that it is more likely that significant growth in sales of its analog systems will be attributable to increased international deployment of broadband equipment. Wireless cable systems are being used internationally in areas where the cost of installing a cable television infrastructure is not justified due to the low density of homes, a relatively small subscriber base or geographical constraints. The Company believes that it has supplied a majority of the addressable cable and wireless cable systems currently in use in international markets. DTH systems have become increasingly popular in international markets, particularly as digital compression technology allows satellite service providers and programmers to maximize their limited transponder capacity in order to reach geographically dispersed subscribers. The Company's digital satellite television technology, DigiCipher-TM- II, which incorporates the Motion Picture Experts Group 2 ("MPEG-2") international standard for digital compression and transport, has been widely accepted in North America, but has not been widely deployed in international markets. Many of these markets have adopted a different technology, Digital Video Broadcast ("DVB"). In 1996, the Company acquired the DVB compliant Magnitude-TM- digital satellite product line from Compression Labs, Inc. The Company has, to date, employed DVB technology only in encoders and not in consumer receivers. The Company expects to have DVB compliant consumer receivers available beginning in the third quarter of 1997, and believes that the introduction of this product will enable it to compete more effectively in the international DTH market. HIGH-SPEED DATA NETWORKS. The Company believes that the rapid growth in personal computer ownership and, in particular, usage of on-line and Internet access services, has created a demand for increased data transmission speeds. Based on data presented in industry trade publications and reports prepared by telecommunications industry analysts, the Company estimates that there are now approximately 39 million computer households in the United States, compared with approximately 22 million in 1990, and that approximately 17 million computer households subscribe to on-line services, compared to approximately two million in 1990. Traditional telephone modems, typically delivering up to 28.8 kilobits of information per second, may not be adequate to service the proliferation of Internet sites and the increasing amounts of data, sophisticated graphics and video. 3 The Company has developed a high-speed modem that delivers information via the cable television infrastructure instead of telephone lines. The Company's SURFboard-TM- modem, which began commercial shipment to cable television operators in the third quarter of 1996, is capable of delivering information down the cable at speeds up to nearly 1,000 times faster than a traditional telephone modem, while delivering instructions and other information upstream from the consumer over telephone lines. Most of the competing modems currently on the market are "two-way" cable, meaning that the information both delivered to the consumer and sent back from the consumer to the network travels over the cable plant. Because only a small percentage of existing cable systems are capable of effective two-way communications, the Company believes that its SURFboard cable modem with telephone return path is the optimal product for the current environment. The Company expects to introduce its SURFboard two-way cable product line by 1998, as more cable systems become capable of two-way communications. The Company is also developing SURFboard product lines for satellite and wireless cable applications. TELEPHONY NETWORKS. The Company entered a new market, the telephone local loop access market, with its purchase of NLC in September 1995. Based on data presented in industry trade publications and reports prepared by telecommunication industry analysts, the Company estimates that local telephone companies in the United States spend approximately $2 billion per year to rebuild their local loop equipment. Although the local telephone companies have been concentrating on their core business of voice transmission, they have begun to implement video and data services. The Company believes that NLC's next-generation NLevel(3) switched-digital broadband access system, which provides an integrated suite of voice, video and data services over an FTTC architecture, is an ideal solution because it allows telephone companies to upgrade their systems to provide voice-only services currently while migrating to data and video services over time. FTTC is a fiber-rich switched digital architecture in which fiber is deployed to very small neighborhood nodes, each serving eight to 50 customer homes, and the customer homes are connected to the nodes through copper cable for telephone services and coaxial or copper cable for video services. The Regional Bell Operating Companies ("RBOCs") are currently evaluating various architectures available to provide upgraded voice, as well as video and data services, and may determine to deploy several architectures. In the first quarter of 1997, NLC began delivering equipment under an agreement with a subsidiary of NYNEX Corporation ("NYNEX") to supply its NLevel(3) system for one million lines of telephone service in metropolitan New York and Boston. NYNEX also has options to extend its deployment of the NLevel(3) system up to five million lines. As of March 20, 1997, three of the other RBOCs had announced their intention to employ FTTC architectures using switched-digital video technology in their planned broadband networks, and four others had announced their intention to use HFC networks. Several of the RBOCs are also evaluating DTH and wireless cable. THE COMPANY'S BROADBAND COMMUNICATIONS STRATEGY The Company's strategy is to use its technological leadership in secure broadband systems and equipment to enhance its leading position in its traditional markets while expanding into new markets. This strategy is based on the belief that (i) consumers, both in the U.S. and international markets, will continue to demonstrate an increasing demand for new entertainment and information services and (ii) content and service providers will continue to create new bandwidth-intensive video, voice and data applications at the upper limits of network capabilities. The Company believes that these factors will generate a continuing need for systems and equipment with greater capacity for all networks and architectures. The key elements of the Company's strategy are set forth below. - TECHNOLOGICAL LEADERSHIP IN ADVANCED DIGITAL NETWORKS. The Company intends to build upon its world leadership in the development and implementation of advanced broadband communications systems and equipment. The Company recently began commercial deployment of two of the most advanced communications systems in the world: its MPEG-2 digital cable television system, which provides more than 100 channels of high-quality digital video and audio, including greatly expanded 4 pay-per-view offerings; and its NLevel(3) switched-digital broadband access system, which provides advanced voice, data and video services for the telephone local loop. The Company believes that it is the only company currently shipping digital cable headend equipment and terminals in volume and that its leadership position in core enabling technologies, such as digital compression, will enhance its ability to compete successfully in new markets. - DELIVERY OF ANY TYPE OF CONTENT OVER ANY NETWORK. The Company supplies a broad range of end-to-end systems that provide the capability to deliver any type of content or services--video, voice or data--over any type of network and architecture (wired analog and digital, wireless cable, satellite and FTTC). The Company believes that it is the only company capable of serving all of the service providers in this increasingly competitive environment, making it uniquely positioned to expand its leadership position in the provision of broadband networks. - RAPID INTERNATIONAL EXPANSION. The Company believes that a significant amount of its growth will come from international markets. There is a growing demand for entertainment programming in these markets, but the penetration of multi-channel video services is low. The Company intends to focus on expanding its international sales with the goal that international sales will approach 50% of its total sales over the next several years. - PROVIDE INTERNET AND DATA TRAFFIC SOLUTIONS. The Company believes that high-speed data networks are an emerging growth opportunity. Until recently, the principal barrier to expanding the bandwidth available to home users has been the speed limitations on data transmitted over copper telephone wires. The Company recently began commercial shipment of its SURFboard modem, which provides Internet and multimedia services to homes and businesses at speeds up to nearly 1,000 times faster than conventional telephone modems. The Company intends to focus on the development of its cable modem products and expects to introduce its two-way cable modem by 1998. BUSINESS UNITS The Company's Broadband Communications segment, which represented 87%, 83% and 84% of the Company's consolidated sales for the years ended December 31, 1996, 1995 and 1994, respectively, is organized into four business units: the Broadband Networks Group; the Satellite Data Networks Group; NLC; and CommScope. The Broadband Networks Group is the world leader in digital and analog set-top systems for wired and wireless cable television networks, as well as HFC network transmission systems used by network operators. The Satellite Data Networks Group is the world's leading provider of digital satellite systems for programmers, DTH satellite network providers, and private networks for business communications and distance learning. It offers a complete product line of digital compression and transmissions systems including MPEG-2, DVB and Advanced Television Systems Committee (ATSC) compliant solutions. The Satellite Data Networks Group is also a leader in the development of high-speed data networks. NLC provides telephony network solutions through its next-generation NLevel(3) switched digital services system. This system supports both residential and small business communications services over a high-speed, digital broadband transport architecture. CommScope is the leading worldwide supplier of coaxial cable for broadband communications. CommScope is the largest manufacturer and supplier of coaxial cable for cable television applications and is a leading supplier of coaxial cable for satellite television and other broadband video distribution applications. CommScope also manufactures and sells electrical and optical cable for local area network ("LAN") and other high-performance cable applications. 5 BROADBAND NETWORKS GROUP ADVANCED NETWORK SYSTEMS AND TRANSMISSION NETWORK SYSTEMS. The principal analog products of the Broadband Networks Group represented 48% 45%, and 47% of the sales of the Broadband Communications segment in the years ended December 31, 1996, 1995 and 1994, respectively. Subscriber products include primarily addressable systems which permit control, through a set-top terminal, of a subscriber's cable television services from a central headend computer without requiring access to the subscriber's premises. Addressable systems also enable a cable television operator to more easily provide pay-per-view programming services and multiple tiers of programming packages. Transmission products include headend signal processing equipment, distribution amplifiers, fiber optic transmission equipment and passive components for wired television distribution systems. Throughout the last several years, the Broadband Networks Group has been the market share leader in the U.S. analog-addressable market, with more than 50% of that market. The Company believes that cable television operators have sought to improve the quality, capacity and capabilities of their networks during this period by increasing their capital spending for addressable systems and transmission infrastructure upgrades. The Company expects cable television operators in the United States and abroad to continue to upgrade their basic networks and invest in new system construction primarily to compete with other television programming sources, such as DTH and cable networks planned by some telephone companies, and to develop, using U.S. architecture and systems, international markets where cable penetration is low and demand for entertainment programming is growing. Beginning in the second quarter of 1995, the Broadband Networks Group began shipping its CFT-2200 advanced analog terminal, which increased the functionality and features of its prior analog addressable subscriber terminals. The CFT-2200 incorporates a user feature platform that allows cable operators to deploy applications of their choice for new services, including electronic program guides, supplementary sports and entertainment information and play-along game shows, and can be modularly upgraded to deliver digital audio, providing CD-quality simulcasts of premium services. The CFT-2200 can also be upgraded to the Broadband Networks Group's second generation end-to-end digital television system, which is compatible with the MPEG-2 international standard for digital compression and transport. The Broadband Networks Group had shipped more than 1.8 million CFT-2200 units by December 31, 1996, and as of March 20, 1997, the Broadband Networks Group had received commitments and letters of intent for approximately 3.5 million additional CFT-2200 terminals. DIGITAL NETWORK SYSTEMS. The Company believes that the commercialization of advanced digital broadband systems and equipment, which provide for greatly expanded channel capacity and programming options, improved quality and security of signal transmission and the capability of delivering enhanced features and services, is an important market for GI. The Company also believes that its position in this developing market is significantly enhanced by the Broadband Networks Group's leadership in a key enabling technology, digital compression, which allows the broadcast of multiple digital channels in the same bandwidth occupied by one uncompressed video channel. The Broadband Networks Group, through its Digital Network Systems business unit, is deploying its digital television system that enables satellite programmers and cable television operators to deliver over their existing networks four to ten times as much information as is possible with existing analog technology. This system was the first digital video compression system to demonstrate capabilities over cable and satellite television networks. The Broadband Networks Group began shipping its first-generation digital encoders and decoders for satellite programmers and cable television commercial headend operators in 1993. The Company expects that cable and other broadband network operators will begin to deploy digital terminals in their customers' homes in order to take advantage of the enhanced capabilities of the digital networks. The rate of deployment will depend largely on consumer demand for new services made available through the digital network and the relative cost of the more advanced digital terminals. The Broadband Networks Group sold its first 100,000 DCT-1000 digital subscriber terminals in the fourth 6 quarter of 1996, and also sold 12 headend systems with the capacity to deliver digital services to more than two million subscribers. As of March 20, 1997, the Broadband Networks Group had obtained commitments and letters of intent for more than four million DCT-1000 and DWT-1000 terminals from major North American cable and wireless cable system operators and GTE. The Broadband Networks Group has entered into an agreement to supply network equipment, featuring CFT-2200 and DCT-1000 digital terminals, for the first three sites of GTE's planned HFC network. The Broadband Networks Group is working with AT&T Network Systems to bring advanced services to GTE's customers in these new video dial-tone networks. The Broadband Networks Group's digital terminals incorporate the MPEG-2 international standard, and the Company's digital television system has the capacity to carry various video, audio and data elements through a complex information infrastructure that will have an improved capability to interact with other consumer devices using MPEG-2 compression. SATELLITE DATA NETWORKS GROUP DIGITAL AND ANALOG SATELLITE PRODUCTS. The Satellite Data Networks Group designs, manufactures and sells analog and digital satellite uplink and downlink products for commercial and consumer use. Using the Company's DigiCipher digital technology, commercial customers are able to compress their video, audio and data transmissions resulting in significant cost savings over traditional analog transmission. The Satellite Data Networks Group also offers state-of-the-art network management and access control products and services allowing program packagers to efficiently and cost-effectively manage customer transactions and securely transmit their programming to only authorized end-users. For consumers, the Satellite Data Networks Group provides "user friendly" graphical user interfaces, excellent video quality and high-end audio reception. Satellite products represented 25%, 31% and 27% of the sales of the Broadband Communications segment for the years ended December 31, 1996, 1995 and 1994, respectively. The Satellite Data Networks Group is the leading manufacturer of access control and scrambling and descrambling equipment used by television programmers for the satellite distribution of proprietary programming. The Satellite Data Networks Group was a pioneer in digital satellite television with its DigiCipher I system, the world's first digital compression, access control and encryption transport system designed for the delivery of video entertainment signals. The digital system relies on encoders located at the point where programming originates, and decoders located at either commercial headends or at consumers' homes for use with their satellite dishes. In the second quarter of 1994, the Satellite Data Networks Group began deployment of DigiCipher I consumer receivers to PRIMESTAR, a consortium of cable television operators and GE Americom, which offers a medium-power Ku-band DTH television system, and, through December 31, 1996, had delivered approximately 2.3 million DigiCipher I receivers to PRIMESTAR. The Satellite Data Networks Group began shipment of its second generation, MPEG-2 compatible DigiCipher II system and Magnitude system, which utilizes the DVB standard, in 1996. The Satellite Data Networks Group is the sole supplier of digital satellite receivers to PRIMESTAR and digital satellite encoders for DTH providers PRIMESTAR, DIRECTV, USSB, Galaxy Latin America and DIRECTV Japan. The Satellite Data Networks Group is also a leading supplier of digital satellite systems to private networks for such applications as business communications and distance learning. The group's digital satellite systems are in use by organizations such as Ford Motor Company and South Carolina Educational TV. The analog satellite products of the Company are the exclusive systems for the distribution of encrypted C-band (large dish) satellite-delivered programming to cable television operators and large-diameter backyard satellite dish owners. The system consists primarily of scramblers, which are installed at 7 the point where the programming originates, and descramblers, which are installed at the commercial headends of cable television systems or purchased by consumers for use with their backyard C-band satellite dishes. Sales of analog consumer descramblers have declined, as expected, to minimal levels over the past two years as a result of the availability of competing satellite video services. The Company plans to introduce, in the second quarter of 1997, its first digital descramblers for the backyard C-band market. This product, called 4DTV-TM-, will allow C-band dish owners to take advantage of the wealth of digital programming now being transmitted by satellite. There can be no assurance, however, that volume shipments of 4DTV will commence in 1997 or as to the degree of market acceptance of this new product. HIGH-SPEED DATA NETWORKS. The Company believes that high-speed data networks are an emerging growth opportunity for the Satellite Data Networks Group. The initial product offered by the group is the SURFboard cable modem, which provides Internet and multimedia services to homes and businesses at speeds up to nearly 1,000 times faster than conventional telephone modems. Initial commercial shipment of SURFboard modems for cable networks commenced during the third quarter of 1996. SURFboard modems are scheduled to be deployed by several cable television operators in the United States and abroad. Most of the competing modems currently on the market are "two-way" cable, meaning that the information both delivered to the consumer and sent back from the consumer to the network travels over the cable plant. Because only a small percentage of existing cable systems are capable of effective two-way communications, the Company believes that its SURFboard cable modem with telephone return path is the optimal product for the current environment. The Company expects to introduce its SURFboard two-way cable product line by 1998, as more cable systems become capable of two-way communications. There can be no assurance that this new product will be available for volume shipments in 1997 or as to the degree of its market acceptance. The Company is currently developing versions of the SURFboard modem for use in wireless and satellite networks. NLC In September 1995, the Company acquired NLC, which was formed to design, manufacture and market a next-generation telecommunications broadband access system for the delivery of telephony, video, and data from a telephone company central office or cable television headend to the home. NLC's product, NLevel(3), is designed to permit the cost-effective delivery of a suite of standard telephony and advanced services such as high-speed data/Internet, work-at-home, distance learning, video-on-demand and video-telephony to the home from a single access platform. The NLevel(3) system is designed to work with and enhance existing telephony networks and offers the capability to provide voice services (POTS), ISDN, high-speed data/Internet and video services over both copper-twisted-pair and FTTC networks. In the fourth quarter of 1996, NLC entered into an agreement with a subsidiary of NYNEX, pursuant to which NLC will supply its NLevel(3) system for one million lines of telephone service in metropolitan New York and Boston. Initial shipments for the greater Boston area began in the first quarter of 1997. NYNEX also has options to extend its deployment of the NLevel(3) system up to five million lines. NLC has also demonstrated NLevel(3) for the other RBOCs, and three of those RBOCs have announced their intention to employ FTTC architectures using switched-digital video technology in their planned broadband networks. A significant amount of research and development expenditures will be required to fund the successful deployment and market growth of telephony networks. The Company does not expect NLC to generate significant revenues until 1998, and there can be no assurance that delays will not occur in the deployment of NLC's products or that such products will be commercially successful. 8 COMMSCOPE CommScope is the leading worldwide supplier of coaxial cable for broadband communications. As cable television, telephone, Internet access and other communication services converge, broadband communication systems are increasingly being configured in a hybrid design that includes both fiber optic and coaxial cables. CommScope also manufactures and sells electrical and optical cable for LANs and other high-performance applications. CommScope is the largest manufacturer and supplier of coaxial cable for cable television applications in the United States in terms of sales volume, with more than a 50% market share in 1996, and is a leading supplier of coaxial cable for satellite television and other broadband video distribution applications. The Company believes that CommScope's competitive strength in the coaxial cable market is due to its extensive coaxial cable product line, its delivery and service capability and its efficient, low-cost manufacturing operations. CommScope also supplies the developing market for high-bandwidth coaxial cables used in HFC networks that provide local access to a combination of services that can include cable television, telephone and Internet access. Cable television service has traditionally been provided primarily by cable television system operators or MSOs that have been awarded franchises from the municipalities they serve. In response to increasing competitive pressures, MSOs have been expanding the variety of their service offerings not only for video, but for Internet access and telephony, which generally require increasing amounts of system bandwidth. MSOs have generally adopted, and the Company believes that for the foreseeable future will continue to adopt, HFC cable system designs when seeking to increase system bandwidth. Such systems combine the advantages of fiber optic cable in transmitting clear signals over a long distance without amplification, and the advantages of coaxial cable in ease of installation, low cost and compatibility with the receiving components of the customer's communications devices. The Company believes that while MSOs are likely to increase their use of fiber optic cable for the trunk and feeder portions of their cable systems, there will be an ongoing need for high-capacity coaxial cable for the local distribution and street-to-the-home portions of the cable system because coaxial cable remains the most cost effective means for the transmission of broadband signals to the home over shorter distances in cable networks. For local distribution purposes, coaxial cable has the necessary signal carrying capacity or bandwidth to handle upstream and downstream signal transmission. As of January 1997, CommScope has provided coaxial cables to most major U.S. telephone operating companies, several of which have announced plans to install broadband networks for the delivery of video, telephone and other services to some portion, or all, of their telephone service areas. The broadband networks that are being proposed by some of the telephone companies utilize HFC technologies similar to those employed by many cable television operators. While there is no assurance that these proposed networks will be built, to the extent they are implemented, they could represent a significant incremental sales opportunity for CommScope beyond its traditional cable television customer base. The acquisition of the Thermatics Division of Teledyne Industries, Inc. in May 1996 enhanced CommScope's LAN cable manufacturing capability and expanded CommScope's product capability and market presence into other high-performance cable markets. These markets include aircraft and aerospace wiring, industrial, automotive and other specialty cable markets that require cables to perform in extremely hostile operating environments. As a result of this acquisition, CommScope broadened its array of cable manufacturing process and product capabilities. POWER SEMICONDUCTOR DIVISION The Power Semiconductor Division (which represented 13%, 17% and 16% of the Company's consolidated sales in the years ended December 31, 1996, 1995 and 1994, respectively) is a world leader in the design, manufacture and sale of low- to medium-power rectifiers and transient voltage suppression components in axial, bridge, surface mount and array packages. These products are used throughout the 9 electrical and electronics industries to condition current and voltage and to protect electrical circuits from power surges. Applications include components for circuits in consumer electronics, computers, telecommunications, computers, lighting ballasts, home appliances and automotive and industrial products. The use of semiconductors has expanded well beyond computer systems, to applications such as communication systems, automotive systems, consumer goods and industrial automation and control systems as product performance has been enhanced and size and cost have decreased. In addition, system users and designers now demand systems with more functionality, higher levels of performance, greater reliability and shorter design cycle times, all in smaller packages and at lower costs. These demands have resulted in increased semiconductor content as a percentage of system content. Other industry market segments where semiconductors are becoming more prevalent include: industrial applications (manufacturing systems, industrial controls, security and energy management and medical equipment); consumer applications (audio, video, personal electronics, video games and appliances); and automotive systems (engine management, anti-lock braking systems, climate control, collision warning and in-car entertainment). The increasing semiconductor content in these products combined with a broadening of end markets in all regions worldwide have created a more stable demand for semiconductor suppliers that sell globally into multiple markets. Given the growing prevalence of semiconductors in other market segments, the Company believes that new products and technologies will play a significant role in the Power Semiconductor Division's growth. The Company further believes that, based upon its current product offerings, the Power Semiconductor Division is well positioned to compete for market share in these other segments. For example, the Power Semiconductor Division's patented Passivated Anisotrophic Rectifier process is increasing the reliability of many automotive electronics applications. In addition, the Power Semiconductor Division has developed a new line of transient voltage protection devices and a new line of rectifiers for automotive applications. The Company believes that the competitive strengths of the Power Semiconductor Division are its continued commitment to global distribution and customer service, value-added manufacturing, technological leadership and new product innovation. The Power Semiconductor Division is a leader in sales of low-to medium-power rectifiers and transient voltage suppression components in North America, Southeast Asia and Europe, with 72% of its worldwide sales for the year ended December 31, 1996 generated from international sales. The Power Semiconductor Division has undertaken a significant capacity expansion in order to meet the demand for its products worldwide. The Power Semiconductor Division owns a manufacturing facility in the Peoples' Republic of China and expects to begin production of bridge and standard rectifiers at this facility in the third quarter of 1997. TECHNOLOGY AND LICENSING The Company believes it is in the unique position of currently producing the majority of the world's analog-addressable systems, while also leading the deployment of the digital technology that will eventually replace these systems. As a result, the Company will seek to build upon its core enabling technologies, digital compression, encryption and conditional access and control, in order to lead the transition of the market for broadband communications networks from analog to digital systems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--New Technologies" incorporated herein by reference from the 1996 Annual Report. GI began shipment of its MPEG-2 system to satellite television programmers in early 1996, and began delivery of MPEG-2 systems to cable television operators in the fourth quarter of 1996. To allow for broad deployment of the Company's MPEG-2 system, a number of semiconductor manufacturers have received licenses, including Motorola, SGS-THOMSON Microelectronics, LSI Logic, C-Cube Microsystems and Samsung Electronics. To ensure the availability of interoperable equipment to cable television operators 10 and other digital providers, DigiCipher II/MPEG-2 technology has been licensed to Hewlett-Packard, Zenith and Pace Micro Technology, Ltd., a major supplier of DTH satellite television systems in international markets. The Company has also entered into other license agreements, both as licensor and licensee, covering certain products and processes with various companies. Under one such agreement, the Company holds a non-exclusive worldwide license under an unaffiliated third party's patent regarding encryption and decryption of satellite television signals. These license agreements require the payment of certain royalties which are not expected to be material to the Company's consolidated financial statements. RESEARCH AND DEVELOPMENT The Company actively pursues the development of new technologies and applications. Research and development expenditures for the year ended December 31, 1996 were $209 million and are expected to be approximately $225 million for the year ending December 31, 1997, compared to $147 million and $111 million for the years ended December 31, 1995 and 1994, respectively. Research and development expenditures reflect continued development of the next generation of cable set-top terminals, which incorporate digital compression and multimedia capabilities, broadband telephony and switched digital video products, cable modems, advanced digital systems for cable and satellite television distribution, next-generation direct broadcast satellite systems and product development through strategic alliances. SALES AND DISTRIBUTION The Company's Broadband Communications products and services are marketed primarily to cable television operators, cable and satellite television programmers and providers, and telephone companies. Demand for the Company's products and services depends primarily on capital spending by cable television operators, satellite programmers and telephone companies for constructing, rebuilding or upgrading their systems. The amount of this capital spending and, therefore, a majority of GI's sales and profitability, are affected by a variety of factors, including general economic conditions, access by cable television operators to financing, regulation of telecommunications service providers and technological developments in the broadband communications industry. Although GI believes that cable television capital spending has increased, there can be no assurance that such increases will continue or that such increased level of cable television capital spending will be maintained. Broadband communications systems are sold primarily through the efforts of sales engineers or other sales personnel employed by the Company who are skilled in the technology of the particular system. The Power Semiconductor Division's products are targeted primarily to the computer, automotive, telecommunications and consumer electronics industries. They are sold primarily through distributors and sales representatives as well as directly by the division's sales personnel. Because a limited number of cable and satellite television operators provide services to a large percentage of television households in the United States, the loss of some of these operators as customers could have a material adverse effect on the Company's sales. Tele-Communications, Inc., including its affiliates, accounted for 17% of GI's consolidated net sales for the year ended December 31, 1996, and was the only customer of GI that accounted for 10% or more of the Company's consolidated net sales during this period. PATENTS The Company's policy is to protect its proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology, inventions and improvements that the Company considers important to the development of its business. Although the Company believes that its patents provide a competitive advantage, the Company relies equally on its proprietary knowledge and continuing technological innovation to develop and maintain its competitive position. 11 BACKLOG The backlog information set forth below includes only orders for products scheduled to be shipped within six months. Orders may be revised or canceled, either pursuant to their terms or as a result of negotiations; consequently, it is impossible to predict accurately the amount of backlog orders that will result in sales.
BACKLOG (IN MILLIONS) -------------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 --------------- --------------- Broadband Communications......................................... $ 442 $ 531 Power Semiconductor.............................................. 141 248 ----- ----- Total............................................................ $ 583 $ 779 ----- ----- ----- -----
COMPETITION The Company's products and services compete with those of a substantial number of foreign and domestic companies, some with greater resources, financial or otherwise, than the Company, and the rapid technological changes occurring in the Company's markets are expected to lead to the entry of new competitors. The Company's ability to anticipate technological changes and introduce enhanced products on a timely basis will be a significant factor in its ability to expand and remain competitive. Existing competitors' actions and new entrants may have an adverse impact on the Company's sales and profitability. The Company believes that it enjoys a strong competitive position in its existing cable and satellite television markets due to its large installed cable television equipment base, its strong relationships with the major cable television operators and satellite television programmers, its technological leadership and new product development capabilities, and the likely need for compatibility of new technologies with currently installed systems. There can be no assurance, however, that competitors will not be able to develop systems compatible with, or that are alternatives to, the Company's proprietary technology or systems or that the Company will be able to introduce new products and technologies on a timely basis. In addition, the Company, through NLC, has entered into a new market, the local telephone access equipment market, in which NLC will be competing with a number of well-established existing suppliers. There is no assurance that the Company will be successful in this market. EMPLOYEES At December 31, 1996, approximately 14,200 people were employed by GI. Of these employees, approximately 5,200, 4,500 and 2,600 were located at GI's U.S., Taiwan and Mexico facilities, respectively, with the balance located in Puerto Rico, Europe and the Far East. GI believes its relations with its employees, and, where they are represented by unions, its relations with their unions, are good. As of December 31, 1996, approximately 5,300 of GI's employees were covered by collective bargaining agreements. Of these employees, approximately 4,400 were located at its Taiwan facilities, approximately 400 were located at its Mexico facilities, approximately 400 were located at its Ireland facilities and the balance were located at its Westbury, New York, and certain Far East facilities. RAW MATERIALS The Company purchases raw materials from many sources in the United States, as well as from sources in the Far East, Canada and Europe and its products include certain components that are currently available only from single sources. The Company has in effect inventory controls and other policies intended to minimize the effect of any interruption in the supply of these components. There is no single supplier the loss of which would have a continuing material adverse effect on the Company. 12 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 is involved in remediation programs, principally with respect to former manufacturing sites, that are proceeding in conjunction with federal and state regulatory oversight. In addition, the Company is currently named as a "potentially responsible party" with respect to the disposal of hazardous waste at nine hazardous waste sites located in six states and Puerto Rico. The Company has engaged independent consultants to assist management in evaluating potential liabilities related to environmental matters. The Company's management assesses the input from these independent consultants along with other information known to the Company in its effort to continually monitor these potential liabilities. Management assesses its environmental exposure on a site-by-site basis, including those sites where the Company has been named a "potentially responsible party." Such assessments include the Company's share of remediation costs, information known to the Company concerning the size of the hazardous waste sites, their years of operation and the number of past users and their financial viability. Although the Company estimates, based on assessments and evaluations made by management, that its exposure with respect to these environmental matters could be as high as $58 million, the Company believes that the reserve for environmental matters of $38 million at December 31, 1996 is reasonable and adequate. However, there can be no assurance that the ultimate resolution of these matters will approximate the amount reserved. Further information regarding the Company's environmental matters appears in Note 9 to the Company's consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. CAPITAL EXPENDITURES Capital expenditures were $228 million, $159 million and $136 million in the years ended December 31, 1996, 1995 and 1994, respectively. Such expenditures were primarily in support of capacity expansion across all businesses to meet increased current and future demands for analog and digital products, coaxial cable and power rectifiers. In 1997, the Company expects to continue to expand its capacity to meet current and future demands, with capital expenditures for the year ending December 31, 1997 expected to approximate $250 million. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K, the 1996 Annual Report, any Form 10-Q or any Form 8-K of the Company or any other written or oral 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," "forseeable future," "believe," "believes," 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 uncertainties and other factors include, but are not limited to, uncertainties relating to general political and economic conditions, uncertainties relating to government and regulatory policies, uncertainties relating to customer plans and commitments, the Company's dependence on the cable television industry and cable television spending, signal security, the pricing and availability of equipment, materials and inventories, technological developments, the competitive environment in which the Company operates, changes in the financial markets relating to the Company's capital structure and cost of 13 capital, the uncertainties inherent in international operations, 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. 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 2. PROPERTIES The Company has manufacturing, warehouse, sales, research and development and administrative facilities worldwide which have an aggregate floor space of approximately 3.9 million square feet. Of these facilities, aggregate floor space of approximately 1.3 million square feet is leased, and the remainder is owned by GI. Leases expire on various dates through the year 2009. GI operates manufacturing facilities in 13 locations worldwide containing aggregate floor space of approximately two million square feet. The Power Semiconductor Division utilizes four manufacturing facilities with an aggregate floor space of approximately 0.6 million square feet, including its facility in Tianjin, China, which is expected to begin production in the third quarter of 1997. GI does not believe there is any material long-term excess capacity in its facilities, although utilization is subject to change based on customer demand. GI believes that its facilities and equipment generally are well maintained, in good operating condition and suitable for GI's purposes and adequate for its present operations. ITEM 3. LEGAL PROCEEDINGS On June 11, 1996, the United States District Court for the Eastern District of Texas entered judgment against NLC and two of its founders for $136.7 million plus interest in an action entitled DSC COMMUNICATIONS CORPORATION AND DSC TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATION, THOMAS R. EAMES AND PETER W. KEELER, Case No. 4:95cv96, which had been brought on April 10, 1995 by DSC Communications Corporation and DSC Technologies Corporation (collectively, "DSC") alleging, among other things, that the individual defendants diverted a corporate opportunity of DSC and misappropriated its trade secrets and that NLC made use of or benefited from these actions. The judgment was entered on the corporate opportunity count and a related conspiracy count. The District Court denied DSC's request to aggregate amounts awarded by the jury on the various claims so as to arrive at a total judgment in excess of $369 million plus pre-judgment interest and attorneys' fees, and it also denied DSC's request for entry of permanent injunctive relief. In connection with the acquisition of NLC, the Company agreed to indemnify the founders, to the extent permitted by applicable law, for any judgment awarded against them in the matter, and following entry of judgment the Company recorded a charge to earnings of $141 million reflecting the judgment and costs of litigation. On February 28, 1997, the Court of Appeals affirmed the denial of DSC's request for injunctive relief, ruled that the claim for diversion of a corporate opportunity was legally insufficient and remanded the case to the District Court for entry of judgment on the jury award for misappropriation of trade secrets which, as revised by the District Court, would be for not more than $137.7 million (including the award on a related conspiracy count), plus accrued interest. Enforcement of the judgment was stayed pending the determination of the appeal. Both parties have filed motions for rehearing with the Court of Appeals, and these motions have not been decided as of the date hereof. 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 behalves and as representatives of a class of purchasers of the Company's Common Stock during the period March 21, 1995 through October 18, 1995. The complaint alleges that the 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"), by allegedly making false 14 and misleading statements and failing to disclose material facts about the Company's planned shipments in 1995 of its CFT-2200 and DigiCipher II products. The plaintiffs have moved for class certification. The Company has filed a motion to dismiss the Consolidated Amended Class Action Complaint. Also pending in the same court, under the same name, is a derivative action brought on behalf of the Company. The derivative action alleges that the members of the Company's Board of Directors, several of its officers and Forstmann Little & Co. and related entities had 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 Company's stock for personal gain. The Company has filed a motion to dismiss the derivative complaint. An action entitled BKP PARTNERS. L.P. V. GENERAL INSTRUMENT CORP. was brought in February 1996 by shareholders of NLC, which was merged into a subsidiary of the 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 complaint alleges that the Company's Common Stock, which was received by the plaintiffs as a result of the merger, was overpriced because of the matters complained of in the class action and the Company's failure to disclose information concerning a significant reduction in its gross margin. The Company has filed a motion to dismiss the complaint. While the ultimate outcome of the matters described above cannot be determined, management does not believe that the final disposition of these matters beyond the amounts previously provided for in the financial statements will have a material adverse effect on the Company's financial statements. GI is involved in various other litigation matters, none of which are expected to have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the three months ended December 31, 1996. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this Item is contained in Note 15 to the consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. As of March 6, 1997, the approximate number of registered stockholders of record of the Company's Common Stock was 921. ITEM 6. SELECTED FINANCIAL DATA Information required by this Item is contained in the Five Year Summary included in the 1996 Annual Report, incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this Item is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 1996 Annual Report, incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is contained in the consolidated financial statements of the Company as of December 31, 1996 and 1995 and for each of the years ended December 31, 1996, 1995 and 1994, the notes to the consolidated financial statements, and the independent auditors' report thereon, and in the Company's unaudited quarterly financial data for the two-year period ended December 31, 1996, included in the 1996 Annual Report, incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the directors and executive officers of the Company as of March 20, 1997. Certain executive officers of the Company also serve as president of the various divisions and subsidiaries of GI Delaware. Officers serve at the discretion of the Board of Directors.
NAME AGE POSITION(S) WITH THE COMPANY - - -------------------------- --------- ------------------------------------------------------------------------- Richard S. Friedland 46 Chairman of the Board and Chief Executive Officer Nicholas C. Forstmann 50 Director Theodore J. Forstmann 57 Director John Seely Brown 56 Director Lynn Forester 42 Director Steven B. Klinsky 40 Director Alex M. Mandl 53 Director J. Tracy O'Rourke 62 Director Felix G. Rohatyn 68 Director Frank M. Drendel 52 Director and Chairman, President and Chief Executive Officer, CommScope, Inc. of North Carolina, a subsidiary of GI Delaware Richard D. Badler 46 Vice President, Corporate Communications Paul J. Berzenski 44 Vice President and Controller Charles T. Dickson 42 Vice President and Chief Financial Officer Thomas A. Dumit 54 Vice President, General Counsel and Chief Administrative Officer Susan M. Meyer 53 Vice President, Secretary and Deputy General Counsel Kenneth Pelowski 37 Vice President, Corporate Development Richard C. Smith 52 Vice President, Taxes and Treasurer Clark E. Tucker 47 Vice President, Human Resources Michael R. Bernique 53 Vice President and President, Satellite Data Networks Group Edward D. Breen 41 Vice President and President, Broadband Networks Group Ronald A. Ostertag 56 Vice President and President, Power Semiconductor Division
The principal occupations and positions for the past several years of each of the directors and executive officers of the Company are as follows: Richard S. Friedland has been a director of the Company since October 1993. He became President and Chief Operating Officer of the Company in October 1993, Chief Executive Officer of the Company in August 1995 and Chairman of the Board of Directors of the Company in December 1995. He was Chief Financial Officer of the Company and GI Delaware from March 1992 to January 1994 and Vice President, Finance of the Company from May 1991 to October 1993. He was Vice President, Finance and Assistant Secretary of GI Delaware from October 1990 to October 1993 and Vice President and Controller of GI Delaware from November 1988 to January 1994. Mr. Friedland is a director of Department 56, Inc. Nicholas C. Forstmann served as a director of GI Delaware from August 1990 to March 1992, when he was elected to serve as a director of the Company. He has been a General Partner of FLC Partnership, L.P., the General Partner of Forstmann Little & Co., since he co-founded Forstmann Little & Co. in 1978. He is a director of Department 56, Inc. and Gulfstream Aerospace Corporation. Theodore J. Forstmann served as a director of GI Delaware from August 1990 to March 1992, when he was elected to serve as a director of the Company. He has been a General Partner of FLC Partnership, L.P., the General Partner of Forstmann Little & Co., since he co-founded Forstmann Little & Co. in 1978. He is a director of Gulfstream Aerospace Corporation. 17 John Seely Brown has been a director of the Company since July 1993. He has been Chief Scientist of Xerox Corporation since 1992 and Corporate Vice President of Xerox Corporation since 1990. He is also the director for the Xerox Palo Alto Research Center. He is a Fellow of the American Association for Artificial Intelligence and a member of the National Academy of Education. Lynn Forester has been a director of the Company since February 1995. She has been President and Chief Executive Officer of FirstMark Holdings, Inc., since 1984, and of NetWave, Inc., an Internet company, since 1996. From 1989 to December 1994, she was Chairman and Chief Executive Officer of TPI Communications International, Inc., a radio common carrier and paging company. She is a director of Gulfstream Aerospace Corporation and Vice Chairman of the Corporate Commission on Educational Technology. Steven B. Klinsky served as a director of GI Delaware from August 1990 to March 1992, when he was elected to serve as a director of the Company. He has been a General Partner of FLC Partnership, L.P., the General Partner of Forstmann Little & Co., since December 1986. Alex M. Mandl has been a director of the Company since December 1996. Mr. Mandl is Chairman and Chief Executive Officer of Associated Communications. Prior to joining Associated Communications in September 1996, Mr. Mandl had served with AT&T, as President and Chief Operating Officer from January 1996 to August 1996; from 1993-1995, as Executive Vice President of AT&T and Chief Executive Officer of AT&T Communications Services Group; and from 1991-1993, as Chief Financial Officer and Group Executive of AT&T. He is a director of Warner-Lambert Company, Carnegie Hall and WETA-TV-FM Washington. J. Tracy O'Rourke served as a director of GI Delaware from September 1990 to March 1992, when he was elected to serve as a director of the Company. He has been Chairman and Chief Executive Officer of Varian Associates, Inc., a manufacturer of health care systems, semiconductor manufacturing equipment and analytical instruments, since early 1990. He is a director of National Semiconductor Corp. Felix G. Rohatyn has been a director of the Company since October 1993. He has been a managing director of Lazard Freres & Co. LLC, Investment Bankers, since 1960 and served as Chairman of the Municipal Assistance Corporation for The City of New York from 1975 to October 1993. He is a director of Crown, Cork & Seal Co., Inc. and Pfizer Inc. Frank M. Drendel served as a director of GI Delaware and its predecessors from 1987 to March 1992, when he was elected to serve as a director of the Company. He has served as Chairman and President of CommScope since 1986 and has served as Chief Executive Officer of CommScope since 1976. Richard D. Badler became Vice President, Corporate Communications of the Company in February 1996. He was an Executive Vice President and Account Director of Golin/Harris Communications from September 1993 to February 1996 and Director of Public Affairs for Kraft General Foods from May 1990 to September 1993. Paul J. Berzenski became Controller of the Company in January 1994 and Vice President of the Company in November 1994. He was Assistant Controller of GI Delaware from January 1991 to January 1994. Charles T. Dickson became Vice President and Chief Financial Officer of the Company in January 1994. He was Vice President-Finance and Administration of several divisions of MCI Communications Corporation from 1988 to 1993. Thomas A. Dumit became Vice President, General Counsel and Secretary of the Company in 1991 and Chief Administrative Officer of the Company in December 1995. Susan M. Meyer became Vice President and Secretary of the Company in December 1995, and has been Deputy General Counsel of the Company since February 1991. Ms. Meyer was Assistant Secretary of GI Delaware from June 1992 to December 1995. 18 Kenneth Pelowski became Vice President, Corporate Development of the Company in June 1996. Mr. Pelowski was Vice President, Corporate Planning and Development with Quantum Corporation from May 1995 to June 1996 and from 1989 to 1995, he was Senior Director, Corporate Planning and Development at Sun Microsystems. Richard C. Smith has been Vice President of GI Delaware since March 1989 and Treasurer of the Company since September 1991. Mr. Smith has been Vice President and Assistant Secretary of the Company since May 1991 and has been Treasurer of the Company since March 1992. Clark E. Tucker has been Vice President, Human Resources of GI since May 1995. From August 1992 until November 1994, Mr. Tucker was Vice President, Human Resources for Witco Corporation; from April 1990 until August 1992, he served as a management consultant with Towers, Perrin, Forster & Crosby. Michael R. Bernique has been Vice President of the Company and President of the Company's Satellite Data Networks Group since June 1996. From December 1993 to December 1995, Mr. Bernique was Senior Vice President North American Sales and Service of DSC Communications and from December 1992 to December 1993, he was Vice President and General Manager of Transmission Products for DSC Communications. Edward D. Breen became President of the Company's Broadband Networks Group in February 1996 and Vice President of the Company in November 1994. He was Executive Vice President, Terrestrial Systems, from October 1994 to January 1996 and Senior Vice President of Sales from June 1988 to October 1994. Ronald A. Ostertag has been Vice President of the Company since February 1989 and President of the Power Semiconductor Division since September 1990. Theodore J. Forstmann and Nicholas C. Forstmann, both of whom are directors of the Company, are brothers. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers and holders of more than 10% of the Company's Common Stock to file with the Securities and Exchange Commission reports of ownership and changes in ownership of the Company's Common Stock and other equity securities of the Company on Forms 3, 4 and 5. The Company undertakes to make such filings on behalf of its directors and officers. Based on written representations of reporting persons and a review of those reports, the Company believes that during the year ended December 31, 1996, its officers and directors and holders of more than 10% of the Company's Common Stock complied with all applicable Section 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth individual compensation information for all services rendered in all capacities during the periods described below for the individuals who served as Chief Executive Officer during 1996 and the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) who were serving as executive officers at December 31, 1996. The following table sets forth compensation information for each of those individuals for the years ended December 31, 1996, 1995 and 1994. 19 SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------------ ------------------------- SECURITIES ALL OTHER UNDERLYING COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(#)(B) SATION - - ----------------------------------------------------------------------------- ---- -------- -------- ------------- --------- Richard S. Friedland......................................................... 1996 $750,000 $ -- 250,000 $ 5,460(c) Chairman and Chief Executive Officer 1995 589,583(d) 214,445(d) 560,000 5,460 1994 420,000 327,600 270,000 5,460 Frank M. Drendel............................................................. 1996 $410,016 $ 93,275 24,000 $17,976(e) Chairman, President and Chief Executive Officer of CommScope, Inc. of North 1995 410,016 114,185 24,000 19,937 Carolina and Director of the Company 1994 398,808 163,757 72,000 17,154 Thomas A. Dumit.............................................................. 1996 $345,000 $ -- 42,000 $ 5,460(c) Vice President, General Counsel and Chief Administrative Officer 1995 320,000 89,120 24,000 5,460 1994 310,999 134,753 48,000 5,460 Ronald A. Ostertag........................................................... 1996 $320,000 $ -- 30,000 $ 5,460(c) Vice President and President, Power Semiconductor Division 1995 305,000 195,810 24,000 5,460 1994 280,000 110,122 72,000 6,516 Edward D. Breen.............................................................. 1996 $300,000 $ 62,820 60,000 $ 4,568(f) Vice President and President, Broadband Networks Group 1995 227,872 25,339 16,000 3,618 1994 199,770 95,216 104,000 3,517
- - ------------------------ (a) Amounts reported for 1996 reflect cash bonus awards paid pursuant to the General Instrument Corporation Annual Incentive Plan (the "Annual Incentive Plan") in 1997 with respect to performance in 1996. Amounts reported for 1995 reflect cash bonus awards paid pursuant to the Annual Incentive Plan in 1996 with respect to performance in 1995. Amounts reported for 1994 reflect cash bonus awards paid pursuant to the Annual Incentive Plan in 1995 with respect to performance in 1994. (b) Reflects the number of shares of the Company's Common Stock underlying options granted. All of the options were granted pursuant to the General Instrument Corporation 1993 Long-Term Incentive Plan (the "1993 Long-Term Incentive Plan"). Each grant set forth for 1994 was made in connection with the cancellation of an option to purchase the same number of shares, previously granted in 1994, except the grant set forth to Mr. Friedland, with respect to which an option to purchase 70,000 shares had previously been granted in 1994 and the remainder had been granted in 1993. Those options granted, and subsequently canceled, in 1994 are not reflected in the table for the named executive officer. (c) Reflects payment by the Company in 1996 of (i) premiums for term life insurance of $960 and (ii) the matching contribution for 1996 by the Company under the General Instrument Corporation Savings Plan (the "Savings Plan") in the amount of $4,500. (d) Reflects compensation of Mr. Friedland for the full year 1995. Effective August 1995, Mr. Friedland was promoted to Chief Executive Officer. Prior to that date Mr. Friedland was President and Chief Operating Officer. In December 1995, Mr. Friedland also became Chairman of the Board. (e) Reflects (i) the matching contribution under the CommScope Employees Profit Sharing and Savings Plan (the "CommScope Savings Plan") in the amount of $2,733 for 1996, (ii) the allocation of $13,813 to Mr. Drendel's account under the CommScope Savings Plan for 1996 and (iii) payment by CommScope in 1996 of premiums of $1,430 for term life insurance on behalf of Mr. Drendel. 20 (f) Reflects payment by the Company in 1996 of (i) premiums for term life insurance of $960 and (ii) the matching contribution for 1996 by the Company under the Savings Plan in the amount of $3,608. OPTION GRANTS IN FISCAL YEAR 1996 The following table sets forth further information with respect to grants of stock options during the year ended December 31, 1996 to the executives listed in the Summary Compensation Table. These grants were made pursuant to the 1993 Long-Term Incentive Plan and are reflected in the Summary Compensation Table. No stock appreciation rights were granted during 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM -------------------------------------------------------------- --------------------------- NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE NAME GRANTED FISCAL YEAR(A) ($/SHARE)(B) EXPIRATION DATE 5%($) 10%($) - - -------------------------------- ----------- ----------------- ------------- --------------- ------------ ------------- Richard S. Friedland............ 250,000(c) 14.0 $ 26.75 2/21/06 $ 4,213,125 $ 10,633,125 Frank M. Drendel................ 24,000(d) 1.3 27.25 2/14/06 412,020 1,039,860 Thomas A. Dumit................. 42,000(d) 2.3 27.25 2/14/06 721,035 1,819,755 Ronald A. Ostertag.............. 30,000(d) 1.7 27.25 2/14/06 515,025 1,299,825 Edward D. Breen................. 60,000(d) 3.4 27.25 2/14/06 1,030,050 2,599,650
- - ------------------------ (a) Percentages included are based on a total of 1,789,676 options granted to 245 employees of the Company during 1996. (b) The Board of Directors has authorized the Company to offer to the optionees that these options be cancelled as of January 10, 1997, and new options in respect of the same number of shares ("repriced options") be granted as of such date at an exercise price of $23.125 per share, the closing market price per share of the Company's Common Stock on such date. The repriced options would become exercisable with respect to one-third of the shares covered thereby on each of the following dates: July 10, 1997, January 10, 1998 and January 10, 1999. The price reported here is the exercise price on the date of grant which equaled the closing market price per share of the Company's Common Stock on the date of grant. (c) The option becomes exercisable with respect to one-third of the shares covered thereby on February 21 in each of 1997, 1998 and 1999. (d) The option becomes exercisable with respect to one-third of the shares covered thereby on February 14 in each of 1997, 1998 and 1999. OPTION EXERCISES AND VALUES FOR FISCAL YEAR 1996 The following table sets forth as of December 31, 1996, for each of the executives listed in the Summary Compensation Table (i) the total number of shares received upon exercise of options during 1996, (ii) the value realized upon such exercise, (iii) the total number of unexercised options to purchase the Company's Common Stock (exercisable and unexercisable) held and (iv) the value of such options which were in-the-money at December 31, 1996 (based on the difference between the closing price of the Company's Common Stock at December 31, 1996 and the exercise price of the option on such date). None of the executive officers hold stock appreciation rights. 21 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT FISCAL THE-MONEY OPTIONS AT YEAR-END(#) FISCAL YEAR-END($)(A) -------------------------- -------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ----------------------------------------- ----------- ----------- ----------- ------------- ----------- ------------- Richard S. Friedland..................... -- $ -- 393,667 722,333 $ 158,625 $ 52,875 Frank M. Drendel......................... 17,000 272,000 56,000 72,500 -- 49,938 Thomas A. Dumit.......................... -- -- 62,500 81,500 132,188 44,063 Ronald A. Ostertag....................... -- -- 72,000 78,000 94,000 47,000 Edward D. Breen.......................... -- -- 65,250 110,584 30,844 30,844
- - ------------------------ (a) Based on the difference between the closing price of $21.75 per share at December 31, 1996, as reported on the New York Stock Exchange Composite Tape, and the exercise price of the option on such date. GI PENSION PLAN AND GI SERP The following table shows, as of December 31, 1996, estimated aggregate annual benefits payable upon retirement at age 65 under the General Instrument Corporation Pension Plan for Salaried and Hourly Paid Non-Union Employees (the "GI Pension Plan") and the General Instrument Corporation Supplemental Executive Retirement Plan (the "GI SERP"). PENSION PLAN TABLE
ESTIMATED ANNUAL BENEFITS UPON RETIREMENT, WITH YEARS OF SERVICE INDICATED ------------------------------------------ AVERAGE ANNUAL BASIC REMUNERATION DURING SIXTY CONSECUTIVE CALENDAR MONTHS PRIOR TO RETIREMENT 15 YEARS 20 YEARS 25 YEARS 30 YEARS - - ---------------------------------------------------------------------- --------- --------- --------- --------- $125,000.............................................................. $ 26,057 $ 34,742 $ 43,428 $ 52,114 150,000.............................................................. 31,682 42,242 52,803 63,364 175,000.............................................................. 37,307 49,742 62,178 74,614 200,000.............................................................. 42,932 57,242 71,553 85,864 225,000.............................................................. 48,557 64,742 80,928 97,114 250,000.............................................................. 54,182 72,242 90,303 108,364 300,000.............................................................. 54,182 72,242 90,303 108,364
The compensation covered by the GI Pension Plan and the GI SERP is substantially that described under the "Salary" column of the Summary Compensation Table. However, pursuant to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), the maximum amount of compensation that could be considered in computing benefits under the GI Pension Plan for 1996 was $150,000. Under the GI SERP, compensation for 1996 in excess of $150,000, but not exceeding $250,000, was considered in computing benefits. Accordingly, the total compensation covered by the GI Pension Plan and the GI SERP for the calendar year 1996 for each of Messrs. Friedland, Dumit, Ostertag and Breen was $250,000. Credited years of service under both the GI Pension Plan and the GI SERP as of December 31, 1996 are as follows: Mr. Friedland, 18 years; Mr. Dumit, five years; Mr. Ostertag, 18 years; and Mr. Breen, 18 years. Mr. Drendel does not participate in the GI Pension Plan or the GI SERP because he is an employee of CommScope. Estimated benefits set forth in the Pension Plan Table were calculated on the basis of a single 22 life annuity and Social Security covered compensation as in effect during 1996. Such estimated benefits are not subject to any deduction for Social Security or other offset amounts. COMMSCOPE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN CommScope maintains the CommScope Supplemental Executive Retirement Plan (the "CommScope SERP") for the benefit of certain executives of CommScope and its subsidiaries. The CommScope SERP provides for the payment of a monthly retirement (or early retirement) benefit to participants who retire from CommScope on or after age 65 (or, for early retirement benefits, on or after age 55 with ten years of service). Frank M. Drendel is the only executive named in the Summary Compensation Table who participates in the CommScope SERP. Mr. Drendel, as well as all other individuals who were participants in the CommScope SERP on August 22, 1990, is fully vested in his benefits under the CommScope SERP and, thus, could retire prior to attaining age 65 (or age 55 in the case of early retirement) and receive a deferred benefit. The benefits provided under the CommScope SERP are payable over 15 years and are equal to a specified percentage, which does not exceed 50%, of the participant's highest consecutive 12 months earnings during the participant's final 60 months of employment. Early retirement benefits are subject to actuarial reductions. Based on compensation earned for the calendar year which ended December 31, 1996, the estimated annual benefit payable to Mr. Drendel on or after attaining age 65 is $136,671. DIRECTOR COMPENSATION Prior to July 1993, directors did not receive any fees for serving on the Company's Board of Directors, or any committees thereof, but were reimbursed for their out-of-pocket expenses arising from attendance at meetings of the Company's Board of Directors or committees thereof. In addition, each director who was neither a partner in FLC Partnership, L.P., the general partner of Forstmann Little & Co., nor a current or former officer of the Company or its subsidiaries was granted an option to purchase 80,000 shares of the Company's Common Stock in connection with his election to the board of directors of GI Delaware or, after the Company's initial public offering in June 1992, the Board of Directors of the Company. Effective as of July 28, 1993 (as adjusted on February 15, 1995 to reflect the two-for-one split of the Company's Common Stock in August 1994), the Company's Board of Directors approved the following standard compensation arrangements for non-employee directors: (i) each non-employee director receives $1,000 for attending, whether in person or by telephone, each meeting of the Board of Directors or any committee thereof of which he or she is a member and is reimbursed for all actual expenses in connection with attending any meeting of the Board of Directors or any committee thereof of which he or she is a member (limited to the cost of first class travel on a commercial airline with respect to air travel expenses); (ii) the Company provides, for the benefit of each non-employee director, an insurance policy in the face amount of $200,000, payable in the event of accidental death or dismemberment of the director while in attendance at, or traveling in connection with, a meeting of the Board of Directors or any committee thereof, or while engaged in or traveling in connection with other business of the Company; and (iii) each non-employee director elected on or after July 28, 1993 receives, effective as of the date of such election, a grant of an option to purchase 80,000 shares of the Company's Common Stock pursuant to the 1993 Long-Term Incentive Plan at an exercise price per share equal to the fair market value of a share of the Company's Common Stock on the date of grant, which option becomes exercisable with respect to one-third of the underlying shares on each of the first three anniversaries of the date of grant. The Company also requests that each non-employee director directly or indirectly own at least 1,000 shares of the Company's Common Stock while a director of the Company. The non-employee directors of the Company who are partners of Forstmann Little & Co. have declined to receive any of the foregoing compensation. 23 EMPLOYMENT ARRANGEMENTS In November 1988, Frank M. Drendel entered into an employment agreement with GI Delaware and CommScope, providing for his employment as President and Chief Executive Officer of CommScope for an initial term ending on November 28, 1991. The agreement provides for a minimum salary, which is less than Mr. Drendel's current salary, and provides that Mr. Drendel will participate, on a substantially similar basis as the presidents of the other broadband divisions of the Company, in any management incentive compensation plan for executive officers that the Company maintains. Commencing on November 29, 1989 (subject to early termination by reason of death or disability or for cause), the agreement extends automatically so that the remaining term is always two years, unless either party gives notice of termination, in which case the agreement will terminate two years from the date of such notice. As of the date of this Form 10-K, neither party has given notice of termination. Pursuant to the agreement, Mr. Drendel is eligible to participate in all benefit plans available to CommScope senior executives. The agreement prohibits Mr. Drendel, for a period of five years following the term of the agreement, from engaging in any business in competition with the business of CommScope or the other broadband communications businesses of GI Delaware in any country where CommScope or GI Delaware's other broadband communications divisions then conduct business. SEVERANCE PROTECTION AND OTHER AGREEMENTS The Company intends to enter into severance protection agreements with its Chief Executive Officer and its other executive officers. These agreements will have a two-year term which is automatically extended for one year upon the first anniversary of the agreement and every anniversary thereafter unless notification is given to either the Company or the executive. The agreements will provide severance pay and other benefits in the event of a termination of employment within 24 months of a Change in Control (as defined in the agreement) of the Company if such termination is for any reason other than by the Company for cause or disability, by reason of the executive's death or by the executive for other than Good Reason (as defined in the agreement). Such severance pay will be in an amount equal to two times the sum of the executive's base salary and the highest bonus that would be payable to the executive in the year of termination in the case of the Chief Executive Officer and one and one-half times such sum in the case of all other executive officers; provided that such amount may be increased by up to one-half times such sum if an executive officer has not become employed within 24 months following such termination, in the case of the Chief Executive Officer, or 18 months following such termination, in the case of any other executive officer. The executive's benefits will be continued for either 24 months, in the case of the Chief Executive Officer, or 18 months in the case of all other executive officers. The executive will also receive a PRO RATA bonus (calculated up to the executive's termination date), reimbursement for outplacement, tax and financial planning assistance and reimbursement for relocation under certain circumstances. If the executive's employment is terminated without cause (i) within six months prior to a Change in Control or (ii) prior to the date of a Change in Control but (A) at the request of a third party who effectuates a Change in Control or (B) otherwise in connection with, or in anticipation of, a threatened Change in Control which actually occurs, such termination shall be deemed to have occurred after the Change in Control. In the case of a termination by the Company for disability or due to the executive's death, the executive will receive a PRO RATA bonus in addition to accrued compensation. The agreements will provide for a gross-up payment by the Company in the event that the total payments the executive receives under the agreement or otherwise are subject to the excise tax under Section 4999 of the Code. In such an event, the Company will pay an additional amount so that the executive is made whole on an after-tax basis from the effect of the excise tax. Mr. Ostertag and certain other executives of the Power Semiconductor Division have executed a letter agreement (the "Letter Agreement") with the Company providing for payments for: (i) remaining with the 24 Power Semiconductor Division (or a successor) until six months after a sale of all or substantially all the assets of the Power Semiconductor Division or sale of stock of the Company or any Company subsidiary containing all the assets of the Power Semiconductor Division (the "Sale") or until May 31, 1998, if the Sale has not occurred by such date, unless the executive's employment is terminated by the Company other than For Cause (as defined in the Letter Agreement) or the executive terminates employment For Good Reason (as defined in the Letter Agreement) prior to the end of such six-month period (or May 31, 1998 if the Sale has not occurred by such date) (the "Stay Incentive"); (ii) upon completion of the Sale if such Sale occurs by December 31, 1998 and the executive is still employed by the Power Semiconductor Division or an affiliate of the Company on that date (the "Sale Incentive"); and (iii) upon termination of employment by the Company other than For Cause or by the executive For Good Reason or termination of employment by reason of the executive's death or permanent and total disability if such termination takes place within two years after a Sale (the "Special Severance Arrangement"). The Stay Incentive and Sale Incentive for Mr. Ostertag are each $160,000. Benefits under the Special Severance Arrangement include guaranteed base salary continuation for the Guarantee Period which is 24 months for Mr. Ostertag, and generally 12 months for the other executives (each such period of time being defined as the "Guarantee Period" in the applicable Letter Agreement). If any executive accepts full-time employment during the Guarantee Period, such executive's remaining monthly payments will be accelerated and paid in a lump sum. If the executive has not accepted full-time employment by the end of the Guarantee Period, the monthly payments will continue until the earlier of: the date the executive accepts full-time employment or the end of an additional 12 months in the case of Mr. Ostertag and an additional six months in the case of the other executives. If employment is terminated during the two years after the Sale due to the executive's death or permanent and total disability, the executive or his spouse or other beneficiary will receive both the guaranteed and additional monthly payments. Health benefits will continue for as long as the executive receives monthly payments with the same monthly costs, deductibles and co-payments as are applicable to active employees. The Special Severance Arrangement also includes outplacement assistance for a minimum period of six months. Payments under the Special Severance Arrangement are conditioned upon the executive's signing an agreement with confidentiality, non-compete and release provisions. Except for the severance protection agreements described above, the GI Pension Plan, the GI SERP, the CommScope SERP, the Savings Plan, the CommScope Savings Plan, the 1993 Long-Term Incentive Plan, the Annual Incentive Plan, the General Instrument Corporation of Delaware Voluntary Non-Qualified Deferred Compensation Plan (under which certain employees may elect to defer receipt of a designated percentage or amount of their compensation) and each Letter Agreement, there are no compensatory plans or arrangements with respect to any of the executive officers named in the Summary Compensation Table which are triggered by, or result from, the resignation, retirement or any other termination of such executive's employment, a change in control of the Company or a change in such executive's responsibilities following a change in control. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In connection with the Company's initial public offering in June 1992, the Company's Board of Directors established a Compensation Committee composed of three non-employee directors. Nicholas C. Forstmann, Lynn Forester and J. Tracy O'Rourke served as members of the Compensation Committee during 1996. Nicholas C. Forstmann served as President of the Company from June 30, 1990 through March 30, 1992, which was prior to the Company's initial public offering in June 1992. Nicholas C. Forstmann received no compensation from the Company for services rendered in such capacity. 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known by the Company regarding the beneficial ownership of the Company's Common Stock, as of March 6, 1997, by each beneficial owner of more than five percent of the outstanding Common Stock of the Company, by each of the Company's directors, by each of the executives named in the Summary Compensation Table and by all current directors and officers of the Company as a group.
NUMBER OF SHARES BENEFICIALLY PERCENTAGE OF NAME OWNED CLASS(1) - - ------------------------------------------------------------------------ ----------------- -------------------- MBO-IV(2)............................................................... 10,161,657 7.4% Instrument Partners(2).................................................. 11,547,008 8.4 Oppenheimer Group, Inc.(3).............................................. 13,970,650 10.2 Brinson Partners, Inc.(4)............................................... 11,305,062 8.3 J.P. Morgan & Co . Incorporated(5)...................................... 10,113,201 7.4 Edward D. Breen(6)(9)................................................... 113,032 * John Seely Brown(7)..................................................... 39,000 * Frank M. Drendel(8)..................................................... 360,138 * Thomas A. Dumit(9)(10).................................................. 146,747 * Lynn Forester(11)....................................................... 54,333 * Nicholas C. Forstmann(2)................................................ 21,708,665 15.9 Theodore J. Forstmann(2)................................................ 21,708,665 15.9 Richard S. Friedland(9)(12)............................................. 686,255 * Winston W. Hutchins(2).................................................. 21,708,665 15.9 Steven B. Klinsky(2).................................................... 21,708,665 15.9 Wm. Brian Little(2)..................................................... 11,547,008 8.4 Alex M. Mandl........................................................... 0 * Ronald A. Ostertag(9)(13)............................................... 133,985 * J. Tracy O'Rourke(14)................................................... 22,210 * Felix G. Rohatyn(15).................................................... 82,000 * John A. Sprague(2)...................................................... 11,547,008 8.4 All current directors and officers of the Company as a group (21 persons)(2)(10)(13)(16)............................................... 23,681,689 18.2
- - ------------------------ * The percentage of shares of Common Stock beneficially owned does not exceed one percent of the outstanding shares of Common Stock. (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares Common Stock which such person has the right to acquire within 60 days following March 6, 1997. For purposes of computing the percentage of outstanding shares of Common Stock held by each person or group of persons named above, any security which such person or persons has or have the right to acquire within 60 days following March 6, 1997 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) The general partner of Instrument Partners, a New York limited partnership ("Instrument Partners"), is FLC XXII Partnership, a general partnership of which Messrs. Wm. Brian Little, Nicholas C. Forstmann, John A. Sprague, Steven B. Klinsky and Winston W. Hutchins, and TJ/JA L.P., a Delaware limited partnership ("TJ/JA L.P."), are general partners. The general partner of TJ/JA L.P. is Theodore J. Forstmann. The general partner of Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-IV, a New York limited partnership ("MBO-IV"), is FLC Partnership, L.P., a limited partnership of which Messrs. Theodore J. Forstmann, Nicholas C. Forstmann, Steven B. Klinsky, Winston W. Hutchins, Ms. Sandra J. Horbach and Mr. Thomas H. Lister are general partners. Accordingly, each of such individuals and partnerships (other than 26 Ms. Horbach and Mr. Lister, for the reasons described below) may be deemed the beneficial owners of shares owned by MBO-IV and Instrument Partners in which such individual or partnership is a general partner and, for purposes of this table, such beneficial ownership is included. Ms. Horbach and Mr. Lister do not have any voting or investment power with respect to, or any economic interest in, the shares of Common Stock held by MBO-IV; and, accordingly, Ms. Horbach and Mr. Lister are not deemed to be the beneficial owners thereof. Theodore J. Forstmann and Nicholas C. Forstmann are brothers. Mr. Little is a special limited partner in FLC Partnership, L.P. and each of FLC Partnership, L.P. and FLC XXII Partnership is a limited partner of Instrument Partners. None of the other limited partners in each of MBO-IV and Instrument Partners is otherwise affiliated with the Company, GI Delaware or Forstmann Little & Co. The address of MBO-IV and Instrument Partners is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New York 10153. (3) This information is obtained from a Schedule 13G, dated February 20, 1997, filed with the Commission jointly by Oppenheimer Group, Inc. ("Oppenheimer") and Oppenheimer Capital. Oppenheimer reports beneficial ownership of 13,970,650 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. Oppenheimer Capital, a registered investment advisor and a subsidiary of Oppenheimer, reports beneficial ownership of 13,929,450 of such shares and claims shared voting power and shared dispositive power with respect to all 13,929,450 shares. The Schedule 13G states that: Oppenheimer is a holding and service company owning a variety of companies engaged in the securities business; 70.78% of the issued and outstanding common stock of Oppenheimer is owned by Oppenheimer & Co., L.P. ("Oppenheimer LP"); and management of the affairs of Oppenheimer's subsidiaries and of certain investment advisory clients, including decisions respecting disposition and/or voting of the shares of GI Common Stock, resides in the respective officers and directors of such companies and is not directed by Oppenheimer or Oppenheimer LP. The address of the principal business of each of Oppenheimer and Oppenheimer Capital is Oppenheimer Tower, World Financial Center, New York, New York 10281. (4) This information is obtained from a Schedule 13G, dated February 12, 1997, filed with the Commission by Brinson Partners, Inc. ("BPI") on behalf of itself, Brinson Trust Company ("BTC"), Brinson Holdings, Inc. ("BHI"), SBC Holding (USA), Inc. ("SBUSA") and Swiss Bank Corporation ("SBC"). BTC is a wholly owned subsidiary of BPI. The Schedule 13G states that: BPI is a wholly owned subsidiary of BHI; BHI is a wholly owned subsidiary of SBUSA; and SBUSA is a wholly owned subsidiary of SBC. BPI reports beneficial ownership of 11,305,062 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. BTC reports beneficial ownership of 2,268,600 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. BHI reports beneficial ownership of 11,305,062 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. SBUSA reports beneficial ownership of 11,406,476 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. SBC reports beneficial ownership of 11,406,476 shares of Common Stock and claims shared voting power and shared dispositive power with respect to all of such shares. The Schedule 13G states that by virtue of their corporate relationships, SBC, SBUSA, BHI and BPI may be deemed to beneficially own and have the power to dispose and vote or direct the disposition or voting of the Common Stock held by BTC and BPI. Each of BPI, BTC and BHI's principal business office is located at 209 South LaSalle, Chicago, Illinois 60604-1295. SBUSA's principal business office is located at 222 Broadway, New York, New York 10038. SBC's principal business office is located at Aeschenplatz 6 CH-4022, Basel, Switzerland. (5) This information is obtained from a Schedule 13G, dated January 31, 1997, filed with the Commission by J.P. Morgan & Co. Incorporated. J.P. Morgan & Co. Incorporated reports beneficial ownership of 10,113,201 shares as follows: 9,690,046 shares and 423,155 shares where there is a right to acquire. J.P. Morgan & Co Incorporated claims sole voting power with respect to 6,549,568 shares, shared voting 27 power with respect to 65,105 shares, sole dispositive power with respect to 9,976,366 shares and shared dispositive power with respect to 130,285 shares. J.P. Morgan & Co. Incorporated's principal business office is located at 60 Wall Street, New York, New York 10260. (6) Includes 110,500 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (7) Includes 38,000 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (8) Includes 104,500 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. Includes 600 shares which were held by the trustee of the CommScope Savings Plan and were allocated to Frank M. Drendel's account under the CommScope Savings Plan as of March 6, 1997. (9) Includes the number of shares which were held by the trustee of the Savings Plan and were allocated to the individual's respective account under the Savings Plan as of March 6, 1997 as follows: Edward D. Breen, 2,532 shares; Thomas A. Dumit, 2,759 shares; Richard S. Friedland, 10,793 shares; and Ronald A. Ostertag, 10,975 shares. (10) Includes 108,000 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. Includes 8,032 shares held by the Thomas A. Dumit Charitable Remainder Trust, dated April 27, 1994, of which Mr. Dumit is the trustee and a beneficiary. Also includes 27,956 shares held by Barbara K. Dumit, the spouse of Thomas A. Dumit, as to which shares Mr. Dumit disclaims beneficial ownership. (11) Includes 53,333 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (12) Includes 596,000 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (13) Includes 122,000 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. Also includes 900 shares held by the spouse of Ronald A. Ostertag. (14) Includes 20,210 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (15) Includes 80,000 shares subject to options which are exercisable currently or within 60 days of March 6, 1997. (16) Includes 1,494,207 shares subject to options exercisable currently or within 60 days of March 6, 1997. Includes an aggregate of 46,283 shares which were held by the trustees of the Savings Plan and the CommScope Savings Plan and were allocated to the current officers' respective accounts under the Savings Plan or the CommScope Savings Plan as of March 6, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS An affiliate of Forstmann Little & Co. provides aircraft maintenance services to the Company and charged the Company $2.1 million for services in 1996. The Company believes that the terms of these transactions were no less favorable to the Company than the terms which could be obtained from an unrelated third party. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Consolidated Balance Sheets at December 31, 1996 and 1995 For the years ended December 31, 1996, 1995 and 1994: Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report 2. Financial Statement Schedules Independent Auditors' Report I. Condensed financial information--Parent Company only II. Valuation and qualifying accounts All other schedules have been omitted because they are not applicable, not required or the information required is included in the consolidated financial statements or notes thereto. 3. Exhibits The exhibits are listed in the accompanying Index to Exhibits. (b) Reports on Form 8-K None. 29 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of General Instrument Corporation: We have audited the consolidated financial statements of General Instrument Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 3, 1997 (February 28, 1997 as to Note 16); such consolidated financial statements and report are included in your 1996 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedules of General Instrument Corporation, listed in Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP - - -------------------------------------------------- DELOITTE & TOUCHE LLP Chicago, Illinois February 3, 1997 30 GENERAL INSTRUMENT CORPORATION (PARENT COMPANY ONLY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ ASSETS Investment in subsidiaries............................................................ $ 853,296 $ 877,638 Note receivable from subsidiary....................................................... 500,000 500,000 Receivable from subsidiary............................................................ 45,521 25,872 Deferred financing fees, less accumulated amortization of $3,285 and $5,081, respectively........................................................................ 3,232 8,999 ------------ ------------ Total assets.......................................................................... $ 1,402,049 $ 1,412,509 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued interest payable............................................................ $ 475 $ 1,030 Accrued liabilities................................................................. 470 1,751 ------------ ------------ Total current liabilities............................................................. 945 2,781 ------------ ------------ Convertible Junior Subordinated Notes................................................. 227,951 494,385 ------------ ------------ Commitments and contingencies Stockholders' Equity: Preferred stock, $.0l par value; 20,000,000 shares authorized; no shares issued..... -- -- Common Stock, $.0l par value; 400,000,000 shares authorized; 137,144,412 and 126,034,911 shares issued at December 31, 1996 and 1995, respectively............. 1,371 1,260 Additional paid-in capital.......................................................... 925,166 666,190 Retained earnings................................................................... 254,552 256,416 ------------ ------------ 1,181,089 923,866 Less--Treasury Stock, at cost, 231,527 and 229,011 shares of Common Stock at December 31, 1996 and 1995, respectively................................. (7,271) (7,246) --Unearned compensation.......................................................... (665) (1,277) ------------ ------------ Total stockholders' equity........................................................ 1,173,153 915,343 ------------ ------------ Total liabilities and stockholders' equity............................................ $ 1,402,049 $ 1,412,509 ------------ ------------ ------------ ------------
- - ------------------------ Note: Investment in subsidiaries is accounted for under the equity method of accounting See notes to consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. 31 GENERAL INSTRUMENT CORPORATION (PARENT COMPANY ONLY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION STATEMENTS OF INCOME (LOSS) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 1995 1994 ---------- ---------- ---------- Interest Income.............................................................. $ 47,500 $ 47,500 $ 47,500 Interest Expense............................................................. (19,462) (26,868) (27,011) ---------- ---------- ---------- Interest Income--net..................................................... 28,038 20,632 20,489 Income Taxes................................................................. (9,813) (7,221) (7,171) ---------- ---------- ---------- Income--Parent Company....................................................... 18,225 13,411 13,318 Income of Subsidiaries....................................................... (20,089) 110,371 233,217 ---------- ---------- ---------- Net Income (Loss)............................................................ $ (1,864) $ 123,782 $ 246,535 ---------- ---------- ---------- ---------- ---------- ----------
- - ------------------------ Note 1: The parent company files a consolidated income tax return with its subsidiaries. The consolidated income tax provisions were $7,381, $38,566 and $9,714 for the years ended December 31, 1996, 1995 and 1994, respectively. Note 2: Statements of cash flows are not required since the parent company did not have any cash flows from operations. Interest income--net for the years ended December 31, 1996, 1995 and 1994 relates to intercompany transactions. See notes to consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. 32 GENERAL INSTRUMENT CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BEGINNING OF BALANCE AT END PERIOD ADDITIONS DEDUCTIONS(1) OTHER OF PERIOD ----------- ----------- ------------- ----------- -------------- Allowance For Doubtful Accounts: Year ended December 31, 1996...................... $ 14,321 $ 6,099 ($ 2,884) -- $ 17,536 -- -- ----------- ----------- ------------- ------- ----------- ----------- ------------- ------- Year ended December 31, 1995...................... $ 7,582 $ 7,946 ($ 1,207) -- $ 14,321 -- -- ----------- ----------- ------------- ------- ----------- ----------- ------------- ------- Year ended December 31, 1994...................... $ 7,012 $ 1,967 ($ 1,397) -- $ 7,582 -- -- ----------- ----------- ------------- ------- ----------- ----------- ------------- -------
- - ------------------------ (1) Accounts receivable written off--net of recoveries 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 BY: /S/ RICHARD S. FRIEDLAND ----------------------------------------- Richard S. Friedland Chairman and Chief Executive Officer Date: March 21, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - - --------------------------------------------- ----------------------------------------------- ----------------- /s/ RICHARD S. FRIEDLAND - - ------------------------------------ Chairman and Chief Executive Officer and March 21, 1997 Richard S. Friedland Director (Principal Executive Officer) /s/ CHARLES T. DICKSON - - ------------------------------------ Vice President and Chief Financial Officer March 21, 1997 Charles T. Dickson (Principal Financial Officer) /s/ PAUL J. BERZENSKI - - ------------------------------------ Vice President and Controller (Principal March 21, 1997 Paul J. Berzenski Accounting Officer) /s/ JOHN SEELY BROWN - - ------------------------------------ Director March 21, 1997 John Seely Brown /s/ FRANK M. DRENDEL - - ------------------------------------ Director March 21, 1997 Frank M. Drendel /s/ LYNN FORESTER - - ------------------------------------ Director March 21, 1997 Lynn Forester /s/ NICHOLAS C. FORSTMANN - - ------------------------------------ Director March 21, 1997 Nicholas C. Forstmann /s/ THEODORE J. FORSTMANN - - ------------------------------------ Director March 21, 1997 Theodore J. Forstmann /s/ STEVEN B. KLINSKY - - ------------------------------------ Director March 21, 1997 Steven B. Klinsky /s/ ALEX MANDL - - ------------------------------------ Director March 21, 1997 Alex Mandl /s/ J. TRACY O'ROURKE - - ------------------------------------ Director March 21, 1997 J. Tracy O'Rourke /s/ FELIX G. ROHATYN - - ------------------------------------ Director March 21, 1997 Felix G. Rohatyn
34 GENERAL INSTRUMENT CORPORATION INDEX TO EXHIBITS (ITEM 14(C))
EXHIBIT DESCRIPTION - - ----------- --------------------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated as of July 1, 1990, among FLGI Acquisition Corp. and General Instrument Corporation.* 3.1 Amended and Restated Certificate of Incorporation of the Company.** 3.2 Amended and Restated By-Laws of the Company.***** 4.1 Specimen Form of Company's Common Stock Certificate.*** 4.2 Indenture, dated as of June 15, 1993, between General Instrument Corporation and Continental Bank.**** 10.1 Second Amended and Restated Credit Agreement, dated as of June 30, 1994, among General Instrument Corporation, the banks and other financial institutions from time to time parties thereto, Chemical Bank, as Administrative Agent for the Banks, and Chemical Bank, Continental Bank N.A., Deutsche Bank AG, The Nippon Credit Bank, Ltd., The Bank of Nova Scotia, The Toronto-Dominion Bank, National Westminster Bank PLC, and the Bank of Tokyo Trust Company, as Co-agents.***** 10.2 Amended and Restated Guarantee, dated as of July 7, 1994, by the Company in favor of Chemical Bank. ***** 10.3 Amended and Restated Guarantee, dated as of July 7, 1994 by Cable/Home Communication Corporation and CommScope, Inc. in favor of Chemical Bank. ***** 10.4 Form of Employee Subscription Agreement, dated as of December 1990, between the Company and certain Management Investors.*+ 10.5 Form of Employee Subscription Agreement, dated as of March 21, 1992, between the Company and certain Management Investors.*+ 10.6 Form of Waiver of Certain Company Rights under the agreement referred to in 10.5.*+ 10.7 Form of Stock Option Agreement, dated as of August 15, 1990, in connection with the purchase of CommScope (including form of Stockholder's Agreement).*+ 10.8 Form of Outside Director Stock Option Agreement (including form of Outside Director Stockholder's Agreement).*+ 10.9 Employment Agreement, dated as of November 28, 1988, between CommScope and Frank M. Drendel.*+ 10.10 Form of Indemnification Agreement between the Company and its directors and executive officers.***** 10.11 Registration Rights Agreement between the Company, GI Corporation, MBO-IV and Instrument Partners.* 10.12 Form of Amendment to Outside Director Stock Option Agreement (including form of Outside Director Stockholder's Agreement) between the Company and each of James M. Denny, J. Tracy O'Rourke, Derald H. Ruttenberg and William C. Lowe.*+ 10.13 The General Instrument Corporation 1993 Long-Term Incentive Plan (including form of Stock Option Agreement).****+ 10.14 General Instrument Corporation Annual Incentive Plan.*****+ 10.15 GI Deferred Compensation Plan.*****+ 11. Computation of Earnings (Loss) Per Share. 13. Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1996 which are incorporated by reference into this Form 10-K. 21. Subsidiaries of the Company. 23. Consent of Deloitte & Touche LLP. 27. Financial Data Schedule (Filing only for the Electronic Data Gathering, Analysis and Retrieval system of the U.S. Securities and Exchange Commission.)
35 All other Exhibits are not applicable. - - ------------------------ * Incorporated by reference from Registration Statement No. 33-46854. ** Incorporated by reference from Registration Statement No. 33-63152. *** Incorporated by reference from Registration Statement No. 33-50215. ****Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1993. *****Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994. + Management contract or compensatory plan 36 EX-11 2 EXHIBIT 11 EXHIBIT 11 GENERAL INSTRUMENT CORPORATION EXHIBIT 11 -- COMPUTATION OF EARNINGS (LOSS) PER SHARE (In Thousands, Except Per Share Amounts)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- PRIMARY: Income (loss) before cumulative effect of change in accounting principle............................................................. $ (1,864) $ 123,782 $ 248,452 Cumulative effect of change in accounting principle.................... -- -- (1,917) ---------- ---------- ---------- Net Income (Loss).................................................... $ (1,864) $ 123,782 $ 246,535 ---------- ---------- ---------- Weighted average common shares outstanding............................. 131,723 123,483 120,937 Incremental shares under stock option plans.......................... 667 891 2,456 ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding..... 132,390 124,374 123,393 ---------- ---------- ---------- Primary earnings (loss) per share: Income (loss) before cumulative effect of change in accounting principle.......................................................... $ (.01) $ 1.00 $ 2.01 Cumulative effect of change in accounting principle.................. -- -- (.01) ---------- ---------- ---------- Net Income (Loss).................................................... $ (.01) $ 1.00 $ 2.00 ---------- ---------- ---------- ---------- ---------- ---------- FULLY DILUTED: Income (loss) before cumulative effect of change in accounting principle............................................................. $ (1,864) $ 123,782 $ 248,452 Interest and amortization of debt issuance costs related to the Convertible Junior Subordinated Notes, net of income tax effects... 11,867 16,383 25,877 ---------- ---------- ---------- Adjusted income before cumulative effect of change in accounting principle.......................................................... 10,003 140,165 274,329 Cumulative effect of change in accounting principle.................. -- -- (1,917) ---------- ---------- ---------- Adjusted net income.................................................. $ 10,003 $ 140,165 $ 272,412 ---------- ---------- ---------- Weighted average common shares outstanding............................. 131,723 123,483 120,937 Incremental shares under stock option plans.......................... 667 904 2,607 Incremental shares attributable to Convertible Junior Subordinated Notes................................................. 15,000 21,019 21,053 ---------- ---------- ---------- Adjusted weighted average shares outstanding......................... 147,390 145,406 144,597 ---------- ---------- ---------- Fully diluted earnings per share: Income before cumulative effect of change in accounting principle.... $ .07(a) $ .96 $ 1.89 Cumulative effect of change in accounting principle.................. -- -- (.01) ---------- ---------- ---------- Net Income........................................................... $ .07(a) $ .96 $ 1.88 ---------- ---------- ----------
Note: The computations of primary and fully diluted earnings (loss) per share assume incremental shares under stock option plans using the treasury method. (a) Differs from loss per share as reported in the Consolidated Statements of Operations because the effect of the Convertible Junior Subordinated Notes was anti-dilutive. EX-13 3 EXHIBIT 13 Exhibit 13 FIVE YEAR SUMMARY
- - ---------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- (In millions, except per share data) 1996* 1995* 1994* 1993* 1992* - - ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales .......................................... $2,690 $2,432 $2,036 $1,393 $1,075 Cost of sales ...................................... 1,998 1,691 1,404 956 755 Selling, general and administrative................. 266 224 180 149 137 Research and development............................ 209 147 111 74 58 Purchased in-process technology..................... -- 140 -- -- -- NLC litigation costs ............................... 141 -- -- -- -- Operating income ................................... 52 205 316 188 98 Interest expense--net .............................. (46) (41) (53) (72) (110) Income (loss) before extraordinary item and cumulative effect of changes in accounting principles ........................... (2) 124 248 90 (41) Net income (loss) .................................. $ (2) $ 124 $ 247 $ 91 $ (53) Weighted average shares outstanding ................ 132 124 123 122 98 Primary earnings (loss) per share before extraordinary item and cumulative effect of changes in accounting principles ............. $ (.01) $ 1.00 $ 2.01 $ .74 $ (.42) Fully diluted earnings (loss) per share before extraordinary item and cumulative effect of changes in accounting principles ............. (.01) .96 1.89 .74 (.42) - - ---------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------- 1996 1995 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Working capital (negative) ......................... $ 548 $ 362 $ 213 $ (16) $ (14) Property, plant and equipment--net ................. 571 437 344 262 266 Total assets ....................................... 2,707 2,301 2,109 1,776 1,727 Long-term debt, including current maturities ....... 703 743 797 840 989 Stockholder's equity ............................... 1,173 915 677 389 291 - - ----------------------------------------------------------------------------------------------------
*1996 includes charges of $237 ($151 net-of-tax), or $1.14 per primary share, reflecting restructuring charges related to the Company's plan to separate into three independent companies, NLC litigation costs and other charges primarily related to the transition to the Company's next-generation digital products and the write-down of certain assets. (See Notes 2, 9 and 15 to the consolidated financial statements.) *1995 includes a charge of $140 ($90 net-of-tax), or $.72 per primary share and $.62 per fully diluted share, for purchased in-process technology in connection with the Company's acquisition of NLC. *1994 includes an income tax benefit of $30, or $.24 per primary share and $.20 per fully diluted share, as a result of a reduction in a valuation allowance, as of December 31, 1994, related to domestic deferred income tax assets. *1993 includes a cumulative effect credit of $10 and a cumulative effect charge of $10 to reflect the adoption of Statements of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," respectively. *1992 includes a $12 extraordinary charge for the write-off of deferred financing costs in connection with the early extinguishment of debt. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions) - - --------------------------------------------------------------------- Year Ended December 31, --------------------------------------- 1996 1995 1994 - - --------------------------------------------------------------------- SEGMENT INFORMATION: Net Sales Broadband Communications............. $ 2,328 $ 2,018 $ 1,720 Power Semiconductor.............. 362 414 316 --------- --------- -------- Total $ 2,690 $2,432 $ 2,036 --------- --------- -------- COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 WITH THE YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales for the year ended December 31, 1996 were $2,690 compared to $2,432 for the year ended December 31, 1995, an increase of $258, or 11%. This increase in net sales reflects higher sales in the Broadband Communications segment, partially offset by lower sales in the Power Semiconductor segment. Broadband Communications sales for the year ended December 31, 1996 were $2,328 compared to $2,018 for the year ended December 31, 1995. Worldwide terrestrial broadband sales (consisting of digital and analog cable and wireless television systems, network transmission systems and coaxial, fiber optic and other high-performance electronic cables) increased $360, or 26%, from 1995 to $1,753 in 1996 primarily as a result of increased U.S. sales volume of CFT-2200 advanced analog set-top terminals, first-time sales of DCT-1000 MPEG-2 digital set-top terminals and increased global sales volume of mature analog addressable set-top terminals, transmission electronics and CommScope cables. These sales reflect the continued commitment of domestic cable television operators to deploy state-of-the-art addressable systems and enhanced services and the continued deployment of new cable television systems in international markets. International terrestrial broadband sales increased $149, or 33%, to $599 in 1996 and represented 34% of worldwide terrestrial broadband sales in 1996 compared to 32% in 1995. Worldwide satellite broadband sales decreased $50, or 8%, from 1995 to $575 in 1996 due to lower sales volume of digital satellite receivers to PRIMESTAR Partners and VideoCipher RS(Trademark) analog satellite modules and receivers, partially offset by higher sales volumes of DigiCipher(Registered Trademark)II/MPEG-2 digital satellite systems and digital video broadcast (DVB) compliant Magnitude(Registered Trademark) satellite encoders. Power Semiconductor sales decreased $52, or 13%, from 1995 to $362 in 1996. This decrease reflects the overall slowdown in the semiconductor industry as Power Semiconductor's OEM customers and distributors aligned their inventories with future needs. International sales decreased $41, or 14%, to $261 and represented 72% of the division's worldwide sales in 1996 compared to 73% in 1995. GROSS PROFIT (NET SALES LESS COST OF SALES). Gross profit decreased $49, or 7%, to $692 in 1996 from $741 in 1995 and was 26% of sales in 2 1996 compared to 30% in 1995. Broadband Communications segment gross profit decreased $21, or 4%, from 1995 to $561 in 1996 and was 24% of sales in 1996 compared to 29% in 1995. The lower gross profit margin in 1996 included $71 of charges recorded in the fourth quarter of 1996 for the write-down of inventories to their estimated net realizable values and the accrual of upgrade and product warranty liabilities primarily related to the transition to the Company's next-generation digital products. (See Note 15 to the consolidated financial statements.) The lower gross profit margin also reflects the shift in product mix from higher margin VideoCipher RS(Trademark) analog satellite receiver consumer modules to new advanced analog and digital television system products, which initially carry lower margins. Power Semiconductor gross profit in 1996 decreased 18% from 1995 and decreased as a percentage of sales to 36% in 1996 from 38% in 1995 as a result of lower volume and pricing pressures due to the slowdown in the industry discussed above. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expense was $266 in 1996 compared to $224 in 1995 and was 10% of sales in 1996 compared to 9% of sales in 1995. SG&A base spending was greater in 1996 than in 1995 as the Company targeted new growth opportunities, including the marketing of NLC broadband access systems to telephone companies for interactive digital video, voice and data services, and the Company increased its sales force, field support and marketing activities to take advantage of continued growth opportunities in international cable and satellite television and worldwide telecommunications markets. SG&A expense in 1996 also included $23 of charges for costs related to the Company's plan to separate into three independent companies, the write-down of various fixed assets to their estimated net realizable values and accruals for environmental and litigation matters. (See Note 15 to the consolidated financial statements.) SG&A expenses incurred for the year ended December 31, 1995 included a $7 restructuring charge for costs related to the reorganization of the Company's Communications Division and the consolidation of the Company's corporate headquarters into one location and $14 related to a national advertising campaign for C-band satellite systems. RESEARCH AND DEVELOPMENT. Research and development expense increased $62, or 42%, to $209 in 1996 from $147 in 1995 and was 8% of sales in 1996 compared to 6% in 1995. The increased level of spending reflects: the continued development of next-generation products, including cable modems and telephone company access products through NLC, as well as the modification of existing products for international markets; continued development of enhanced addressable analog terminals and advanced digital systems for cable and satellite television distribution; ongoing cost-reduction programs; and product development and international expansion through strategic alliances. The Company's research and development expenditures are expected to approximate $225 for the year ending December 31, 1997. NLC LITIGATION COSTS. In June 1996, the Company recorded a pre-tax charge of $141 reflecting the judgment and costs of litigation in the case involving NLC, its founders and DSC Communications Corporation (the "NLC Litigation"). (See Notes 9 and 16 to the consolidated financial statements.) INTEREST EXPENSE-NET. Net interest expense increased $5 to $46 in 1996 from $41 in 1995. This increase reflects a $7 benefit recorded in 1995 for the settlement of certain tax matters and $4 of interest 3 accrued in 1996 related to the NLC Litigation, partially offset by lower weighted-average borrowings in 1996 compared to 1995. INCOME TAXES. Income tax expense was $7 in 1996 compared to $39 in 1995, with effective tax rates of 134% and 24% in 1996 and 1995, respectively. Excluding the NLC-related charges and related tax benefits recorded in June 1996 and September 1995 and the $12 credit related to the settlement of certain tax matters during the first quarter of 1995, the effective tax rates would have been 39% in 1996 and 33% in 1995. (See Note 7 to the consolidated financial statements.) COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 WITH THE YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales for the year ended December 31, 1995 were $2,432 compared to $2,036 for the year ended December 31, 1994, an increase of $396, or 19%. This increase reflects continued higher sales volume in both the Broadband Communications and Power Semiconductor segments. Broadband Communications sales increased $298, or 17%, to $2,018 in 1995, primarily as a result of increased sales volume of DigiCipher(Registered Trademark) digital television system products, CFT-2200 advanced analog addressable terminals and CommScope cable products, partially offset by decreased sales of C-band satellite systems. The higher sales volume primarily reflects commercialization of digital broadband systems in the United States and deployment of new cable television systems in international markets. International sales of cable television electronics and CommScope cables increased $86, or 24%, to $450 for the year ended December 31, 1995 in comparison to 1994 and represented 32% of total cable television electronics and CommScope cable sales in 1995 compared to 29% in 1994. The increased DigiCipher(Registered Trademark) digital television system product sales in 1995 consisted primarily of sales of digital satellite consumer receivers to PRIMESTAR Partners. Sales of DigiCipher(Registered Trademark) products represented 20% of 1995 Broadband Communications sales. In 1994, the Company had significant sales of VideoCipher RS(Trademark) analog satellite receiver consumer modules to persons who had been receiving without authorization (or "pirating") the commercial satellite programming data signals. In 1995, sales of these modules were at lower levels as expected. Power Semiconductor sales increased $98, or 31%, to $414 in 1995 in comparison to 1994. This increase reflects continued broad-based global demand, primarily from automotive, computer, telecommunications and consumer electronics customers, for power rectifiers and protection devices. International sales increased $78, or 35%, to $302 for the year ended December 31, 1995 in comparison to 1994 and represented 73% of total Power Semiconductor net sales in 1995. GROSS PROFIT (NET SALES LESS COST OF SALES). Gross profit increased $108, or 17%, to $741 in 1995 from $633 in 1994 and was 30% of sales in 1995 compared to 31% in 1994. Broadband Communications segment gross profit in 1995 increased 11% over 1994. Gross profit margin for Broadband Communications was 29% in 1995, down from 31% in 1994, as a result of a shift in product mix from higher margin VideoCipher RS(Trademark) analog satellite receiver 4 consumer modules to CFT-2200 advanced analog and DigiCipher(Registered Trademark) digital television system products, new products which initially carry lower margins. The decrease in gross profit resulting from a shift in product mix was partially offset by higher margins earned on mature products as a result of cost-reduction programs. Power Semiconductor gross profit in 1995 increased 49% over 1994 and increased as a percentage of sales to 38% in 1995 from 34% in 1994, primarily as a result of volume efficiencies and favorable product mix. SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense was $224 in 1995 compared to $180 in 1994 and represented 9% of sales in each period. SG&A expense in 1995, reflecting higher sales volume, included: marketing and selling costs incurred by the Company to increase its sales force; field support and marketing activities to take advantage of increased growth opportunities in international cable and satellite television and worldwide telecommunications markets; a national advertising campaign to support sales of C-Band satellite systems; and a $7 restructuring charge for costs primarily related to the reorganization of the Company's Communications Division and the consolidation of the Company's corporate headquarters into one location. RESEARCH AND DEVELOPMENT. Research and development expense increased $36, or 32%, to $147 in 1995 from $111 in 1994 and was 6% of sales in 1995 compared to 5% in 1994. Research and development expenditures reflect continued development of the next generation of cable set-top terminals, which incorporate digital compression and multimedia capabilities, cable modems, telephone company access products, advanced digital systems for cable and satellite television distribution, next-generation direct broadcast satellite systems and product development through strategic alliances. Emerging research and development activities include development of broadband telephony products and interactive multimedia technologies for broadband networks. PURCHASED IN-PROCESS TECHNOLOGY. In connection with the completion of the acquisition of NLC in September 1995, the Company recorded a pre-tax charge of $140 for purchased in-process technology which had not yet reached technological feasibility and had no alternative future use. Further development expenditures primarily consist of costs for design, prototype development and lab and field testing. INTEREST EXPENSE-NET. Net interest expense decreased $12, to $41 in 1995 from $53 in 1994. The decrease resulted from lower weighted-average borrowings in 1995 and a $7 benefit related to the settlement of certain tax matters, partially offset by higher interest rates. INCOME TAXES. Income tax expense was $39 in 1995 and $10 in 1994. Before the NLC-related charge and related tax benefit and the settlement of certain tax matters in 1995 and the release of valuation reserves in 1994, the Company's effective tax rate would have been 33% in 1995 and 45% in 1994. The decrease in the effective rate in 1995 reflects the utilization of foreign tax credits and a decision to permanently reinvest the undistributed earnings of certain foreign entities. (See Note 7 to the consolidated financial statements.) LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations for the year ended December 31, 1996 was $44 compared to $232 and $162 for 1995 and 1994, respectively. Cash 5 provided by operations decreased by $188 in 1996 compared to 1995 due to lower operating income, adjusted for non-cash items, recorded in 1996 and increased working capital in 1996. Cash provided by operations increased $70 in 1995 compared to 1994 due primarily to lower working capital increases in 1995 compared to 1994. At December 31, 1996, working capital was $548 compared to $362 at December 31, 1995 and $213 at December 31, 1994. The working capital increases in 1996 over 1995 and in 1995 over 1994 were due primarily to increased sales volume and corresponding increases in accounts receivable and inventory build-up to support business growth and the introduction of new products, partially offset by related increases in accounts payable. Based on current levels of order input and backlog, as well as significant sales agreements not yet reflected in order and backlog levels, the Company believes that working capital levels are appropriate to support future operations. There can be no assurance, however, that future industry-specific developments or general economic trends will not alter the Company's working capital requirements. During the year ended December 31, 1996, the Company invested $228 in equipment and facilities compared with $159 and $136 in 1995 and 1994, respectively. The higher levels of capital spending were attributable to capacity expansion across all businesses to meet increased current and expected future demands for analog and digital products, coaxial cable and discrete semiconductors. In 1997, the Company expects to continue to expand its capacity to meet increased current and expected future demands with capital expenditures for the year expected to approximate $250. The Company's research and development expenditures were $209 for the year ended December 31, 1996 compared to $147 and $111 in 1995 and 1994, respectively, and are expected to approximate $225 for the year ending December 31, 1997. (See "Comparison of Results of Operations for the Year Ended December 31, 1996 with the Year Ended December 31, 1995-Research and Development" above.) At December 31, 1996, the Company had $20 of cash and cash equivalents on hand compared to $36 and $5 at December 31, 1995 and 1994, respectively. At December 31, 1996, long-term debt (including current maturities) was $703, compared to $743 and $797 at December 31, 1995 and 1994, respectively. In 1996, the Company strengthened its balance sheet and enhanced its financial flexibility through the conversion of $260 of its original $500 of 5% Convertible Junior Subordinated Notes ("Convertible Notes") into Common Stock. (See Note 8 to the consolidated financial statements.) In August 1996, the Company amended and restated its senior bank credit agreement (as further amended and restated, the "Credit Agreement") to lower its interest costs and commitment fees, increase available credit commitments and obtain greater operating flexibility with less restrictive financial and operating covenants. The Credit Agreement provides for a $650 unsecured revolving credit facility and matures on December 31, 2001. Amounts outstanding under this facility are classified as long-term based on the Company's intent and ability to maintain these loans on a long-term basis. The Credit Agreement contains financial and operating covenants, including limitations on contingent obligations and liens, and requires the maintenance of certain financial ratios. None of the restrictions contained in the Credit Agreement are expected to have a significant effect on the ability of the Company to operate. At December 31, 1996, the Company 6 was in compliance with all financial and operating covenants and had borrowings of $414. In June 1996, a final judgment against NLC and the individual defendants was entered in the NLC Litigation which, in February 1997, was affirmed in part, reversed in part and remanded to the trial court by the U.S. Court of Appeals for the Fifth Circuit. The Company expects the judgment on remand to result in a damage award of not more than $138 plus accrued interest. The Company has the ability and intent to pay this judgment utilizing borrowings under the Credit Agreement. During 1997, the Company expects to incur $50 to $70 of after-tax charges for costs related to dividing the Company's Taiwan operations between NextLevel Systems, Inc. and General Semiconductor, Inc. and additional transaction costs related to the restructuring, of which approximately 50% will be payable in 1997. (See Note 2 to the consolidated financial statements.) The Company intends to borrow under the Credit Agreement and from existing lenders to fund amounts payable in 1997. Prior to the completion of the restructuring of the Company, the Company intends to issue a notice to redeem all outstanding Convertible Notes. The Company believes it will be able to obtain adequate bank financing to fund Convertible Notes which are not converted but are redeemed for cash. The Company's principal sources of liquidity both on a short-term and long-term basis are cash flow provided by operations and borrowings under the Credit Agreement. The Company believes that, based upon its analysis of its consolidated financial position, its cash flow during the past 12 months and the expected results of operations in the future, operating cash flow, funding under the Credit Agreement and additional funding from existing lenders will be adequate to fund operations, research and development expenditures, capital expenditures and debt service for the next 12 months. The Company intends to repay its remaining indebtedness primarily with cash flow from operations. 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. On a selective basis, the Company enters into interest rate cap or swap agreements to reduce the potential negative impact of increases in interest rates on its outstanding variable-rate debt. In the fourth quarter of 1994, the Company entered into two interest rate cap agreements to hedge an aggregate notional amount of $150 of outstanding variable-rate borrowings under the Credit Agreement. The interest rate cap agreements expired on January 3, 1996. The Company monitors its underlying interest rate exposures on its variable-rate debt on an ongoing basis and believes that it can modify or adapt its hedging strategies as needed. (See Note 13 to the consolidated financial statements for additional information on the Company's hedging strategies.) NEW TECHNOLOGIES The Company has entered a new 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 7 systems and equipment for the cable and satellite television, local telephone access, and Internet/data delivery markets. The Company believes that a key step in the evolution of cable television system architecture and satellite delivery of programming is the implementation of digital video compression, which converts television signals to a digital format and then compresses the signals of several channels of television programming into the bandwidth currently used by just one analog channel. The Company has developed and is deploying digital television systems that enable cable television operators and satellite programmers to deliver over their existing networks up to 16 times as much information as is possible with existing analog technology. As a result of the high costs of initial production, digital products currently being shipped carry substantially lower margins than the Company's mature analog products. As the Company progresses through the initial stages of production of its digital products, the Company expects these margins to improve. In September 1995, the Company acquired NLC, which was formed to design, manufacture and market a next-generation telecommunications broadband access system for the delivery of telephony, video and data from a telephone company central office or cable television headend to the home. NLC's product, NLevel(3), is designed to permit the cost-effective delivery of a suite of standard telephony and advanced services such as high-speed Internet/data, work-at-home, distance-learning, video-on-demand and video-telephony to the home from a single access platform. The NLevel(3) system is designed to work with and enhance existing telephony networks and offers the capability to provide voice services (POTS), ISDN, high-speed Internet/data and video services over both copper-twisted-pair and fiber-to-the-curb networks. In the fourth quarter of 1996, NYNEX Corporation entered into an agreement with NLC to deploy approximately one million lines of transport electronics in the greater Boston and New York City areas to carry voice, video and data services. NYNEX also has options to extend its deployment of the NLevel(3) system up to five million lines. A significant amount of research and development expenditures will be required to fund the successful deployment and market growth of telephony networks. The Company does not expect NLC to generate significant revenues until 1998 and there can be no assurance that delays will not occur in the deployment of NLC's products or that the products will be commercially successful. The Company commenced initial commercial deployment of its SURFboard(Trademark) modem for cable networks during the third quarter of 1996. SURFboard(Trademark) enables network operators to link subscribers to interactive video and data services at speeds up to 1,000 times faster than conventional telephone modems. SURFboard(Trademark) modems have been selected in the U.S. and internationally by several cable operators, including Continental Cable, Adelphia Cable, Television International in Mexico and Red Argentina, Argentina's largest cable television operator. There can be no assurance that the SURFboard(Trademark) product line will be commercially successful. With these new technologies and applications under development, the Company believes it is well positioned to take advantage of the opportunities presented in the new competitive environment. There can be no assurance, however, that these technologies and applications will be successfully developed, or, if they are successfully developed, that they will be implemented by the Company's customers or that the Company will otherwise be able to successfully exploit these 8 technologies and applications. FOREIGN EXCHANGE A significant portion of the Company's products are manufactured or assembled in countries outside the United States. In addition, as mentioned above, the Company's sales of its equipment into international markets have increased. These foreign operations are subject to risk with respect to currency exchange rate fluctuations. 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. (See Notes 13 and 14 to the consolidated financial statements.) 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. FORWARD-LOOKING STATEMENTS 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 Annual Report contain forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, uncertainties relating to economic conditions, uncertainties relating to government and regulatory policies, uncertainties relating to customer plans and commitments, the Company's dependence on the cable television industry and cable television spending, signal security, the pricing and availability of equipment, materials and inventories, technological developments, the competitive environment in which the Company operates, changes in the financial markets relating to the Company's capital structure and cost of capital, the uncertainties inherent in international operations and foreign currency fluctuations. The words "believe," "expect," "anticipate," "project" and similar expressions identify forward-looking 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. 9 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of General Instrument Corporation: We have audited the consolidated balance sheets of General Instrument Corporation and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Instrument Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 11 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for postemployment benefits to conform with Statement of Financial Accounting Standards No. 112. /S/ DELOITTE & TOUCHE LLP - - ---------------------------- DELOITTE & TOUCHE LLP CHICAGO, ILLINOIS FEBRUARY 3, 1997 (FEBRUARY 28, 1997 AS TO NOTE 16) 10 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ NET SALES............................................................... $ 2,689,688 $ 2,432,024 $ 2,036,323 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Cost of sales......................................................... 1,997,625 1,690,639 1,403,585 Selling, general and administrative................................... 265,717 224,269 179,631 Research and development.............................................. 209,257 147,253 111,462 Purchased in-process technology....................................... -- 139,860 -- NLC litigation costs.................................................. 141,000 -- -- Amortization of excess of cost over fair value of net assets acquired............................................................ 24,577 24,702 25,574 ------------ ------------ ------------ Total operating costs and expenses.................................. 2,638,176 2,226,723 1,720,252 ------------ ------------ ------------ OPERATING INCOME........................................................ 51,512 205,301 316,071 Other income (expense)--net............................................. 361 (1,894) (5,154) Interest expense--net................................................... (46,356) (41,059) (52,751) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................................................. 5,517 162,348 258,166 Provision for income taxes.............................................. (7,381) (38,566) (9,714) ------------ ------------ ------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................................................. (1,864) 123,782 248,452 Cumulative effect of change in accounting principle..................... -- -- (1,917) ------------ ------------ ------------ NET INCOME (LOSS)....................................................... $ (1,864) $ 123,782 $ 246,535 ------------ ------------ ------------ ------------ ------------ ------------ Weighted Average Shares Outstanding..................................... 132,390 124,374 123,393 EARNINGS (LOSS) PER SHARE: Primary: Income (loss) before cumulative effect of change in accounting principle......................................................... $ (.01) $ 1.00 $ 2.01 Cumulative effect of change in accounting principle................. -- -- (.01) ------------ ------------ ------------ Net income (loss)................................................... $ (.01) $ 1.00 $ 2.00 ------------ ------------ ------------ ------------ ------------ ------------ Fully Diluted: Income (loss) before cumulative effect of change in accounting principle......................................................... $ (.01) $ .96 $ 1.89 Cumulative effect of change in accounting principle................. -- -- (.01) ------------ ------------ ------------ Net income (loss)................................................... $ (.01) $ .96 $ 1.88 ------------ ------------ ------------ ------------ ------------ ------------
See notes to consolidated financial statements. 11 GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents............................................................ $ 20,252 $ 36,382 Short-term investments............................................................... 49,946 -- Accounts receivable, less allowance for doubtful accounts of $17,536 and $14,321, respectively....................................................................... 544,430 367,672 Inventories.......................................................................... 336,516 281,398 Prepaid expenses and other current assets............................................ 24,619 26,992 Deferred income taxes................................................................ 107,322 111,750 ------------ ------------ Total current assets............................................................... 1,083,085 824,194 Property, plant and equipment--net................................................... 571,051 437,194 Intangibles, less accumulated amortization of $110,298 and $94,654, respectively..... 131,051 146,646 Excess of cost over fair value of net assets acquired, less accumulated amortization of $160,231 and $135,654, respectively............................................. 827,373 842,954 Investments and other assets......................................................... 28,999 27,576 Deferred income taxes, net of valuation allowance.................................... 58,891 8,885 Deferred financing costs, less accumulated amortization of $28,070 and $28,045, respectively....................................................................... 6,401 13,309 ------------ ------------ TOTAL ASSETS......................................................................... $2,706,851 $2,300,758 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable..................................................................... $ 272,041 $ 215,761 Accrued interest payable............................................................. 7,772 3,571 Income taxes payable................................................................. 20,703 33,904 Other accrued liabilities............................................................ 229,894 204,874 Current portion of long-term debt.................................................... 4,310 4,310 ------------ ------------ Total current liabilities.......................................................... 534,720 462,420 Deferred income taxes................................................................ 21,457 22,221 Long-term debt....................................................................... 698,825 738,569 NLC litigation liability............................................................. 139,100 -- Other non-current liabilities........................................................ 139,596 162,205 ------------ ------------ Total liabilities.................................................................. 1,533,698 1,385,415 ------------ ------------ Commitments and contingencies (See Note 9) 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; 137,144,412 and 126,034,911 shares issued, respectively............................................ 1,371 1,260 Additional paid-in capital........................................................... 925,166 666,190 Retained earnings.................................................................... 254,552 256,416 ------------ ------------ 1,181,089 923,866 Less-- Treasury Stock, at cost, 231,527 and 229,011 shares of Common Stock, respectively................................................................... (7,271) (7,246) --Unearned compensation........................................................... (665) (1,277) ------------ ------------ Total stockholders' equity......................................................... 1,173,153 915,343 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $2,706,851 $2,300,758 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. 12 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
RETAINED COMMON STOCK ADDITIONAL EARNINGS COMMON -------------------- PAID-IN (ACCUMULATED STOCK IN UNEARNED SHARES AMOUNT CAPITAL DEFICIT) TREASURY COMPENSATION --------- --------- ---------- ------------ --------- ------------- BALANCE, JANUARY 1, 1994......................... 60,131 $ 601 $ 502,423 $ (113,901) $ (18) $ -- Two-for-one stock split.......................... 60,131 601 (601) -- -- -- Exercise of stock options........................ 1,954 20 9,076 -- -- -- Treasury Stock transactions...................... -- -- 15 -- 1 -- Issuance of restricted stock..................... 15 -- 480 -- -- (389) Tax benefit from reduction in a valuation allowance for domestic deferred tax assets..... -- -- 32,335 -- -- -- Net income....................................... -- -- -- 246,535 -- -- --------- --------- ---------- ------------ --------- ------------- BALANCE, DECEMBER 31, 1994....................... 122,231 1,222 543,728 132,634 (17) (389) Exercise of stock options and related tax benefit........................................ 1,103 11 25,897 -- -- -- Stock issued for business acquisition............ 2,465 25 92,052 -- (7,229) (1,394) Costs associated with the sale/issuance of Common Stock.......................................... -- -- (1,100) -- -- -- Amortization of unearned compensation............ -- -- -- -- -- 506 Conversion of Convertible Junior Subordinated Notes--net..................................... 236 2 5,613 -- -- -- Net income....................................... -- -- -- 123,782 -- -- --------- --------- ---------- ------------ --------- ------------- BALANCE, DECEMBER 31, 1995....................... 126,035 1,260 666,190 256,416 (7,246) (1,277) Exercise of stock options and related tax benefit........................................ 162 2 3,473 -- -- -- Amortization of unearned compensation............ -- -- -- -- -- 612 Conversion of Convertible Junior Subordinated Notes--net..................................... 10,947 109 255,503 -- -- -- Treasury Stock transactions...................... -- -- -- -- (25) -- Net loss......................................... -- -- -- (1,864) -- -- --------- --------- ---------- ------------ --------- ------------- BALANCE, DECEMBER 31, 1996....................... 137,144 $ 1,371 $ 925,166 $ 254,552 $ (7,271) $ (665) --------- --------- ---------- ------------ --------- ------------- --------- --------- ---------- ------------ --------- -------------
See notes to consolidated financial statements. 13 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES: Net income (loss).......................................................... $ (1,864) $ 123,782 $ 246,535 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................................ 129,136 110,140 97,350 NLC litigation costs-net................................................. 91,650 -- -- Purchased in-process technology-net...................................... -- 90,000 -- Loss from asset write-downs and divested businesses...................... 11,974 -- 3,153 Changes in assets and liabilities: Accounts receivable.................................................... (171,135) (54,918) (95,035) Inventories............................................................ (62,537) (67,218) (105,229) Prepaid expenses and other current assets.............................. (2,228) (5,308) (4,446) Deferred income taxes.................................................. 6,133 13,531 (50,435) Accounts payable, income taxes payable and other accrued liabilities... 59,893 55,409 60,513 Other non-current liabilities.......................................... (23,439) (28,406) 4,605 Other.................................................................... 6,132 (5,185) 5,126 ----------- ----------- ----------- Net cash provided by operating activities.................................. 43,715 231,827 162,137 ----------- ----------- ----------- INVESTING ACTIVITIES: Additions to property, plant and equipment............................... (227,902) (159,441) (135,740) Acquisitions, net of cash acquired....................................... (29,520) (2,775) -- Proceeds from sales of assets............................................ 4,368 2,339 8,210 Purchase of short-term investments....................................... (24,974) -- -- Investments in other assets.............................................. (3,700) (8,796) -- ----------- ----------- ----------- Net cash used in investing activities...................................... (281,728) (168,673) (127,530) ----------- ----------- ----------- FINANCING ACTIVITIES: Costs associated with the issuance of debt and Common Stock.............. (1,053) (1,051) (804) Proceeds from the issuance of Flexible Term Notes........................ -- 10,800 -- Net proceeds from (repayments of) revolving credit facilities............ 231,000 (57,000) (26,645) Redemption of Convertible Junior Subordinated Notes...................... (6,440) -- -- Repayment of debt........................................................ (4,310) (2,155) (16,710) Proceeds from stock options.............................................. 2,686 17,506 9,096 ----------- ----------- ----------- Net cash provided by (used in) financing activities........................ 221,883 (31,900) (35,063) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........................... (16,130) 31,254 (456) Cash and cash equivalents, beginning of year............................... 36,382 5,128 5,584 ----------- ----------- ----------- Cash and cash equivalents, end of year..................................... $ 20,252 $ 36,382 $ 5,128 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid........................................................ $ 56,381 $ 36,973 $ 70,815 Interest paid............................................................ $ 41,766 $ 47,801 $ 45,594
See notes to consolidated financial statements. 14 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of General Instrument Corporation (the "Company" or "GI") and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue when products are shipped and services are performed. PRODUCT WARRANTY The Company warrants its products against defects and accrues estimated warranty expense at the time of sale. Actual warranty costs incurred are charged against the accrual when paid. CASH EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out ("FIFO") basis, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line method. Average useful lives are 5 to 35 years for buildings and improvements; economic useful life or lease term, whichever is shorter, for leasehold improvements and 3 to 10 years for machinery and equipment. DEFERRED FINANCING COSTS Financing costs are capitalized and amortized using the interest method over the term of the related financing. INTANGIBLE ASSETS Intangible assets consist primarily of patents which are being amortized on a straight-line basis over 5 to 17 years. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED The excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over 35 to 40 years. Management continually reassesses the appropriateness of both the carrying value and remaining life of the excess of cost over fair value of net assets acquired by assessing recoverability based on forecasted operating cash flows, on an undiscounted basis, and other factors. Management believes that, as of December 31, 1996, the carrying value and remaining life of the excess of cost over fair value of net assets acquired are appropriate. LONG-LIVED ASSETS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121 prescribes the accounting treatment for long-lived assets, identifiable intangibles and goodwill related to those assets when there are indications that the carrying values of those assets may not be recoverable. Whenever events indicate that the carrying values of such assets may not be recoverable, the Company evaluates the carrying values of such assets using future undiscounted cash flows. The adoption of SFAS No. 121 did not have a material impact on the Company's financial position or operations. 15 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION The Company has determined the U.S. dollar to be the functional currency of all foreign subsidiaries. Accordingly, gains and losses recognized as a result of translating foreign subsidiaries' monetary assets and liabilities from local foreign currencies to U.S. dollars are reflected in the accompanying consolidated statements of operations. To hedge certain foreign currency exposures on monetary assets and liabilities, the Company enters into foreign currency forward exchange contracts on a month-to-month basis. BENEFIT PLANS Substantially all employees, including certain employees of divested businesses, are covered by pension plans. The benefits under the plans are based on years of service and compensation levels. Contributions to pension funds are made when actuarial computations prescribe such funding. INCOME TAXES Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax bases of assets and liabilities. Deferred income taxes have been provided for the income tax liability which would be incurred on the repatriation of undistributed earnings of the Company's foreign subsidiaries, except for locations where the Company has designated earnings to be permanently reinvested. EARNINGS (LOSS) PER SHARE Primary earnings (loss) per share is computed based on the weighted average number of common and common equivalent shares outstanding during the applicable periods. Fully diluted earnings (loss) per share computations for all periods are based on net income (loss) adjusted for interest and amortization of debt issuance costs related to convertible debt and the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options and convertible securities. The computations of primary and fully diluted earnings (loss) per share assume the exercise of stock options using the treasury stock method, and to the extent that stock options are anti-dilutive, they are excluded from the computation. For 1996, the computation of fully diluted earnings (loss) per share is anti-dilutive; therefore, the amounts reported for primary and fully diluted earnings (loss) per share are the same. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 2 RESTRUCTURING OF GENERAL INSTRUMENT CORPORATION On January 7, 1997, the Company announced its intention to separate the Company into three publicly-traded companies to focus on global growth opportunities. The restructuring, expected to be completed in the third quarter of 1997 through a tax-free distribution to stockholders, will create three independent companies: NextLevel Systems, Inc., a leading worldwide supplier of systems and components for high-performance networks, delivering video, voice and Internet/data services to the cable, telephony and satellite markets; CommScope, Inc., the world's largest manufacturer of coaxial cable for cable television applications and a leading supplier of high-performance electronic cables; and General Semiconductor, Inc. (which will change its name from General Instrument Corporation), a world leader in the manufacture of low-to-medium power rectifiers and transient voltage suppressors. The restructuring is subject to the approval of the holders of a majority of the outstanding shares of the Company, the receipt of a ruling from the Internal Revenue Service that the transactions related to the separation of NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. are not taxable to the Company or its stockholders, and the absence of events or developments that would have a material adverse impact on the Company or its stockholders. In connection with the restructuring, NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. will enter into various agreements that will generally provide for the 16 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 2 RESTRUCTURING OF GENERAL INSTRUMENT CORPORATION (CONTINUED) separation and distribution of the operating assets and liabilities and pension plan assets and liabilities of the Company, as well as tax sharing, transition services and other matters. In connection with the restructuring, the Company recorded a charge of $12 million to selling, general and administrative expense in the fourth quarter of 1996, which included $8 million for the write-down of various assets to their estimated net realizable values and $4 million for transaction costs incurred related to the restructuring. During 1997, the Company expects to incur $50 to $70 million of charges for costs related to dividing the Company's Taiwan operations between NextLevel Systems, Inc. and General Semiconductor, Inc. and additional transaction costs related to the restructuring. 3 ACQUISITIONS In May 1996, CommScope, Inc. of North Carolina, an indirect wholly-owned subsidiary of the Company, acquired certain assets of Teledyne, Inc.'s Thermatics unit, a high performance wire and cable manufacturer specializing in high temperature cables, for a net purchase price of $18 million. In June 1996, the Company acquired the assets of the Magnitude-Registered Trademark-MPEG-2/DVB product family of Compression Labs Inc. for a net purchase price of $13 million. The Magnitude line consists of modular video and audio encoders and decoders for the delivery of entertainment and information services over cable, satellite and telephone networks. Both acquisitions were accounted for as purchases and, accordingly, the acquired assets and liabilities were recorded at their estimated fair value at the date of acquisition. In September 1995, the Company acquired all the outstanding shares of Next Level Communications ("NLC") not previously owned by the Company, including shares issued upon conversion of all of NLC's outstanding options and warrants. The total purchase price of $91 million consisted of 2.2 million common shares of the Company valued at $75 million, Company stock options valued at $10 million and cash of $6 million. NLC is involved with the development of a next generation broadband access system, NLevel(3), utilizing switched-digital access technology. NLevel(3) is designed to provide delivery of video, voice and Internet/data services over both copper-twisted-pair and fiber-to-the-curb networks. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair value at the date of acquisition. The purchase price of $91 million, plus the $2 million of costs directly attributable to the completion of the acquisition, have been allocated to the assets and liabilities acquired. Approximately $90 million of the total purchase price represented the value, net of deferred income taxes, of NLC's in-process technology. Since technological feasibility had not yet been achieved and there was no alternative future use for the technology being developed, the amounts allocated to the in-process technology were expensed concurrent with the purchase. The net-of-tax charge of $90 million included $140 million associated with this technology charged to operating income, offset by a non-cash tax benefit of $50 million. 4 INVENTORIES Inventories consist of:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Raw materials.......................................... $ 134,807 $ 142,573 Work in process........................................ 38,135 38,565 Finished goods......................................... 163,574 100,260 ----------------- ----------------- $ 336,516 $ 281,398 ----------------- ----------------- ----------------- -----------------
17 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 5 PROPERTY, PLANT AND EQUIPMENT-NET Property, plant and equipment-net consists of:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Land and land improvements............................. $ 96,563 $ 96,152 Buildings, improvements and leasehold improvements..... 121,446 78,734 Machinery and equipment................................ 747,189 575,266 ----------------- ----------------- 965,198 750,152 Less accumulated depreciation.......................... (394,147) (312,958) ----------------- ----------------- $ 571,051 $ 437,194 ----------------- ----------------- ----------------- -----------------
6 OTHER ACCRUED LIABILITIES Other accrued liabilities consist of:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Salaries and compensation liabilities.................. $ 53,252 $ 48,345 Payroll, state and local taxes......................... 15,017 12,040 Product and warranty liabilities....................... 83,207 68,628 Other.................................................. 78,418 75,861 ----------------- ----------------- $ 229,894 $ 204,874 ----------------- ----------------- ----------------- -----------------
7 INCOME TAXES The domestic and foreign components of income (loss) before income taxes and cumulative effect of a change in accounting principle are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Domestic...................................................................... $ (39,649) $ 78,390 $ 194,112 Foreign....................................................................... 45,166 83,958 64,054 ---------- ---------- ---------- Total......................................................................... $ 5,517 $ 162,348 $ 258,166 ---------- ---------- ---------- ---------- ---------- ----------
18 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 7 INCOME TAXES (CONTINUED) The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ---------- ---------- ----------- Current: Federal.................................................................... $ 25,278 $ 35,707 $ 26,153 Foreign.................................................................... 9,413 20,586 19,680 State...................................................................... 10,822 14,367 7,614 ---------- ---------- ----------- 45,513 70,660 53,447 ---------- ---------- ----------- Deferred: Federal.................................................................... (42,119) (30,864) 55,534 Foreign.................................................................... 4,398 (901) 3,543 State...................................................................... 39 1,328 3,941 ---------- ---------- ----------- (37,682) (30,437) 63,018 ---------- ---------- ----------- Net change in valuation allowance.......................................... (450) (1,657) (106,751) ---------- ---------- ----------- Provision for income taxes................................................. $ 7,381 $ 38,566 $ 9,714 ---------- ---------- ----------- ---------- ---------- -----------
The following table presents the principal reasons for the difference between the actual income tax provision and the tax provision computed by applying the U.S. federal statutory income tax rate to income before income taxes and cumulative effect of a change in accounting principle:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- ---------- ---------- Federal income tax provision at 35%............................................. $ 1,931 $ 56,822 $ 90,358 Valuation allowance benefit..................................................... (450) (1,657) (106,751) State income taxes-net.......................................................... 7,060 10,202 7,511 Foreign operations.............................................................. (5,409) (21,227) 7,586 Non-deductible purchase accounting item......................................... 8,451 8,696 8,951 Settlement of tax audits........................................................ -- (12,000) -- Other-net....................................................................... (4,202) (2,270) 2,059 --------- ---------- ---------- Provision for income taxes...................................................... $ 7,381 $ 38,566 $ 9,714 --------- ---------- ---------- --------- ---------- ---------- Effective income tax rate....................................................... 133.8% 23.8% 3.8%
Income taxes related to foreign operations in 1996 and 1995 reflect the Company's ability to recognize the benefit of foreign tax credits. The amounts included in "Other-net" in 1996 and 1995 primarily relate to the benefit associated with the Company's Foreign Sales Corporation, partially offset by other permanent items. The amount included in "Other-net" in 1994 primarily reflects miscellaneous non-deductible items. 19 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 7 INCOME TAXES (CONTINUED) Deferred income taxes as recorded in the accompanying consolidated balance sheets are comprised of the following:
DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------------------- --------------------------------- ASSET LIABILITY NET ASSET LIABILITY NET ---------- --------- ---------- ---------- --------- ---------- Current Deferred Income Taxes: Domestic net operating loss carryforwards......... $ -- $ -- $ -- $ 11,382 $ -- $ 11,382 Accounts receivable and inventory reserves........ 37,294 -- 37,294 43,054 -- 43,054 Product and warranty liabilities.................. 25,555 -- 25,555 15,376 -- 15,376 Employee benefits................................. 15,008 -- 15,008 13,870 -- 13,870 Other current..................................... 29,465 -- 29,465 28,068 -- 28,068 ---------- --------- ---------- ---------- --------- ---------- $ 107,322 $ -- $ 107,322 $ 111,750 $ -- $ 111,750 ---------- --------- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- ---------- Non-Current Deferred Income Taxes: Domestic capital loss carryforwards............... $ 17,518 $ -- $ 17,518 $ 25,336 $ -- $ 25,336 Tax credit carryforwards.......................... 13,944 -- 13,944 7,091 -- 7,091 Fixed and intangible assets....................... (48,621) 1,218 (49,839) (3,296) 50,348 (53,644) Environmental liabilities......................... 14,755 -- 14,755 1,503 (12,302) 13,805 Litigation liabilities............................ 48,955 -- 48,955 50 (412) 462 Employee benefits................................. 21,532 -- 21,532 2,193 (18,448) 20,641 Product and warranty liabilities.................. -- -- -- 5,629 -- 5,629 Other non-current................................. 10,585 20,239 (9,654) (1,576) 3,035 (4,611) ---------- --------- ---------- ---------- --------- ---------- 78,668 21,457 57,211 36,930 22,221 14,709 Valuation allowance............................... (19,777) -- (19,777) (28,045) -- (28,045) ---------- --------- ---------- ---------- --------- ---------- $ 58,891 $ 21,457 $ 37,434 $ 8,885 $ 22,221 $ (13,336) ---------- --------- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- ----------
Deferred taxes have not been provided on undistributed earnings of certain foreign operations of $9 and $30 million in 1996 and 1995, respectively, as those earnings are considered to be permanently reinvested. Determining the tax liability that would arise if these earnings were remitted is not practicable. As a result of adopting SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993, the Company recorded a valuation allowance to fully reserve its domestic deferred tax assets. The valuation allowance was reduced during 1994 to the extent that the Company generated domestic taxable income, resulting in an income tax benefit of $77 million. In addition, based on operating trends, positive industry and technological developments and management's assessment of expected domestic taxable income included in the Company's planning process, the Company recorded a further reduction to the valuation allowance, as of December 31, 1994, resulting in an income tax benefit of $30 million. The valuation allowance which exists at December 31, 1996 relates principally to domestic capital loss carryforwards, which expire in 2002. The valuation allowance will be reduced when and if the Company generates domestic capital gains. During 1996 and 1995, the Company settled certain tax matters which resulted in a $12 million credit to income taxes in 1995 and $8 and $36 million of credits to goodwill in 1996 and 1995, respectively, since such matters related to the period prior to August 1990, when affiliates of Forstmann Little & Co., a private investment firm, acquired the Company. 20 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 8 LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Senior bank indebtedness: Revolving credit facilities.......................... $ 414,000 $ 183,000 Taiwan loan.......................................... 50,384 54,694 Flexible Term Notes.................................. 10,800 10,800 Convertible Junior Subordinated Notes.................. 227,951 494,385 -------- -------- 703,135 742,879 Less current maturities................................ 4,310 4,310 -------- -------- Long-term debt......................................... $ 698,825 $ 738,569 -------- -------- -------- --------
In August 1996, the Company amended and restated its senior bank credit agreement (as further amended and restated, the "Credit Agreement") to lower its interest costs and commitment fees, increase available credit commitments and obtain greater operating flexibility with less restrictive financial and operating covenants. The Credit Agreement, which matures on December 31, 2001, provides for a $650 million unsecured revolving credit facility. Amounts outstanding as of December 31, 1996 under this facility are classified as long-term based on the Company's intent and ability to maintain these loans on a long-term basis. The Credit Agreement requires the Company to pay a facility fee of .125% per annum on the total commitment. The Credit Agreement permits the Company to choose between three interest rate options: the Adjusted Base Rate, which is based on the prime rate of The Chase Manhattan Bank, a Eurodollar rate (LIBOR) plus .225% and a competitive bid loan rate. The interest rates and facility fees are subject to change based on the Company's credit ratings as issued by nationally recognized statistical rating companies specified in the Credit Agreement. The Credit Agreement contains financial and operating covenants, including limitations on contingent obligations and liens, and requires the maintenance of certain financial ratios. In addition, under the Credit Agreement, certain changes in control of the Company would cause an event of default, and the banks could declare all outstanding borrowings under the Credit Agreement immediately due and payable. None of the restrictions contained in the Credit Agreement are expected to have a significant effect on the ability of the Company to operate. As of December 31, 1996 and 1995, the Company was in compliance with all financial and operating covenants under existing credit agreements and other arrangements with debt holders. At December 31, 1996 and 1995, the Company had borrowings of $414 and $183 million, respectively, under its revolving credit facilities and available credit of $233 and $264 million, respectively. The Company has a $60 million loan agreement with a consortium of banks in Taiwan (the "Taiwan Loan Agreement"). Borrowings under the Taiwan Loan Agreement are secured by a mortgage on land and buildings in Taiwan, and the interest rate under the Taiwan Loan Agreement is equal to the Singapore Interbank Offered Rate (SIBOR) plus 3/4%. At December 31, 1996, the variable rate was 6.75%. The borrowings mature on June 30, 2000 and require nine semi-annual installments of $2.2 million payable on June 30 and December 31, which began on December 31, 1995, with the remaining balance to be paid at maturity. In January 1995, CommScope, Inc. of North Carolina, an indirect wholly-owned subsidiary of the Company, entered into an $11 million loan agreement in connection with the issuance of notes by the Alabama State Industrial Development Authority (the "Flexible Term Notes"). Borrowings under the loan agreement bear interest at variable rates based upon current market conditions for short-term financing. At December 31, 1996, the variable rate was 6.28%. The loan agreement will mature on January 1, 2015, 21 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 8 LONG-TERM DEBT (CONTINUED) and any remaining amounts outstanding under the Flexible Term Notes will be due and payable on that date. The Company consummated a public offering of an aggregate principal amount of $500 million of 5% Convertible Junior Subordinated Notes (the "Notes") in 1993. The Notes mature on June 15, 2000 and have semi-annual interest payments on each June 15 and December 15. The Notes have been redeemable since June 18, 1996 in whole or in part at the Company's option at amounts decreasing from 102.857% of principal plus accrued interest at June 18, 1996 to 100% of principal at June 15, 2000. Holders of the Notes have a repurchase right, pursuant to which, in the event certain changes of control of the Company occur, each holder will have the right, at the holder's option, to require the Company to repurchase all or any part of the holder's Notes at 100% of principal plus accrued interest to the repurchase date. The Notes are convertible into Common Stock at a conversion price of $23.75 per share. In May 1996, the Company issued a notice to redeem $250 million in principal amount of the Notes. Of the Notes called, $244 million in principal amount were converted into the Company's Common Stock prior to the redemption date, with the remaining $6 million redeemed for cash. Additionally, $16 and $6 million in principal amount of Notes that were not called for redemption were also converted into the Company's Common Stock during 1996 and 1995, respectively. These conversions resulted in the issuance of 11.2 million shares of Common Stock, and approximately 9.6 million shares of Common Stock are reserved for issuance upon conversion of the remaining outstanding Notes. In connection with the Common Stock conversions, $4.4 million was charged to additional paid-in capital, net of the related tax benefit, for unamortized deferred financing costs and accrued but unpaid interest related to the converted Notes. The estimated fair value of the Notes, which are publicly traded, as of December 31, 1996 and 1995 was $244 and $544 million, respectively, based on quoted market prices. The weighted average interest rate on the Company's long-term debt at December 31, 1996 and 1995 was 5.66% and 5.60%, respectively. 9 COMMITMENTS AND CONTINGENCIES The Company leases office space, manufacturing and warehouse facilities and transportation and other equipment under operating leases which expire at various dates through the year 2009. Rent expense was $23, $17 and $14 million in 1996, 1995 and 1994, respectively. In August 1996, the Company entered into a seven-year operating lease agreement for two administrative facilities. The total cost of the facilities covered by this lease agreement is limited to $115 million. The lease provides for a substantial residual value guarantee (approximately 83% of the total cost) by the Company which is due upon termination of the lease and includes purchase and renewal options. Upon termination of the lease, the Company can either exercise its purchase option, or the facilities can be sold to a third party. The Company expects the fair market value of the leased facilities to substantially reduce or eliminate the Company's payment under the residual value guarantee. The table of future minimum operating lease payments below excludes any payment related to this guarantee. 22 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 9 COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum lease payments required under operating leases as of December 31, 1996 were as follows: 1997............................................................... $ 11,558 1998............................................................... 13,976 1999............................................................... 12,241 2000............................................................... 10,793 2001............................................................... 9,622 Thereafter......................................................... 24,706
The Company has approximately $60 million in letters of credit outstanding at December 31, 1996. 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 is also involved in remediation programs, principally with respect to former manufacturing sites, which are proceeding in conjunction with federal and state regulatory oversight. In addition, the Company is currently named as a potentially responsible party with respect to the disposal of wastes at nine hazardous waste sites located in six states and Puerto Rico. The Company engages independent consultants to assist management in evaluating potential liabilities related to environmental matters. Management assesses the input from these independent consultants along with other information known to the Company in its effort to continually monitor these potential liabilities. Management assesses its environmental exposure on a site-by-site basis, including those sites where the Company has been named as a potentially responsible party. Such assessments include the Company's share of remediation costs, information known to the Company concerning the size of the hazardous waste sites, their years of operation and the number of past users and their financial viability. Although the Company estimates, based on assessments and evaluations made by management, that its exposure with respect to these environmental matters could be as high as $58 million, the Company believes that the reserve for environmental matters of $38 million at December 31, 1996 ($35 million at December 31, 1995) is reasonable and adequate. However, there can be no assurance that the ultimate resolution of these matters will approximate the amount reserved. Based on the factors discussed above, capital expenditures and expenses for the Company's remediation programs, and the proportionate share of the cost of the necessary investigation and eventual remedial work that may be needed to be performed at the sites for which the Company has been named as a potentially responsible party, are not expected to have a material adverse effect on the Company's financial statements. The Company's present and past facilities have been in operation for many years, and over that time in the course of those operations, the Company's 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. In April 1995, prior to the Company's acquisition of NLC in September 1995, DSC Communications Corporation and DSC Technologies Corporation (collectively, "DSC") brought suit against NLC and the founders of NLC. On March 28, 1996, a jury verdict was reached in the case which stated that the founders of NLC breached certain employee agreements with DSC, failed to disclose and diverted a corporate opportunity of DSC, misappropriated DSC trade secrets and conspired to take certain of the foregoing 23 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 9 COMMITMENTS AND CONTINGENCIES (CONTINUED) actions, and that NLC used or benefited from the diversion of corporate opportunity and misappropriation of trade secrets. In June 1996, a final judgment against NLC and the individual defendants was entered in favor of DSC, in a total amount of $137 million. However, the court denied DSC's request for entry of permanent injunctive relief. In June 1996, a pre-tax charge to earnings of $141 million was recorded, reflecting the judgment and costs of litigation. Since the Company has the ability and intent to pay this judgment utilizing borrowings under its Credit Agreement, the liability has been classified as long term. Both sides appealed to the U.S. Court of Appeals for the Fifth Circuit, and a decision was rendered in February 1997 (See Note 16). During October 1995, the Company and certain of its officers and directors were named as defendants in purported class action complaints in which the plaintiffs alleged that during various periods, generally extending from March 21, 1995 through October 18, 1995, the Company and certain officers and directors violated certain federal securities laws by making false and misleading statements about the Company's financial prospects, and as a result, the plaintiffs allege that the market value of the Company Stock declined, thereby causing unspecified monetary damages to the plaintiffs. The Company intends to vigorously defend these allegations. In February 1996, the Company and NLC were named as defendants in a complaint in which the plaintiffs, who are some of the former holders of preferred stock of NLC, allege, among other things, that the defendants violated federal securities laws by making misrepresentations and omissions and breached fiduciary duties to NLC in connection with the acquisition by the Company of NLC in September 1995. Plaintiffs seek, among other things, unspecified compensatory and punitive damages and attorneys' fees and costs. The Company intends to vigorously defend these allegations. While the ultimate outcome of the matters described above cannot be determined, management does not believe that the final disposition of these matters beyond the amounts previously provided for in the financial statements will have a material adverse effect on the Company's financial statements. 24 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 10 EMPLOYEE BENEFITS Net pension cost consists of the following:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1996 1995 1994 ---------------------- --------------------- --------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN ----------- --------- ---------- --------- ---------- --------- Service cost............................................ $ 2,464 $ 4,577 $ 1,999 $ 3,543 $ 2,113 $ 3,149 Interest................................................ 7,137 5,266 6,832 4,967 6,580 4,851 Loss (return) on plan assets............................ (7,441) (2,105) (22,872) (1,885) 5,974 (2,092) Net amortization and deferral........................... 1,056 1,237 16,659 203 (12,097) (99) ----------- --------- ---------- --------- ---------- --------- Net pension cost........................................ $ 3,216 $ 8,975 $ 2,618 $ 6,828 $ 2,570 $ 5,809 ----------- --------- ---------- --------- ---------- --------- ----------- --------- ---------- --------- ---------- ---------
The funded status of the pension plans and the related amounts as recorded in the accompanying consolidated balance sheets are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------- ---------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN ---------- ---------- ---------- ---------- Actuarial present value of: Vested benefits................................................. $ 87,354 $ 14,607 $ 87,503 $ 11,657 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Accumulated benefits............................................ $ 90,148 $ 44,634 $ 90,157 $ 39,305 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Projected benefit obligation.................................... $ 101,435 $ 89,471 $ 99,693 $ 82,768 Market value of plan assets....................................... 89,703 33,166 83,443 30,759 ---------- ---------- ---------- ---------- Funded status..................................................... (11,732) (56,305) (16,250) (52,009) Unrecognized loss (gain).......................................... (1,106) 32,634 2,947 32,069 ---------- ---------- ---------- ---------- Accrued pension obligation........................................ $ (12,838) $ (23,671) $ (13,303) $ (19,940) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Actuarial assumptions: Discount rate................................................... 7.75% 6.75% 7.25% 6.5% Investment return............................................... 9% 8% 9% 8% Compensation increases.......................................... 4.75% 6% 4.25% 6%
The impact of the changes in the actuarial assumptions, as of December 31, 1996, have been reflected in the funded status of the domestic and foreign pension plans, and the Company believes that such changes will not have a material effect on net pension cost in 1997. The domestic pension plans consist principally of a qualified retirement plan which has satisfied the full funding limitation requirements under the Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions of $4 million were made in 1996, and no contributions were made to the plan during 1995. It is anticipated that no pension contributions will be required under ERISA during 1997. In 1994, the Company established unfunded supplemental retirement plans for certain members of management. Net pension cost and accrued pension obligations for these plans are included in the amounts above. The foreign pension plans consist principally of a Taiwan pension plan, which is funded under Taiwan's statutory requirements. Pension contributions for the Taiwan pension plan were $5, $6 and $4 million in 1996, 1995 and 1994, respectively, and are expected to approximate $5 million in 1997. Domestic plans assets consist of fixed income and equity securities. Foreign plans assets principally consist of fixed income securities. 25 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 10 EMPLOYEE BENEFITS (CONTINUED) CommScope, Inc. of North Carolina, an indirect wholly owned subsidiary of the Company, maintains an Employees Profit Sharing and Savings Plan (the "Profit Sharing and Savings Plan"). The majority of contributions to the Profit Sharing and Savings Plan are made at the discretion of CommScope, Inc. of North Carolina's Board of Directors. In addition, eligible employees may elect to contribute up to 10% of their salaries. The subsidiary contributes an amount equal to 50% of the first 4% of the employee's salary that the employee contributes. During the years ended December 31, 1996, 1995 and 1994, the subsidiary contributed $7, $7 and $6 million, respectively, to the Profit Sharing and Savings Plan, of which $6, $6 and $5 million, respectively, was discretionary. The Company maintains a voluntary savings plan covering all domestic non-union employees. Eligible employees not covered by the Profit Sharing and Savings Plan (as described in the preceding paragraph) may elect to contribute up to 10% of their salaries. The Company contributes an amount equal to 50% of the first 6% of the employee's salary that the employee contributes. Contributions were $3, $3 and $2 million for the years ended December 31, 1996, 1995 and 1994, respectively. 11 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS POSTRETIREMENT. The Company maintains an unfunded contributory group medical plan (the "Plan") for all full-time U.S. employees not covered by a collective bargaining agreement and who meet defined age and service requirements. The Company recognizes the cost of providing and maintaining postretirement benefits during employees' active service periods. The Plan is the primary provider of benefits for retirees up to age 65. After age 65, Medicare becomes the primary provider. Net postretirement benefit cost consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost......................................................................... $ 997 $ 669 $ 663 Interest............................................................................. 1,510 1,522 1,424 Net amortization and deferral........................................................ (515) (599) (515) --------- --------- --------- Net postretirement benefit cost...................................................... $ 1,992 $ 1,592 $ 1,572 --------- --------- --------- --------- --------- ---------
The status of the Plan and the related amounts as recorded in the accompanying consolidated balance sheets are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Accumulated postretirement benefit obligation ("APBO"): Retirees................................................................. $ 12,691 $ 13,721 Active participants...................................................... 8,970 8,724 ------- ------- Total APBO................................................................. 21,661 22,445 Unrecognized prior service cost............................................ 7,532 8,047 Unrecognized gain (loss)................................................... 1,959 (97) ------- ------- Accrued postretirement benefit obligation.................................. $ 31,152 $ 30,395 ------- ------- ------- ------- Discount rate used in determining APBO..................................... 7.75% 7.25%
The assumed rate of future increases in health care cost during 1996 and 1995 was 14% and 15%, respectively, for pre-age 65 retirees, and 11% and 12%, respectively, for post-age 65 retirees, and is 26 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 11 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) expected to decline to 6% by the year 2006. Under the Plan, the actuarially determined effect of a one percentage point increase in the assumed health care cost trend rate on annual net postretirement benefit cost and the APBO would be $.6 and $4 million, respectively. POSTEMPLOYMENT. Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Under SFAS No. 112, the Company is required to accrue the cost of providing benefits to employees after employment but before retirement. The postemployment benefit obligation relates principally to medical costs for former employees on long-term disability. Upon adoption of SFAS No. 112, the Company recorded a cumulative effect charge to income of $2 million to recognize the accumulated postemployment benefit obligation as of January 1, 1994. 12 STOCKHOLDERS' EQUITY COMMON SHARES. In April 1995, the stockholders approved an amendment to the Company's Certificate of Incorporation which increased the number of authorized shares of Common Stock from 175 to 400 million. STOCK OPTION AGREEMENTS. In May 1993, the stockholders of the Company approved the General Instrument Corporation 1993 Long-Term Incentive Plan ("1993 Plan") which provides for the granting of stock options, stock appreciation rights, restricted stock, performance units, performance shares and phantom stock to employees of the Company and its subsidiaries and the granting of stock options to directors of the Company. In March 1996, the stockholders approved an increase of 6 million shares of Common Stock that may be awarded under the 1993 Plan. The following table summarizes stock option activity relating to the Company's stock option plans.
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE ----------- ----------------- Outstanding at January 1, 1994...................................................... 5,059 $ 12.72 Grants.............................................................................. 4,470 27.41 Exercised........................................................................... (1,954) 4.64 Canceled............................................................................ (2,638) 28.60 ----------- Outstanding at December 31, 1994.................................................... 4,937 20.74 Grants.............................................................................. 8,933 27.24 Exercised........................................................................... (1,103) 15.88 Canceled............................................................................ (3,116) 29.44 ----------- Outstanding at December 31, 1995.................................................... 9,651 24.50 Grants.............................................................................. 1,792 26.21 Exercised........................................................................... (162) 16.52 Canceled............................................................................ (679) 26.37 ----------- Outstanding at December 31, 1996.................................................... 10,602 $ 24.79 ----------- -----------
27 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 12 STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information about stock options outstanding and exercisable under the Company's stock option plans.
SHARES UNDER OPTIONS OUTSTANDING ------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ------------------------------ NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE EXERCISE PRICES 31, 1996 TERM (YEARS) PRICE 31, 1996 PRICE - - ------------------------------------------ ----------------- ----------------- ----------- ----------------- ----------- $1.51--$2.75.............................. 106 6.4 $ 2.23 106 $ 2.23 15.88--24.75.............................. 4,189 8.2 20.40 943 19.81 25.19--29.88.............................. 5,188 8.3 26.93 2,108 26.52 30.06--39.50.............................. 1,119 8.7 33.43 184 36.37
At December 31, 1996 and 1995, 5.2 and .3 million shares, respectively, were reserved for future awards under the Company's stock award plans. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Since the exercise price of all stock options granted under the 1993 Plan in 1996, 1995 and 1994 was equal to the closing price of the Common Stock on the New York Stock Exchange on the date of grant, no compensation expense has been recognized by the Company for its stock-based compensation plans during these years other than for restricted stock agreements. Compensation expense would have been $22 and $7 million in 1996 and 1995, respectively, had compensation cost for stock options awarded in 1996 and 1995 under the Company's stock option agreements been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," and the Company's pro forma net income/loss and fully diluted earnings/loss per share would have been a net loss of $15 million and $0.12 loss per share for 1996 and earnings of $119 million and $0.93 earnings per share for 1995. The weighted-average per share fair value of the options granted during 1996 and 1995 was estimated as $10.80 and $10.00, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1996 1995 --------- --------- Expected life (years)........................................................... 4.0 4.0 Risk-free interest rate......................................................... 6.18% 6.21% Expected volatility............................................................. 43% 38% Expected dividend yield......................................................... 0% 0%
The pro forma effect on net income/loss and earnings/loss per share for 1996 and 1995 may not be representative of the pro forma effect in future years because it includes compensation cost on a straight-line basis over the vesting periods of the grants and does not take into consideration the pro forma compensation costs for grants made prior to 1995. In connection with the acquisition of NLC, the Company entered into restricted stock agreements with NLC stockholders who, prior to the merger, held NLC common stock that was subject to repurchase rights. The repurchase rights generally permit the Company to repurchase shares of common stock upon certain terminations of employment. At the acquisition date, unearned compensation, based on the unamortized excess of the market value of the shares awarded over the price paid by the recipient at the date of grant, was charged to stockholders' equity and is being amortized to expense over the vesting period, which expires in July 1999. 28 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 12 STOCKHOLDERS' EQUITY (CONTINUED) STOCKHOLDER RIGHTS PLAN. On January 6, 1997, the Board of Directors adopted a stockholder rights plan designed to protect stockholders from various abusive takeover tactics, including attempts to acquire control of the Company at an inadequate price. Under the rights plan, each stockholder, subsequent to the distribution date of January 24, 1997, receives a dividend of one right for each outstanding share of Common Stock. The rights are attached to, and presently only trade with, the Common Stock and currently are not exercisable. Except as specified below, upon becoming exercisable, all rights holders will be entitled to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock at a price of $100. The rights become exercisable and will begin to trade separately from the Common Stock upon the earlier of (i) the first date of public announcement that a person or group (other than an existing 15% stockholder or pursuant to a Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of the outstanding Common Stock, or (ii) 10 business days following a person's or group's commencement of, or announcement of, an intention to commence a tender or exchange offer, the consummation of which would result in beneficial ownership of 15% or more of the Common Stock. The rights will entitle holders to purchase Common Stock having a market value (immediately prior to such acquisition) of twice the exercise price of the right. The Company may redeem the rights for $0.01 each at any time prior to such acquisition. The rights will expire on January 6, 2007, unless earlier redeemed. In connection with the rights plan, the Board of Directors approved the creation of, out of the authorized but unissued shares of Common Stock of the Company, a Series A Junior Participating Preferred Stock ("Participating Preferred Stock"), consisting of .4 million shares with a par value of $0.01 per share. The holders of the Participating Preferred Stock are entitled to receive dividends, if declared by the Board of Directors, from funds legally available. Each share of Participating Preferred Stock is entitled to one thousand votes on all matters submitted to stockholder vote. The shares of Participating Preferred Stock are not redeemable by the Company nor convertible into Common Stock or any other security of the Company. 13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS Derivative financial instruments are primarily used by the Company to reduce market risk arising from changes in foreign exchange and interest rates. The Company does not use derivative financial instruments for trading purposes, nor does it engage in currency or interest rate speculation. Derivatives used by the Company consist of foreign exchange, interest rate and other instruments. The Company believes that the various counterparties with which the Company enters into these agreements consist of only financially sound institutions and, accordingly, believes that the credit risk for non-performance of these contracts is remote. The Company monitors its underlying market risk exposures on an ongoing basis and believes that it can modify or adapt its hedging strategies as needed. FOREIGN EXCHANGE INSTRUMENTS. The Company enters into forward exchange contracts on a month-to-month basis to hedge foreign currency exposure with regard to certain monetary assets and liabilities denominated in currencies other than the U.S. dollar. These contracts generally do not subject the Company's results of operations to risk of exchange rate movements because gains and losses on these contracts generally offset, in the same period, gains and losses on the monetary assets and liabilities being hedged. On a selective basis, the Company enters into forward exchange and purchased option contracts to hedge the currency exposure of contractual and other firm commitments denominated in foreign currencies. The Company may also enter into forward exchange and purchased option contracts designed to 29 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) hedge the currency exposure of anticipated, but not yet committed, transactions expected to be denominated in foreign currencies. The purpose of these activities is to protect the Company from the risk that the eventual net cash flows in U.S. dollars from foreign receivables and payables will be adversely affected by changes in exchange rates. Gains and losses on hedges related to contractual and other firm commitments are deferred and recognized in the Company's results of operations in the same period as the gain or loss from the underlying transactions. Gains and losses on forward exchange contracts used to hedge anticipated, but not yet committed, transactions are recognized in the Company's results of operations as changes in exchange rates for the applicable foreign currencies occur. Historically, foreign exchange contracts with respect to contractual and other firm commitments and anticipated, but not yet committed, transactions have been short-term in nature. In addition, purchased options have had no intrinsic value at the time of purchase. The Company generally settles forward exchange contracts at maturity at prevailing market rates. The Company recognizes in its results of operations over the life of the contract the amortization of contract premium or discount. The amortization of these premiums or discounts during each of the three years in the period ended December 31, 1996 was not significant. During 1995, in response to first half of the year appreciation in the New Taiwan dollar, the Company increased the volume of forward exchange contracts utilized to hedge its cash flows in Taiwan. As of December 31, 1996 and 1995, the Company had outstanding forward exchange contracts in the amounts of $12 and $162 million, respectively, comprised of foreign currencies which were to be purchased (principally the Irish punt in 1996 and the New Taiwan dollar in 1995) and $43 and $46 million, respectively, comprised of foreign currencies which were to be sold (principally the Japanese yen, Canadian dollar and German mark). All outstanding forward exchange contracts at December 31, 1996 and 1995 mature within six months, and the fair values of such contracts approximated their carrying values. Accordingly, deferred gains or losses on such contracts at December 31, 1996 and 1995 were not significant. Foreign currency transaction losses included in net income were $3 and $10 million in 1996 and 1995, respectively. Gains and losses in 1994 were not significant. As of December 31, 1996 and 1995, the Company had no purchased option contracts outstanding. INTEREST RATE AND OTHER DERIVATIVE INSTRUMENTS. On a selective basis, the Company from time to time enters into interest rate cap or swap agreements to reduce the potential negative impact of increases in interest rates on its outstanding variable-rate debt under the Credit Agreement. The Company recognizes in its results of operations over the life of the contract, as interest expense, the amortization of contract premiums incurred from buying interest rate caps. Net payments or receipts resulting from these agreements are recorded as adjustments to interest expense. The effect of interest rate instruments on the Company's results of operations in each of the three years in the period ended December 31, 1996 was not significant. In the fourth quarter of 1994, the Company entered into two interest rate cap agreements to hedge an aggregate amount of $150 million of outstanding variable-rate borrowings under the Credit Agreement. Each contract had a notional amount of $75 million and a one-year term, covering the period from January 3, 1995 through January 3, 1996. At December 31, 1995, the fair value of interest rate agreements was not material. As of December 31, 1996, the Company also had four option contracts outstanding, providing for the purchase and sale of certain investments. The net premiums totaled $50 million, of which $25 million was paid on the transaction settlement date subsequent to December 31, 1996. At December 31, 1996, the $50 million net premiums have been reported as short-term investments, and the $25 million which settled subsequent to December 31, 1996 is included in accounts payable. The option contracts expire in 30 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) February 1997 and are accounted for at fair value with unrealized gains and losses recognized in earnings. As of December 31, 1996, the net unrealized gains and losses on these open contracts, for which the right of offset exists, were not material. OTHER FINANCIAL INSTRUMENTS. The carrying value of cash and cash equivalents approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount of the Company's senior bank indebtedness approximates fair value because the underlying instruments have variable interest rates that adjust to market on a short-term basis. 14 SEGMENT INFORMATION The Company's major business segments are Broadband Communications and Power Semiconductor. Broadband Communications offers a variety of products and services for the cable and satellite television industries, including digital and analog set-top systems, transmission systems, digital and analog satellite systems, including digital compression and transmission systems, and coaxial and fiber optic cable. Broadband Communications is also in the business of developing high-speed data networks and telephony network solutions. Products offered by Power Semiconductor include discrete power rectifying and transient voltage suppression components used in telecommunications, automotive and consumer electronic products. A significant portion of the Company's products are manufactured or assembled in Mexico, Taiwan and Ireland. At December 31, 1996, the net assets of these production operations were $20, $90 and $47 million, respectively. Operating profit represents net revenue less operating expenses, which excludes interest, unallocated corporate expenses and income taxes. Identifiable assets are those used in the operations of each segment or geographic area.
UNITED OPERATIONS BY GEOGRAPHIC AREA: STATES(A) EUROPE FAR EAST OTHER ELIMINATIONS CONSOLIDATED(B) --------- --------- ----------- --------- ------------ -------------- Year ended December 31, 1996: Net sales (c).............................. $2,385,032 $ 225,740 $ 30,068 $ 48,848 $ -- $2,689,688 Intercompany transfers (d)................. 230,978 41,369 288,552 22,489 (583,388) -- --------- --------- ----------- --------- ------------ -------------- Net revenues............................. 2,616,010 267,109 318,620 71,337 (583,388) 2,689,688 Operating profit........................... 70,573(e) 5,738 5,557 2,160 -- 84,028(e) Identifiable assets........................ 2,179,208 126,224 231,582 36,017 -- 2,573,031 Year ended December 31, 1995: Net sales (c).............................. 2,153,144 210,436 38,505 29,939 -- 2,432,024 Intercompany transfers (d)................. 202,091 47,801 250,190 16,828 (516,910) -- --------- --------- ----------- --------- ------------ -------------- Net revenues............................. 2,355,235 258,237 288,695 46,767 (516,910) 2,432,024 Operating profit........................... 180,275(f) 38,814 7,862 4,554 -- 231,505(f) Identifiable assets........................ 1,888,401 89,773 194,018 28,760 -- 2,200,952 Year ended December 31, 1994: Net sales (c).............................. 1,822,383 151,644 32,803 29,493 -- 2,036,323 Intercompany transfers (d)................. 140,691 32,772 221,930 23,264 (418,657) -- --------- --------- ----------- --------- ------------ -------------- Net revenues............................. 1,963,074 184,416 254,733 52,757 (418,657) 2,036,323 Operating profit........................... 299,944 16,854 20,186 4,336 -- 341,320 Identifiable assets........................ 1,753,161 80,061 169,331 16,836 -- 2,019,389
- - ------------------------ (a) Net sales by geographic segment reflect the originating source of the unaffiliated sale. Included in the U.S. net sales amount are export sales of $625, $513 and $413 million in 1996, 1995 and 1994, respectively. (b) Excludes corporate expenses and assets which are shown separately in the "Operations by Segment" table. 31 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 14 SEGMENT INFORMATION (CONTINUED) (c) A limited number of cable and satellite television operators provide services to a large percentage of television households in the U.S. The loss of some of these operators as customers could have a material adverse effect on the Company's sales. One customer, including affiliates, accounted for 17%, 20% and 15% of the Company's consolidated net sales in 1996, 1995 and 1994, respectively. Sales to this customer are made primarily from the Broadband Communications segment. (d) Intercompany transfers reflect the originating geographic source of the transfer and principally reflect product assembly which is accounted for at cost plus a nominal profit. (e) Includes charges of $237 million reflecting restructuring charges related to the Company's plan to separate into three independent companies, NLC litigation costs and other charges primarily related to the transition to the Company's next-generation digital products and the write-down of certain assets to their estimated net realizable values (See Notes 2, 9 and 15). (f) Includes a charge of $140 million for purchased in-process technology in connection with the Company's acquisition of NLC.
BROADBAND POWER COMMUNICATIONS SEMICONDUCTOR CORPORATE CONSOLIDATED --------------- ------------- ---------- ------------ OPERATIONS BY SEGMENT: Year ended December 31, 1996: Net sales.................................. $ 2,327,797 $ 361,891 $ -- $2,689,688 Operating profit (loss).................... (608)(a) 84,636(a) -- 84,028 Corporate expenses......................... -- -- (32,516)(a) (32,516) Identifiable assets........................ 2,094,053 478,978 -- 2,573,031 Corporate assets........................... -- -- 133,820 133,820 Capital expenditures....................... 165,526 60,335 2,041 227,902 Depreciation and amortization expense...... 103,433 22,015 3,688 129,136 Year ended December 31, 1995: Net sales.................................. 2,017,755 414,269 -- 2,432,024 Operating profit........................... 131,810(b) 99,695 -- 231,505 Corporate expenses......................... -- -- (26,204) (26,204) Identifiable assets........................ 1,751,518 449,434 -- 2,200,952 Corporate assets........................... -- -- 99,806 99,806 Capital expenditures....................... 124,261 34,990 190 159,441 Depreciation and amortization expense...... 85,195 19,483 5,462 110,140 Year ended December 31, 1994: Net sales.................................. 1,720,634 315,689 -- 2,036,323 Operating profit........................... 281,985 59,335 -- 341,320 Corporate expenses......................... -- -- (25,249) (25,249) Identifiable assets........................ 1,590,876 428,513 -- 2,019,389 Corporate assets........................... -- -- 89,562 89,562 Capital expenditures....................... 112,080 23,406 254 135,740 Depreciation and amortization expense...... 71,618 19,627 6,105 97,350
- - ------------------------ (a) Operating profit (loss) for Broadband Communications and Power Semiconductor and corporate expenses for Corporate include charges of $226, $2 and $9 million, respectively, reflecting restructuring charges related to the Company's plan to separate into three independent companies, NLC litigation costs and other charges primarily related to the transition to the Company's next-generation 32 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 14 SEGMENT INFORMATION (CONTINUED) digital products and the write-down of certain assets to their estimated net realizable values (See Notes 2, 9 and 15). (b) Includes a charge of $140 million for purchased in-process technology in connection with the Company's acquisition of NLC. 33 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED) 15 QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly data for 1996 and 1995 are as follows:
QUARTER ENDED ---------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ---------------------- ---------------------- ---------------------- ---------------------- 1996 1995 1996(A) 1995 1996 1995(B) 1996(C) 1995 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net sales......................... $ 615,762 $ 608,716 $ 675,189 $ 611,639 $ 662,122 $ 563,251 $ 736,615 $ 648,418 Gross profit...................... 174,024 190,832 185,253 195,370 192,089 179,443 140,697 175,740 Net income (loss)................. $ 31,164 $ 57,055 $ (58,086) $ 54,051 $ 42,122 $ (40,892) $ (17,064) $ 53,568 Earnings (loss) per share: Primary......................... $ .25 $ .46 $ (.45) $ .44 $ .31 $ (.33) $ (.12) $ .43 Fully diluted(d)................ .24 .42 (.45) .40 .30 (.33) (.12) .39 Common Stock Prices:(e) High.......................... $ 28 3/8 $ 36 1/4 $ 34 3/8 $ 39 1/4 $ 29 3/8 $ 41 5/8 $ 27 1/8 $ 29 3/4 Low........................... 21 25 5/8 26 1/4 30 1/2 21 1/2 30 1/4 18 1/8 18 1/4
- - ------------------------ (a) Includes a charge of $141 million ($92 million net-of-tax) reflecting NLC litigation costs. (b) Includes a charge of $140 million ($90 million net-of-tax) for purchased in-process technology in connection with the acquisition of NLC. (c) Includes a pre-tax charge of $12 million ($7 million net-of-tax) for costs related to the Company's plan to separate into three independent companies, a pre-tax charge of $57 million ($35 million net-of-tax) related to the Company's transition to next-generation digital products and other pre-tax charges of $27 million ($17 million net-of-tax). Of these charges, $73 million ($45 million net-of-tax) were recorded as cost of goods sold and related to the write-down of inventories to their estimated net realizable values and the accrual of upgrade and product warranty liabilities related to the transition to the Company's next-generation digital products. The remaining $23 million ($14 million net-of-tax) of charges were recorded as SG&A expense and related to the Company's plan to separate into three independent companies, the write-down of fixed assets to their estimated net realizable values and accruals for environmental and litigation matters. (d) The sum of the four quarters does not equal the full-year fully-diluted calculation because the Company recorded losses in certain quarters of 1996 and 1995, the impact of which had an anti-dilutive effect on the Company's fully-diluted calculation during these periods. (e) The New York Stock Exchange is the principal market on which these securities are traded. The Company did not pay dividends on its Common Stock during 1996 or 1995. 16 SUBSEQUENT EVENT As discussed in Note 9, in 1995 DSC brought suit against NLC and the founders of NLC. On February 28, 1997, the U.S. Court of Appeals for the Fifth Circuit confirmed the trial court's denial of DSC's request for injunctive relief, reversed the district court judgment for diversion of a corporate opportunity and remanded the case to the trial court for the entry of judgment on the misappropriation of trade secrets claim, which the Company expects to result in a damage award of $138 million plus accrued interest. 34 EX-21 4 LIST OF SUBSIDIARIES
Exhibit 21 GENERAL INSTRUMENT CORPORATION Company Name Place of Incorporation - - ------------- ---------------------- GENERAL INSTRUMENT CORPORATION .......................................................... Delaware (Formerly FLGI Holding Corp.) GENERAL INSTRUMENT CORPORATION OF DELAWARE .......................................... Delaware (Formerly GI Corporation and General Instrument Corporation) Access Control Center, Inc. (Formerly DBS Authorization Center, Inc.) ............... Delaware Amplevalue Ltd. ..................................................................... U.K. ATC Corp. (Formerly American Totalisator Company, Inc.) ............................. Delaware Cable Transport, Inc. ............................................................... North Carolina Century Components, Inc. ............................................................ Delaware Charger Industries .................................................................. California CommScope, Inc. ..................................................................... Delaware CommScope India, Inc. ............................................................... Delaware CommScope Inc. of North Carolina (Formerly CommScope, Inc.) ......................... North Carolina DBS Services, Inc. .................................................................. California Ensambladora de Matamoros, S.A. de C.V. ............................................. Mexico General Instrument of Arizona, Inc. ................................................. Delaware General Instrument Australia Pty Ltd. ............................................... Australia General Instrument Belgium B.V.B.A. ................................................. Belgium General Instrument do Brasil Comunicacoes Ltda. ..................................... Brazil General Instrument of Canada, Inc. .................................................. Canada General Instrument Chile Limitada (LLC) ............................................. Chile General Instrument China Holdings, Inc. ............................................. Delaware General Instrument Deutschland GmbH ................................................. Germany General Instrument Europe Limited ................................................... Ireland General Instrument Europe N.V. ...................................................... Belgium General Instrument Foreign Sales Corp. .............................................. Barbados General Instrument France S.A. ...................................................... France General Instrument High Definition Television Corporation ........................... Delaware General Instrument India Holdings, Inc. ............................................. Delaware General Instrument International Corp. .............................................. New York General Instrument Ireland (formerly General Semiconductor Ireland) ................ Ireland General Instrument Italia S.r.L ..................................................... Italy General Instrument Japan, Ltd. ...................................................... Japan General Instrument Mauritius, Inc. .................................................. Delaware General Instrument de Mexico, S.A. de C.V. .......................................... Mexico General Instrument Microelectronics Ltd. ............................................ U.K. General Instrument (Music Services) Ltd. ............................................ U.K. General Instrument PSD (China) Co., Ltd. ............................................ Rep. of China General Instrument PSD (China) Holdings, Inc. ....................................... Delaware General Instrument (Puerto Rico), Inc. .............................................. Delaware General Instrument Remittance Products, Inc. ........................................ Florida General Instrument Semiconductor Industries, Inc. ................................... Delaware
GENERAL INSTRUMENT CORPORATION Company Name Place of Incorporation - - ------------- ---------------------- General Instrument Services, Inc. ................................................... Delaware General Instrument Services Ltd. .................................................... U.K. General Instrument (Singapore) Pte. Ltd. ............................................ Singapore General Instrument of Taiwan, Ltd. .................................................. Rep. of China General Instrument (UK) Ltd. ........................................................ U.K. GI Communications Purchasing Corp. .................................................. Delaware GI Mauritius Holdings, Ltd. ......................................................... Mauritius GSI - General Instrument Semiconductor Industries, Inc. ............................. Delaware Jerrold DC Radio, Inc. .............................................................. Delaware Magnitude Compression Systems, Inc. ................................................. California NextLevel Holdings (Taiwan), Inc. ................................................... Delaware NextLevel Systems of Delaware, Inc. (formerly Cable/Home Communication Corp.) ....... Delaware NextLevel Systems Hong Kong Limited ................................................. Hong Kong NextLevel Systems, Inc. ............................................................. Delaware NextLevel Systems (Taiwan), Ltd. .................................................... Taiwan Sharpstep Ltd. ...................................................................... U.K. The General Instrument Foundation ................................................... Illinois NEXT LEVEL COMMUNICATIONS ............................................................... California
GENERAL INSTRUMENT CORPORATION JOINT VENTURES Japan VideoCipher Corporation Vision Cables Pty. Ltd. (CommScope Australian joint venture) HCL General Instrument Private Limited PARTNERSHIPS Digital Cable Radio Associates EX-23 5 INDEPENDENT AUDITORS' CONSENT Exhibit 23 Independent Auditors' Consent We consent to the incorporation by reference in Registration Statement Nos. 33-60498, 33-61820, 33-50911, 33-52189, 33-54923, 33-55595, 33-57737 and 333-22861 of General Instrument Corporation on Forms S-8 of our report on the financial statement schedules of General Instrument Corporation and subsidiaries listed in Item 14(a)2 dated February 3, 1997 appearing in, and our report on the consolidated financial statements of General Instrument Corporation and subsidiaries dated February 3, 1997 (February 28, 1997 as to Note 16) incorporated by reference in, this Annual Report on Form 10-K of General Instrument Corporation for the year ended December 31, 1996. /s/ Deloitte & Touche LLP - - -------------------------- Deloitte & Touche LLP Chicago, Illinois March 21, 1997 EX-27 6 FDS
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GENERAL INSTRUMENT CORPORATION FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 20,252 49,946 544,430 17,536 336,516 1,083,085 571,051 0 2,706,851 534,720 698,825 1,371 0 0 1,171,782 2,706,851 2,689,688 2,689,688 1,997,625 1,997,625 0 0 46,356 5,517 (7,381) (1,864) 0 0 0 (1,864) (0.01) (0.01)
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