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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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GENERAL INSTRUMENT CORPORATION
(FORMERLY, NEXTLEVEL SYSTEMS, INC.)
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-4134221
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 TOURNAMENT DRIVE 19044
HORSHAM, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
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(215) 323-1000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant was approximately $2.2 billion as of March 16,
1998 (based on the closing price for the Common Stock on the New York Stock
Exchange on that date). For purposes of this computation, shares held by
affiliates and by directors and officers of the registrant have been excluded.
Such exclusion of shares held by directors and officers is not intended, nor
shall it be deemed, to be an admission that such persons are affiliates of the
registrant. As of March 16, 1998 there were 150,130,388 shares of the
registrant's Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission, are
incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
On July 25, 1997, the Company was spun off (the "Spin-off") from its former
parent company, General Instrument Corporation (the "Distributing Company")
under the name "NextLevel Systems, Inc.," through a distribution of the
Company's common stock, par value $.01 per share ("Common Stock"), to the
stockholders of the Distributing Company. Immediately following the Spin-off,
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." Unless the
context otherwise requires, references to the "Company" include General
Instrument Corporation and its direct or indirect subsidiaries and the business
of the Company as conducted by the Distributing Company prior to the Spin-off.
GENERAL
The Company 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. The Company is the world leader in
digital and analog set-top terminals and systems for wired and wireless cable
television networks, as well as hybrid fiber/coaxial network transmission
systems used by cable television operators and is a leading provider of digital
satellite television 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"), the
Company provides broadband telephony network solutions with the Partnership's
NLevel(3)-Registered Trademark- Switched Digital Access system.
RECENT DEVELOPMENTS
The Company recently entered into several transactions intended to provide a
strong foundation for the Company's future business and to reinforce its
position as the leading provider of the next generation of broadband
communication equipment and systems. The Company has completed definitive
agreements to supply 15 million advanced digital set-top terminals, in the
aggregate, to National Digital Television Center, Inc. ("NDTC"), a wholly-owned
subsidiary of Tele-Communications, Inc. ("TCI"), and eleven other leading cable
television multiple system operators ("MSOs") over the next three to five years.
The Company has issued warrants to purchase approximately 29 million shares of
the Company's Common Stock to NDTC and certain MSOs in connection with such
arrangements. The transactions with NDTC and the other MSOs are intended to
enable NDTC and the MSOs to deliver a range of new interactive cable services by
means of the digital set-top terminals and related systems and applications. The
Company has also agreed in principle to acquire from NDTC certain assets and a
license enabling the Company to conduct the set-top authorization business
presently operated by NDTC, which is intended to provide the cable industry with
a secure access control platform to support widespread deployment of digital
terminals and related systems, in exchange for the issuance to NDTC of
21,356,000 shares of Common Stock. In addition, the Company and Sony Corporation
("Sony") have announced plans to enter into a strategic alliance to develop
jointly digital television technologies for cable TV devices and high-definition
TV (HDTV) products, as well as to incorporate Sony's Home Network architecture
into the Company's advanced digital set-top terminals. Subject to the completion
of definitive agreements related to this alliance, Sony has agreed to purchase
7,500,000 newly issued shares of Common Stock at a purchase price of $25.00 per
share.
In February 1998, PRIMESTAR, the nation's second largest provider of
satellite television entertainment, entered into an agreement with the Company,
pursuant to which the Company will manufacture integrated receiver decoders
("IRDs") valued at more than $180 million for PRIMESTAR's high-power retail and
wholesale services expected to be launched during 1998 after PRIMESTAR receives
government approval related to the transition of an orbital slot. There can be
no assurance, however, that the Company
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will realize the full benefits of this agreement if PRIMESTAR does not receive
the necessary government approval.
Beginning in the fourth quarter of 1997 and continuing through the first
quarter of 1998, the Company made significant improvements in the cost structure
of its cable and satellite television operations. The Company reduced headcount
by 225 in its San Diego-based satellite television operations, closed its Puerto
Rico satellite receiver manufacturing facility, reducing headcount by 1,100, and
consolidated and relocated the Company's corporate headquarters from Chicago,
Illinois to Horsham, Pennsylvania.
In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of its Next Level Communications
subsidiary to the Partnership in exchange for approximately an 89% limited
partnership interest (subject to additional dilution). An entity controlled by
Spencer Trask & Co., the operating general partner, has acquired approximately
an 11% interest in the Partnership, and has the potential to acquire an
additional 11% interest in the Partnership in the future.
MARKET OVERVIEW
The Company is a leading worldwide supplier of systems and equipment for
high-performance networks delivering video, voice and data/Internet services.
The Company is the only company currently providing such systems and equipment
for broadband networks (I.E., networks having the capacity, or bandwidth, to
transmit large volumes of information) using all of the following architectures:
(i) wired systems including analog signals over the traditional hybrid fiber
coaxial cable television ("HFC") plant and digital signals over the HFC plant;
(ii) multichannel multipoint distribution systems ("wireless cable"); (iii)
direct-to-home ("DTH") satellite television systems; and, (iv) through the
Partnership, switched-digital technology over fiber-to-the-curb architecture
("FTTC"). The management of the Company believes that its technological
leadership position and its ability to deliver any type of content over any type
of network around the world make it well positioned to continue to be a leading
provider of broadband systems and equipment regardless of the network and
architecture used.
Sales of digital and analog addressable television systems, including
set-top terminals, and headend signal processing equipment, distribution
amplifiers, fiber optic transmission equipment and passive components for wired
cable television distribution systems in the United States accounted for
approximately 51% of the sales of the Company for the year ended December 31,
1997.
Wireless cable television operators and local telephone companies also have
begun competing with existing cable television operators to offer video
entertainment in many markets in the United States. The Company is the leading
supplier of analog and digital set-top terminals for wireless cable systems.
Cable television operators are facing competition from DTH programmers using
broadband networks to transmit television signals, via satellite, directly to
subscribers' home receivers. The Company is the exclusive supplier of digital
consumer receivers for PRIMESTAR, and is the exclusive supplier of encoders for
both DIRECTV-Registered Trademark- and PRIMESTAR. United States sales of
satellite products represented approximately 20% of the sales of the Company for
the year ended December 31, 1997.
In response to increasing consumer demand and competition, many cable
television operators have increased, or are planning to increase, the number of
channels they are capable of offering, either by upgrading the existing cable
plant using an HFC architecture, or by implementing digital compression
technology over the existing cable plant. As a leading provider of HFC systems
and equipment, as well as the only company shipping digital cable headend
equipment and terminals in volume, the Company's management believes that the
Company is well positioned to serve its traditional customer base, whichever
path to increasing capacity the cable television operators choose.
The Company's management believes that international markets represent a key
growth opportunity for sales of broadband systems and equipment. International
sales by the Company represented approximately 29% of its total sales for the
year ended December 31, 1997. International markets employ the
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same types of broadband network architectures used in the United States:
traditional wired cable television; wireless cable; and DTH systems.
BUSINESS STRATEGY
The Company's strategy is to use its technological leadership in providing
secure broadband systems and equipment to enhance its leading position in its
traditional markets while expanding into new markets. This strategy is based on
the belief that (i) consumers, both in the U.S. and international markets, will
continue to demonstrate an increasing demand for new entertainment and
information services and (ii) content and service providers will continue to
create new bandwidth-intensive video, voice and data applications at the upper
limits of network capabilities. The Company's management believes that these
factors will generate a continuing need for systems and equipment with greater
capacity for all networks and architectures.
In recent months, the Company has taken a number of actions intended to
provide a strong foundation for the Company's future business. The completion of
definitive agreements with most of the leading cable TV operators in North
America to supply 15 million of the Company's two-way, digital set-top terminals
over the next three to five years and the proposed strategic alliance with Sony
are expected to reinforce the Company's position as the leading provider of the
next generation of broadband communication equipment and systems.
BUSINESS UNITS
The Company is presently organized into four strategic business units:
Digital Network Systems, Advanced Network Systems, Transmission Network Systems
and Satellite Data Network Systems.
DIGITAL NETWORK SYSTEMS. The Company believes that the commercialization of
digital broadband systems and equipment, which provide for greatly expanded
channel capacity and programming options, improved quality and security of
signal transmission and the capability of delivering enhanced features and
services, is a strategic market for the Company. Management also believes that
the Company's position in this developing market is significantly enhanced by
its leadership in a key enabling technology, digital compression, which converts
television signals to a digital format and then compresses the signals of
several channels of television programming into the bandwidth currently used by
just one analog channel. The Company has developed and is deploying digital
television systems that enable cable television operators and satellite
programmers to deliver over their existing networks up to 16 times as much
information as is possible with existing analog technology.
The Company's digital terminals incorporate the Motion Picture Experts Group
2 ("MPEG-2") international standard, and the Company's digital television system
has the capacity to carry various video, audio and data elements through a
complex information infrastructure that will have an improved capability to
interact with other consumer devices using MPEG-2 compression. A digital video
broadcast ("DVB") version (European standard) of the Company's digital terminal
is expected to be available during 1998.
The Company will offer cable television operators what it believes is a
cost-effective family of digital terminals that also are able to deliver analog
programming. The terminals range from a lower-cost broadcast-only digital
terminal to a highly capable, real-time two-way interactive terminal, expected
to be available by the end of 1998, with a built-in high-speed cable modem
enabling personal computer connectivity and interactive sessions over a
dedicated return path. Through December 31, 1997, the Company had shipped more
than 500 digital cable TV headend systems, passing 25 million homes, and more
than 700,000 digital cable TV set-top terminals.
ADVANCED NETWORK SYSTEMS. Analog subscriber products offered by this
business unit include primarily addressable systems which permit control,
through a set-top terminal, of a subscriber's cable television
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services from a central headend computer without requiring access to the
subscriber's premises. Addressable systems also enable a cable television
operator to more easily provide pay-per-view programming services and multiple
tiers of programming packages.
Beginning in early 1995, the Company began shipping its CFT advanced analog
terminals, with increased functionality and features from its prior analog
subscriber terminals. The CFT advanced analog terminals incorporate a user
feature platform that allows cable operators to deploy applications of their
choice for new services, and certain units include electronic program guides,
supplementary sports and entertainment information and play-along game shows,
and can be modularly upgraded to deliver digital audio, providing CD-quality
simulcasts of premium services. The Company shipped approximately 3.2 million
CFT advanced analog cable television terminals for the year ended December 31,
1997.
Throughout the last several years, the Company has been the market share
leader in the U.S. analog-addressable market, with more than 50% of that market.
However, due to the expected increased use of digital and advanced analog
systems, management expects that demand in North America for analog cable
products other than advanced analog products will continue to decline.
TRANSMISSION NETWORK SYSTEMS. Transmission products include headend signal
processing equipment, distribution amplifiers, fiber optic transmission
equipment and passive components for wired television distribution systems. The
Company's transmission products provide end-to-end solutions that enable the
transformation of the HFC network to a full service interactive network.
The Company's management expects cable television operators in the United
States and abroad to continue to upgrade their basic networks and invest in new
system construction primarily to compete with other television programming
sources, such as DTH and cable networks planned by some telephone companies, and
to develop, using U.S. architecture and systems, international markets where
cable penetration is low and demand for entertainment programming is growing.
SATELLITE DATA NETWORK SYSTEMS. The Company is the world's leading provider
of digital satellite television systems for programmers, DTH satellite network
providers and private networks for business communications and distance
learning. It offers a complete product line of digital compression and
transmission systems including MPEG-2, DVB and Advanced Television Systems
Committee (ATSC) compliant solutions. The Company is also a leader in the
development of high-speed data networks.
-Digital and Analog Satellite Products. The Company designs, manufactures
and sells analog and digital satellite uplink and downlink products for
commercial and consumer use. Using the Company's
DigiCipher-Registered Trademark- II digital technology, commercial customers are
able to compress their video, audio and data transmissions resulting in
significant cost savings over traditional analog transmission. The Company also
offers state-of-the-art network management and access control products and
services allowing program packagers to efficiently and cost-effectively manage
customer transactions and securely transmit their programming to only authorized
end-users. The Company is the leading manufacturer of access control and
scrambling and descrambling equipment used by television programmers for the
satellite distribution of proprietary programming.
The Company is the sole supplier of digital satellite receivers to PRIMESTAR
and digital satellite encoders for DTH providers PRIMESTAR and
DIRECTV-Registered Trademark-. The Company is also a leading supplier of digital
satellite systems to private networks for such applications as business
communications and distance learning. The Company's digital satellite systems
are in use by organizations such as Ford Motor Company and South Carolina
Educational TV.
The analog satellite products of the Company are the exclusive systems for
the distribution of encrypted C-band (large dish) satellite-delivered
programming to cable television operators and large-diameter backyard satellite
dish owners. Sales of analog consumer descramblers have declined, as expected,
to minimal levels over the past two years, and are expected to continue to
decline as a result of the availability of competing digital satellite video
services. The Company introduced its first digital
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descramblers for the backyard C-band market in 1997. This product, called
4DTV-Registered Trademark-, allows C-band dish owners to take advantage of the
wealth of digital programming now being transmitted by satellite. There can be
no assurance, however, as to the degree of market acceptance of this new
product, or whether significant quantities of 4DTV-Registered Trademark- will be
shipped.
-High-Speed Data Networks. The Company's management believes that the rapid
growth in personal computer ownership and, in particular, usage of on-line and
Internet access services, has created a demand for increased data transmission
speeds. The Company's high-speed cable modem is capable of delivering
information through the cable television network at speeds significantly faster
than a traditional telephone modem, while delivering instructions and other
information upstream from the consumer over telephone lines. The Company has
become the first company to launch cable modems with a major national computer
retailer -- CompUSA. In addition, in anticipation of mass distribution of
standardized cable modems, the Company has entered into a working relationship
with Cisco Systems to develop an interoperable MCNS-compliant, two-way cable
modem network using the Company's cable modems.
NEXT LEVEL COMMUNICATIONS, L.P.
In September 1995, the Distributing Company acquired Next Level
Communications, a California corporation, which was formed to design,
manufacture and market a next-generation telecommunications broadband access
system for the delivery of telephony, video, and data from a telephone company
central office or cable television headend to the home. Commencing in January
1998, the business of Next Level Communications has been operated through the
Partnership as described below. The Partnership's product,
NLevel(3)-Registered Trademark-, is designed to permit the cost-effective
delivery of a suite of standard telephony and advanced services such as
high-speed data/Internet, work-at-home, distance learning, video-on-demand and
video-telephony to the home from a single access platform. The
NLevel(3)-Registered Trademark- system is designed to work with and enhance
existing telephony networks and offers the capability to provide voice services
(POTS), ISDN, high-speed data/Internet and video services over both
copper-twisted-pair and FTTC networks.
In the fourth quarter of 1996, Next Level Communications entered into an
agreement with a subsidiary of NYNEX Corporation, now Bell Atlantic Corporation,
pursuant to which the Partnership will supply its
NLevel(3)-Registered Trademark- system for one million lines of telephone
service in metropolitan New York City and Boston. Initial deployment for the
greater Boston area began in the first quarter of 1997. Bell Atlantic also has
options to extend its deployment of the NLevel(3)-Registered Trademark- system
to up to five million lines. In the third quarter of 1997, Next Level
Communications entered into an agreement with U S WEST Communications, pursuant
to which the Partnership will supply its NLevel(3)-Registered Trademark- system
for 450,000 lines of broadband xDSL access.
In January 1998, the Company transferred the business of Next Level
Communications, including its net assets, principally technology, and its
management and workforce to the Partnership in exchange for approximately an 89%
limited partnership interest (subject to additional dilution). An entity
controlled by Spencer Trask & Co., the operating general partner, has acquired
approximately an 11% interest in the Partnership and has the potential to
acquire up to an additional 11% in the future. 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.
TECHNOLOGY AND LICENSING
The management of the Company believes that it is in the unique position of
currently producing the majority of the world's analog-addressable systems,
while also leading the deployment of the digital technology that will eventually
replace these systems. As a result, the Company will seek to build upon its core
enabling technologies, digital compression, encryption and conditional access
and control, in order to lead the transition of the market for broadband
communications networks from analog to digital systems.
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The Company has licensed a number of semiconductor manufacturers to allow
for broad deployment of the Company's MPEG-2 system. The Company has also
licensed its DigiCipher-Registered Trademark- II/MPEG-2 technology to other
equipment suppliers.
The Company has also entered into other license agreements, both as licensor
and licensee, covering certain products and processes with various companies.
These license agreements require the payment of certain royalties which are not
expected to be material to the Company's financial statements.
RESEARCH AND DEVELOPMENT
The Company intends to continue the current policy of actively pursuing the
development of new technologies and applications. Research and development
expenditures for the year ended December 31, 1997 were $208 million compared to
$198 million and $138 million for the years ended December 31, 1996 and 1995,
respectively. The Company's management expects research and development
expenditures to approximate $170 million in 1998. Research and development
expenditures reflect continued development of the next generation of cable
set-top terminals, which incorporate digital compression and multimedia
capabilities, broadband telephony, cable modems, advanced digital systems for
cable and satellite television distribution, next-generation direct broadcast
satellite systems and product development through strategic alliances.
SALES AND DISTRIBUTION
The broadband communications products and services of the Company are
marketed primarily to cable television operators, cable and satellite television
programmers and providers, and telephone companies. Demand for the Company's
products and services will depend primarily on capital spending by cable
television operators, satellite programmers and telephone companies for
constructing, rebuilding or upgrading their systems. The amount of this capital
spending and, therefore, a majority of the Company's sales and profitability,
will be affected by a variety of factors, including general economic conditions,
access by cable television operators to financing, regulation of
telecommunications service providers and technological developments in the
broadband communications industry. While the Company's management believes that
cable television capital spending is likely to increase as cable operators
upgrade their basic networks and move from basic analog to advanced analog and
digital systems, there can be no assurance that such increase will occur.
Broadband communications systems are sold primarily through the efforts of
sales personnel employed by the Company who are skilled in the technology of the
particular system.
Because a limited number of cable and satellite television operators provide
services to a large percentage of television households in the United States,
the loss of some of these operators as customers could have a material adverse
effect on the Company's sales. TCI, including its affiliates, and Time Warner
Cable, including its affiliates, each accounted for 14% of the consolidated net
sales of the Company for the year ended December 31, 1997.
PATENTS
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that the Company considers important to the
development of its business. Although the Company's management believes that the
Company's patents provide a competitive advantage, the Company will rely equally
on its proprietary knowledge and ongoing technological innovation to develop and
maintain its competitive position.
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BACKLOG
At December 31, 1997 and 1996, the Company had a backlog of approximately
$484 million and $406 million, respectively. Backlog includes only orders for
products scheduled to be shipped within six months. Orders may be revised or
canceled, either pursuant to their terms or as a result of negotiations;
consequently, it is impossible to predict accurately the amount of backlog
orders that will result in sales.
COMPETITION
The Company's products and services will 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
management of the Company believes that the Company will enjoy a strong
competitive position in its existing cable and satellite television markets due
to the Company's large installed cable and satellite television equipment base,
its strong relationships with the major cable television operators and satellite
television programmers, its technological leadership and new product development
capabilities, and the likely need for compatibility of new technologies with
currently installed systems. There can be no assurance, however, that
competitors will not be able to develop systems compatible with, or that are
alternatives to, the Company's proprietary technology or systems or that the
Company will be able to introduce new products and technologies on a timely
basis. In addition, the Partnership is competing in the local telephone access
equipment market with a number of well-established suppliers. There is no
assurance that the Partnership will be successful in this market.
RAW MATERIALS
The Company purchases raw materials from many sources in the United States,
as well as from sources in the Far East, Canada and Europe and its products
include certain components that are currently available only from single
sources. The Company has in effect inventory controls and other policies
intended to minimize the effect of any interruption in the supply of these
components. There is no single supplier the loss of which would have a
continuing material adverse effect on the Company.
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 manufacturing facilities of the Company 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.
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EMPLOYEES
At January 31, 1998, approximately 7,350 people were employed by the
Company. Of these employees, approximately 2,100, 2,200 and 2,700 were located
at the U.S., Taiwan and Mexico facilities, respectively, with the balance
located in Europe, Latin America and the Far East. As of January 31, 1998,
approximately 400 of the Company's employees were covered by collective
bargaining agreements. Of these employees, approximately 220 were located at the
Mexican facilities and approximately 180 were located at facilities in Germany.
The management of the Company believes that the Company's relations with both
its union and non-union employees are satisfactory.
ITEM 2. PROPERTIES
The Company has manufacturing, warehouse, sales, research and development
and administrative facilities worldwide which have an aggregate floor space of
1.1 million square feet. Of these facilities, aggregate floor space of
approximately 0.5 million square feet is leased (excluding the new facilities
described below), and the remainder is owned by the Company. The management of
the Company does not believe that there is any material long-term excess
capacity in the Company's facilities, although utilization is subject to change
based on customer demand. During the fourth quarter of 1997, employees began to
move into new Company headquarters facilities in Horsham, Pennsylvania, which
are expected to be completed by the end of the second quarter of 1998. New
facilities in San Diego, California for the Satellite Data Networks business
unit are expected to be completed during the second quarter of 1998. These new
facilities in Pennsylvania and California, totaling approximately 0.7 million
square feet, will be leased by the Company and will be used for administrative,
sales, marketing and engineering purposes. The management of the Company
believes that the Company's facilities and equipment, as supplemented by the new
facilities, generally are well maintained, in good operating condition and
suitable for the Company's purposes and adequate for present operations. The
foregoing description does not include Company facilities that will be closed in
1998.
ITEM 3. LEGAL PROCEEDINGS
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 alleges that the Distributing 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, the Distributing Company's motion to dismiss the complaint for lack of
personal jurisdiction was denied. In March 1998, the Company filed motions with
the district court for summary judgment on the issues of invalidity and
non-infringement of the BBT patent and BBT filed a motion of partial summary
judgment on the issue of infringement. In connection with the Spin-off, the
Company has agreed to indemnify the Distributing Company in respect of its
obligations, if any, arising out of or in connection with this litigation. The
Partnership has assumed liability with respect to this litigation.
In March 1997, Next Level Communications 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, Next Level Communications charges that
BBT infringes two patents 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. The Partnership has assumed responsibility with respect to this
litigation. In March 1998, the Partnership filed motions for summary judgment on
the issues of validity and non-infringement of the BBT patent.
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A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's Common
Stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the Spin-off, 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-Registered Trademark- 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 Spin-off,
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. In
connection with the Spin-off, the Company has agreed to indemnify the
Distributing Company in respect of its obligations, if any, arising out of or in
connection with these actions. The Company intends to vigorously contest these
actions.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by certain holders of preferred stock of Next Level
Communications, which was 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
Next Level Communications in connection with the acquisition of Next Level
Communications 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. In connection with the Spin-off, the Company has agreed to
indemnify the Distributing Company in respect of its obligations, if any,
arising out of or in connection with this action. The Company intends to
vigorously contest this action.
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 alleges that the defendants violated Section 11 of the
Securities Act of 1933, as amended (the "Securities Act"), and Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false and
misleading statements about the Company's business, finances and future
prospects. The Company intends to vigorously contest this action.
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. The plaintiffs allege 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
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monetary and exemplary damages and attorney fees. The Company believes this
litigation is duplicative of prior litigation and intends to vigorously contest
this action.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business (and it is required to indemnify CommScope, Inc. and
the Distributing Company in respect of certain legal proceedings), none of which
the Company's management believes will have a material adverse effect on the
Company's financial statements. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the three months ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed and traded under the symbol GIC on the New York
Stock Exchange. The Common Stock began trading on July 24, 1997, as a result of
the Spin-off. The Company did not pay dividends on its Common Stock during 1997.
The Company's ability to pay cash dividends on its Common Stock is limited by
certain covenants contained in a credit agreement to which the Company is a
party.
<TABLE>
<CAPTION>
STOCK PRICE RANGES
------------------
<S> <C> <C>
1997 HIGH LOW
- ----------------------------------------------------------------------------- ------- -------
Third quarter................................................................ $21 1/2 $16
Fourth quarter............................................................... $19 1/8 $12 5/8
</TABLE>
As of March 16, 1998, the approximate number of registered stockholders of
record of the Company's Common Stock was 1,080.
In December 1997, the Company issued warrants (the "Warrants") which are
exercisable to purchase approximately 29 million shares of Common Stock to NDTC
and certain MSOs. Each Warrant is exercisable at an exercise price of $14.25 per
share, for one share of Common Stock. The Warrants vest in three installments on
December 31, 1998, 1999 and 2000 upon the purchase by the warrantholder (or, in
some cases, a related party) of a specified number of advanced digital set-top
terminals from the Company, and remain exercisable for 18 months. The issuance
of the Warrants was exempt from registration pursuant to Section 4(2) of the
Securities Act. The Warrants were issued in connection with the execution of
agreements for the supply of advanced digital set-top terminals by the Company
to each of NDTC and the MSOs. Proceeds from the exercise of the Warrants will be
used for general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 (A) 1996 (B) 1995 (C) 1994 (D) 1993
- ----------------------------------------------------------------- ----------- ----------- ----------- ----------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales........................................................ $ 1,764 $ 1,756 $ 1,533 $ 1,275 $ 783
Cost of sales.................................................... 1,336 1,350 1,080 878 529
Gross profit..................................................... 428 406 453 397 254
Selling, general and administrative.............................. 215 174 138 103 87
Research and development......................................... 208 198 138 105 68
Purchased in-process technology.................................. -- -- 140 -- --
NLC litigation costs............................................. -- 141 -- -- --
Amortization of excess of cost over fair value of
net assets acquired............................................ 15 14 14 15 15
Operating income (loss).......................................... (10) (122) 22 175 84
Interest expense, net............................................ (5) (26) (23) (27) (35)
Income (loss) before income taxes and cumulative effect of
changes in accounting principles............................... (10) (149) (2) 149 58
Net income (loss)................................................ $ (16) $ (96) $ 4 $ 121 $ 50
Pro forma loss per share--basic and diluted (e).................. (0.11) (0.65)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Total assets....................................................... $ 1,675 $ 1,630 $ 1,354 $ 1,199 $ 970
Other non-current liabilities...................................... 66 188 75 78 103
Stockholders' equity............................................... 1,215 1,051 926 764 629
</TABLE>
- ------------------------
(a) Includes charges of $110 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily related to the closure of various
facilities, including the Company's satellite TV manufacturing facility in
Puerto Rico, severance and other employee separation costs, the write-down
of certain assets to their estimated net realizable values and costs related
to dividing the Distributing Company's Taiwan operations between the Company
and General Semiconductor, Inc. (see Notes 1, 5 and 17 to the consolidated
financial statements).
(b) Includes charges of $226 million ($145 million net-of-tax) reflecting Next
Level Communications ("NLC") litigation costs and other charges primarily
related to the transition to the Company's next-generation digital products
and the write-down of certain assets to their estimated net realizable
values (see Notes 5, 12 and 17 to the consolidated financial statements).
(c) Includes a charge of $140 million ($90 million net-of-tax) for purchased
in-process technology in connection with the acquisition of NLC (see Note 6
to the consolidated financial statements).
(d) Includes an income tax benefit of $31 million, as a result of a reduction in
a valuation allowance related to domestic deferred income tax assets.
(e) Prior to the Distributions (see Note 1 to the consolidated financial
statements), the Company did not have its own capital structure, and pro
forma per share information has only been presented for the years ended
December 31, 1997 and 1996. The pro forma loss per share was calculated by
dividing the
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net loss by the pro forma weighted-average number of shares outstanding. The
pro forma weighted-
average number of shares outstanding used for 1996 equaled the number of
common shares issued on the date of the Distributions, and for 1997,
included the number of common shares issued on the date of the Distributions
plus the actual share activity during the period subsequent to the
Distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF BUSINESS
General Instrument Corporation ("General Instrument" or the "Company"),
formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and
components of high-performance networks, delivering video, voice and
Internet/data services to the cable, satellite and telephony markets. The
Company was formerly the Communications Business of the former General
Instrument Corporation (the "Distributing Company"). In July 1997, the
Distributing Company distributed all of its outstanding shares of capital stock
of the Company to its stockholders, and the Company then began operating as an
independent entity with publicly traded stock.
The Company's consolidated financial statements and notes to the
consolidated financial statements, included elsewhere in this Form 10-K, should
be read as an integral part of the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 WITH
THE YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for the year ended December 31, 1997 were $1,764
million compared to $1,756 million for the year ended December 31, 1996. Net
sales in 1997 when compared to 1996 reflect higher sales of digital cable TV
systems and interactive advanced analog TV systems, offset by lower sales of
basic analog cable TV systems, cable transmission network systems, digital
satellite receivers and private/ commercial network satellite systems. Analog
and digital products represented 58% and 42%, respectively, of total sales in
1997 compared to 67% and 33%, respectively, of total sales in 1996.
Worldwide broadband sales (consisting of digital and analog cable and
wireless television systems and transmission network systems) increased $112
million, or 10%, to $1,293 million in 1997 primarily as a result of increased
U.S. sales volumes of digital cable TV terminals and headends and CFT advanced
analog cable TV terminals, partially offset by lower sales of basic analog cable
and transmission network systems. These sales reflect the increasing commitment
of U.S. 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. International
broadband sales increased $11 million, or 3%, to $403 million in 1997 and
represented 31% of worldwide broadband sales in 1997 compared to 33% in 1996.
Worldwide satellite sales of $462 million for the year ended December 31, 1997
decreased $113 million, or 20%, from 1996 primarily as a result of lower sales
volumes of digital satellite receivers to PRIMESTAR. International satellite
sales increased $41 million, or 59%, to $110 million in 1997, primarily as a
result of higher Canadian sales. International satellite sales represented 24%
of worldwide satellite sales in 1997 compared to 12% in 1996. Next Level
Communications' ("NLC") sales were $9 million in 1997.
GROSS PROFIT. Gross profit increased $22 million, or 5%, to $428 million in
1997 from $406 million in 1996 and was 24% of sales in 1997 compared to 23% in
1996. Gross profit for the year ended December 31, 1997 was reduced by $84
million of charges primarily related to the closure of the Company's Puerto Rico
satellite manufacturing facility, employee costs related to dividing the
Distributing Company's Taiwan operations between the Company and General
Semiconductor, Inc. and the write-down of inventories to their estimated net
realizable values (see Notes 1, 5 and 17 to the consolidated financial
statements). Gross profit for the year ended December 31, 1996 was reduced by
$71 million of charges
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primarily related to the write-down of inventories to their estimated net
realizable values and the accrual of upgrade and product warranty liabilities in
connection with the transition to the Company's next-generation digital products
(see Note 17 to the consolidated financial statements). The higher gross profit
and gross profit margin in 1997 resulted from higher production volumes and
ongoing cost reduction programs on digital and advanced analog products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was $215 million in 1997 compared to $174 million in 1996 and
was 12% of sales in 1997 compared to 10% in 1996. SG&A expense for the year
ended December 31, 1997 included $28 million of charges related to severance and
other employee separation costs, costs associated with the closure of various
facilities and legal and other professional fees incurred in connection with the
Distributions (see Notes 1, 5 and 17 to the consolidated financial statements),
partially offset by a $5 million credit related to the collection of certain
receivables previously considered to be uncollectible. SG&A expense in 1996
included $14 million of charges primarily related to employee separation costs
due to the Distributing Company's plan to separate into three independent
companies, the write-down of various fixed assets to their estimated net
realizable values and the settlement of a litigation matter (see Notes 1, 5 and
17 to the consolidated financial statements). SG&A base spending was also
greater in 1997 than in 1996 as a result of increased marketing and field
support for NLC's NLevel(3)-Registered Trademark- telephony system and the
Company's DVB-compliant digital satellite products and increased sales force,
field support and marketing in international cable and satellite television
markets.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expense
increased $10 million, or 5%, to $208 million in 1997 from $198 million in 1996
and was 12% of sales in 1997 compared to 11% in 1996. R&D expense for the year
ended December 31, 1997 included $9 million of charges primarily related to the
write-down of certain assets used in R&D activities to their estimated net
realizable values (see Notes 5 and 17 to the consolidated financial statements).
R&D spending in 1997 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, in 1997,
the Company remained focused on reducing costs and enhancing the features of its
digital cable and satellite television systems.
OTHER INCOME (EXPENSE)-NET. Other income of $6 million for the year ended
December 31, 1997 predominantly reflects net investment gains, primarily from
the sale of a portion of the Company's investment in Ciena Corporation.
INTEREST INCOME (EXPENSE)-NET. Net interest expense represents an
allocation of interest expense from the Distributing Company based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company through July 25, 1997, the date of the Distributions. Net interest
expense allocated to the Company was $15 million for the year ended December 31,
1997 compared to $26 million in 1996. Subsequent to July 25, 1997, net interest
income primarily represents actual interest earned on the Company's net cash
balance and the net reversal of accrued interest subsequent to receiving a
revised final judgment in the suit brought against NLC and the founders of NLC
by DSC Communications Corporation and DSC Technologies Corporation (the "NLC
Litigation").
On a pro forma basis, interest income was $6 million in 1997 compared to
interest expense of $8 million in 1996 (see Note 4 to the consolidated financial
statements).
INCOME TAXES. Through the date of the Distributions, income taxes were
determined as if the Company had filed separate tax returns under its then
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 provision for income taxes of $6
million and a benefit for income taxes
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of $53 million for the years ended December 31, 1997 and 1996, respectively.
Excluding the restructuring and other net charges recorded in 1997 and 1996, the
effective tax rates were 38% and 36%, respectively. The higher effective rate in
1997 resulted from a higher provision for state income taxes (see Note 10 to the
consolidated financial statements).
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 WITH
THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 were $1,756
million compared to $1,533 million for the year ended December 31, 1995, an
increase of $223 million, or 15%. This increase in net sales reflects higher
broadband sales, partially offset by lower satellite sales. Analog and digital
products represented 67% and 33%, respectively, of total sales in 1996, compared
to 70% and 30%, respectively, in 1995.
Worldwide broadband sales increased $273 million, or 30%, to $1,181 million
in 1996 primarily as a result of increased U.S. sales volumes of CFT advanced
analog set-top terminals, first-time sales of DCT-1000 MPEG-2 digital set-top
terminals and increased global sales volumes of mature analog addressable
set-top terminals and transmission network systems electronics. These sales
reflect the continued commitment of domestic cable television operators to
deploy state-of-the-art addressable systems and enhanced services and the
continued deployment of new cable television systems in international markets.
International broadband sales increased $107 million, or 37%, to $392 million in
1996 and represented 33% of worldwide broadband sales in 1996 compared to 31% in
1995. Worldwide satellite sales decreased $50 million, or 8%, to $575 million in
1996 due to lower sales volume of digital satellite receivers to PRIMESTAR and
VideoCipher RS-TM- analog satellite modules and receivers, partially offset by
higher sales volumes of DigiCipher-Registered Trademark- II/MPEG-2 digital
satellite systems and DVB-compliant satellite encoders. International satellite
sales increased $30 million, or 76%, to $69 million in 1996 and represented 12%
of worldwide satellite sales in 1996 compared to 6% in 1995.
GROSS PROFIT. Gross profit decreased $47 million, or 10%, to $406 million
in 1996 from $453 million in 1995 and was 23% of sales in 1996 compared to 30%
in 1995. The lower gross profit margin in 1996 reflects $71 million of charges
related to the write-down of inventories to their estimated net realizable
values and the accrual of upgrade and product warranty liabilities primarily
related to the transition to the Company's next-generation digital products (see
Note 17 to the consolidated financial statements). The lower gross profit margin
also reflects the shift in product mix from higher margin VideoCipher RS-TM-
analog satellite receiver consumer modules to new advanced analog and digital
television system products, which initially carry lower margins.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense was $174 million in 1996
compared to $138 million in 1995 and was 10% of sales in 1996 compared to 9% of
sales in 1995. SG&A base spending was greater in 1996 than in 1995 as the
Company targeted new growth opportunities, including the marketing of NLC's
broadband access systems to telephone companies for interactive digital video,
voice and data services, and the Company increased its sales force, field
support and marketing activities to take advantage of continued growth
opportunities in international cable and satellite television and worldwide
telecommunications markets. SG&A expense in 1996 also included $14 million of
charges primarily related to the Distributing Company's plan to separate into
three independent companies, the write-down of various fixed assets to their
estimated net realizable values and the settlement of a litigation matter (see
Notes 1, 5 and 17 to the consolidated financial statements). SG&A expense for
1995 included a $5 million charge primarily related to the direct costs
associated with the consolidation of the Company's corporate headquarters and
the reorganization of its divisions and $14 million related to a national
advertising campaign for C-band satellite systems.
14
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RESEARCH AND DEVELOPMENT. The Company's R&D expense increased $60 million,
or 44%, to $198 million in 1996 from $138 million in 1995 and was 11% of sales
in 1996 compared to 9% in 1995. The increased level of spending reflects: the
continued development of next-generation products, including cable modems and
telephone company access products through NLC, as well as the modification of
existing products for international markets; continued development of enhanced
addressable analog terminals and advanced digital systems for cable and
satellite television distribution; ongoing cost-reduction programs; and product
development and international expansion through strategic alliances.
NLC LITIGATION COSTS. In June 1996, the Company recorded a pre-tax charge
of $141 million reflecting the judgment and costs of litigation in the NLC
Litigation (see Note 12 to the consolidated financial statements).
INTEREST EXPENSE-NET. Net interest expense 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. Net interest expense allocated to the Company increased $3 million to
$26 million in 1996 from $23 million in 1995 as a result of higher net interest
expense of the Distributing Company.
INCOME TAXES. Income taxes have been determined as if the Company had filed
separate tax returns under its existing structure for the periods presented. The
Company recorded a tax benefit of $53 million and $7 million in 1996 and 1995,
respectively (see Note 10 to the consolidated financial statements).
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 years ended December 31, 1997 and 1996, cash used by operations was
$1 million and $77 million, respectively. Cash used by operations in 1997
primarily reflects the payment of the judgment in the NLC Litigation and the
funding of NLC's operations, offset by cash generated by the operations of the
broadband business. Cash used in operations in 1996 primarily reflects the
Company's increased working capital requirements.
At December 31, 1997, working capital was $436 million compared to $372
million 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, the Company believes that working capital levels are appropriate
to support future operations. There can be no assurance, however, that future
industry-specific developments or general economic trends will not alter the
Company's working capital requirements.
During the years ended December 31, 1997 and 1996, the Company invested $80
million and $134 million, respectively, in equipment and facilities. In 1998,
the Company expects to continue to expand its capacity to meet increased current
and anticipated future demands for advanced analog and digital products, with
capital expenditures for the year expected to approximate $140 million.
Additionally, during the years ended December 31, 1997 and 1996, the Company
made $40 million and $15 million, respectively, of strategic investments. The
Company's R&D expenditures were $208 million and $198 million for the years
ended December 31, 1997 and 1996, respectively, and are expected to approximate
$170 million 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
15
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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 December 31, 1997, the Company was in compliance with all
financial and operating covenants contained in the Credit Agreement and had
available credit of $513 million.
In January 1998, the Company announced that, subject to the completion of
definitive agreements, Sony Corporation will purchase 7.5 million new shares of
Common Stock of the Company for $188 million (see Note 14 to the consolidated
financial statements).
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% (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 an 8% debt instrument
(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 concurrently with the funding (see Note 18 to the
consolidated financial statements). Separately, the Company expects to incur an
additional $20 to $35 million of after-tax charges in the first quarter of 1998
related to additional severance, relocation and other employee separation costs
and move-related costs associated with the closure of various facilities. The
Company expects these amounts will be paid during 1998.
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 (see Note 11 to the consolidated financial statements), cash flows
will be adequate to fund operations, research and development, capital
expenditures and strategic 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.
Management of the Company believes that the commercialization of digital
broadband systems and equipment, which provide for greatly expanded channel
capacity and programming options, improved quality and security of signal
transmission and the capability of delivering enhanced features and services, is
a strategic market for the Company. Management also believes that the Company's
position in this emerging market is significantly enhanced by the Company's
leadership in a key enabling technology, digital video compression, which
converts television signals to a digital format and then compresses the signals
of several channels of television programming into the bandwidth currently used
by just one analog channel. The Company has developed and is deploying digital
television systems that enable cable television operators and satellite
programmers to deliver over their existing networks up to 16 times as much
information as is possible with existing analog technology.
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The Company will offer multiple system operators ("MSOs") what it believes
is a cost-effective family of open-standard digital terminals with analog
program capabilities as well. The terminals range from a lower-cost
broadcast-only digital terminal to a highly capable, real-time two-way
interactive terminal, expected to be available by the end of 1998, with a
built-in high-speed cable modem enabling personal computer connectivity and
interactive sessions over a dedicated return path. Through December 31, 1997,
the Company had shipped more than 500 digital cable TV headend systems, passing
25 million homes, and more than 700,000 digital cable TV set-top terminals.
Additionally, effective as of December 1997, the Company entered into agreements
to supply an aggregate of 15 million advanced digital terminals to most of the
leading North American MSOs over the next three to five years (see Note 14 to
the consolidated financial statements). Management of the Company expects these
MSOs to begin mass deployment of these terminals in their customers' homes over
the next several years in order to take advantage of the enhanced capabilities
of the digital networks. The future success of the Company, however, will be
dependent on its ability to develop, produce and sell these products
successfully and continue to develop and timely exploit new technologies and
market opportunities both in the United States and internationally.
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 current higher costs of 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.
Sales of analog satellite television consumer descramblers have declined, as
expected, to minimal levels over the past two years, and are expected to
continue to decline, as a result of the availability of competing digital
satellite video services. Today, this product line represents less than 1% of
consolidated net sales. In February 1998, PRIMESTAR entered into an agreement
with the Company, pursuant to which the Company will manufacture integrated
receiver decoders for PRIMESTAR's high-power retail and wholesale services
expected to be launched during 1998 after PRIMESTAR receives government approval
related to the transition of an orbital slot. There can be no assurance,
however, that the Company will realize the full benefits of this agreement if
PRIMESTAR does not receive the necessary government approval. Additionally the
Company introduced its first digital descramblers for the backyard C-band market
in 1997. This product, called 4DTV-Registered Trademark-, allows C-band dish
owners to take advantage of the wealth of digital programming now being
transmitted by satellite. There can be no assurance, however, as to the degree
of market acceptance of this new product, or whether significant quantities of
4DTV-Registered Trademark- will be shipped in 1998.
In September 1995, the Distributing Company, on behalf of the Company,
acquired NLC, which was formed to design, manufacture and market a
next-generation telecommunications broadband access system for the delivery of
telephony, video and data from a telephone company central office or cable
television headend to the home. NLC's product, NLevel(3)-Registered Trademark-,
is designed to permit the cost-effective delivery of a suite of standard
telephony and advanced services such as high-speed Internet/data, work-at-home,
distance-learning, video-on-demand and video-telephony to the home from a single
access platform. The NLevel(3)-Registered Trademark- system is designed to work
with and enhance existing telephony networks and offers the capability to
provide voice services (POTS), ISDN, high-speed Internet/data and video services
over both copper-twisted-pair and fiber-to-the-curb networks. In the fourth
quarter of 1996, NLC entered into an agreement with NYNEX Corporation, now a
part of Bell Atlantic Corporation, pursuant to which NLC would deploy
approximately one million lines of transport electronics in the greater Boston
and New York City areas to carry voice, video and data services. Bell Atlantic
Corporation also has options to extend its
17
<PAGE>
deployment of the NLevel(3)-Registered Trademark- system to up to five million
lines. In the third quarter of 1997, NLC entered into an agreement with U S WEST
Communications to develop a product to support 450,000 lines of telephone, data
and video service and to build an infrastructure for one million households over
five years. Commencing in January 1998, the business of NLC has been operated
through the Partnership (see Note 18 to the consolidated financial statements).
Since a significant amount of research and development efforts will be required
by the Partnership, there can be no assurance that the Company will be able to
recover its investment in NLC.
The Company commenced initial commercial deployment during the third quarter
of 1996 of its high-speed cable modem for cable networks, which enables network
operators to link subscribers to interactive video and data services at speeds
significantly faster than conventional telephone modems. Several cable operators
have selected the Company's high-speed cable modems in the U.S. and
internationally. However, there can be no assurance that this product line will
be commercially successful.
With these new technologies and applications under development, the Company
believes it is well positioned to take advantage of the opportunities presented
in its dynamic and competitive environment. There can be no assurance, however,
that these technologies and applications will be successfully developed, or, if
they are successfully developed, that the Company's customers will implement
them or that the Company will otherwise be able to successfully exploit these
technologies and applications.
FOREIGN EXCHANGE AND MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. In addition, as mentioned above, the Company's
sales of its equipment into international markets have increased. 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 (see Notes 3 and 15 to the
consolidated financial statements). 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 December 31, 1997, 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. 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.
Sales to the Asia Pacific region accounted for 4% of the Company's worldwide
sales for the year ended December 31, 1997. While the Company has not been
significantly affected by the current economic and currency uncertainty in this
region, the Company continues to monitor its backlog and future orders
18
<PAGE>
from its customers in this region to evaluate any impact on shipments.
Additionally, as a result of reduced liquidity levels in this region, the
Company continues to review the credit position of its customers. There can be
no assurance, however, that this situation will not adversely impact the
Company's business in the future.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the past
few years, the rate of inflation has been low and has not had a material impact
on the Company's results of operations.
READINESS FOR YEAR 2000
The Company has identified and evaluated the changes to its computer systems
and products necessary to achieve a year 2000 date conversion, and any 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-K 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 to this Form 10-K, which is incorporated herein by reference, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. In addition, the Company's sales of its
equipment into international markets have increased. 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
19
<PAGE>
strategies to reduce the market risks from changes in exchange rates (see Notes
3 and 15 to the consolidated financial statements contained in Item 8). 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 December 31, 1997, 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the consolidated balance sheets of General Instrument
Corporation and its subsidiaries (formerly NextLevel Systems, Inc. and, prior
thereto, the Communications Business of the former General Instrument
Corporation) as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of General Instrument Corporation
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 14, 1998
(March 5, 1998 as to Note 19)
21
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
NET SALES............................................................... $ 1,764,088 $ 1,755,585 $ 1,532,595
Cost of sales........................................................... 1,336,482 1,349,815 1,079,916
------------ ------------ ------------
GROSS PROFIT............................................................ 427,606 405,770 452,679
------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative................................... 215,404 174,432 138,209
NLC litigation costs.................................................. -- 141,000 --
Research and development.............................................. 207,826 198,071 137,930
Purchased in-process technology....................................... -- -- 139,860
Amortization of excess of cost over fair value of net assets
acquired............................................................ 14,571 14,278 14,418
------------ ------------ ------------
Total operating expenses.............................................. 437,801 527,781 430,417
------------ ------------ ------------
OPERATING INCOME (LOSS)................................................. (10,195) (122,011) 22,262
Other income (expense), net............................................. 5,766 (1,427) (1,737)
Interest expense, net................................................... (5,210) (25,970) (22,933)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES................................................ (9,639) (149,408) (2,408)
(Provision) benefit for income taxes.................................... (6,474) 53,098 6,614
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ (16,113) $ (96,310) $ 4,206
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING........................... 147,523 147,315
PRO FORMA LOSS PER SHARE--BASIC AND DILUTED............................. $ (0.11) $ (0.65)
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 35,225 $ --
Short-term investments........................................... 30,346 --
Accounts receivable, less allowance for doubtful accounts of
$3,566 and $12,910, respectively............................... 343,625 392,984
Inventories...................................................... 288,078 263,829
Deferred income taxes............................................ 105,582 81,226
Other current assets............................................. 21,862 17,657
------------ ------------
Total current assets........................................... 824,718 755,696
Property, plant and equipment, net............................... 236,821 251,748
Intangibles, less accumulated amortization of $86,333 and
$76,077, respectively.......................................... 82,546 92,802
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $108,123 and $93,552,
respectively................................................... 471,186 478,783
Deferred income taxes............................................ 5,634 32,499
Investments and other assets..................................... 54,448 18,208
------------ ------------
TOTAL ASSETS..................................................... $1,675,353 $1,629,736
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................. $ 200,817 $ 201,382
Other accrued liabilities........................................ 188,250 182,782
------------ ------------
Total current liabilities...................................... 389,067 384,164
Deferred income taxes............................................ 5,745 6,353
NLC litigation liability......................................... -- 139,100
Other non-current liabilities.................................... 65,730 48,945
------------ ------------
Total liabilities.............................................. 460,542 578,562
------------ ------------
Commitments and contingencies (See Notes 12 and 19)
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;
148,358,188 shares issued at December 31, 1997................. 1,484 --
Additional paid-in capital....................................... 1,213,566 --
Accumulated deficit.............................................. (19,236) --
Unrealized gain on investments, net of taxes of $11,347.......... 18,999 --
------------ ------------
1,214,813 1,051,174
Less--Treasury Stock, at cost, 4,309 shares of Common Stock...... (2) --
------------ ------------
Total stockholders' equity..................................... 1,214,811 1,051,174
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $1,675,353 $1,629,736
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED COMMON TOTAL
--------------- PAID-IN ACCUMULATED GAIN ON STOCK IN DIVISIONAL STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS TREASURY NET EQUITY EQUITY
------- ------ ---------- ----------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995...... -- $-- $ -- $ -- $-- $-- $ 763,895 $ 763,895
Net income.................... 4,206 4,206
Transfers from the
Distributing Company........ 88,558 88,558
Other transactions with the
Distributing Company........ 69,509 69,509
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1995.... -- -- -- -- -- -- 926,168 926,168
Net loss...................... (96,310) (96,310)
Transfers from the
Distributing Company........ 226,370 226,370
Other transactions with the
Distributing Company........ (5,054) (5,054)
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1996.... -- -- -- -- -- -- 1,051,174 1,051,174
Net income (loss)............. (19,236) 3,123 (16,113)
Transfers from the
Distributing Company........ 125,310 125,310
Other transactions with the
Distributing Company........ 17,814 17,814
Unrealized gain on investment,
net of tax.................. 21,576 21,576
Spin-off from the Distributing
Company..................... 147,315 1,473 1,195,948 21,576 (1,218,997) --
Exercise of stock options and
related tax benefit......... 679 7 10,362 10,369
Stock issued in connection
with a business
acquisition................. 358 4 6,996 7,000
Net change in investments..... (2,577) (2,577)
Other......................... 6 260 (2) 258
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1997.... 148,358 $1,484 $1,213,566 $(19,236) $18,999 $ (2) $ -- $1,214,811
------- ------ ---------- ----------- ----------- --- ---------- -------------
------- ------ ---------- ----------- ----------- --- ---------- -------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (16,113) $ (96,310) $ 4,206
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 89,857 84,500 68,042
Gain on sale of short-term investment....................................... (10,667) -- --
NLC litigation costs, net................................................... -- 91,650 --
Losses from asset sales and write-downs, net................................ 19,486 11,974 --
Purchased in-process technology, net........................................ -- -- 90,000
Changes in assets and liabilities:
Accounts receivable....................................................... 57,557 (160,550) (40,809)
Inventories............................................................... (22,637) (42,450) (58,444)
Other current assets...................................................... 7,919 (2,185) (4,921)
Deferred income taxes..................................................... 5,237 (3,978) (173)
Non-current assets........................................................ 1,226 3,327 (12,281)
Accounts payable and other accrued liabilities............................ (11,245) 60,108 (16,917)
NLC litigation payment.................................................... (140,692) -- --
Other non-current liabilities............................................. 18,955 (26,079) (12,109)
Other....................................................................... 617 3,347 1,570
---------- ---------- ----------
Net cash provided by (used in) operating activities........................... (500) (76,646) 18,164
---------- ---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment.................................. (79,828) (134,353) (96,944)
Investments in other assets................................................. (32,770) (3,700) (7,003)
Acquisitions, net of cash acquired.......................................... (6,980) (11,671) (2,775)
Proceeds from sale of short-term investment................................. 10,667 -- --
Proceeds from sale of assets................................................ 10,529 -- --
---------- ---------- ----------
Net cash used in investing activities......................................... (98,382) (149,724) (106,722)
---------- ---------- ----------
FINANCING ACTIVITIES:
Transfers from Distributing Company......................................... 125,310 226,370 88,558
Proceeds from stock option exercises........................................ 9,363 -- --
Other....................................................................... (566) -- --
---------- ---------- ----------
Net cash provided by financing activities..................................... 134,107 226,370 88,558
---------- ---------- ----------
Change in cash and cash equivalents........................................... 35,225 -- --
Cash and cash equivalents, beginning of year.................................. -- -- --
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 35,225 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, 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 18), the Company provides telephone network solutions
through the Partnership's NLevel(3)-Registered Trademark- 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 consolidated financial statements include an allocation of certain
assets, liabilities and general corporate expenses from the Distributing Company
for the periods prior to the Distributions. 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 allocations
are 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 financial
statements include 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. The net effect of
these transactions is reflected in stockholders' equity. Net
26
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
2. BASIS OF PRESENTATION (CONTINUED)
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. Subsequent to the
Distributions, the provision for income taxes is based on the Company's actual
results for that period.
The financial information included herein, related to the periods prior to
the Distributions, may not necessarily reflect the consolidated results of
operations, financial position, changes in stockholders' equity and cash flows
of the Company since the Company was not a separate stand-alone entity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of General Instrument and its wholly-owned
subsidiaries. Investments in which the Company exercises significant influence,
but which it does not control, are accounted for under the equity method of
accounting. Investments in which the Company has less than a 20% ownership
interest, and does not exercise significant influence, are accounted for at
cost. All intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of the accompanying consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ
from those estimates.
REVENUE RECOGNITION. The Company recognizes revenue when products are
shipped and services are performed.
PRODUCT WARRANTY. The Company warrants its products against defects and
accrues estimated warranty expense at the time of sale. Actual warranty costs
incurred are charged against the accrual when paid.
CASH EQUIVALENTS. The Company considers all highly liquid debt instruments
with a maturity of three months or less at the date of purchase to be cash
equivalents.
27
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS. Equity securities held by the Company are classified as
"available-for-sale" securities and reported at fair value. Any unrealized
holding gains and losses, net of taxes, are excluded from operating results and
are recognized as a separate component of stockholders' equity until realized.
Fair value of the securities is determined based on market prices. The Company
held no debt securities during any period presented.
INVENTORIES. Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Provisions for depreciation are based on estimated useful lives of the
assets using the straight-line method. Average useful lives are 5 to 35 years
for buildings and improvements; economic useful life or lease term, whichever is
shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment.
INTANGIBLE ASSETS. Intangible assets consist primarily of patents, which
are being amortized on a straight-line basis over 5 to 17 years.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 30 to 40 years. Management continually reassesses the appropriateness
of both the carrying value and remaining life of the excess of cost over fair
value of net assets acquired by assessing recoverability based on forecasted
operating cash flows, on an undiscounted basis, and other factors. Management
believes that, as of December 31, 1997, the carrying value and remaining life of
the excess of cost over fair value of net assets acquired are appropriate.
LONG-LIVED ASSETS. Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles, and the goodwill related to those
assets, may not be recoverable, the Company evaluates the carrying values of
such assets using future undiscounted cash flows. Management believes that, as
of December 31, 1997, the carrying values of such assets are appropriate.
FOREIGN CURRENCY TRANSLATION. The Company has determined the U.S. dollar to
be the functional currency of all foreign operations. Accordingly, gains and
losses recognized as a result of translating foreign operations' monetary assets
and liabilities from local currencies to U.S. dollars are reflected in the
accompanying consolidated statements of operations. For periods prior to the
Distributions, the Company had been considered in the Distributing Company's
overall risk management strategy to reduce its exposure to adverse movements in
foreign exchange rates. To hedge foreign currency exposure on monetary assets
and liabilities the Distributing Company, on behalf of the Company, and
subsequent to the Distributions, the Company entered into foreign currency
forward exchange contracts on a month-to-month basis.
BENEFIT PLANS. Prior to the Distributions, the Company participated in the
Distributing Company's sponsored non-contributory, defined benefit pension plans
covering substantially all employees of the Company. Subsequent to the
Distributions, substantially all employees are covered by defined benefit
pension plans of the Company. The benefits under the plans are based on years of
service and compensation levels. Contributions to pension funds are made when
actuarial computations prescribe such funding.
28
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. The Company's operating results for periods prior to the
Distributions will be included in the Distributing Company's consolidated U.S.
and state income tax returns and in the tax returns of certain of the
Distributing Company's foreign subsidiaries. Through the date of the
Distributions, the provision for income taxes 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. Accordingly, future tax
rates could vary from the historical effective tax rates depending upon the
Company's future tax elections. Subsequent to the Distributions, the provision
for income taxes is based on the Company's actual results for that period.
Deferred income taxes reflect the future tax consequences of differences between
the financial reporting and tax bases of assets and liabilities. Deferred income
taxes have been provided for the income tax liability that would be incurred on
the repatriation of undistributed earnings of the Company's foreign
subsidiaries, except for locations where the Company has designated earnings to
be permanently reinvested.
PRO FORMA EARNINGS (LOSS) PER SHARE. On December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," which replaces primary and fully diluted earnings per share
calculated under Accounting Principles Board Opinion No. 15, "Earnings per
Share," with basic and diluted 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 and common
equivalent 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. Prior to the
Distributions, the Company did not have its own capital structure, and pro forma
per share information has been presented for the years ended December 31, 1997
and 1996. The pro forma weighted-average number of shares outstanding used in
the pro forma per share calculation for 1996 equaled the number of common shares
issued on the date of the Distributions, and for 1997, included the number of
common shares issued on the date of the Distributions plus the actual share
activity during the period subsequent to the Distributions. Further, since the
computation of diluted loss per share is anti-dilutive, the amounts reported for
pro forma basic and diluted loss per share are the same.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED.
OTHER COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
was issued in June 1997 and is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements, either in the statement of operations
or as a separate statement. In addition, it requires the display of the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
statement of financial position. The Company will adopt SFAS No. 130 in the
first quarter of 1998. However, since this statement only requires
additional disclosures, its adoption will not have any impact on the
Company's consolidated financial position, results of operations or cash
flows.
29
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 will
adopt SFAS No. 131 in the first quarter of 1998 and is currently evaluating
the disclosure requirements.
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma consolidated statements of operations presented
below 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 the Company's operations actually would
have been had the Distributions occurred on January 1, 1996 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 $4 million and $7 million of selling,
general and administrative ("SG&A") costs for the years ended December 31, 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 (ii) a net debt level of
30
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
$100 million at the beginning of each period presented through July 25, 1997,
the date of the Communications Distribution.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Net sales............................................................................. $ 1,764,088 $ 1,755,585
Cost of sales......................................................................... 1,336,482 1,349,815
------------ ------------
Gross profit.......................................................................... 427,606 405,770
------------ ------------
Operating expenses:
Selling, general and administrative................................................. 219,004 181,032
NLC litigation costs................................................................ -- 141,000
Research and development............................................................ 207,826 198,071
Amortization of excess of cost over fair value of net assets acquired............... 14,571 14,278
------------ ------------
Total operating expenses.......................................................... 441,401 534,381
------------ ------------
Operating loss........................................................................ (13,795) (128,611)
Other income (expense), net........................................................... 5,766 (1,427)
Interest income (expense), net........................................................ 5,631 (7,595)
------------ ------------
Loss before income taxes.............................................................. (2,398) (137,633)
(Provision) benefit for income taxes.................................................. (9,269) 48,989
------------ ------------
Net loss.............................................................................. $ (11,667) $ (88,644)
------------ ------------
------------ ------------
Weighted-average shares outstanding................................................... 147,523 147,315
Loss per share -- basic and diluted................................................... $ (0.08) $ (0.60)
</TABLE>
5. 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 also announced it would
move its corporate headquarters from Chicago, Illinois to Horsham, Pennsylvania
during the first quarter of 1998.
As a result of the above actions, the Company recorded a pre-tax charge of
$36 million 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, $21
million were recorded as cost of sales, $14 million as SG&A expense and $1
million as research and development expense. Through December 31, 1997, the
Company has made severance payments of $5
31
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
5. RESTRUCTURINGS (CONTINUED)
million to approximately 800 employees, and the remaining severance and other
employee separation costs will be paid in 1998. The Company expects to incur an
additional $20 to $35 million of restructuring and other after-tax charges in
the first quarter of 1998 related to additional severance, relocation and other
employee separation costs and move-related costs associated with the closure of
various facilities.
In connection with the Distributions (see Note 1), the Company recorded a
charge during 1997 of $18 million to cost of sales for employee costs, which
included a curtailment and settlement loss of $4 million (see Note 13), related
to dividing the Distributing Company's Taiwan operations between the Company and
General Semiconductor. The Company expects to fully pay these costs prior to the
end of the second quarter of 1998. Further, the Company recorded a charge of $6
million to SG&A expense for legal and other professional fees incurred in
connection with the Distributions.
In December 1996, the Distributing Company committed to certain
restructuring actions not related to the Distributions. These actions resulted
in a charge of $8 million to SG&A expense for the write-down of various assets
to their estimated net realizable values.
6. ACQUISITIONS
In September 1997, the Company acquired Telenetworks, a specialized software
company, and in June 1996, the Company acquired the assets of the
Magnitude-Registered Trademark- MPEG-2/DVB product family of Compression Labs,
Inc. The aggregate net purchase price of these acquisitions was $19 million.
Such acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair value at
the date of each acquisition.
In September 1995, the Distributing Company, on behalf of the Company,
acquired all of the remaining outstanding shares of Next Level Communications
("NLC"), including shares issued upon conversion of all of NLC's outstanding
options and warrants. The total purchase price of $91 million consisted of 2.2
million common shares of the Distributing Company valued at $75 million,
Distributing Company stock options valued at $10 million and cash of $6 million.
NLC is involved with the development of a next-generation broadband access
system, NLevel(3)-Registered Trademark-, utilizing switched-digital video
technology. NLevel(3)-Registered Trademark- is designed to provide delivery of
video, voice and Internet/data services over both copper-twisted-pair and
fiber-to-the-curb networks. The acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition. The purchase price of $91
million, plus the $2 million of costs directly attributable to the completion of
the acquisition, have been allocated to the assets and liabilities acquired.
Approximately $90 million of the total purchase price represented the value, net
of deferred income taxes, of NLC's in-process technology. Since technological
feasibility had not yet been achieved and there was no alternative future use
for the technology being developed, the amounts allocated to the in-process
technology were expensed concurrent with the purchase. The net-of-tax charge of
$90 million included $140 million associated with this technology charged to
operating income, offset by a non-cash tax benefit of $50 million. See also Note
18.
32
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
7. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Raw materials....................................................... $ 111,148 $ 104,984
Work in process..................................................... 19,676 21,344
Finished goods...................................................... 157,254 137,501
----------- -----------
$ 288,078 $ 263,829
----------- -----------
----------- -----------
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT-NET
Property, plant and equipment-net consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Land and land improvements.......................................... $ 17,683 $ 17,678
Buildings, improvements and leasehold improvements.................. 37,443 23,111
Machinery and equipment............................................. 421,615 435,078
----------- -----------
476,741 475,867
Less accumulated depreciation....................................... (239,920) (224,119)
----------- -----------
$ 236,821 $ 251,748
----------- -----------
----------- -----------
</TABLE>
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Salaries and compensation liabilities............................... $ 49,831 $ 27,049
Payroll, state and local taxes...................................... 7,648 12,542
Product and warranty liabilities.................................... 54,594 77,291
Other............................................................... 76,177 65,900
----------- -----------
$ 188,250 $ 182,782
----------- -----------
----------- -----------
</TABLE>
33
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Domestic............................................... $ (23,157) $ (189,487) $ (42,964)
Foreign................................................ 13,518 40,079 40,556
----------- ----------- -----------
Total.................................................. $ (9,639) $ (149,408) $ (2,408)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Current:
Federal.............................................. $ 7,583 $ (5,878) $ (17,823)
Foreign.............................................. 3,905 4,312 4,810
State................................................ 3,800 1,796 6,572
----------- ----------- -----------
15,288 230 (6,441)
----------- ----------- -----------
Deferred:
Federal.............................................. (11,039) (52,635) (305)
Foreign.............................................. 926 1,269 1,781
State................................................ 1,299 (1,962) (1,649)
----------- ----------- -----------
(8,814) (53,328) (173)
----------- ----------- -----------
Provision (benefit) for income taxes................... $ 6,474 $ (53,098) $ (6,614)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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. Subsequent to the Distributions, the provision for income taxes is
based on the Company's actual results for that period.
34
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. INCOME TAXES (CONTINUED)
The following table presents the principal reasons for the difference
between the actual income tax provision (benefit) and the tax benefit computed
by applying the U.S. federal statutory income tax rate to the loss before income
taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Federal income tax benefit at 35%.......................................... $ (3,374) $ (52,293) $ (842)
State income taxes-net..................................................... 3,314 (108) 3,199
Foreign operations......................................................... 1,153 (6,655) (2,449)
Non-deductible purchase accounting item.................................... 4,997 4,997 5,046
Settlement of tax audits................................................... -- -- (12,000)
Other-net.................................................................. 384 961 432
---------- ---------- ----------
Provision (benefit) for income taxes....................................... $ 6,474 $ (53,098) $ (6,614)
---------- ---------- ----------
---------- ---------- ----------
Effective income tax rate.................................................. 67.2% (35.5%) (274.7%)
</TABLE>
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET LIABILITY NET ASSET LIABILITY NET
---------- ----------- ---------- --------- ----------- ----------
Current Deferred Income Taxes:
Domestic net operating loss carryforwards (expiring
in 2012)........................................... $ 35,325 $ -- $ 35,325 $ -- $ -- $ --
Accounts receivable and inventory reserves........... 33,732 -- 33,732 27,600 -- 27,600
Product and warranty liabilities..................... 21,250 -- 21,250 23,357 -- 23,357
Employee benefits.................................... 13,444 -- 13,444 8,128 -- 8,128
Other current........................................ 1,831 -- 1,831 22,141 -- 22,141
---------- ----------- ---------- --------- ----------- ----------
$ 105,582 $ -- $ 105,582 $ 81,226 $ -- $ 81,226
---------- ----------- ---------- --------- ----------- ----------
---------- ----------- ---------- --------- ----------- ----------
Non-Current Deferred Income Taxes:
Tax credit carryforwards (expiring in 2012).......... $ 6,516 $ -- $ 6,516 $ -- $ -- $ --
Fixed and intangible assets.......................... (17,673) -- (17,673) (26,839) -- (26,839)
NLC litigation liability............................. -- -- -- 48,690 -- 48,690
Employee benefits.................................... 13,340 -- 13,340 6,865 -- 6,865
Other non-current.................................... 3,451 5,745 (2,294) 3,783 6,353 (2,570)
---------- ----------- ---------- --------- ----------- ----------
$ 5,634 $ 5,745 $ (111) $ 32,499 $ 6,353 $ 26,146
---------- ----------- ---------- --------- ----------- ----------
---------- ----------- ---------- --------- ----------- ----------
</TABLE>
In July 1997, the Company, General Semiconductor and CommScope entered into
a tax-sharing agreement that effectively provides that the Company will be
responsible for the consolidated tax liability of the Distributing Company for
all periods prior to the Distributions. As a result, the consolidated tax
liability of the Distributing Company was allocated to the Company at the date
of the Distributions.
35
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. INCOME TAXES (CONTINUED)
At December 31, 1996 the federal and state income taxes which were currently
payable or receivable were settled with the Distributing Company through
divisional net equity. In addition, during the years ended December 31, 1996 and
1995, the Distributing Company settled certain tax matters which decreased the
Company's tax payable through divisional net equity to the Distributing Company
and resulted in credits of $5 and $2 million to goodwill for 1996 and 1995,
respectively, since these matters related to periods prior to the acquisition of
the Distributing Company by affiliates of Forstmann Little & Co. In addition,
during 1995, the Distributing Company had a favorable settlement of a tax matter
related to the Company that resulted in a $12 million benefit to the 1995 income
tax provision.
Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $6 million in 1997 as those earnings are considered to be
permanently reinvested. Determining the tax liability that would arise if these
earnings were remitted is not practicable. Income taxes received during the
period subsequent to the Distributions was $2 million.
11. 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 will vary 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 the 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, and as of December 31, 1997, the Company was
in compliance with all financial and operating covenants under the Credit
Agreement. At December 31, 1997, the Company had not borrowed under the Credit
Agreement and had available credit of $513 million. Interest paid during the
period subsequent to the Distributions was $5 million.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space, manufacturing and warehouse facilities and
transportation and other equipment under operating leases, which expire at
various dates through the year 2009. Rent expense was $16, $15 and $11 million
in 1997, 1996 and 1995, respectively. The Company has three seven-year operating
lease agreements for its domestic administrative facilities, and the total cost
of the facilities covered by these agreements approximates $140 million. These
leases provide for a substantial residual value guarantee (approximately 83% of
the total cost) which is due upon termination of the lease and include purchase
and renewal options. The Company can exercise its purchase option or the
facilities can
36
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
be sold to a third party. Upon termination of the leases, the Company expects
the fair market value of the leased facilities to substantially reduce or
eliminate the payment under the residual value guarantees. The table of future
minimum operating lease payments below excludes any payments related to these
guarantees.
Future minimum lease payments required under operating leases as of December
31, 1997 were as follows:
<TABLE>
<S> <C>
1998............................................................... $ 13,035
1999............................................................... 13,052
2000............................................................... 11,908
2001............................................................... 11,379
2002............................................................... 11,063
Thereafter......................................................... 19,130
</TABLE>
The Company has approximately $87 million of letters of credit outstanding
at December 31, 1997.
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.
In April 1995, DSC Communications Corporation and DSC Technologies
Corporation (collectively, "DSC") brought suit against NLC and the founders of
NLC (the "NLC Litigation"). In June 1996, a final judgment against NLC and the
individual defendants was entered in favor of DSC and a pre-tax charge to
earnings of $141 million was recorded. In October 1997, the trial court entered
a revised final judgment, and in November 1997, the Company satisfied the
judgment with a payment of $141 million. See also Note 19.
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 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, the
Distributing Company's motion to dismiss the complaint for lack of personal
jurisdiction was denied. The Partnership has assumed liability with respect to
this litigation (see Note 18).
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
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. The Partnership has
assumed responsibility with respect to this litigation.
37
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's common
stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
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-Registered Trademark- 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.
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.
38
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS. Prior to the Distributions, the Company participated in the
Distributing Company's domestic and foreign pension plans, and the Company's
consolidated financial statements reflect the costs experienced for its
employees and retirees while included in the Distributing Company's plans. The
Company, CommScope and General Semiconductor entered into an Employee Benefits
Allocation Agreement, which provided that, effective as of the Distributions,
the Company assumed responsibility for liabilities of the Distributing Company
under the Distributing Company's employee benefit plans with respect to
individuals who are employees or retirees of the Company. In connection with
dividing the Distributing Company's Taiwan operations between the Company and
General Semiconductor, a curtailment and settlement loss of $4 million was
recorded by the Company.
Following the Distributions, the Company established separate defined
benefit plans for the employees and retirees of the Company. Assets included in
trusts under qualified pension plans were divided after the Distributions
between the trusts for the Distributing Company's qualified pension plans and
the Company's qualified pension plans. Each such domestic plan received the
legally required funding under the Employee Retirement Income Security Act of
1974 ("ERISA"), and foreign plans received funding as specified under the
applicable statutory requirements.
Net pension cost of the Company for the year ended December 31, 1997
consists of the following:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
----------- ---------
<S> <C> <C>
Service cost.............................................................. $ 2,651 $ 1,713
Interest.................................................................. 2,443 1,612
Return on plan assets..................................................... (4,263) (285)
Net amortization and deferral............................................. 2,497 578
Curtailment and settlement loss........................................... -- 4,282
----------- ---------
Net pension cost.......................................................... $ 3,328 $ 7,900
----------- ---------
----------- ---------
</TABLE>
The Company's share of the Distributing Company's consolidated net pension
costs which have been recorded in the accompanying statements of operations in
1996 and 1995 was $5 and $4 million, respectively. The net pension expense
presented above for 1997 includes the Company's share of the Distributing
Company's net pension cost for the period prior to the Distributions.
39
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the pension plans and the related amounts as recorded
in the accompanying consolidated balance sheet at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
---------- ----------
<S> <C> <C>
Actuarial present value of:
Vested benefits..................................................... $ 23,501 $ 6,058
---------- ----------
---------- ----------
Accumulated benefits................................................ $ 25,880 $ 9,353
---------- ----------
---------- ----------
Projected benefit obligation........................................ $ 37,986 $ 20,211
Market value of plan assets........................................... 25,680 912
---------- ----------
Funded status......................................................... (12,306) (19,299)
Unrecognized (gain) loss.............................................. (1,662) 7,752
---------- ----------
Accrued pension obligation............................................ $ (13,968) $ (11,547)
---------- ----------
---------- ----------
Actuarial assumptions:
Discount rate....................................................... 7.25% 6.75%
Investment return................................................... 9.00% 8.00%
Compensation increases.............................................. 4.75% 6.00%
</TABLE>
The Company's share of the Distributing Company's consolidated actuarial
present value of vested benefits, accumulated benefits and the projected benefit
obligation was $27, $39 and $62 million, respectively, as of December 31, 1996.
The accrued pension obligation recorded in the accompanying consolidated balance
sheet at December 31, 1996 was $14 million.
The domestic pension plans consist principally of a qualified retirement
plan that has satisfied the full funding limitation requirements under ERISA. No
contributions were made to the plans during 1997. The Company maintains an
unfunded supplemental retirement plan for certain members of management, and net
pension cost and accrued pension obligations for this plan are included in the
amounts above. The Company's foreign pension plans consist principally of a
Taiwan pension plan, which is funded under Taiwan's statutory requirements. The
Company contributed $1 million to the Taiwan pension plan in 1997. The Company's
domestic plan's assets consist of fixed income and equity securities, and the
Taiwan plan's assets principally consist of fixed income securities.
SAVINGS PLAN. The Company maintains a voluntary savings plan covering all
non-union employees (prior to the Distributions, eligible employees of the
Company participated in the Distributing Company's savings plan). Eligible
employees may elect to contribute up to 10% of their salaries subject to certain
limitations. The Company contributes an amount equal to 50% of the first 6% of
the employee's salary that the employee contributes subject to certain
limitations. The Company's expense related to these savings plans was $4, $3 and
$2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
POSTRETIREMENT PLAN. Prior to the Distributions, the Company participated
in the Distributing Company's sponsored contributory health-care and life
insurance benefits plan. Following the Distributions, the Company established a
separate postretirement benefit plan for the employees and retirees of the
Company (the "Plan"). The Plan is an unfunded contributory group medical plan
for all full-time U.S.
40
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
employees of the Company not covered by a collective bargaining agreement and
who meet defined age and service requirements. The Company recognizes the cost
of providing and maintaining postretirement benefits during employees' active
service periods. The Plan is the primary provider of benefits for retirees up to
age 65. After age 65, Medicare becomes the primary provider.
Net postretirement benefit costs covering all of the Company's employees for
the year ended December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Service cost....................................................... $ 824
Interest........................................................... 531
Net amortization and deferral...................................... (181)
---------
Net postretirement benefit costs................................... $ 1,174
---------
---------
</TABLE>
The Company's share of the Distributing Company's consolidated net
postretirement benefit costs which have been recorded in the accompanying
statements of operations in 1996 and 1995 was $0.8 and $0.6 million,
respectively. The net postretirement benefit costs presented above for 1997
includes the Company's share of the Distributing Company's net postretirement
benefit cost for the period prior to the Distributions.
The status of the Plan and the related amounts as recorded in the
accompanying consolidated balance sheet at December 31, 1997 are as follows:
Accumulated postretirement benefit obligation ("APBO"):
<TABLE>
<S> <C>
Retirees......................................................... $ 2,325
Active participants.............................................. 6,203
---------
Total APBO......................................................... 8,528
Unrecognized prior service cost.................................... 1,800
Unrecognized gain.................................................. 1,515
---------
Accrued postretirement benefit obligation.......................... $ 11,843
---------
---------
Discount rate used in determining APBO............................. 7.25%
</TABLE>
The Company's share of the Distributing Company's consolidated
postretirement benefit obligation as of December 31, 1996 was $11 million.
The assumed rate of future increases in health care cost during 1997 was
12.5% for pre-age 65 retirees and 10% for post-age 65 retirees, and is expected
to decline to 6% by the year 2006. Under the Plan, the actuarially determined
effect of a one percentage point increase in the assumed health care cost trend
rate on annual net postretirement benefit cost and the APBO would be $0.3 and $2
million, respectively.
14. STOCKHOLDERS' EQUITY
COMMON SHARES. Pursuant to the Company's Amended and Restated Certificate
of Incorporation, the authorized capital stock of the Company consists of 400
million shares. As discussed in Note 1, 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.
41
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION AGREEMENTS. During 1997 and in prior years, certain employees
of the Company were granted awards under the Distributing Company's 1993
Long-Term Incentive Plan (the "Distributing Company Plan"). Awards issued to
employees of the Company consisted primarily of stock options.
Immediately following the Distributions, awards outstanding under the
Distributing Company Plan held by the Company's employees were replaced by
substitute awards under the Company's 1997 Long-Term Incentive Plan (the
"Plan"), and the substitute awards preserved the economic value of the canceled
Distributing Company options. Accordingly, the substitute options have the same
ratio of the exercise price per option to the market value per share, the same
aggregate intrinsic value (difference between market value per share and
exercise price) and the same vesting provisions, option period and other terms
and conditions as the Distributing Company options being replaced.
The Plan provides for the granting of stock options, stock appreciation
rights, restricted stock, performance units, performance shares and phantom
shares and phantom stock to employees of the Company and its subsidiaries and
the granting of stock options to directors of the Company. Generally, stock
options have a 10-year term and vest within three or four years of grant.
The number of shares of Distributing Company common stock subject to options
held by the Company's employees at December 31, 1996 and 1995 were approximately
9 and 8 million, respectively. The following table summarizes stock option
activity relating to the Company's stock option plan subsequent to the
Distributions.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
(IN THOUSANDS) PER SHARE
--------------- -----------------
<S> <C> <C>
Distributing Company options related to employees of the Company, and
outstanding at July 25, 1997.................................................. 11,349 $ 22.45
------
------
Company options substituted for Distributing Company Options, and outstanding at
July 25, 1997................................................................. 16,655 15.30
Granted......................................................................... 3,069 16.59
Exercised....................................................................... (679) 13.78
Canceled........................................................................ (2,117) 15.93
------
Outstanding at December 31, 1997................................................ 16,928 15.52
------
------
</TABLE>
42
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable under the Company's stock option plan.
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS
OUTSTANDING AT WEIGHTED- AVERAGE WEIGHTED- OPTIONS WEIGHTED-
DECEMBER 31, REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF 1997 CONTRACTUAL EXERCISE DECEMBER 31, 1997 EXERCISE
EXERCISE PRICES (IN THOUSANDS) TERM (YEARS) PRICE (IN THOUSANDS) PRICE
- -------------------- --------------- ----------------- ------------- ----------------- -------------
$ 1.03 - $ 1.87 130 5.0 $ 1.45 130 $ 1.45
10.82 - 13.82 441 4.4 10.91 432 10.86
14.14 - 15.75 12,485 8.1 15.17 5,232 14.72
16.00 - 17.80 3,267 7.0 17.12 1,750 17.19
18.57 - 20.88 605 9.6 20.43 8 19.93
</TABLE>
At December 31, 1997, 5.6 million shares were reserved for future awards
under the Company's stock award plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plan. Since the exercise price of all stock options granted was equal to the
closing price of the Common Stock on the New York Stock Exchange on the date of
grant, no compensation expense has been recognized by the Company under its
stock option plan. Compensation expense would have been $23 million in 1997 had
compensation cost for stock options awarded under the Plan and under the
Distributing Company Plan been determined based upon the fair value at the grant
date consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," and the Company's pro forma net loss and pro
forma loss per share (basic and diluted) would have been $31 million and $0.21
for 1997, respectively.
The incremental fair value of the Company's options was determined using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected holding period of 4 years; a risk-free interest rate of
6.08%; an expected volatility of 35%; and an expected dividend yield of 0%. The
weighted-average per share fair value of the options granted during 1997 was
estimated at $6.20. The pro forma effect on net loss and loss per share for 1997
may not be representative of the pro forma effect in future years because it
includes compensation cost on a straight-line basis over the vesting periods of
the grants and does not take into consideration the pro forma compensation costs
for grants made prior to 1995.
WARRANTS. Effective as of December 1997, the Company entered into
agreements to supply an aggregate of 15 million of its two-way, interactive
digital cable terminals to most of the leading North American cable television
multiple system operators ("MSOs") over the next three to five years. In
connection with these supply arrangements, the Company issued warrants to
purchase approximately 29 million shares of the Company's Common Stock. The
warrants issued to each MSO will vest in three installments on December 31,
1998, 1999, and 2000, to the extent that in each of those years such MSO
fulfills its obligation to purchase a threshold number of digital terminals from
the Company. Each warrant is exercisable for a period of 18 months after it
vests at an exercise price of $14.25 for each share of Common Stock. If, in any
year, the Company fails to deliver the threshold number of digital terminals for
such year, through no fault of the MSO, the total number of such MSO's warrants
will vest for that year.
43
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average per share fair value of the warrants granted during 1997
approximated $3.50 using the Black-Scholes pricing model with assumptions
consistent with those discussed above. The value of the warrants will be
amortized to operations in the respective period the digital terminals are
shipped.
STOCKHOLDER RIGHTS PLAN. On June 10, 1997, the Board of Directors adopted a
stockholder rights plan designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder received a dividend of
one right for each outstanding share of Common Stock. The rights are attached
to, and presently only trade with, the Common Stock and currently are not
exercisable. Except as specified below, upon becoming exercisable, all rights
holders will be entitled to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $85.
The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement that
a person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock, or (ii) 10 business days following a person's or
group's commencement of, or announcement of, an intention to commence a tender
or exchange offer, the consummation of which would result in beneficial
ownership of 15% or more of the Common Stock. Each right will entitle the holder
to purchase Common Stock of the Company having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. If the Company is
acquired through a merger or other business combination transaction (other than
a Permitted Offer, as defined), each right will entitle the holder to purchase
common stock of the surviving company having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. The Company may
redeem the rights for $0.01 each at any time prior to such acquisition. The
rights will expire on June 10, 2007, unless earlier redeemed.
In connection with the rights plan, the Board of Directors approved the
creation of, out of the authorized but unissued shares of Common Stock of the
Company, a Series A Junior Participating Preferred Stock ("Participating
Preferred Stock"), consisting of 400,000 shares with a par value of $0.01 per
share. The holders of the Participating Preferred Stock are entitled to receive
dividends, if declared by the Board of Directors, from funds legally available.
Each share of Participating Preferred Stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of Participating Preferred
Stock are not redeemable by the Company or convertible into Common Stock or any
other security of the Company.
OTHER TRANSACTIONS. The Company and Sony Corporation ("Sony") have
announced preliminary plans to enter into a strategic alliance to jointly
develop digital television technologies. Subject to the completion of definitive
agreements related to this alliance, Sony will purchase 7.5 million new shares
of Common Stock of the Company at a purchase price of $25 per share. Separately,
in December 1997, the Company signed a memorandum of understanding to purchase
from National Digital Television Center, Inc., a subsidiary of
Tele-Communications, Inc., certain assets and rights of its authorization
business, which is intended to provide the cable industry with a secure access
control platform to support widespread deployment of digital terminals and
related systems, in exchange for 21,356,000 shares of the Company's Common
Stock. These transactions are expected to close in the first half of 1998.
44
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Derivative financial instruments are primarily used by the Company to reduce
market risk arising from changes in foreign exchange and interest rates. The
Company does not use derivative financial instruments for trading purposes, nor
does it engage in currency or interest rate speculation. Derivatives used by the
Company consist of foreign exchange instruments. The Company believes that the
various counterparties with which the Company enters into these agreements
consist of only financially sound institutions and, accordingly, believes that
the credit risk for non-performance of these contracts is remote. The Company
monitors its underlying market risk exposures on an ongoing basis and believes
that it can modify or adapt its hedging strategies as needed.
The Company enters into forward exchange contracts on a month-to-month basis
to hedge foreign currency exposure with regard to certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. These
contracts generally do not subject the Company's results of operations to risk
of exchange rate movements because gains and losses on these contracts generally
offset, in the same period, gains and losses on the monetary assets and
liabilities being hedged.
On a selective basis, the Company (and the Distributing Company, on behalf
of the Company, prior to the Distributions) enters into forward exchange and
purchased option contracts to hedge the currency exposure of contractual and
other firm commitments denominated in foreign currencies. The Company may also
use forward exchange and purchased option contracts designed to hedge the
currency exposure of anticipated, but not yet committed, transactions expected
to be denominated in foreign currencies. The purpose of these activities is to
protect the Company from the risk that the eventual net cash flows in U.S.
dollars from foreign receivables and payables will be adversely affected by
changes in exchange rates. Gains and losses on hedges related to contractual and
other firm commitments are deferred and recognized in the Company's results of
operations in the same period as the gain or loss from the underlying
transactions. Gains and losses on forward exchange contracts used to hedge
anticipated, but not yet committed, transactions are recognized in the Company's
results of operations as changes in exchange rates for the applicable foreign
currencies occur. Historically, foreign exchange contracts with respect to
contractual and other firm commitments and anticipated, but not yet committed,
transactions have been short-term in nature. In addition, purchased options have
had no intrinsic value at the time of purchase.
The Company generally settles forward exchange contracts at maturity at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of the contract premium or
discount. The amortization of these premiums or discounts during each of the
three years in the period ended December 31, 1997 was not significant. As of
December 31, 1997 and 1996, the Company had outstanding forward exchange
contracts with notional amounts of $73 and $9 million, respectively, comprised
of foreign currencies that were to be purchased (principally the New Taiwan and
Canadian dollars in 1997 and the Pound Sterling in 1996) and $11 and $21
million, respectively, comprised of foreign currencies that were to be sold
(principally the Canadian dollar). All outstanding forward exchange contracts at
December 31, 1997 and 1996 mature within 12 months, and the fair values of such
contracts approximated their carrying values, which were not material.
Accordingly, deferred gains or losses on such contracts at December 31, 1997 and
1996 were not significant. Foreign currency transaction losses included in
operations were $2, $2 and $5 million in 1997, 1996 and 1995, respectively. As
of December 31, 1997 and 1996, the Company had no purchased option contracts
outstanding.
45
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION
The Company operates in a single-industry segment as a leading supplier of
systems and equipment for high-performance networks delivering video, voice and
data/Internet services. This segment includes digital and analog set-top
systems, network transmission systems, digital and analog satellite systems,
including digital compression and transmission system, and high-speed data
network and telephony network solutions.
A significant portion of the Company's products are manufactured or
assembled in Mexico and Taiwan. At December 31, 1997, the net assets of these
production operations were $20 and $34 million, respectively.
Operating income (loss) represents net revenue less operating expenses,
which excludes interest and income taxes. Identifiable assets are those used in
the operations of each geographic area.
<TABLE>
<CAPTION>
U.S. (a) FOREIGN ELIMINATIONS COMBINED
----------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Net sales (b)............................................................... $ 1,555,319 $208,769 $ -- $1,764,088
Intercompany transfers (c).................................................. 197,622 148,873 (346,495) --
Net revenues.............................................................. 1,752,941 357,642 (346,495) 1,764,088
Operating income............................................................ 23,123(d) 2,154 -- 25,277(d)
Corporate expenses.......................................................... -- -- -- (35,472)(e)
Identifiable assets......................................................... 1,375,809 137,380 -- 1,513,189
Corporate assets............................................................ -- -- -- 162,164
Year Ended December 31, 1996
Net sales (b)............................................................... 1,579,917 175,668 -- 1,755,585
Intercompany transfers (c).................................................. 140,123 177,060 (317,183) --
Net revenues.............................................................. 1,720,040 352,728 (317,183) 1,755,585
Operating income (loss)..................................................... (119,109)(f) 14,514 -- (104,595)(f)
Corporate expenses.......................................................... -- -- -- (17,416)
Identifiable assets......................................................... 1,462,886 150,947 -- 1,613,833
Corporate assets............................................................ -- -- -- 15,903
Year Ended December 31, 1995
Net sales (b)............................................................... 1,400,678 131,917 -- 1,532,595
Intercompany transfers (c).................................................. 118,445 110,314 (228,759) --
Net revenues.............................................................. 1,519,123 242,231 (228,759) 1,532,595
Operating income............................................................ 27,042(g) 15,218 -- 42,260(g)
Corporate expenses.......................................................... -- -- -- (19,998)
Identifiable assets......................................................... 1,239,976 105,977 -- 1,345,953
Corporate assets............................................................ -- -- -- 8,385
</TABLE>
- ------------------------
(a) Included in the U.S. net sales amount are export sales of $304, $285 and
$193 million in 1997, 1996 and 1995, respectively.
(b) A limited number of cable and satellite television operators provide
services to a large percentage of television households in the U.S. The loss
of some of these operators as customers could have a material adverse effect
on the Company's sales. TCI and Time Warner, including affiliates, accounted
for 14%, 23% and 30% and 14%, 13% and 14% of the Company's consolidated net
sales in 1997, 1996 and 1995, respectively.
46
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION (CONTINUED)
(c) Intercompany transfers reflect the originating geographic source of the
transfer and principally reflect product assembly, which is accounted for at
cost plus a nominal profit.
(d) Includes charges of $107 million reflecting $45 million of restructuring
charges (see Note 5) and $62 million of charges primarily related to the
closure of various facilities and the write-down of certain assets to their
estimated net realizable values (see Note 17).
(e) Includes $15 million of restructuring charges (see Note 5).
(f) Includes charges of $226 million reflecting $8 million of restructuring
charges (see Note 5), $141 million of NLC Litigation costs (see Note 12),
$57 million of charges primarily related to the transition to the Company's
next-generation digital products (see Note 17), and $20 million of other
charges related to the write-down of certain assets to their estimated net
realizable values and an accrual for a litigation matter (see Note 17).
(g) Includes a charge of $140 million for purchased in-process technology in
connection with the acquisition of NLC (see Note 6).
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------- ---------------------- ----------------------
1997(a) 1996 1997(b) 1996(c) 1997 1996 1997(d) 1996(e)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 408,028 $ 386,948 $ 450,403 $ 433,173 $ 464,582 $ 428,892 $ 441,075 $ 506,572
Gross profit............... 113,514 100,134 117,618 110,816 133,441 121,223 63,033 73,597
Net income (loss).......... $ 4,960 $ 5,843 $ 406 $ (86,129) $ 24,458 $ 16,813 $ (45,937) $ (32,837)
</TABLE>
- ------------------------
(a) Includes a pre-tax charge of $3 million ($2 million net-of-tax), recorded as
cost of sales, for employee costs related to dividing the Distributing
Company's Taiwan operations between the Company and General Semiconductor.
(b) Includes a pre-tax charge of $15 million ($11 million net-of-tax), recorded
as cost of sales, for employee costs related to dividing the Distributing
Company's Taiwan operations between the Company and General Semiconductor
and a pre-tax charge of $6 million ($4 million net-of-tax), recorded as SG&A
expense, related to legal and other professional fees incurred in connection
with the Distributions.
(c) Includes a charge of $141 million ($92 million net-of-tax) related to the
NLC Litigation (see Note 12).
(d) Includes pre-tax charges of $86 million reflecting $36 million ($24 million
net-of-tax) of restructuring charges (see Note 5) and $50 million ($37
million net-of-tax) of other net charges primarily related to the write-down
of certain assets to their estimated net realizable values, partially offset
by net investment gains and the reversal of accrued interest related to the
NLC Litigation based on the final judgment. Of these charges, $66 million
were recorded as cost of sales and primarily related to the closure of the
Company's Puerto Rico satellite TV manufacturing facility and the write-down
of inventories to their estimated net realizable values; $22 million were
recorded as SG&A expense and
47
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
primarily related to severance and other employee separation charges and
costs associated with the closure of various facilities; and $9 million were
recorded as research and development expense and primarily related to
severance and other employee separation charges and the write-down of
certain assets used in research and development activities to their
estimated net realizable values. These charges were partially offset by $11
million of other income related to net investment gains and income
associated with the reversal of accrued interest related to the final NLC
Litigation settlement.
(e) Includes pre-tax charges of $85 million reflecting $8 million ($5 million
net-of-tax) of restructuring charges (see Note 5), $57 million ($35 million
net-of-tax) of charges related to the Company's transition to
next-generation digital products and $20 million ($13 million net-of-tax) of
other charges related to the write-down of certain assets to their estimated
net realizable values and the settlement of a litigation matter. Of these
charges, $71 million were recorded as cost of sales and related to the
write-down of inventories to their estimated net realizable values and the
accrual of upgrade and product warranty liabilities in connection with the
transition to the Company's next-generation digital products. The remaining
$14 million of charges were recorded as SG&A expense and related to the
restructuring charges, the write-down of fixed assets to their estimated net
realizable values and the settlement of a litigation matter.
The basic and diluted earnings per share were $0.17 and $0.16, respectively,
for the third quarter of 1997, and the basic and diluted loss per share were
both $0.31 for the fourth quarter of 1997. Historical earnings (loss) per share
for all periods prior to the Distributions have been omitted since the Company
was not a separate company with a capital structure of its own.
The New York Stock Exchange is the principal market on which the Company's
securities are traded. The Company's Common Stock began trading on July 24,
1997, and the high and low prices during the third and fourth quarters were
$21 1/2 and $16 and $19 1/8 and $12 5/8, respectively. The Company did not pay
dividends on its Common Stock during 1997.
18. 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 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.
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 going forward.
48
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
18. THE PARTNERSHIP (CONTINUED)
In addition, in January 1998, the Company advanced $75 million to the
Partnership in exchange for an 8% debt instrument (the "Note"), and the Note
contains normal creditor security rights, including a prohibition against
incurring amounts of indebtedness for borrowed money in excess of $10 million.
Since the repayment of the Note is solely dependent upon the results of the
Partnership's research and development activities and the commercial success of
its product development, the Company recorded a charge to fully reserve for the
Note concurrent with the funding.
The Company will account 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.
19. SUBSEQUENT EVENTS
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 alleges that the defendants violated Section 11 of the
Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 thereunder by making false an misleading statements about the
Company's business, finances and future prospects. The Company intends to
vigorously contest this action.
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. The plaintiffs allege 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. The Company
believes this litigation is duplicative of prior litigation and intends to
vigorously contest this action.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the financial statements of General Instrument Corporation and
its subsidiaries (formerly NextLevel Systems, Inc. and, prior thereto, the
Communications Business of the former General Instrument Corporation) as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated February 14, 1998
(March 5, 1998 as to Note 19); such report is included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of General
Instrument Corporation, listed in Item 14(a)2. This financial statement schedule
is the responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 14, 1998
50
<PAGE>
GENERAL INSTRUMENT CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
OF END OF
PERIOD ADDITIONS DEDUCTIONS OTHER(1) PERIOD
----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful Accounts:
Year ended December 31, 1997...................... $ 12,910 $ 437 $ (4,781) $ (5,000) $ 3,566
Year ended December 31, 1996...................... $ 10,144 $ 5,190 $ (2,424) $ -- $ 12,910
Year ended December 31, 1995...................... $ 3,791 $ 6,971 $ (618) $ -- $ 10,144
</TABLE>
- ------------------------
(1) Other represents the collection of certain receivables previously considered
to be uncollectable.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections captioned
"Management of the Company--Board of Directors of the Company," "Management of
the Company--Executive Officers" and "Management of the Company--Section 16(a)
Beneficial Ownership Reporting Compliance" included in the Proxy Statement for
the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement")
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the sections captioned
"Management of the Company--Executive Officer Compensation," "Management of the
Company--Compensation of Directors," "Management of the Company--Stock Options,"
"Management of the Company--Pension Plan and SERP" and "Management of the
Company--Severance Protection and Separation Agreements" in the 1998 Proxy
Statement and is incorporated herein by reference. The sections captioned
"Management of the Company--Compensation Committee Report on Compensation of
Executive Officers" and "Performance Graph" in the 1998 Proxy Statement are not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in the section captioned
"Beneficial Ownership of Common Stock" in the 1998 Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section captioned
"Management of the Company--Certain Relationships and Related Transactions" in
the 1998 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included in
Part II, Item 8.
2. FINANCIAL STATEMENT SCHEDULE.
The Financial Statement Schedule of the Company is included in Part
II, Item 8.
3. LIST OF EXHIBITS. See Index of Exhibits included on page 54.
(b) Reports on Form 8-K:
A Form 8-K dated as of December 17, 1997 was filed pursuant to Item 5
(Other Events).
A Form 8-K dated as of October 16, 1997 was filed pursuant to Item 5
(Other Events).
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL INSTRUMENT CORPORATION
Date: March 31, 1998 By: /s/ EDWARD D. BREEN
------------------------------------------
Edward D. Breen
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ EDWARD D. BREEN Chairman of the Board and Chief
------------------------------------------- Executive Officer (Principal March 31, 1998
Edward D. Breen Executive Officer)
/s/ ERIC M. PILLMORE Vice President, Finance and Acting
------------------------------------------- Chief Financial Officer (Principal March 31, 1998
Eric M. Pillmore Financial Officer)
/s/ PAUL J. BERZENSKI
------------------------------------------- Vice President and Controller March 31, 1998
Paul J. Berzenski (Principal Accounting Officer)
/s/ JOHN SEELY BROWN
------------------------------------------- Director March 31, 1998
John Seely Brown
/s/ FRANK M. DRENDEL
------------------------------------------- Director March 31, 1998
Frank M. Drendel
/s/ LYNN FORESTER
------------------------------------------- Director March 31, 1998
Lynn Forester
/s/ THEODORE J. FORSTMANN
------------------------------------------- Director March 31, 1998
Theodore J. Forstmann
/s/ ALEX J. MANDL
------------------------------------------- Director March 31, 1998
Alex J. Mandl
/s/ J. TRACY O'ROURKE
------------------------------------------- Director March 31, 1998
J. Tracy O'Rourke
</TABLE>
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
2.1* Agreement of Merger, dated as of July 25, 1997, between the Company and NextLevel Systems of
Delaware, Inc.
3.1 Certificate of Ownership and Merger, effective February 2, 1998 (amending Amended and Restated
Certificate of Incorporation of the Company).
3.2* Amended and Restated Certificate of Incorporation of the Company
3.3* Amended and Restated By-Laws of the Company.
4.1** Rights Agreement, dated as of June 12, 1997, between the Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (the "Rights Agreement"), which includes, as Exhibit A thereto,
the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock of the Company, as Exhibit B thereto, the Form of Right Certificate and as Exhibit C thereto,
the Summary of Rights to Purchase Preferred Shares.
4.2**** Amendment, dated as of December 16, 1997, to the Rights Agreement.
4.3 Form of Warrant Issuance Agreement.
10.1* Employee Benefits Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope,
Inc. and General Semiconductor, Inc.
10.2* Debt and Cash Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc.
and General Semiconductor, Inc.
10.3* Insurance Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
Semiconductor, Inc.
10.4* Tax Sharing Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
Semiconductor, Inc.
10.5* Trademark License Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and
General Semiconductor, Inc.
10.6* Transition Services Agreement, dated as of July 25, 1997, between the Company and General
Semiconductor, Inc.
10.7* Transition Services Agreement, dated as of July 25, 1997, between the Company and CommScope, Inc.
10.8* Credit Agreement, dated as of July 23, 1997, among the Company, Certain Banks, The Chase Manhattan
Bank, as Administrative Agent, and The Chase Manhattan Bank, Bank of America National Trust and
Savings Association, BankBoston, N.A., The Bank of Nova Scotia, Bank of Tokyo-Mitsubishi Trust
Company, Caisse Nationale de Credit Agricole, CIBC Inc., Deutsche Bank, A.G., New York Branch
and/or Cayman Islands Branch, The Fuji Bank Limited and NationsBank, N.A. as Co-Agents.
10.9*+ The Company's 1997 Long-Term Incentive Plan.
10.10***+ Form of Severance Protection Agreement between the Company and certain executive officers.
10.11+ The Company's Annual Incentive Plan.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.12+ The Company's Deferred Compensation Plan.
10.13+ The Company's Supplemental Executive Retirement Plan.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Forward-Looking Information.
</TABLE>
All other exhibits are not applicable.
- ------------------------
* Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 001-12925).
** Incorporated herein by reference from the Company's Registration Statement
on Form 8-A, filed with the Commission on June 30, 1997 (File No.
001-12925).
*** Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997 (File No. 001-12925).
****Incorporated herein by reference from the Company's Current Report on Form
8-K dated as of December 17, 1997 (File No. 001-12925).
+ Management contract or compensatory plan.
55
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
GENERAL INSTRUMENT CORPORATION
INTO
NEXTLEVEL SYSTEMS, INC.
(PURSUANT TO SECTION 253 OF THE
GENERAL CORPORATION LAW OF DELAWARE)
NextLevel Systems, Inc., a corporation organized and existing under the laws
of Delaware (the "Corporation"), does hereby certify:
FIRST: That the Corporation owns all of the outstanding shares of each class
of stock of General Instrument Corporation, a Delaware corporation ("GI"),
incorporated on October 3, 1997, pursuant to the General Corporation Law of
Delaware.
SECOND: That the Corporation, by the following resolutions of its Board of
Directors, duly adopted at a meeting held on December 10, 1997, determined
to and did merge GI into the Corporation, by the adoption thereof:
RESOLVED, that the Corporation merge, and it hereby does merge, into
itself GI and assumes all of its obligations.
RESOLVED, that said merger shall be effective as of 8:00 a.m. on February
2, 1998.
RESOLVED, that upon effectiveness of said merger, the name of the
Corporation shall be changed to General Instrument Corporation and
Article FIRST of the Amended and Restated Certificate of Incorporation of
the Corporation, as heretofore amended, shall be amended to read as
follows:
"FIRST: The name of the Corporation is General Instrument Corporation."
RESOLVED, that except for the foregoing amendment to Article FIRST, the
Amended and Restated Certificate of Incorporation shall remain unchanged
by the merger and in full force and effect until further amended in
accordance with the General Corporation Law of Delaware.
RESOLVED, that the proper officers of the Corporation be, and they hereby
are, directed to make and execute a Certificate of Ownership and Merger
setting forth a copy of the resolutions to so merge GI and to assume its
obligations, and to so change the name of the Corporation, and the date
of adoption thereof, and to cause the same to be filed with the Secretary
of State of the State of Delaware and to do all acts and things
whatsoever, whether within or without the State of Delaware, which may be
necessary or proper to effect said merger and change of name.
THIRD: This Certificate of Ownership and Merger shall become effective as of
8:00 a.m. on February 2, 1998.
In witness whereof, the Corporation has caused this Certificate to be signed
by its duly authorized officer, this 30th day of January, 1998.
<TABLE>
<S> <C> <C>
NEXTLEVEL SYSTEMS, INC.
By: /s/ KEITH A. ZAR
----------------------------------------------
Name: Keith A. Zar
Title: VICE PRESIDENT AND
GENERAL COUNSEL
</TABLE>
<PAGE>
EXHIBIT 4.3
-------------------------------------------
FORM OF
WARRANT ISSUANCE AGREEMENT
-------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Section 1. ISSUANCE OF WARRANTS...................................................................... 1
Section 2. FORM OF WARRANT CERTIFICATES.............................................................. 1
Section 3. EXECUTION OF WARRANT CERTIFICATES......................................................... 1
Section 4. REGISTRATION.............................................................................. 2
Section 5. TRANSFER AND EXCHANGE..................................................................... 2
Section 6. [INTENTIONALLY OMITTED]................................................................... 2
Section 7. TRANSFERS TO COMPETITORS.................................................................. 2
Section 8. RIGHTS IN THE EVENT OF A PUBLIC OFFERING; CLOSING MATTERS, ETC............................ 4
Section 9. NO IMPAIRMENT............................................................................. 6
Section 10. VESTING OF WARRANTS....................................................................... 6
Section 11. EXERCISE OF WARRANTS...................................................................... 7
(a) EXERCISABILITY OF WARRANTS............................................................ 7
(b) METHOD OF EXERCISE.................................................................... 7
Section 12. EXPIRATION OF WARRANTS.................................................................... 8
Section 13. PAYMENT OF TAXES.......................................................................... 8
Section 14. MUTILATED OR MISSING WARRANT CERTIFICATES................................................. 8
Section 15. RESERVATION OF SHARES..................................................................... 8
Section 16. OBTAINING OF CERTAIN GOVERNMENTAL APPROVALS............................................... 9
Section 17. WARRANT SHARES ISSUABLE UPON EXERCISE OF A VESTED COMMON STOCK WARRANT.................... 9
Section 17A. WARRANT SHARES ISSUABLE UPON EXERCISE OF A VESTED PREFERRED STOCK WARRANT................. 13
Section 18. NOTICE TO WARRANTHOLDER................................................................... 13
Section 19. REGISTRATION RIGHTS....................................................................... 14
(a) DEMAND REGISTRATION RIGHTS............................................................ 14
(b) "PIGGYBACK" REGISTRATIONS............................................................. 15
(c) GI'S OBLIGATIONS IN REGISTRATION...................................................... 16
(d) PAYMENT OF REGISTRATION EXPENSES...................................................... 18
(e) INFORMATION FROM HOLDERS.............................................................. 19
(f) INDEMNIFICATION....................................................................... 19
(g) EXCHANGE OF CERTIFICATES.............................................................. 20
(h) OBLIGATIONS OF THE HOLDERS............................................................ 20
(i) UNDERWRITTEN REGISTRATION............................................................. 21
(j) EXCHANGE ACT COMPLIANCE............................................................... 21
Section 20. RESTRICTIONS ON TRANSFERABILITY OF WARRANT SHARES......................................... 21
(a) RESTRICTIVE LEGEND; WARRANTHOLDER'S REPRESENTATION.................................... 22
(b) STATEMENT OF INTENTION TO TRANSFER; OPINION OF COUNSEL................................ 22
(c) TERMINATION OF RESTRICTIONS........................................................... 22
Section 21. REPRESENTATIONS AND WARRANTIES; CERTAIN COVENANTS......................................... 23
(a) ORGANIZATION AND STANDING............................................................. 23
(b) CAPITALIZATION........................................................................ 23
(c) AUTHORIZATION......................................................................... 23
(d) NO CONFLICTS.......................................................................... 24
(e) SEC FILINGS........................................................................... 24
(f) NO BROKERS............................................................................ 24
Section 21A. REPRESENTATION AND WARRANTY OF THE COMPANY................................................ 24
Section 22. NO RIGHTS OR LIABILITIES AS STOCKHOLDER................................................... 24
Section 23. DEFINITIONS............................................................................... 24
Section 24. NOTICES................................................................................... 28
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Section 25. AMENDMENTS................................................................................ 29
Section 26. SUCCESSORS AND ASSIGNS.................................................................... 29
Section 27. TERMINATION............................................................................... 29
Section 28. GOVERNING LAW............................................................................. 29
Section 29. THIRD PARTY BENEFICIARIES................................................................. 29
Section 30. HEADINGS.................................................................................. 29
Section 31. ENTIRE AGREEMENT.......................................................................... 29
Section 32. EXPENSES.................................................................................. 29
Section 33. COUNTERPARTS.............................................................................. 29
</TABLE>
<TABLE>
<S> <C> <C>
Schedule A. Threshold Amount and Vesting Schedule.......................
Schedule B. Terms of Preferred Stock....................................
Exhibit A-1 [OMITTED] Form of--Warrant Certificate for GI Common Stock............
--Election to Purchase......................................
--Assignment................................................
Exhibit A-2 [OMITTED] Form of--Warrant Certificate for GI Preferred Stock.........
--Election to Purchase......................................
--Assignment................................................
</TABLE>
ii
<PAGE>
WARRANT ISSUANCE AGREEMENT
WARRANT ISSUANCE AGREEMENT (this "AGREEMENT"), dated as of ,
199 , by and between NextLevel Systems, Inc., a Delaware corporation ("GI"), and
[ ] (the "COMPANY").
WHEREAS, GI and the Company have entered into a Digital Terminal Purchase
Agreement, dated as of the date hereof (the "PURCHASE AGREEMENT"), whereby the
Company agreed to purchase Digital Terminals from GI;
WHEREAS, it is a condition to the effectiveness of the Purchase Agreement
that GI and the Company enter into this Agreement;
WHEREAS, GI intends, pursuant to this Agreement, to issue Warrants entitling
the Warrantholder to purchase shares of common stock, par value $.01 per share,
of GI (the "GI COMMON STOCK") and shares of a new series of exchangeable
preferred stock, par value $.01 per share, of GI (the "GI PREFERRED STOCK")
having the terms set forth on Schedule B.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein set forth, the parties hereto agree as follows:
SECTION 1. ISSUANCE OF WARRANTS.
Simultaneously with the execution hereof, GI, for good and valuable
consideration, hereby agrees to issue to the Warrantholder an aggregate of (i)
warrants to purchase shares of GI Common Stock ("COMMON STOCK WARRANTS")
and (ii) warrants to purchase shares of GI Preferred Stock ("PREFERRED
STOCK WARRANTS"), each GI Common Stock Warrant exercisable, at the Common
Exercise Price, for one share of GI Common Stock and each Preferred Stock
Warrant exercisable, at the Preferred Exercise Price, for one share of GI
Preferred Stock, subject to adjustment as set forth herein (the Common Stock
Warrants and the Preferred Stock Warrants being collectively referred to as the
"WARRANTS").
SECTION 2. FORM OF WARRANT CERTIFICATES.
The certificates evidencing the Warrants (the "WARRANT CERTIFICATES") to be
delivered pursuant to this Agreement shall be in registered form only, shall
comply with the Delaware General Corporation Law and any other applicable law
and shall be substantially in the form set forth in EXHIBIT A-1 AND A-2 attached
hereto.
SECTION 3. EXECUTION OF WARRANT CERTIFICATES.
Warrant Certificates shall be signed on behalf of GI by its President or any
Vice President, and by its Secretary or an Assistant Secretary, under its
corporate seal. Each such signature upon the Warrant Certificates may be in the
form of a facsimile signature of the President, any Vice President, Secretary or
Assistant Secretary and may be imprinted or otherwise reproduced on the Warrant
Certificates and for that purpose GI may adopt and use the facsimile signature
of any person who shall have been President, any Vice President, Secretary or an
Assistant Secretary at the time such signature was so imprinted or otherwise
produced notwithstanding the fact that at the time the Warrant Certificates
shall be delivered or disposed of such person shall have ceased to hold such
office. The seal of GI may be in the form of a facsimile thereof and may be
impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates.
In case any officer of GI who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been delivered or disposed of by GI, such Warrant Certificates
nevertheless may be delivered or disposed of as though such person had not
ceased to be such officer of GI; and any Warrant Certificate may be signed on
behalf of GI by any person who, at the actual date of the execution of such
Warrant Certificate, shall be a proper officer of GI to sign such Warrant
Certificate, although at the date of the execution of this Agreement any such
person was not such officer.
<PAGE>
SECTION 4. REGISTRATION.
Warrant Certificates issued as provided in this Agreement shall be numbered
by GI and shall be registered by GI in a register maintained by its Secretary at
its principal executive offices in the name of the Warrantholder.
SECTION 5. TRANSFER AND EXCHANGE.
(a) An assignment, conveyance or other transfer of the Warrants shall be
made on the books of GI maintained for such purpose at the principal office of
GI referred to in SECTION 24 upon surrender of the Warrants together with a
properly completed assignment duly executed by the Warrantholder or a subsequent
transferee. Upon any such registration of transfer, new Warrants shall be issued
to the transferee and the surrendered Warrants shall be canceled.
Notwithstanding the foregoing, the Warrants and the rights under this Agreement
may not be assigned, conveyed or transferred unless (i) such assignment,
conveyance or transfer complies with all applicable securities laws and the
provisions of this Agreement, including SECTION 5(B), and (ii) the transferee
agrees in writing to be bound by the terms of this Agreement, including the
restrictions set forth in SECTIONS 5(B), 7 and 8.
(b) The Warrants may not be sold, assigned, monetized or otherwise
transferred prior to their respective Warrant Expiration Dates, except that the
Warrantholder may transfer the Warrants to an Affiliate of the Warrantholder
that agrees in writing to be bound by the terms of this Agreement.
(c) Warrant Certificates may be exchanged at the option of the
Warrantholder, when surrendered to GI at its office referred to in SECTION 24
for another Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number and type of Warrants. Warrant
Certificates surrendered for exchange, transfer or exercise shall be canceled by
GI.
(d) At any time prior to the exercise of a Preferred Stock Warrant, at GI's
option, GI may elect to cause such Warrant to become exercisable for 10 times
the Common Warrant Shares issuable or deliverable upon exercise of a Common
Stock Warrant (initially for 10 shares of GI Common Stock) for each share of GI
Preferred Stock issuable upon exercise of such Preferred Stock Warrant prior to
such changes.
SECTION 6. [INTENTIONALLY OMITTED]
SECTION 7. TRANSFERS TO COMPETITORS.
(a) Notwithstanding any other provisions of this Agreement the Warrantholder
shall not knowingly sell, transfer, pledge, hypothecate, assign or otherwise
dispose of any Warrant Shares to a Competitor at any time prior to December 31,
2002 without first complying with the provisions of this SECTION 7. If prior to
December 31, 2002, the Warrantholder shall receive a bona fide offer in writing
from a Competitor (a "COMPETITOR OFFER") to acquire all or part of the Warrant
Shares (the "FIRST OFFER SHARES"), which offer the Warrantholder proposes to
accept, the Warrantholder shall deliver to GI a notice (a "NOTICE OF SALE")
containing a copy of the Competitor Offer, and setting forth the identity of the
Competitor and an offer to sell the First Offer Shares to GI on the following
terms: (i) if the Competitor Offer contemplates a purchase of the First Offer
Shares by the Competitor for consideration consisting solely of cash, then the
Warrantholder's offer shall be to sell the First Offer Shares for cash in an
amount equal to the purchase price specified in, and otherwise on the terms and
conditions contained in, the Competitor Offer, and (ii) if the Competitor Offer
contemplates an acquisition of the First Offer Shares by the Competitor for
consideration any portion of which is not cash, then the Warrantholder's offer
shall be to sell the First Offer Shares for cash in an amount equal to the sum
of the cash consideration and the fair market value of the noncash consideration
(as determined pursuant to paragraph (c) below) specified in, and otherwise on
the terms and conditions contained in, the Competitor Offer; PROVIDED, HOWEVER
that if the Competitor
2
<PAGE>
Offer is a public tender or exchange offer (other than a tender or exchange
offer made by a Person that is not an Affiliate of the Warrantholder to acquire
50% or more of the outstanding shares of GI Common Stock as to which this
SECTION 7 shall not apply), made by a person that is not an Affiliate of the
Warrantholder, to acquire shares of GI Common Stock, the per share price to be
paid for the First Offer Shares shall be equal to the highest per share price
actually paid for shares of GI Common Stock in such public tender or exchange
offer. The Notice of Sale shall specify the price at which the First Offer
Shares are offered, as provided in the preceding sentence. If GI desires to
accept the offer set forth in a Notice of Sale, GI shall, within 30 days of
receipt of such Notice of Sale, notify the Warrantholder in writing of its
intention to acquire the First Offer Shares. The closing of such purchase and
sale shall be subject to the additional provisions of paragraphs (d) and (e) of
SECTION 8.
(b) If (i) GI does not timely accept the offer set forth in a Notice of
Sale, or (ii) the purchase of the First Offer Shares is not consummated within
the period set forth in SECTION 8(D)(III) for any reason other than a breach by
the Warrantholder of any of its covenants, representations or warranties that
are a condition to consummation of such purchase, then GI shall be deemed to
have rejected such offer as of the last date for accepting such offer or closing
such purchase, as applicable, and the Warrantholder shall have the right, at any
time during the thirty day period beginning on the date that the offer set forth
in a Notice of Sale is deemed rejected or the day following the last day of the
period set forth in SECTION 8(D)(III), as applicable, to enter into a binding
agreement to sell all of the First Offer Shares to the Competitor on terms and
conditions no less favorable in the aggregate to the Warrantholder than those
set forth in the Competitor Offer, and thereafter (within the period specified
below in this paragraph (b)) to sell all of the First Offer Shares to the
Competitor pursuant to such agreement. If the Warrantholder does not enter into
such an agreement during such thirty-day period, or does not close the sale
thereunder within sixty days after execution of such an agreement (subject to
extension for a maximum of one hundred eighty additional days to the extent
required to obtain all required governmental and third party approvals), the
procedure set forth above with respect to the Notice of Sale shall be repeated
with respect to any subsequent proposed sale, assignment or other disposition of
the Warrant Shares to a Competitor. Any First Offer Shares transferred to a
Person other than GI in compliance with the provisions of this SECTION 7 shall
not thereafter be subject to the provisions of this Agreement.
(c) Before submitting a Notice of Sale pursuant to paragraph (a) in response
to a Competitor Offer that contemplates (i) a sale of the First Offer Shares in
conjunction with other assets, or (ii) an acquisition of the First Offer Shares
by the Competitor for consideration any portion of which is not cash, the
Warrantholder and GI shall cause (A) if the Competitor Offer contemplates a sale
of the First Offer Shares in conjunction with other assets, the total
consideration specified in the Offer to be allocated between the First Offer
Shares and such other assets, (B) if the Competitor Offer contemplates an
acquisition of the First Offer Shares by the Competitor for consideration any
portion of which is not cash, the fair market value of the noncash consideration
to be determined, in each case pursuant to this paragraph (c):
(i) The Warrantholder shall deliver to GI a notice stating that the
Warrantholder intends to deliver a Notice of Sale to which this paragraph
(c) applies and identifying an appraiser (the "FIRST APPRAISER") who has
been retained by the Warrantholder to allocate the total consideration
specified in the Competitor Offer or to conduct an appraisal of the noncash
consideration pursuant to this paragraph (c). Within ten business days after
its receipt of the Warrantholder's notice pursuant to the preceding
sentence, GI shall send a notice to the Warrantholder identifying a second
appraiser (the "SECOND APPRAISER") who shall be retained by GI to make such
allocation or conduct such appraisal, as applicable, pursuant to this
paragraph (c).
(ii) The First Appraiser and the Second Appraiser shall submit their
independent determinations of the amount of consideration allocable to the
First Offer Shares or the fair market value of the noncash consideration as
applicable, within thirty days after the date on which the Second Appraiser
is retained. If the respective determinations of the First Appraiser and the
Second Appraiser vary by less
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than ten percent of the higher determination, the amount of consideration
allocable to the First Offer Shares or the fair market value of the noncash
consideration, as applicable, for purposes of paragraph (a), shall be the
average of the two determinations.
(iii) If the respective determinations of the First Appraiser and the
Second Appraiser vary by ten percent or more of the higher determination,
the two Appraisers shall promptly designate a third appraiser (the "THIRD
APPRAISER"), who shall be retained by the Warrantholder and GI to make an
allocation or conduct an appraisal pursuant to this paragraph (c). The First
Appraiser and the Second Appraiser shall be instructed not to, and the
Warrantholder and GI shall not provide any information to the Third
Appraiser as to the determinations of the First Appraiser and the Second
Appraiser or otherwise influence the Third Appraiser's determination in any
way. The Third Appraiser shall submit its determination of the amount of
consideration allocable to the First Offer Shares or the fair market value
of the noncash consideration, as applicable, within thirty days after the
date on which the Third Appraiser is retained. If a Third Appraiser is
retained, the amount of consideration allocable to the First Offer Shares or
the fair market value of the noncash consideration, as applicable, for
purposes of paragraph (a), shall equal the average of the two closest of the
three determinations, except that, if the difference between the highest and
middle determinations is no more than 105% and no less than 95% of the
difference between the middle and lowest determinations, then the amount of
consideration allocable to the First Offer Shares or the fair market value
of the noncash consideration, as applicable, for purposes of paragraph (a),
shall equal the middle determination.
(iv) Any appraiser retained pursuant to this paragraph (c) shall be
nationally recognized as being qualified and experienced in the appraisal of
assets comparable to the First Offer Shares and, if applicable, any other
assets proposed to be sold pursuant to the Competitor Offer and shall not be
an Affiliate of any party to this Agreement. All fees and expenses of the
First Appraiser shall be borne by the Warrantholder, of the Second Appraiser
shall be borne by GI and of the Third Appraiser shall be borne equally by
the Warrantholder and GI.
(v) In determining the fair market value of the noncash consideration,
each appraiser retained pursuant to this paragraph (c) shall: (A) assume
that the fair market value of the applicable asset is the price at which the
asset would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and each having reasonable
knowledge of all relevant facts; (B) assume that the applicable asset would
be sold for cash; and (C) use valuation techniques then prevailing in the
relevant industry.
SECTION 8. RIGHTS IN THE EVENT OF A PUBLIC OFFERING; CLOSING MATTERS, ETC.
(a) In the event that the Warrantholder desires to sell any Warrant Shares
in a registered public offering for cash (the "OFFERING"), the Warrantholder
shall first offer such shares for sale to GI in accordance with the following
provisions.
(b) If the Warrantholder intends to cause GI to register Warrant Shares
pursuant to the terms of this Agreement, the Warrantholder shall deliver a
notice to GI (in addition to any notice required pursuant to SECTION 19 of this
Agreement) specifying (A) the number of the Warrant Shares the Warrantholder
desires to sell in the Offering (the "OFFERED SHARES") and (B) the proposed
timing of the Offering, and offering to sell the Offered Shares to GI at the
price determined below (an "OFFERING NOTICE"). If GI desires to purchase the
Offered Shares, it shall so notify the Warrantholder in writing within 10 days
from the receipt of such Offering Notice (a "REPLY NOTICE"). If, by its Reply
Notice, GI accepts the offer of the Warrantholder, such Reply Notice shall
constitute an agreement binding on GI and the Warrantholder to sell and purchase
for cash all, but not less than all, the Offered Shares at the Fair Market Value
for such shares as of the date of the Reply Notice.
(c) If GI does not accept the offer of the Warrantholder pursuant to the
foregoing provisions of this SECTION 8 or the purchase of the Offered Shares is
not consummated within the period set forth in
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SECTION 8(D)(III) for any reason other than a breach by the Warrantholder of any
of its covenants, representations or warranties that is a condition to
consummation of such purchase, then GI shall be deemed to have rejected such
offer as of the last date for accepting such offer or closing such purchase, as
applicable, and the Warrantholder shall have the right to proceed with a
registered public offering of the Offered Shares, subject to the further
provisions of this Agreement; PROVIDED, HOWEVER, that any Offered Shares that
have not been sold in a registered public offering prior to the first
anniversary of the date that the offer set forth in the Offering Notice is
deemed rejected for any reason other than the failure of GI to comply with its
covenants in SECTION 19 may not thereafter be sold in a registered public
offering without complying with the provisions of this Agreement. Any Offered
Shares transferred to a Person other than GI in compliance with the provisions
of this SECTION 8 shall not thereafter be subject to the provisions of this
Agreement.
(d) Any purchase by GI of Warrant Shares pursuant to SECTION 7 or SECTION 8
shall be subject to the following additional terms and conditions:
(i) The Warrantholder shall represent and warrant that GI will receive
good and valid title to the Warrant Shares, free and clear of all liens, of
any nature whatsoever except for governmental and third party approvals
required for transfers of shares of GI Common Stock generally.
(ii) The closing of the purchase and sale shall be subject to the
satisfaction of the following conditions:
(A) all governmental and third party approvals required with respect
to the transactions to be consummated at such closing shall have been
obtained, to the extent the failure to obtain such approvals would
prevent GI or the Warrantholder from performing any of its material
obligations under the transaction documents or would result in any
material adverse change in, or material adverse effect on, GI;
(B) there shall be no preliminary or permanent injunction or other
order by any court of competent jurisdiction restricting, preventing or
prohibiting the consummation of the transactions to be consummated at
such closing; and
(C) the representation and warranty of the Warrantholder contemplated
by clause (i) of this paragraph (d) shall be true and correct at the
closing of such sale with the same force and effect as if then made.
(iii) Unless otherwise agreed by the applicable parties, the closing of
any purchase and sale of Warrant Shares shall take place at the principal
executive offices of GI at 10:00 a.m. local time on a business day selected
by GI, provided that such closing shall occur as promptly as practicable,
and in any event within sixty days after the acceptance of the applicable
offer, subject to extension for a maximum of thirty additional days to the
extent required to obtain all required governmental and third party
approvals.
(iv) Unless otherwise agreed by the applicable parties, the purchase
price shall be payable by wire transfer of same day funds or by certified or
cashier's check drawn to the order of the Warrantholder, as specified by the
Warrantholder.
(e) The Warrantholder and GI shall each use commercially reasonable efforts
to cooperate with the other in connection with the Warrantholder's efforts to
transfer any interest in the Warrant Shares in accordance with the provisions of
SECTIONS 7 AND 8, including making qualified personnel available for attending
hearings and meetings respecting any approvals and authorizations required for
such transfer and, at the request of the Warrantholder, making all filings with,
and giving all notices to third parties and governmental authorities that may be
necessary or reasonably required to be made or given by the Warrantholder and GI
in order to effect the contemplated transfers. Subject to the other provisions
of this Agreement, neither the Warrantholder nor GI shall take any action to
delay, impair or impede the receipt
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of any required consents, approvals or authorizations. "Commercially reasonable
efforts" as used in this SECTION 8 shall not require any party to undertake
extraordinary or unreasonable measures to obtain any consents, approvals or
other authorizations.
SECTION 9. NO IMPAIRMENT.
The rights granted to the Warrantholder hereunder do not in any way conflict
with and are not inconsistent with the rights granted to a registered holder of
GI Common Stock under any other agreements, except such rights that have been
waived. GI will not, by amendment of its Amended and Restated Certificate of
Incorporation or By-laws, or through reorganization, consolidation, merger,
dissolution, issuance or sale of securities, sale of assets or any other
voluntary action, willfully avoid or seek to avoid the observance or performance
of any of the terms of this Agreement or the Warrants, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the Warrantholder under this Agreement and the Warrants against wrongful
impairment. Without limiting the generality of the foregoing, GI: (i) will take
all such action as may be necessary or appropriate in order that GI may validly
and legally issue fully paid and nonassessable Warrant Shares upon the exercise
of the Warrants; and (ii) will not on or after the date hereof enter into any
agreement with respect to its securities which is inconsistent with the rights
granted to the Warrantholder under this Agreement or which otherwise conflicts
with the provisions hereof.
SECTION 10. VESTING OF WARRANTS.
(a) The exercisability of the Warrants and the Warrantholder's rights under
this Agreement shall vest in accordance with the vesting schedule set forth in
SCHEDULE A and paragraph (c) below. Upon attainment of each applicable
Threshold, GI shall promptly notify the Warrantholder in writing that the number
of Warrants related to such Threshold will become exercisable in accordance with
SCHEDULE A, but the failure to give any such notice shall not affect the
exercisability of the applicable Warrants. The first Warrants to become
exercisable shall be the Common Stock Warrants; the Preferred Stock Warrants
shall become exercisable only after all outstanding Common Stock Warrants have
either become exercisable or failed to vest in accordance with SCHEDULE A
hereof.
(b) GI hereby covenants and agrees to proceed as promptly as practicable to
call and hold a meeting of its stockholders (the "STOCKHOLDERS MEETING"), in
compliance with all applicable laws and to the extent required by applicable law
or stock exchange regulations, for the purpose of approving the issuance of the
maximum amount of GI Common Stock that may be issued in the Transaction,
including, without limitation, upon consummation of the transactions
contemplated by the Memorandum of Agreement, upon exercise of the Common Stock
Warrants and, assuming only for purposes of such stockholder vote that GI has
exercised in full its right to cause the Preferred Stock Warrants to become
exercisable for GI Common Stock, upon exercise of the Preferred Stock Warrants
as so changed.
(c) If, as of June 30, 1998, GI has not exercised its right, as to all and
not less than all of the Preferred Stock Warrants, to cause the Preferred Stock
Warrants to become exercisable for GI Common Stock as provided in Section 5(d)
of this Agreement, then (i) after July 1, 1998 each Warrant shall automatically
vest and become exercisable on the last day of the applicable calendar year for
such Warrant set forth in the first column on Schedule A without regard to
whether the threshold number of Digital Terminals has been purchased for such
year (but the purchase commitment shall continue unaffected) and (ii) if at any
time and from time to time on or after July 1, 1998, Warrantholder desires to
sell any Preferred Warrant Shares to a Person that is not an Affiliate of the
Warrantholder in a bona fide arm's length transaction and the fair market value
of the consideration to be received therefor per Preferred Warrant Share would
be less than 10 times the then fair market value of a Common Warrant Share (the
amount of such difference being the "Per Share Differential"), then
Warrantholder shall provide prior written notice (the "Proposal Notice") to GI,
and GI shall (subject to the provisions set forth below) pay to the
Warrantholder within 45 days after
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receipt of a further written notice from the Warrantholder that the Preferred
Warrant Shares have been sold, an amount in cash (in immediately available
funds) equal to the product of the Per Share Differential times the number of
Preferred Warrant Shares so sold. The fair market value of the consideration
received in a sale of Warrant Shares shall be the amount of cash, if any, so
received and the fair market value of any noncash consideration determined in
the manner provided in Section 7(c), with the Warrantholder identifying the
First Appraiser in its Proposal Notice and GI identifying the Second Appraiser
within 5 days after receipt of such notice. GI at its option may, in lieu of
making payment pursuant to clause (ii) of this Section 10(c), elect, by written
notice (the "Response Notice") to the Warrantholder within 5 days after
receiving the Proposal Notice, to purchase the Preferred Warrant Shares which
Warrantholder proposes to sell pursuant to clause (ii) of this Section 10(c),
for a price equal to 10 times the then fair market value of a Common Warrant
Share multiplied by the number of Preferred Warrant Shares to be sold to such
Person; such payment by GI shall be made in cash (in immediately available
funds) within 45 days after the date of the Response Notice. The fair market
value of a Common Warrant Share that is a share of GI Common Stock shall, for
the purpose of this Section 10(c), be deemed to be the Closing Price of a share
of GI Common Stock on the Trading Day before the date of the sale of the
Preferred Warrant Shares to a Person or GI, as applicable; PROVIDED, HOWEVER,
that for purposes of determining whether the Warrantholder shall provide GI with
a Proposal Notice, the fair market value of a Common Warrant Share that is a
share of GI Common Stock shall be deemed to be the Closing Price of a share of
GI Common Stock on the Trading Day before the date the Proposal Notice is sent
by the Warrantholder. Any Preferred Stock Warrants remaining outstanding after
July 1, 1998 may, at GI's election at any time, become exercisable for GI Common
Stock in accordance with the terms of this Agreement. In the event that GI has
filed a preliminary proxy statement for the Stockholders Meeting prior to
February 15, 1998, but GI has been unable to obtain all necessary clearances
from the Securities and Exchange Commission so as to be able to hold the
Stockholders Meeting prior to June 30, 1998, then the July 1, 1998 date in this
paragraph (c) shall be extended, up to a maximum of 3 additional months, for
such time as may be necessary to obtain such approvals.
SECTION 11. EXERCISE OF WARRANTS.
(a) EXERCISABILITY OF WARRANTS. Subject to the terms and conditions set
forth herein, vested Warrants shall be exercisable for cash, in whole or in part
until the applicable Warrant Expiration Date in accordance with SCHEDULE A.
(b) METHOD OF EXERCISE. In order to exercise any vested Warrant, the
Warrantholder shall deliver to GI at its office referred to in SECTION 24: (i) a
written notice of such Warrantholder's election to exercise the vested Warrants,
which notice shall specify the number of such Warrantholder's vested Warrants
being exercised, (ii) a certified check or official bank check in immediately
available funds payable to the order of GI or a wire transfer in immediately
available funds to a bank account designated by GI, in an amount equal to the
Exercise Price multiplied by the number of Warrants being exercised, and (iii)
the Warrant Certificate evidencing the vested Warrants being exercised. Such
notice may be in the form of the Election to Purchase appearing at the end of
the Warrant Certificates attached as EXHIBIT A-1 and EXHIBIT A-2 hereto. Upon
receipt of the items referred to in clauses (i), (ii) and (iii) above, GI shall,
as promptly as practicable, and in any event within two Business Days
thereafter, execute or cause to be executed, and delivered to or upon the
written order of the Warrantholder, and in the name of the Warrantholder, a
certificate or certificates representing the number of Warrant Shares issuable
upon exercise (as determined pursuant to this SECTION 11 and SECTION 17 or
SECTION 17A, as applicable), of the vested Warrants, and any and all of which
certificates shall bear the restrictive legend set forth in SECTION 20(A),
except as provided in SECTION 20(C). The stock certificate or certificates so
delivered shall be registered in the name of the Warrantholder. If the vested
Warrants evidenced by a Warrant Certificate shall have been exercised and/or
surrendered in part, GI shall, at the time of delivery of the Warrant Shares,
deliver to the holder thereof or on the order of the holder thereof a new
Warrant Certificate evidencing vested Warrants in an amount equal to the number
of vested Warrants evidenced by the delivered Warrant Certificates that were not
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exercised or surrendered which new Warrant Certificate shall in all other
respects be identical with the Warrant Certificate being exercised or
surrendered (including with respect to the number of unvested Warrants evidenced
thereby).
GI shall keep copies of this Agreement and any notices received hereunder
available for inspection during normal business hours at its office referred to
in SECTION 24.
SECTION 12. EXPIRATION OF WARRANTS.
All Warrants that are not surrendered to GI for exercise in accordance
herewith by 5:00 p.m., New York City time at GI's office referred to in SECTION
24, on the Warrant Expiration Date set forth in SCHEDULE A for the applicable
Warrants shall expire as of such time and all rights of the Warrantholder in
respect of such Warrants shall terminate and cease.
SECTION 13. PAYMENT OF TAXES.
GI shall pay any and all issue, documentary stamp or other taxes (other than
applicable income taxes) that may be payable in respect of any issuance or
delivery of Warrant Shares. GI shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of Warrant Shares in a name other than that of the Warrantholder, and
no such issuance or delivery shall be made unless and until the Person to which
issuance and delivery is to be made has paid to GI the amount of any such tax,
or has established, to the satisfaction of GI, that such tax has been paid.
SECTION 14. MUTILATED OR MISSING WARRANT CERTIFICATES.
In case any Warrant Certificates shall be mutilated, lost, stolen or
destroyed, GI shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but in the case of a lost, stolen or destroyed Warrant Certificate, a
new Warrant Certificate shall be issued by GI only upon its receipt of
reasonably satisfactory evidence of such loss, theft or destruction and, if
requested, an indemnity or bond reasonably satisfactory to GI.
SECTION 15. RESERVATION OF SHARES.
The Warrant Shares, when issued upon exercise of the Warrants, shall be duly
authorized, validly issued, fully paid, nonassessable, and free from all taxes
(other than income taxes with respect to dividends or distributions thereon and
taxes arising from the disposition thereof), liens, charges, security interests,
restrictions and other encumbrances (except restrictions set forth in this
Agreement or otherwise imposed under applicable securities laws). GI will at all
times during the period that the Warrants may be exercised reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued GI Common Stock and GI Preferred Stock, or its authorized and
issued GI Common Stock and GI Preferred Stock held in treasury, for the purpose
of enabling it to satisfy any obligation to issue Warrant Shares upon exercise
of the Warrants, the full number of Warrant Shares deliverable upon the exercise
of the Warrants. Before taking any action which would cause an adjustment
pursuant to SECTION 17 reducing the Common Exercise Price below the then par
value (if any) of the Common Warrant Shares issuable upon exercise of the Common
Stock Warrants, GI will take any corporate action that may, in the opinion of
its counsel (which may be counsel employed by GI), be necessary in order that GI
may validly and legally issue fully paid and nonassessable Common Warrant Shares
at the Exercise Price as so adjusted.
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SECTION 16. OBTAINING OF CERTAIN GOVERNMENTAL APPROVALS.
(a) GI from time to time will use reasonable efforts to obtain and keep
effective any and all permits, consents and approvals of governmental agencies
and authorities and to make securities law filings under federal and state laws,
or with any securities exchange or association on which the GI Common Stock is
listed, that may be required in connection with the issuance and delivery of the
Warrant Certificates, the exercise of Warrants and the issuance and delivery of
Warrant Shares.
(b) Without limiting the generality of the foregoing, in the event that GI
or the Warrantholder reasonably believes that exercise of the Warrants and
issuance of Warrant Shares acquirable upon such exercise requires prior
compliance with the Hart-Scott-Rodino Antitrust Improvements Act of l976 and the
rules and regulations thereunder (the "HSR ACT AND RULES"), then any such
exercise shall be contingent upon such prior compliance and, subject to
effecting such compliance, be effective as of the Exercise Date. To effect such
compliance, GI and the Warrantholder will, promptly following receipt by GI of
the Warrantholder's notice of exercise or other written request, use their
respective commercially reasonable efforts to make all filings necessary to
cause the expiration or termination of any applicable waiting period under the
HSR Act and Rules. Each of GI and the Warrantholder shall bear and pay its
respective costs or expenses that it incurs in complying with this SECTION
16(B), except that each of GI and the Warrantholder electing to exercise the
Warrants shall pay one half of any fee payable to the Federal Trade Commission
or the Department of Justice (or any other governmental body then having
jurisdiction with respect to the HSR Act and Rules) in connection with the
filing of any reports under the HSR Act and Rules.
SECTION 17. WARRANT SHARES ISSUABLE UPON EXERCISE OF A VESTED COMMON STOCK
WARRANT.
(a) After the vesting of a Common Stock Warrant and prior to the Warrant
Expiration Date for such Common Stock Warrant, one (1) share of GI Common Stock
is purchasable at the Common Exercise Price upon the exercise of one (1) Common
Stock Warrant, subject to adjustment as discussed below:
(b) In case, subsequent to the date of this Agreement, GI shall: (i) pay a
dividend on the GI Common Stock in shares of GI Common Stock, (ii) subdivide the
outstanding shares of GI Common Stock into a greater number of shares, (iii)
combine the outstanding shares of GI Common Stock into a smaller number of
shares, (iv) pay a dividend on the GI Common Stock in shares of its capital
stock (other than GI Common Stock), or (v) issue any shares of its capital stock
by reclassification of the shares of GI Common Stock (other than any
reclassification by way of merger or binding share exchange that is subject to
paragraph (i)), the Common Exercise Price, and the number and kind of Common
Warrant Shares receivable upon exercise, in effect at the time of the record
date for such dividend or of the effective date of such subdivision, combination
or reclassification shall be proportionately adjusted so that the holder of the
Common Stock Warrants exercised after such time shall be entitled to receive the
aggregate number and kind of Common Warrant Shares which, if the Common Stock
Warrants had been exercised immediately prior to such time, it would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur. Subject to paragraph
(g), for a dividend or distribution, the adjustment shall become effective
immediately after the record date for the dividend or distribution, and for a
subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
(c) In case GI shall issue rights or warrants to all holders of GI Common
Stock entitling them (for a period expiring within 45 days after the record date
for the determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of GI Common Stock (or Convertible
Securities) at a price per share (or having a conversion price per share, after
adding thereto an allocable portion of the exercise price of the right or
warrant to purchase such Convertible Securities, computed on the basis of the
maximum number of shares of GI Common Stock issuable upon conversion of such
Convertible Securities) less than the Current Market Price per share on the
Determination Date, the
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Common Exercise Price shall be adjusted by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, of which the
numerator shall be the number of shares of GI Common Stock outstanding on such
record date plus the number of shares which the aggregate offering price of the
total number of shares of GI Common Stock so offered (or the aggregate initial
conversion price of the Convertible Securities so offered, after adding thereto
the aggregate exercise price of the rights or warrants to purchase such
Convertible Securities) to holders of GI Common Stock (and to holders of
Convertible Securities referred to in the following paragraph if the
distribution to which this paragraph (c) applies is also being made to such
holders) would purchase at such Current Market Price, and of which the
denominator shall be the number of shares of GI Common Stock outstanding on such
record date plus the number of additional shares of GI Common Stock so offered
for subscription or purchase (or into which the Convertible Securities so
offered are initially convertible). The adjustment contemplated by this
paragraph (c) shall be made successively whenever any such rights or warrants
are issued and shall become effective immediately after the close of business on
such record date; however, to the extent that shares of GI Common Stock (or
Convertible Securities) have not been issued when such rights or warrants expire
(or, in the case of rights or warrants to purchase Convertible Securities which
have been exercised, if all of the shares of GI Common Stock issuable upon
conversion of such Convertible Securities have not been issued prior to the
expiration of the conversion right thereof), the Common Exercise Price shall be
readjusted (but only with respect to Warrants exercised after such expiration)
to the Exercise Price which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made upon the basis of
delivery of only the number of shares (or Convertible Securities) actually
issued upon the exercise of such rights or warrants (or the conversion of such
Convertible Securities).
For purposes of this paragraph (c) the number of shares of GI Common Stock
outstanding on any record date shall be deemed to include the maximum number of
shares of GI Common Stock the issuance of which would be necessary to effect the
full exercise, exchange or conversion of all Convertible Securities outstanding
on such record date which are then exercisable, exchangeable or convertible at a
price (before giving effect to any adjustment to such price for the distribution
to which this paragraph (c) is being applied) equal to or less than the Current
Market Price per share of GI Common Stock on the applicable Determination Date,
if all of such Convertible Securities were deemed to have been exercised,
exchanged or converted immediately prior to the opening of business on such
record date. In case any subscription price may be paid in a consideration part
or all of which shall be in a form other than cash, the value of such
consideration shall be as determined by the Board of Directors of GI. Shares of
Common Stock owned by or held for the account of GI or any majority owned
subsidiary shall not be deemed outstanding for the purpose of any computation
under this paragraph (c).
(d) In case GI shall distribute to all holders of GI Common Stock evidences
of its indebtedness or assets or subscription rights or warrants (excluding (x)
dividends or distributions referred to in paragraph (b) and distributions of
rights or warrants referred to in paragraph (c) and (y) cash dividends or other
cash distributions, unless such cash dividends or cash distributions are
Extraordinary Cash Dividends), the Common Exercise Price shall be adjusted by
multiplying the Common Exercise Price in effect immediately prior to the record
date for the determination of stockholders entitled to receive such distribution
by a fraction, of which the numerator shall be the number of shares of GI Common
Stock outstanding on such record date multiplied by the Current Market Price on
the Determination Date, less the fair market value (as determined by the Board
of Directors of GI) on such record date of the evidences of indebtedness,
assets, subscription rights or warrants to be distributed to the holders of GI
Common Stock (and to the holders of Convertible Securities referred to below if
the distribution to which this paragraph (d) applies is also being made to such
holders), and of which the denominator shall be the number of shares of GI
Common Stock outstanding on such record date multiplied by such Current Market
Price. For purposes of this paragraph (d), the number of shares of GI Common
Stock outstanding on any record date shall be deemed to include the maximum
number of shares of GI Common Stock the issuance of which would be necessary to
effect the full exercise, exchange or conversion of all Convertible Securities
outstanding on such record date which are then exercisable, exchangeable or
convertible at a price (before giving effect to
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any adjustment to such price for the distribution to which this paragraph (d) is
being applied) equal to or less than the Current Market Price per share of GI
Common Stock on the applicable Determination Date, if all of such Convertible
Securities were deemed to have been exercised, exchanged or converted
immediately prior to the opening of business on such record date.
For purposes of this paragraph (d), the term "EXTRAORDINARY CASH DIVIDEND"
shall mean any cash dividend with respect to the GI Common Stock the amount of
which, together with the aggregate amount of cash dividends on the GI Common
Stock to be aggregated with such cash dividend in accordance with the following
provisions of this paragraph, equals or exceeds the threshold percentage set
forth below in the following sentence. If, upon the date prior to the
Ex-Dividend Date with respect to a cash dividend on GI Common Stock, the
aggregate of the amount of such cash dividend together with the amounts of all
cash dividends on the GI Common Stock with Ex-Dividend Dates occurring in the
365 consecutive day period ending on the date prior to the Ex-Dividend Date with
respect to the cash dividend to which this provision is being applied (other
than any such other cash dividends with Ex-Dividend Dates occurring in such
period for which a prior adjustment to the Exercise Price was previously made
under this paragraph (d)) equals or exceeds on a per share basis 50% of the
average of the Closing Prices during the period beginning on the date after the
first such Ex-Dividend Date in such period and ending on the date prior to the
Ex-Dividend Date with respect to the cash dividend to which this provision is
being applied (except that if no other cash dividend has had an Ex-Dividend Date
occurring in such period, the period for calculating the average of the Closing
Prices shall be the period commencing 365 days prior to the date immediately
prior to the Ex-Dividend Date with respect to the cash dividend to which this
provision is being applied), such cash dividend together with each other cash
dividend with an Ex-Dividend Date occurring in such 365-day period that is
aggregated with such cash dividend in accordance with this paragraph shall be
deemed to be an Extraordinary Cash Dividend.
The adjustment pursuant to the foregoing provisions of this paragraph (d)
shall be made successively whenever any distribution to which this paragraph (d)
applies is made, and shall become effective immediately after the record date
for the determination of stockholders entitled to receive the distribution.
Shares of GI Common Stock owned by or held for the account of GI or any majority
owned subsidiary shall not be deemed outstanding for the purposes of any such
adjustment.
(e) In the event that this SECTION 17 requires adjustments to the Common
Exercise Price and number of Common Warrant Shares purchasable under more than
one of clause (iv) of the first sentence of paragraph (b), paragraph (c) or
paragraph (d), and the record dates for the distribution giving rise to such
adjustments shall occur on the same date, then such adjustments shall be made by
applying, first, the provisions of paragraph (b), second the provisions of
paragraph (d) and, third, the provisions of paragraph (c).
(f) No adjustment in the Common Exercise Price shall be required if the
amount of such adjustment shall be less than 14 cents per Common Warrant Share;
PROVIDED, HOWEVER, that any adjustments which by reason of this subsection (f)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this SECTION 17 shall be made
to the nearest cent or to the nearest one-hundredth of a Common Warrant Share,
as the case may be.
(g) In any case in which this SECTION 17 shall require that an adjustment in
the Common Exercise Price be made effective as of the record date for a
specified event, GI may elect to defer until the occurrence of such event (x)
issuing to the holder of any Common Stock Warrant exercised after such record
date the Common Warrant Shares, if any, issuable upon such exercise over and
above the Common Warrant Shares, if any, issuable upon such exercise on the
basis of the Common Exercise Price in effect prior to such adjustment and (y)
paying to such holder cash or its check in lieu of any fractional interest to
which such holder would be entitled pursuant to paragraph (k); PROVIDED,
HOWEVER, that GI shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such
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additional Common Warrant Shares and such cash upon the occurrence of the event
requiring such adjustment.
(h) Upon each adjustment of the Common Exercise Price as a result of the
calculations made in subsections (b), (c), (d) or (j) of this SECTION 17, each
Warrant outstanding prior to the making of the adjustment in the Common Exercise
Price shall thereafter evidence the right to purchase, at the adjusted Common
Exercise Price, that number of Common Warrant Shares (calculated to the nearest
hundredth) obtained by (A) multiplying the number of Common Warrant Shares
purchasable upon exercise of a Common Stock Warrant prior to adjustment of the
number of Common Warrant Shares by the Common Exercise Price in effect prior to
adjustment of the Common Exercise Price and (B) dividing the product so obtained
by the Common Exercise Price in effect after such adjustment of the Common
Exercise Price.
(i) If GI consolidates with or merges into, or transfers (other than by
mortgage or pledge) its properties and assets substantially as an entirety to,
another Person or GI is a party to a merger or binding share exchange which
reclassifies or changes its outstanding GI Common Stock, GI (or its successor in
such transaction) or the transferee of such properties and assets shall make
appropriate provision so that the Common Stock Warrants shall thereafter be
exercisable, upon the terms and conditions specified in this Agreement, for the
kind and amount of securities, cash or other assets receivable upon such
transaction by a holder of the number of Common Warrant Shares purchasable upon
exercise of the Common Stock Warrants immediately before the effective date of
such transaction (assuming, to the extent applicable, that such holder failed to
exercise any rights of election with respect thereto, and received per Common
Warrant Share the kind and amount of securities, cash or other assets received
per share of GI Common Stock by a plurality of the nonelecting shares of GI
Common Stock); and in any such case, if necessary, the provisions set forth in
this SECTION 17 with respect to the rights and interests thereafter of the
holder of the Common Stock Warrants shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any such other securities or
assets thereafter deliverable on the exercise of the Common Stock Warrants.
Equivalent requirements to the foregoing shall also be applicable for the
protection of the rights of the holders of Preferred Stock Warrants based on the
Common Warrant Shares that would be issuable upon exchange of the GI Preferred
Stock for which such Preferred Stock Warrants are exercisable assuming for this
purpose that GI had exercised in full its right to require such exchange. The
subdivision or combination of the GI Common Stock at any time outstanding into a
greater or lesser number of shares of GI Common Stock shall not be deemed to be
a reclassification of the GI Common Stock for the purposes of this subsection.
GI shall not effect any such consolidation, merger, transfer or binding share
exchange unless prior to or simultaneously with the consummation thereof the
successor (if other than GI) resulting from such consolidation or merger or the
Person purchasing such assets or other appropriate Person shall assume, by
written instrument, the obligation to deliver to the holder of the Warrants such
securities, cash or other assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase and the other obligations
under this Agreement.
(j) The Company may make such reductions in the Common Exercise Price, in
addition to those required by subsections (b), (c) and (d) of this SECTION 17,
as it shall in its sole discretion determine to be advisable.
(k) If the number of Common Warrant Shares purchasable upon the exercise of
the Common Stock Warrants is adjusted pursuant to paragraph (h), the Company
shall nonetheless not be required to issue fractions of Common Warrant Shares
upon exercise of the Common Stock Warrants or to distribute share certificates
which evidence fractional Common Stock Warrant Shares. In lieu of fractional
Common Warrant Shares, there shall be paid to the Warrantholder at the time the
Common Stock Warrant is exercised as herein provided an amount in cash equal to
the same fraction of the current market value of a Common Warrant Share. For
purposes of this paragraph (k), the current market value of a Common Warrant
Share shall be the Closing Price of a Common Warrant Share for the Trading Day
immediately prior to the date of such exercise.
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SECTION 17A. WARRANT SHARES ISSUABLE UPON EXERCISE OF A VESTED PREFERRED STOCK
WARRANT.
(a) After the vesting of a Preferred Stock Warrant and prior to the Warrant
Expiration Date for such Preferred Stock Warrant, one (1) share of GI Preferred
Stock is purchasable at the Preferred Exercise Price upon the exercise of one
(1) Preferred Stock Warrant, subject to adjustment as discussed below.
(b) For so long as any Preferred Stock Warrants are outstanding, (i) GI
shall not amend, modify or withdraw the Certificate of Rights, Designations and
Preferences for the GI Preferred Stock, (ii) issue any shares of GI Preferred
Stock other than pursuant to the Preferred Stock Warrants issued to
Warrantholder and other cable television multiple systems operators; or (iii)
split, combine or reclassify the shares of GI Preferred Stock, in each case
without the prior written approval of Warrantholder, which may be unreasonably
withheld, except as may be required by law or stock exchange regulations. If,
and to the extent that, the Common Exercise Price or the number or kind of
Common Warrant Shares with respect to the Common Stock Warrants are adjusted
pursuant to Section 17, the Preferred Stock Exercise Price and the number and
kind of Common Warrant Shares for which a Preferred Warrant Share issuable upon
exercise of a Preferred Stock Warrant may be exchanged at the option of GI,
shall automatically be adjusted correspondingly in accordance with the terms of
the Preferred Stock Warrants.
SECTION 18. NOTICE TO WARRANTHOLDER.
(a) Upon any adjustment of the Exercise Price or number of Warrant Shares
pursuant to SECTION 17 or SECTION 17A, GI within 20 days thereafter shall cause
to be given to the Warrantholder written notice of such adjustment setting forth
the Exercise Price after such adjustment and setting forth in reasonable detail
the method of calculation and the facts upon which such calculations are based
and setting forth the number of Warrant Shares (or portion thereof) purchasable
upon exercise of the Warrants after such adjustment in the Exercise Price or
number of Warrant Shares. Where appropriate, such notice may be given in advance
and included as a part of the notice required to be mailed under the provisions
of SECTION 18(B).
(b) In case:
(i) GI shall authorize the issuance to all holders of GI Common Stock of
right or warrants to subscribe for or purchase shares of GI Common Stock or
of any other subscription rights or warrants; or
(ii) GI shall authorize the distribution to all holders of GI Common
Stock of evidences of its indebtedness or assets (other than dividends
payable in GI Common Stock); or
(iii) of any consolidation, merger or binding share exchange to which GI
is a party and for which approval of any shareholders of GI is required, or
of the conveyance or transfer of the properties and assets of GI as, or
substantially as, an entirety, or of any reclassification or change of
outstanding Warrant Shares issuable upon exercise of the Warrants (other
than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination); or
(iv) of the voluntary or involuntary dissolution, liquidation or winding
up of GI; or
(v) GI proposes to take any action (other than actions of the character
described in SECTION 17(B), except as required under (iii) above) which
would require an adjustment of the Exercise Price or number of Warrant
Shares pursuant to SECTION 17 or SECTION 17A.
then GI shall cause to be given to the Warrantholder at least 20 days (or 10
days in any case specified in clauses (i) or (ii) above) prior to the applicable
record or effective date hereinafter specified, a written notice stating (x) the
date as of which the holders of record of GI Common Stock to be entitled to
receive any such rights, warrants or distribution are to be determined, or (y)
the date on which any such consolidation, merger, binding share exchange,
conveyance, transfer, dissolution, liquidation or winding up
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is expected to become effective, and the date as of which it is expected that
holders of record of GI Common Stock shall be entitled to exchange their shares
of GI Common Stock for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, binding share exchange,
conveyance, transfer, dissolution, liquidation or winding up. The failure to
give the notice required by this SECTION 18(B) or any defect therein shall not
affect the legality or validity of any distribution, right, warrant,
consolidation, merger, binding share exchange, conveyance, transfer,
dissolution, liquidation or winding up, or the vote upon any such action.
SECTION 19. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS.
(i) At any time and from time to time after the date hereof, the
Warrantholder and any transferee of Registrable Securities who becomes a
party to this Agreement (the "TRANSFEREES"; and together with the
Warrantholder, the "HOLDERS") shall have the right to request GI to effect
the registration under the Securities Act of all or part of their
Registrable Securities. Holders shall exercise such right by giving of a
notice stating (A) the number of Registrable Securities to be included in
such registration statement and (B) Holder's intended method of distribution
(which may include an underwritten offering). Upon receipt by GI of any such
request, GI shall promptly give notice of such proposed registration to all
Holders who hold Registrable Securities and thereupon shall, as
expeditiously as possible, use reasonable efforts to effect the registration
under the Securities Act of:
(A) all Registrable Securities that GI has been requested to register
pursuant to clause (i) of this SECTION 19(A); and
(B) all other Registrable Securities that Holders have, within 20
days after GI has given such notice, requested GI to register;
all to the extent requisite to permit the sale or other disposition by the
Holders of the Registrable Securities so to be registered.
(ii) If the managing underwriter, selected pursuant to SECTION 19(I)(A);
of the public offering to be effected pursuant to a registration statement
filed pursuant to clause (i) of this SECTION 19(A) of any Registrable
Securities shall advise GI in writing (with a copy to each holder of
Registrable Securities requesting registration) that, in its opinion, the
number of securities requested to be included in such registration
(including securities of GI that are not Registrable Securities) exceeds the
number that can be sold in such offering without having an adverse effect on
such offering, GI will include in such registration to the extent of the
number that GI is so advised can be sold in such offering:
(A) FIRST, Registrable Securities requested to be included in such
registration by Holders pro rata based on the number of shares to be
included; and
(B) SECOND, other securities of GI proposed to be included pursuant
to SECTION 19(A)(VIII) in such registration, in accordance with the
priorities, if any, then existing among GI and the holders of such other
securities.
(iii) The Holders requesting inclusion in a registration statement under
this SECTION 19(A) may withdraw from any requested registration pursuant to
this SECTION 19(A) by giving written notice to GI prior to the date an
underwriting agreement is executed or such registration statement becomes
effective; PROVIDED, HOWEVER, that for a period of three months after such
withdrawal, such Holders may not request any registration pursuant to this
SECTION 19(A), unless (A) such Holders pay GI for its out-of-pocket expenses
relating to such registration, (B) the registration statement had not been
filed within 90 days of the initial request for registration pursuant to
Section 19(a)(i) or had not become
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effective within 120 days of such request or (C) GI otherwise failed to
comply with its obligations under this Section 19 with respect to such
registration.
(iv) GI shall not be required to effect more than a total of three
effective registrations under this SECTION 19(A). Notwithstanding the
foregoing, if the Holders withdraw from an offering after the registration
statement for the shares to be offered thereby has become effective due to
the occurrence of any of the events set forth in SECTIONS 19(C)(VI), (VII)
OR (VIII), then such registration shall not be counted as an effective
registration for purposes of this SECTION 19(A)(IV).
(v) GI shall not be required to effect a registration pursuant to this
SECTION 19(A) unless the offering includes Registrable Securities having a
Fair Market Value of at least $10 million in the aggregate.
(vii) GI shall not be required to effect any registration within six (6)
months of the effective date of any other registration under this SECTION
19(A).
(viii) If the managing underwriter in an underwritten offering has not
limited the number of Registrable Securities to be underwritten, then GI may
include securities for its own account or for the account of others in such
registration statement and underwriting if the managing underwriter so
agrees and if the number of Registrable Securities held by Holders which
would otherwise have been included in such registration statement and
underwriting will not thereby be limited. The inclusion of such shares shall
be on the same terms as the registration of Registrable Securities held by
the Holders. In the event that the managing underwriter excludes some of the
securities to be registered, the securities to be sold for the account of
the Company and any other holders shall be excluded in their entirety prior
to the exclusion of any Registrable Securities of the Holders.
(b) "PIGGYBACK" REGISTRATIONS. If GI at any time proposes to register any of
its securities under the Securities Act (other than pursuant to SECTION 19(A))
on a registration statement on Form S-1, S-2 or S-3 or on any other form upon
which may be registered securities similar to the Registrable Securities for
sale to the general public except Form S-4 and Form S-8, GI will at each such
time give prompt notice to the Holders of its intention to do so setting forth
the date on which GI proposes to file such registration statement, which date
shall be no earlier than 30 days from the date of such notice, and advising the
Holders of their right to have Registrable Securities included therein. Upon the
written request of the Holders given to GI not less than 5 days prior to the
proposed filing date of such registration statement set forth in such notice, GI
will use reasonable best efforts to cause each of the Registrable Securities
that GI has been requested to register by the Holders to be registered under the
Securities Act. If the securities to be so registered for sale include
securities to be sold for the account of GI and to be distributed by or through
a firm of underwriters of recognized standing under underwriting terms
appropriate for such transaction, then the Registrable Securities shall also be
included in such underwriting, PROVIDED that if, in the reasonable written
opinion of the managing underwriter or underwriters, the total amount of such
securities to be so registered, when added to such Registrable Securities, will
exceed the maximum amount of GI's securities that can be marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
materially and adversely affecting the entire offering, GI will include in such
registration to the extent of the number which GI is so advised can be sold in
such offering securities determined as follows:
(i) if such registration as initially proposed by GI was solely a
primary registration of its securities:
(A) FIRST, the securities proposed by GI to be sold for its own
account,
(B) SECOND, any Registrable Securities requested to be included in
such registration pro rata among the Holders of such Registrable
Securities and the holders of such other shares of GI Common Stock on the
basis of the number of Registrable Securities and other shares of GI
Common Stock requested to be included by each such holder, and
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(C) THIRD, any other securities of GI proposed to be included in such
registration statement in accordance with the provisions, if any, then
existing among the holders of such securities, and
(ii) if such registration as initially proposed by GI was in whole or in
part requested by holders of securities of GI, other than Holders of
Registrable Securities, pursuant to demand registration rights,
(A) FIRST, such securities held by the holders initiating such
registration, pro rata among the holders thereof, on the basis agreed
upon by such holders and GI,
(B) SECOND, Registrable Securities requested to be included in such
registration pro rata among the Holders of such Registrable Securities
and the holders of such other shares of GI Common Stock on the basis of
the number of Registrable Securities and other shares of GI Common Stock
requested to be included by each such holder, and
(C) THIRD, any securities of GI proposed to be included in such
registration statement in accordance with the priorities, if any, then
existing among the holders of such securities.
To the extent that the managing underwriter in an underwritten offering
pursuant to this Section 19(b) determines that the public sale or other
distribution of any Registrable Securities, shares of GI Common Stock or other
securities of GI other than those included in such underwritten offering should
be delayed following the effective date of such registration statement, the
Holders agree to enter, together with and on the same terms as GI and any other
holders of securities included in such registration statement, into an agreement
not to sell any other Registrable Securities, shares of GI Common Stock or other
securities of GI during such period following the effective date of such
registration statement as the managing underwriter reasonably determines is
necessary in connection with such underwritten offering, which period shall in
no event exceed 180 days following the effective date of such registration
statement.
The Holders requesting inclusion in a registration statement under this
SECTION 19(B) may withdraw from any requested registration pursuant to this
SECTION 19(B) by giving written notice to GI prior to the date an underwriting
agreement is executed or such registration statement becomes effective.
(c) GI'S OBLIGATIONS IN REGISTRATION. If and whenever GI is obligated by the
provisions of this SECTION 19 to use reasonable best efforts to effect the
registration of any Registrable Securities under the Securities Act, GI will:
(i) prepare and file with the Commission, as expeditiously as possible
within 90 days after the initial request from holders to register such
Registrable Securities, a registration statement with respect to such
Registrable Securities and use reasonable best efforts to cause such
registration statement to become effective within 180 days after such
initial request and to remain effective; PROVIDED, HOWEVER, that GI shall
not be required to keep such registration statement effective, or to prepare
and file any amendments or supplements thereto, later than the earlier of
(x) such time as all Registrable Securities have been sold and (y) 5:00
P.M., New York City time, on the last business day of the sixth month
following the date on which such registration statement becomes effective
under the Securities Act or such longer period during which the Commission
requires that such registration statement be kept effective with respect to
any of the Registrable Securities so registered;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with provisions of the Securities Act with respect
to the disposition of all Registrable Securities covered by such
registration statement whenever the Holders for whom such Registrable
Securities are registered or are to be registered shall desire to dispose of
the same, subject, however, to the proviso contained in the immediately
preceding clause (i);
(iii) furnish each Holder for whom such Registrable Securities are
registered or are to be registered such numbers of copies of each
registration statement and printed prospectus, including a
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preliminary prospectus and any amendments or supplements thereto, in
conformity with the requirements of the Securities Act, and such other
documents and information as such Holder may reasonably request in order to
facilitate the disposition of such Registrable Securities;
(iv) use reasonable best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each Holder shall
reasonably request, and do any and all other acts and things that may be
necessary or advisable to enable such Holder to consummate the disposition
in such jurisdictions of such Registrable Securities except that GI shall
not for any purpose be required to (A) qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for the
requirements of this clause (iv) be obligated to be so qualified, (B)
subject itself to taxation in any such jurisdiction or (C) consent to
general service of process in any such jurisdiction unless GI is already
subject to general service of process in such jurisdiction;
(v) furnish to the Holders for whom such Registrable Securities are
registered or are to be registered at the time of the disposition of such
Registrable Securities by such Holders a signed copy of an opinion of
counsel for GI reasonably acceptable to such holders as to such matters as
such holders may reasonably request and substantially to the effect that, a
registration statement covering such Registrable Securities has been filed
with the Commission under the Securities Act and has been made effective by
order of the Commission; said registration statement and the prospectus
contained therein comply as to form in all material respects with the
requirements of the Securities Act and, based upon such investigation and
inquiry as said counsel deems necessary or appropriate, nothing has come to
said counsel's attention that would cause it to believe that either said
registration statement or said prospectus contains an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein (in the case of said
prospectus, in the light of the circumstances under which they were made)
not misleading; said counsel knows of no legal or governmental proceedings
required to be described in said prospectus that are not described as
required, or of any contract or documents of a character required to be
described in said registration statement or said prospectus or to be filed
as an exhibit to said registration statement or to be incorporated by
reference therein that is not described and filed as required; no stop order
has been issued by the Commission suspending the effectiveness of such
registration statement and that, to the best of such counsel's knowledge, no
proceedings for the issuance of such a stop order are threatened or
contemplated; and the applicable provisions of the securities or blue sky
laws of each state in which GI shall be required, pursuant to clause (iv) of
this SECTION 19(C), to register or qualify such Registrable Securities, have
been complied with, assuming the accuracy and completeness of the
information furnished to such counsel with respect to each filing relating
to such laws; it being understood that said counsel may rely, as to all
factual matters and financial data treated therein, on certificates of GI
(copies of which shall be delivered to such Holders), and as to all
questions of the laws of each state in which GI shall be so required to
register or qualify such Registrable Securities, on the opinion of counsel
from such state reasonably acceptable to such Holders, copies of which shall
be delivered to such Holders;
(vi) immediately notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and at the request of any such
Holder promptly prepare and furnish to such Holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of
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a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(vii) advise each Holder of Registrable Securities covered by such
registration statement, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such Registration Statement or the
initiation or threatening of any proceeding for that purpose; and use its
reasonable best efforts to comply with all applicable rules and regulations
of the Commission, and make generally available to the seller of Registrable
Securities covered by such Registration Statement, earnings statements
satisfying the provisions of Section 11(a) of the Securities Act, no later
than forty-five (45) days after the end of any twelve (12) month period (or
ninety (90) days, if such period is a fiscal year) (a) commencing at the end
of any fiscal quarter in which Securities are sold to underwriters in an
underwritten offering, or (b) if not sold to underwriters in such an
offering, beginning with the first day of the month of GI's first fiscal
quarter commencing after the effective date of a registration statement;
(viii) permit any holder holding Registrable Securities covered by such
registration statement or prospectus to withdraw their Registrable
Securities from such registration statement or prospectus if such Holder has
informed GI that it reasonably believes that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five (5) business days prior to the
filing thereof;
(ix) enter into such customary agreements (including an underwriting
agreement in customary form, if applicable) and take all such other actions
as holders of a majority of the Registrable Securities being sold or the
underwriters retained by such Holders, if any, reasonably request in order
to expedite or facilitate the disposition of such Registrable Securities,
including customary opinions and indemnification and lock-up agreements;
(x) if requested by the managing underwriters or a Holder of Registrable
Securities being sold in connection with an underwritten offering, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriters and the holders of a majority of
the Registrable Securities being sold agree should be included therein
relating to the plan of distribution with respect to such Registrable
Securities including, without limitation, information with respect to the
securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
underwritten offering of the Registrable Securities to be sold in such
offering; and make all required filings of such prospectus supplement or
post-effective amendment as soon as notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment;
(xi) list such Registrable Securities on any securities exchange on
which the GI Common Stock is then listed, if such Registrable Securities are
not already so listed and if such listing is then permitted under the rules
of such exchange, and provide a transfer agent and registrar for such
Registrable Securities covered by such registration statement not later than
the effective date of such registration statement; and
(xii) obtain a CUSIP number for all Registrable Securities (unless
already obtained) not later than the effective date of such registration
statement.
The period of time that GI is obligated to keep any registration
statement effective, or to prepare and file any amendments or supplements
thereto, pursuant to SECTION 19(C)(I) shall be extended by the number of
days that any such Holder is unable to sell Registrable Securities due to
the matters discussed in SECTIONS 19(C)(VI) AND (VII) above.
(d) PAYMENT OF REGISTRATION EXPENSES. GI shall pay all Registration Expenses
in connection with each registration pursuant to this SECTION 19.
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(e) INFORMATION FROM HOLDERS. Notices and requests delivered by the
Warrantholder to GI pursuant to this SECTION 19 shall contain the information
required by SECTION 19(A)(I).
(f) INDEMNIFICATION.
(i) INDEMNIFICATION BY GI. In the event of any registration under the
Securities Act of any Registrable Securities pursuant to this SECTION 19, GI
hereby agrees to indemnify and hold harmless the Holders, their respective
agents, directors and officers, each other person, if any, who controls
(within the meaning of the Securities Act) the Holders and each other person
(including underwriters) who participates in the offering of such
Registrable Securities, against any losses, claims, damages or liabilities,
to the extent that such losses, claims, damages or liabilities (or
proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement, on the effective date thereof, under which such
Registrable Securities were registered under the Securities Act, in any
preliminary prospectus or final prospectus contained therein or in any
amendment or supplement to any preliminary prospectus or final prospectus
(if used during the period GI is required to keep such registration
statement current in any such case), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or any violation by GI of the Securities Act or state securities or blue sky
laws and relating to action or inaction required of GI in connection with
the registration or qualification of securities under such laws and will
reimburse such Holders, such agents, directors and officers and each such
controlling person or participating person (including underwriters) for any
legal or any other expenses reasonably incurred by such Holders, such
agents, directors and officers or such controlling person or participating
person (including underwriters) in connection with investigating or
defending any such loss, claim, damage, liability or proceeding, PROVIDED,
that GI will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in such registration statement, said preliminary or final prospectus or said
amendment or supplement in reliance upon and in conformity with written
information furnished to GI by an instrument duly executed by such Holder or
such controlling or participating person (including underwriters), as the
case may be, specifically for use in the preparation of such registration
statement; and PROVIDED, FURTHER, that, with respect to any untrue statement
or omission or alleged untrue statement or omission made in any preliminary
prospectus, GI will not be liable to any holder to the extent that any loss,
claim, damage, liability or expense results from the fact that a current
copy of the final prospectus was not sent or given to the Person asserting
any such loss, claim, damage, liability or expense at or prior to the
written confirmation of the sale of the Registrable Securities concerned to
such Person if it is determined that it was the responsibility of such
Holder to provide such Person with a current copy of the final prospectus
and such current copy of the final prospectus was provided to such Holders
and would have cured the defect giving rise to such loss, claim, damage,
liability or expense.
(ii) INDEMNIFICATION BY THE HOLDERS. The Holders, each individually and
not jointly, agree to indemnify and hold harmless GI, its respective agents,
directors and officers, each other person, if any, who controls (within the
meaning of the Securities Act) GI and each other person (including
underwriters) who participates in the offering of such Registrable
Securities, against all losses, claims, damages and liabilities to which GI,
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement of any material fact contained in any such registration
statement, on the effective date thereof, under which such Registrable
Securities were registered under the Securities Act, in any preliminary
prospectus or final prospectus contained therein or in any amendment or
supplement to any preliminary prospectus or final prospectus (if used during
the period GI is required to keep such registration statement current in any
such case), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the
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statements therein not misleading, but only if and to the extent that any
such loss, claim, damage or liability arises out of or is based upon any
such statement or omission made in such registration statement, said
preliminary or final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished to GI by an
instrument duly executed by the Holders or such underwriter, as the case may
be, and specifically stated to be for use in the preparation of such
registration statement.
(iii) NOTICES OF CLAIMS, ETC. Each party entitled to be indemnified
pursuant to SECTION 19(F)(I) OR (II) above, promptly but not later than 30
days after its receipt of notice of the commencement of any action against
it in respect of which indemnity may be sought from any indemnifying party
pursuant to this SECTION 19(F), shall notify such indemnifying party in
writing of the commencement thereof. In case any such action shall be
brought against any indemnified party and it shall notify such indemnifying
party of the commencement thereof, such indemnifying party will be entitled
to participate therein and, to the extent that it may wish, to assume the
defense thereof, with counsel satisfactory to such indemnified party, and
such indemnified party may participate in such defense, which participation
by the indemnified party shall be at its expense unless (i) the employment
of counsel by such indemnified party has been authorized by the indemnifying
party, (ii) the indemnified party shall have been advised by its counsel in
writing that there is a conflict of interest between the indemnifying party
and the indemnified party in the conduct of the defense of such action (in
which case the indemnifying party shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying party shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of the
indemnified party's counsel shall be at the expense of the indemnifying
party. The failure of any such indemnified party to give notice as provided
herein shall not relieve such indemnifying party of its obligations under
this SECTION 19(F) unless such failure to give notice shall materially
adversely affect such indemnifying party in the defense of any such claim or
any such litigation. With respect to any claim or litigation the defense of
which is being conducted by such indemnifying party, no indemnified party
shall, except with the consent of such indemnifying party, consent to entry
of any judgment or enter into any settlement of any claim as to which
indemnity may be sought. No indemnifying party, in the defense of any such
claim or litigation, shall, except with the consent of each indemnified
party, consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant
or plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation.
(iv) CONTRIBUTION. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in paragraphs (i) and (ii) of this SECTION 19(F)
may be unenforceable because it is violative of any law or public policy,
each party that would have been required to provide the indemnity shall
contribute the maximum portion which it is permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all indemnified
liabilities incurred by each party entitled to indemnification under this
SECTION 19(F); provided that in no event shall a Holder of Registrable
Securities be required to contribute an amount greater than the dollar
amount of net proceeds received by such holder upon the sale of such
Registrable Securities.
(g) EXCHANGE OF CERTIFICATES. As soon as possible after the effectiveness of
any registration statement under the Securities Act pursuant to this SECTION 19,
GI will deliver to the Holders of any Warrant Shares so registered, upon demand
of the Holders and their delivery to GI of a certificate or certificates
representing such Warrant Shares bearing the legend set forth in SECTION 20(A),
a new certificate or certificates representing such Warrant Shares but not
bearing such legend.
(h) OBLIGATIONS OF THE HOLDERS. The Holders agree:
(i) that upon receipt of any notice from GI of the happening of any
event of the kind described in SECTION 19(C)(VI), the Holders will forthwith
discontinue its disposition of Registrable Securities
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pursuant to the registration statement relating to such Registrable
Securities until its receipt of the copies of the supplemented or amended
prospectus contemplated by SECTION 19(C)(VI) and, if so directed by GI, will
use it reasonable best efforts to deliver to GI (at GI's expense) all
copies, other than permanent file copies, then in such Holder's possession
of the prospectus relating to such Registrable Securities current at the
time of receipt of such notice, and
(ii) that they will immediately notify GI at any time when a prospectus
relating to the registration of such Registrable Securities is required to
be delivered under the Securities Act, of the happening of any event as a
result of which information previously furnished by such Holder to GI in
writing specifically for inclusion in such prospectus contains an untrue
statement of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made.
(i) UNDERWRITTEN REGISTRATION. (A) If any of the Registrable Securities
covered by a registration pursuant to SECTION 19(A) are to be sold in an
underwritten offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority in Fair Market Value of such Registrable Securities included in such
offering. No Person may participate in any such underwritten registration
hereunder unless such Person (a) agrees to sell its Registrable Securities, GI
Common Stock or other securities of GI on the basis provided in an underwriting
agreement provided by the Holders of a majority in Fair Market Value of the
Registrable Securities to be sold in such underwritten offering and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
(B) If any of the Registrable Securities covered by a registration pursuant
to SECTION 19(B) are to be sold in an underwritten offering, the investment
banker or investment bankers and manager or managers that will administer the
offering will be selected by the holders of a majority in Fair Market Value of
securities being registered. No Holder may participate in any such underwritten
registration hereunder unless such Holder (a) agrees to sell its Registrable
Securities on the basis provided in an underwriting agreement approved by, GI or
the holders of a majority in Fair Market Value of the securities being
registered and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
(j) EXCHANGE ACT COMPLIANCE. The Company shall comply with all of the
reporting requirements of the Exchange Act and shall comply with all other
public information reporting requirements of the Commission which are conditions
to the availability of Rule 144 for the sale of Registrable Securities. GI shall
cooperate with each Holder in supplying such information as may be necessary for
such Holder to complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the availability of Rule
144.
SECTION 20. RESTRICTIONS ON TRANSFERABILITY OF WARRANT SHARES.
Notwithstanding any provisions contained in this Agreement to the contrary,
the Warrants and the related Warrant Shares shall not be transferable except
upon the conditions specified in SECTION 5, 7, 8, if and to the extent
applicable, and in this SECTION 20, which conditions are intended, among other
things, to ensure compliance with the provisions of the Securities Act in
respect of the transfer of the Warrant Shares. The Warrantholder agrees that it
will not (i) transfer any Warrant Shares prior to delivery to GI of the opinion
of counsel (who may be an employee of the Warrantholder) (which opinion shall be
reasonably satisfactory to GI) referred to in, and to the effect described in,
clause (i) of SECTION 20(B), or until registration of such Warrant Shares under
the Securities Act has become effective, or (ii) transfer any Warrant Shares
without compliance with SECTIONS 5, 7 AND 8. The Warrantholder agrees that such
opinion of counsel must be reasonably satisfactory to GI.
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(a) RESTRICTIVE LEGEND; WARRANTHOLDER'S REPRESENTATION. Unless and until
otherwise permitted by this SECTION 20, Warrant Certificates and each
certificate representing Warrant Shares, and any certificate issued at any time
upon transfer of, or in exchange for or replacement of, any certificate bearing
the legend set forth below shall be stamped or otherwise imprinted with a legend
in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF OR AN
EXEMPTION UNDER SUCH ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE TERMS AND CONDITIONS OF THAT WARRANT AGREEMENT DATED AS OF
DECEMBER 16, 1997, BY AND BETWEEN THE WARRANTHOLDER AND NEXTLEVEL SYSTEMS,
INC. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF NEXTLEVEL SYSTEMS, INC."
The Warrantholder represents and warrants, and in entering into this
Agreement with GI, understands and acknowledges, that it is acquiring the
Warrants and Warrant Shares for its own account for investment purposes and not
with a view to, or for sale in connection with, any distribution (as such term
is used under Section 2(11) of the Securities Act) thereof. Without limiting the
foregoing, the Warrantholder acknowledges and agrees that the Warrants have not
and will not be registered under the Securities Act or any applicable state
securities laws and it agrees that it will reoffer or resell the Warrant Shares
purchased by it under this Agreement (i) only (A) to GI, (B) pursuant to any
transaction under and meeting the requirements of Rule 144A, as amended from
time to time, promulgated under the Securities Act, (C) pursuant to an exemption
from registration under the Securities Act in accordance with Rule 144, as
amended from time to time, promulgated under the Securities Act, or (D) in
accordance with any other available exemption from the requirements of Section 5
of the Securities Act and (ii) in accordance with any applicable federal and
state securities laws. The Warrantholder further agrees to hold GI harmless from
any claim, demand or liability for broker's or finder's placement fees or
commissions payable by the Warrantholder alleged to have been incurred by the
Warrantholder in connection with this transaction. The Warrantholder and each
holder of Warrant Shares by its acceptance of such security further understands
that such security may bear a legend as contemplated by this SECTION 20.
(b) STATEMENT OF INTENTION TO TRANSFER; OPINION OF COUNSEL. The
Warrantholder, by its acceptance of this Agreement, agrees that prior to any
transfer of any Warrant Shares, the Warrantholder will deliver to GI a notice of
such proposed transfer and a signed copy of the opinion of the Warrantholder's
counsel (who may be an employee of Warrantholder) reasonably satisfactory to GI
as to the necessity or non-necessity for registration under the Securities Act
in connection with such transfer.
(i) If, in the opinion of the Warrantholder's counsel (which opinion
shall be reasonably satisfactory to GI) , the proposed transfer of any
Warrant Shares may be effected without registration under the Securities Act
of such Warrant Shares, then the Warrantholder shall be entitled to transfer
such Warrant Shares in accordance with the intended method of disposition
specified in the notice delivered by the Warrantholder to GI.
(ii) Notwithstanding the foregoing provisions of this SECTION 20(B), no
opinion of any counsel need be furnished (x) in the event of any proposed
transfer of any Warrant to an institutional investor who is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act
and which transfer is otherwise exempt from the registration requirements of
the Securities Act or (y) in the event of any proposed transfer of Warrant
Shares in connection with a registration under the Securities Act.
(c) TERMINATION OF RESTRICTIONS. Notwithstanding the foregoing provisions of
this SECTION 20, the restrictions imposed by this SECTION 20 upon the
transferability of the Warrant Certificates and the Warrant Shares shall cease
and terminate as to any particular Warrant Certificate or shares of capital
stock when,
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(i) such Warrant Certificate or Warrant Shares shall have been effectively
registered under the Securities Act and sold by the Warrantholder in accordance
with such registration or (ii) in the opinion of counsel for the holder of such
Warrant Certificate or Warrant Shares, if such opinion is satisfactory in form
and substance to GI, such restrictions are no longer required in order to ensure
compliance with the Securities Act. If and whenever the restrictions imposed by
this SECTION 20 shall terminate as to a Warrant Certificate (or to any shares of
capital stock) as hereinabove provided, the Warrantholder may and GI shall, as
promptly as practicable upon the request of the Warrantholder and at GI's
expense, cause to be stamped or otherwise imprinted upon such Warrant
Certificate or such shares of capital stock a legend in substantially the
following form:
"The restrictions on transferability of this [these] [Warrant
Certificate/securities] terminated on , 199 [20 ], and are of no further
force or effect."
All Warrant Certificates issued upon transfer, division or combination of,
or in substitution for, any Warrant Certificate or Warrant Certificates entitled
to bear such legend shall have a similar legend endorsed thereon. Whenever the
restrictions imposed by this SECTION 20 shall terminate as to any Warrant
Certificate or as to any shares of capital stock, as hereinabove provided, the
Warrantholder shall be entitled to receive from GI without expense, a new
Warrant Certificate or new shares of capital stock not bearing the restrictive
legend set forth in Subsection (a) of this SECTION 20.
SECTION 21. REPRESENTATIONS AND WARRANTIES; CERTAIN COVENANTS.
GI represents and warrants to the Warrantholder that:
(a) ORGANIZATION AND STANDING. GI (x) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified or licensed to do business and in good standing in each
jurisdiction in which the failure to be so qualified or licensed and in good
standing (individually or in the aggregate) would have a material adverse effect
on GI, and (y) has all requisite corporate power and authority necessary to
enable it to carry on its business as now conducted, to enter into this
Agreement, to issue the Warrants and to carry out the transactions contemplated
hereby and thereby.
(b) CAPITALIZATION. The authorized capital stock of GI consists of as of the
date hereof 400,000,000 shares of GI Common Stock, and 20,000,000 shares of
preferred stock, par value $.01 per share, issuable in series ("PREFERRED
STOCK"). The rights, privileges and preferences of the GI Common Stock and
Preferred Stock are as stated in the Company's Amended and Restated Certificate
of Incorporation. As of the date hereof, there are issued and outstanding
147,999,599 shares of GI Common Stock, no shares of Preferred Stock and no other
shares of capital stock. All such issued and outstanding GI Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable, and
were issued in compliance with all applicable state and federal securities laws.
As of the date hereof, there are no outstanding options, warrants or other
rights to purchase or otherwise acquire equity securities of GI, securities
convertible into or exchangeable for equity securities of GI, options, warrants
or other rights to purchase or otherwise acquire any such convertible or
exchangeable securities, or agreements to issue or grant any of the foregoing,
other than pursuant to employee benefit plans of the Company, the Rights
Agreement or pursuant to agreements entered into in connection or simultaneously
with this Transaction (including agreements with affiliates of Warrantholder and
agreements with certain cable television multiple system operators).
(c) AUTHORIZATION. All corporate action on the part of GI and its officers,
directors and shareholders necessary for the authorization, execution and
delivery of, and the performance of all obligations of GI under, this Agreement
and, upon issuance in accordance with the terms of this Agreement, the Warrants,
and for the authorization, issuance and delivery of the Warrants and of the
Warrant Shares issuable upon exercise of the Warrants has been taken. This
Agreement has been duly executed and delivered by GI, and this Agreement
constitutes, and the Warrants when issued and delivered in accordance with the
terms of
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this Agreement shall constitute, the legal, valid and binding obligations of GI,
enforceable against GI in accordance with their respective terms, subject to:
(x) judicial principles respecting election of remedies or limiting the
availability of specific performance, injunctive relief and other equitable
remedies; and (y) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect generally relating to or affecting
creditors' rights.
(d) NO CONFLICTS. The execution and delivery by GI of this Agreement and the
Warrants and the performance by GI of its obligations hereunder and thereunder
and the consummation of the transactions contemplated hereby and thereby do not
and will not conflict with, result in any violation of or default (with or
without notice or lapse of time or both) under, give rise to a right of
termination, cancellation or acceleration or any material obligation or to the
loss of any material benefit under or result in or require the creation,
imposition or extension of any lien, security interest, restriction or other
encumbrance upon any of GI's properties or assets (other than those imposed
under this Agreement or the Warrants) under (i) any oral or written contract,
indenture, mortgage, lease, deed, commitment, agreement, arrangement or legally
binding understanding or instrument, (ii) any provision of its constitutive or
governing documents or (iii) any law, statute, ordinance, rule, regulation,
judgment, order, decree or arbitral award, except for any such conflicts,
violations, defaults, rights, obligations or losses that, individually or in the
aggregate, would not have a material adverse effect on GI or its ability to
consummate the transactions contemplated under this Agreement or the Warrants.
(e) SEC FILINGS. GI has filed all required reports, schedules, forms,
statements and other documents with the Securities and Exchange Commission
("SEC") since July 25, 1997 (as such documents have been amended prior to the
date hereof, the "GI SEC DOCUMENTS"). As of their respective dates, the GI SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such GI SEC
Documents. None of the GI SEC Documents contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by a later GI SEC Document.
(f) NO BROKERS. GI agrees to hold the Warrantholder harmless from any claim,
demand or liability for broker's or finder's placement fees or commissions
payable by GI alleged to have been incurred by GI in connection with this
transaction.
SECTION 21A. REPRESENTATION AND WARRANTY OF THE COMPANY.
The Company represents and warrants to GI that it is financially capable of
performing all of its obligations under this Agreement and the Purchase
Agreement.
SECTION 22. NO RIGHTS OR LIABILITIES AS STOCKHOLDER.
The Warrant Certificates shall not be construed as conferring upon the
Warrantholder the right to vote or to consent or to receive notice as a
stockholder in respect of the meetings of stockholders or the election of
directors of GI or any other matter, or any rights whatsoever as a stockholder
of GI, including, without limitation, the right to receive any dividends or
other distributions paid by GI in respect of the GI Common Stock. No provision
hereof, in the absence of affirmative action by the Warrantholder to purchase
Warrant Shares, and no mere enumeration herein of the rights or privileges of
the Warrantholder, shall give rise to any liability of such holder for the
Exercise Price or as a stockholder of GI, whether such liability is asserted by
GI or by creditors of GI.
SECTION 23. DEFINITIONS.
The terms defined in this SECTION 23, whenever used in this Agreement,
shall, unless the context otherwise requires, have the respective meanings
hereinafter specified and, unless the context otherwise
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requires, words in the singular or in the plural shall each include the singular
and the plural and the use of any gender shall include all genders.
"AFFILIATE" shall mean, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with the Person specified.
"AGREEMENT" shall mean this Warrant Issuance Agreement as it may be from
time to time amended, supplemented or restated.
"BOARD OF DIRECTORS" shall mean the Board of Directors of GI.
"BUSINESS COMBINATION" means any merger, consolidation, sale of assets or
other business combination by GI with one or more Persons in which cash or
non-cash consideration is distributed to holders of any shares of GI Common
Stock.
"BUSINESS DAY" shall mean any day other than Saturday, Sunday or a day on
which banking institutions in New York City are authorized or obligated by law
to close.
"CLOSING PRICE" of a share of GI Common Stock on any Trading Day means the
last reported sales price, regular way, for such Trading Day as reported on the
New York Stock Exchange.
"COMMON EXERCISE PRICE" shall mean $[ ] per Common Warrant Share, as the
same may be adjusted pursuant to this Agreement.
"COMMON STOCK WARRANTS" shall have the meaning assigned to such term in
SECTION 1.
"COMMON WARRANT SHARES" shall mean shares of GI Common Stock and/or such
other securities, property and cash that the Warrantholder shall be entitled to
receive upon exercise of the Common Stock Warrants pursuant to the provisions of
SECTION 17, including, without limitation, subsection (b) thereof.
"COMMISSION" shall mean the Securities and Exchange Commission and any other
similar or successor agency of the federal government administering the
Securities Act or the Exchange Act.
"COMPANY" shall have the meaning assigned to such term in the preamble to
this Agreement.
"COMPETITOR" shall mean a competitor of GI that is engaged in the business
of selling the same types of products to the same types of customers as GI,
which competitors are set forth in the most recent written list of competitors
delivered by GI to Warrantholder (as supplemented from time to time after the
date hereof).
"COMPETITOR OFFER" shall have the meaning assigned to such term in SECTION
7(A).
"CONVERTIBLE SECURITIES" shall mean convertible into or exercisable or
exchangeable for GI Common Stock at the option of the holder thereof, or which
otherwise entitle the holder thereof to subscribe for, purchase or otherwise
acquire GI Common Stock.
"CURRENT MARKET PRICE", on the Determination Date for any issuance of rights
or warrants or any distribution in respect of which the Current Market Price is
being calculated, shall mean the average of the daily Closing Prices of the GI
Common Stock for the shortest of:
(i) the period of 30 consecutive Trading Days commencing 45 Trading Days
before such Determination Date;
(ii) the period commencing on the date next succeeding the first public
announcement of the issuance of rights or warrants or the distribution in
respect of which the Current Market Price is being calculated and ending on the
last full Trading Day before such Determination Date; and
(iii) the period, if any, commencing on the date next succeeding the
Ex-Dividend Date with respect to the next preceding issuance of rights or
warrants or distribution for which an adjustment is required by the
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provisions of clause (iv) of the first sentence of SECTION 17(B), SECTION 17(C)
or SECTION 17(D), and ending on the last full Trading Day before such
Determination Date.
If the record date for an issuance of rights or warrants or a distribution
for which an adjustment is required by the provisions of clause (iv) of the
first sentence of SECTION 17(B), SECTION 17(C) or SECTION 17(D) (the "preceding
adjustment event") precedes the record date for the issuance or distribution in
respect of which the Current Market Price is being calculated and the
Ex-Dividend Date for such preceding adjustment event is on or after the
Determination Date for the issuance or distribution in respect of which the
Current Market Price is being calculated, then the Current Market Price shall be
adjusted by deducting therefrom the fair market value (on the record date for
the issuance or distribution in respect of which the Current Market Price is
being calculated), as determined in good faith by the Board of Directors, of the
capital stock, rights, warrants, assets or evidences of indebtedness issued or
distributed in respect of each share of GI Common Stock in such preceding
adjustment event. Further, in the event that the Ex-Dividend Date (or in the
case of a subdivision, combination or reclassification, the effective date with
respect thereto) with respect to a dividend, subdivision, combination or
reclassification to which clause (i), (ii), (iii) or (v) of the first sentence
of SECTION 17(B) applies occurs during the period applicable for calculating the
Current Market Price, then the Current Market Price shall be calculated for such
period in a manner determined in good faith by the Board of Directors to reflect
the impact of such dividend, subdivision, combination or reclassification on the
Closing Prices of the GI Common Stock during such period.
"DETERMINATION DATE" for any issuance of rights or warrants or any
distribution to which SECTION 17(C) or SECTION 17(D) applies shall mean the
earlier of (i) the record date for the determination of stockholders entitled to
receive the rights or warrants or the distribution to which such Section applies
and (ii) the Ex-Dividend Date for such right, warrants or distribution.
"EX-DIVIDEND DATE" shall mean the date on which "ex-dividend" trading
commences for a dividend, an issuance of rights or warrants or a distribution to
which any of SECTION 17(B), SECTION 17(C) or SECTION 17(D) applies in the
over-the-counter market or on the principal exchange on which the GI Common
Stock is then quoted or listed.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" shall mean the Common Exercise Price or Preferred Exercise
Price as applicable.
"FAIR MARKET VALUE" shall mean (i), as to any Registrable Securities which
are shares of GI Common Stock, (x) the number of such shares proposed to be sold
times (y) the average daily Closing Prices of the GI Common Stock for the period
of 30 consecutive Trading Days commencing 45 Trading Days prior to the date of
the initial request for registration, (ii), as to any Registrable Securities
which are shares of GI Preferred Stock, an amount calculated in accordance with
(i) for the number of shares of GI Common Stock for which such GI Preferred
Stock may be exchanged at GI's option and (iii), as to any other Registrable
Securities, the fair market value of such securities, as determined in good
faith by the Board of Directors of GI.
"FIRST APPRAISER" shall have the meaning assigned to such term in SECTION
7(C)(I).
"FIRST OFFER SHARES" shall have the meaning assigned to such term in Section
7(a).
"GI" means NextLevel Systems, Inc., a Delaware corporation.
"GI COMMON STOCK" shall have the meaning set forth in the recitals to this
Agreement.
"GI PREFERRED STOCK" shall have the meaning set forth in the recitals to
this Agreement.
"HOLDERS" shall have the meaning assigned to such term in SECTION 19(A)(I).
"HSR ACT AND RULES" shall have the meaning assigned to such term in SECTION
16(B).
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"MEMORANDUM OF AGREEMENT" shall mean the Memorandum of Agreement, dated
December 16, 1997, between National Digital Television Center, Inc. ("NDTC") and
NextLevel Systems, Inc.
"NOTICE OF SALE" shall have the meaning assigned to such term in SECTION
7(A).
"NOTIFICATION EVENT" shall have the meaning assigned to such term in SECTION
18.
"OFFERING" shall have the meaning associated with such term in SECTION 8(A).
"OFFERING NOTICE" shall have the meaning assigned to such term in Section
8(a).
"PARTIES" shall mean GI and the Warrantholder.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or other
entity or any government, or any agency or political subdivision thereof.
"PREFERRED EXERCISE PRICE", as of any relevant time, means, for one share of
GI Preferred Stock, the dollar amount that is equal to 10 times the Common
Exercise Price in effect at such time; PROVIDED, HOWEVER, that if there are no
Common Stock Warrants outstanding at the time of determination, the Preferred
Exercise Price shall be determined by reference to the Common Stock Warrants as
if they were still outstanding and all adjustments pursuant to this Agreement
continued to be made.
"PREFERRED STOCK WARRANT" shall have the meaning assigned to such term in
SECTION 1.
"PREFERRED WARRANT SHARES" shall mean shares of GI Preferred Stock and/or
such other securities, property and cash that the Warrantholder shall be
entitled to receive upon exercise of the Preferred Stock Warrants pursuant to
the provisions of SECTION 17A.
"PURCHASE AGREEMENT" shall have the meaning assigned to such term in the
recitals to this Agreement.
"REGISTRABLE SECURITIES" shall mean any Warrant Shares issued upon the
exercise of a Warrant issued pursuant to this Agreement. As to any particular
Registrable Securities once issued, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such registration
statement, (ii) such securities shall have been distributed to the public
pursuant to Rule 144 (or any successor provision) under the Securities Act,
(iii) such securities shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have been
delivered by GI and subsequent disposition of them shall not require
registration or qualification of them under the Securities Act, or (iv) such
securities shall have ceased to be outstanding.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance with SECTION 19, including, without limitation, (i)
all Commission and stock exchange or National Association of Securities Dealers,
Inc. registration, filing fees and listing expenses, (ii) all fees and expenses
of complying with securities or blue sky laws (including reasonable fees and
disbursements of counsel for any underwriters in connection with blue sky
qualification of any Warrant Shares), (iii) all printing, messenger and delivery
expenses, (iv) the fees and disbursements of counsel for GI and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, (v) the fees and disbursements of counsel retained in connection
with such registration by Holders of the Warrant Shares being registered, and
(vi) any fees and disbursements of underwriters customarily paid by issuers or
sellers of securities, including the fees and expenses of any special experts
retained in connection with the requested registration.
"REPLY NOTICE" shall mean a notice from GI, stating whether GI accepts or
rejects the offer made by the offering Warrantholder in the Offering Notice.
"RIGHT OF FIRST OFFER PROVISIONS" shall have the meaning assigned to such
term in SECTION 7.
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<PAGE>
"RIGHTS AGREEMENT" shall mean the Rights Agreement, dated as of June 12,
1997, as amended, between GI and ChaseMellon Shareholder Services, L.L.C.
"SECOND APPRAISER" shall have the meaning assigned to such term in SECTION
7(A).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"STOCKHOLDERS MEETING" shall have the meaning assigned to such term in
SECTION 10(B).
"THIRD APPRAISER" shall have the meaning assigned to such term in SECTION
7(C)(III).
"THRESHOLD" shall mean the threshold number of Digital Terminals as set
forth in SCHEDULE A.
"TRADING DAY" means a day on which the New York Stock Exchange is open for
the transaction of business (unless such trading shall have been suspended for
the entire day).
"TRANSACTION" shall mean all of the transactions contemplated by the
following: (i) this Agreement, (ii) the Memorandum of Agreement, and (iii) the
warrant agreements entered into between GI and certain other cable television
multiple system operators (including NDTC) on terms substantially similar to
this Agreement, and (iv) all instruments and documents forming part of the
foregoing.
"TRANSFEREES" shall have the meaning assigned to such term in SECTION
19(A)(I).
"WARRANT CERTIFICATES" shall have the meaning assigned to such term in
SECTION 2.
"WARRANT EXPIRATION DATE" shall mean the expiration dates as set forth in
SCHEDULE A.
"WARRANTHOLDER" means the Company and any transferee of Warrantholder that
is the record owner of the Warrants or the Warrant Shares, as applicable, and is
bound by this Agreement.
"WARRANTS" shall have the meaning assigned to such term in Section 1.
"WARRANT SHARES" shall mean the Common Warrant Shares on the Preferred
Warrant Shares, as applicable.
SECTION 24. NOTICES.
All notices, consents, requests, waivers or other communications required or
permitted under this Agreement (each a "NOTICE") shall be in writing and shall
be sufficiently given (a) if hand delivered, (b) if sent by nationally
recognized overnight courier, or (c) if sent by registered or certified mail,
postage prepaid, return receipt requested, addressed, if to the Warrantholder at
the address shown on the Warrant register kept by GI, with a copy to ___________
- --------------------------------------------------------------------------------
Attention: ___________________________________________________, and if to GI to:
General Instrument Corporation
2200 Byberry Road
Hatboro, Pennsylvania 19040
Attn: Robert A. Scott
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attn: Lois Herzeca
or such other address as shall be furnished by any of the Parties in a Notice.
Any Notice shall be deemed given upon receipt.
28
<PAGE>
SECTION 25. AMENDMENTS.
This Agreement may be amended, supplemented or waived only by a subsequent
writing signed by each of the Parties.
SECTION 26. SUCCESSORS AND ASSIGNS.
All terms and conditions of this Agreement shall be binding upon and inure
to the benefit of and be enforceable by the successors and permitted assigns of
the Parties.
SECTION 27. TERMINATION.
This Agreement shall terminate on December 31, 2005 (other than SECTIONS 10,
13, 16, 19, AND 20 and SECTIONS 24 THROUGH 33, inclusive, and all related
definitions, which shall survive such termination). Notwithstanding the
foregoing, this Agreement (other than SECTIONS 7, 8, 10, 13, 16, 19, AND 20 and
SECTIONS 24 THROUGH 33, inclusive, and all related definitions, which shall
survive such termination) will terminate when all Warrants have been exercised.
SECTION 28. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER.
SECTION 29. THIRD PARTY BENEFICIARIES.
Each Party intends that this Agreement shall not benefit or create any right
or cause of action in or on behalf of any Person other than the Parties and
transferees.
SECTION 30. HEADINGS.
The headings in this Agreement are for convenience only and shall not affect
the construction or interpretation of this Agreement.
SECTION 31. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits and Schedules (which are
incorporated herein by this reference), constitutes the entire agreement and
understanding between the Parties with respect to the subject matter hereof and
shall supersede any prior agreements and understandings between the Parties with
respect to such subject matter.
SECTION 32. EXPENSES.
Regardless whether the transactions contemplated by this Agreement are
consummated, each of the Parties shall pay its own expenses and costs incurred
or to be incurred in negotiating, closing and carrying out this Agreement and in
consummating the transactions contemplated herein, except as otherwise expressly
provided for herein.
SECTION 33. COUNTERPARTS.
This Agreement may be executed with counterpart signature pages or in one or
more counterparts, all of which shall be one and the same Agreement, and shall
become effective when one or more counterparts have been signed by each of the
Parties and delivered to all the Parties.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
NEXTLEVEL SYSTEMS, INC.
By: __________________________________
Name:
Title:
[ ]
By: __________________________________
Name:
Title:
30
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF WARRANTS
VESTING UPON
THE COMPANY'S EXPIRATION DATE
ATTAINMENT OF THRESHOLD OF
THRESHOLD ---------------------------------------- VESTED WARRANTS
CALENDAR NUMBER OF DELIVERED COMMON PREFERRED (EACH, A "WARRANT
YEAR DIGITAL TERMINALS STOCK WARRANTS STOCK WARRANTS EXPIRATION DATE)
- --------------------------------------- ------------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
1998................................... June 30, 2000
1999................................... June 30, 2001
2000................................... June 30, 2002
</TABLE>
If, in any year, the Company fails to purchase the Threshold number of
Digital Terminals for such year, through no fault of GI, the Warrants for such
year will not vest and the Company shall be subject to legal proceedings and
damages relating to such failure. Otherwise, the number of Warrants identified
for the applicable year in the third column above will vest on the last day of
such year and will be exercisable at any time and from time to time during the
18-month period from and including the vesting date to and including the Warrant
Expiration Date set forth above.
If, in any year, GI fails to deliver the Threshold number of Digital
Terminals for such year, through no fault of the Company, the total number of
Warrants will vest for that year.
The Warrants are also subject to vesting pursuant to Section 10 of the
Warrant Issuance Agreement.
31
<PAGE>
SCHEDULE B
<TABLE>
<S> <C>
TERMS OF THE GI PREFERRED
STOCK(1):
Voting: Each share has the same voting rights as the number of
shares of GI Common Stock for which a share of GI
Preferred Stock may be exchanged at GI's option (the
"Exchange Number"), which shall initially be 10.
Dividends: Each share has the same dividend rights as the Exchange
Number of shares of GI Common Stock. In addition, with
respect to shares of GI Preferred Stock issued on or
after July 1, 1998, dividends will accrue from the date
of issuance on each share of such GI Preferred Stock at
the rate of 12% per annum on the amount of the Base
Value, payable semiannually in cash on each December 31
and June 30 following the issuance thereof. The "Base
Value" of a share of GI Preferred Stock means the sum of
(i) $150 plus (ii) an amount equal to all unpaid
dividends accrued on such share through the dividend
payment date immediately preceding the date on which the
Base Value is being determined, which have been added to
and remain a part of the Base Value as of such date.
Dividends not paid when due will be added to the Base
Value and remain a part thereof until such unpaid
dividends and any dividends accrued thereon have been
paid in full.
Liquidation: Preferred as to GI Common Stock; liquidation preference
of (i) $150 per share, plus (ii) accrued but unpaid
dividends, plus (iii) an amount equal to all unpaid
dividends accrued on the sum of the amounts specified in
clauses (i) and (ii) above to the date as of which the
liquidation preference is being calculated. After
payment of the liquidation preference, each share of GI
Preferred Stock will participate in liquidating
distributions to holders of GI Common Stock on the same
basis as if such share of GI Preferred Stock had been
exchanged for the Exchange Number of shares of GI Common
Stock
Transferability and Registration Same right to transfer and register GI Preferred Stock
Rights: as GI Common Stock, pursuant to the Warrant Issuance
Agreement.
Business Combination Transaction: Each share gets the same per share consideration
received by the Exchange Number of shares of GI Common
Stock.
Exchangeable: At any time at GI's option, the Preferred Stock Warrants
will become exercisable for GI Common Stock, such that
each Preferred Stock Warrant will be exercisable for 10
times the number and kind of Common Warrant Shares then
issuable or deliverable upon exercise of a Common Stock
Warrant.
At any time at GI's option, the GI Preferred Stock is
exchangeable into GI Common Stock at a ratio of one
share of GI Preferred Stock for 10 times the number and
kind of Common Warrant Shares then issuable or
deliverable upon exercise of a Common Stock Warrant.
</TABLE>
- ------------------------
(1) If as of a date of determination, there are no Common Stock Warrants
outstanding, the determination shall be made as if the Common Stock Warrants
were outstanding and all required adjustments under the Warrant Issuance
Agreement continued to be made.
32
<PAGE>
EXHIBIT 10.11
-------------------------------------------
GENERAL INSTRUMENT CORPORATION
ANNUAL INCENTIVE PLAN
-------------------------------------------
1
<PAGE>
GENERAL INSTRUMENT CORPORATION
ANNUAL INCENTIVE PLAN
1. PURPOSE
The purpose of the Annual Incentive Plan (the "Plan") is to enhance General
Instrument Corporation's ability to attract, reward, and retain employees, to
strengthen employee commitment to the success of the Company and to align their
interests with those of the Company's stockholders by providing additional
variable compensation, based on the achievement of performance objectives, to
employees who do not participate in a sales incentive plan or other similar plan
of the Company. To this end, the Plan provides a means of annually rewarding
participants based on the performance of the Company and its Business Units and,
where appropriate, on their own personal performance.
2. DEFINITIONS
"Award" shall mean the incentive award earned by a Participant under the
Plan for any Performance Period.
"Base Salary" shall mean the Participant's base salary earned in a
Performance Period. Base Salary does not include Awards under this Plan or any
other short term or long term incentive plan; imputed income from such programs
as group-term life insurance; or non-recurring earnings, such as moving
expenses, and is based on salary earnings before reductions for such items as
deferrals under Company-sponsored deferred compensation plans, contributions
under Section 401(k) of the Code, and contributions to flexible spending
accounts under Section 125 of the Code.
"Beneficial Owner," "Beneficially Owned" and "Beneficially Owning" shall
have the meanings applicable under Rule 13d-3 promulgated under the 1934 Act.
"Business Unit" shall mean either the Company, a strategic business unit,
central function, regional group or other unit of classification, as specified
by the Committee or the CEO, as applicable.
"CEO" shall mean the Chief Executive Officer of the Company.
"Change of Control" means, any of the following:
(i) the acquisition by any Person other than Instrument Partners or
Forstmann Little & Co. Subordinated Debt and Equity Management Buyout
Partnership-IV or any of their affiliates (collectively, the "Forstmann
Little Companies") of Beneficial Ownership of Voting Securities which, when
added to the Voting Securities then Beneficially Owned by such Person, would
result in such Person Beneficially Owning (A) 33% or more of the combined
Voting Power of General Instrument's then outstanding Voting Securities and
(B) a number of Voting Securities greater than the aggregate number of
Voting Securities then Beneficially Owned by the Forstmann Little Companies;
PROVIDED, HOWEVER, that for purposes of this paragraph (i), a Person shall
not be deemed to have made an acquisition of Voting Securities if such
Person: (1) acquires Voting Securities as a result of a stock split, stock
dividend or other corporate restructuring in which all stockholders of the
class of such Voting Securities are treated on a pro rata basis; (2)
acquires the Voting Securities directly from General Instrument; (3) becomes
the Beneficial Owner of 33% or more of the combined Voting Power of General
Instrument's then outstanding Voting Securities solely as a result of the
acquisition of Voting Securities by General Instrument or any Subsidiary
which, by reducing the number of Voting Securities outstanding, increases
the proportional number of shares Beneficially Owned by such Person,
provided that if (x) a Person would own at least such percentage as a result
of the acquisition by General Instrument or any Subsidiary and (y) after
such acquisition by General Instrument or any Subsidiary, such Person
acquires Voting Securities, then an acquisition of Voting Securities shall
have
2
<PAGE>
occurred; (4) is General Instrument or any corporation or other Person of
which a majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by General Instrument (a
"Controlled Entity"); or (5) acquires Voting Securities in connection with a
"Non-Control Transaction" (as defined in paragraph (iii) below); or
(ii) the individuals who, as of the Effective Date, are members of the
Board (the "Incumbent Board") ceasing for any reason to constitute at least
two-thirds of the Board; PROVIDED, HOWEVER, that if either the election of
any new director or the nomination for election of any new director by
General Instrument's stockholders was approved by a vote of at least
two-thirds of the Incumbent Board prior to such election or nomination, such
new director shall be considered as a member of the Incumbent Board;
PROVIDED FURTHER, HOWEVER, that no individual shall be considered a member
of the Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(iii) approval by stockholders of General Instrument of :
(A) a merger, consolidation or reorganization involving General
Instrument (a "Business Combination"), unless:
(1) the stockholders of General Instrument, immediately before
the Business Combination, own, directly or indirectly immediately
following the Business Combination, at least a majority of the
combined voting power of the outstanding voting securities of the
corporation resulting from the Business Combination (the "Surviving
Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before the Business Combination,
and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for the
Business Combination constitute at least a majority of the members of
the Board of Directors of the Surviving Corporation, and
(3) no Person (other than General Instrument or any Controlled
Entity, a trustee or other fiduciary holding securities under one or
more employee benefit plans or arrangements (or any trust forming a
part thereof) maintained by General Instrument, the Surviving
Corporation or any Controlled Entity, or any Person who, immediately
prior to the Business Combination, had Beneficial Ownership of 33% or
more of the then outstanding Voting Securities) has Beneficial
Ownership of 33% or more of the combined voting power of the
Surviving Corporation's then outstanding voting securities (a
Business Combination satisfying the conditions of clauses (1), (2)
and (3) of this subparagraph (A) shall be referred to as a
"Non-Control Transaction");
(B) a complete liquidation or dissolution of General Instrument; or
(C) the sale or other disposition of all or substantially all of the
assets of General Instrument (other than a transfer to a Controlled
Entity).
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because 33% or more of the then outstanding Voting Securities is
Beneficially Owned by (x) a trustee or other fiduciary holding securities under
one or more employee benefit plans or arrangements (or any trust forming a part
thereof) maintained by General Instrument or any Controlled Entity or (y) any
corporation which, immediately prior to its acquisition of such interest, is
owned directly or indirectly by the stockholders of General Instrument in the
same proportion as their ownership of stock in General Instrument immediately
prior to such acquisition.
3
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Board. The
Committee shall consist of two or more persons appointed by the Board, all of
whom shall be "outside directors" as defined under Section 162(m) of the Code
and related Treasury regulations.
"Company" shall mean General Instrument and any Subsidiary which is
authorized by the Board to adopt the Plan and cover its Employees and whose
designation as such has become effective upon acceptance of such status by the
board of directors of the Subsidiary. A Subsidiary, with the permission of the
Committee, may alter the manner in which Awards are determined under the Plan by
so specifying the modifications in its acceptance of the terms of the Plan and
may revoke its acceptance of such designation at any time, but until such
acceptance has been revoked, all the provisions of the Plan and amendments
thereto (except to the extent modified as specified above) shall apply to the
Employees of the Subsidiary. In the event the designation is revoked by the
board of directors of the Subsidiary, the Plan shall be deemed terminated only
with respect to such Subsidiary.
"Disability" shall mean total disability, as provided in the Company's
long-term disability plan.
"Effective Date" shall mean February 18, 1998.
"Employee" shall mean any individual employed by the Company or any of its
Subsidiaries on a regular full-time (regular schedule equal to or greater than
32 hours per week) basis, other than an individual employed by the Company
pursuant to a collective bargaining agreement unless such agreement specifically
provides for participation in the Plan. Individuals employed by the Company in a
casual or temporary capacity (I.E., those hired for a specific job of limited
duration), individuals characterized as "leased employees," within the meaning
of Section 414 of the Code, or individuals characterized by the Company as
"independent contractors" with whom the Company has entered into a contract, no
matter how characterized by the Internal Revenue Service, other governmental
agency or a court, shall not be considered "Employees" for the purposes of the
Plan. Any change of characterization of an individual shall take effect on the
actual date of such change without regard to any retroactive recharacterization.
"General Instrument" shall mean General Instrument Corporation, a Delaware
corporation, and its successors and assigns.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Officer" shall mean an officer of the Company elected by the Board.
"Operational Target Award Earned," for any Performance Period, shall mean
the percentage based on the achievement of the Operational Targets as determined
in accordance with Section 5 of the Plan.
"Operational Targets," for any Performance Period, shall mean the financial
performance of the Company or a Business Unit, as specified by the Committee or
the CEO, as applicable, as to stock price, earnings per share, net earnings,
operating income, return on assets, net capital employed, shareholder return,
return on equity, growth in assets, unit volume, sales, market share, or
strategic business criteria consisting of one or more Company or Business Units
objectives based on meeting specified revenue goals, market penetration goals,
geographic business expansion goals, cost targets, customer satisfaction goals,
product development goals, or goals relating to acquisitions or divestitures. In
setting the Operational Targets pursuant to Section 5, the Committee or the CEO
shall use objectively determinable Operational Targets based on the foregoing
criteria. To the extent applicable, any such Operational Target shall be
determined in accordance with generally accepted accounting principles and
reported upon by the Company's independent accountants. The Operational Targets
established by the Committee or the CEO may be (but need not be) different each
Performance Period and different Operational Targets may be applicable to
different Participants.
4
<PAGE>
"Participant," for any Performance Period, shall mean an Employee who
satisfies the requirements for eligibility in Section 3 of the Plan.
"Performance Period" shall mean the fiscal year of the Company or any other
period designated by the CEO or the Committee, as applicable, with respect to
which an Award is earned.
"Person" shall mean a person within the meaning of Sections 13(d) and 14(d)
of the 1934 Act.
"Personal Performance Percentage," with respect to Participants other than
the CEO for any Performance Period, shall mean the percentage, between 80% and
120%, based on the Employees' overall personal performance during that
Performance Period, as determined in accordance with Section 5 of the Plan.
"Plan" shall mean this General Instrument Corporation Annual Incentive Plan,
as from time to time amended and in effect.
"Retirement" shall mean retirement at or after the early retirement age set
forth in the primary retirement plan covering the Participant. In the event a
Participant participates in more than one retirement plan, the CEO shall
designate one such plan as the Participant's primary retirement plan.
"Subsidiary" shall mean a corporation as defined in Section 424(f) of the
Code, with General Instrument being treated as the employer corporation for
purposes of this definition.
"Target Award Percentage" for any Participant with respect to any
Performance Period, shall mean the percentage of the Participant's Base Salary
(determined at the beginning of the Performance Period for the CEO) that the
Participant would earn as an Award for that Performance Period if each of the
Operational Target Award Earned and Personal Performance Percentage (if
applicable) for that Performance Period is 100%, and shall be determined by the
Committee with respect to Officers who are Participants and the CEO with respect
to all other Participants, based on the Participant's responsibility level or
the position or positions held during the Performance Period; PROVIDED, HOWEVER,
that if any Participant other than an Officer held more than one position during
the Performance Period, then the CEO may designate different Target Award
Percentages with respect to each position and the Award will be pro-rated to
reflect (to the nearest semi-monthly increment) the period during which such
Participant had each Target Award Percentage.
"Voting Power" shall mean the combined voting power of the then outstanding
Voting Securities.
"Voting Securities shall mean, with respect to General Instrument, any
securities issued by General Instrument which generally entitle the holder
thereof to vote for the election of members of the Board.
3. ELIGIBILITY
Subject to the limitations contained in this Section 3, all Employees of the
Company are eligible to participate in the Plan. To be eligible to receive an
Award with respect to any Performance Period, an Employee shall have had at
least three months active service during such Performance Period and (except as
provided in Sections 7 and 8) be actively employed by the Company on the Award
payment date.
Employees shall participate in only one annual incentive plan or sales
incentive plan for any specific period in time. An individual may participate in
this Plan and another plan sequentially during any Performance Period because of
promotion or reassignment, provided that participation in each such plan is
prorated to reflect (to the nearest semi-monthly increment) the period during
which he or she participated in each plan.
4. ADMINISTRATION
The administration of the Plan shall be consistent with the purpose and the
terms of the Plan. The Plan shall be administered by the Committee with respect
to Officers who are Participants and by the CEO
5
<PAGE>
with respect to all other Participants. The Committee and the CEO, as the case
may be, shall have full authority to establish the rules and regulations
relating to the Plan, to interpret the Plan and those rules and regulations, to
select Participants in the Plan, to determine each Participant's Target Award
Percentage, to approve all of the Awards, to decide the facts in any case
arising under the Plan and to make all other determinations, including factual
determinations, and to take all other actions necessary or appropriate for the
proper administration of the Plan, including the delegation of such authority or
power, where appropriate; PROVIDED, HOWEVER, that only the Committee shall have
authority to amend or terminate the Plan and the Committee shall not be
authorized to increase the amount of the Award payable to the CEO that would
otherwise be payable pursuant to the terms of the Plan. All powers of the
Committee or the CEO, as applicable, shall be executed in its or his or her sole
discretion, in the best interest of the Company, not as a fiduciary, and in
keeping with the objectives of the Plan and need not be uniform as to similarly
situated individuals. The Committee's and the CEO's administration of the Plan,
including all such rules and regulations, interpretations, selections,
determinations, approvals, decisions, delegations, amendments, terminations and
other actions, shall be final and binding on the Company and all employees of
the Company, including, the Participants and their respective beneficiaries.
5. DETERMINATION OF AWARDS
Prior to, or as soon as practicable following but in any event no later than
the earlier of (i) 90 days after the beginning of the Performance Period or (ii)
the date on which 25% of the Performance Period has been completed, or, with
respect to the CEO, such other date as may be required or permitted under
applicable regulations under Section 162(m) of the Code, the Committee with
respect to the Officers and the CEO with respect to all other Employees shall
determine the Officers and Employees who shall be Participants during that
Performance Period and determine each Participant's Target Award Percentage each
of which shall be listed on a schedule attached to the Plan as Exhibit A. The
Operational Targets of the CEO for each Performance Period shall satisfy the
requirements for "qualified performance-based compensation" under Section 162(m)
of the Code, including the requirement that the achievement of the Operational
Targets be substantially uncertain at the time they are established and that the
Operational Targets be established in such a way that a third party with
knowledge of the relevant facts could determine whether and to what extent the
Operational Targets Goals have been met. The Company, on the basis of the
decisions of the Committee and the CEO, as applicable, shall prepare the
schedules, which will be treated as part of the Plan for that Performance
Period, setting forth (x) the Participants during that Performance Period (which
may be amended during the Performance Period for new Participants), (y) each
Participant's Target Award Percentage for that Performance Period, and (z) the
Operational Targets (and the allocations among the Operational Targets) for that
Performance Period. The Company shall notify each Participant of his or her
Target Award Percentage and the applicable Operational Targets for the
Performance Period.
Generally, a Participant earns an Award for a Performance Period based on
the Company's and his or her Business Unit's achievement of Operational Targets.
The portion of Awards based on Company or Business Unit, as applicable,
performance will only be earned if the Company or Business Unit, as applicable,
achieves at least the minimum percentage specified by the Committee or CEO, as
applicable, of the Operational Target set for that Performance Period. The
Awards for any Performance Period may also be increased above the Target Award
Percentage for achievement in excess of the Operational Targets for that
Performance Period, as specified by the Committee or CEO, as applicable, at the
time the Operational Targets and the Target Award Percentages are set by the
Committee or CEO, as applicable, for that Performance Period. The Awards of each
Participant (other than the CEO) may be adjusted by the CEO, or with respect to
Officers by the Committee, (upward or downward) based upon the CEO's or the
Committee's, as applicable, determination of a Participant's Personal
Performance Percentage for that Performance Period. The Committee is authorized
to reduce the amount of the Award payable to the CEO (but not by more than
one-third) for any Performance Period based upon its assessment of personal
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performance but not to increase the Award beyond that yielded by the Operational
Target Award Earned for the CEO.
The maximum Award any Participant (other than the CEO) may receive for any
Performance Period is 150% of the Participant's Base Salary for that Performance
Period. The maximum award the CEO may receive for any Performance Period is $1.5
million.
6. CHANGES TO THE TARGET
The CEO, with respect to all Participants who are not Officers, may at any
time prior to the final determination of Awards change the Target Award
Percentage of any Participant or assign a different Target Award Percentage to a
Participant to reflect any change in the Participant's responsibility level or
position during the course of the Performance Period. In addition, the CEO, with
respect to all Participants who are not Officers, and the Committee, with
respect to Officers but, with respect to the CEO, only to the extent consistent
with the requirements of Section 162(m) of the Code permitting a federal income
tax deduction for Awards to the CEO, may at any time prior to the financial
determination of Awards change the performance measures or Operational Targets
to reflect a change in corporate capitalization, such as a stock split or stock
dividend, or a corporate transaction, such as a merger, consolidation,
separation, reorganization or partial or complete liquidation, or to equitably
reflect the occurrence of any extraordinary event, any change in applicable
accounting rules or principles, any change in the Company's method of
accounting, any change in applicable law, any change due to any merger,
consolidation, acquisition, reorganization, stock split, stock dividend,
combination of shares or other changes in the Company's corporate structure or
shares, or any other change of a similar nature.
7. PAYMENT OF AWARDS
The Committee shall certify and announce the Awards that will be paid by the
Company to each Officer as soon as practicable following the final determination
of the Company's financial results for the relevant Performance Period. Subject
to the provisions of Section 8, payment of the Awards certified by the Committee
shall normally be made, in a single lump sum cash payment as soon as practicable
following the close of such Performance Period but in any event within 120 days
after the close of the Performance Period. In the case of all other
Participant's, as soon as practicable after the close of a Performance Period,
the CEO shall review the Business Units' financial performance against the
Operational Targets for that Performance Period and, subject to the provisions
of Section 8 of the Plan, each Award to the extent earned shall be paid in a
single lump sum cash payment as soon as practicable after the close of the
Performance Period, but no later than March 31 following the close of the
Performance Period. Participants in the Plan who are eligible to participate in
the General Instrument Corporation Savings Plan (the "Savings Plan") and who are
not a "highly compensated employee" within the meaning of Section 414(q) of the
Code may, in lieu of receiving payment of the Award in cash, elect to contribute
50% or 100% of any Award to the Savings Plan for the Performance year in which
the Award is earned as a pre-tax non-matched contribution, to the extent such
contribution is permitted in accordance with the terms of such plan.
Participants in the Plan who are eligible to participate in the General
Instrument Corporation Deferred Compensation Plan shall be permitted to forego
all or a portion of their respective Awards to the extent deferrals are
permitted in accordance with the terms of such plan.
If a Change of Control occurs prior to the end of a Performance Period, the
Company shall, within 60 days thereafter, pay to each Participant in the Plan
immediately prior to the Change of Control (regardless of whether the
Participant remains employed after the Change of Control) an Award which is
calculated assuming that the Operational Targets were achieved at the 100% level
(without regard to any other factors such as personal performance) and such
Award shall be based on Base Salary earned to the date of the Change of Control.
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8. LIMITATIONS ON RIGHTS TO PAYMENT OF AWARDS
No Participant shall have any right to receive payment of an Award under the
Plan for a Performance Period unless the Participant remains in the employ of
the Company through the payment date of the Award for such Performance Period,
except as provided in the last paragraph of Section 7 of the Plan. However, if
the Participant has active service with the Company for at least three months
during any Performance Period but, prior to payment of the Award for such
Performance Period, a Participant's employment with the Company terminates due
to the Participant's death, Disability or Retirement, such Participant (or, in
the event of the Participant's death, the Participant's estate, beneficiary or
beneficiaries as determined under Section 9 of the Plan) shall remain eligible
to receive a prorated portion of any earned Award, based on the number of days
that the Participant was actively employed and performed services during such
Performance Period.
9. DESIGNATION OF BENEFICIARY
A Participant may designate a beneficiary or beneficiaries who, in the event
of the Participant's death prior to full payment of any Award hereunder, shall
receive payment of any Award due under the Plan. Such designation shall be made
by the Participant on a form prescribed by the CEO. The Participant may, at any
time, change or revoke such designation. A beneficiary designation, or
revocation of a prior beneficiary designation, will be effective only if it is
made in writing on a form provided by the Company, signed by the Participant and
received by the Company. If the Participant does not designate a beneficiary or
the beneficiary dies prior to receiving any payment of an Award, Awards payable
under the Plan shall be paid to the Participant's estate.
10. AMENDMENTS
The Committee may at any time amend (in whole or in part) this Plan;
provided, however, that the Committee shall not amend the Plan without
stockholder approval if such approval is required by Section 162(m) of the Code.
No such amendment which adversely affects any Participant's rights to or
interest in an Award earned prior to the date of the amendment shall be
effective unless the Participant shall have agreed thereto.
11. TERMINATION
The Committee may terminate this Plan (in whole or in part) at any time. In
the case of such termination of the Plan, the following provisions of this
Section 11 shall apply notwithstanding any other provisions of the Plan to the
contrary:
(i) The Committee shall promulgate administrative rules applicable to
Plan termination, pursuant to which each affected Participant (other than an
Officer) shall receive, with respect to each Performance Period which has
commenced on or prior to the effective date of the Plan termination (the
"Termination Date") and for which the Award has not yet been paid, the
amount described in such rules and each Officer shall receive an amount
equal to the amount the Award would have been had the Plan not been
terminated (prorated for the Performance Period in which the Termination
Date occurred), subject to reduction in the discretion of the Committee.
(ii) Each Award payable under this Section 11 shall be paid as soon as
practicable, but in no event later than 120 days after the Termination Date.
12. MISCELLANEOUS PROVISIONS
(a) This Plan is not a contract between the Company and the Employees or
the Participants. Neither the establishment of this Plan, nor any action
taken hereunder, shall be construed as giving
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any Employee or any Participant any right to be retained in the employ of
the Company or any of its Subsidiaries. The Company is under no obligation
to continue the Plan.
(b) A Participant's right and interest under the Plan may not be
assigned or transferred, except as provided in Section 8 of the Plan, and
any attempted assignment or transfer shall be null and void and shall
extinguish, in the Company's sole discretion, the Company's obligation under
the Plan to pay Awards with respect to the Participant.
(c) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund, or to make any other segregation of
assets, to assure payment of Awards.
(d) The Company shall have the right to deduct from Awards paid any
taxes or other amounts required by law to be withheld.
(e) Nothing contained in the Plan shall limit or affect in any manner or
degree the normal and usual powers of management, exercised by the officers
and the Board of Directors or committees thereof, to change the duties or
the character of employment of any employee of the Company or to remove the
individual from the employment of the Company at any time, all of which
rights and powers are expressly reserved.
(f) It is the intent of the Company that the Plan and Awards under the
Plan for the CEO comply with the applicable provisions of Sections 162(m) of
the Code. To the extent that any legal requirement of Section 162(m) of the
Code as set forth in the Plan ceases to be required under Section 162(m) of
the Code, that Plan provision shall cease to apply.
(g) The validity, construction, interpretation and effect of the Plan
shall exclusively be governed by and determined in accordance with the law
of the Commonwealth of Pennsylvania.
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EXHIBIT 10.12
GENERAL INSTRUMENT CORPORATION DEFERRED COMPENSATION PLAN
ARTICLE 1--INTRODUCTION
1.1 PURPOSE OF PLAN--AMENDMENT AND RESTATEMENT
NextLevel Systems, Inc. adopted the NextLevel Deferred Compensation Plan
("NextLevel Plan") effective July 1, 1997. Effective as of February 2, 1998,
NextLevel Systems, Inc. changed its name to General Instrument Corporation. This
General Instrument Corporation Deferred Compensation Plan is a successor to the
NextLevel Plan. The Plan provides a means by which certain employees may elect
to defer receipt of designated percentages or amounts of their Compensation.
Effective as of the distribution by General Instrument Corporation ("Old
GI") of all its shares of stock of NextLevel Systems, Inc. (the "Spinoff"), the
NextLevel Plan assumed the liabilities from the GI Deferred Compensation Plan
("Old GI Plan") with respect to participants in the Old GI Plan as of the date
of the Spinoff whose employment after the Spinoff was with the business of
NextLevel Systems, Inc. As of the Spinoff, assets were to be transferred from
the trust maintained in connection with the Old GI Plan to the Trust maintained
in connection with the Plan, in an amount equal to the liabilities transferred
from the Old GI Plan to the Plan. Effective as of February 2, 1998, the
liabilities of the NextLevel Plan are transferred to and assumed by the Plan.
1.2 STATUS OF PLAN
The Plan is intended to be "a plan which is unfunded and is maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees" within the meaning
of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974 ("ERISA"), and shall be interpreted and administered to the
extent possible in a manner consistent with that intent.
ARTICLE 2--DEFINITIONS
Wherever used herein, the following terms have the meanings set forth below,
unless a different meaning is clearly required by the context:
2.1 ACCOUNT means, for each Participant, the bookkeeping account established for
his or her benefit under Section 5.1.
2.2 CHANGE OF CONTROL has the meaning set forth in the NextLevel Systems, Inc.
1997 Long-Term Incentive Plan (now renamed the General Instrument Corporation
1997 Long-Term Incentive Plan).
2.3 CODE means the Internal Revenue Code of 1986, as amended from time to time.
Reference to any section or subsection of the Code includes reference to any
comparable or succeeding provisions of any legislation which amends, supplements
or replaces such section or subsection.
2.4 COMPANY means on and after February 2, 1998, General Instrument Corporation
(and prior to February 2, 1998, NextLevel Systems, Inc.) and any successor to
all or a major portion of the Company's assets or business which assumes the
obligations of the Company, and each other entity that is affiliated with the
Company which adopts the Plan with the consent of the Company. With respect to
any Participant, the "Company" shall mean the entity by which he is employed.
2.5 COMPENSATION means base salary payable to a Participant by the Company or an
affiliate, and any bonuses earned by a Participant under the Company's annual
management incentive plan.
2.6 EFFECTIVE DATE of this amendment and restatement is February 2, 1998. The
Plan was originally effective July 1, 1997.
2.7 ELECTION FORM means the participation election form as approved and
prescribed by the Plan Administrator.
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2.8 ELECTIVE DEFERRAL means the portion of Compensation which is deferred by a
Participant under Section 4.1.
2.9 ELIGIBLE EMPLOYEE means each employee of the Company who is at a salary
level of Grade 16 or higher.
2.10 ERISA MEANS the Employee Retirement Income Security Act of 1974, as amended
from time to time. Reference to any section or subsection of ERISA includes
reference to any comparable or succeeding provisions of any legislation which
amends, supplements or replaces such section or subsection.
2.11 INSOLVENT means either (i) the Company is unable to pay its debts as they
become due, or (ii) the Company is subject to a pending proceeding as a debtor
under the United States Bankruptcy Code.
2.12 PARTICIPANT means any individual who participates in the Plan in accordance
with Article 3.
2.13 PLAN means the General Instrument Corporation Deferred Compensation Plan as
set forth herein and all amendments thereto.
2.14 PLAN ADMINISTRATOR means the person, persons or entity designated by
General Instrument Corporation from time to time to administer the Plan and to
serve as the agent for the Company with respect to the Trust as contemplated by
the agreement establishing the Trust. If no such person or entity is so serving
at any time, General Instrument Corporation shall be the Plan Administrator.
2.15 PLAN YEAR means the 12-month period beginning January l and ending December
31.
2.16 TOTAL AND PERMANENT DISABILITY means the inability of a Participant to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months, and the permanence and degree of which shall be
supported by medical evidence satisfactory to the Plan Administrator.
2.17 TRUST means the applicable trust established by General Instrument
Corporation or an affiliate thereof that identifies the Plan as a plan with
respect to which assets are to be held by the Trustee.
2.18 TRUSTEE means the trustee or trustees under the Trust.
ARTICLE 3--PARTICIPATION
3.1 COMMENCEMENT OF PARTICIPATION
Any individual who elects to defer part of his or her Compensation in
accordance with Section 4.1 shall become a Participant in the Plan as of the
date such deferrals commence in accordance with Section 4.1.
3.2 CONTINUED PARTICIPATION
A Participant in the Plan shall continue to be a Participant so long as any
amount remains credited to his or her Account.
ARTICLE 4--ELECTIVE DEFERRALS
4.1 ELECTIVE DEFERRALS
Any individual who becomes an Eligible Employee after June 30, 1997 may, by
completing an Election form and filing it with the Plan Administrator within 30
days after becoming an Eligible Employee, elect to defer a percentage or dollar
amount of one or more payments of Compensation, on such terms as the Plan
Administrator may permit, which are earned and payable to the Participant after
the date on which the
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individual files the Election Form; provided that such Participant may not elect
to defer any part of his or her bonus payable in any Plan Year, after November
15 of the year preceding such Plan Year.
Any Eligible Employee who has not otherwise initially elected to defer
Compensation in accordance with this paragraph 4.1 may elect to defer a
percentage or dollar amount of one or more payments of Compensation, on such
terms as the Plan Administrator may permit, commencing with Compensation paid in
the next succeeding Plan Year, by completing an Election form, with respect to
base salary, prior to the first day of such succeeding Plan Year, or with
respect to bonus deferral, before November 15 of the year preceding such Plan
Year.
A Participant may elect to defer only up to 50% of base salary and up to
100% of any bonuses earned under the Company's annual management incentive plan
for any Plan Year. Base salary is determined before giving effect to Elective
Deferrals and other salary reduction amounts which are not included in the
Participant's gross income under Code sections 125, 401(k), 402(h) or 403(b).
A Participant's Compensation shall be reduced in accordance with the
Participant's election hereunder and amounts deferred hereunder shall be paid by
the Company to the Trust once per month and credited to the Participant's
Account as of the date the amounts are received by the Trustee. Elective
Deferrals shall not be in effect for any Participant during any period in which
such Participant is eligible to receive benefits under the Company's Long Term
Disability policy.
An election to defer a percentage or dollar amount of Compensation for any
Plan Year shall apply for only such Plan Year. An Eligible Employee must make a
new deferral election as of the first day of any Plan Year by giving written
notice to the Plan Administrator, with respect to base salary deferral, before
such first day or with respect to bonus deferral, before November 15 of the year
preceding such Plan Year (or, in each case, any such earlier date as the Plan
Administrator may prescribe.)
ARTICLE 5--ACCOUNTS
5.1 ACCOUNTS
The Plan Administrator shall establish a bookkeeping Account for each
Participant reflecting Elective Deferrals made for the Participant's benefit
together with any adjustments for income, gain or loss and any payments from the
Account. The Plan Administrator may cause the Trustee to maintain and invest
separate asset accounts corresponding to each Participant's Account. The Plan
Administrator shall establish sub-accounts for each Participant that has more
than one election in effect under Section 7.1 and such other sub-accounts as are
necessary for the proper administration of the Plan. As of the last business day
of each calendar quarter, the Plan Administrator shall provide the Participant,
as soon as practicable after the end of such quarter, with a statement of his or
her Account reflecting the income, gains and losses (realized and unrealized),
amounts of deferrals, and distributions of such Account since the prior
statement.
5.2 INVESTMENTS
The assets of the Trust shall be invested in such investments as the Trustee
shall determine. The Trustee may (but is not required to) consider the Company's
or a Participant's investment preferences when investing the assets attributable
to a Participant's Account. A Participant, at the time of making a deferral
election, may designate the rate of return to be credited to his accounts from
among options offered by the Company. A Participant (or the beneficiary or legal
representative of a deceased Participant) may change such designated rate of
return, effective as of the first business day of any calendar quarter, by
filing a written election specifying the change with the Plan Administrator no
later than the fifteenth day of the month preceding the first month of such
calendar quarter. Such designations shall not obligate the Company or the
Trustee to set aside or invest assets designed to provide such rate of return.
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ARTICLE 6--VESTING
6.1 GENERAL
A Participant shall be immediately vested in, i.e., shall have a
nonforfeitable right to, all Elective Deferrals, and all income and gain
attributable thereto, credited to his or her Account.
ARTICLE 7--PAYMENTS
7.1 ELECTION AS TO TIME AND FORM OF PAYMENT
A Participant shall elect irrevocably on the Election Form the date at which
the Elective Deferrals (including any earnings attributable thereto) will
commence to be paid to the Participant. Such date must be at least five years
following the date at which such Elective Deferrals commence. The Participant
shall also elect thereon for payments to be paid in either:
a. a single lump deferrals sum; or
b. annual installments over a period elected by the Participant up to 10
years, the amount of each installment to equal the balance of his or her
Account immediately prior to the installment divided by the number of
installments remaining to be paid ("Annual Installments").
Each such election will be effective only for deferrals (including any
earnings or losses attributable thereto) for the Plan Year for which it is made.
Except as provided in Sections 7.2, 7.3, 7.4, or 7.5, payment of a Participant's
Account shall be made in accordance with the Participant's elections under this
Section 7.1.
7.2 CHANGE OF CONTROL
The Plan will terminate upon a Change of Control. Immediately prior to the
consummation of a transaction resulting in a Change of Control or, if not
possible, as soon as possible following a Change of Control, each Participant
shall be paid his or her entire Account balance in a single lump sum.
7.3 TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT AGE
Upon termination of a Participant's employment for any reason including
Total and Permanent Disability, but other than death, prior to the attainment of
the Retirement Age, which is age 55, the Participant's entire Account shall be
paid to the Participant, according to the Participant's irrevocable election on
the Election Form, in a single lump sum as soon as practicable following the end
of the quarter in which such termination occurs (and valued as of the last
business day of such quarter), or in Annual Installments over a period elected
by the Participant up to 10 years, commencing the year immediately following the
year in which such termination occurs (with each distribution valued as of the
last day of the calendar quarter preceding the date of distribution).
7.4 DEATH
If a Participant dies prior to the complete distribution of his or her
Account, the balance of the Account shall be paid, according to the
Participant's irrevocable election on the Election Form, to the Participant's
designated beneficiary or beneficiaries, in a single lump sum as soon as
practicable following the end of the quarter in which death occurs (and valued
as of the last business day of such quarter), or in Annual Installments over a
period elected by the Participant up to 10 years, commencing the year
immediately following the year in which death occurs (with each distribution
valued as of the last day of the calendar quarter preceding the date of
distribution).
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Any designation of beneficiary and form of payment to such beneficiary shall
be made by the Participant on a designation/change of beneficiary form filed
with the Plan Administrator and may be changed by the Participant at any time by
filing another designation/change of beneficiary form containing the revised
instructions. If no beneficiary is designated or no designated beneficiary
survives the Participant, payment shall be made to the Participant's surviving
spouse, or, if none, to his or her issue per stirpes, in a single payment. If no
spouse or issue survives the Participant, payment shall be made in a single lump
sum to the Participant's estate.
7.5 UNFORESEEN EMERGENCY
If a Participant suffers an unforeseen emergency, as defined herein, the
Plan Administrator, in its sole discretion, may pay to the Participant only that
portion, if any, of his or her Account which the Plan Administrator determines
is necessary to satisfy the emergency need, including at the discretion of the
Plan Administrator any amounts necessary to pay any federal, state and local
income taxes reasonably anticipated to result from the distribution.
A Participant requesting an emergency payment shall apply for the payment in
writing in a form approved by the Plan Administrator and shall provide such
additional information as the Plan Administrator may require. For purposes of
this paragraph, "unforeseen emergency" means an immediate and heavy financial
need resulting from any of the following:
a. expenses which are not covered by insurance and which the Participant or
his or her spouse or dependent has incurred as a result of sudden and
unexpected illness or accident; or
b. expenses which are not covered by insurance and which the Participant or
his or her spouse or dependent has incurred or must incur as a result of
a casualty loss.
7.6 TAXES
All federal, state and local taxes that the Plan Administrator determines
are required to be withheld from any payments made pursuant to this Article 7
shall be withheld.
7.7 CLAIMS PROCEDURE
A Participant or beneficiary (a "Claimant") entitled to benefits may file a
claim for such benefits with the Plan Administrator, in such form as permitted
by the Plan Administrator. The claim will be evaluated and a decision rendered
within ninety (90) days, unless special circumstances require an additional
ninety (90) day extension of time.
A Claimant shall be given written notice of whether the claim is granted or
denied, in whole or in part, including (1) specific reasons for the denial, (2)
references to pertinent Plan provisions on which the denial is based, (3) a
description of any additional material or information necessary to perfect the
claim and explanation as to why necessary, and (4) the Claimant's right to seek
review of the denial.
If denied, in whole or in part, the Claimant may make a written request for
review of such denial to the Plan Administrator, within 60 days after receipt of
the denial, and may include pertinent documents, issues and comments to aid the
Plan Administrator. The request will be evaluated and a decision rendered within
sixty (60) days, unless special circumstances require an additional sixty (60)
day extension of time. The written decision will specify reasons for the
decision and references to Plan provisions upon which the decision is based.
A Claimant who fails to file a claim, or submit a request for review of an
initial claim shall have no right to review and shall have no right to bring
action in any court. The denial of the claim shall be final and binding on all
persons for all purposes.
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7.8 SECTION 162(M) LIMITATIONS
In the event that any amount to be paid pursuant to Section 7.1, 7.3, 7.4 or
7.5 would, in the Company's judgment, result in the non-deductibility, under
Section 162(m) of the Code, of any portion of such Participant's income payable
by or attributable to the Company for the year in which such amount is to be
paid, such amount shall not be paid in such year. Such nondeductible amount
shall be payable in the following calendar year, as an addition to the annual
installment scheduled to be paid in such following calendar year, if applicable,
subject to the provisions of this Section 7.8.
ARTICLE 8--PLAN ADMINISTRATOR
8.1 PLAN ADMINISTRATION AND INTERPRETATION
The Plan Administrator shall oversee the administration of the Plan. The
Plan Administrator shall have complete control and authority to determine the
rights and benefits and all claims, demands and actions arising out of the
provisions of the Plan of any Participant, beneficiary, deceased Participant, or
other person having or claiming to have any interest under the Plan. The Plan
Administrator shall have complete discretion to interpret the Plan and to decide
all matters under the Plan. Such interpretation and decision shall be final,
conclusive and binding on all Participants and any person claiming under or
through any Participant, in the absence of clear and convincing evidence that
the Plan Administrator acted arbitrarily and capriciously. Any individual(s)
serving as Plan Administrator who is a Participant will not vote or act on any
matter relating solely to himself or herself. In such case, General Instrument
Corporation will appoint an individual to act as Plan Administrator to take such
actions. When making a determination or calculation, the Plan Administrator
shall be entitled to rely on information furnished by a Participant, a
beneficiary, the Company or the Trustee. The Plan Administrator shall have the
responsibility for complying with any reporting and disclosure requirements of
ERISA.
8.2 POWERS, DUTIES, PROCEDURES, ETC.
The Plan Administrator shall have such powers and duties, may adopt such
rules and tables, may act in accordance with such procedures, may appoint such
officers or agents, may delegate such powers and duties, may receive such
reimbursements, and shall follow such claims and appeal procedures with respect
to the Plan as it may establish.
8.3 INFORMATION
To enable the Plan Administrator to perform its functions, the Company shall
supply full and timely information to the Plan Administrator on all matters
relating to the compensation of Participants, their employment, retirement,
death, termination of employment, and such other pertinent facts as the Plan
Administrator may require.
8.4 INDEMNIFICATION OF PLAN ADMINISTRATOR
The Company agrees to indemnify and to defend to the fullest extent
permitted by law any officer(s) or employee(s) who serve as Plan Administrator
(including any such individual, whether a present or former employee, who
formerly served as Plan Administrator) against all liabilities, damages, costs
and expenses (including attorneys' fees and amounts paid in settlement of any
claims approved by General Instrument Corporation) occasioned by any act or
omission to act in connection with the Plan, if such act or omission is in good
faith.
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ARTICLE 9--AMENDMENT AND TERMINATION
9.1 AMENDMENTS
General Instrument Corporation shall have the right to amend the Plan from
time to time, subject to Section 9.3, by an instrument in writing which has been
executed on its behalf by its Chief Executive Officer or his delegate designated
in writing, with or without the specific approval of the board of directors.
9.2 TERMINATION OF PLAN
This Plan is strictly a voluntary undertaking on the part of the Company and
shall not be deemed to constitute a contract between the Company and any
Eligible Employee (or any other employee) or a consideration for, or an
inducement or condition of employment for, the performance of the services by an
Eligible Employee (or other employee). General Instrument Corporation reserves
the right to terminate the Plan at any time, subject to Section 9.3, by an
instrument in writing which has been executed on its behalf by its Chief
Executive Officer or his delegate designated in writing, with or without the
specific approval of the board of directors. In addition, the Plan shall
terminate upon a Change of Control in accordance with Section 7.2. Upon
termination other than pursuant to Section 7.2, General Instrument Corporation
may (a) elect to continue to maintain the Trust to pay benefits hereunder as
they become due as if the Plan had not terminated or (b) amend the Trust as
provided therein to require prompt payment to Participant's (or their
beneficiaries) of the balance of their Accounts.
9.3 EXISTING RIGHTS
No amendment or termination of the Plan shall adversely affect the rights of
any Participant with respect to amounts that have been credited to his or her
Account prior to the date of such amendment or termination.
ARTICLE 10--MISCELLANEOUS
10.1 NO FUNDING
The Plan constitutes a mere promise by the Company to make payments in
accordance with the terms of the Plan and Participants and beneficiaries shall
have the status of general unsecured creditors of the Company. Nothing in the
Plan will be construed to give any employee or any other person rights to any
specific assets of the Company or of any other person. In all events, it is the
intent of the Company that the Plan be treated as unfunded for tax purposes and
for purposes of Title I of ERISA.
10.2 NON-ASSIGNABILITY
None of the benefits, payments, proceeds or claims of any participant or
beneficiary shall be subject to any claim of any creditor of any Participant or
beneficiary, nor shall any Participant or beneficiary have any right to
alienate, anticipate, commute, pledge, encumber or assign any of the benefits or
payments or proceeds which he or she may expect to receive, contingently or
otherwise, under the Plan.
10.3 LIMITATION OF PARTICIPANT'S RIGHTS
Nothing contained in the Plan shall confer upon any person a right to be
employed or to continue in the employ of the Company, or interfere in any way
with the right of the Company to terminate the employment of a Participant in
the Plan at any time, with or without cause.
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10.4 PARTICIPANTS BOUND
Any action with respect to the Plan taken by General Instrument Corporation,
the Plan Administrator or the Company or the Trustee or any action authorized by
or taken at the direction of the General Instrument Corporation, the Plan
Administrator, the Company or the Trustee shall be conclusive upon all
Participants and beneficiaries entitled to benefits under the Plan.
10.5 RECEIPT AND RELEASE
Any payment to any Participant or beneficiary in accordance with the
provisions of the Plan shall, to the extent thereof, be in satisfaction of
claims against the Company, the Plan Administrator and the Trustee under the
Plan, and the Plan Administrator may require such Participant or beneficiary, as
a condition precedent to such payment, to execute a receipt and release to such
effect. If any Participant or beneficiary is determined by the Plan
Administrator to be incompetent by reason of physical or mental disability,
including minority, to give a valid receipt and release, the Plan Administrator
may cause the payment or payments becoming due to such person to be made to
another person for his or her benefit without responsibility on the part of the
Plan Administrator, the Company or the Trustee to follow the application of such
funds.
10.6 GOVERNING LAW
The Plan shall be construed, administered, and governed in all respects
under and by the laws of the State of Pennsylvania. If any provision shall be
held by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions hereof shall continue to be fully effective.
10.7 HEADINGS AND SUBHEADINGS
Headings and subheadings in this Plan are inserted for convenience only and
are not to be considered in the construction of the provisions hereof.
<TABLE>
<S> <C> <C> <C>
Dated: 2 March, 1998 GENERAL INSTRUMENT CORPORATION
By:
<CAPTION>
/s/ SCOTT CRUM
------------------------------------------
Name: Scott Crum
Title: VICE PRESIDENT, ADMINISTRATION
AND EMPLOYEE RESOURCES
</TABLE>
8
<PAGE>
EXHIBIT 10.13
GENERAL INSTRUMENT CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
AMENDED AND RESTATED EFFECTIVE FEBRUARY 2, 1998
(ORIGINALLY EFFECTIVE JULY 1, 1997)
<PAGE>
GENERAL INSTRUMENT CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
SECTION 1
INTRODUCTION
1.1 THE PLAN AND ITS EFFECTIVE DATE. NextLevel Systems, Inc. established
the NextLevel Systems, Inc. Supplemental Executive Retirement Plan ("NextLevel
SERP"), effective July 1, 1997. Effective February 2, 1998 NextLevel Systems,
Inc. changed its name to General Instrument Corporation. This Plan is a
successor to the NextLevel SERP.
Effective as of the date of the distribution by General Instrument
Corporation ("Old GI") of all of the shares of stock of NextLevel Systems, Inc.
owned by it (the "Spinoff"), the liabilities of the General Instrument
Corporation Supplemental Executive Retirement Plan ("Old GI SERP") accrued
through June 30, 1997 with respect to participants in the Old GI SERP who
continued in employment with NextLevel Systems, Inc. or its subsidiaries after
the Spinoff were transferred to and assumed by the NextLevel SERP. Effective as
of February 2, 1998 the liabilities of the NextLevel SERP are transferred to and
assumed by the Plan.
1.2 PURPOSE. The Company maintains the General Instrument Corporation
Pension Plan (the "Pension Plan"), which was originally named the NextLevel
Systems, Inc. Pension Plan, and which has been spun off from the General
Instrument Corporation Pension Plan for Salaried and Hourly Paid Non-Union
Employees ("Old GI Pension Plan"). The Pension Plan is intended to meet the
requirements of a "qualified plan" under the Internal Revenue Code of 1986.
Internal Revenue Code Section 401(a)(17) places limitations on the maximum
amount of annual compensation which may be taken into account in determining the
amount of benefit to which a participant is entitled under a qualified plan.
Prior to 1994, the limit was $200,000, as adjusted for cost of living increases
("Old Compensation Limit"). Effective beginning in 1994, the limit is $150,000,
as adjusted for cost of living increases ("New Compensation Limit"). Certain
participants in the Pension Plan are also eligible to participate in the General
Instrument Corporation Deferred Compensation Plan ("Deferred Compensation
Plan"), which was originally named the NextLevel Deferred Compensation Plan.
Certain participants in the Pension Plan may have been eligible to participate
in the GI Deferred Compensation Plan. Under the Deferred Compensation Plan,
eligible participants are permitted to elect to defer payment of a portion of
their compensation. Amounts deferred under the Deferred Compensation Plan or the
GI Deferred Compensation Plan are not considered to be compensation on which
benefits under the Pension Plan are based ("Pension Earnings"). The purpose of
the Plan is to provide benefits which would be payable under the Pension Plan if
the Pension Plan and the GI Pension Plan had been subject to the Old
Compensation Limit in 1994 and later years, but which may not be provided under
the Pension Plan because of (a) the New Compensation Limit and (b) the exclusion
of certain deferrals under the Deferred Compensation Plan from Pension Earnings.
The Plan shall be an unfunded plan maintained by an employer primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees.
SECTION 2
PARTICIPATION AND BENEFITS
2.1 ELIGIBILITY FOR PARTICIPATION. Any Related Company (as defined in the
Pension Plan) that has become an Employer under the Pension Plan may, with the
consent of the Company, adopt this Plan for its employees who are participants
in the Pension Plan. The Company and each Related Company that adopts this Plan
is referred to herein as an "Employer."
2
<PAGE>
2.2 ELIGIBILITY FOR BENEFITS. Subject to the conditions and limitations of
the Plan, if a participant in the Pension Plan becomes entitled to benefits
under the Pension Plan, and such benefits have been limited as a result of the
New Compensation Limit or the exclusion of deferrals under the Deferred
Compensation Plan or the GI Deferred Compensation Plan from Pension Earnings, or
any of them, such employee shall then become a participant in the Plan.
2.3 AMOUNT OF BENEFITS. The participant (or his beneficiary) shall be
entitled to receive under the Plan an amount ("Supplemental Benefit") equal to
the amount by which the benefit which would have been payable to the participant
(or his beneficiary) under the Pension Plan (under the Old Compensation Limit)
is reduced on account of the New Compensation Limit or the exclusion, in the
year of deferral, of deferrals under the Deferred Compensation Plan or the GI
Deferred Compensation Plan from Pension Earnings, or any of them, subject to (a)
and (b) below:
(a) The amount which would have been payable under the Old Compensation
Limit shall be determined by adjusting the Old Compensation Limit for cost
of living increases as though the New Compensation Limit had not taken
effect. For this purpose, a participant's Frozen Benefit as of December 31,
1993 (as defined in the Pension Plan) shall not be considered to be affected
by the New Compensation Limit.
(b) Supplemental Benefits shall be based on amounts deferred under the
Deferred Compensation Plan in the year of deferral, but only to the extent
such amounts would have been considered to be Pension Compensation (subject
to the Old Compensation Limit) if they had not been so deferred.
A participant shall be vested in and subject to forfeitures of his
Supplemental Benefit to the same extent as he would be if it were a benefit
under the Pension Plan.
2.4 PAYMENT OF BENEFITS. A participant's Supplemental Benefit shall be
paid to him, or his beneficiary, at the same time and in the same manner as the
benefit payable to such person under the Pension Plan, subject to the following:
(i) if the present value lump sum actuarial equivalent of the
Supplemental Benefit at the earlier of the date of a participant's
termination of employment or the date pension benefits commence to him under
the Pension Plan is $10,000 or less, the Supplemental Benefit shall be paid
as soon as administratively practicable after such earlier date in a lump
sum in cash; and
(ii) in the event of a Change of Control (as defined in the Company's
1997 Long-Term Incentive Plan), the present value lump sum actuarial
equivalent of each participant's Supplemental Benefit on the date of the
Change of Control (including Supplemental Benefits then in pay status) shall
be paid immediately in a lump sum in cash.
Any Supplemental Benefits payable under the Plan after a lump sum payment
has been made shall be reduced by the actuarial equivalent of such lump sum
payment to the extent necessary to avoid double payment of benefits.
2.5 DETERMINATION OF ACTUARIAL EQUIVALENTS. The actuarial equivalent for a
lump sum under this Plan shall be determined in accordance with the provisions
of the Pension Plan regarding actuarial equivalents as in effect for the
participant's pension benefits.
2.6 NO FUNDING. Benefits payable under the Plan to any person shall be
paid directly by the Employer that last employed the participant; provided that
benefits not paid by an Employer shall be paid by the Company. No Employer shall
be required to fund, or otherwise segregate assets to be used for payment of,
benefits under the Plan.
3
<PAGE>
SECTION 3
GENERAL PROVISIONS
3.1 PLAN ADMINISTRATION. The Plan shall be administered by a Committee
("Committee"), which shall have, to the extent appropriate, the same powers,
rights, duties and obligations with respect to the Plan as it has with respect
to the Pension Plan, including but not limited to claims administration and the
discretionary power to construe and interpret the Plan. If the General
Instrument Corporation Employee Benefits Administrative Committee does not
accept appointment as the Committee, the Company shall appoint a Committee of at
least two members, and if no such appointment is made, the Company shall serve
as the Committee.
3.2 EMPLOYMENT RIGHTS. Establishment of the Plan shall not be construed to
give any employee the right to be retained in the service of any Employer or to
any benefits not specifically provided by the Plan, nor shall the establishment
of the Plan in any manner modify the Company's right to modify, amend or
terminate the Pension Plan.
3.3 INTERESTS NOT TRANSFERABLE. Except as to withholding of any tax under
the laws of the United States or any state or locality, no benefit payable at
any time under the Plan shall be subject in any manner to alienation, sale,
transfer, assignment, pledge, attachment, or other legal process, or encumbrance
of any kind. Any attempt to alienate, sell, transfer, assign, pledge or
otherwise encumber any such benefits, whether currently or thereafter payable,
shall be void. No benefit shall, in any manner, be liable for or subject to the
debts or liabilities of any person entitled to such benefits. If any person
shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise
encumber his benefits under the Plan, or if by reason of his bankruptcy or other
event happening at any time, such benefits would devolve upon any other person
or would not be enjoyed by the person entitled thereto under the Plan, then the
Committee, in its discretion, may terminate the interest in any such benefits of
the person entitled thereto under the Plan and hold or apply them to or for the
benefit of such person entitled thereto under the Plan or his spouse, children
or other dependents, or any of them, in such manner as the Committee may deem
proper.
3.4 CONTROLLING LAW. The law of Pennsylvania, except its law with respect
to choice of law, shall be controlling in all matters relating to the Plan,
except to the extent preempted by federal law.
3.5 ACTION BY THE COMPANY. Any action required of or permitted by the
Company under the Plan shall be by resolution of the Board of Directors of the
Company or any person(s) authorized by resolution of such Board of Directors.
SECTION 4
AMENDMENT AND TERMINATION
The Company intends the Plan to be permanent, but reserves the right at any
time, by action of its board of directors, to modify, amend or terminate the
Plan, including with respect to benefits then being paid; provided, however,
that if a person covered by the Plan becomes entitled to a benefit under the
Pension Plan, benefits provided under Section 2.1 hereof shall constitute an
irrevocable obligation of the Company to the same extent as such benefit would
have been irrevocable had it been an obligation of the Pension Plan.
4
<PAGE>
Date: 2 March, 1998
<TABLE>
<S> <C> <C>
GENERAL INSTRUMENT CORPORATION
By: /s/ SCOTT CRUM
------------------------------
Name: Scott Crum
Title: VICE PRESIDENT,
ADMINISTRATION
AND EMPLOYEE RESOURCES
ATTEST:
By: /s/ LEE S. ZIMMERMAN
----------------------------
Name: Lee S. Zimmerman
Title: ASSISTANT
SECRETARY
</TABLE>
5
<PAGE>
EXHIBIT 21
GENERAL INSTRUMENT CORPORATION SUBSIDIARIES
<TABLE>
<S> <C>
Ensambladora de Matamoros, S.A. de C.V.
Incorporated: Mexico
General Instrument (Australia) Pty Limited
Incorporated: Australia
General Instrument (Belgium) B.V.B.A.
Incorporated: Belgium
General Instrument (Chile) Limitada
Incorporated: Chile
General Instrument China Holdings, Inc.
Incorporated: Delaware
General Instrument HDTV Corporation
Incorporated: Delaware
General Instrument (Hong Kong) Limited
Incorporated: Hong Kong
General Instrument (India), Inc.
Incorporated: Delaware
General Instrument (Mauritius), Inc.
Incorporated: Delaware
General Instrument (Mexico), S.A. de C.V.
Incorporated: Mexico
General Instrument Services, Inc.
Incorporated: Delaware
General Instrument Purchasing Corp.
Incorporated: Delaware
Jerrold DC Radio, Inc.
Incorporated: Delaware
Next Level Communications
Incorporated: California
NextLevel Holdings (Taiwan), Inc.
Incorporated: Delaware
The NextLevel Systems Foundation
Incorporated: Illinois
NextLevel Systems (Puerto Rico), Inc.
Incorporated: Delaware
Magnitude Compression Systems, Inc.
Incorporated: California
GI Mauritius Holdings, Ltd.
Incorporated: Mauritius
General Instrument of Taiwan, Ltd.
Incorporated: Taiwan
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Access Control Center, Inc.
Incorporated: Delaware
Charger Industries
Incorporated: California
DBS Services, Inc.
Incorporated: California
General Instrument (Canada) Inc.
Incorporated: Canada
General Instrument (Europe) Ltd.
Incorporated: England
General Instrument (Music Services) Ltd.
Incorporated: England
General Instrument International, Inc.
Incorporated: Delaware
General Instrument (Brasil) Ltda.
Incorporated: Brazil
General Instrument (Argentina) S.A.
Incorporated: Argentina
General Instrument (Japan) Ltd.
Incorporated: Japan
General Instrument (Singapore) Pte.
Incorporated: Singapore
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-29719 and 333-33399 of General Instrument Corporation (formerly NextLevel
Systems, Inc.) on Forms S-8 of our reports dated February 14, 1998 (March 5,
1998 as to Note 19) included in this Annual Report on Form 10-K of General
Instrument Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 30, 1998
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,225
<SECURITIES> 30,346
<RECEIVABLES> 343,625
<ALLOWANCES> (3,566)
<INVENTORY> 288,078
<CURRENT-ASSETS> 824,718
<PP&E> 236,821
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,675,353
<CURRENT-LIABILITIES> 389,067
<BONDS> 0
0
0
<COMMON> 1,484
<OTHER-SE> 1,213,327
<TOTAL-LIABILITY-AND-EQUITY> 1,675,353
<SALES> 1,764,088
<TOTAL-REVENUES> 1,764,088
<CGS> 1,336,482
<TOTAL-COSTS> 1,336,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,210
<INCOME-PRETAX> (9,639)
<INCOME-TAX> (6,474)
<INCOME-CONTINUING> (16,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,113)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
<PAGE>
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
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,
<PAGE>
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 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, 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 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
<PAGE>
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 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 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.
<PAGE>
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. In addition, as mentioned above, sales of
equipment into international markets by the Company have increased. 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.
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.
