UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission file number 001-12925
NextLevel Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4134221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8770 West Bryn Mawr Avenue, Chicago, Illinois 60631
(Address of principal executive offices)
(Zip Code)
(773) 695-1000
(Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of October 31, 1997, there were 147,912,273 shares of Common Stock
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
NEXTLEVEL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents .............................................................. $ 162,027 $ -
Short-term investment .................................................................. 26,900 -
Accounts receivable, less allowance for doubtful accounts
of $8,712 and $12,910, respectively ............................................... 346,025 392,984
Inventories ............................................................................ 305,199 263,829
Prepaid expenses and other current assets .............................................. 29,751 17,657
Deferred income taxes ................... .............................................. 107,906 81,226
----------- -----------
Total current assets .............................................................. 977,808 755,696
Property, plant and equipment, net ..................................................... 260,937 251,748
Intangibles, less accumulated amortization of $83,639
and $76,077, respectively ......................................................... 85,240 92,802
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $104,368 and $93,552, respectively .................... 472,446 478,783
Investments and other assets ........................................................... 57,398 18,208
Deferred income taxes .................................................................. 2,171 32,499
----------- -----------
TOTAL ASSETS ........................................................................... $1,856,000 $1,629,736
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
NEXTLEVEL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
Current Liabilities:
<S> <C> <C>
Accounts payable ..................................................................... $ 202,905 $ 201,382
NLC litigation liability ............................................................. 138,000 -
Other accrued liabilities ............................................................ 183,594 172,782
---------- -----------
Total current liabilities ....................................................... 524,499 374,164
Deferred income taxes ................................................................ 15,079 6,353
NLC litigation liability ............................................................. - 139,100
Other non-current liabilities ........................................................ 66,000 58,945
---------- -----------
Total liabilities ............................................................... 605,578 578,562
---------- -----------
Commitments and contingencies
Stockholders' Equity:
Divisional net equity ................................................................ - 1,051,174
Preferred Stock, $.01 par value; 20,000,000 shares authorized; no
shares issued ................................................................. - -
Common Stock, $.01 par value: 400,000,000 shares authorized;
147,847,544 shares issued at September 30, 1997 ............................... 1,478 -
Additional paid-in capital ........................................................... 1,206,208 -
Retained earnings .................................................................... 26,702 -
Unrealized gain on investment, net of taxes of $10,491 ............................... 16,409 -
---------- -----------
1,250,797 1,051,174
Less - Treasury Stock, at cost, 4,309 shares of Common Stock ......................... (2) -
Unearned compensation ......................................................... (373) -
---------- -----------
Total stockholders' equity ........................................................... 1,250,422 1,051,174
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $1,856,000 $ 1,629,736
========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NEXTLEVEL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES ................................................... $ 464,582 $ 428,892 $ 1,323,013 $ 1,249,013
------------- ------------- ------------- ------------
OPERATING COSTS AND EXPENSES
Cost of sales ........................................... 331,141 307,669 958,441 916,841
Selling, general and administrative ..................... 45,316 37,958 139,958 112,264
NLC litigation costs .................................... - - - 141,000
Research and development ................................ 47,867 47,363 148,542 144,683
Amortization of excess of cost over fair value
of net assets acquired ............................... 3,698 3,638 10,816 10,638
------------- ------------- ------------- ------------
Total operating costs and expenses ................. 428,022 396,628 1,257,757 1,325,426
------------- ------------- ------------- ------------
OPERATING INCOME (LOSS) ..................................... 36,560 32,264 65,256 (76,413)
Other income (expense), net ................................. 3,717 (63) 1,864 (912)
Interest expense, net ....................................... (829) (6,295) (14,340) (19,698)
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ........................... 39,448 25,906 52,780 (97,023)
(Provision) Benefit for income taxes ........................ (14,990) (9,093) (22,955) 33,549
------------- ------------- ------------ ------------
NET INCOME (LOSS) ........................................... $ 24,458 $ 16,813 $ 29,825 $ (63,474)
============= ============= ============ ============
Weighted Average Shares Outstanding ......................... 149,491 149,416
Earnings Per Common Share ................................... $ 0.16 $ 0.20
============= ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NEXTLEVEL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Unrealized Total
Common Stock Additional Gain Common Unearned Stock-
--------------- Paid-In Retained On Stock In Compen- Divisional holders'
Shares Amount Capital Earnings Investment Treasury sation Net Equity Equity
------- ------ ---------- -------- ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ......... - $ - $ - $ - $ - $ - $ - $1,051,174 $1,051,174
Net income for the period
January 1, 1997 to July 25, 1997 3,123 3,123
Transfers from General Instrument .. 125,310 125,310
Other transactions with
General Instrument .............. 17,814 17,814
Unrealized gain on investment,
net of tax ...................... 21,576 21,576
Spin-off from General Instrument ... 147,315 1,473 1,196,370 21,576 (422) (1,218,997) -
Net income for the period July 26,
1997 to September 30, 1997 ...... 26,702 26,702
Exercise of stock options
and related tax benefit ........ 169 1 2,716 2,717
Stock issued in connection with a
business acquisition ........... 358 4 6,996 7,000
Net change in investment ........... (5,167) (5,167)
Amortization of unearned
compensation ................... 59 59
Other .............................. 6 126 (2) (10) 114
------- ------ ---------- -------- --------- --------- ------- ----------- -----------
BALANCE, SEPTEMBER 30, 1997 ........ 147,848 $1,478 $1,206,208 $ 26,702 $ 16,409 $ (2) $ (373) $ - $1,250,422
======= ====== ========== ======== ========= ========= ======= =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NEXTLEVEL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ........................................................................................ $ 29,825 $(63,474)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ......................................................................... 67,000 60,227
NLC litigation costs, net ............................................................................. - 91,650
Gain on sale of short-term investment ................................................................. (4,829) -
Changes in assets and liabilities:
Accounts receivable .............................................................................. 57,105 (38,258)
Inventories ...................................................................................... (41,358) (118,193)
Prepaid expenses and other current assets ........................................................ 30 (2,811)
Other non-current assets ......................................................................... (1,573) (7,587)
Deferred income taxes ............................................................................ 13,697 17,205
Accounts payable, income taxes payable and other accrued liabilities ............................. 4,731 35,161
Other non-current liabilities .................................................................... 792 (20,945)
Other ................................................................................................. 767 548
-------- -------
Net cash provided by (used in) operating activities ....................................................... 126,187 (46,477)
======== =======
INVESTING ACTIVITIES:
Additions to property, plant and equipment ............................................................ (56,437) (106,893)
Investments in other assets ........................................................................... (32,635) (1,266)
Acquisitions, net of cash acquired .................................................................... (6,980) (11,671)
Proceeds from sale of short-term investment ........................................................... 4,829 -
-------- -------
Net cash used in investing activities ..................................................................... (91,223) (119,830)
======== ========
FINANCING ACTIVITIES:
Transfers from General Instrument ..................................................................... 125,310 166,307
Proceeds from stock options ........................................................................... 2,319 -
Other ................................................................................................. (566) -
-------- --------
Net cash provided by financing activities ................................................................. 127,063 166,307
======== ========
Change in cash and cash equivalents ....................................................................... 162,027 -
Cash and cash equivalents, beginning of period ............................................................ - -
-------- --------
Cash and cash equivalents, end of period .................................................................. $162,027 $ -
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NEXTLEVEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, unless otherwise noted)
1. COMPANY BACKGROUND
NextLevel Systems, Inc. ("NextLevel Systems" or the "Company"),
formerly the Communications Business of General Instrument Corporation ("General
Instrument"), was incorporated in Delaware in January 1997 and is 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. NextLevel Systems is the world leader in digital and analog
set-top systems for wired and wireless cable television networks, as well as
hybrid fiber/coaxial network transmission systems used by cable television
operators and is a leading provider of digital satellite systems for
programmers, direct-to-home satellite network providers and private networks for
business communications. Through its Next Level Communications business,
NextLevel Systems will provide telephone network solutions through its NLevel(3)
Switched Digital Services system.
In a transaction that was consummated on July 28, 1997, General
Instrument (i) transferred all the assets and liabilities relating to the
manufacture and sale of broadband communications products used in the cable
television, satellite, and telecommunications industries to NextLevel Systems
(then a wholly-owned subsidiary of General Instrument) and all the assets and
liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii)
distributed all of its outstanding shares of capital stock of each of NextLevel
Systems and CommScope to its stockholders on a pro rata basis as a dividend.
Approximately 147.3 million shares of NextLevel Systems Common Stock, based on
an exchange ratio of one for one, were distributed to General Instrument's
stockholders of record on July 25, 1997 (the "NextLevel Distribution"). On July
28, 1997, approximately 49.1 million shares of CommScope Common Stock, based on
an exchange ratio of one for three, were distributed to NextLevel Systems'
stockholders of record on that date (the "CommScope Distribution" and, together
with the NextLevel Distribution, the "Distributions"). On July 28, 1997,
NextLevel Systems and CommScope began operating as independent entities with
publicly traded common stock, and General Instrument retained no ownership
interest in either NextLevel Systems or CommScope. Additionally, immediately
following the NextLevel Distribution, General Instrument was renamed General
Semiconductor, Inc. ("General Semiconductor") and effected a one for four
reverse stock split.
For the purpose of governing certain of the ongoing relationships among
NextLevel Systems, CommScope and General Semiconductor after the Distributions
and to provide mechanisms for an orderly transition, NextLevel Systems,
CommScope and General Semiconductor have entered into various agreements.
NextLevel Systems, CommScope and General Semiconductor believe that the
agreements are fair to each of the parties and are comparable to those, which
would have been reached in arm's length negotiations with unaffiliated parties.
In connection with the Distributions, NextLevel Systems recorded a
charge of $18 million to cost of sales for the nine months ended September 30,
1997 for employee costs related to dividing General Instrument's Taiwan
operations between NextLevel Systems and General Semiconductor. Additionally,
NextLevel Systems recorded a charge of $6 million to selling, general and
administrative expense for legal and other professional fees incurred during the
nine months ended September 30, 1997.
<PAGE>
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements reflect the
results of operations, financial position, changes in stockholders' equity and
cash flows of NextLevel Systems. The consolidated balance sheet as of September
30, 1997, the consolidated statements of operations for the three and nine
months ended September 30, 1997 and 1996, the consolidated statement of
stockholders' equity for the nine months ended September 30, 1997 and the
consolidated statements of cash flows for the nine months ended September 30,
1997 and 1996 of NextLevel Systems are unaudited and reflect all adjustments of
a normal recurring nature (except for those charges disclosed in Notes 1 and 5)
which are, in the opinion of management, necessary for a fair presentation of
the interim period financial statements. The results of operations for the
interim period are not necessarily indicative of the results of operations to be
expected for the full year.
The consolidated financial statements include an allocation of certain
assets, liabilities and general corporate expenses from General Instrument for
the periods prior to the Distributions. In the opinion of management, general
corporate administrative expenses have been allocated to NextLevel Systems on a
reasonable and consistent basis using management's estimate of services provided
to NextLevel Systems by General Instrument. However, such allocations are not
necessarily indicative of the level of expenses which would have been incurred
had NextLevel Systems been operating as a separate stand-alone entity during the
periods presented.
Prior to the Distributions, NextLevel Systems participated in General
Instrument's cash management program, and the accompanying consolidated
financial statements include an allocation of net interest expense from General
Instrument. To the extent NextLevel Systems generated positive cash, such
amounts were remitted to General Instrument. To the extent NextLevel Systems
experienced temporary cash needs for working capital purposes or capital
expenditures, such funds were historically provided by General Instrument. The
net effect of these transactions is reflected in divisional net equity. Net
interest expense has been allocated based upon NextLevel Systems' net assets as
a percentage of the total net assets of General Instrument. The allocations were
made consistently in each period, and management believes the allocations are
reasonable. However, these interest costs would not necessarily be indicative of
what the actual costs would have been had NextLevel Systems operated as a
separate, stand-alone entity. Subsequent to the Distributions, NextLevel Systems
is responsible for the cash management functions using its own resources or
purchased services and is responsible for the costs associated with operating as
a public company.
Prior to the Distributions, NextLevel Systems' financial results
included the costs incurred by General Instrument's pension and postretirement
benefit plans for employees and retirees of NextLevel Systems. The provision for
income taxes for the periods prior to the Distributions was based on NextLevel
Systems' expected annual effective tax rate including the tax effects of
restructuring charges, calculated assuming NextLevel Systems had filed separate
tax returns under its existing structure.
The financial information included herein does not necessarily reflect
the consolidated results of operations, financial position, changes in
stockholders' equity and cash flows of NextLevel Systems in the future or on a
historical basis had NextLevel Systems been a separate stand-alone entity for
the periods presented. These interim consolidated financial statements should be
read in conjunction with the Company's December 31, 1996 audited combined
financial statements contained in the Company's Prospectus, dated June 13, 1997.
Certain reclassifications have been made to the comparative prior
period financial statements to conform to the current period presentation.
<PAGE>
3. PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statements of operations presented
below are the consolidated results of NextLevel Systems and were prepared to
give effect to the Distributions as if they had occurred on January 1, 1996. The
unaudited pro forma statements of operations set forth below do not purport to
represent what NextLevel Systems' operations actually would have been had the
Distributions occurred on January 1, 1996 or to project NextLevel Systems'
operating results for any future period.
The unaudited pro forma information has been prepared utilizing the
historical consolidated statements of operations of NextLevel Systems which were
adjusted to reflect: (i) an additional $1.3 million of selling, general and
administrative ("SG&A") costs for the three months ended September 30, 1996 and
an additional $3.6 and $5.0 million of SG&A costs for the nine months ended
September 30, 1997 and 1996, respectively, to eliminate the allocation of
corporate expenses to CommScope and General Semiconductor, as such costs
subsequent to the Distributions are no longer allocable and are expected to be
incurred by NextLevel Systems in the future; and (ii) a net debt level of $100
million at the beginning of each period presented through July 25, 1997, the
date of the NextLevel Distribution.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales .............................................................. $ 464,582 $ 428,892 $ 1,323,013 $ 1,249,013
----------- ----------- ----------- -----------
Operating costs and expenses
Cost of sales ....................................................... 331,141 307,669 958,441 916,841
Selling, general and administrative ................................. 45,316 39,258 143,558 117,264
NLC litigation costs ................................................ -- -- -- 141,000
Research and development ............................................ 47,867 47,363 148,542 144,683
Amortization of excess of cost over fair
value of net assets acquired ..................................... 3,698 3,638 10,816 10,638
----------- ----------- ----------- -----------
Total operating costs and expenses .......................... 428,022 397,928 1,261,357 1,330,426
----------- ----------- ----------- -----------
Operating income (loss) ................................................ 36,560 30,964 61,656 (81,413)
Other income (expense), net ............................................ 3,717 (63) 1,864 (912)
Interest income (expense), net ......................................... 299 (1,900) (3,499) (5,700)
----------- ----------- ----------- -----------
Income (loss) before income taxes ...................................... 40,576 29,001 60,021 (88,025)
(Provision) Benefit for income taxes ................................... (15,421) (10,180) (25,808) 30,376
----------- ----------- ----------- -----------
Net income (loss) ...................................................... $ 25,155 $ 18,821 $ 34,213 $ (57,649)
=========== =========== =========== ===========
Weighted average shares outstanding (*) ................................ 149,491 148,700 149,416 148,700
Earnings (loss) per common share (*) ................................... $ 0.17 $ 0.13 $ 0.23 $ (0.39)
=========== =========== =========== ===========
</TABLE>
- -----------
(*) For the three and nine months ended September 30, 1996, earnings (loss)
per common share was calculated by dividing pro forma net income (loss)
by the sum of 147.3 million NextLevel System common shares issued, and
1.4 million common equivalent shares existing, on the date of the
Distributions. See Note 6 regarding earnings per common share for the
three and nine months ended September 30, 1997.
<PAGE>
4. INVENTORIES
Inventories consist of:
September 30, 1997 December 31, 1996
---------------------- ----------------------
Raw materials $ 137,391 $ 104,984
Work in process 26,834 21,344
Finished goods 140,974 137,501
---------------------- ----------------------
Total inventories $ 305,199 $ 263,829
====================== ======================
5. LITIGATION
In April 1995, prior to the Company's acquisition of Next Level
Communications ("NLC") in September 1995, DSC Communications Corporation and DSC
Technologies Corporation (collectively, "DSC") brought suit against NLC and the
founders of NLC ("NLC Litigation"). 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 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. Both sides appealed to the U.S. Court of Appeals for
the Fifth Circuit. Enforcement of the judgment was stayed pending the
determination of the appeal. 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. On June 25, 1997, the
Court of Appeals denied both parties' motions for rehearing. On October 28,
1997, the trial court entered a revised final judgment against NLC and the
individual defendants in a total amount of $138 million, plus interest from July
3, 1997. On November 7, 1997, the Company satisfied the judgment with a payment
of approximately $141 million.
An action entitled BroadBand Technologies, Inc. vs. General Instrument
Corp. was brought in March 1997 in the United States District Court for the
Eastern District of North Carolina. The complaint alleges that the Company
infringes BroadBand Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560 (the
"560 Patent"), covering an electronic communications system which delivers
television signals, and seeks monetary damages and injunctive relief. On June
13, 1997, General Instrument's motion to dismiss the complaint for lack of
personal jurisdiction was denied.
In March 1997, NLC commenced an action against BBT in the United States
District Court for the Northern District of California for a declaratory
judgment that BBT's 560 Patent is invalid and unenforceable; for patent
infringement; and for violation of the antitrust laws of the United States. In
the patent infringement claim, NLC charges that BBT infringes two patents
licensed to NLC relating to video compression and video signal processing. BBT
has answered the complaint and does not contest jurisdiction. On September 30,
1997, BBT's motion to have the case transferred to North Carolina was denied.
<PAGE>
During October 1995, General Instrument 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, General Instrument and certain officers
and directors violated certain federal securities laws by making false and
misleading statements about General Instrument's financial prospects, and as a
result, the plaintiffs allege that the market value of General Instrument's
stock declined, thereby causing unspecified monetary damages to the plaintiffs.
On September 23, 1997, the district court dismissed the complaints, without
prejudice, and the plaintiffs were given until November 7, 1997 to amend their
complaints. On November 7, 1997, plaintiffs served the defendants with amended
complaints, which contain allegations substantially similar to those in the
original complaints. The Company intends to vigorously contest these actions.
In February 1996, General Instrument and NLC were named as defendants
in a complaint in which the plaintiffs, who were some of the 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 General Instrument
of NLC in September 1995. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorney's fees and costs. On September
23, 1997, the district court dismissed the complaint, without prejudice, and the
plaintiffs were given until November 7, 1997 to amend their complaint. On
November 7, 1997, plaintiffs served the defendants with amended complaints,
which contain allegations substantially similar to those in the original
complaint. The Company intends to vigorously contest this action.
In connection with the Distributions, NextLevel Systems has agreed to
indemnify General Semiconductor (formerly General Instrument) with respect to
its obligations, if any, related to these matters.
On October 21, 1997, a securities class action complaint entitled
Michael J. DiBattista v. NextLevel Systems, Inc. and Richard S. Friedland was
filed in the United States District court for the Northern District of Illinois,
Eastern Division. The complaint was filed on behalf of stockholders who
purchased stock of the Company between July 28, 1997 and October 16, 1997. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder by making false and misleading statements
about the Company's business, finances and future prospects. The Company intends
to vigorously contest this action.
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.
6. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed based upon the weighted
average number of common and common equivalent shares outstanding during the
applicable periods adjusted for the dilutive effect of stock options. The
computation of earnings per common 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. Historical earnings
(loss) per common share for the three and nine month period ended September 30,
1996 have been omitted since the Company was not a separate company with a
capital structure of its own.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("SFAS No. 128"), which supersedes
Accounting Principles Board Opinion No. 15, Earnings per Share, and replaces
primary and fully diluted earnings per share with basic and diluted earnings per
share, respectively. The Company will adopt SFAS No. 128 on December 31, 1997.
Had earnings per share been calculated in accordance with SFAS No. 128, basic
and diluted earnings per share would have been $0.17 and $0.16, respectively,
for the three months ended September 30, 1997, and would have both been $0.20
for the nine months ended September 30, 1997.
<PAGE>
7. CREDIT FACILITIES
In July 1997, NextLevel Systems entered into a bank credit agreement
(the "Credit Agreement") which provides a $600 million unsecured revolving
credit facility and matures on December 31, 2002. The Credit Agreement permits
NextLevel Systems to choose between two interest rate options: an Adjusted Base
Rate (as defined in the Credit Agreement), which is based on the highest of (i)
the rate of interest publicly announced by The Chase Manhattan Bank as its prime
rate, (ii) 1% per annum above the secondary market rate for three-month
certificates of deposit and (iii) the federal funds effective rate from time to
time plus 0.5%, and a Eurodollar rate (LIBOR) plus a margin which varies based
on certain performance criteria. NextLevel Systems is also able to set interest
rates through a competitive bid procedure. In addition, the Credit Agreement
requires NextLevel Systems to pay a facility fee on the total loan commitment.
The Credit Agreement contains financial and operating covenants, including
limitations on guarantee obligations, liens and sale of assets, and requires the
maintenance of certain financial ratios. None of the restrictions contained in
the Credit Agreement is expected to have a significant effect on the Company's
ability to operate. As of September 30, 1997, the Company was in compliance with
all financial and operating covenants under the Credit Agreement.
8. STRATEGIC RESTRUCTURING
On October 16, 1997, the Board of Directors of the Company announced it
is developing a multifaceted plan to improve the Company's financial performance
and achieve the full strategic potential of its world-class communications
technologies and market leadership positions. The Board accepted the resignation
of Richard S. Friedland as Chairman and Chief Executive Officer, and named
Edward D. Breen President and Acting CEO. The Company, in conjunction with the
Board, expects to announce details of this plan in mid-December.
While the plan has not been completed and is subject to change, the
plan has three principal elements. First, the Company intends to promptly
explore and evaluate alternatives for its advanced telephony products
subsidiary, Next Level Communications (NLC), based in Rohnert Park, Calif. NLC
produces next-generation broadband digital loop carrier networks and xDSL
products, and has entered into contracts for deployment of these products with
U S West and Bell Atlantic. NLC is investing heavily in research and development
of its technology and, as a result, will produce operating losses of over $50
million in 1997. Second, the Company will streamline the cost structure of its
Satellite Data Networks Group, located in San Diego. At the same time, it will
support the division's key engineering developments and share those technologies
more widely across the Company. In 1997, the Satellite Data Networks Group is
expected to generate over $500 million of revenue, but will produce a small loss
on an operating basis. Third, the Company will actively employ its Board to
capitalize on the strategic opportunities and alliances made possible by
NextLevel Systems' large installed base of cable television network equipment
and the increasing importance of these networks for low-cost home computing and
high-speed Internet access.
Also in connection with this plan, on November 4, 1997, the Company
announced that it would be moving its corporate headquarters from Chicago,
Illinois to Horsham, Pennsylvania during the first quarter of 1998. The Company
plans to consolidate its corporate staff with the staff of its principal
operating unit, the Broadband Networks Group. On November 13, 1997, the Company
announced it is restructuring its San Diego-based Satellite Data Networks
business and reducing headcount by 225. Separately, the Company also named Eric
M. Pillmore to the position of Acting Chief Financial Officer (CFO), replacing
Charles T. Dickson, Vice President and CFO.
<PAGE>
NEXTLEVEL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, unless otherwise noted)
NET SALES
Net sales for the three months ended September 30, 1997 were $465
compared to $429 for the three months ended September 30, 1996, an increase of
$36, or 8%. Net sales for the nine months ended September 30, 1997 were $1,323
compared to $1,249 for the nine months ended September 30, 1996, an increase of
$74, or 6%. The increases in net sales for the three and nine month periods
reflect increased sales of digital cable systems and interactive advanced analog
systems, partially offset by lower sales of basic analog cable terminals, cable
transmission systems and satellite systems for private and international
networks.
Broadband sales (consisting of digital and analog cable and wireless
television systems and network transmission systems) were $335 and $953 for the
three and nine months ended September 30, 1997, respectively. Broadband sales
increased $42, or 14%, and $124, or 15%, for the three and nine month periods,
respectively, from the comparable 1996 periods. The increases are primarily a
result of increased U.S. sales volume of digital cable terminals and headends
and CFT-2200 advanced analog set-top terminals, partially offset by lower sales
of analog cable and transmission network systems. These sales reflect the
commitment of cable television operators to deploy state-of-the-art digital and
interactive advance analog systems in order to offer advanced entertainment,
interactive services and Internet access to their customers. International
broadband sales decreased 9% for the three months ended September 30, 1997, but
increased 10% for the nine months ended September 30, 1997, over the comparable
1996 periods, and represented approximately 30% of worldwide broadband sales for
all periods. Analog and digital broadband products represented 69% and 31%,
respectively, of total broadband sales for the three months ended September 30,
1997, and 79% and 21%, respectively, of total broadband sales for the nine
months ended September 30, 1997. For the comparable periods in 1996, analog and
digital sales represented approximately 99% and 1%, respectively, of total
broadband sales.
Satellite sales of $127 for the three months ended September 30, 1997
decreased $9, or 7%, from the comparable 1996 period primarily as a result of
lower private and international network sales. Satellite sales of $367 for the
nine months ended September 30, 1997 decreased $53, or 13%, from the comparable
1996 period as a result of lower sales volumes of digital satellite receivers to
PRIMESTAR Partners, partially offset by higher sales volumes of DigiCipher(R)
II/MPEG-2 digital satellite systems and digital video broadcast ("DVB")
compliant Magnitude(R) satellite encoders. International satellite sales
represented approximately 20% of worldwide satellite sales for the three and
nine months ended September 30, 1997, compared to 9% for the comparable 1996
periods. Analog and digital satellite products represented 15% and 85%,
respectively, of total satellite sales for the three months ended September 30,
1997, and 12% and 88%, respectively, of total satellite sales for the nine
months ended September 30, 1997. For the comparable periods in 1996, analog and
digital sales represented approximately 9% and 91%, respectively, of total
satellite sales.
In late 1996, TCI announced that it would significantly curtail capital
spending on its cable networks, although TCI informed the Company that it
planned to continue spending on its digital cable networks. TCI represented
approximately 23% of the revenues of NextLevel Systems for the year ended
December 31, 1996. Through September 30, 1997, TCI (and its Primestar interest)
represented approximately 18% of total NextLevel Systems' sales.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit was $133 and $365 for the three and nine months ended
September 30, 1997, respectively, and increased $12, or 10%, and $32, or 10%,
respectively, from the comparable 1996 periods. Gross profit was 29% and 28% of
sales for the three and nine months ended September 30, 1997, respectively,
compared to 28% and 27% for the comparable 1996 periods. Gross profit for the
nine months ended September 30, 1997 included $18 million of charges for
employee costs incurred related to dividing General Instrument's Taiwan
operations between NextLevel Systems and General Semiconductor (see Note 1 to
the consolidated financial statements). Excluding these charges, the gross
profit margin for the nine months ended September 30, 1997 would have increased
to 29%. The higher gross profit and gross profit margin resulted from higher
production volumes noted above and ongoing cost reduction programs on advanced
analog and digital products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling general & administrative ("SG&A") expense was $45 and $140 for
the three and nine months ended September 30, 1997, respectively, compared to
$38 and $112 for the comparable 1996 periods. SG&A expense increased as a
percentage of sales to 10% and 11% for the three and nine months ended September
30, 1997, respectively, from 9% for the 1996 periods. SG&A spending for the
three and nine months ended September 30, 1997 was greater than for the
comparable 1996 periods as a result of new potential growth opportunities from
businesses acquired, including the marketing and field support of NLC's
NLevel(3) telephony system and Magnitude's DVB-compliant digital satellite
products, and increased sales force, field support and marketing activities to
take advantage of increased potential growth opportunities in international
cable and satellite television and worldwide telecommunications markets. This
increased spending was partially offset by a credit of $3 in the third quarter
of 1997 related to the collection of certain receivables previously considered
to be uncollectible. Additionally, SG&A expense for the nine months ended
September 30, 1997 included a $6 charge for legal and other professional fees,
which were incurred in connection with the Distributions (see Note 1 to the
consolidated financial statements).
Pro forma SG&A expense for the three months ended September 30, 1996,
and for the nine months ended September 30, 1997 and 1996, reflects an
additional $1, $4 and $5, respectively, of costs to eliminate the allocation of
corporate expenses to CommScope and General Semiconductor, as such costs
subsequent to the Distributions will no longer be allocable and are expected to
be incurred by NextLevel Systems in the future. Excluding the
Distribution-related charges of $6 and including the pro forma adjustments, SG&A
expense as a percentage of sales would have been 10% for the 1997 periods and 9%
for the 1996 periods.
NLC LITIGATION COSTS
In June 1996, NextLevel Systems 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") subsequent to
the entry of a final judgment by the United States District Court for the
Eastern District of Texas. The NLC Litigation was concluded in November 1997.
See Note 5 to the consolidated financial statements and Item 1 of Part II,
"Legal Proceedings."
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expense was $48 and $149 for the three
and nine months ended September 30, 1997, respectively, compared to $47 and $145
for the comparable 1996 periods. R&D expense decreased as a percentage of sales
to 10% and 11% for the three and nine months ended September 30, 1997,
respectively, from 11% and 12% for the comparable 1996 periods. The current
level of spending reflects: the continued development of next-generation
products, including high-speed data systems for cable and telephone networks,
switched-digital access systems for fiber and twisted-pair networks, as well as
the modification of existing products for international markets; the continued
development of enhanced addressable analog terminals and advanced digital
systems for cable and satellite television distribution; and product development
and international expansion through strategic alliances. In addition, NextLevel
Systems is focused on reducing costs and enhancing the features of its digital
cable and satellite systems.
OTHER INCOME (EXPENSE) - NET
Other income of $4 for the three months ended September 30, 1997
primarily reflects net investment gains, primarily from the sale of a portion of
the Company's investment in Ciena Corporation.
INTEREST EXPENSE-NET
Net interest expense represents an allocation of interest expense from
General Instrument and was allocated based upon NextLevel Systems' net assets as
a percentage of the total net assets of General Instrument through July 25,
1997, the date of the NextLevel Distribution. Net interest expense allocated to
NextLevel Systems was $2 and $15 for the three and nine months ended September
30, 1997, respectively, compared to $6 and $20 for the comparable 1996 periods.
Subsequent to July 25, 1997, the date of the NextLevel Distribution, net
interest represents actual interest earned on the Company's cash balance,
partially offset by interest accrued related to the NLC Litigation.
INCOME TAXES
Through the date of the Distributions, income taxes were determined as
if NextLevel Systems had filed separate tax returns under its existing structure
for the periods presented. Accordingly, future tax rates could vary from the
historical effective tax rates depending on NextLevel Systems' future tax
elections. NextLevel Systems recorded a provision for income taxes of $15 and
$23 for the three and nine months ended September 30, 1997, respectively, and a
provision of $9 and a benefit of $34 for the three and nine months ended
September 30, 1996. Excluding the charges related to the Distributions recorded
in the nine months ended September 30, 1997 and the NLC charge recorded in the
nine months ended September 30, 1996, the effective tax rates were approximately
38% for three and the nine months ended September 30, 1997 compared to 35% and
36%, respectively, for the three and nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Through the date of the Distributions, NextLevel Systems participated
in General Instrument's cash management program. To the extent NextLevel Systems
generated positive cash, such amounts were remitted to General Instrument. To
the extent NextLevel Systems experienced temporary cash needs for working
capital purposes or capital expenditures, such funds were historically provided
by General Instrument. Based on General Instrument's debt balance on July 25,
1997, and since CommScope and General Semiconductor each assumed net debt levels
of $275, $125 of cash was transferred to NextLevel Systems.
For the nine months ended September 30, 1997, cash provided by
operations was $126 compared to cash used in operations of $46 for the nine
months ended September 30, 1996. Cash provided by operations in the first nine
months of 1997 reflects net income adjusted for depreciation and amortization
and the collection of accounts receivable, partially offset by increased
inventory levels to support business growth and the introduction of new
products. Cash used in operations in the nine months ended September 30, 1996
reflects the net loss adjusted for non-cash items, more than offset by increased
working capital requirements.
At September 30, 1997, working capital was $453 compared to $382 at
December 31, 1996. Based on current levels of order input and backlog, as well
as significant sales agreements not yet reflected in order and backlog levels,
NextLevel Systems 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
NextLevel Systems' working capital requirements.
During the nine months ended September 30, 1997 and 1996, NextLevel
Systems invested $56 and $107, respectively, in equipment and facilities.
NextLevel Systems expects to continue to expand its capacity to meet increased
current and anticipated future demands for analog and digital products, with
capital expenditures for the year expected to approximate $85. Additionally,
during the nine months ended September 30, 1997 and 1996, NextLevel Systems made
$40 and $13, respectively, of strategic investments.
NextLevel Systems' R&D expenditures were $149 and $145 for the nine
months ended September 30, 1997 and 1996, respectively, and are expected to
approximate $200 for the year ending December 31, 1997.
In July 1997, NextLevel Systems entered into a bank credit agreement
(the "Credit Agreement") which provides a $600 unsecured revolving credit
facility and matures on December 31, 2002. The Credit Agreement permits
NextLevel Systems to choose between two interest rate options: an Adjusted Base
Rate (as defined in the Credit Agreement), which is based on the highest of (i)
the rate of interest publicly announced by The Chase Manhattan Bank as its prime
rate, (ii) 1% per annum above the secondary market rate for three-month
certificates of deposit and (iii) the federal funds effective rate from time to
time plus 0.5%, and a Eurodollar rate (LIBOR) plus a margin which varies based
on certain performance criteria. NextLevel Systems is also able to set interest
rates through a competitive bid procedure. In addition, the Credit Agreement
requires NextLevel Systems to pay a facility fee on the total loan commitment.
The Credit Agreement contains financial and operating covenants, including
limitations on guarantee obligations, liens and sale of assets, and requires the
maintenance of certain financial ratios. None of the restrictions contained in
the Credit Agreement is expected to have a significant effect on the Company's
ability to operate. As of September 30, 1997, the Company was in compliance with
all financial and operating covenants contained in the Credit Agreement.
In October 1997, the trial court entered a revised final judgment
against NLC and the individual defendants in the NLC Litigation. On November 7,
1997, the Company satisfied the judgment plus accrued interest with a payment of
approximately $141 from available operating funds.
NextLevel Systems management assesses its liquidity in terms of its
overall ability to obtain cash to support its ongoing business levels and to
fund its growth objectives. NextLevel Systems' principal sources of liquidity
both on a short-term and long-term basis are cash flows provided by operations
and borrowings under the Credit Agreement. NextLevel Systems 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 and available funding under the Credit Agreement will be
adequate to fund operations, research and development expenditures, capital
expenditures, strategic restructuring expenditures (see Note 8 to the
consolidated financial statements) and any debt service for the next 12 months.
There can be no assurance, however, that future industry-specific developments
or general economic trends will not adversely affect NextLevel Systems'
operations or its ability to meet its cash requirements.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
A securities class action is presently pending in the United States
District Court for the Northern District of Illinois, Eastern Division, In Re
General Instrument Corporation Securities Litigation. This action, which
consolidates numerous class action complaints filed in various courts between
October 10 and October 27, 1995, is brought by plaintiffs, on their own behalves
and as representatives of a class of purchasers of General Instrument Common
Stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that General Instrument 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 Exchange Act, by
allegedly making false and misleading statements and failing to disclose
material facts about General Instrument's planned shipments in 1995 of its
CFT-2200 and DigiCipher II products. The plaintiffs have moved for class
certification. A derivative action brought on behalf of General Instrument is
also pending in the same court, under the same name. The derivative action
alleges that the members of General Instrument'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
General Instrument's stock for personal gain. On September 23, 1997, the
district court dismissed the Consolidated Amended Class Action Complaint and the
derivative complaint, without prejudice, and the plaintiffs were given until
November 7, 1997 to amend their complaints. On November 7, 1997, plaintiffs
served the defendants with amended complaints, which contain allegations
substantially similar to those in the original 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 General
Instrument 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 General Instrument 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 General
Instrument's failure to disclose information concerning a significant reduction
in its gross margins. On September 23, 1997, the district court dismissed the
complaint, without prejudice, and the plaintiffs were given until November 7,
1997 to amend their complaint. On November 7, 1997, plaintiffs served the
defendants with amended complaints, which contain allegations substantially
similar to those in the original complaint.
In April 1995, prior to General Instrument'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 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. Both sides appealed to the U.S.
Court of Appeals for the Fifth Circuit. Enforcement of the judgment was stayed
pending the determination of the appeal. 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. On
June 25, 1997, the Court of Appeals denied both parties' motions for rehearing.
On October 28, 1997, the trial court entered a revised final judgment in a total
amount of $138 million, plus interest from July 3, 1997. On November 7, 1997,
the Company satisfied the judgment with a payment of approximately $141 million.
<PAGE>
An action entitled BroadBand Technologies, Inc. vs. General Instrument
Corp. was brought in March 1997 in the United States District Court for the
Eastern District of North Carolina. The complaint alleges that the Company
infringes BroadBand Technologies, Inc.'s ("BBT) U.S. Patent No. 5,457,560 (the
"560 Patent"), covering an electronic communications system which delivers
television signals, and seeks monetary damages and injunctive relief. On June
13, 1997, General Instrument's motion to dismiss the complaint for lack of
personal jurisdiction was denied.
In March 1997, NLC commenced an action against BBT in the United States
District Court for the Northern District of California for a declaratory
judgment that BBT's 560 Patent is invalid and unenforceable; for patent
infringement; and for violation of the antitrust laws of the United States. In
the patent infringement claim, NLC charges that BBT infringes two patents
licensed to NLC relating to video compression and video signal processing. BBT
has answered the complaint and does not contest jurisdiction. On September 30,
1997, BBT's motion to have the case transferred to North Carolina was denied.
In connection with the Distributions, NextLevel Systems has agreed to
indemnify General Semiconductor (formerly General Instrument) with respect to
its obligations, if any, related to these matters.
On October 21, 1997, a securities class action complaint entitled
Michael J. DiBattista v. NextLevel Systems, Inc. and Richard S. Friedland was
filed in the United States District court for the Northern District of Illinois,
Eastern Division. The complaint was filed on behalf of stockholders who
purchased stock of the Company between July 28, 1997 and October 16, 1997. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder by making false and misleading statements
about the Company's business, finances and future prospects.
Item 4. Submission of Matters to a Vote of Security Holders
On July 25, 1997, the sole stockholder of the Company approved the
following by written consent:
1. NextLevel Systems, Inc. 1997 Long-Term Incentive Plan, as amended.
2. Amended and Restated Certificate of Incorporation to provide for a
classified board of directors.
3. The merger of NextLevel Systems of Delaware, Inc. with and into
the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99 - Forward-Looking Information
(b) Report on Form 8-K
The Company filed a report on Form 8-K dated October 16, 1997
announcing the resignation of Richard S. Friedland as Chairman and
Chief Executive Officer, and naming Edward D. Breen President and
Acting CEO. In addition, the Company announced that it was developing a
multifaceted plan to improve the Company's financial performance and
achieve the full strategic potential of its world-class communications
technologies and market leadership positions.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTLEVEL SYSTEMS, INC.
/s/Paul J. Berzenski
--------------------
Paul J. Berzenski
Vice President and Controller
Signing both in his capacity as Vice President
on behalf of the Registrant and as Chief
Accounting Officer of the Registrant
November 14, 1997
- -----------------
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the NextLevel
Systems, Inc. financial statements for the nine months ended September 30, 1997
and is qualified in its entirety by references to such financial statements.
</LEGEND>
<CIK> 0001035881
<NAME> NEXTLEVEL SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 162,027
<SECURITIES> 26,900
<RECEIVABLES> 346,025
<ALLOWANCES> 8,712
<INVENTORY> 305,199
<CURRENT-ASSETS> 977,808
<PP&E> 260,937
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,856,000
<CURRENT-LIABILITIES> 524,499
<BONDS> 0
0
0
<COMMON> 1,478
<OTHER-SE> 1,248,944
<TOTAL-LIABILITY-AND-EQUITY> 1,856,000
<SALES> 1,323,013
<TOTAL-REVENUES> 1,323,013
<CGS> 958,441
<TOTAL-COSTS> 958,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,340
<INCOME-PRETAX> 52,780
<INCOME-TAX> 22,955
<INCOME-CONTINUING> 29,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,825
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
Exhibit 99
NEXTLEVEL SYSTEMS, INC.
EXHIBIT 99 - FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The Company's Form 10-K, the Company's
Annual Report to Stockholders, any Form 10-Q or Form 8-K of the Company, or any
other oral or written statements made by or on behalf of the Company, may
include forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projects," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The actual results of the Company may differ significantly from the results
discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States and other markets where the
Company operates; (b) changes in capital availability or costs, such as changes
in interest rates, market perceptions of the industry in which the Company
operates, or security ratings; (c) employee workforce factors; and (d)
authoritative generally accepted accounting principles or policy changes from
such standard-setting bodies as the Financial Accounting Standards Board and the
Securities and Exchange Commission, and the factors set forth below.
FACTORS RELATING TO THE DISTRIBUTION
General Instrument Corporation (i) transferred all the assets and
liabilities relating to the manufacture and sale of broadband communications
products used in the cable television, satellite, and telecommunications
industries (the "Communications Business") to the Company (then a wholly-owned
subsidiary of GI) and transferred all the assets and liabilities relating to the
manufacture and sale of coaxial, fiber optic and other electric cable used in
the cable television, satellite and other industries (the "Cable Manufacturing
Business") to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii)
then distributed all of the outstanding shares of capital stock of each of the
Company and CommScope to its shareholders on a pro rata basis as a dividend (the
"Distribution"), in a transaction that was consummated on July 28, 1997. General
Instrument Corporation prior to the Distribution is herein referred to as "GI"
and following the Distribution is referred to herein as "General Semiconductor".
The Company is a smaller and less diversified company than GI was prior to
the Distribution and has no recent operating history as a separate entity. The
ability of the Company to satisfy its obligations and maintain profitability
will be solely dependent upon its own future performance, and the Company will
no longer be able to rely on the capital resources and cash flows of the
businesses of CommScope or General Semiconductor. In particular, in recent
years, NextLevel Systems has invested heavily in the development of new
technologies and products and relied on the cash flows of GI's other businesses
to help fund these expenditures. Although this source of funding is no longer
available, the Company believes that its expected cash flow, as well as other
sources of funding available to it, will be sufficient to finance its planned
expenditures. The future performance and cash flows of the Company will be
subject to prevailing economic conditions and to financial, business and other
factors affecting the business operations of the Company, including factors
beyond its control.
The division of GI may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of the Company, and will also result in the duplication of
certain personnel, administrative and other expenses required for the operation
of an independent company. The management of the Company has not previously
operated its business as a separate public company so there can be no assurance
that the transition will not alter or disrupt, at least temporarily, the
management and operations of Company's business.
The Distribution Agreement dated as of June 12, 1997, among the Company,
CommScope and General Semiconductor (the "Distribution Agreement") and certain
other agreements executed in connection with the Distribution (collectively, the
"Ancillary Agreements") allocate among the Company, CommScope, and General
Semiconductor and their respective subsidiaries responsibility for various
indebtedness, liabilities and obligations. It is possible that a court would
disregard this contractual allocation of indebtedness, liabilities and
obligations among the parties and require the Company or its subsidiaries to
assume responsibility for obligations allocated to another party, particularly
if such other party were to refuse or was unable to pay or perform any of its
allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, the Company has agreed to indemnify the other parties (and certain
related persons) from and after consummation of the Distribution with respect to
certain indebtedness, liabilities and obligations, which indemnification
obligations could be significant.
<PAGE>
Although the Company has received a favorable ruling from the Internal
Revenue Service, if the Distribution were not to qualify as a tax free spin-off
under Section 355 of the Internal Revenue Code of 1986, as amended, then, in
general, a corporate tax would be payable by the consolidated group of which GI
was the common parent based upon the difference between the fair market value of
the stock distributed and the distributing corporation's adjusted basis in such
stock. The corporate level tax would be payable by General Semiconductor and
could substantially exceed the net worth of General Semiconductor. However,
under certain circumstances, the Company and CommScope have agreed to indemnify
General Semiconductor for such tax liability. In addition, under the
consolidated return rules, each member of the consolidated group (including the
Company and CommScope) is severally liable for such tax liability.
LEVERAGE; CERTAIN RESTRICTIONS UNDER CREDIT FACILITIES
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
product development, acquisitions, general corporate purposes or other purposes
may be impaired; (ii) a portion of the Company's and its subsidiaries' cash flow
from operations must be dedicated to the payment of the principal of and
interest on its indebtedness; (iii) the Credit Agreement dated as of July 23,
1997, among the Company, certain banks, and The Chase Manhattan Bank, as
Administrative Agent contains certain restrictive financial and operating
covenants, including, among others, requirements that the Company satisfy
certain financial ratios; (iv) a significant portion of the Company's borrowings
will be at floating rates of interest, causing the Company to be vulnerable to
increases in interest rates; (v) the Company's degree of leverage may make it
more vulnerable to a downturn in general economic conditions; and (vi) the
Company's degree of leverage may limit its flexibility in responding to changing
business and economic conditions.
In addition, in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, a court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and to require
that the stockholders return the special dividend (in whole or in part) to
General Semiconductor or require the Company to fund certain liabilities of
General Semiconductor and CommScope for the benefit of creditors.
DEPENDENCE OF THE COMPANY ON THE CABLE TELEVISION INDUSTRY AND CABLE TELEVISION
CAPITAL SPENDING
The majority of the Company's revenues come from sales of systems and
equipment to the cable television industry. Demand for these products depends
primarily on capital spending by cable television operators for constructing,
rebuilding or upgrading their systems. The amount of this capital spending, and,
therefore, the Company's sales and profitability will be affected by a variety
of factors, including general economic conditions, consolidation in the
industry, the financial condition of domestic cable television operators and
their access to financing, competition from satellite and wireless television
providers and telephone companies, technological developments in the broadband
communications industry and new legislation and regulation of cable television
operators as described below. Capital spending in the cable television industry
fell sharply in the middle of 1990 compared to 1989 and remained at a low level
until it began to recover in mid-1992. Although the Company believes that the
constraining pressures on domestic cable television capital spending eased and
that cable television capital spending generally increased from mid-1992 through
1996, there can be no assurance that such increases will continue or that such
increased level of cable television capital spending will be maintained.
In recent years, cable television capital spending has also been affected
by new legislation and regulation, on the federal, state and local level, and
many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. During 1993 and 1994,
the Federal Communications Commission (the "FCC") adopted rules under the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), regulating rates that cable television operators may charge for lower
tiers of service and generally not regulating the rates for higher tiers of
service. In 1996, the Telecommunications Act of 1996 (the "Telecom Act") was
enacted to eliminate certain governmental barriers to competition among local
and long distance telephone, cable television, broadcasting and wireless
services. When fully implemented by the FCC, the Telecom Act may significantly
impact the communications industry and alter federal, state and local laws and
regulations regarding the provision of cable and telephony services. Among other
things, the Telecom Act eliminates substantially all restrictions on the entry
of telephone companies and certain public utilities into the cable television
business. Telephone companies may now enter the cable television business as
traditional cable operators, as common carrier conduits for programming supplied
by others, as operators of wireless distribution systems, or as hybrid common
carrier/cable operator providers of programming on so-called "open video
systems." The economic impact of the 1992 Cable Act, the Telecom Act and the
rules thereunder on the cable television industry and the Company is still
uncertain.
Although the domestic cable television industry is comprised of
approximately 11,200 cable systems, a small number of cable television operators
own a majority of cable television systems and account for a majority of the
capital expenditures made by cable television operators. The loss of some or all
of the Company's principal cable television customers could have a material
adverse effect on the business of the Company.
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TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING THE
COMPANY
The Company will be significantly affected by the competition among cable
television operators, satellite television providers and telephone companies to
provide video, voice and data/Internet services. In particular, although cable
television operators have historically provided television services to the
majority of U.S. households, direct-to-home ("DTH") satellite television has
attracted a growing number of subscribers and the regional telephone companies
have begun to offer competing cable and wireless cable services. This
competitive environment is characterized by rapid technological changes,
particularly with respect to developments in digital compression and broadband
access technology.
The Company believes that, as a result of the new products developed by
NextLevel Systems based on emerging technologies and the diversity of its
product offerings, it is well positioned to supply each of the cable, satellite
and telephone markets. The future success of the Company, however, will be
dependent on its ability to market and deploy these new products successfully
and continue to develop and timely exploit new technologies and market
opportunities both in the United States and internationally. The development of
NextLevel Systems' digital television systems took significantly longer than
anticipated as a result of several factors, including increased system
complexity, evolving international Motion Picture Experts Group 2 ("MPEG-2")
standards and other system design issues. Accordingly, volume shipments to cable
television operators and satellite television programmers were delayed from
their original expected delivery dates. There can be no assurance that the
Company will be able to continue to successfully introduce new products and
technologies, that it will be able to deploy them successfully on a large-scale
or that its technologies and products will achieve significant market
acceptance. Further, there can be no assurance that the development of products
using new technologies (such as digital compression) will not have an adverse
impact on sales by the Company of certain of its other products. In addition,
because of the competitive environment and the nature of the Company' business,
there have been and may continue to be legal challenges to its new technologies.
The Company's sales to international markets have recently increased
substantially and will continue to be an important focus of the Company in the
future. However, there can be no assurance that international markets will
continue to expand, or that growth and profitability in international sales will
not be affected by political uncertainties, currency exchange rate fluctuations
or variations in capital spending cycles in developing countries.
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 the Company's ability
to expand and remain competitive. Existing competitors' actions and new entrants
may have an adverse impact on the Company's sales and profitability. The Company
believes that it enjoys a strong competitive position because of its large
installed cable television equipment base, its strong relationships with the
major cable television operators, its technological leadership and new product
development capabilities, and the likely need for compatibility of new
technologies with currently installed systems. There can be no assurance,
however, that competitors will not be able to develop systems compatible with,
or that are alternatives to, the Company's proprietary technology or systems.
INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS
U.S. broadband system designs and equipment are increasingly being employed
in international markets, where cable television penetration is low. However,
there can be no assurance that international markets will continue to develop or
that the Company will receive additional contracts to supply its systems and
equipment in international markets.
A significant portion of the Company's products are manufactured or
assembled in Mexico and Taiwan (Republic of China) and other countries outside
the United States. In addition, sales of equipment into international markets by
the Company have recently grown. These foreign operations are subject to the
usual risks inherent in situating operations abroad, including risks with
respect to currency exchange rates, economic and political destabilization,
restrictive actions by foreign governments, nationalizations, the laws and
policies of the United States affecting trade, foreign investment and loans, and
foreign tax laws. The Company's cost-competitive status relative to other
competitors could be adversely affected if the New Taiwan dollar or another
relevant currency appreciates relative to the U.S. dollar.
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ENVIRONMENT
The Company is subject to various federal, state, local and foreign laws
and regulations governing the use, discharge and disposal of hazardous
materials. The Company's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had and is not expected to have a material
adverse effect on the Company's financial condition.
The Company's present and past facilities have been in operation for many
years, and over that time in the course of those operations, such facilities
have used substances which are or might be considered hazardous, and the Company
has generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future, which the Company cannot now predict.
