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