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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to Commission file number: 001-12925
GENERAL INSTRUMENT CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 36-4134221
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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101 TOURNAMENT DRIVE, HORSHAM, PENNSYLVANIA 19044
(Address of principal executive offices) (Zip
Code)
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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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Title of each class Name of each exchange 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 / / No /X/
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 $4.5 billion as of March 15, 1999 (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 15, 1999 there were 177,153,291 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 1999 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 "Distribution") 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 (the "Common Stock"), to the
stockholders of the Distributing Company. Immediately following the
Distribution, the Distributing Company changed its corporate name to "General
Semiconductor, Inc." ("General Semiconductor"). Effective February 2, 1998, the
Company changed its corporate name from "NextLevel Systems, Inc." to "General
Instrument Corporation." Unless the context otherwise requires, references to
the "Company" or "General Instrument" 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 Distribution.
OVERVIEW
The Company is a leading worldwide provider of integrated and interactive
broadband access solutions and, with its strategic partners and customers, is
advancing the convergence of the Internet, telecommunications and video
entertainment industries. The Company is the world's leading supplier of digital
and analog set-top terminals and systems for wired and wireless cable television
networks, as well as hybrid fiber/coaxial network transmission systems used by
cable television operators, and is a provider of digital satellite television
systems for programmers, direct-to-home ("DTH") satellite networks and private
networks for business communications. Through its limited partnership interest
in Next Level Communications L.P. (the "Partnership"), the Company provides
next-generation broadband access solutions for local telephone companies with
the Partnership's NLevel(3)-Registered Trademark-Switched Digital Access System
("NLevel(3)").
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 in the United States and international markets
will continue to demonstrate an increasing demand for new information and
entertainment services, and (ii) content and service providers will continue to
create new bandwidth-intensive video, voice and data applications. 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.
Since December 1997, the Company has entered into several strategic
relationships, including equity investments in the Company by large cable
television multiple systems operators ("MSOs"), which are expected to provide a
strong foundation for future business development and to reinforce the Company's
position as a leading provider of the next generation of broadband
communications equipment and systems.
CABLE CUSTOMER EQUITY OWNERSHIP. The Company has issued warrants to purchase
approximately 29 million shares of Common Stock to leading North American cable
system operators. These warrants were issued in connection with definitive
agreements to supply approximately 15 million digital set-top terminals to such
operators. Included among the cable operators entitled to exercise the warrants
upon the purchase of set-top terminals from the Company are Tele-Communications,
Inc. ("TCI"), Time Warner Cable ("Time Warner"), MediaOne of Delaware, Inc.
("MediaOne"), Comcast Cable Communications, Inc. ("Comcast"), Cox
Communications, Inc. ("Cox"), Adelphia Communications Corporation ("Adelphia"),
Shaw Communications, Inc. ("Shaw"), Jones Intercable, Inc. ("Jones") and Charter
Communications, Inc. ("Charter"). See "- Broadband Network Systems - Digital
Network Systems" and Note 18 to the Consolidated Financial Statements.
SET-TOP AUTHORIZATION SERVICES. The Company issued 21,356,000 shares of its
Common Stock to an affiliate of TCI in connection with the Company's acquisition
of the set-top authorization services business that controls the receipt of
cable programming services delivered to subscribers by TCI's Headend In The
Sky-Registered Trademark-. The Company now provides national authorization
services throughout the United States to cable operators, many with relatively
small individual systems that could not otherwise justify the initial capital
investment required to launch a local digital headend computer control system.
See "- Broadband Network Systems - Digital Network Systems" and Note 7 to the
Consolidated Financial Statements
SONY CORPORATION. The Company has entered into a strategic alliance with Sony
Corporation of America ("Sony") to jointly develop digital television
technologies for cable television devices and high definition television
("HDTV") products. In addition, the Company plans to
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incorporate Sony's Home Network architecture into its advanced digital set-top
terminals. In connection with this strategic alliance, Sony purchased 7.5
million shares of Common Stock.
MARKET OVERVIEW
The Company has two reportable segments: Broadband Networks Systems (consisting
of digital and analog cable and wireless television systems and transmission
network systems) and Satellite and Broadcast Network Systems.
For financial information about the Company's reportable segments and foreign
and domestic operations see Note 21 to the Consolidated Financial Statements.
Worldwide broadband networks systems sales increased $277 million, or 21%, to
$1,569 million in 1998. For the years ended December 31, 1998 and 1997,
broadband networks systems sales in the U.S. were 84% and 69%, respectively,
combined U.S. and Canadian sales were 86% and 74%, respectively, and all other
international sales were 14% and 26%, respectively, of total worldwide broadband
networks systems sales. Worldwide broadband networks systems sales were $1,180
million in 1996, of which 33% related to international sales.
Worldwide satellite and broadcast network systems sales of $418 million for
the year ended December 31, 1998, decreased $44 million, or 10%, from the
comparable 1997 period. For the years ended December 31, 1998 and 1997,
satellite sales in the U.S. were 86% and 76%, respectively, combined U.S. and
Canadian sales were 98% and 88%, respectively, and all other international sales
were 2% and 12%, respectively, of total worldwide satellite sales. Worldwide
satellite and broadcast network systems sales were $575 million in 1996, of
which 12% related to international sales.
BROADBAND NETWORKS SYSTEMS
The Company's Broadband Networks product lines are organized as follows within
the Broadband Networks Systems Segment: Digital Network Systems, Advanced
Network Systems, Transmission Network Systems and IP Network Systems.
DIGITAL NETWORK SYSTEMS. The Company is the world's leading supplier of
secure interactive digital cable television delivery systems. The principal
products are: (i) individual network elements, including consumer set-top
terminals and various video, audio and data processing equipment used in cable
operators' headends; (ii) computer equipment, software and services that secure
programming content, download software applications to consumer set-top
terminals, authorize individual subscriber services, enable network management
and provide interfaces to cable operators' billing systems; and (iii) system
integration services for the custom assembly and testing of Company and
third-party hardware and software elements.
North American cable operators began deploying commercial services using the
Company's interactive digital delivery systems in 1996. As of December 31, 1998,
the Company had shipped approximately 700 digital headend systems throughout
North America, passing approximately 34 million homes and over 2.7 million
digital cable and wireless set-top terminals. In addition, the Company's digital
business is beginning to expand into regions beyond North America such as
Europe, the Middle East, Asia/Pacific and Latin America.
Digital compression technology typically allows cable operators to provide 6
to 12 times the number of programs per traditional channel slot than is possible
using analog technology. Initial cable operator demand for the Company's digital
products has resulted from: (i) the cable operators' ability to offer additional
pay-per-view and other programming choices enabled by such digital compression
technology; and (ii) the high quality of digital video/audio, electronic program
guides and the potential to offer a wide range of new interactive applications.
The Company's digital systems and set-top terminals enable Video-on-Demand
("VOD"), impulse Pay-Per-View, Internet access, e-mail, electronic yellow pages,
home shopping, interactive games and educational services. The Company's digital
products are designed with an open architecture so that new interactive software
applications, being developed by third parties, can be downloaded over the cable
network to set-top terminals already installed in consumer homes.
All of the Company's digital cable set-top terminals utilize the digital
transport stream and decode video compliant with the Motion Picture Experts
Group 2 ("MPEG-2") international standard and demodulate
Quadrature-Amplitute-Modulated signals compliant with International
Telecommunications Union international standards. The Company's terminals and
delivery systems also use standards-based interactive communications protocols
and the Company's proprietary access
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control technology marketed under the DigiCipher-Registered Trademark- II and
MediaCipher-TM- brand names, as well as decode Dolby Digital-Registered
Trademark- audio. As of December 31, 1998, the Company's digital terminal
shipments have consisted of its DCT-1000, DCT-1200 and DCT-2000 model cable
terminals and DWT-1000 model wireless terminals. All of these set-top products
are two-way terminals capable of real-time, interactive operation using either a
built-in RF return modem or optional telephone return modem. Additionally, all
of these set-top products are compatible with the existing installed base of the
Company's set-top products. Such compatability enhances security, reduces
operating costs and improves bandwidth utilization.
The Company expects to introduce new two-way interactive set-top terminal
models during 1999. The DCT-5000+ model is a high-end terminal that will
capitalize on a built-in Data-Over-Cable-Service/Interoperability Specification
("DOCSIS") compliant cable modem, Internet protocols and a unique triple tuner
architecture to enable consumers to watch television, surf the World Wide Web
and talk on a telephone simultaneously. The DVi-2000 and DVi-5000 models, which
include Digital Video Broadcast Standard ("DVB") compliant technologies such as
Musicam-Registered Trademark- audio decoding, target European and other
international cable operators.
The Company has entered into definitive agreements with leading North American
cable operators to supply approximately 15 million digital set-top terminals,
consistent with the cable industry's OpenCable initiative, over a three to five
year period beginning in 1998, with an estimated value of $4.5 billion. The
Company has issued warrants to purchase approximately 29 million shares of the
Company's Common Stock to these cable operators in connection with such
agreements. Included among these cable operators entitled to purchase set-top
terminals from the Company are TCI, Time Warner, MediaOne, Comcast, Cox,
Adelphia, Shaw, Jones, Charter, Suburban Cable Company, Intermedia Cable and
Bresnan Communications Company, which cable operators have a collective
subscriber base of over 46 million.
In July 1998, the Company completed its acquisition from TCI's affiliates of
certain physical assets and a license of associated intellectual property to
enable it to provide the set-top authorization services that control the receipt
of cable programming services delivered to subscribers by TCI's Headend In The
Sky and other programmers. The Company issued 21,356,000 shares of its Common
Stock to an affiliate of TCI in connection with this acquisition. The Company
now provides national authorization services throughout the United States to
MSOs, many with relatively small individual systems that could not otherwise
justify the initial capital investment required to launch a local digital
headend computer control system. The Company continues to supply its internally
developed DAC-6000 model controller for local and regional authorization systems
solutions for operators with larger individual system subscriber bases.
ADVANCED NETWORK SYSTEMS. The Company is the world's leading provider of
addressable analog set-top systems which enable cable operator control and
subscriber access to a number of advanced entertainment services and features.
The principal products include consumer set-top terminals and the associated
central office headend computer and processing equipment. Use of these
addressable systems enables operators to provide a suite of service offerings,
including: pay-per-view, multiple tiers of programming services, and advanced
video, audio and data entertainment services.
Beginning in early 1995, the Company began shipping its latest generation
Consumer Friendly Terminal system ("CFT"), the CFT2200 interactive advanced
analog system, adding a new level of service offering to the prior analog
platforms. The CFT2200 two-way interactive advanced analog terminal provides
cable operators with the most complete set of services available today over an
analog platform, including Internet access, interactive programming guides,
CD-quality music, near video-on-demand ("NVOD"), supplemental sports and
entertainment information and local information-on-demand. The Company shipped
approximately 2.8 million and 3.2 million CFT advanced analog terminals for the
years ended December 31, 1998 and December 31, 1997, respectively.
The Company sells addressable analog set-top systems throughout the world, and
is the market leader in North and South America, Europe, and Asia with the CFT
advanced platform. The Company estimates that its market share in the U.S.
analog addressable market has exceeded 50% for the last several years, both in
the traditional and advanced product areas. While management expects that the
Company's advanced analog cable products will continue to satisfy cable and
wireless operator
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demands worldwide for several years, due to the anticipated increased
availability and use of digital cable products, the Company expects that demand
in North America for its analog cable products will continue to decline.
TRANSMISSION NETWORK SYSTEMS. The Company's transmission products provide
end-to-end solutions that enable the transformation of the traditional cable
television network into a two-way, fiber-rich, high speed voice/ video/data
network. Transmission products include headend signal processing equipment,
distribution amplifiers, fiber optic transmission equipment and passive
components for wired television distribution systems.
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 capacity primarily to compete with other television programming sources,
such as DTH, as well as to capitalize on the rapid growth in demand for new
voice and data services, including high-speed Internet access. Further
opportunities exist internationally where cable penetration is low and demand
for both entertainment and high speed internet access is growing.
IP NETWORK SYSTEMS. The Company's management believes Internet Protocol
("IP")-based high-speed data and telephony solutions over two-way cable networks
present significant growth opportunities for the Company. To best capitalize on
this market, the Company consolidated the management activities of its
high-speed cable modem business with the emerging IP-based telephony business.
The Company's family of Surfboard-Registered Trademark-high-speed cable modems
are capable of delivering information through a cable television network at
speeds significantly faster than a traditional telephony modem, while delivering
instructions and other information upstream from the consumer over either the
telephone lines in one-way systems or utilizing the cable network in two-way
systems. The Company has been a leading proponent of two-way cable modem
networks compliant with interoperable standards based upon DOCSIS and has
entered into a working relationship with Cisco Systems, Inc. ("Cisco") to
further the mass deployment of this technology.
During 1998, the Company intensified its focus on local loop telephony
solutions leveraging the standards-based DOCSIS network infrastructure. AT&T
Corporation ("AT&T") has identified IP telephony as its solution of choice for
providing local telephony service over cable networks. With its relationship
with Cisco, the Company announced in January 1999 its intent to work with AT&T
to develop and bring to market a seamless, end-to-end IP telephony solution. The
Company is developing a broad portfolio of communication gateway products to
enable IP telephony, including an option for the DCT 5000+, a variant of the
Surfboard-Registered Trademark- high-speed data modem, and a point-of-entry
mounted broadband telecommunications interface unit, or "BTI."
SATELLITE AND BROADCAST NETWORK SYSTEMS.
The Company is a provider of digital satellite television systems for
programmers, DTH satellite network providers and private networks for business
communications and distance learning. The Company offers a broad product line of
digital compression and transmission systems including MPEG-2, DVB and Advanced
Television Systems Committee compliant solutions. The Company also sees an
emerging business opportunity for digital broadcast products related to the
delivery of high definition and standard definition digital video signals by the
cable and broadcast industries.
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 that allow 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 also a leading supplier of digital satellite systems
to private networks for business communications and distance learning.
In 1998, in support of the government-mandated conversion to digital
terrestrial television, the Company delivered its first commercial high
definition television (HDTV)
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encoding and decoding equipment to the CBS Television Network and Home Box
Office (HBO), as well as local television stations in the U.S.
The Company's analog satellite products are the exclusive systems for
distributing 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 because
of the availability of competing digital satellite video services. 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 product. To date, significant quantities of 4DTV have not
been shipped.
The Company is currently the sole supplier of digital satellite receivers and
digital satellite encoders to PRIMESTAR, Inc. ("PRIMESTAR"), representing
approximately 11% of the Company's consolidated net sales for the year ended
December 31, 1998. PRIMESTAR, the second largest provider of satellite
television entertainment in the United States, currently operates a 160 channel
medium-power direct broadcast satellite ("DBS") service. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 21 to the Consolidated Financial Statements.
On January 22, 1999, PRIMESTAR announced that it reached an agreement to sell
its medium-power DBS business and assets as well as its rights to acquire
high-power satellite assets to Hughes Electronics Corporation ("Hughes"). While
the announcement stated that Hughes' DIRECTV expects to operate PRIMESTAR's
medium-power business for a period of approximately two years, during which time
it intends to transition PRIMESTAR subscribers to the high-power DIRECTV
service, the Company is currently uncertain whether and to what extent PRIMESTAR
will continue to order and purchase medium power-equipment from the Company.
Further, the Company does not expect to supply any high-power equipment to
PRIMESTAR. The announcement stated that if the proposed transaction with Hughes
is not consummated for any reason, PRIMESTAR intends to continue its
medium-power business. The loss of PRIMESTAR as a continuing customer of the
Company will have a significant impact on the Company's satellite business.
NEXT LEVEL COMMUNICATIONS L.P.
The Partnership is a leading provider of next-generation integrated full service
digital loop carrier ("DLC") and fiber-to-the-curb ("FTTC") systems that deliver
telephony, video and data for local telephone companies, including Bell Atlantic
Corporation ("Bell Atlantic") and U S West Communications ("U S West"). The
Partnership's product, NLevel(3), is designed to permit the cost effective
delivery of a suite of standard and advanced telephony services over twisted
pair networks, including high-speed data/Internet, distance learning, video
services as well as basic telephone services, to the home from a single access
platform.
In the fourth quarter of 1996, Next Level Communications ("NLC") entered into
an agreement with a subsidiary of NYNEX Corporation, now Bell Atlantic, pursuant
to which the Partnership will supply its NLevel(3) 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) system to up
to five million lines. In the third quarter of 1997, NLC entered into an
agreement with U S West, pursuant to which the Partnership will supply its
NLevel(3) system for 450,000 lines of broadband xDSL access. In addition, in
July 1998, U S West selected the Partnership to supply DLC and FTTC systems for
the delivery of broadband video, high-speed data/Internet, and basic telephone
services.
In January 1998, the Company transferred the business of NLC, 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 of the Partnership, acquired approximately an 11%
interest in the Partnership and has the potential to acquire up to an additional
11% in the future. Pursuant to an agreement entered into in July 1998, the
Company agreed to make an additional $50 million equity investment in the
Partnership, which will increase its limited partnership interest to more than
90%. Through
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December 31, 1998, the Company paid $16 million of the $50 million equity
investment. The remainder of this investment will be paid during the first half
of 1999. See Note 8 to the Consolidated Financial Statements. 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.
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, 1998 were $244 million (including a
$75 million charge to fully reserve the research and development advance made to
the Partnership, see Note 8 to the Consolidated Financial Statements) compared
to $208 million and $198 million for the years ended December 31, 1997 and 1996,
respectively. The Company's management expects research and development
expenditures to approximate $165 million in 1999. Research and development
expenditures reflect the continued development of the Company's digital set-top
terminals, broadband telephony, cable modems, advanced digital systems for cable
and satellite television distribution and product development through strategic
alliances.
SALES AND DISTRIBUTION
The Company's broadband communications products and services are marketed
primarily to cable television operators and telephone companies. The Company's
satellite communications products are marketed to satellite television
programmers and providers as well as cable television operators. Demand for the
Company's products 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, the continuing
trend of consolidation within the cable industry, the financial condition of
domestic cable television system operators and their access to financing,
competition from DTH, satellite, wireless television providers and telephone
companies offering video programming, technological developments and
standardization efforts that impact the deployment of new equipment and new
legislation and regulations affecting the equipment used by cable television
system operators and their customers. 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 from historical
levels will occur or that existing levels will be maintained.
Broadband and satellite 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.
Although the domestic cable television industry is comprised of thousands of
cable systems, a small number of MSOs own a majority of cable television systems
and account for a significant portion of the capital expenditures made by cable
television system operators. The loss of business from a significant MSO could
have a material adverse effect on the business of the Company. TCI, including
its affiliates, accounted for 31% of the consolidated net sales of the Company
for the year ended
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December 31, 1998. See Note 19 to the Consolidated Financial Statements.
PRIMESTAR accounted for 11% of the consolidated net sales of the Company for the
year ended December 31, 1998. See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 21 to the Consolidated
Financial Statements.
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 its
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.
BACKLOG
As of December 31, 1998 and December 31, 1997, the Company had a backlog of
approximately $636 million and $484 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 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 Company
believes that it enjoys a strong competitive position because of its large
installed cable television equipment base, its strong relationships with the
major MSOs, 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 results of operations and financial condition.
EMPLOYEES
As of March 1, 1999, approximately 7,800 people were employed by the Company. Of
these employees, approximately 1,900, 2,400 and 3,200 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 March 1, 1999, approximately 500 of the
Company's employees were covered by collective bargaining agreements. Of these
employees, approximately 300 were located at the Mexican facilities and
approximately 200 were located at facilities in Germany. The management of the
Company believes that its relations with both its union and non-union employees
are satisfactory.
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ITEM 2. PROPERTIES
The Company has manufacturing, warehouse, sales, research and development and
administrative facilities worldwide which have an aggregate floor space of 1.8
million square feet. Of these facilities, aggregate floor space of approximately
1.1 million square feet is leased 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. The Company's primary manufacturing facilities
are located in Taiwan and Mexico. The Company also has smaller manufacturing
facilities in San Diego, California, Lewisville, Texas, and Bad Salzdetfurth,
Germany. In addition, the Company leases office space for its sales, marketing
and engineering personnel in the U.S., Europe, Asia, and Latin America. The
Company's corporate headquarters are located in Horsham, Pennsylvania. The
management of the Company believes that the Company's facilities and equipment
generally are well maintained, in good operating condition and suitable for the
Company's purposes and adequate for present operations.
ITEM 3. LEGAL PROCEEDINGS
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's common
stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
Distribution, by allegedly making false and misleading statements and failing to
disclose material facts about the Distributing Company's planned shipments in
1995 of its CFT2200 and Digicipher-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
Distribution, the members of the Distributing Company's Board of Directors,
several of its officers and Forstmann Little & Co. and related entities have
breached their fiduciary duties by reason of the matter complained of in the
class action and the defendants' alleged use of material non-public information
to sell shares of the Distributing Company's stock for personal gain. Both
actions seek unspecified damages and attorneys' fees and costs. The court
granted the defendants' motion to dismiss the original complaints in both of
these actions, but allowed the plaintiffs in each action an opportunity to file
amended complaints. Amended complaints were filed on November 7, 1997. The
defendants answered the amended consolidated complaint in the class actions,
denying liability, and filed a renewed motion to dismiss the derivative action.
On September 22, 1998, defendants' motion to dismiss the derivative action was
denied. In November 1998, the defendants filed an answer to the derivative
action, denying liability. On January 21, 1999, the plaintiffs in the class
actions filed their motion for class certification, including the defendants'
opposition. The Company intends to vigorously contest these actions.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP.was brought
in February 1996 by certain holders of preferred stock of NLC, which merged into
a subsidiary of the Distributing Company in September 1995. The action was
originally filed in the Northern District of California and was subsequently
transferred to the Northern District of Illinois. The plaintiffs allege that the
defendants violated federal securities laws by making misrepresentations and
omissions and breached fiduciary duties to NLC in connection with the
acquisition of NLC by the Distributing Company. Plaintiffs seek, among other
things, unspecified compensatory and punitive damages and attorneys' fees and
costs. On September 23, 1997, the district court dismissed the complaint,
without prejudice, and the plaintiffs were given until November 7, 1997 to amend
their complaint. On November 7, 1997, plaintiffs served the defendants with
amended complaints, which contain allegations substantially similar to those in
the original complaint. The defendants filed a motion to dismiss parts of the
amended complaint and answered the balance of the amended complaint, denying
liability. On September 22, 1998, the district court dismissed with prejudice
the portion of the complaint alleging violations of Section 14(a) of the
Exchange Act, and denied the remainder of the defendants' motion to
8
<PAGE>
dismiss. In November, 1998, the defendants filed an answer to the remaining
parts of the amended complaint, denying liability. The Company intends to
vigorously contest this action.
In connection with the Distribution, the Company has agreed to indemnify
General Semiconductor with respect of its obligations, if any, arising out of or
in connection with the matters discussed in the preceding two paragraphs.
On February 19, 1998, a consolidated securities class action complaint
entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleged that the defendants violated Sections 11 and 15 of
the Securities Act of 1933, as amended (the "Securities Act"), and Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false
and misleading statements about the Company's business, finances and future
prospects. The complaint seeks damages in an unspecified amount. On April 9,
1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May
5, 1998, the defendants moved to dismiss the remaining counts of the complaint.
The Company intends to vigorously contest this action.
On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC
TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS L.P., KK MANAGER, L.L.C.,
GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC Communications Corporation and DSC
Technologies Corporation (collectively, "DSC") alleged that in connection with
the formation of the Partnership and the transfer to it of NLC's switched
digital video technology, the Partnership and KK Manager, L.L.C. misappropriated
DSC's trade secrets; that the Company improperly disclosed trade secrets when it
conveyed such technology to the Partnership; and that Spencer Trask & Co., Inc.
conspired to misappropriate DSC's trade secrets. The plaintiffs sought actual
damages for the defendants' purported unjust enrichment, disgorgement of
consideration, exemplary damages and attorney's fees, all in unspecified
amounts. In April 1998, the Company and the other defendants filed an action in
the United States District Court for the Eastern District of Texas, requesting
that the federal court preliminarily and permanently enjoin DSC from prosecuting
the Delaware Action because by pursuing such action, DSC effectively was trying
to circumvent and relitigate the Texas federal court's November 1997 judgment in
a previous lawsuit involving DSC, pursuant to which NLC had paid $140 million.
On May 14, 1998, the Texas court granted a preliminary injunction preventing DSC
from proceeding with the Delaware Action. That injunction order is now on appeal
to the United States Court of Appeal for the Fifth Circuit where it has been
briefed and awaits determination. On July 6, 1998, the defendants filed a motion
for summary judgment with the Texas court requesting a permanent injunction
preventing DSC from proceeding with this litigation. As a result of the
preliminary injunction, the Delaware Action has been stayed in its entirety. The
Company intends to vigorously contest this action.
In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for
Arbitration against the Company alleging that the Company breached the terms of
a license agreement with StarSight by (a) developing a competing product that
wrongfully incorporates StarSight's technology and inventions claimed within a
certain StarSight patent, (b) failing to promote and market the StarSight
product as required by the license agreement, and (c) wrongfully using
StarSight's technical information, confidential information and StarSight's
graphical user interface in breach of the license agreement. StarSight is
seeking injunctive relief as well as damages (as specified below). The first
part of a bifurcated arbitration proceeding began on March 22, 1999 before an
arbitration panel of the American Arbitration Association in San Francisco,
California. A separate hearing relating to certain of the Company's digital set
top boxes and satellite products will be scheduled for a later date. On January
25, 1999, the Company received a copy of StarSight's Statement of Damages, as
directed by the arbitration panel. This statement identifies purported damages
arising from the sale by the Company of certain analog set top boxes containing
a native electronic program guide. StarSight alleges that it is entitled to
collect $90 million to $177 million in compensatory damages and an unspecified
amount of punitive damages.
9
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StarSight is seeking additional damages, including consequential damages,
relating to the Company's digital set top boxes. The Company has denied
StarSight's allegations and intends to vigorously contest this action.
On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND
INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United
States District Court for the Northern District of California. The complaint
alleges infringement by the Company of two U.S. patents allegedly covering
electronic program guides. The complaint seeks unspecified damages and an
injunction. The plaintiffs have sought to consolidate discovery for this action
with similar actions pending against Pioneer Electronics Corp. and
Scientific-Atlanta, Inc. The Company has responded to the plaintiffs' motion,
currently pending before the Judicial Panel on Multidistrict Litigation (the
"Judicial Panel"). On January 27, 1999, the court entered an order staying these
proceedings until the Judicial Panel decides the plaintiffs' consolidation
motion. The Company denies that it infringes the subject patents and intends to
vigorously defend this action.
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, 1998.
10
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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
Distribution. The Company did not pay dividends on its Common Stock during 1998.
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
------------------------
High Low
----------- -----------
<S> <C> <C>
1997
Third quarter $ 21 1/2 $ 16
Fourth quarter $ 19 1/8 $ 12 5/8
1998
First quarter $ 22 $ 16 7/16
Second quarter $ 28 3/4 $ 19 3/4
Third quarter $ 29 1/2 $ 16 11/16
Fourth quarter $ 36 15/16 $ 17 1/2
</TABLE>
As of March 23, 1999, the number of registered stockholders of record of the
Company's Common Stock was 904.
11
<PAGE>
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) 1998(a) 1997(b) 1996(c) 1995(d) 1994(e)
------- ------- ------- ------- -------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,988 $ 1,764 $ 1,756 $ 1,533 $ 1,275
Cost of sales 1,431 1,336 1,350 1,080 878
Gross profit 557 428 406 453 397
Selling, general and administrative 194 215 174 138 103
Research and development 244 208 198 138 105
Purchased in-process technology -- -- -- 140 --
Amortization of excess of cost over fair value of
net assets acquired 14 15 14 14 15
NLC litigation costs -- -- 141 -- --
Operating income (loss) 104 (10) (122) 22 175
Interest income (expense), net 1 (5) (26) (23) (27)
Income (loss) before income taxes and cumulative
effect of changes in accounting principles 94 (10) (149) (2) 149
Net income (loss) $ 55 $ (16) $ (96) $ 4 $ 121
Earnings per share - basic $ 0.35
Earnings per share - diluted $ 0.33
Pro forma loss per share - basic and diluted (f) $ (0.11) $ (0.65)
December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 2,188 $ 1,675 $ 1,630 $ 1,354 $ 1,199
Other non-current liabilities 68 66 188 75 78
Stockholders' equity 1,650 1,215 1,051 926 764
</TABLE>
- --------------------------
(a) Includes charges of $124 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily including costs 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 fixed assets to their estimated fair values and inventory to its
lower of cost or market, as well as a $75 million charge to fully reserve for
the R&D advance made to the Partnership (see Notes 5, 6 and 8 to the
consolidated financial statements contained in Item 8).
(b) Includes charges of $110 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily including costs 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 inventory to its lower of cost or market, the write-down of fixed
assets to their estimated fair values and costs related to dividing the
Distributing Company's Taiwan operations between the Company and General
Semiconductor, Inc. (see Notes 1, 5 and 6).
(c) Includes charges of $226 million ($145 million net-of-tax) reflecting Next
Level Communications ("NLC") litigation costs, restructuring charges and other
charges primarily related to the transition to the Company's next-generation
digital products and the write-down of inventory to its lower of cost or market
(see Notes 5, 6 and 16).
(d) 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 8).
(e) 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.
(f) Prior to the Distributions (see Note 1), the Company did not have its own
capital structure; accordingly, 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 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.
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<PAGE>
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 provider of integrated and
interactive broadband access solutions and, with its strategic partners and
customers, is advancing the convergence of the Internet, telecommunications and
video entertainment industries. The Company 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 a publicly traded independent entity.
The Company's consolidated financial statements and notes to the consolidated
financial statements ("Notes"), 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, 1998 WITH THE YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales for the year ended December 31, 1998 were $1,988 million
compared to $1,764 million for the year ended December 31, 1997. Net sales in
1998 when compared to 1997 reflect higher sales of digital cable systems,
partially offset by lower sales of analog cable systems and a decline in
international sales. Analog and digital products represented 44% and 56%,
respectively, of total sales in 1998 compared to 58% and 42%, respectively, of
total sales in 1997.
Worldwide broadband sales (consisting of digital and analog cable and wireless
television systems and transmission network systems) increased $277 million, or
21%, to $1,569 million in 1998 primarily as a result of increased U.S. sales
volumes of digital cable terminals and headends, partially offset by lower sales
of analog cable systems. These sales reflect the increasing commitment of U.S.
cable television operators to deploy interactive digital systems in order to
offer advanced entertainment, interactive services and Internet access to their
customers. For the years ended December 31, 1998 and 1997, broadband sales in
the U.S. were 84% and 69%, respectively, combined U.S. and Canadian sales were
86% and 74%, respectively, and all other international sales were 14% and 26%,
respectively, of total worldwide broadband sales.
Worldwide satellite sales of $418 million for the year ended December 31, 1998
decreased $44 million, or 10%, from the comparable 1997 period primarily as a
result of lower private and commercial network sales in international markets.
For the years ended December 31, 1998 and 1997, satellite sales in the U.S. were
86% and 76%, respectively, combined U.S. and Canadian sales were 98% and 88%,
respectively, and all other international sales were 2% and 12%, respectively,
of total worldwide satellite sales.
The decrease in broadband and satellite international sales during 1998 was
experienced in all international regions. The largest decreases in sales were
experienced in the Asia/Pacific and Latin American regions, and there can be no
assurance that international sales will return to 1997 levels in the near term.
On January 22, 1999, PRIMESTAR, Inc. ("PRIMESTAR") announced that it reached
an agreement to sell its direct broadcast satellite ("DBS") medium-power
business and assets as well as its rights to acquire high-power satellite assets
to Hughes Electronics Corporation ("Hughes"). Sales to PRIMESTAR accounted for
11% of the Company's sales in 1998. The Company is currently uncertain whether
and to what extent PRIMESTAR will continue to order and purchase medium-power
equipment from the Company. Further, the Company does not expect to supply any
high-power equipment to PRIMESTAR. See "Developments Related to PRIMESTAR"
below.
GROSS PROFIT. Gross profit increased $129 million, or 30%, to $557 million in
1998 from $428 million in 1997 and was 28% of sales in 1998 compared to 24% in
1997. Gross profit for the year ended December 31, 1998 was reduced by $9
million of restructuring charges (see Note 5 and "Restructurings" below) and $18
million of other charges (see Note 6 and "Other Charges" below) recorded in the
first quarter of 1998, primarily related to severance and other employee
13
<PAGE>
separation costs, costs associated with the closure of various facilities, the
write-down of fixed assets to their estimated fair values and the write-down of
inventories to their lower of cost or market. 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 lower of cost or market (see Notes 1, 5 and 6). Gross profit increases
primarily reflect increased sales levels as well as product cost reductions,
driven primarily by chip integration and productivity improvements at the
Company's Taiwan manufacturing facility.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was $194 million in 1998 compared to $215 million in 1997 and
was 10% of sales in 1998 compared to 12% in 1997. SG&A expense for the year
ended December 31, 1998 included $6 million of restructuring charges (see Note 5
and "Restructurings" below) and $7 million of other charges (see Note 6 and
"Other Charges" below) recorded in the first quarter of 1998, primarily related
to severance and other employee separation costs, costs associated with the
closure of various facilities, including moving costs, and costs associated with
changing the Company's corporate name. SG&A expense in 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 6), partially offset by a $5 million credit related to the collection of
certain receivables previously considered to be uncollectible. SG&A spending for
1997 also included SG&A expenses related to NLC.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expense increased
$36 million, or 17%, to $244 million in 1998 from $208 million in 1997 and was
12% of sales in 1998 and 1997. R&D expense for the year ended December 31, 1998
included a $75 million charge to fully reserve the Partnership Note (see Note
8). Proceeds of the Partnership Note are being utilized by the Partnership to
fund research and development activities through 1999 to develop, for widespread
commercial deployment, the next-generation telecommunications technology for the
delivery of telephony, video, and data from the telephone company central office
to the home. Such widespread deployment is not expected until the latter part of
1999 or early in 2000; however, there can be no assurance that the development
activities currently being undertaken will result in successful commercial
deployment. R&D 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 fair values (see Notes 5 and 6). R&D spending in
1998 reflects the continued development of the Company's digital set-top
terminals, broadband telephony, cable modems, advanced digital systems for cable
and satellite television distribution and product development through strategic
alliances.
OTHER INCOME (EXPENSE) - NET. Other expense - net of $12 million for the year
ended December 31, 1998 primarily included the Company's equity interest in the
Partnership's loss (see Note 8), which includes the BBT litigation settlement
(see Note 16) and compensation expense related to key executives of an acquired
company, partially offset by gains on the sale of a portion of the Company's
investment in Ciena Corporation and the settlement of an insurance claim. 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. Interest expense - net for the year ended
December 31, 1997 includes an allocation of interest expense from the
Distributing Company, which was allocated based upon the Company's net assets as
a percentage of the total net assets of the Distributing Company for the period
prior to the date of the Communications Distribution. Net interest expense
allocated to the Company was $15 million for the year ended December 31, 1997.
Subsequent to July 25, 1997, the date of the Communications Distribution, net
interest represents actual net interest expense incurred by the Company.
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. The Company recorded provisions
for income taxes of $38 million and $6 million for the years ended December 31,
1998 and 1997, respectively. Excluding the restructuring and other net charges
recorded in 1998 and 1997, the effective tax rates were 38%.
14
<PAGE>
DEVELOPMENTS RELATED TO PRIMESTAR. PRIMESTAR is the second largest provider
of satellite television entertainment in the United States and currently
operates a 160-channel medium-power DBS service. The Company is currently the
sole supplier of digital satellite receivers and digital satellite encoders to
PRIMESTAR.
The announcement of the proposed acquisition of PRIMESTAR, described above,
stated that if the proposed transaction with Hughes is not consummated for any
reason, PRIMESTAR intends to continue its medium-power business. Prior to this
announcement, the Company had estimated that 1999 revenues from the sale of
equipment to PRIMESTAR would be approximately $100 million. The Company believes
that, if the proposed acquisition is consummated, such revenues will be
substantially reduced. While the Company expects to minimize the effect of the
potential loss of revenue from PRIMESTAR through increased sales of its digital
cable systems and reductions in overhead expenses, there can be no assurance
that the Company will be successful in replacing this lost revenue. In February
1999, the Company evaluated its overhead structure and has taken steps to
further consolidate its San Diego, California and Horsham, Pennsylvania
operations, including reducing headcount by approximately 200. The Company
expects to take a pre-tax charge during the first quarter of 1999 of
approximately $15 million, for severance and facility consolidation costs.
Approximately $10 million of this charge requires cash payments, which the
Company expects to make during 1999. The employee reductions are expected to
decrease ongoing SG&A expenses by approximately $25 million during 1999.
The loss of PRIMESTAR as a continuing customer will have a significant impact
on the Company's satellite business. However, absent the failure of PRIMESTAR to
honor its contractual commitments with the Company, the Company believes that
the loss of PRIMESTAR's business will not have a material adverse effect on the
Company's financial condition or results of operations.
RESTRUCTURINGS. In the first half of 1997, in connection with the
Distributions, the Company recorded pre-tax charges to cost of sales of $18
million for employee costs, which included a curtailment and settlement loss of
$4 million, related to dividing the Distributing Company's Taiwan operations
between the Company and General Semiconductor. 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. These charges did not result in
the reduction of future costs; therefore, they have not had and are not expected
to have a significant impact on the Company's results of operations and cash
flows.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are currently being manufactured by subcontractors in the U.S. and were
sold by the Company during 1998. The Company also decided to close its corporate
office and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of
the Chicago corporate office was completed during the first quarter of 1998. As
a result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. 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. All of the fourth quarter severance and other employee
separation costs were paid by the end of 1998. Costs associated with the closure
of facilities include vacated long-term leases which are payable through the end
of the lease terms which extend through the year 2008 (see Note 5). These
restructuring costs provided cost savings in certain satellite production
processes; however, declining demand for certain satellite products has
substantially offset the cost reductions.
15
<PAGE>
As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense. As of December 31, 1998,
approximately $1 million of the first quarter severance costs remain to be paid
and will be paid during 1999 (see Note 5).
In connection with the developments related to PRIMSTAR, in February 1999, the
Company evaluated its overhead structure and has taken steps to further
consolidate its San Diego, California and Horsham, Pennsylvania operations,
including reducing headcount by approximately 200. The Company expects to take a
pre-tax charge during the first quarter of 1999 of approximately $15 million,
for severance and facility consolidation costs.
OTHER CHARGES. In the fourth quarter of 1997, the Company recorded $61
million ($44 million net of tax) of other charges, partially offset by $11
million ($7 million net of tax) of other income, described below. In conjunction
with the assessment of the satellite business, management concluded that future
sales of certain satellite products would not be sufficient to recover the
carrying value of related inventory. Accordingly, the Company recorded a $43
million charge to write-down inventory to its lower of cost or market.
Concurrent with this inventory write-down, management reviewed the fixed assets
and equipment related to production and testing associated with these products
and concluded that their carrying value would no longer be recoverable since
such assets would no longer be utilized and, accordingly, the Company wrote-down
such assets by $10 million to their estimated scrap value, which management
believes approximated fair value. These fixed assets were not being utilized as
of December 31, 1997 and 1998. A portion of these fixed assets have been
disposed of and the Company expects that the remaining assets will be disposed
of during 1999. The Company incurred approximately $8 million of professional
fees related to the assessment of the satellite business. Of the $61 million of
charges, $45 million were recorded as cost of sales, $8 million were recorded as
SG&A expense and $8 million were recorded as research and development expense.
The $61 million of other charges were partially offset by $11 million of other
income related to investment gains and income associated with the reversal of
accrued interest related to the final NLC Litigation settlement on the date the
court issued its final ruling.
The Company incurred certain other pre-tax charges during the first quarter of
1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut down expenses and legal fees. The above charges
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 16) and compensation expense related to key executives of an acquired
company (see Note 6).
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.
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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. 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 lower of cost or
market (see Notes 1, 5 and 6). Gross profit for the year ended December 31, 1996
was reduced by $71 million of charges primarily related to the write-down of
inventories to their lower of cost or market and the accrual of upgrade and
product warranty liabilities in connection with the transition to the Company's
next-generation digital products (see Note 6). 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. 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 6), 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 fair values
and the settlement of a litigation matter (see Notes 1, 5 and 6). SG&A base
spending was also greater in 1997 than in 1996 as a result of increased
marketing and field support for NLC's Nleve1(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. 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 fixed assets used in
R&D activities to their estimated fair values (see Notes 5 and 6). 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.
The NLC business has expended approximately $50 million in research and
development costs from the date of the Company's acquisition of the NLC business
in 1995 through December 31, 1997.
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OTHER INCOME (EXPENSE) - NET. Other income of $6 million for the year ended
December 31, 1997 predominantly reflects 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).
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. The Company recorded a provision
for income taxes of $6 million and a benefit for income taxes 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 14).
RESTRUCTURINGS. In 1996, the Company recorded an $8 million charge to SG&A
expense for the write-down of various assets to fair value. This charge consists
principally of a $3 million write-down of a facility that the Company decided to
vacate and a $4 million write-off of previously capitalized amounts related to a
data processing systems project which the Company abandoned in 1996. These
actions reduced depreciation expense associated with the assets written down.
In the first half of 1997, in connection with the Distributions, the Company
recorded pre-tax charges to cost of sales of $18 million for employee costs
related to dividing the Distributing Company's Taiwan operations between the
Company and General Semiconductor. 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. These charges do not result in the reduction
of future costs; therefore, they have not had and are not expected to have a
significant impact on the Company's results of operations and cash flows. Cash
payments related to these charges were paid by the end of the first quarter of
1998.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility which reduced headcount by 1,100. This facility
manufactured receivers used in the private network, commercial and consumer
satellite markets for the reception of analog and digital television signals.
The Company does not expect reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location will be manufactured by subcontractors in the U.S. and will be sold by
the Company during 1998. The Company also decided to close its corporate office
and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of the
Chicago corporate office was completed during the first quarter of 1998. As a
result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. 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 made severance
payments of $5 million to approximately 800 employees, and the remaining
severance and other employee separation costs were paid by the end of 1998.
Costs associated with the closure of facilities ("Facility Costs") include
vacated long-term leases which are payable through the
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end of the lease terms which extend through the year 2008 (see Note 5). These
restructuring costs provided cost savings in certain satellite production
processes; however, declining demand for certain satellite products has
substantially offset the cost reductions.
OTHER CHARGES. In the fourth quarter of 1996, the Company recorded $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 to the lower of cost or market, of
inventory products the Company decided to discontinue 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 lower of cost or
market and the accrual of contractual upgrade and product warranty liabilities
in connection with the transition to the Company's next generation digital
products. The remaining $6 million of charges were recorded as SG&A expense and
related to the write-down of fixed assets to their estimated fair values and
settlement of a litigation matter. All of the fourth quarter charges were
utilized by the end of 1997. The following is a description of the $57 million
of charges related to the Company's transition to next generation digital
products:
- - In the fourth quarter of 1996, the Company recorded a $47.9 million write-down
of digital product inventory to its lower of cost or market as it became
evident that the expected sales price, less costs to complete, would not be
sufficient to recover the carrying value of the inventory.
- - The initial sales of digital products occurred during the fourth quarter of
1996. At the time of the sale, the Company accrued warranty liability in
accordance with its accounting policy in Note 3. However, during the fourth
quarter of 1996, subsequent to the initial sale, the Company was required to
rework the product to correct an unanticipated system issue. This rework
resulted in an additional $1.6 million of warranty expense and was incurred
prior to December 31, 1996.
- - In addition, the Company recorded an additional $3.8 million warranty
liability as it became evident in the fourth quarter of 1996 that the failure
rates on certain satellite products would exceed the rate previously
anticipated. At the time of the sale of this product, the Company accrued a
warranty liability in accordance with its accounting policy in Note 3.
- - Also, in December 1996, the Company contractually agreed to provide an upgrade
at no charge related to its transition from the analog platform to digital
products. The $3.4 million cost of this upgrade was accrued on the date the
Company became contractually obligated to perform such upgrade.
In the fourth quarter of 1997, the Company recorded $61 million ($44 million
net of tax) of other charges offset by $11 million ($7 million net of tax) of
other income, described below. In conjunction with the assessment of the
satellite business, management concluded that future sales of certain satellite
products would not be sufficient to recover the carrying value of related
inventory. Accordingly, the Company recorded a $43 million charge to write-down
inventory to its lower of cost or market. Concurrent with this inventory
write-down, management reviewed the fixed assets and equipment related to
production and testing associated with these products and concluded that their
carrying value would no longer be recoverable since such assets would no longer
be utilized and, accordingly, the Company wrote-down such assets by $10 million
to their estimated scrap value, which management believes approximated fair
value. These fixed assets were not being utilized as of December 31, 1997. A
portion of these fixed assets have been disposed of and the Company expects that
the remaining assets will be disposed of during 1999. The Company incurred
approximately $8 million of professional fees related to the assessment of the
satellite business. Of the $61 million of charges, $45 million were recorded as
cost of sales, $8 million were recorded as SG&A expense and $8 million were
recorded as research and development expense. The $61 million of other charges
were partially offset by $11 million of other income related to investment gains
and income associated with the reversal of accrued interest related to the final
NLC Litigation settlement on the date the court issued its final ruling.
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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, 1998 and 1997, cash provided by operations
was $271 million and cash used in operations was $1 million, respectively. Cash
provided by operations in 1998 primarily reflects cash generated from
operations, partially offset by the R&D advance made to the Partnership and
payments related to restructuring charges. Cash used in 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 network systems business.
At December 31, 1998, working capital was $437 million compared to $436
million at December 31, 1997. The Company believes that working capital levels
are appropriate to support the growth of the business; however, there can be no
assurance that future industry-specific developments or general economic trends
will not alter the Company's working capital requirements.
During the years ended December 31, 1998 and 1997, the Company invested $92
million and $80 million, respectively, in equipment and facilities. In 1999, the
Company expects to continue to expand its capacity to meet increased current and
anticipated future demands for digital products, with capital expenditures for
the year expected to approximate $90 million. Additionally, during the years
ended December 31, 1998 and 1997, the Company made investments of $34 million
and $40 million, respectively. The Company's R&D expenditures were $244 million
(including the $75 million charge for the R&D advance made to the Partnership)
and $208 million for the years ended December 31, 1998 and 1997, respectively,
and are expected to approximate $165 million for the year ending December 31,
1999.
The Company has a bank credit agreement (the "Credit Agreement") which
provides a $600 million unsecured revolving credit facility and matures on
December 31, 2002. The Credit Agreement permits the Company to choose between
two competitive interest rate options. The Credit Agreement contains financial
and operating covenants, including limitations on guarantee obligations, liens
and the sale of assets, and requires the maintenance of certain financial
ratios. Significant financial ratios include (i) maintenance of consolidated net
worth above $600 million adjusted for 50% of cumulative positive quarterly net
income subsequent to June 30, 1997; (ii) maintenance of an interest coverage
ratio based on EBITDA (excluding $116 million and $86 million of charges
incurred in 1998 and 1997, respectively) in comparison to net interest expense
of greater than 5 to 1; and (iii) maintenance of a leverage ratio comparing
total indebtedness to EBITDA (excluding $116 million and $86 million of charges
incurred in 1998 and 1997, respectively) of less than 3 to 1. 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, 1998, the Company
was in compliance with all financial and operating covenants contained in the
Credit Agreement and had available credit of $500 million.
In January 1999, Sony Corporation purchased 7.5 million newly issued
unregistered shares of Common Stock of the Company for $188 million.
On September 9, 1998, the Company announced a share repurchase program
authorizing the Company to repurchase up to 10 million shares of its outstanding
Common Stock. Through December 31, 1998, the Company had repurchased a total of
6.3 million shares at a cost of $126.3 million.
On July 17, 1998, the Company consummated a transaction with TCI, pursuant to
which the Company acquired, in exchange for 21.4 million unregistered shares of
the Company's Common Stock, certain assets, a license to certain intellectual
property (which will enable the Company to conduct authorization services
intended to provide the cable industry with a secure access control platform to
support widespread deployment of digital terminals and related systems and
applications) and a $50 million non-interest bearing note receivable. The net
purchase price of $400 million was allocated primarily to the license acquired
(see Note 7).
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In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of NLC to a newly formed limited
partnership in exchange for approximately an 89% (subject to additional
dilution) limited partnership interest. The technology transferred to the
Partnership related to in-process research and development for the design and
marketing of a highly innovative next-generation telecommunication broadband
access system for the delivery of telephony, video and data from a telephone
company central office to the home. Additionally, the Company advanced to the
Partnership $75 million, utilizing available operating funds and borrowings
under its Credit Agreement, in exchange for the Note. Since the repayment of the
Note is solely dependent upon the results of the Partnership's research and
development activities and the commercial success of its product development,
the Company recorded a charge to fully reserve for the Note concurrent with the
funding (see Note 8). During 1998, the Company agreed to make additional equity
investments in the Partnership, aggregating $50 million, beginning in November
1998, to fund the Partnership's growth and assist the Partnership in meeting its
forecasted working capital requirements. Through December 31, 1998, the Company
has made $16 million of this $50 million investment. The Company expects to make
the remaining equity investment during the first half of 1999.
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 15), cash flows will be adequate to fund operations,
research and development, capital expenditures, restructuring charges and
investments. There can be no assurance, however, that future industry-specific
developments or general economic trends will not adversely affect the Company's
operations or its ability to meet its cash requirements.
NEW TECHNOLOGIES
The Company operates in a dynamic and competitive environment, in which its
success will be dependent upon numerous factors, including its ability to
continue to develop appropriate technologies and successfully implement
applications based on those technologies. In this regard, the Company has made
significant investments to develop advanced systems and equipment for the cable
and satellite television, Internet/data delivery and local telephone access
markets. Additionally, the future success of the Company will be dependent on
the ability of the cable and satellite television operators to successfully
market the services provided by the Company's advanced digital terminals to
their customers. Furthermore, as a result of the higher costs of initial
production, digital products presently being shipped carry lower margins than
the Company's mature analog products.
Management of the Company expects cable television operators in the United
States and abroad to continue to purchase analog products to upgrade their basic
networks and to develop, using U.S. architecture and systems, international
markets where cable penetration is low and demand for entertainment programming
is growing. However, management expects that demand in North America for its
analog cable products will continue to decline.
As the Company continues to introduce new products and technologies and such
technologies gain market acceptance, there can be no assurance that sales of
products based on new technologies will not affect the Company's product sales
mix and/or will not have an adverse impact on sales of certain of the Company's
other products. For example, sales of analog cable products have been impacted
by a shift to digital deployment in North America.
INTERNATIONAL MARKETS
Management of the Company believes that additional growth for the Company will
come from international markets, although the Company's international sales
decreased during 1998 in comparison to the prior year, and there can be no
assurance that international sales will increase to 1997 levels in the near
future. In order to support the Company's international product and marketing
strategies, it is currently expected that the Company will add operations in
foreign
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markets in the following areas, among others: customer service, sales and
expansion of manufacturing capacity at existing facilities. Although no
assurance can be given, management expects that the expansion of international
operations will not require significant increased levels of capital
expenditures.
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.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the arrival of the Year 2000 on its
business, as well as on the businesses of its customers, suppliers and business
partners. The "Year 2000 Issue" is a term used to describe the problems created
by systems that are unable to accurately interpret dates after December 31,
1999. These problems are derived predominantly from the fact that many software
programs have historically categorized the "year" in a two-digit format. The
Year 2000 Issue creates potential risks for the Company, including potential
problems in the Company's products as well as in the Information Technology
("IT") and non-IT systems that the Company uses in its business operations. The
Company may also be exposed to risks from third parties with whom the Company
interacts who fail to adequately address their own Year 2000 Issues.
THE COMPANY'S STATE OF READINESS
While the Company's Year 2000 efforts have been underway for several years,
the Company centralized its focus on addressing the Year 2000 Issue in 1998 by
forming a Year 2000 cross-functional project team of senior managers, chaired by
the Company's Vice President of Information Technology who reports directly to
the Company's Chief Executive Officer on this issue. The Audit Committee of the
Board of Directors is advised periodically on the status of the Company's Year
2000 compliance program.
The Year 2000 project team has developed a phased approach to identifying and
remediating Year 2000 Issues, with many of these phases overlapping with one
another or conducted simultaneously.
The first phase was to develop a corporate-wide, uniform strategy for
addressing the Year 2000 Issue and to assess the Company's current state of Year
2000 readiness. This included a review of all IT and non-IT systems, including
Company products and internal operating systems for potential Year 2000 Issues.
The Company completed this phase for its IT and non-IT systems prior to the end
of 1998. In addition, during this phase the Company developed its Year 2000
Policy Statement which was released to the Company's customers, suppliers and
business partners.
The second phase of the Company's Year 2000 compliance program (begun
simultaneously with the first phase) was to define a Year 2000 "Compliance"
standard and to develop uniform test plans and test methodologies, building on
work already done by one of the Company's engineering groups. The Company
developed a comprehensive Year 2000 test plan and test methodologies for the
testing of its products, as well as third-party products. The Company has
adopted the following six compliance categories for its products: "Compliant,"
"Compliant with Upgrade," "Compliant with Minor Issues," "Not Compliant or End
of Life Product," "Testing to be Completed" and "Testing not Required." The
creation of these six categories has assisted the Company in communicating with
its customers, suppliers and business partners regarding the Year 2000 status of
the Company's products.
To aid in communication with the Company's customers, suppliers and business
partners, the Company has developed an Internet web site that identifies the
current Year 2000 status for each of the Company's products in accordance with
the Company's Year 2000 compliance standard. The web site, which is updated
periodically, also identifies available upgrades, as well as the contemplated
completion date of testing and remediation for such products. In addition, the
Company has provided detailed, customer-specific inventory information to major
customers on a product-by-product basis in order to further assist such
customers with their own Year 2000 compliance programs. In furtherance of
providing information about its Year 2000 testing and remediation program, the
Company has disclosed
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its test plan and methodologies to certain of its customers, strategic vendors
and business partners. The Company is also participating in industry-wide joint
system testing efforts and has participated in industry-wide forums with the
Federal Communications Commission in order to facilitate awareness in the
industry of Year 2000 Issues.
The Company has also undertaken a review of its internal IT and non-IT systems
to identify potential Year 2000 Issues. In 1996, the Company began the process
of implementing a uniform worldwide business and accounting information system
to improve internal reporting processes. The internal IT systems being replaced
include order entry systems, purchasing and inventory management systems, and
the Company's general financial systems. Based upon representations from the
manufacturer and the Company's own internal testing, the Company believes that
this uniform information system is Year 2000 compliant. The Company also has
plans to identify and replace and/or upgrade legacy business systems that are
not Year 2000 compliant and are not part of the uniform worldwide business and
accounting information system. In conjunction with the Company's review of
internal IT systems, the Company engaged an outside consulting firm with Year
2000 consulting experience to perform an assessment of the Company's test plans
and test methodologies and to benchmark such plans and methodologies against the
practices of other companies. Based on these benchmark comparisons, certain
recommendations were made related to the test plans. The Company is currently
addressing these recommendations. In addition, the outside consulting firm is
continuing to provide assistance in monitoring the Company's Year 2000 status
and progress in areas such as: testing, internal and external communication and
contingency planning. With respect to non-IT systems, the Company is actively
analyzing its in-line manufacturing equipment in order to assess any Year 2000
issues. To date, no material problems have been discovered, and the Company will
continue to review, test and remediate (if necessary) such equipment. The
Company is also evaluating its other critical non-IT facility and internal
systems with date sensitive operating controls for Year 2000 Issues. While the
Company believes that most of these systems will function without substantial
Year 2000 compliance problems, the Company will continue to review, test and
remediate (if necessary) such systems.
The third phase of the Company's Year 2000 compliance program is the actual
testing and remediation (if necessary) of the Company's IT and non-IT products
and systems. The Company has prioritized its testing and remediation work,
focusing on products which the Company believes are more likely to be impacted
by Year 2000 Issues. The Company has completed the testing and remediation (as
necessary) of the majority of its products in accordance with its adopted test
plans and methodologies and is diligently working to complete testing and
remediation (if necessary) of the remainder of its products (except for end of
life products) by the end of the third quarter of 1999. As of March 1, 1999, the
Company estimates that it has completed approximately 95% of the Year 2000
readiness analysis required for its Advanced Network Systems, Digital Network
Systems and Transmission Network Systems products. As of March 1, 1999, the
Company estimates that it has completed approximately 60% of the Year 2000
readiness analysis for its Satellite and Broadcast Network Systems products. For
certain of the Company's satellite and broadcast products and the Company's
national authorization center, testing and remediation (if necessary) is
currently anticipated to be completed by the end of the third quarter of 1999.
The Company has completed testing and remediation of substantially all of its IT
and non IT internal systems, with the exception of certain minor systems which
the Company expects to complete by the end of the third quarter of 1999.
The Company is presently evaluating each of its principal suppliers, service
providers and other business partners to determine each of such party's Year
2000 status. The Company has developed a questionnaire and a Year 2000
certification for use with such third parties, and, as of March 1, 1999, the
Company had contacted approximately 300 vendors about their Year 2000
compliance, including many of the vendors that the Company has identified as
critical vendors. The Company is currently focused on obtaining Year 2000
Certifications or assurances from approximately 150 of these suppliers. The
Company anticipates that this evaluation will be on-going through the remainder
of 1999.
The Company is working jointly with customers, strategic vendors and business
partners to identify and resolve any Year 2000 issues that may impact the
Company. However, there can be no assurance that the companies with which the
Company does business will achieve a Year 2000 conversion in a timely fashion,
or that such failure to convert by another company will not have a material
adverse effect on the Company.
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THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The total cost associated with the Company's Year 2000 remediation is not
expected to be material to the Company's financial condition or results of
operations. The estimated total cost of the Company's Year 2000 remediation is
not expected to exceed $5 million. Through March 1, 1999, the Company has spent
approximately $2 million in connection with Year 2000 Issues. The cost of
implementing the uniform worldwide business and accounting information system
has not been included in this figure since the replacement of the previous
systems was not accelerated due to Year 2000 Issues. All Year 2000 expenditures
are made from the respective departments' budgets. The percentage of the IT
budget during 1998 used for Year 2000 remediation was less than 3% and is
expected to represent less than 3% of the IT budget for 1999. No IT projects
have been deferred due to Year 2000 efforts.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
There can be no assurance that the Company will be completely successful in
its efforts to address Year 2000 Issues. If some of the Company's products are
not Year 2000 compliant, the Company could suffer lost sales or other negative
consequences, including, but not limited to, diversion of resources, damage to
the Company's reputation, increased service and warranty costs and litigation,
any of which could materially adversely affect the Company's business operations
or financial statements.
The Company is also dependent on third parties such as its customers,
suppliers, service providers and other business partners. If these or other
third parties fail to adequately address Year 2000 Issues, the Company could
experience a negative impact on its business operations or financial statements.
For example, the failure of certain of the Company's principal suppliers to have
Year 2000 compliant internal systems could impact the Company's ability to
manufacture and/or ship its products or to maintain adequate inventory levels
for production.
THE COMPANY'S CONTINGENCY PLANS
The Company is evaluating the need for certain contingency plans to address
situations that may result if the Company or any of the third parties upon which
the Company is dependent is unable to achieve Year 2000 readiness. For example,
the Company is in the process of developing plans and procedures for its
customer service division to assist customers with the transition through the
Year 2000. Part of this plan will include processes and procedures recently used
by the Company in connection with a program to upgrade a substantial number of
analog addressable controllers to solve a date rollover issue prior to the year
1999. The Company is also evaluating the need for increasing inventory levels of
key components of its manufactured products. Since the Company's Year 2000
compliance program is ongoing, its ultimate scope, as well as the consideration
of additional contingency plans, will continue to be evaluated as new
information becomes available.
YEAR 2000 FORWARD-LOOKING STATEMENTS
The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of Year 2000 Issues by businesses and other third
parties who are service providers, suppliers or customers of the Company,
unanticipated system costs, the adequacy of and ability to develop and implement
contingency plans and similar uncertainties. The "forward-looking statements"
24
<PAGE>
made in the foregoing Year 2000 discussion speak only as of the date on which
such statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this Form
10-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, Year 2000 readiness, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations and authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. Reference is made to
Exhibit 99 in this Form 10-K 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. 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 20 to the consolidated financial statements contained in Item
8). On a selective basis, the Company enters into contracts to limit the
currency exposure of monetary assets and liabilities, contractual and other firm
commitments denominated in foreign currencies and the currency exposure of
anticipated, but not yet committed, transactions expected to be denominated in
foreign currencies. The use of these derivative financial instruments allows the
Company to reduce its overall exposure to exchange rate movements since the
gains and losses on these contracts substantially offset losses and gains on the
assets, liabilities and transactions being hedged.
Foreign currency exchange contracts are sensitive to changes in exchange
rates. As of December 31, 1998, a hypothetical 10% fluctuation in the exchange
rate of foreign currencies applicable to the Company, principally the new Taiwan
and Canadian dollars, would result in a net $4 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14(a) for a list of financial statements filed as part
of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
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 1999 Annual Meeting of Stockholders (the "1999 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 1999 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 1999 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 1999 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 1999 Proxy Statement and is incorporated herein by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
---------
<S> <C>
(a) Documents Filed as Part of this Report:
1. FINANCIAL STATEMENTS.
Independent Auditors' Report F-1
Consolidated Statements of Operations for the Years ended December 31, 1996,
1997, and 1998 F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the Years ended December
31, 1996, 1997, and 1998 F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1996,
1997, and 1998 F-5
Notes to Consolidated Financial Statements for the Years ended December 31,
1996, 1997, and 1998 F-6
2. FINANCIAL STATEMENT SCHEDULE.
Independent Auditors' Report F-30
Schedule II - Valuation and Qualifying Accounts F-31
3. FINANCIAL STATEMENTS OF NEXT LEVEL COMMUNICATIONS L.P.
(an unconsolidated majority owned investee) F-32
4. LIST OF EXHIBITS.
See Index of Exhibits included on pages 29-30.
(b) Reports on Form 8-K:
None.
</TABLE>
27
<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, 1999 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
- ------------------------------------------------------------------------ --------------------------------------------------
<C> <S>
/s/ EDWARD D. BREEN
------------------------------------------------ Chairman of the Board, President and Chief
Edward D. Breen Executive Officer (Principal Executive Officer)
/s/ ERIC M. PILLMORE
------------------------------------------------ Senior Vice President, Finance and Chief Financial
Eric M. Pillmore Officer (Principal Financial Officer)
/s/ MARC E. ROTHMAN
------------------------------------------------ Vice President, Financial Planning and Controller
Marc E. Rothman (Principal Accounting Officer)
/s/ JOHN SEELY BROWN
------------------------------------------------ Director
John Seely Brown
/s/ FRANK M. DRENDEL
------------------------------------------------ Director
Frank M. Drendel
/s/ LYNN FORESTER
------------------------------------------------ Director
Lynn Forester
/s/ THEODORE J. FORSTMANN
------------------------------------------------ Director
Theodore J. Forstmann
/s/ ALEX J. MANDL
------------------------------------------------ Director
Alex J. Mandl
/s/ DAN SCHAEFER
------------------------------------------------ Director
Dan Schaefer
<CAPTION>
Signature Date
- ------------------------------------------------------------------------ -----------------------
<C> <C>
/s/ EDWARD D. BREEN
------------------------------------------------ March 31, 1999
Edward D. Breen
/s/ ERIC M. PILLMORE
------------------------------------------------ March 31, 1999
Eric M. Pillmore
/s/ MARC E. ROTHMAN
------------------------------------------------ March 31, 1999
Marc E. Rothman
/s/ JOHN SEELY BROWN
------------------------------------------------ March 31, 1999
John Seely Brown
/s/ FRANK M. DRENDEL
------------------------------------------------ March 31, 1999
Frank M. Drendel
/s/ LYNN FORESTER
------------------------------------------------ March 31, 1999
Lynn Forester
/s/ THEODORE J. FORSTMANN
------------------------------------------------ March 31, 1999
Theodore J. Forstmann
/s/ ALEX J. MANDL
------------------------------------------------ March 31, 1999
Alex J. Mandl
/s/ DAN SCHAEFER
------------------------------------------------ March 31, 1999
Dan Schaefer
</TABLE>
28
<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## Restated Certificate of Incorporation of the Company.
3.2## Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock.
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.
4.4### Specimen Form of the Company's Common Stock Certificate.
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# First Amendment, dated as of March 18, 1998, to the Credit Agreement, dated as of July 23, 1997, among the Company,
certain banks, the Chase Manhattan Bank as Administrative Agent, and certain other banks as Co-Agents.
10.10## Asset Purchase Agreement among TCIVG-GIC, Inc., NDTC Technology, Inc. and the Company dated as of June 17, 1998.
10.11## License Agreement by and between NDTC Technology, Inc. and the Company dated as of July 17, 1998.
10.12 Stock Purchase Agreement by and between Sony Corporation of America and the Company dated November 30, 1998.
10.13*+ The Company's 1997 Long-Term Incentive Plan.
10.14*****+ Form of Severance Protection Agreement between the Company and certain executive officers.
10.15**+ The Company's Annual Incentive Plan.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
10.16**+ The Company's Deferred Compensation Plan.
10.17**+ 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 Annual Report on Form
10-K for the period ended December 31, 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 Current Report on Form
8-K dated as of December 17, 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 Quarterly Report on Form
10-Q for the period ended March 31, 1998 (File No. 001-12925).
## Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998 (File No. 001-12925).
### Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 (File No. 001-12925).
+ Management contract or compensatory plan.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the accompanying 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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 9, 1999
F-1
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
<S> <C> <C>
(In thousands, except per share amounts) 1998 1997
---------------- ----------------
NET SALES $ 1,987,825 $ 1,764,088
Cost of sales 1,431,327 1,336,482
---------------- ----------------
GROSS PROFIT 556,498 427,606
---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 193,637 215,404
Research and development 244,295 207,826
Amortization of excess of cost over fair value of
net assets acquired 14,319 14,571
NLC litigation costs -- --
---------------- ----------------
Total operating expenses 452,251 437,801
---------------- ----------------
OPERATING INCOME (LOSS) 104,247 (10,195)
Other income (expense) - net (including equity interest in Partnership losses of $25,089
for the year ended December 31, 1998) (11,815) 5,766
Interest income (expense) - net 1,217 (5,210)
---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 93,649 (9,639)
(Provision) benefit for income taxes (38,199) (6,474)
---------------- ----------------
NET INCOME (LOSS) $ 55,450 $ (16,113)
---------------- ----------------
Pro Forma Loss Per Share - Basic and Diluted $ (0.11)
----------------
Pro Forma Weighted - Average Shares Outstanding 147,523
Earnings Per Share - Basic $ 0.35
----------------
Earnings Per Share - Diluted $ 0.33
----------------
Weighted - Average Shares Outstanding - Basic 159,547
Weighted - Average Shares Outstanding - Diluted 168,952
<CAPTION>
<S> <C>
(In thousands, except per share amounts) 1996
----------------
NET SALES $ 1,755,585
Cost of sales 1,349,815
----------------
GROSS PROFIT 405,770
----------------
OPERATING EXPENSES:
Selling, general and administrative 174,432
Research and development 198,071
Amortization of excess of cost over fair value of
net assets acquired 14,278
NLC litigation costs 141,000
----------------
Total operating expenses 527,781
----------------
OPERATING INCOME (LOSS) (122,011)
Other income (expense) - net (including equity interest in Partnership losses of $25,089
for the year ended December 31, 1998) (1,427)
Interest income (expense) - net (25,970)
----------------
INCOME (LOSS) BEFORE INCOME TAXES (149,408)
(Provision) benefit for income taxes 53,098
----------------
NET INCOME (LOSS) $ (96,310)
----------------
Pro Forma Loss Per Share - Basic and Diluted $ (0.65)
----------------
Pro Forma Weighted - Average Shares Outstanding 147,315
Earnings Per Share - Basic
Earnings Per Share - Diluted
Weighted - Average Shares Outstanding - Basic
Weighted - Average Shares Outstanding - Diluted
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
<S> <C>
(In thousands, except share data) 1998
----------------
ASSETS
Cash and cash equivalents $ 148,675
Short-term investments 4,865
Accounts receivable, less allowance for doubtful accounts of
$3,833 and $3,566, respectively (includes accounts receivable
from related party of $81,075 at December 31, 1998) 340,039
Inventories 281,451
Deferred income taxes 100,274
Other current assets 15,399
----------------
Total current assets 890,703
Property, plant and equipment, net 237,131
Intangibles, less accumulated amortization of $97,630
and $86,333, respectively 497,696
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $122,110 and $108,123, respectively 455,466
Deferred income taxes 1,999
Investments and other assets 104,765
----------------
TOTAL ASSETS $ 2,187,760
----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 267,565
Other accrued liabilities 186,113
----------------
Total current liabilities 453,678
Deferred income taxes 15,913
Other non-current liabilities 67,998
----------------
Total liabilities 537,589
----------------
Commitments and contingencies (See Notes 16 and 21)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
no shares issued --
Common Stock, $.01 par value; 400,000,000 shares authorized;
173,393,275 and 148,358,188 shares issued, respectively 1,734
Additional paid-in capital 1,742,824
Note receivable from stockholder (40,615)
Retained earnings (accumulated deficit) 36,214
Accumulated other comprehensive income, net of taxes of
$1,020 and $11,347, respectively 2,845
----------------
1,743,002
Less - Treasury Stock, at cost, 4,619,069 and 4,309 shares, respectively (92,831)
----------------
Total stockholders' equity 1,650,171
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,187,760
----------------
<CAPTION>
<S> <C>
(In thousands, except share data) 1997
----------------
ASSETS
Cash and cash equivalents $ 35,225
Short-term investments 30,346
Accounts receivable, less allowance for doubtful accounts of
$3,833 and $3,566, respectively (includes accounts receivable
from related party of $81,075 at December 31, 1998) 343,625
Inventories 288,078
Deferred income taxes 105,582
Other current assets 21,862
----------------
Total current assets 824,718
Property, plant and equipment, net 236,821
Intangibles, less accumulated amortization of $97,630
and $86,333, respectively 82,546
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $122,110 and $108,123, respectively 471,186
Deferred income taxes 5,634
Investments and other assets 54,448
----------------
TOTAL ASSETS $ 1,675,353
----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 200,817
Other accrued liabilities 188,250
----------------
Total current liabilities 389,067
Deferred income taxes 5,745
Other non-current liabilities 65,730
----------------
Total liabilities 460,542
----------------
Commitments and contingencies (See Notes 16 and 21)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
no shares issued --
Common Stock, $.01 par value; 400,000,000 shares authorized;
173,393,275 and 148,358,188 shares issued, respectively 1,484
Additional paid-in capital 1,213,566
Note receivable from stockholder --
Retained earnings (accumulated deficit) (19,236)
Accumulated other comprehensive income, net of taxes of
$1,020 and $11,347, respectively 18,999
----------------
1,214,813
Less - Treasury Stock, at cost, 4,619,069 and 4,309 shares, respectively (2)
----------------
Total stockholders' equity 1,214,811
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,675,353
----------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note Retained
Common Stock Additional Receivable Earnings
--------------------- Paid-In From (Accumulated
(In thousands) Shares Amount Capital Stockholder Deficit)
---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 -- $ -- $ -- $ -- $ --
Comprehensive loss
Net loss -- -- -- -- --
Total comprehensive loss
Transfers from the Distributing Company -- -- -- -- --
Other transactions with the Distributing Company -- -- -- -- --
---------- --------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 -- -- -- -- --
Comprehensive income
Net income (loss) -- -- -- -- (19,236)
Other comprehensive income (loss), net-of-tax:
Unrealized gains (losses) on
available-for-sale securities, net
of reclassification adjustment
(see Note 10) -- -- -- -- --
Total comprehensive income
Transfers from the Distributing Company -- -- -- -- --
Other transactions with the
Distributing Company -- -- -- -- --
Spin-off from the Distributing Company 147,315 1,473 1,195,948 -- --
Exercise of stock options and related
tax benefit 679 7 10,362 -- --
Stock issued in connection with a business
acquisition 358 4 6,996 -- --
Other 6 -- 260 -- --
---------- --------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 148,358 1,484 1,213,566 -- (19,236)
Comprehensive income
Net income -- -- -- -- 55,450
Other comprehensive income,
net-of-tax:
Unrealized losses on available-for-sale se-
curities, net of reclassification adjustment
(see Note 10) -- -- -- -- --
Total comprehensive income
Treasury stock purchases (6,278 shares) -- -- -- -- --
Exercise of stock options and related tax benefit
(5,342 shares, of which 1,663 shares were issued
from Treasury) 3,679 37 64,501 -- --
Stock issued in connection with an acquisition 21,356 213 442,923 (43,320) --
Payment of note receivable from stockholder -- -- -- 2,705 --
Warrant costs related to customer purchases -- -- 21,834 -- --
---------- --------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 173,393 $ 1,734 $ 1,742,824 $ (40,615) $ 36,214
---------- --------- ------------- ------------- -------------
<CAPTION>
Accumulated
Other Common Total
Comprehensive Stock In Divisional Stockholders'
(In thousands) Income Treasury Net Equity Equity
--------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ -- $ -- $ 926,168 $ 926,168
Comprehensive loss
Net loss -- -- (96,310) (96,310)
-------------
Total comprehensive loss (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
Comprehensive income
Net income (loss) -- -- 3,123 (16,113)
Other comprehensive income (loss), net-of-tax:
Unrealized gains (losses) on
available-for-sale securities, net
of reclassification adjustment
(see Note 10) (2,577) -- 21,576 18,999
-------------
Total comprehensive income 2,886
Transfers from the Distributing Company -- -- 125,310 125,310
Other transactions with the
Distributing Company -- -- 17,814 17,814
Spin-off from the Distributing Company 21,576 -- (1,218,997) --
Exercise of stock options and related
tax benefit -- -- -- 10,369
Stock issued in connection with a business
acquisition -- -- -- 7,000
Other -- (2) -- 258
--------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 1997 18,999 (2) -- 1,214,811
Comprehensive income
Net income -- -- -- 55,450
Other comprehensive income,
net-of-tax:
Unrealized losses on available-for-sale se-
curities, net of reclassification adjustment
(see Note 10) (16,154) -- -- (16,154)
-------------
Total comprehensive income 39,296
Treasury stock purchases (6,278 shares) -- (126,300) -- (126,300)
Exercise of stock options and related tax benefit
(5,342 shares, of which 1,663 shares were issued
from Treasury) -- 33,471 -- 98,009
Stock issued in connection with an acquisition -- -- -- 399,816
Payment of note receivable from stockholder -- -- -- 2,705
Warrant costs related to customer purchases -- -- -- 21,834
--------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 1998 $ 2,845 $ (92,831) $ -- $ 1,650,171
--------------- ------------ -------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(In thousands) 1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 55,450 $ (16,113)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 83,564 89,857
Warrant costs related to customer purchases 21,834 --
Gain on sale of short-term investment (11,429) (10,667)
NLC litigation costs, net -- --
Losses from asset sales and write-downs, net 20,569 19,486
Loss from equity investment 25,089 --
Changes in assets and liabilities:
Accounts receivable (4,738) 57,557
Inventories (4,773) (22,637)
Prepaid expenses and other current assets 1,350 7,919
Deferred income taxes (278) 5,237
Non-current assets (2,504) 1,226
Accounts payable and other accrued liabilities 83,933 (11,245)
NLC litigation payment -- (140,692)
Other non-current liabilities 2,268 18,955
Other 454 617
-------------- --------------
Net cash provided by (used in) operating activities 270,789 (500)
-------------- --------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (91,760) (79,828)
Investments in other assets (31,387) (32,770)
Acquisitions, net of cash acquired (2,150) (6,980)
Proceeds from sale of short-term investment 11,429 10,667
Proceeds from sale of assets -- 10,529
-------------- --------------
Net cash used in investing activities (113,868) (98,382)
-------------- --------------
FINANCING ACTIVITIES:
Transfers from Distributing Company -- 125,310
Proceeds from stock option exercises 80,124 9,363
Purchase of treasury shares (126,300) --
Payment of note receivable from stockholder 2,705 --
Other -- (566)
-------------- --------------
Net cash provided by (used in) financing activities (43,471) 134,107
-------------- --------------
Change in cash and cash equivalents 113,450 35,225
Cash and cash equivalents, beginning of year 35,225 --
-------------- --------------
Cash and cash equivalents, end of year $ 148,675 $ 35,225
-------------- --------------
<CAPTION>
(In thousands) 1996
--------------
<S> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (96,310)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 84,500
Warrant costs related to customer purchases --
Gain on sale of short-term investment --
NLC litigation costs, net 91,650
Losses from asset sales and write-downs, net 11,974
Loss from equity investment --
Changes in assets and liabilities:
Accounts receivable (160,550)
Inventories (42,450)
Prepaid expenses and other current assets (2,185)
Deferred income taxes (3,978)
Non-current assets 3,327
Accounts payable and other accrued liabilities 60,108
NLC litigation payment --
Other non-current liabilities (26,079)
Other 3,347
--------------
Net cash provided by (used in) operating activities (76,646)
--------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (134,353)
Investments in other assets (3,700)
Acquisitions, net of cash acquired (11,671)
Proceeds from sale of short-term investment --
Proceeds from sale of assets --
--------------
Net cash used in investing activities (149,724)
--------------
FINANCING ACTIVITIES:
Transfers from Distributing Company 226,370
Proceeds from stock option exercises --
Purchase of treasury shares --
Payment of note receivable from stockholder --
Other --
--------------
Net cash provided by (used in) financing activities 226,370
--------------
Change in cash and cash equivalents --
Cash and cash equivalents, beginning of year --
--------------
Cash and cash equivalents, end of year $ --
--------------
</TABLE>
See notes to consolidated financial statements.
F-5
<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 provider of integrated and
interactive broadband access solutions and, with its strategic partners and
customers, is advancing the convergence of the Internet, telecommunications and
video entertainment industries. The Company is the world's leading supplier of
digital and analog set-top terminals and systems for wired and wireless cable
television networks, as well as hybrid fiber/coaxial network transmission
systems used by cable television operators, and is a provider of digital
satellite television systems for programmers, direct-
to-home ("DTH") satellite networks and private networks for business
communications. Through its limited partnership interest in Next Level
Communications, L.P. (the "Partnership") (see Note 8), the Company provides
next-generation broadband access solutions for local telephone companies with
the Partnership's NLevel(3)-Registered Trademark-Switched Digital Access System
("NLevel(3)").
The Company was formerly the Communications Business of the former General
Instrument Corporation (the "Distributing Company"). In a transaction that was
consummated on July 28, 1997, the Distributing Company (i) transferred all the
assets and liabilities, at the Distributing Company's historical cost, relating
to the manufacture and sale of broadband communications products used in the
cable television, satellite, and telecommunications industries to the Company
(then a wholly-owned subsidiary of the Distributing Company) and all the assets
and liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope"), at the
Distributing Company's historical cost, and (ii) distributed all of its
outstanding shares of capital stock of each of the Company and CommScope to its
stockholders on a pro rata basis as a dividend. Approximately 147.3 million
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), based on a ratio of one for one, were distributed to the Distributing
Company's stockholders of record on July 25, 1997 (the "Communications
Distribution"). On July 28, 1997, approximately 49.1 million shares of CommScope
common stock, based on a ratio of one for three, were distributed to the
Company's stockholders of record on that date (the "CommScope Distribution" and,
together with the Communications Distribution, the "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 by management of the Distributing Company using
estimates of the relative efforts provided to the Company by the Distributing
Company. However, it is not practicable to determine the actual costs that would
have been incurred if the Company operated on a stand-alone basis; accordingly,
such allocations may not necessarily be 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 prior to the Distributions.
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 for the periods prior to the Distributions. 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 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
F-6
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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. Revenues generated by services performed and the
costs of those services are not material.
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.
SHORT-TERM INVESTMENTS. Marketable 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 and
realized gains and losses are determined using the securities' cost. 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. 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 a license, which is
being amortized over its 20-year term based on the expected revenue stream. The
revenue earned from the license is solely dependent on the Company's deployment
of digital terminals and such deployment is expected to rise significantly
during the 20-year term. The Company believes the expected revenue stream is a
reliable measure of the future benefit of the license both in the aggregate and
in terms of the periods to which such benefit will be realized. Accordingly, the
Company believes this method of amortization is a more appropriate method than
straight-line. At each reporting date, the Company's method of amortization
requires the determination of a fraction, the numerator of which is the
F-7
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
actual revenues for the period and the denominator of which is the expected
revenues from the license during its 20-year term (see Note 7). Intangible
assets also include patents, which are being amortized on a straight-line basis
over 5 to 17 years. Management believes that, as of December 31, 1998, the
carrying values and remaining lives of such assets are appropriate.
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, 1998, 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. If the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset,
the Company will recognize an impairment loss equal to the difference between
the fair value and carrying value of such asset. The Company recorded
significant impairment losses during the periods presented (see Notes 5 and 6).
Management believes that, as of December 31, 1998, 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 its 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 limit 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.
INCOME TAXES. The Company's operating results for periods prior to the
Distributions were 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. 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.
EARNINGS PER SHARE AND PRO FORMA 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 ("APB") No. 15,
"Earnings per Share," with basic and diluted earnings per share. Basic earnings
per share is computed by dividing net income by the weighted-average number of
common shares outstanding. Diluted earnings per share is computed by dividing
net income 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 per share assumes the exercise of stock options
and warrants using
F-8
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
the treasury stock method. For the year ended December 31, 1998 the calculation
of diluted weighted-average shares outstanding included the dilutive effects of
stock options and warrants of 2,575 and 6,830 shares, respectively.
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 for the years ended December 31, 1997 and 1996, 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. In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued and
is effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities. The Company is
currently evaluating the impact this pronouncement will have on its consolidated
financial statements.
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 $100 million at the beginning of
each period presented through July 25, 1997, the date of the Communications
Distribution.
<TABLE>
<S> <C> <C>
Year Ended December
31,
--------------------
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
Research and development 207,826 198,071
Amortization of excess of
cost over fair value of
net assets acquired 14,571 14,278
NLC litigation costs -- 141,000
--------- ---------
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 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 fair value.
This charge consists principally of a $3 million write-down of a facility that
the Company decided to vacate and a $4 million write-off of previously
capitalized amounts related to a data processing systems project which the
Company abandoned in 1996.
In the first half of 1997, in connection with the Distributions (see Note 1),
the Company recorded pre-tax charges of $18 million to cost of sales for
employee costs, which included a curtailment and settlement loss of $4 million
(see Note 17), related to dividing the Distributing Company's Taiwan operations
between the Company and General Semiconductor. Further, the Company recorded
F-9
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
a charge of $6 million to SG&A expense for legal and other professional fees
incurred in connection with the Distributions.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are currently being manufactured by subcontractors in the U.S. and were
sold by the Company during 1998. The Company also decided to close its corporate
office and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of
the Chicago corporate office was completed during the first quarter of 1998. As
a result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. 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. All of the fourth quarter severance and other employee
separation costs were paid by the end of 1998. Costs associated with the closure
of facilities ("Facility Costs") include vacated long-term leases which are
payable through the end of the lease terms which extend through the year 2008.
The $18 million and $21 million of restructuring charges described in the
preceding two paragraphs were recorded to cost of sales during 1997 since they
relate to the Taiwan and Puerto Rico manufacturing facilities. The costs of
these facilities have historically been included in cost of sales; therefore,
the restructuring charges related to these facilities have also been recorded in
cost of sales.
As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense.
The following tabular reconciliation summarizes the restructuring activity
discussed above:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- Balance -------------------- Balance --------------------
Amounts at Dec. 31, Amounts at Dec. 31, Amounts
(in millions) Additions Utilized 1996 Additions Utilized 1997 Additions Utilized
--------- --------- ----------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property, Plant & Equipment
(1) $4.2 $(3.3) $0.9 $10.4 $ (3.5) $ 7.8 $ 4.6 $(12.4)
Facility Costs 3.0 -- 3.0 11.2 (3.7) 10.5 3.3 (10.0)
Severance 0.4 (0.4) -- 32.7 (12.8) 19.9 7.6 (26.7)
Professional Fees -- -- -- 6.0 (6.0) -- -- --
--------- --------- ----------- --------- --------- ------------ --------- ---------
Total $7.6 $(3.7) $3.9 $60.3 $(26.0) $38.2 $15.5 $(49.1)
--------- --------- ----------- --------- --------- ------------ --------- ---------
<CAPTION>
Balance
at Dec. 31,
(in millions) 1998
------------
<S> <C>
Property, Plant & Equipment
(1) $ --
Facility Costs 3.8
Severance 0.8
Professional Fees --
------------
Total $4.6
------------
</TABLE>
(1) The amount provided represents a direct reduction to the property, plant and
equipment balance to reflect the identified impaired assets at their fair value.
The amounts utilized reflect the disposition of such identified impaired assets.
6. OTHER CHARGES
In the fourth quarter of 1996, the Company recorded $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 to the lower of cost or market, of inventory products
the Company decided to discontinue
F-10
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
and the settlement of a litigation matter. Sales of the product the Company
decided to discontinue were not material. Of these charges, $71 million were
recorded as cost of sales and related to the write-down of inventories to their
estimated lower of cost or market and the accrual of contractual upgrade and
product warranty liabilities in connection with the transition to the Company's
next generation digital products. The remaining $6 million of charges were
recorded as SG&A expense and related to the write-down of fixed assets to their
estimated fair values and settlement of a litigation matter. All of the fourth
quarter charges were utilized by the end of 1997. The following is a description
of the $57 million of charges related to the Company's transition to next
generation digital products:
- - In the fourth quarter of 1996, the Company recorded a $47.9 million write-down
of digital product inventory to its lower of cost or market as it became
evident that the expected sales price, less costs to complete, would not be
sufficient to recover the carrying value of the inventory.
- - The initial sales of digital products occurred during the fourth quarter of
1996. At the time of the sale, the Company accrued warranty liability in
accordance with its accounting policy in Note 3. However, during the fourth
quarter of 1996, subsequent to the initial sale, the Company was required to
rework the product to correct an unanticipated system issue. This rework
resulted in an additional $1.6 million of warranty expense and was incurred
prior to December 31, 1996.
- - In addition, the Company recorded an additional $3.8 million warranty
liability as it became evident in the fourth quarter of 1996 that the failure
rates on certain satellite products would exceed the rate previously
anticipated. At the time of the sale of this product, the Company accrued a
warranty liability in accordance with its accounting policy in Note 3.
- - Also, in December 1996, the Company contractually agreed to provide an upgrade
at no charge related to its transition from the analog platform to digital
products. The $3.4 million cost of this upgrade was accrued on the date the
Company became contractually obligated to perform such upgrade.
In the fourth quarter of 1997, the Company recorded $61 million ($44 million
net of tax) of other charges, partially offset by $11 million ($7 million net of
tax) of other income, described below. In conjunction with the assessment of the
satellite business, management concluded that future sales of certain satellite
products would not be sufficient to recover the carrying value of related
inventory. Accordingly, the Company recorded a $43 million charge to write-down
inventory to its lower of cost or market. Concurrent with this inventory
write-down, management reviewed the fixed assets and equipment related to
production and testing associated with these products and concluded that their
carrying value would no longer be recoverable since such assets would no longer
be utilized and, accordingly, the Company wrote-down such assets by $10 million
to their estimated scrap value, which management believes approximated fair
value. These fixed assets were not being utilized as of December 31, 1998. A
portion of these fixed assets have been disposed of and the Company expects that
the remaining assets will be disposed of during 1999. The Company incurred
approximately $8 million of professional fees related to the assessment of the
satellite business. Of the $61 million of charges, $45 million were recorded as
cost of sales, $8 million were recorded as SG&A expense and $8 million were
recorded as research and development expense. The $61 million of other charges
were partially offset by $11 million of other income related to investment gains
and income associated with the reversal of accrued interest related to the final
NLC Litigation settlement on the date the court issued its final ruling.
The Company incurred certain other pre-tax charges during the first quarter of
1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut down expenses and legal fees. The above charges
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense) - net,"
related to costs incurred by the Partnership, which the Company accounts for
under the equity method. Such costs are primarily related to the BBT litigation
settlement (see Note 16) and compensation expense related to key executives of
an acquired company.
F-11
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
The following tabular reconciliation summarizes the other charge activity
discussed above:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- Balance -------------------- Balance --------------------
Amounts at Dec. 31, Amounts at Dec. 31, Amounts
(In millions) Additions Utilized 1996 Additions Utilized 1997 Additions Utilized
--------- --------- ----------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory(1) $64.4 $(4.2) $60.2 $42.6 $(59.5) $43.3 $15.0 $(43.3)
Property, Plant &
Equipment(1) 4.9 (1.7) 3.2 10.0 (4.8) 8.4 -- (1.1)
Professional Fees & Other
Costs 8.2 (7.1) 1.1 7.7 (5.6) 3.2 10.1 (13.3)
Partnership Related Costs -- -- -- -- -- -- 8.4 (8.4)
--------- --------- ----------- --------- --------- ------------ --------- ---------
Total $77.5 $(13.0) $64.5 $60.3 $(69.9) $54.9 $33.5 $(66.1)
--------- --------- ----------- --------- --------- ------------ --------- ---------
<CAPTION>
Balance
at Dec. 31,
(In millions) 1998
------------
<S> <C>
Inventory(1) $15.0
Property, Plant &
Equipment(1) 7.3
Professional Fees & Other
Costs --
Partnership Related Costs --
------------
Total $22.3
------------
</TABLE>
(1) These charges represent a direct reduction to the inventory and property,
plant and equipment balances to reflect these assets at the lower of cost or
market and fair values, respectively. The amounts utilized reflect the
disposition of such identified assets.
7. ASSET PURCHASE
On June 17, 1998, the Company entered into an Asset Purchase Agreement (the
"Agreement") with two affiliates of Tele-Communications, Inc., TCIVG-GIC, Inc.
("TCIVG") and NDTC Technology, Inc. ("NDTC Technology" and, collectively with
TCIVG, "TCI") pursuant to which the Company agreed to acquire from TCIVG, in
exchange for 21.4 million unregistered shares of the Company's Common Stock,
certain assets, a license to certain intellectual property from NDTC Technology
which will enable the Company to conduct authorization services and future cash
consideration as discussed below. The shares issued to TCI are restricted in
that they are not registered and are not transferable to any unrelated party
other than in the event of a change of control of the Company for a period of
three years following their date of issuance. The Company's provision of
services under the aforementioned license is intended to provide the cable
industry with a secure access control platform to support widespread deployment
of digital terminals and related systems and applications. On July 17, 1998, the
transaction was consummated. The Agreement provides the Company with minimum
revenue guarantees from TCI over the first nine years from the date of closing.
The Company has contracted with NDTC Technology for certain support services
during the first nine years following the date of closing, with renewable
one-year terms. The Agreement gives the Company the right to license the
technology for a period of 20 years. As mentioned above, the Agreement contains
a provision for TCIVG to pay the Company $50 million over the first five years
from the date of closing in equal monthly installments which represents a
reduction of purchase price. The present value of the $50 million note
receivable was recorded as a reduction of stockholders' equity. The net purchase
price of $400 million was allocated to the license and the assets acquired based
on their respective estimated fair values. The fair value of assets acquired
includes property, plant and equipment of $2 million, deferred tax liabilities
of $30 million and a license of $428 million. The Company computed the purchase
price by multiplying the number of shares issued by the per share trading price
of the stock reduced by a 10% discount to reflect the restrictions associated
with the unregistered shares, and adjusted such resulting amount to reflect the
$50 million reduction in purchase price discussed above.
The Company is amortizing the cost of the license over its 20-year term based
on the expected revenue stream. The revenue earned from the license is solely
dependent on the Company's deployment of digital terminals. Such deployment is
expected to rise significantly during the 20-year license term as supported by
industry data and the Company's contractual obligations with customers. The
Company expects revenues resulting from such deployments, which are calculated
based on estimated monthly fees times the estimated subscriber base, to rise
from approximately $2.5 million in 1998 to approximately $44 million by 2002 to
approximately $70 million by 2007 to approximately $80 million per annum during
the last seven years of the 20-year license term. The Company
F-12
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
believes the expected revenue stream is a reliable measure of the future benefit
of the license both in the aggregate and in terms of the periods to which such
benefit will be realized. Accordingly, the Company believes this method of
amortization is a more appropriate method than straight-line. At each reporting
date, the Company's method of amortization requires the determination of a
fraction, the numerator of which is the actual revenues for the period and the
denominator of which is the expected revenues from the license during its
20-year term. This method results in any variation from original estimates being
recognized in the current period in a manner consistent with a
units-of-production method of depreciation. Under the Company's method,
amortization for the period from July 17, 1998 to December 31, 1998 was
approximately $0.7 million.
8. THE PARTNERSHIP
In January 1998, the Company transferred at historical cost the net assets of
its Next Level Communications ("NLC") subsidiary purchased in 1995, the
underlying NLC technology related to the design and marketing of a
next-generation telecommunication broadband access system for the delivery of
telephony, video and data from a telephone company central office to the home,
and the management and workforce of NLC to the newly formed Partnership in
exchange for approximately an 89% limited partnership interest (subject to
additional dilution). Such transaction was accounted for at historical cost. The
limited partnership interest is included in "investments and other assets" in
the accompanying consolidated balance sheet at December 31, 1998. The operating
general partner, which was formed by Spencer Trask & Co., an unrelated third
party, has acquired approximately an 11% interest in the Partnership and has the
potential to acquire up to an additional 11% in the future. The Company does not
have the option to acquire the remaining interest in the Partnership. Net assets
transferred to the Partnership of $45 million primarily included property, plant
and equipment, inventories and accounts receivable partially offset by accounts
payable and accrued expenses. The Company's net equity investment in the
Partnership was $36 million at December 31, 1998.
Pursuant to the Partnership agreement, the operating general partner controls
the Partnership and is responsible for developing the business plan and
infrastructure necessary to position the Partnership as a stand-alone company.
The Company, as the limited partner, has certain protective rights, including
the right to approve an alteration of the legal structure of the Partnership,
the sale of the Partnership's principal assets, the sale of the Partnership and
a change in the limited partner's financial interests in the Partnership. The
Company can not remove the general partner, except for cause; however, it has
the right to approve a change in the general partner. Since the operating
general partner controls the day-to-day operations of the Partnership and has
the ability to make decisions typical of a controlling party, including the
execution of agreements on all material matters affecting the Partnership's
business, the Partnership's operating results have not been consolidated with
the operating results of the Company subsequent to the January 1998 transfer.
The Company does not expect widespread commercial deployment of this
technology until the latter part of 1999 or early in 2000, however, there can be
no assurance that the development activities currently being undertaken will
result in successful commercial deployment.
In addition, in January 1998, the Company advanced $75 million to the
Partnership in exchange for an 8% debt instrument (the "Note"), and the Note
contains normal creditor security rights, including a prohibition against
incurring amounts of indebtedness for borrowed money in excess of $10 million.
Since the repayment of the Note is solely dependent upon the results of the
Partnership's research and development activities and the commercial success of
its product development, the Company recorded a charge to research and
development expense during the quarter ended March 31, 1998 to fully reserve for
the Note concurrent with the funding. The proceeds of the Note are being
utilized to fund the research and development activities of the Partnership
through 1999 to develop the aforementioned telecommunication technology for
widespread commercial deployment. During 1998, the Company agreed to make
additional equity investments in the Partnership, aggregating $50 million,
beginning in November 1998, to fund the Partnership's growth and assist the
Partnership in meeting its forecasted working capital requirements. Through
December 31, 1998, the Company has made $16 million of this $50 million
investment. The Company expects to make the remaining equity investment during
the first half of 1999.
F-13
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
The Company is accounting for its interest in the Partnership as an investment
under the equity method of accounting. Further, the Company's share of the
Partnership's losses related to future research and development activities will
be offset against the $75 million reserve discussed above. Also, the Company
eliminates its interest income from the Note against the Partnership's related
interest expense on the Note. For the year ended December 31, 1998, the
Company's share of the Partnership's losses was $25 million, (net of the
Company's share of research and development expenses and the interest income
elimination). The following summarized financial information is provided for the
Partnership as of and for the year ended December 31, 1998:
<TABLE>
<S> <C>
Net sales $ 43,830
Gross profit 397
Loss before income taxes (81,731)
Net cash used in operating activities (66,633)
Current assets 69,829
Non-current assets 27,942
Current liabilities 31,265
Non-current liabilities 81,275
</TABLE>
9. SHORT-TERM INVESTMENTS
Short-term investments are comprised of marketable equity securities at December
31, 1998 and 1997, and all such securities were classified as
"available-for-sale." Proceeds and the related realized gains from the sales of
available-for-sale securities were $11 million during both 1998 and 1997. The
Company held no such securities during 1996. Short-term investments, excluding
cash equivalents, consisted of the following at December 31, 1998 and 1997:
<TABLE>
<S> <C> <C> <C>
Gross
Fair Unrealized Cost
Marketable Equity Securities Value Gains Basis
---------- ---------- ---------
December 31, 1998 $ 4,865 $ 3,865 $1,000
---------- ---------- ---------
December 31, 1997 $30,346 $30,346 $ --
---------- ---------- ---------
</TABLE>
- --------------------------------------------------------------------------------
10. OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that an enterprise report the
change in its net assets during the period from non-owner sources. Since this
statement only requires additional disclosures, it had no impact on the
Company's consolidated financial position or cash flows. During 1998 and 1997,
other comprehensive income (loss) comprised unrealized gains (losses) on
available-for-sale securities. Below is a reconciliation of the gross unrealized
holding gains (losses) arising during 1998 and 1997 and the net unrealized gains
(losses), including reclassification adjustments and the related tax benefit
(expense) of each:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997
------------------------------------- ------------------------
<CAPTION>
Tax Tax
Pre-tax (Expense) Net-of-tax Pre-tax (Expense)
Amount or Benefit Amount Amount or Benefit
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Unrealized holding gains (losses) arising during the period $ (15,052) $ 5,870 $ (9,182) $ 41,013 $ (15,507)
Less: reclassification adjustment for gains included in net
income (11,429) 4,457 (6,972) (10,667) 4,160
----------- ----------- ----------- ----------- -----------
Unrealized gains (losses) on available-for-sale securities, net $ (26,481) $ 10,327 $ (16,154) $ 30,346 $ (11,347)
----------- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C>
Net-of-tax
Amount
-----------
<S> <C>
Unrealized holding gains (losses) arising during the period $ 25,506
Less: reclassification adjustment for gains included in net
income (6,507)
-----------
Unrealized gains (losses) on available-for-sale securities, net $ 18,999
-----------
</TABLE>
F-14
<PAGE>
Notes (Dollars in thousands, except per share data, unless otherwise noted)
11. INVENTORIES
Inventories consist of:
<TABLE>
<S> <C> <C>
December 31,
--------------------------
1998 1997
------------ ------------
Raw materials $ 103,807 $ 111,148
Work in process 19,236 19,676
Finished goods 158,408 157,254
------------ ------------
$ 281,451 $ 288,078
------------ ------------
</TABLE>
12. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment - net consist of:
<TABLE>
<S> <C> <C>
December 31,
--------------------------
1998 1997
------------ ------------
Land and land improvements $ 17,683 $ 17,683
Buildings, improvements and leasehold
improvements 33,051 37,443
Machinery and equipment 462,305 421,615
------------ ------------
513,039 476,741
Less accumulated depreciation (275,908) (239,920)
------------ ------------
$ 237,131 $ 236,821
------------ ------------
</TABLE>
13. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<S> <C> <C>
December 31,
--------------------------
1998 1997
------------ ------------
Salaries and compensation liabilities $ 41,286 $ 49,831
Payroll, state and local taxes 10,764 7,648
Product and warranty liabilities 56,666 54,594
Other 77,397 76,177
------------ ------------
$ 186,113 $ 188,250
------------ ------------
</TABLE>
14. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are as
follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ------------ ------------
Domestic $ 81,881 $ (23,157) $ (189,487)
Foreign 11,768 13,518 40,079
----------- ------------ ------------
Total $ 93,649 $ (9,639) $ (149,408)
----------- ------------ ------------
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ 19,987 $ 7,583 $ (5,878)
Foreign 8,939 3,905 4,312
State 9,550 3,800 1,796
----------- ----------- -----------
38,476 15,288 230
----------- ----------- -----------
Deferred:
Federal 7,932 (11,039) (52,635)
Foreign (5,971) 926 1,269
State (2,238) 1,299 (1,962)
----------- ----------- -----------
(277) (8,814) (53,328)
----------- ----------- -----------
Provision (benefit) for income
taxes $ 38,199 $ 6,474 $ (53,098)
----------- ----------- -----------
</TABLE>
Actual current tax liabilities are lower than reflected above for the year
ended December 31, 1998 by $17,602 for the stock option deduction benefits
recorded as a credit to stockholders' equity.
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 following table presents the principal reasons for the difference between
the actual income tax provision (benefit) and the tax provision (benefit)
computed by applying the U.S. federal statutory income tax rate to the loss
before income taxes:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Federal income tax provision
(benefit) at 35% $32,777 $(3,374) $(52,293)
State income taxes - net 4,253 3,314 (108)
Foreign operations (996) 1,153 (6,655)
Non-deductible purchase
accounting item 4,880 4,997 4,997
Other - net (2,715) 384 961
---------- ---------- ----------
Provision (benefit) for income
taxes $38,199 $6,474 $(53,098)
---------- ---------- ----------
Effective income tax rate 40.8% 67.2% (35.5%)
</TABLE>
F-15
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
<TABLE>
<S> <C> <C>
December 31,
------------------------
1998 1997
----------- -----------
Deferred tax assets:
Domestic net operating loss carryforwards
(expiring in 2012) $ 18,892 $ 35,325
Tax credit carryforwards (expiring through
2018) 11,897 6,516
Accounts receivable and inventory reserves 33,312 33,732
Product and warranty liabilities 22,064 21,250
Employee benefits 28,996 26,784
Reserve on Partnership Note 11,010 --
Warrant costs related to customer purchases 8,515 --
Other accrued liabilities 15,686 12,354
Other 3,438 4,275
----------- -----------
Gross deferred tax assets 153,810 140,236
----------- -----------
Deferred tax liabilities:
Fixed and intangible assets 65,063 17,673
Unrealized gain on short-term investments 1,020 11,347
Other 1,367 5,745
----------- -----------
Gross deferred tax liabilities 67,450 34,765
----------- -----------
Net deferred tax asset $ 86,360 $ 105,471
----------- -----------
</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.
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 year ended December 31, 1996, 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 a credit of $5 million to goodwill, since these matters related to
periods prior to the acquisition of the Distributing Company by affiliates of
Forstmann Little & Co.
Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $14 million and $6 million in 1998 and 1997, respectively,
as those earnings are considered to be permanently reinvested. Determining the
tax liability that would arise if these earnings were remitted is not
practicable. Income taxes received during 1998 and 1997 subsequent to the
Distributions were $5 million and $2 million, respectively. Income taxes paid
during 1998 were $15 million.
15. 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, 1998 and 1997, the
Company was in compliance with all financial and operating covenants under the
Credit Agreement. At December 31, 1998 and 1997, the Company had not borrowed
under the Credit Agreement and had available credit of $500 million and $513
million, respectively. Interest paid related to the Credit Agreement during 1998
and 1997 subsequent to the Distributions was $1 million and $5 million,
respectively.
F-16
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
16. 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 $15 million, $16 million
and $15 million in 1998, 1997 and 1996, respectively. The Company has two
seven-year operating lease agreements for its domestic administrative
facilities, and the total cost of the facilities covered by these agreements
approximates $110 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 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.
Total future minimum rentals to be received under noncancelable subleases as
of December 31, 1998 are $9 million. Future minimum lease payments required
under noncancelable operating leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $9,769
2000 9,073
2001 8,649
2002 8,421
2003 5,932
Thereafter 8,643
---------
Total minimum lease payments $50,487
---------
</TABLE>
The Company had approximately $109 million and $87 million of letters of
credit outstanding at December 31, 1998 and 1997, respectively.
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 consolidated 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.
On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General
Instrument Corp., pending in the United States District Court for the Eastern
District of North Carolina, was dismissed with prejudice. In addition, on May 4,
1998, the action entitled Next Level Communications v. BroadBand Technologies,
Inc., was dismissed with prejudice. These dismissals were entered pursuant to a
settlement agreement under which, among other things, the Partnership has paid
BroadBand Technologies ("BBT") $5 million and BBT and the Partnership have
entered into a perpetual cross-license of patents applied for or issued
currently or during the next five years. At the time of the formation of the
Partnership (see Note 8), the Company, as limited partner, and Spencer Trask, as
general partner, estimated that no liability existed with respect to the BBT
litigation. Further, the Partnership indemnified the Company with respect to
this litigation because such litigation was directly related and attributable to
the technology transferred to the Partnership.
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
F-17
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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. Both actions seek
unspecified damages and attorneys' fees and costs. The court granted the
defendants' motion to dismiss the original complaints in both of these actions,
but allowed the plaintiffs in each action an opportunity to file amended
complaints. Amended complaints were filed on November 7, 1997. The defendants
answered the amended consolidated complaint in the class actions, denying
liability, and filed a renewed motion to dismiss the derivative action. On
September 22, 1998, defendants' motion to dismiss the derivative action was
denied. In November 1998, the defendants filed an answer to the derivative
action, denying liability. On January 21, 1999, the plaintiffs in the class
actions filed their motion for class certification, including the defendants'
opposition. The Company intends to vigorously contest these actions.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was brought
in February 1996 by certain holders of preferred stock of Next Level
Communications ("NLC"), which merged into a subsidiary of the Distributing
Company in September 1995. The action was originally filed in the Northern
District of California and was subsequently transferred to the Northern District
of Illinois. The plaintiffs allege that the defendants violated federal
securities laws by making misrepresentations and omissions and breached
fiduciary duties to NLC in connection with the acquisition of NLC by the
Distributing Company. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorneys' fees and costs. On September
23, 1997, the district court dismissed the complaint, without prejudice, and the
plaintiffs were given until November 7, 1997 to amend their complaint. On
November 7, 1997, plaintiffs served the defendants with amended complaints,
which contain allegations substantially similar to those in the original
complaint. The defendants filed a motion to dismiss parts of the amended
complaint and answered the balance of the amended complaint, denying liability.
On September 22, 1998, the district court dismissed with prejudice the portion
of the complaint alleging violations of Section 14(a) of the Exchange Act, and
denied the remainder of the defendants' motion to dismiss. In November 1998, the
defendants filed an answer to the remaining parts of the amended complaint,
denying liability. The Company intends to vigorously contest this action.
In connection with the Distributions, the Company has agreed to indemnify
General Semiconductor, Inc. with respect of its obligations, if any, arising out
of or in connection with the matters discussed in the preceding two paragraphs.
On February 19, 1998, a consolidated securities class action complaint
entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleged that the defendants violated Sections 11 and 15 of
the Securities Act of 1933, as amended (the "Securities Act"), and Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false
and misleading statements about the Company's business, finances and future
prospects. The complaint seeks damages in an unspecified amount. On April 9,
1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May
5, 1998, the defendants moved to dismiss the remaining counts of the complaint.
The Company intends to vigorously contest this action.
On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC
TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS, L.P, KK MANAGER, L.L.C.,
GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC alleged that in connection with the
formation of the Partnership and the transfer to it of NLC's switched digital
video technology, the Partnership and KK Manager misappropriated DSC's trade
F-18
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
secrets; that the Company improperly disclosed trade secrets when it conveyed
such technology to the Partnership; and that Spencer Trask conspired to
misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the
defendants' purported unjust enrichment, disgorgement of consideration,
exemplary damages and attorney's fees, all in unspecified amounts. In April
1998, the Company and the other defendants filed an action in the United States
District Court for the Eastern District of Texas, requesting that the federal
court preliminarily and permanently enjoin DSC from prosecuting the Delaware
Action because by pursuing such action, DSC effectively was trying to circumvent
and relitigate the Texas federal court's November 1997 judgment in a previous
lawsuit involving DSC, described above, pursuant to which NLC had paid $141
million. On May 14, 1998, the Texas court granted a preliminary injunction
preventing DSC from proceeding with the Delaware Action. That injunction order
is now on appeal to the United States Court of Appeal for the Fifth Circuit
where it has been briefed and awaits determination. On July 6, 1998, the
defendants filed a motion for summary judgment with the Texas court requesting a
permanent injunction preventing DSC from proceeding with this litigation. As a
result of the preliminary injunction, the Delaware Action has been stayed in its
entirety. The Company intends to vigorously contest this action.
In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for
Arbitration against the Company alleging that the Company breached the terms of
a license agreement with StarSight by (a) developing a competing product that
wrongfully incorporates StarSight's technology and inventions claimed within a
certain StarSight patent, (b) failing to promote and market the StarSight
product as required by the license agreement, and (c) wrongfully using
StarSight's technical information, confidential information and StarSight's
graphical user interface in breach of the license agreement. StarSight is
seeking injunctive relief as well as damages (as specified below). The
arbitration proceeding is scheduled to begin March 22, 1999 before an
arbitration panel of the American Arbitration Association in San Francisco,
California. On January 25, 1999, the Company received a copy of StarSight's
Statement of Damages, as directed by the arbitration panel. This statement
identifies purported damages arising from the sale by the Company of certain
analog set top boxes containing a native electronic program guide. StarSight
alleges that it is entitled to collect $90 million to $177 million in
compensatory damages and an unspecified amount of punitive damages. The Company
has denied StarSight's allegations and intends to vigorously contest this
action.
On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND
INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United
States District Court for the Northern District of California. The complaint
alleges infringement by the Company of two U.S. patents allegedly covering
electronic program guides. The complaint seeks unspecified damages and an
injunction. The plaintiffs have sought to consolidate discovery for this action
with similar actions pending against Pioneer Electronics Corp. and
Scientific - Atlanta, Inc. The Company has responded to the plaintiffs' motion,
currently pending before the Judicial Panel on Multidistrict Litigation (the
"Judicial Panel"). On January 27, 1999, the court entered an order staying these
proceedings until the Judicial Panel decides the plaintiffs' consolidation
motion. The Company denies that it infringes the subject patents and intends to
vigorously defend this action.
While the ultimate outcome of the matters described above cannot be
determined, the Company intends to vigorously contest these actions and
management does not believe that the final disposition of these matters will
have a material adverse effect on the Company's consolidated financial
statements.
17. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT 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
F-19
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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.
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.
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 periodic benefit cost of the Company for the years ended December 31, 1998
and 1997 consists of the following:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------------------ --------------------------
Year Ended December 31, Year Ended December 31,
------------------------------------------------------ --------------------------
1998 1997 1998 1997
-------------------------- -------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC Domestic Foreign Domestic Foreign
BENEFIT COST ------------ ------------ ------------ ------------
Service cost $ 3,557 $ 1,719 $ 2,651 $ 1,713 $ 1,063 $ 824
Interest 2,881 1,347 2,443 1,612 591 531
Expected return on plan assets (2,081) (135) (1,755) (285) -- --
Net amortization and deferral (9) 367 (11) 578 (186) (181)
Curtailment and settlement loss -- -- -- 4,282 -- --
------------ ------------ ------------ ------------ ------------ ------------
Net periodic benefit cost $ 4,348 $ 3,298 $ 3,328 $ 7,900 $ 1,468 $ 1,174
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The Company's share of the Distributing Company's consolidated net periodic
benefit costs that has been recorded in the accompanying statement of operations
in 1996 was $5 million for pension benefit costs and $0.8 million for other
benefit costs. The net periodic benefit cost presented above for 1997 includes
the Company's share of the Distributing Company's net periodic benefit cost for
the period prior to the Distributions.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------------------ --------------------------
1998 1997 1998 1997
-------------------------- -------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION Domestic Foreign Domestic Foreign
------------ ------------ ------------ ------------
Benefit obligation at beginning of year $ 37,986 $ 20,211 $ 32,558 $ 31,243 $ 8,528 $ 5,510
Service cost 3,557 1,719 2,651 1,713 1,063 824
Interest 2,881 1,347 2,443 1,612 591 531
Actuarial (gain) loss 6,890 534 1,021 (647) 642 1,967
Benefits paid (690) (1,946) (687) (174) (118) (304)
Effect of curtailment -- -- -- (1,806) -- --
Settlement payments -- -- -- (11,307) -- --
Effect of foreign exchange -- 250 -- (423) -- --
------------ ------------ ------------ ------------ ------------ ------------
Benefit obligation at end of year $ 50,624 $ 22,115 $ 37,986 $ 20,211 $ 10,706 $ 8,528
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
F-20
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
<TABLE>
<CAPTION>
Pension Benefits
------------------------------------------------------
1998 1997
-------------------------- --------------------------
CHANGE IN PLAN ASSETS Domestic Foreign Domestic Foreign
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fair value of plan assets at beginning of year $ 25,680 $ 912 $ 22,104 $ 8,752
Actual return on plan assets 3,374 53 4,263 --
Employer contributions 2,651 3,386 -- 1,751
Benefits paid (690) (1,937) (687) (10,704)
Transfers from the Distributing Company -- -- -- 1,616
Effect of foreign exchange -- 65 -- (503)
------------ ------------ ------------ ------------
Fair value of plan assets at end of year $ 31,015 $ 2,479 $ 25,680 $ 912
------------ ------------ ------------ ------------
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------------------ --------------------------
December 31, December 31,
------------------------------------------------------ --------------------------
1998 1997 1998 1997
-------------------------- -------------------------- ------------ ------------
RECONCILIATION OF FUNDED STATUS Domestic Foreign Domestic Foreign
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Funded status $(19,609) $(19,636) $(12,306) $(19,299) $(10,706) $(8,528)
Unrecognized prior service cost (181) -- (200) -- (1,668) (1,800)
Unrecognized actuarial (gain) loss 4,041 8,119 (1,462) 7,752 (819) (1,515)
------------ ------------ ------------ ------------ ------------ ------------
Accrued benefit liability $(15,749) $(11,517) $(13,968) $(11,547) $(13,193) $(11,843)
------------ ------------ ------------ ------------ ------------ ------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.75% 6.75% 7.25% 6.75% 6.75% 7.25%
Investment return 9.00% 7.00% 9.00% 8.00% -- --
Compensation increase 4.75% 6.00% 4.75% 6.00% -- --
</TABLE>
The domestic pension plans consist principally of a qualified retirement plan
that has satisfied the full funding limitation requirements under ERISA. The
Company maintains unfunded supplemental retirement plans for certain members of
management, and net periodic benefit cost and accrued benefit obligations for
these plans 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's domestic plan's assets consist of
fixed income and equity securities, and the Taiwan plan's assets principally
consist of fixed income securities.
The assumed rate of future increases in health care cost during 1998 was
11.25% for pre-age 65 retirees and is expected to decline to 6% by the year
2005, and 9.0% for post-age 65 retirees and is expected to decline to 6% by the
year 2003. Under the Plan, the actuarially determined effect of a one-percentage
point change in the
assumed health care cost trend rate would have the following effects:
<TABLE>
<S> <C> <C>
One-Percentage One-Percentage
Point Increase Point Decrease
---------------- ----------------
Effect on postretirement benefit
obligation $2,356 $(1,772)
Effect on total of service and
interest cost components 427 (303)
</TABLE>
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 $3
million, $4 million and $3 million for the years ended December 31, 1998, 1997
and 1996, respectively.
F-21
<PAGE>
Notes (Dollars in thousands, except per share data, unless otherwise noted)
18. 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.
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 "1997
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 1997 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 was approximately 9
million. The following table summarizes stock option activity relating to the
Company's stock option plan subsequent to the Distributions.
<TABLE>
<S> <C> <C>
Weighted-
Number of) Average
Shares Exercise Price
(In Thousands Per Share
-------------- --------------
Distributing Company options
related to employees of the
Company, and outstanding
at July 28, 1997 11,349 $22.45
--------------
Company options substituted for
Distributing Company Options,
and outstanding at July 28, 1997 16,655 15.30
Granted 3,069 16.59
Exercised (679) 13.78
(2,117) 15.93
Canceled
--------------
16,928 15.52
Outstanding at December 31, 1997
Granted 3,509 21.87
Exercised (5,342) 15.00
(1,240) 17.74
Canceled
--------------
13,855 17.13
Outstanding at December 31, 1998
--------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable under the 1997 Plan.
<TABLE>
<CAPTION>
Shares Under Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------------------
Options Weighted-Average Options
Outstanding at Remaining Exercisable at
Range of Exercise December 31, 1998 Contractual Weighted-Average December 31, 1998 Weighted-Average
Prices (In Thousands) Term (Years) Exercise Price (In Thousands) Exercise Price
- --------------------- -------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.03 - $ 1.87 67 4.0 $ 1.32 67 $ 1.32
10.82 - 13.82 154 4.2 11.08 151 11.03
14.14 - 15.75 7,749 7.8 15.24 3,654 14.98
16.00 - 17.80 2,069 7.2 17.09 1,319 17.16
18.57 - 20.88 758 8.8 20.07 41 20.19
21.69 - 24.44 2,996 9.6 21.75 -- --
25.00 - 30.00 62 9.7 27.08 -- --
</TABLE>
F-22
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
At December 31, 1998, 0.4 million shares were reserved for future awards under
the 1997 Plan.
The Company applies APB 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 $19 million and $23 million for the years ended December 31,
1998 and 1997, respectively, had compensation cost for stock options awarded
under the 1997 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." The
Company's net income for the year ended December 31, 1998 would have been $44
million and basic and diluted earnings per share would have been $0.28 and
$0.26, respectively. The Company's pro forma net loss and pro forma loss per
share (basic and diluted) for the year ended December 31, 1997 would have been
$31 million and $0.21, 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
4.49% and 6.08% for 1998 and 1997, respectively; an expected volatility of 40%
and 35% for 1998 and 1997, respectively; and an expected dividend yield of 0%.
The weighted-average per share fair values of the options granted during 1998
and 1997 were estimated at $8.17 and $6.20, respectively.
WARRANTS. In December 1997, the Company entered into agreements to supply an
aggregate of 15 million of its two-way, interactive digital cable terminals to
nine of the leading North American cable television multiple system operators
("MSOs") over a three to five year period, beginning in 1998. In connection with
these legally binding supply agreements, the Company issued warrants to purchase
approximately 29 million shares of the Company's Common Stock. Warrants
aggregating 7.2 million, 7.3 million and 14.2 million issued to the MSOs will
vest and become exercisable on December 31, 1998, 1999, and 2000, respectively,
provided that in each of those years each such MSO fulfills its obligation to
purchase a threshold number of digital terminals from the Company. Each warrant
is exercisable for one share of Common Stock 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 MSOs warrants
will vest for that year. If, in any year, an MSO fails to purchase the threshold
number of terminals for such year, through no fault of the Company, no warrants
for such year will vest, and the MSO shall be subject to legal proceedings and
damages relating to such failure. The Company believes that the magnitude of
such damages would be substantial. The Company believes it is probable that the
MSOs will perform under the terms of the supply agreement because there is a
sufficiently large disincentive for non-performance, accordingly, it believes a
performance commitment has been met and the fair value of the warrants was
determined as of the date of the supply agreement. 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, except for the expected holding periods for the warrants, which range
from 2.5 to 4.5 years. The value of the warrants for each MSO is being expensed
to cost of sales based upon actual units shipped to the MSO in a year in
relation to the total threshold number of units required to be purchased by the
MSO in such year. During 1998, the Company recorded $21.8 million to cost of
sales related to these warrants, since the full amount of the 1998 warrants
vested on December 31, 1998.
On a quarterly basis, management assesses the Company's ability to deliver the
threshold number of units and to the extent it believes the Company will not be
able to deliver the committed number of units, a charge reflecting the fair
value of warrants for the undeliverable units for that year would be recorded.
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,
F-23
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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. On September 9, 1998, the Company announced a share
repurchase program authorizing the Company to repurchase up to 10 million shares
of its outstanding Common Stock. Through December 31, 1998, the Company had
repurchased a total of 6.3 million shares at a cost of $126.3 million.
In January 1999, Sony Corporation purchased 7.5 million newly issued
unregistered shares of Common Stock of the Company for $188 million.
19. RELATED PARTY TRANSACTIONS
In connection with the asset purchase from TCI, which was consummated on July
17, 1998 (see Note 7), TCI obtained approximately a 12% ownership interest in
the Company, and at December 31, 1998, such ownership interest was 13%. TCI is
also a significant customer of the Company. Sales to TCI represented 31% of
total Company sales for the year ended December 31, 1998. Management believes
the transactions with TCI are at arms length and are under terms no less
favorable to the Company than those with other customers. At December 31, 1998
accounts receivable from TCI totaled $81 million.
20. 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 reduce 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 covered by the exchange contracts.
F-24
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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 reduce 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 limit 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 such transactions 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
settlement of the underlying transactions. Gains and losses on forward exchange
contracts used to limit 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, 1998 was not significant. As of
December 31, 1998 and 1997, the Company had outstanding forward exchange
contracts with notional amounts of $58 million and $73 million, respectively,
comprised of foreign currencies that were to be purchased (principally the New
Taiwan dollar and the Pound Sterling in 1998 and the New Taiwan and Canadian
dollars in 1997) and $13 million and $11 million, respectively, comprised of
foreign currencies that were to be sold (principally the Canadian dollar and the
Deutsche Mark in 1998 and the Canadian dollar in 1997). All outstanding forward
exchange contracts at December 31, 1998 and 1997 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, 1998 and 1997 were not significant. Foreign currency transaction
losses included in operations were $1 million, $2 million and $2 million in
1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, the Company
had no purchased option contracts outstanding.
The estimated fair value of cash equivalents, accounts receivable, and
accounts payable, approximates their carrying value. The Company has an
investment in equity securities of a publicly traded company, which have certain
restrictions, which may under certain circumstances cause the investment to be
redeemed at cost. Such restrictions do not lapse until April 2000 and,
therefore, the Company has not reflected this investment at its fair value at
December 31, 1998. Accordingly, the Company is carrying this investment at its
cost of $23 million, which has been included in "Investments and other assets"
on the consolidated balance sheets as of December 31, 1998 and 1997. When such
restrictions expire, the investment will be classified as available-for-sale
with any unrealized gain or loss recorded through stockholders' equity. At
December 31, 1998, the fair value of this investment, were it not restricted,
would have been approximately $272 million.
21. SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosure about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the Chairman of the Board and Chief Executive Officer.
F-25
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
The Company currently has two reportable segments: Broadband Networks Systems
and Satellite and Broadcast Network Systems. The Broadband Networks Systems
segment is comprised of digital and analog cable and wireless television systems
and transmission network systems which includes cable television analog and
digital set top terminal products and headend and amplifier equipment products
for the transmission of voice, video and high speed data over cable TV networks.
The Satellite and Broadcast Network Systems segment includes analog and digital
satellite television system products which enable programmers, satellite
operators and business users to deliver high quality, compressed video service
to cable television headends, corporate locations or directly to consumer homes.
Although both of the Company's segments provide communications equipment
products that deliver video, audio and high-speed internet/data services, they
have not been aggregated due primarily to different customer bases.
The Company has also disclosed separately below the results of NLC for the
years prior to the transfer of the net assets of NLC to the Partnership. As
disclosed in Note 8, the results of the Partnership are included in other income
(expense)-net in the statement of operations for the year ended December 31,
1998.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies, however, as described below, for
internal management reporting purposes certain costs, such as corporate overhead
and restructuring charges, have not been allocated to the segments. The Company
measures segment performance based upon operating profit. Information on the
segments and reconciliations to consolidated amounts are as follows:
F-26
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
<TABLE>
<CAPTION>
Satellite
Broadband and Broadcast Corporate
Networks Network Next Level Unallocated
Systems Systems Communications(a) and Other
------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C>
1998
Net sales $ 1,569,483 $418,342 $ -- $ --
Operating income (loss) 234,884 35,201 -- (165,838)(c)
Other income (expense) - net (including equity interest in
Partnership losses of $25,089) -- -- -- (11,815)
Interest income (expense) - net -- -- -- 1,217
Income (loss) before income taxes -- -- -- 93,649
Segment assets(b) 649,183 203,119 -- 6,319(d)
Capital expenditures 78,869 12,891 -- --
Depreciation and intangible amortization expense 41,215 23,975 -- 18,374(e)
Warrant costs related to customer purchases 21,834 -- -- --
1997
Net sales $ 1,292,930 $462,068 $ 9,090 $ --
Operating income (loss) 218,942 (7,449) (58,462) (163,226)(c)
Other income (expense) - net -- -- -- 5,766
Interest income (expense) - net -- -- -- (5,210)
Income (loss) before income taxes -- -- -- (9,639)
Segment assets(b) 512,241 338,250 37,970 (19,937)(d)
Capital expenditures 42,064 26,740 10,702 322
Depreciation and intangible amortization expense 33,962 33,225 4,133 18,537(e)
1996
Net sales $ 1,180,424 $575,161 $ -- $ --
Operating income (loss) 153,388 22,229 (29,781) (267,847)(c)
Other income (expense) - net -- -- -- (1,427)
Interest income (expense) - net -- -- -- (25,970)
Income (loss) before income taxes -- -- -- (149,408)
Segment assets(b) 588,284 321,138 12,214 (13,075)(d)
Capital expenditures 99,172 27,040 8,048 93
Depreciation and intangible amortization expense 32,344 31,553 2,063 18,540(e)
<CAPTION>
Total
Company
-------------
<S> <C>
1998
Net sales $ 1,987,825
Operating income (loss) 104,247
Other income (expense) - net (including equity interest in
Partnership losses of $25,089) (11,815)
Interest income (expense) - net 1,217
Income (loss) before income taxes 93,649
Segment assets(b) 858,621
Capital expenditures 91,760
Depreciation and intangible amortization expense 83,564
Warrant costs related to customer purchases 21,834
1997
Net sales $ 1,764,088
Operating income (loss) (10,195)
Other income (expense) - net 5,766
Interest income (expense) - net (5,210)
Income (loss) before income taxes (9,639)
Segment assets(b) 868,524
Capital expenditures 79,828
Depreciation and intangible amortization expense 89,857
1996
Net sales $ 1,755,585
Operating income (loss) (122,011)
Other income (expense) - net (1,427)
Interest income (expense) - net (25,970)
Income (loss) before income taxes (149,408)
Segment assets(b) 908,561
Capital expenditures 134,353
Depreciation and intangible amortization expense 84,500
</TABLE>
(a) See Note 8.
(b) Segment assets include accounts receivable, inventories and property, plant
and equipment. Other balance sheet items are not allocated to the segments.
(c) Primarily reflects unallocated costs, including amortization of excess of
cost over fair value of net assets acquired of $14 million, $15 million and $14
million in 1998, 1997 and 1996, respectively, and restructuring and other
charges of $115 million, $122 million and $126 million in 1998, 1997 and 1996,
respectively (see Notes 5, 6, and 16). The remaining reconciling amounts reflect
unallocated corporate selling, general and administrative expenses.
(d) Primarily reflects non-trade accounts receivable of $8 million, $15 million
and $17 million at December 31, 1998, 1997 and 1996, respectively, and certain
unallocated property, plant and equipment balances of $16 million, $17 million
and $21 million at December 31, 1998, 1997 and 1996, respectively, offset by
restructuring and other charge adjustments not allocated to the segments for
internal management reporting purposes.
(e) Primarily reflects amortization of excess of cost over fair value of net
assets acquired of $14 million, $15 million and $14 million in 1998, 1997 and
1996, respectively, as well as intangible amortization of $4 million, $3 million
and $4 million in 1998, 1997 and 1996, respectively.
F-27
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
Net revenues are attributed to geographic areas based upon the location to
which the product is shipped. A majority of the foreign long-lived assets are
located in Taiwan and Mexico, where the Company manufactures or assembles a
significant portion of its products.
<TABLE>
<CAPTION>
U.S. Foreign Total
------------- ----------- -------------
<S> <C> <C> <C>
1998
Net revenues $ 1,683,072 $ 304,753 $ 1,987,825
Long-lived assets 1,090,126 100,167 1,190,293
1997
Net revenues $ 1,251,324 $ 512,764 $ 1,764,088
Long-lived assets 711,297 79,256 790,553
1996
Net revenues $ 1,294,646 $ 460,939 $ 1,755,585
Long-lived assets 745,000 78,333 823,333
</TABLE>
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, including affiliates, accounted for 31%, 14%, and 23% of
the Company's consolidated net sales in 1998, 1997 and 1996, respectively. Time
Warner, including affiliates, accounted for 14% and 13% of the Company's
consolidated net sales in 1997 and 1996, respectively. PRIMESTAR accounted for
11% of the Company's consolidated net sales in 1998.
On January 22, 1999, PRIMESTAR announced that it reached an agreement to sell
its direct broadcast satellite medium-power business and assets as well as its
rights to acquire high-power satellite assets to Hughes Electronics Corporation.
The Company is currently uncertain whether and to what extent PRIMESTAR will
continue to order and purchase medium-power equipment from the Company. Further,
the Company does not expect to supply any high-power equipment to PRIMESTAR.
Absent the failure of PRIMESTAR to honor its contractual commitments with the
Company, the Company believes that the loss of PRIMESTAR's business will not
have a material adverse effect on the Company's financial condition or results
of operations.
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, June 30, September 30, December 31,
-------------------- -------------------- -------------------- --------------------
<CAPTION>
1998(a) 1997(b) 1998 1997(c) 1998 1997 1998 1997(d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales $416,920 $408,028 $488,505 $450,403 $518,196 $464,582 $564,203 $441,075
Gross profit 92,988 113,514 141,121 117,618 152,863 133,441 169,526 63,033
Net income (loss) (59,891) 4,960 29,963 406 39,409 24,458 45,969 (45,937)
Earnings (loss) per share - basic(e) $ (0.40) $ 0.20 $ 0.23 $ 0.17 $ 0.27 $ (0.31)
Earnings (loss) per share - diluted(e) (0.40) 0.19 0.22 0.16 0.26 (0.31)
</TABLE>
(a) Includes pre-tax charges of $124 million ($79 million net-of-tax) reflecting
$16 million of restructuring charges (see Note 5) and $33 million of other
charges (see Note 6) primarily including costs 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
fixed assets to their estimated fair values and inventory to its lower of cost
or market, as well as a $75 million charge to fully reserve for the R&D advance
made to the Partnership (see Note 8). Of these charges, $27 million were
recorded as cost of sales, $13 million were recorded as SG&A expense, $75
million were recorded as R&D expense and $9 million were recorded as other
expense.
(b) 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.
(c) 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.
(d) Includes pre-tax charges of $86 million reflecting $36 million ($24 million
net-of-tax) of restructuring charges (see Note 5) and $61 million ($44 million
net-of-tax) of other charges (see Note 6), primarily related to the
restructuring of the satellite business and the consolidation of the corporate
headquarters, offset by $11 million ($7 million net of tax) of other income and
interest income (see Note 6). These costs include $66 million recorded as cost
of sales, $22 million recorded as SG&A expense and $9 million recorded as R&D
expense, partially offset by $4 million of other income and $7 million of
interest income.
(e) Historical earnings (loss) per share for the periods prior to the
Distributions have been omitted since the Company was not a separate company
with a capital structure of its own.
F-28
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
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 Distributions. The Company did not pay dividends on its Common Stock during
1997 or 1998. 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. The high and low stock prices of the Common Stock are listed
below:
<TABLE>
<CAPTION>
Stock Price Ranges
----------------------------
<S> <C> <C> <C> <C>
High Low
------------- -------------
1997
Third Quarter $ 21 1/2 $ 16
Fourth Quarter $ 19 1/8 $ 12 5/8
1998
First Quarter $ 22 $ 16 7/16
Second Quarter $ 28 3/4 $ 19 3/4
Third Quarter $ 29 1/2 $ 16 11/16
Fourth Quarter $ 36 15/16 $ 17 1/2
</TABLE>
F-29
<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, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated February 9, 1999;
such report is included elsewhere in this Form 10-K. Our audits also included
the financial state-
ment 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.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 9, 1999
F-30
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of
(In thousands) Period Additions Deductions Other Period
<S> <C> <C> <C> <C> <C>
------------- ----------- ------------- ------------- -----------
Allowance For Doubtful Accounts:
Year ended December 31, 1998 $ 3,566 $ 2,074 $ (1,807) $ -- $ 3,833
Year ended December 31, 1997 $ 12,910 $ 437 $ (4,781) $ (5,000)(a) $ 3,566
Year ended December 31, 1996 $ 10,144 $ 5,190 $ (2,424) $ -- $ 12,910
</TABLE>
(a) Other represents the collection of certain receivables previously considered
to be uncollectable.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Next Level Communications L.P.:
We have audited the accompanying balance sheet of Next Level Communications L.P.
as of December 31, 1998 and the related statements of operations, partners'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Next Level Communications L.P. as of
December 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As discussed in Note 2, Next Level Communications L.P. has incurred operating
losses and negative cash flows and is dependent upon obtaining additional
capital to fund its operations and meet its obligations.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
February 9, 1999
F-32
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------
<S> <C>
(dollars in thousands) 1998
--------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,983
Trade receivables (net of allowance for doubtful accounts of $490) 11,068
Other receivables 5,023
Inventories 20,670
Receivable from General Instrument 3,350
Other current assets 735
--------------
Total current assets 69,829
PROPERTY AND EQUIPMENT, NET 21,558
INTANGIBLE ASSETS, NET 6,266
OTHER ASSETS 118
--------------
TOTAL ASSETS $ 97,771
--------------
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 16,467
Accrued expenses 10,697
Deferred revenue 3,705
Current portion of capital lease obligations 396
--------------
Total current liabilities 31,265
NOTE PAYABLE TO GENERAL INSTRUMENT (INCLUDING ACCRUED INTEREST OF $5,940) 80,940
LONG TERM CAPITAL LEASE OBLIGATIONS 335
COMMITMENTS AND CONTINGENCIES (NOTE 12)
PARTNERS' DEFICIT (14,769)
--------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 97,771
--------------
</TABLE>
See notes to financial statements.
F-33
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF OPERATIONS
Year Ended
December
31,
-----------
(dollars in thousands) 1998
-----------
NET SALES:
Equipment $ 39,243
Software 4,587
-----------
Total net sales 43,830
-----------
COST OF SALES:
Equipment 43,172
Software 261
-----------
Total cost of sales 43,433
-----------
GROSS PROFIT 397
-----------
OPERATING EXPENSES:
Research and development 47,086
Selling, general and administrative 26,248
Litigation settlement 5,000
-----------
Total operating expenses 78,334
-----------
LOSS FROM OPERATIONS (77,937)
INTEREST EXPENSE (6,035)
OTHER INCOME 2,241
-----------
NET LOSS $ (81,731)
-----------
See notes to financial statements.
F-34
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Year Ended December 31,
1998
--------------------------
<S> <C> <C>
Limited
General Partner
Partner Capital
(dollars in thousands) Capital (Deficit)
------------ ------------
BALANCE, JANUARY 1, 1998 $ -- $ --
Partner capital contributions 10,000 56,962
Net loss (8,990) (72,741)
------------ ------------
BALANCE, DECEMBER 31, 1998 $ 1,010 $ (15,779)
------------ ------------
<CAPTION>
<S> <C>
Partners'
Capital
(dollars in thousands) (Deficit)
------------
BALANCE, JANUARY 1, 1998 $ --
Partner capital contributions 66,962
Net loss (81,731)
------------
BALANCE, DECEMBER 31, 1998 $ (14,769)
------------
</TABLE>
See notes to financial statements.
F-35
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF CASH FLOWS
Year Ended
December
31,
-----------
(dollars in thousands) 1998
-----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (81,731)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,733
Loss on disposal of assets 1,162
Changes in assets and liabilities:
Trade receivables (6,323)
Inventories (7,286)
Prepaid expenses and other current assets (4,683)
Accrued interest payable to General
Instrument 5,940
Accounts payable 7,141
Accrued expenses 8,414
-----------
Net cash used by operating activities (66,633)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,612)
Proceeds from notes receivable 264
-----------
Net cash used in investing activities (9,348)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Limited Partner capital contribution 19,587
General Partner capital contribution 10,000
Proceeds from note payable to General Instrument 75,000
-----------
Net cash provided from financing
activities 104,587
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 28,606
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 377
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,983
-----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 731
See notes to financial statements.
F-36
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
1. ORGANIZATION AND BUSINESS
Next Level Communications L.P. (the "Partnership") designs, manufactures and
markets broadband access systems capable of transmitting telephony, video, and
data to homes and businesses.
NEXT LEVEL COMMUNICATIONS - Next Level Communications ("NLC" or the "Limited
Partner") was incorporated as a California corporation on June 22, 1994 and
commenced operations in July 1994. In September 1995, Next Level Communications
was acquired by General Instrument Corporation ("General Instrument") in an
acquisition accounted for using the purchase method of accounting; accordingly,
the purchase price was allocated to the fair value of assets and liabilities of
Next Level Communications. Through December 31, 1997, Next Level Communications
was a 100% owned subsidiary of General Instrument.
In January 1998, General Instrument transferred the net assets, management and
workforce of NLC to the Partnership in exchange for an 89% limited partner
interest. Such 89% limited partnership interest is held by NLC, a wholly owned
subsidiary of General Instrument. KK Manager LLC (the "General Partner"),
acquired an 11% general partner interest in the Partnership in exchange for a
$10 million cash contribution.
Net losses have been allocated to the partners based on their respective
partnership percentages. If the Partnership converts to a corporation (the
"Successor Corporation") in conjunction with an Initial Public Offering ("IPO"),
each partner will receive voting common stock of the Successor Corporation based
on their respective partnership percentages. The General Partner has an option,
which expires in January 2003, to acquire from the Limited Partner, up to 11% of
the Successor Corporation common stock at a predetermined valuation of $700
million. Such option is exercisable after an IPO or in connection with a merger
or sale of the Successor Corporation. Upon dissolution of the Partnership, the
assets will be used to pay all liabilities of the Partnership and any remaining
assets, after establishment of reserves, will be distributed to the partners in
accordance with their respective partnership percentages.
2. Results of Operations for 1998 and Management Plans for 1999
In 1998, the Partnership incurred net losses of $81.7 million and net cash used
by operating activities was $66.6 million. At December 31, 1998, partners'
deficit was $14.8 million.
The Partnership has prepared cash flow projections for 1999 which indicate
that additional capital will be required during the latter part of 1999 to fund
its operations and meets its obligations. The Partnership believes that it has
several alternatives available to it to obtain the required capital, including
additional equity contributions from its partners, private placement financing
or an IPO. Management of the Partnership believes that cash and cash equivalents
at December 31, 1998, cash flows from operations, capital contributions from the
Limited Partner (see Note 8), and additional capital from the sources noted
above will enable the Partnership to fund its operations and meet its
obligations through at least December 31, 1999.
3. Significant Accounting Policies
USE OF ESTIMATES - The preparation of the accompanying 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 year. Actual results could differ from these estimates.
CASH EQUIVALENTS - The Partnership considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
INVENTORIES are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY AND EQUIPMENT are stated at cost. Provisions for depreciation are
based on estimated useful lives using the straight-line method. Useful lives
range from the shorter of five to ten years or the lease term for leasehold
improvements and two to seven years for machinery and equipment. Whenever events
indicate that the carrying values of property and equipment may not be
recoverable, the Partnership evaluates the carrying values of such
F-37
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
assets using estimated undiscounted cash flows. Management believes that, as of
December 31, 1998, the carrying value of such assets are appropriate.
INTANGIBLE ASSETS consists principally of goodwill which is being amortized
on a straight-line basis over seven years. Management periodically reassesses
the appropriateness of both the carrying value and remaining life of the
intangible assets by assessing recoverability based on forecasted operating cash
flows, on an undiscounted basis, and other factors. At December 31, 1998,
accumulated amortization was $1,940. Management believes that, as of December
31, 1998, the carrying value and remaining lives of such assets are appropriate.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the short-term nature of these instruments. The fair value of
long-term debt is based upon current interest rates for debt instruments with
comparable maturities and characteristics.
REVENUE RECOGNITION - The Partnership recognizes revenue from equipment sales
when the product has been shipped. Sales contracts do not permit the right of
return of product by the customer. Amounts received in excess of revenue
recognized are recorded as deferred revenue.
Software license revenues are recognized when software revenue recognition
criteria have been met, pursuant to Statement of Position ("SOP") 97-2, SOFTWARE
REVENUE RECOGNITION. Under SOP 97-2, license revenue is recognized when a
non-cancelable license agreement has been signed, the product has been shipped,
there are no uncertainties surrounding product acceptance, the fees are fixed
and determinable and collection is probable. The portion of revenues from new
license agreements which relate to the Partnership's obligations to provide
customer support are deferred and recognized ratably over the maintenance
period.
PRODUCT WARRANTY - The Partnership provides for the estimated costs to
fulfill customer warranty and other contractual obligations upon the recognition
of the related revenue. Such provisions are determined based upon estimates of
component failure rates. Actual warranty costs are charged against the accrual
when incurred.
INCOME TAXES are not included in the financial statements, since income taxes
are the responsibility of the partners.
STOCK-BASED COMPENSATION - Stock-based awards granted to employees are
accounted for using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards
("SFAS")No. 130, REPORTING COMPREHENSIVE INCOME, requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This statement also requires
that an entity classify items of other comprehensive income by their nature in
an annual financial statement. Comprehensive income includes net income and
other comprehensive income. Comprehensive loss was the same as net loss for
1998.
SEGMENT REPORTING - SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, establishes standards for the reporting of information
about operating segments, including related disclosures about products and
services, geographic areas and major customers, and requires selected
information about operating segments in interim financial statements. Segment
data has not been presented as management has determined that the Partnership
does not operate in more than one reportable segment.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued, which establishes
accounting and reporting standards for derivative instruments and hedging
activities which are required for fiscal years beginning after June, 15, 1999.
SFAS No. 133 requires that all derivative instruments be measured at fair value
and recognized in the balance sheet as either assets or liabilities. The
Partnership believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - Two customers comprised
substantially all of the Partnership's revenue from equipment sales in 1998. As
of December 31, 1998, 84% of the Partnership's trade accounts receivable were
derived from these two customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could have a material
adverse affect on the Partnership operating
F-38
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
results. Additionally, the Partnership relies on certain contract manufacturers
to perform substantially all of its manufacturing activities. The inability of
its contract manufacturers to fulfill their obligations to the Partnership could
adversely impact future results.
The Partnership performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Partnership
maintains allowances for potential losses, and has not incurred any significant
losses to date.
4. Acquisition of Telenetworks
In September 1997, NLC acquired of all of the outstanding capital stock of
Telenetworks, a specialized data protocol communications software company. The
purchase price was approximately $7 million in cash. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
assets acquired and liabilities assumed were recorded at their estimated fair
values as of the date of acquisition. The $6.9 million excess of the purchase
price over the net identifiable assets acquired was allocated to goodwill. In
January 1998, in conjunction with the formation of the Partnership, the Limited
Partner contributed the assets and liabilities of Telenetworks to the
Partnership.
In conjunction with the acquisition in September 1997, General Instrument
granted $7 million in restricted common stock of General Instrument to certain
Telenetworks employees. The restrictions on the common stock of General
Instrument lapsed over a 270-day period which ended on May 31, 1998. Since this
stock was contingently payable based on the individual's continued employment,
prepaid compensation of $7 million was recorded and amortized to compensation
expense over the life of the restrictions. Compensation expense of $3.9 million
was recorded in 1998.
In June 1998, the Partnership issued approximately $2.9 million in loans to
former Telenetworks employees due to certain tax liabilities associated with the
restricted stock, $2.5 million of which was outstanding at December 31, 1998 and
recorded in other receivables. The loans are due in April 1999, and are
collateralized by the common stock of General Instrument held by such employees.
5. Inventories
Inventories at December 31, 1998 consist of:
<TABLE>
<S> <C>
Raw materials $ 7,203
Work-in-process 1,157
Finished goods 12,310
---------
Total $ 20,670
---------
</TABLE>
The Partnership recorded a provision for inventory obsolescence of $5.8
million in 1998.
6. Property and Equipment - net
Property and equipment - net at December 31, 1998 consists of:
<TABLE>
<S> <C>
Leasehold improvements $ 4,457
Machinery and equipment 28,315
---------
Total 32,772
Less accumulated depreciation (11,214)
---------
Property and equipment - net $ 21,558
---------
</TABLE>
Machinery and equipment includes assets acquired under capital leases of $.9
million and accumulated depreciation of $.2 million at December 31, 1998.
7. Accrued Expenses
Accrued expenses at December 31, 1998 consists of:
<TABLE>
<S> <C>
Accrued payroll and related expenses $ 4,767
Other accrued expenses 5,930
---------
Total $ 10,697
---------
</TABLE>
8. Related Party Transactions with General Instrument
In January 1998, in conjunction with the formation of the Partnership, General
Instrument advanced $75 million to the Partnership in exchange for a note (the
"Note") bearing interest at a rate of 8%. The Note includes certain covenants
including limitations on borrowings, and is due in 2005. The Note provides for
the deferral of scheduled interest payments under certain circumstances.
Deferred interest payments bear interest at 10% and are not payable until
certain earnings levels, as defined, are met. The Partnership or the Successor
Corporation has an option, following an IPO of the Successor Corporation, to
repay the Note, together with accrued interest, in shares of stock of the
Successor Corporation. In 1998, the Partnership deferred interest payments of
$4.5 million. At December 31, 1998, the Partnership owed General Instrument
$80.9 million under this Note, including accrued interest of $5.9 million. The
fair value of the Note, computed based
F-39
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
upon current interest rates for debt instruments with comparable maturities and
characteristics, at December 31, 1998 was approximately $62.5 million.
General Instrument has agreed to provide an additional $34 million of capital
contributions in 1999, payable in installments through April 1999, in return for
an increase in its Partnership interest to 90.4%.
9. STOCK OPTION PLANS
Certain employees of the Partnership have been granted contingently issuable
stock options in NLC which expire in ten years. Such options are exercisable
only in the event of an initial public offering or a change in control of NLC
(the "Event"). Compensation expense will be recognized on the date of the Event
based on the difference between the exercise price of the options and the fair
value on the date of the Event.
In addition, during 1997, as part of a tandem stock option grant certain
employees of NLC were granted options for a total of 5.8 million shares of
common stock of NLC, or options for a total of 1.5 million shares of General
Instrument common stock (the "GI Options"). Under the terms of the grant, the
exercise of options on either NLC or General Instrument common stock results in
the cancellation of options in the other company's common stock at a ratio of
approximately 4 shares of NLC common stock to 1 share of General Instrument
common stock. The options have a ten year life and vest over three years.
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK BASED COMPENSATION, requires the disclosure of pro forma net income (loss)
using the fair value method.
The estimated fair value of an option grant is based, in part, on the
estimated term of the option. NLC options granted under the NLC Plan are not
exercisable unless an Event occurs. As a result, it is not practicable to
determine the expected term of NLC options and therefore it is not possible to
estimate the fair value of such options.
Had compensation cost been determined under SFAS 123 for the GI Options under
the tandem stock option grant, the Partnership's net loss would have been
changed to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss:
As reported $ (81,731)
Pro forma (84,494)
</TABLE>
10. Employee Benefit Plans
Employees of the Partnership, who meet certain eligibility requirements, are
able to participate in the General Instrument 401(k) Plan. Employees may
contribute up to 10% of their annual compensation, subject to the legal maximum.
The Partnership, through General Instrument, contributes an amount equal to 50%
of the first 6% of the employee's salary that the employee contributes. The
Partnership's expense related to the 401(k) Plan was $.5 million for the year
ended December 31, 1998.
The Partnership's employees participate in General Instrument's Pension Plan,
Post Retirement Benefit Plan and Post Employment Benefit Plan. The Partnership
expense related to these plans was $.4 million for the year ended December 31,
1998.
11. Obligations Under Capital Leases
The Partnership leases certain equipment under capital leases. Leases expire at
various dates from 1999 to 2001 and all contain purchase options.
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999 $ 396
2000 310
2001 25
---------
Total 731
Less current portion (396)
---------
Total long-term capital lease obligations $ 335
---------
</TABLE>
12. Commitments and Contingencies
The Partnership leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 1999 to 2006 and certain facilities
leases have renewal options.
During 1998 the Partnership entered into an operating lease for one of its
buildings which expires in 2004. The lease provides for a purchase option but
does not allow for renewal options. General Instrument has guaranteed a residual
value to the lessor of approximately 82% of the underlying mortgage and equity
investment. The table of future minimum operating lease payments below excludes
any payments related to the residual guarantee. Rental expense recorded under
the lease in 1998 was $.8 million.
F-40
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999 $ 3,154
2000 2,943
2001 2,357
2002 2,181
2003 2,098
Thereafter 2,548
---------
Total $ 15,281
---------
</TABLE>
Rent expense was $3.5 million for the year ended December 31, 1998.
The Partnership has a commitment with a supplier to purchase approximately
$2.1 million of products in the 12 months following the release of the product
and approximately $4.3 million in the subsequent 12 months. In addition, the
Partnership has a commitment to purchase $2.4 million of product prior to
September 2002 with a minimum purchase of $.5 million each 12-month period
following the release of the product. The Partnership expects the release of
these products to occur during the second quarter of 1999. The Partnership has a
commitment to another supplier to purchase approximately $14.7 million of
products prior to December 2001.
On May 5, 1998, the action entitled BroadBand Technologies, Inc., v. General
Instrument Corp., pending in the United States District Court for the Eastern
District of North Carolina, was dimissed with prejudice. In addition, on May 4,
1998, the action entitled Next Level Communications, Inc. v. BroadBand
Technologies, Inc., was dismissed with prejudice. These dismissals were entered
pursuant to a settlement agreement under which, among other things, the
Partnership has paid BroadBand Technologies ("BBT") $5 million, which was
expensed in 1998, and BBT and the Partnership have entered into a perpetual
cross-license of patents applied for or issued currently or during the next five
years.
On March 5, 1998, an action entitled DSC Communications Corporation and DSC
Technologies Corporation v. Next Level Communications, L.P., KK Manager, LLC,
General Instrument Corporation and Spencer Trask & Co., Inc. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC alleged that in connection with the
formation of the Partnership and the transfer of the switched digital video
technology, the Partnership and KK Manager LLC misappropriated DSC's trade
secrets; that General Instrument improperly disclosed trade secrets when it
conveyed such technology to the Partnership; and that Spencer Trask & Co.
conspired to misappopriate DSC's trade secrets. The plaintiffs sought actual
damages for the defendants' purported unjust enrichment, disgorgement of
consideration, exemplary damages and attorney's fees, all in unspecified
amounts. In April 1998, General Instrument and the other defendants filed an
action in the United District Court for the Eastern District of Texas,
requesting that the federal court preliminarily and permanently enjoin DSC from
prosecuting the Delaware Action because by pursuing such action, DSC effectively
was trying to circumvent and relitigate the Texas federal court's November 1997
judgment in a previous lawsuit invloving DSC. On May 14, 1998, the United States
District Court for the Eastern District of Texas granted a preliminary
injunction preventing DSC from proceeding with the Delaware Action. That
injunction order is now on appeal to the United States Court of Appeal for the
Fifth Circuit where it has been briefed and awaits determination. On July 6,
1998, the defendants filed a motion for summary judgment with the Texas Court
requesting a permanent injunction preventing DSC from proceeding with this
litigation. As a result of the preliminary injunction, the Delaware Action has
been stayed in its entirety. The Partnership intends to vigorously contest this
action.
While the ultimate outcome of these matters described above cannot be
determined, management, KK Partners LLC and General Instrument intend to
vigorously contest these actions and do not believe that the final disposition
of these matters will have a material adverse effect on the financial statements
taken as a whole.
F-41
<PAGE>
Exhibit 10.12
STOCK PURCHASE AGREEMENT
by and between
SONY CORPORATION OF AMERICA
and
GENERAL INSTRUMENT CORPORATION
November 30, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
ARTICLE I TERMS OF PURCHASE AND SALE.....................................1
1.1 Purchase and Sale of Shares........................................1
1.2 The Closing........................................................1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................2
2.1 Corporate Organization.............................................2
2.2 Capitalization.....................................................2
2.3 Authority; No Violation............................................2
2.4 Consents and Approvals.............................................3
2.5 SEC Reports; Financial Statements..................................4
2.6 Compliance with Laws...............................................4
2.7 Absence of Certain Changes or Events...............................4
2.8 Legal Proceedings..................................................4
2.9 Brokers and Finders................................................5
2.10 No Other Representations or Warranties............................5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER..................5
3.1 Corporate Organization.............................................5
3.2 Authority; No Violation............................................5
3.3 Consents and Approvals.............................................6
3.4 Investment Intent..................................................6
3.5 Financial Ability..................................................6
3.6 Compliance with Laws; Legal Proceedings............................6
3.7 Available Funds....................................................7
3.8 Brokers............................................................7
ARTICLE IV PRE-CLOSING COVENANTS.........................................7
4.1 Undertakings.......................................................7
4.2 Access.............................................................7
4.3 Share Listing......................................................7
ARTICLE V ADDITIONAL AGREEMENTS..........................................8
5.1 Restrictions on Transfer; Right of First Offer.....................8
5.2 Rights in the Event of a Public Offering; Closing Matters, etc....11
5.3 Standstill........................................................13
5.4 Registration Rights...............................................13
(a) Demand Registration Rights........................................13
(b) "Piggyback" Registrations.........................................15
<PAGE>
(c) The Company's Obligations in Registration.........................17
(d) Payment of Registration Expenses..................................21
(e) Information from Holders..........................................21
(f) Indemnification...................................................21
(g) Exchange of Certificates..........................................23
(h) Obligations of the Holders........................................24
(i) Underwritten Registration.........................................24
(j) Exchange Act Compliance...........................................25
5.5 Restrictions on Transferability of Shares.........................25
(a) Restrictive Legend; Purchaser's Representation....................25
(b) Statement of Intention to Transfer; Opinion of Counsel............26
(c) Termination of Restrictions.......................................26
5.6 No Public Announcement............................................27
5.7 Confidentiality...................................................27
ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS........................28
6.1 Representations, Warranties and Covenants of the Company..........28
6.2 No Proceedings....................................................28
6.3 Hart-Scott-Rodino Waiting Periods.................................28
6.4 Share Listing.....................................................28
6.5 Joint Development Agreement.......................................29
ARTICLE VII CONDITIONS TO THE COMPANY'S OBLIGATIONS.....................29
7.1 Representations, Warranties and Covenants of Purchaser............29
7.2 No Proceedings....................................................29
7.3 Hart-Scott-Rodino Waiting Periods.................................29
7.4 Stockholder Approval..............................................29
ARTICLE VIII TERMINATION PRIOR TO CLOSING...............................30
8.1 Termination of Agreement..........................................30
8.2 Effect of Termination.............................................30
ARTICLE IX DEFINITIONS....................................................30
ARTICLE X SURVIVAL; INDEMNIFICATION......................................33
10.1 Survival.........................................................33
10.2 Indemnification by Purchaser.....................................34
10.3 Indemnification by The Company...................................34
10.4 Indemnification Procedures.......................................34
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<PAGE>
ARTICLE XI MISCELLANEOUS................................................35
11.1 Entire Agreement.................................................35
11.2 Successors and Assigns...........................................36
11.3 Assignment.......................................................36
11.4 Counterparts.....................................................36
11.5 Headings.........................................................36
11.6 No Waiver........................................................36
11.7 Fees and Expenses................................................36
11.8 Notices..........................................................36
11.9 Amendments.......................................................37
11.10 Governing Law...................................................37
11.11 Consent to Jurisdiction.........................................37
11.12 Specific Performance............................................38
-4-
<PAGE>
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, dated as of this 30th day of November 1998, by and
between General Instrument Corporation, a Delaware corporation (the "Company"),
and Sony Corporation of America, a New York corporation ("Purchaser").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Purchaser, and/or its direct or indirect Subsidiary, and the
Company are concurrently entering into a Joint Development and Licensing
Agreement (the "Joint Development Agreement") providing for certain joint
activities to be undertaken by Purchaser and the Company with respect to the
development of advanced digital television technologies; and
WHEREAS, the Company desires to sell to Purchaser, and Purchaser desires
to buy from the Company, an aggregate of 7,500,000 newly issued shares of common
stock, par value $.01 per share of the Company (the "Common Stock"), together
with the associated preferred share purchase rights (the "Rights" and, such
shares of Common Stock, together with the associated Rights, the "Shares");
NOW, THEREFORE, in consideration of the premises and mutual
representations, warranties, covenants and agreements contained herein, and upon
the terms and subject to the conditions hereinafter set forth, the parties do
hereby agree as follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 PURCHASE AND SALE OF SHARES.
On the Closing Date (as defined in Section 1.2), subject to the terms
and conditions set forth herein, the Company shall sell to Purchaser, and
Purchaser shall purchase from the Company, the Shares for the Purchase Price (as
defined below). At the Closing (as defined in Section 1.2), the Company shall
deliver to Purchaser certificates representing the Shares registered in the name
of the Purchaser, and Purchaser shall deliver to the Company the amount of
$187,500,000 in cash (the "Purchase Price"), by wire transfer of immediately
available funds to the account designated by the Company in writing to Purchaser
at least two Business Days prior to the Closing Date.
1.2 THE CLOSING.
The purchase and sale of the Shares (the "Closing") shall take place at
the offices of Fried, Frank, Harris, Shriver and Jacobson, One New York Plaza,
New York, New York
-5-
<PAGE>
10004 at 10:00 A.M. on the second Business Day following the date on which all
applicable waiting periods under the HSR Act shall have expired, or at such
other time, place and/or date as the parties may mutually agree (the "Closing
Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as follows:
2.1 CORPORATE ORGANIZATION.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not, individually
or in the aggregate, be reasonably expected to have a Material Adverse Effect on
the Company and its Subsidiaries, taken as a whole. True and complete copies of
the amended and restated certificate of incorporation and by-laws of the
Company, in effect as of the date of this Agreement, have previously been made
available by the Company to Purchaser.
2.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 400,000,000
shares of Common Stock and 20,000,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock"), 400,000 shares of which are designated Series
A Junior Participating Preferred Stock (the "Series A Preferred Stock"). As of
October 30, 1998, 167,391,015 shares of Common Stock were issued and
outstanding, 44,360,925 shares of Common Stock were reserved for issuance
pursuant to existing warrant agreements and stock option plans, 6,278,424 shares
of Common Stock were held in treasury and no shares of Preferred Stock were
outstanding. All of the issued and outstanding shares of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof. Except for (i) the Warrant Issuance Agreement, dated as of December 16,
1997, between the Company and NDTC (the "NDTC Warrant Issuance Agreement"), (ii)
the various warrant issuance agreements between the Company and the MSOs (the
"MSO Warrant Issuance Agreements"), (iii) the Company's employee benefits plans
and the options and awards granted thereunder, and (iv) the Company's Rights
Agreement, dated as of June 12, 1997, as amended, or as contemplated by this
Agreement, the Company is not bound by any outstanding subscriptions, options,
warrants, stock appreciation rights or agreements of any character calling for
the purchase or issuance of any equity securities of the Company or any debt
securities of the Company convertible into, or exchangeable for, any equity
securities of the Company.
(b) There are no "Significant Subsidiaries" of the Company (as defined
in Regulation S-X under the federal securities laws of the United States).
-6-
<PAGE>
2.3 AUTHORITY; NO VIOLATION.
(a) The Company has full corporate power and authority to execute and
deliver this Agreement, to issue and deliver the Shares and to perform its other
obligations hereunder, and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement, the issuance and delivery of the
Shares and the performance of the Company's other obligations hereunder and the
consummation of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of the Company. No other corporate
proceedings on the part of the Company are necessary under Delaware law to
approve this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by the Company
and (assuming due authorization, execution and delivery by Purchaser)
constitutes a valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its terms except to the extent that (i)
its enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditor's rights generally and by general equitable principles and (ii) rights
to indemnity or contribution contained herein may be limited by United States
federal or state laws, regulations or public policy.
(b) The Shares, when issued and delivered by the Company pursuant to
this Agreement, against payment of the consideration set forth herein, will be
validly issued, fully paid and non-assessable and the issuance of the Shares is
not subject to preemptive or other similar rights of any securityholder of the
Company.
(c) The execution, delivery and performance of this Agreement by the
Company do not, and the issuance and delivery of the Shares and the consummation
by the Company of the transactions contemplated hereby will not (i) constitute a
breach or violation of, or a default under, the certificate of incorporation or
by-laws of the Company, (ii) constitute a breach or violation of, or a default
under, or give rise to any Lien, any acceleration of remedies or any right of
termination under, any law, any rule or regulation or any judgment, decree,
order, governmental permit or license, or agreement, indenture or instrument of
the Company or to which the Company or its properties is subject or bound, or
(iii) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement, indenture or
instrument, except in the case of (ii) and (iii) above for such breaches,
violations, defaults, Liens, accelerations, rights, consents or approvals as
would not, individually or in the aggregate, be reasonably expected to result in
a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole.
2.4 CONSENTS AND APPROVALS.
Except pursuant to the provisions of the HSR Act, the Securities Act,
the Exchange Act, state securities laws, and the rules of the New York Stock
Exchange, Inc. ("NYSE"), no notice to, filing with, authorization of, exemption
by, or consent or approval of, any regulatory authority on the part of the
Company is necessary for the consummation by the Company of the transactions
contemplated by this Agreement, except where the failure to provide such notice,
make such filing, or obtain such authorization, exemption, consent or approval
would not, individually or in the aggregate, be reasonably expected to result in
a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole.
-7-
<PAGE>
2.5 SEC REPORTS; FINANCIAL STATEMENTS
(a) Since March 31, 1998, the Company has filed all forms, reports,
statements and other documents (such filings by the Company are collectively
referred to as the "SEC Reports"), required to be filed by it with the
Commission. The SEC Reports, including all SEC Reports filed after the date of
this Agreement and prior to the Closing Date, (i) were or will be prepared in
all material respects in accordance with the requirements of the Securities Act
and the Exchange Act, as the case may be, and the rules and regulations of the
Commission thereunder applicable to such SEC Reports at the time of filing
thereof and (ii) did not at the time they were filed, or will not at the time
they are filed, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the SEC Reports, including all SEC
Reports filed after the date of this Agreement and prior to the Closing Date (i)
have been or will be prepared in accordance with the published rules and
regulations of the Commission and generally accepted accounting principles
applicable at the time of filing thereof, applied on a consistent basis
throughout the periods involved (except (A) to the extent required by changes in
generally accepted accounting principles and (B) as may be indicated in the
notes thereto) and (ii) fairly present, or will fairly present, in all material
respects the consolidated financial position of the Company and its consolidated
Subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated (including reasonable
estimates of normal and recurring year-end adjustments), except that (x) any
unaudited interim financial statements were or will be subject to normal and
recurring year-end adjustments, and (y) any pro forma financial statements
contained in such consolidated financial statements are not necessarily
indicative of the consolidated financial position of the Company and its
consolidated Subsidiaries, as of the respective dates thereof and the
consolidated results of operations and cash flows for the periods indicated.
2.6 COMPLIANCE WITH LAWS.
The Company is in compliance with all applicable laws, regulations,
orders, judgments and decrees, except where the failure to so comply would not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole.
2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since March 31, 1998, except as set forth in the SEC Reports or as set
forth in the Company's press releases, no event has occurred which has had,
individually or in the aggregate, a Material Adverse Effect on the Company and
its Subsidiaries, taken as a whole.
2.8 LEGAL PROCEEDINGS.
As of the date hereof, except as set forth in the SEC Reports or as
disclosed to Purchaser, the Company is not a party to any, and there are no
pending or, to the Company's knowledge, threatened, legal, administrative, or
other proceedings, claims, actions or
-8-
<PAGE>
governmental or regulatory investigations of any nature against the Company or
any of its Subsidiaries which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole.
2.9 BROKERS AND FINDERS.
Except for the Company's retention of Merrill Lynch, Pierce, Fenner &
Smith, Incorporated and Lazard Freres & Co., LLC (whose fees will be paid by the
Company), the Company and its affiliates have not employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
2.10 NO OTHER REPRESENTATIONS OR WARRANTIES.
Except for the representations and warranties contained in this Article
II, none of the Company or any other Person makes any express or implied
representation or warranty with respect to the subject matter of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Company as follows:
3.1 CORPORATE ORGANIZATION
Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Purchaser has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed or qualified would not, individually or in the aggregate, be
reasonably expected to materially adversely affect the ability of Purchaser to
consummate the transactions contemplated by this Agreement.
3.2 AUTHORITY; NO VIOLATION.
(a) Purchaser has full corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder, and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement, the performance of Purchaser's obligations hereunder, and the
consummation of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Purchaser. No other corporate proceedings
on the part of Purchaser and no stockholder votes are necessary to approve this
Agreement and to consummate the transaction contemplated hereby. This Agreement
has been duly and validly executed and delivered by Purchaser and (assuming due
authorization, execution and delivery by the Company) constitutes a valid and
legally binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms except to the extent that (i)
-9-
<PAGE>
its enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditor's rights generally and by general equitable principles and (ii) rights
to indemnity or contribution contained herein may be limited by United States
federal or state laws, regulations or public policy.
(b) The execution, delivery and performance of this Agreement by
Purchaser do not, and the consummation by Purchaser of the transactions
contemplated hereby, will not, (i) constitute a breach or violation of, or
default under the certificate of incorporation or by-laws of Purchaser; (ii)
constitute a breach or violation of, or a default rise to any Lien, any
acceleration of remedies or termination under, any law, rule or regulation or
decree, order, governmental permit or license, or indenture or instrument of
Purchaser or to which Purchaser or its properties are subject or bound, or (iii)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument except in the case of (ii) and (iii) above for such breaches,
violations, defaults, Liens, accelerations, rights, consents or approvals as
would not, individually or in the aggregate, be reasonably expected to
materially adversely affect the ability of Purchaser to consummate the
transactions contemplated by this Agreement.
3.3 CONSENTS AND APPROVALS.
Except pursuant to the provisions of the HSR Act, no notice to, filing
with, authorization of, exemption by, or consent or approval of, any regulatory
authority is necessary for consummation by Purchaser of the transactions
contemplated hereby, except where the failure to provide such notice, make such
filing, or obtain such authorization, exemption, consent or approval would not,
individually or in the aggregate, be reasonably expected to materially adversely
affect the ability of Purchaser to consummate the transactions contemplated by
this Agreement.
3.4 INVESTMENT INTENT.
Purchaser acknowledges that the Shares have not been registered under
the Securities Act, or under any state or foreign securities laws. Purchaser is
not an underwriter, as such term is defined under the Securities Act, and is
purchasing the Shares solely for investment with no present intention to
distribute any of the Shares to any person, and Purchaser will not sell or
otherwise dispose of any of the Shares, except in compliance with the
registration requirements or exemption provisions under the Securities Act and
the rules and regulations promulgated thereunder, and any other applicable state
or federal securities laws. Purchaser is acquiring the Shares solely for its own
account and not with a view to a sale or distribution thereof in violation of
any state or federal securities laws. Purchaser acknowledges that it has
received, or has had access to, all information which it considers necessary or
advisable to enable it to make a decision concerning its purchase of the Shares,
provided that the foregoing access shall not limit or otherwise affect the
rights or remedies of Purchaser hereunder with respect to the breach of any
representations, warranties, covenants or agreements of the Company contained
herein.
3.5 FINANCIAL ABILITY.
-10-
<PAGE>
Purchaser has the financial capacity to perform all of its obligations
under this Agreement.
3.6 COMPLIANCE WITH LAWS; LEGAL PROCEEDINGS.
Purchaser and its Subsidiaries are in compliance with all applicable
laws, regulations, orders, judgments and decrees, except where the failure to so
comply would not materially adversely affect the ability of Purchaser to
consummate the transactions contemplated by this Agreement. Purchaser is not a
party to any, and there are no pending, or to the best of Purchaser's knowledge
threatened, legal, administrative or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Purchaser or any
of its Affiliates, which, individually or in the aggregate, would materially
adversely affect the ability of Purchaser to consummate the transactions
contemplated by this Agreement.
3.7 AVAILABLE FUNDS.
At the Closing, Purchaser will have available to it all funds necessary
to satisfy all of its obligations hereunder and in connection with the
transactions contemplated hereby on the terms and conditions set forth herein.
3.8 BROKERS.
Other than The Blackstone Group, L.P. (whose fees will be paid by
Purchaser), Purchaser and its Affiliates have not employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
ARTICLE IV
PRE-CLOSING COVENANTS
The parties hereto hereby covenant and agree as follows:
4.1 UNDERTAKINGS.
Each of the parties hereto agrees to use its reasonable best efforts
promptly to take or cause to be taken all action and promptly to do or cause to
be done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the Closing of the transactions
contemplated by this Agreement. Without limiting the foregoing, Purchaser and
the Company (a) will use their reasonable best efforts to make all filings,
including filings under the HSR Act, and obtain all other regulatory approvals
necessary or, in the opinion of Purchaser or the Company, advisable in order to
permit the consummation of the transactions contemplated hereby and (b) will not
take actions that could reasonably be expected to have the effect of delaying or
hindering the Closing of the transactions contemplated hereby. In no event,
however, shall the Company or Purchaser be obligated to pay any money to any
Person or to offer or grant other financial or other accommodations to any
Person in connection with its obligations under this Section 4.1. Each party
shall execute and deliver both before and after the Closing such further
certificates, agreements and other documents and take such other
-11-
<PAGE>
actions as the other party may reasonably request to consummate or implement the
transactions contemplated hereby or to evidence such events or matters.
4.2 ACCESS.
Subject to compliance by Purchaser with the provisions of Section 5.7,
from the date of this Agreement to the Closing Date, the Company shall, and
shall cause its Subsidiaries to, afford to Purchaser and its representatives
reasonable access, upon reasonable notice and request and in such manner as will
not unreasonably interfere with the conduct of the Company's and its
Subsidiaries' business, to such public financial and other public information
regarding the Company and its Subsidiaries as Purchaser reasonably considers
necessary or advisable to allow it to make a decision concerning its purchase of
the Shares.
4.3 SHARE LISTING.
As soon as practicable but in any event prior to the Closing Date, the
Company shall use its reasonable best efforts to cause the Shares to be listed
for trading on the NYSE or such other exchange or quotation system on which the
Common Stock is then listed or traded.
ARTICLE V
ADDITIONAL AGREEMENTS
The Company, on the one hand, and Purchaser, on the other hand, hereby
covenant to and agree with one another as follows:
5.1 RESTRICTIONS ON TRANSFER; RIGHT OF FIRST OFFER.
(a) Notwithstanding any other provisions of this Agreement, Purchaser
and any Permitted Transferee (each, a "Holder") shall not sell, transfer,
pledge, hypothecate, assign or otherwise dispose of (a "Transfer") any Shares at
any time prior to the date which is 540 days after the Closing Date. During the
period between the 540th day after the Closing Date and the 905th day after the
Closing Date (such period being referred to as the "Restricted Period"), a
Holder shall not Transfer any Shares (other than pursuant to the provisions of
Section 5.2) without first complying with the provisions of this Section 5.1.
(b) If, during the Restricted Period, a Holder shall receive a bona fide
offer in writing (an "Offer") to acquire all or part of the Shares (the "First
Offer Shares"), which offer such Holder proposes to accept, such Holder shall
deliver to the Company a notice (a "Notice of Sale") containing a copy of the
Offer, and setting forth the identity of the proposed purchaser and an offer to
sell the First Offer Shares to the Company on the following terms: (i) if the
Offer contemplates a purchase of the First Offer Shares by the proposed
purchaser for consideration
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consisting solely of cash, then the Holder'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 Offer, and (ii) if the
Offer contemplates an acquisition of the First Offer Shares by the proposed
purchaser for consideration any portion of which is not cash, then the 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 (d) below) specified in, and otherwise on
the terms and conditions contained in, the Offer. The Notice of Sale shall
specify the price at which the First Offer Shares are offered, as provided in
the preceding sentence. If the Company desires to accept the offer set forth in
a Notice of Sale, the Company shall, within 30 days of receipt of such Notice of
Sale, notify the Holder 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 5.2.
(c) If (i) the Company 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 5.2(d)(iii) for any reason
other than a breach by the Holder of any of its covenants, representations or
warranties that are a condition to consummation of such purchase, then the
Company 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 Holder
shall have the right, at any time during the 30-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 5.2(d)(iii), as
applicable, to enter into a binding agreement to sell all of the First Offer
Shares to the proposed purchaser on terms and conditions no less favorable in
the aggregate to the Holder than those set forth in the Offer, and thereafter
(within the period specified below in this paragraph (c)) to sell all of the
First Offer Shares to the proposed purchaser pursuant to such agreement. If the
Holder does not enter into such an agreement during such 30-day period, or does
not close the sale thereunder within 60 days after execution of such an
agreement (subject to extension for a maximum of 180 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 Shares. Any First Offer Shares transferred to a Person other
than the Company in compliance with the provisions of this Section 5.1 shall not
thereafter be subject to the provisions of this Agreement.
(d) Before submitting a Notice of Sale pursuant to paragraph (b) in
response to an 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 proposed purchaser for consideration any portion of which is not cash,
the Holder and the Company shall cause (A) if the 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 Offer contemplates an acquisition of the First Offer
Shares by the proposed purchaser 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 (d):
(i) The Holder shall deliver to the Company a notice stating
that
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the Holder intends to deliver a Notice of Sale to which this paragraph
(d) applies and identifying an appraiser (the "First Appraiser") who has
been retained by the Holder to allocate the total consideration
specified in the Offer or to conduct an appraisal of the noncash
consideration pursuant to this paragraph (d). Within ten business days
after its receipt of the Holder's notice pursuant to the preceding
sentence, the Company shall send a notice to the Holder identifying a
second appraiser (the "Second Appraiser") who shall be retained by the
Company to make such allocation or conduct such appraisal, as
applicable, pursuant to this paragraph (d).
(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 30 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 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 (b),
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 Holder
and the Company 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 Holder and the Company 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 (d) 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
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<PAGE>
proposed to be sold pursuant to the 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 Holder, of the Second Appraiser shall be
borne by the Company and of the Third Appraiser shall be borne equally
by the Holder and the Company.
(v) In determining the fair market value of the noncash
consideration, each appraiser retained pursuant to this paragraph (d)
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.
(e) Notwithstanding any provision of paragraphs (a), (b), (c) and (d) of
this Section 5.1, Transfers of Shares may be made (i) at any time to a Permitted
Transferee or (ii) at any time during the Restricted Period in open market
transactions through a broker.
(f) During the term of the Joint Development Agreement (whether during
or after the Restricted Period), a Holder shall not knowingly Transfer Shares to
any Person who is a competitor of the Company, or a Person controlled by, under
common control with, or who controls, a competitor of the Company, unless such
Transfer is made pursuant to a tender offer or exchange offer which is
recommended by the Board of Directors of the Company.
(g) The limitations provided in this Section 5.1 shall terminate (i)
upon termination of the Joint Development Agreement, except if such termination
is the result of a breach by the Purchaser of any of its representations,
warranties, agreements or covenants set forth in the Joint Development Agreement
or (ii) other than the limitations set forth in paragraph (f) above (which shall
not terminate), upon the sale by the Company of securities representing 10% or
more of the voting power of its then outstanding voting securities to a
competitor of Purchaser, or a Person controlled by, under common control with,
or who controls, a competitor of Purchaser, in each case only if the competitor
is primarily engaged in the consumer electronics business.
5.2 RIGHTS IN THE EVENT OF A PUBLIC OFFERING; CLOSING MATTERS, ETC.
(a) If, during the Restricted Period, any Holder desires to sell any
Shares in a registered public offering for cash (an "Offering"), the Holder
shall first offer such shares for sale to the Company in accordance with the
following provisions.
(b) If the Holder intends to cause the Company to register Shares
pursuant to the terms of this Agreement, the Holder shall deliver a notice to
the Company (in addition to any notice required pursuant to Section 5.4 of this
Agreement) specifying (A) the number of the Shares the Holder 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 the Company at the price determined
below (an "Offering Notice"). If the Company desires to purchase the Offered
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<PAGE>
Shares, it shall so notify the Holder in writing within 10 days from the
receipt of such Offering Notice (a "Reply Notice"). If, by its Reply Notice, the
Company accepts the offer of the Holder, such Reply Notice shall constitute an
agreement binding on the Company and the Holder 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 the Company does not accept the offer of the Holder pursuant to
the foregoing provisions of this Section 5.2 or the purchase of the Offered
Shares is not consummated within the period set forth in Section 5.2(d)(iii) for
any reason other than a breach by the Holder of any of its covenants,
representations or warranties that is a condition to consummation of such
purchase, then the Company 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 Holder 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 the Company to comply with its covenants in Section 5.4 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 the Company in compliance with the provisions of this Section 5.2
shall not thereafter be subject to the provisions of this Agreement.
(d) Any purchase by the Company of Shares pursuant to Section 5.1 or
Section 5.2 shall be subject to the following additional terms and conditions:
(i) The Holder shall represent and warrant that the Company will
receive good and valid title to the Shares, free and clear of all Liens,
of any nature whatsoever except for governmental and third party
approvals required for transfers of shares of the 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 the Company or the Holder
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, the Company;
(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 Holder
contemplated by clause (i) of this paragraph (d) shall be true
and correct at the closing
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<PAGE>
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 Shares shall take place at the
principal executive offices of the Company at 10:00 a.m. local time on a
Business Day selected by the Company, provided that such closing shall
occur as promptly as practicable, and in any event within 60 days after
the acceptance of the applicable offer, subject to extension for a
maximum of 30 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 immediately
available funds or by certified or cashier's check drawn to the order of
the Holder, as specified by the Holder.
(e) The Holder and the Company shall each use commercially reasonable
efforts to cooperate with the other in connection with the Holder's efforts to
transfer any interest in the Shares in accordance with the provisions of
Sections 5.1 and 5.2, 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 Holder, 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 Holder and
the Company in order to effect the contemplated transfers. Subject to the other
provisions of this Agreement, neither the Holder nor the Company shall take any
action to delay, impair or impede the receipt of any required consents,
approvals or authorizations. "Commercially reasonable efforts" as used in this
Section 5.2 shall not require any party to undertake extraordinary or
unreasonable measures to obtain any consents, approvals or other authorizations.
5.3 STANDSTILL.
Purchaser agrees that (except as contemplated hereby and by the Joint
Development Agreement), from the date of this Agreement until the second
anniversary of the Closing Date, Purchaser shall not, and shall cause each other
member of the Purchaser Group not to, propose to the Company or its stockholders
or any other Person any transaction between Purchaser or its Affiliates and the
Company or involving any of the Company's capital stock, unless the Company
shall have requested in writing that such member of the Purchaser Group make
such proposal, and that Purchaser shall not, and shall cause each other member
of the Purchaser Group not to, acquire, or assist, advise or encourage any other
Persons in acquiring, directly or indirectly, control of the Company or any of
its capital stock, businesses or assets unless the Company shall have consented
in advance in writing to such action; provided, however, that notwithstanding
anything to the contrary contained herein, Purchaser may (i) propose a
transaction to the Company (whether or not Purchaser is invited in writing to do
so) in conjunction with any or all of Forstmann, Little & Co.,
Tele-Communications, Inc. and/or any of their respective Affiliates (each such
person a "Permitted Person"), (ii) directly or indirectly acquire in conjunction
with any Permitted Person, or assist, advise or encourage any Permitted Person
to acquire, control of the Company or any of its capital stock, businesses or
assets or (iii)
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<PAGE>
acquire any capital stock of the Company owned directly or indirectly by any
Permitted Person. Purchaser also agrees that neither it nor any other member of
the Purchaser Group will seek a waiver of the provisions of this Section 5.3 and
that the Company shall be entitled to equitable relief, including injunction, in
the event of any breach of the provisions of this Section 5.3 and that neither
Purchaser nor any member of the Purchaser Group shall oppose the granting of
such relief.
5.4 REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS.
(i) At any time and from time to time after the date hereof, any
Holder shall have the right to request the Company to effect the
registration under the Securities Act of all or part of its Registrable
Securities; PROVIDED, that so long as Purchaser shall hold any
Registrable Securities, no Holder shall have the right to request any
such registration without the written consent of Purchaser. Holders
shall exercise such right by delivering to the Company 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 the
Company of any such request, the Company 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:
(1) all Registrable Securities that the Company has been
requested to register pursuant to clause (i) of this Section
5.4(a); and
(2) all other Registrable Securities that Holders have,
within 20 days after the Company has given such notice,
requested the Company 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
5.4(i)(A) hereof) of the public offering of any Registrable Securities
to be effected pursuant to a registration statement filed pursuant to
clause (i) of this Section 5.4(a) shall advise the Company 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 the Company
that are not Registrable Securities) exceeds the number that can be sold
in such offering without having an adverse effect on such offering, the
Company will include in such registration to the extent of the number
that the Company is so advised can be sold in such offering:
(A) FIRST, Registrable Securities requested to be
included in such registration by Purchaser and its Affiliates,
pro rata based on the number of shares to be included;
(B) SECOND, Registrable Securities requested to be
included in such
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<PAGE>
registration by Holders other than Purchaser and its Affiliates,
pro rata based on the number of shares to be included; and
(C) THIRD, other securities of the Company proposed to
be included pursuant to Section 5.4(a)(viii) in such
registration, in accordance with the priorities, if any, then
existing among the Company and the holders of such other
securities.
(iii) The Holders requesting inclusion in a registration
statement under this Section 5.4(a) may withdraw from any requested
registration pursuant to this Section 5.4(a) by giving written notice to
the Company 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 5.4(a), unless (A)
such Holders pay the Company for that portion of its out-of-pocket
expenses relating to the inclusion of Registrable Securities owned by
such Holder in such registration, (B) the registration statement had not
been filed within 90 days of the initial request for registration
pursuant to Section 5.4(a)(i) or had not become effective within 120
days of such request or (C) the Company otherwise failed to comply with
its obligations under this Section 5.4 with respect to such
registration.
(iv) The Company shall not be required to effect more than a
total of two effective registrations under this Section 5.4(a).
Notwithstanding the foregoing, if all 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 5.4(c)(vii), (viii) or (ix), then such
registration shall not be counted as an effective registration for
purposes of this Section 5.4(a)(iv).
(v) The Company shall not be required to effect a registration
pursuant to this Section 5.4(a) unless the offering includes Registrable
Securities having a Fair Market Value of at least $10 million in the
aggregate.
(vii) The Company shall not be required to effect any
registration within six (6) months of the effective date of any other
registration under this Section 5.4(a).
(viii) If the managing underwriter in an underwritten offering
has not limited the number of Registrable Securities to be underwritten,
then the Company may include securities for its own account or for the
account of others in such registration statement and underwriting if (x)
the managing underwriter so agrees, (y) 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, and (z) the managing underwriter advises the Holders in writing
that, in its judgment, the inclusion of such securities in such
registration statement should not have a significant adverse effect on
the price of the Registrable Securities offered or the timing of the
offering. The inclusion of such shares shall be on the same terms as the
registration of
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<PAGE>
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 the Company at any time proposes to
register any of its securities under the Securities Act (other than pursuant to
Section 5.4(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, the
Company will at each such time give prompt notice to the Holders of its
intention to do so setting forth the date on which the Company 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 any Holder
given to the Company not less than 10 days prior to the proposed filing date of
such registration statement set forth in such notice, the Company will use
reasonable best efforts to cause each of the Registrable Securities that the
Company has been requested to register by such Holder 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 the Company 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 the Company'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 price, timing or
distribution of the entire offering, the Company will include in such
registration to the extent of the number which the Company is so advised can be
sold in such offering securities determined as follows:
(i) if such registration as initially proposed by the Company
was solely a primary registration of its securities:
(A) FIRST, the securities proposed by the Company 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
Common Stock on the basis of the number of Registrable
Securities and other shares of Common Stock requested to be
included by each such holder, and
(C) THIRD, any other securities of the Company proposed
to be included in such registration statement in accordance with
the provisions and relative priorities, if any, then existing
among the holders of such securities, and
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(ii) if such registration as initially proposed by the Company
was in whole or in part requested by holders of securities of the
Company (the "Requesting Holders"), other than Holders of Registrable
Securities, pursuant to demand registration rights,
(A) FIRST, such securities held by the Requesting
Holders, pro rata among the Requesting Holders, on the basis
agreed upon by such holders and the Company,
(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
Common Stock on the basis of the number of Registrable
Securities and other shares of Common Stock requested to be
included by each such holder, and
(C) THIRD, any securities of the Company 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 5.4(b) determines that the public sale or other
distribution of any Registrable Securities, shares of Common Stock or other
securities of the Company 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
the Company and any other holders of securities included in such registration
statement, into an agreement not to sell any other Registrable Securities,
shares of Common Stock or other securities of the Company 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 5.4(b) may withdraw from any requested registration pursuant to this
Section 5.4(b) by giving written notice to the Company prior to the date an
underwriting agreement is executed or such registration statement becomes
effective.
(c) THE COMPANY'S OBLIGATIONS IN REGISTRATION. If and whenever the
Company is obligated by the provisions of this Section 5.4 to use reasonable
best efforts to effect the registration of any Registrable Securities under the
Securities Act, the Company 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 before filing a registration
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statement or prospectus (or any amendments or supplements thereto), the
Company will furnish to any Holder requesting such registration pursuant
to this Section 5.4 draft copies of all documents proposed to be filed
at least five business days prior thereto, which documents will be
subject to the reasonable review of any such Holder, their agents and
representatives; PROVIDED, FURTHER, that the Company 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 month in 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 (including, but not limited to, post-effective 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 provisos
contained in the immediately preceding clause (i);
(iii) notify the Holders requesting such registration and (if
requested) confirm such notice in writing, as soon as practicable after
notice thereof is received by the Company (A) when the registration
statement and any amendment thereto has been filed and becomes effective
and the prospectus or any amendment or supplement to the prospectus has
been filed, (B) of any request by the Commission for amendments or
supplements to the registration statement or the prospectus or for
additional information or (C) if any representation of the Company made
in any underwriting agreement contemplated hereby becomes untrue in any
material respect;
(iv) 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 preliminary
prospectus and any amendments or supplements thereto and any documents
incorporated by reference therein, 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;
(v) 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 the Company shall not for any purpose be required to (A) qualify
generally to do business as a foreign
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corporation in any jurisdiction wherein it would not but for the
requirements of this clause (v) 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 the Company
is already subject to general service of process in such jurisdiction;
(vi) 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 the Company reasonably acceptable to such holders 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; the
applicable provisions of the securities or blue sky laws of each state
in which the Company shall be required, pursuant to clause (v) of this
Section 5.4(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 the Company (copies of which shall be delivered to such
Holders), and as to all questions of the laws of each state in which the
Company 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;
(vii) 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 Company's determination that, or 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, file with the Commission and furnish to
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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 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;
(viii) 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 45 days after the end of any 12-month
period (or 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 the Company's first fiscal quarter commencing after the
effective date of a registration statement;
(ix) 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 the Company that it 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 5
Business Days prior to the filing thereof;
(x) 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;
(xi) 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
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be incorporated in such prospectus supplement or post-effective
amendment;
(xii) list such Registrable Securities on any securities
exchange on which the 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;
(xiii) obtain a CUSIP number for all Registrable Securities
(unless already obtained) not later than the effective date of such
registration statement;
(xiv) subject to the provisions of Section 5.7 of this Agreement
and appropriate safeguards of confidentiality, make available for
inspection by any Holder requesting such registration, any underwriter
participating in such disposition pursuant to such registration
statement and any representative or agent retained by any such Holder or
underwriter, all material financial and other material information of
the Company, necessary in connection with such registration statement;
and
(xv) obtain customary "cold comfort" letters and updates from
the Company's independent public accountants in customary form covering
such matters of the type customarily covered by "cold comfort" letters
as any managing underwriter shall reasonably request.
The period of time that the Company is obligated to keep any
registration statement effective, or to prepare and file any amendments
or supplements thereto, pursuant to Section 5.4(c)(i) shall be extended
by the number of days that any such Holder is unable to sell Registrable
Securities due to the matters set forth in Sections 5.4(c)(vii) and
(viii) above.
(d) PAYMENT OF REGISTRATION EXPENSES. The Company shall pay all
Registration Expenses in connection with each registration pursuant to this
Section 5.4.
(e) INFORMATION FROM HOLDERS. Notices and requests delivered
by Purchaser to the Company pursuant to this Section 5.4 shall contain the
information required by Section 5.4(a)(i).
(f) INDEMNIFICATION.
(i) INDEMNIFICATION BY THE COMPANY. In the event of any
registration under the Securities Act of any Registrable Securities
pursuant to this Section 5.4, the Company hereby agrees to indemnify and
hold harmless the Holders, their respective agents, directors, officers
and employees, each other Person, if any, who controls (within the
meaning of the Securities Act) the Holders and each other Person
(including
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underwriters) who participates in the offering of such Registrable
Securities, against any and all 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 (x) 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 the Company is
required to keep such registration statement current in any such case),
(y) 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 (z) arise out of or
are based upon any violation by the Company of the Securities Act or any
state securities or blue sky laws and relating to action or inaction
required of the Company in connection with the registration or
qualification of securities under such laws and will reimburse such
Holders, such agents, directors, officers and employees and each such
controlling person or participating person (including underwriters) for
any legal, investigative 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 the Company will not be liable to any
Person indemnified hereunder 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 information furnished to the Company in writing by such
indemnified person, 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, the Company 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 finally 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 Holder 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 the
Company, its respective agents, directors, officers and employees, each
other Person, if any, who controls (within the meaning of the Securities
Act) the Company and each other Person (including underwriters) who
participates in the offering of such Registrable Securities, against any
and all losses, claims, damages and liabilities to which the Company,
such agents, directors, officers and employees, or other Persons
(including underwriters), 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
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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 the Company 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, 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 the Company by the Holders and specifically stated to be
for use in the preparation of such registration statement; PROVIDED,
that, with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus, no Holder
shall be liable to any Person indemnified hereunder to the extent that
any loss, claim, damage or liability 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 or liability at or prior to the
written confirmation of the sale of the Registrable Securities concerned
to such Person if it is finally determined that it was not the
responsibility of such Holder to provide such Person with a current copy
of the final prospectus and such current copy of such final prospectus
would have cured the defect giving rise to such loss, claim, damage or
liability.
(iii) NOTICES OF CLAIMS, ETC. Each party entitled to be
indemnified pursuant to Section 5.4(f)(i) or (ii) above shall, 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 5.4(f),
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 5.4(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
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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 or
which requires such indemnified party to concede any fault or
wrongdoing.
(iv) CONTRIBUTION. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in paragraphs (i) and (ii) of
this Section 5.4(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 5.4(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 5.4, the Company
will deliver to the Holders of any Shares so registered, upon demand of the
Holders and their delivery to the Company of a certificate or certificates
representing such Shares bearing the legend set forth in Section 5.5(a), a new
certificate or certificates representing such Shares but not bearing such
legend.
(h) OBLIGATIONS OF THE HOLDERS.
The Holders agree:
(i) that upon receipt of any notice from the Company of any
determination or the happening of any event of the kind described in
Section 5.4(c)(vii), the Holders will forthwith discontinue its
disposition of Registrable Securities pursuant to the registration
statement relating to such Registrable Securities until their receipt of
the copies of the supplemented or amended prospectus contemplated by
Section 5.4(c)(vii) and, if so directed by the Company, will use their
reasonable best efforts to deliver to the Company (at the Company'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 the Company 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 Company 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
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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 5.4(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 (1) agrees to sell its Registrable Securities or other securities of the
Company 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 (2) 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 5.4(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 the Company 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. The Company 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.
5.5 RESTRICTIONS ON TRANSFERABILITY OF SHARES.
Notwithstanding any provisions contained in this Agreement to
the contrary, the Shares shall not be transferable except upon the conditions
specified in this Section 5.5 and Sections 5.1 and 5.2, which conditions are
intended, among other things, to ensure compliance with the provisions of the
Securities Act in respect of the transfer of the Shares. Purchaser agrees that
it will not (i) transfer any Shares prior to delivery to the Company of the
opinion of counsel (which opinion shall be reasonably satisfactory to the
Company) referred to in, and to the effect described in, clause (i) of Section
5.5(b), or until registration of such Shares under the Securities Act has become
effective, or (ii) transfer any Shares without compliance with Sections 5.1 and
5.2. Purchaser agrees that such opinion of counsel must be reasonably
satisfactory to the Company.
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(a) RESTRICTIVE LEGEND; PURCHASER'S REPRESENTATION.
Unless and until otherwise permitted by this Section 5.5, each
certificate representing 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 REGISTRATION REQUIREMENTS UNDER SUCH ACT OR
AN EXEMPTION THEREFROM. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A STOCK
PURCHASE AGREEMENT DATED AS OF NOVEMBER __, 1998, BY AND BETWEEN
THE HOLDER AND GENERAL INSTRUMENT CORPORATION. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY
OF GENERAL INSTRUMENT CORPORATION."
Without limiting the foregoing, Purchaser acknowledges and
agrees that the Shares 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 Shares (i) only (A) to the Company, (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 and this Agreement. Purchaser and each holder of Shares by
its acceptance of such security further understands that such security may bear
a legend as contemplated by this Section 5.5.
(b) STATEMENT OF INTENTION TO TRANSFER; OPINION OF COUNSEL.
Purchaser, by its acceptance of this Agreement, agrees that
prior to any transfer of any Shares, Purchaser will deliver to the Company a
notice of such proposed transfer and a signed copy of the opinion of Purchaser's
counsel reasonably satisfactory to the Company as to the necessity or
non-necessity for registration under the Securities Act in connection with such
transfer.
(i) If, in the opinion of Purchaser's counsel (which opinion
shall be reasonably satisfactory to the Company), the proposed transfer
of any Shares may be effected without registration under the Securities
Act of such Shares, then Purchaser shall be entitled to transfer such
Shares in accordance with the intended method of disposition specified
in the notice delivered by Purchaser to the Company, subject to
compliance with the other provisions of this Article V.
(ii) Notwithstanding the foregoing provisions of this Section
5.5(b), no opinion
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of any counsel need be furnished (x) in the event of any proposed
transfer of any Shares 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 Shares in connection with a registration under
the Securities Act.
(c) TERMINATION OF RESTRICTIONS.
Notwithstanding the foregoing provisions of this Section 5.5,
the restrictions imposed by this Section 5.5 upon the transferability of the
Shares shall cease and terminate as to any particular Shares when, (i) such
Shares shall have been effectively registered under the Securities Act and sold
by Purchaser in accordance with such registration or (ii) in the opinion of
counsel for the holder of such Shares, if such opinion is satisfactory in form
and substance to the Company, such restrictions are no longer required in order
to ensure compliance with the Securities Act. If and whenever the restrictions
imposed by this Section 5.5 shall terminate as to a Share as hereinabove
provided, Purchaser may and the Company shall, as promptly as practicable upon
the request of Purchaser and at the Company's expense, cause to be stamped or
otherwise imprinted upon the certificates representing such Shares a legend in
substantially the following form:
"The restrictions on transferability of this [these]
[securities] terminated on _________, and are of no further
force or effect."
All certificates issued upon transfer, division or combination
of, or in substitution for, any Shares entitled to bear such legend shall have a
similar legend endorsed thereon. Whenever the restrictions imposed by this
Section 5.5 shall terminate as to any Shares, as hereinabove provided, Purchaser
shall be entitled to receive from the Company without expense, a new certificate
representing such Shares not bearing the restrictive legend set forth in
Subsection (a) of this Section 5.5.
5.6 NO PUBLIC ANNOUNCEMENT.
Neither party hereto shall make any public announcement
concerning the transactions contemplated by this Agreement without the prior
approval of the other party, which approval shall not be unreasonably withheld.
Notwithstanding the foregoing, in the event any such public announcement is
required by law to be made by the party proposing to make the same, such party
shall consult in good faith with the other party before the making of such
public announcement.
5.7 CONFIDENTIALITY.
(a) Unless otherwise agreed to in writing by the Company,
Purchaser shall, except as required by law (and then only in compliance with
Section 5.7(b)), (i) keep all Proprietary Information confidential and not
disclose or reveal any Proprietary Information to any person other than to a
limited number of Purchaser's and its Affiliates' directors, officers, advisors
and employees and to cause those Persons to observe the terms of this Section
5.7, (ii) not use Proprietary Information for any purpose other than in
connection with Purchaser's and
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its Affiliates' proposed business relationship with the Company (including any
internal evaluation thereof) and (iii) not disclose to any Person (other than to
a limited number of Purchaser's and its Affiliates' directors, officers,
advisors and employees who Purchaser causes to observe the terms of this Section
5.7) any information that is not otherwise publicly available about the
transactions contemplated hereby, or the terms or conditions or any other facts
relating thereto or the status thereof, or the nature of any Proprietary
Information that has been made available to Purchaser. Purchaser will be
responsible for any breach of the terms of this Section 5.7 by Purchaser or its
advisors and employees.
(b) In the event that Purchaser or its Affiliates or any of
Purchaser's or its Affiliates' directors, officers, advisors and employees are
requested pursuant to, or required by, applicable law or legal process to
disclose any Proprietary Information or any other information concerning the
Company or the transactions contemplated hereby, Purchaser will provide the
Company with prompt notice of such request or requirement so that the Company
may seek an appropriate protective order or other remedy or waive compliance
with the terms of this Agreement and Purchaser will take all reasonable steps to
cooperate with the Company, at the Company's expense, with respect to taking
steps to resist or narrow the scope of such request or requirement. In the event
that no such protective order or other remedy is obtained or the Company waives
compliance with the terms of this Section 5.7, Purchaser may furnish only that
portion of the Proprietary Information or other information which is legally
required to be furnished or necessary to avoid contempt proceedings or other
official sanctions and will use its reasonable efforts at the Company's expense
to ensure that all Proprietary Information and other information that is so
disclosed will be accorded confidential treatment.
(c) In the event that the Closing does not occur by February
1, 1999, Purchaser will, upon the request of the Company, promptly deliver to
the Company or destroy all Proprietary Information, including all copies,
reproductions, summaries, analyses or extracts thereof or based thereon, in
Purchaser's or its Affiliates' possession or in the possession of any of their
respective directors, officers, advisors or employees and certify to the Company
in writing that such delivery and/or destruction has taken place.
ARTICLE VI
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to consummate the transactions
contemplated hereby shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, except such conditions as
Purchaser may waive:
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
The Company shall have complied in all material respects with
all of its agreements and covenants contained herein required to be complied
with at or prior to the Closing Date, and all the representations and warranties
of the Company contained herein which are qualified as to materiality shall be
true, and all representations and warranties of the Company which are not
qualified as to materiality shall be true in all material respects, on and as
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of the Closing Date with the same effect as though made on and as of the Closing
Date, except as otherwise contemplated hereby, and except to the extent that
such representations and warranties expressly make reference to a specified date
and as to such representations and warranties the same shall continue on the
Closing Date to have been true in all material respects as of the specified
date. Purchaser shall have received a certificate of the Company, dated as of
the Closing Date and signed by an officer of the Company, certifying as to the
fulfillment of the conditions set forth in this Section 6.1.
6.2 NO PROCEEDINGS.
No Governmental Entity of competent jurisdiction shall have
issued any Order restraining, enjoining, prohibiting, imposing burdensome
penalties on, or otherwise making illegal the consummation of the transactions
contemplated by this Agreement or the Joint Development Agreement. No action,
suit or other proceeding by any Governmental Entity shall have been instituted
that seeks to restrain, enjoin, prohibit, impose burdensome penalties on or
otherwise make illegal the performance of this Agreement or the Joint
Development Agreement or the consummation of the transactions contemplated
hereby or thereby.
6.3 HART-SCOTT-RODINO WAITING PERIODS.
All applicable waiting periods under the HSR Act shall have
expired or early termination thereof shall have been granted.
6.4 SHARE LISTING.
The Shares shall have been listed for trading, subject to
official notice of issuance, on the NYSE or such other exchange or quotation
system on which the Common Stock is then listed or traded.
6.5 JOINT DEVELOPMENT AGREEMENT.
Concurrently with the execution of this Agreement, the Company
shall have executed and delivered the Joint Development Agreement and on or
before the Closing Date shall have performed such of the Company's obligations
under the Joint Development Agreement as are to be performed on or before the
Closing Date.
ARTICLE VII
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to consummate the transactions
contemplated hereby shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, except such conditions as the
Company may waive:
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7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.
Purchaser shall have complied in all material respects with all
of its agreements and covenants contained herein required to be complied with at
or prior to the Closing Date, and all of the representations and warranties of
Purchaser contained herein which are qualified as to materiality shall be true,
and all representations and warranties of the Purchaser which are not qualified
as to materiality shall be true in all material respects, on and as of the
Closing Date with the same effect as though made on and as of the Closing Date,
except as otherwise contemplated hereby, and except to the extent that such
representations and warranties expressly make reference to a specified date and
as to such representations and warranties the same shall continue on the Closing
Date to have been true as of the specified date. The Company shall have received
a certificate of Purchaser, dated as of the Closing Date and signed by an
officer of Purchaser, certifying as to the fulfillment of the condition set
forth in this Section 7.1.
7.2 NO PROCEEDINGS.
No Governmental Entity of competent jurisdiction shall have
issued any Order restraining, enjoining, prohibiting, imposing burdensome
penalties on, or otherwise making illegal the consummation of the transactions
contemplated by this Agreement or the Joint Development Agreement. No action,
suit or other proceeding by any Governmental Entity shall have been instituted
that seeks to restrain, enjoin, prohibit, impose burdensome penalties on or
otherwise make illegal the performance of this Agreement or the Joint
Development Agreement or the consummation of the transactions contemplated
hereby or thereby.
7.3 HART-SCOTT-RODINO WAITING PERIODS.
All applicable waiting periods under the HSR Act shall have
expired or early termination thereof shall have been granted.
7.4 JOINT DEVELOPMENT AGREEMENT.
Concurrently with the execution of this Agreement, Purchaser
and/or its direct or indirect Subsidiary shall have executed and delivered the
Joint Development Agreement and on or before the Closing Date shall have
performed such of Purchaser's and/or its direct or indirect Subsidiary's
obligations under the Joint Development Agreement as are to be performed on or
before the Closing Date.
ARTICLE VIII
TERMINATION PRIOR TO CLOSING
8.1 TERMINATION OF AGREEMENT.
(a) This Agreement may be terminated at any time prior to the
Closing:
(i) By the mutual written consent of Purchaser and the Company;
or
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(ii) By either Purchaser or the Company in writing if the
Closing shall not have occurred on or before February 1, 1999; provided,
however, that the right to terminate this Agreement under this Section
8.1(a)(ii) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Closing to occur on or before such date; or
(iii) By either Purchaser or the Company if there shall be in
effect any law, regulation or Order that prohibits the consummation of
the Closing or if consummation of the Closing would violate any Order.
8.2 EFFECT OF TERMINATION.
If this Agreement is terminated in accordance with Section 8.1
hereof and the transactions contemplated hereby are not consummated, this
Agreement shall become null and void and of no further force and effect except
that (i) the terms and provisions of Sections 5.7, 8.2, 11.7, 11.8, 11.10 and
11.11 shall remain in full force and effect, and (ii) any termination of this
Agreement shall not relieve any party hereto from any liability for any breach
of its obligations hereunder.
ARTICLE IX
DEFINITIONS
The terms defined in this Article IX, whenever used in this
Agreement, shall, unless the context otherwise requires, have the respective
meanings hereinafter specified and, unless the context otherwise 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" of a Person has the meaning set forth in Rule 12b-2
under the Exchange Act.
"ASSOCIATE" of a Person has the meaning set forth in Rule 12b-2
under the Exchange Act.
"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" shall have the meaning set forth in Section 1.2.
"CLOSING DATE" shall have the meaning set forth in Section 1.2.
"COMMISSION" shall mean the Securities and Exchange Commission.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"FAIR MARKET VALUE" of a share of Common Stock, as of a
particular date, shall
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mean the average of the daily closing prices (i.e. the last reported sales
price, regular way, for such day as reported on the NYSE) of the Common Stock
for the period of 30 consecutive trading days commencing 35 trading days prior
to such date.
"GOVERNMENTAL ENTITY" shall mean any government or any agency,
bureau, board, commission, court, department, political subdivision, tribunal,
or other instrumentality of any government (including any regulatory or
administrative agency), whether federal, state or local, domestic or foreign.
"HOLDER" shall mean Purchaser and any Person acquiring
Registrable Securities from Purchaser other than in an offering registered under
the Securities Act or in a sale made pursuant to Rule 144 promulgated under the
Securities Act.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvement
Act of 1976.
"LIEN" shall mean any security interest, claim, voting
agreement, restriction, option, mortgage, deed of trust, pledge, hypothecation,
assignment, charge or deposit arrangement, encumbrance, lien (statutory or
other) or preferential arrangement of any kind or nature whatsoever and any
contingent or other agreement to provide any of the foregoing.
"MSO" shall mean cable television multiple system operators.
"MSO WARRANT ISSUANCE AGREEMENTS" shall have the meaning set
forth in Section 2.2.
"MATERIAL ADVERSE EFFECT" shall mean with respect to the
Company or Purchaser, as the case may be, a material adverse effect on the
business, operations, financial condition or results of operations of such party
and its Subsidiaries taken as a whole, excluding effects reasonably attributable
to the general state of the industry, to general economic conditions, to the
transactions contemplated by this Agreement.
"MEMBER" shall mean a member of the Purchaser Group.
"NYSE" shall have the meaning set forth in Section 2.3.
"NDTC" shall mean National Digital Television Center, Inc., a
Colorado corporation and a subsidiary of Tele-Communications, Inc. and its
Affiliates.
"NDTC WARRANT ISSUANCE AGREEMENT" shall have the meaning set
forth in Section 2.2.
"ORDER" means any judgment, decree, order, writ, award, ruling,
stipulation, injunction or determination of an arbitrator or court or other
Governmental Entity.
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<PAGE>
"PERMITTED TRANSFEREE" shall mean any wholly owned Subsidiary
of Purchaser or Sony Corporation (Japan) who agrees to be bound by the terms of
this Agreement to the same extent as Purchaser and such Subsidiary at all times
remains wholly owned by Purchaser or Sony Corporation (Japan).
"PERSON" shall mean 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.
"PROPRIETARY INFORMATION" shall mean all information about the
Company furnished by or on behalf of the Company, whether furnished before or
after the date hereof, whether oral or written, and regardless of the manner in
which it is furnished, and including any summaries or analyses thereof or other
documents containing or reflecting any such information, whether prepared by the
Company or Purchaser. Proprietary Information does not include, however,
information which (a) is or becomes generally available to the public other than
as a result of a disclosure by Purchaser or its employees or advisors or (b) was
or becomes available to Purchaser on a nonconfidential basis from a person other
than the Company or one of its employees or advisors who is not otherwise bound
by a confidentiality agreement with the Company, or, to the knowledge of
Purchaser, is otherwise not under a contractual, legal, or fiduciary obligation
to the Company not to transmit the information to Purchaser.
"PURCHASE PRICE" shall have the meaning set forth in Section
1.1.
"PURCHASER GROUP" shall mean (a) Purchaser, (b) any Subsidiary
or direct or indirect parent of Purchaser, (c) any Affiliate of Purchaser
controlled by Purchaser such that Purchaser has the power (including through
negative control) to cause such Affiliate to comply with the terms of this
Agreement applicable to Purchaser, and (d) any Person with whom Purchaser or any
Person included in the foregoing clauses (b) or (c) is part of a 13D Group.
"REGISTRABLE SECURITIES" shall mean the Shares and any
securities which may be distributed in respect thereof or result therefrom, by
way of stock dividend, stock split or other distribution, recapitalization,
merger, consolidation, reclassification or reorganization or otherwise. 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 the Company 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 5.4, 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
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<PAGE>
reasonable fees and disbursements of counsel for any underwriters in connection
with blue sky qualification of any Shares), (iii) all printing, messenger and
delivery expenses, (iv) the fees and disbursements of counsel for the Company
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 Shares being registered, (vi) all
roadshow and related expenses of the Company and the underwriters, and (vii) 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.
"RESTRICTED PERIOD" shall have the meaning set forth in Section
5.1.
"SEC REPORTS" shall have the meaning set forth in Section 2.5.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SUBSIDIARY" shall mean, when used with respect to any party
means any corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated, of which such party owns
50% or more of the outstanding voting securities or economic interest.
"13D GROUP" shall mean any group of Persons who, with respect
to those acquiring, holding, voting or disposing of Common Stock would, assuming
ownership of the requisite percentage thereof, be required under Section 13(d)
of the Exchange Act and the rules and regulations thereunder to file a statement
on Schedule 13D with the Commission as a "person" within the meaning of Section
13(d)(3) of the Exchange Act, or who would be considered a "person" for purposes
of Section 13(g)(3) of the Exchange Act.
ARTICLE X
SURVIVAL; INDEMNIFICATION
10.1 SURVIVAL.
The representations and warranties of the Company and Purchaser
contained in this Agreement shall survive the Closing, but shall terminate on
the first anniversary of the Closing Date; it being understood that in the event
notice of any claim for indemnification under Section 10.2 (a)(i) or Section
10.3(a)(i) hereof shall have been given within the applicable survival period,
the representations and warranties that are the subject of such indemnification
claim shall survive until such time as such claim is finally resolved. Each
party shall have no indemnification obligation with respect to any
indemnification claim made for breach of a representation or warranty contained
in this Agreement if such claim is made after the end of the applicable survival
period.
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<PAGE>
10.2 INDEMNIFICATION BY PURCHASER. (a) Purchaser hereby agrees
that it shall indemnify, defend and hold harmless the Company, its Affiliates,
and, if applicable, their respective directors, officers, shareholders,
partners, attorneys, accountants, agents and employees and their heirs,
successors and assigns (the "Company Indemnified Parties") from, against and in
respect of any damages, claims, losses, charges, actions, suits, proceedings,
deficiencies, interest, penalties, and reasonable costs and expenses (including
without limitation reasonable attorneys' fees, removal costs, remediation costs,
closure costs, fines, penalties and expenses of investigation and ongoing
monitoring) (collectively, the "Losses") imposed on, sustained, incurred or
suffered by or asserted against any of the Company Indemnified Parties, directly
or indirectly relating to or arising out of (i) any breach of any representation
or warranty made by Purchaser contained in this Agreement and (ii) any breach of
any covenant or agreement of Purchaser contained in this Agreement.
(b) As to any Losses with respect to the matters contained in
Section 10.2(a)(i), Purchaser shall be liable to the Company Indemnified Parties
to the extent (but only to the extent) the Losses therefrom exceed an aggregate
amount equal to $1,000,000.
10.3 INDEMNIFICATION BY THE COMPANY.
(a) The Company hereby agrees that it shall defend and hold
harmless Purchaser, its Affiliates and, if applicable, their respective
directors, officers, shareholders, partners, attorneys, accountants, agents and
employees and their heirs, successors and assigns (the "Purchaser Indemnified
Parties"; collectively with the Company Indemnified Parties, the "Indemnified
Parties") from, against and in respect of any Losses imposed on, sustained,
incurred or suffered by or asserted against any of the Purchaser Indemnified
Parties, directly or indirectly relating to or arising out of (i) any breach of
any representation or warranty made by the Company contained in this Agreement,
and (ii) any breach of any covenant or agreement of the Company contained in
this Agreement.
(b) As to any Losses with respect to the matters contained in
Section 10.3(a)(i), the Company shall be liable to the Purchaser Indemnified
Parties to the extent (but only to the extent) the Losses therefrom exceed an
aggregate amount equal to $1,000,000.
10.4 INDEMNIFICATION PROCEDURES.
With respect to third party claims, all claims for
indemnification by any Indemnified Party hereunder (other than claims for which
indemnification is provided under Section 5.4, which shall be resolved in
accordance therewith) shall be asserted and resolved as set forth in this
Section 10.4. In the event that any written claim or demand for which an
indemnifying party, the Company or Purchaser, as the case may be (an
"Indemnifying Party"), would be liable to any Indemnified Party hereunder is
asserted against or sought to be collected from any Indemnified Party by a third
party, such Indemnified Party shall promptly, but in no event more than 30 days
following such Indemnified Party's receipt of such claim or demand, notify the
Indemnifying Party of such claim or demand and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be
conclusive of the final amount of such claim and demand) (the "Claim Notice");
PROVIDED, HOWEVER, that if the Claim Notice has
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<PAGE>
been given within any applicable survival period, failure to notify the
Indemnifying Party within such 30-day period shall relieve the Indemnifying
Party of its indemnification obligation only to the extent that the Indemnifying
Party is actually prejudiced thereby. The Indemnifying Party shall have 30 days
from the personal delivery or mailing of the Claim Notice (the "Notice Period")
to notify the Indemnified Party (a) whether or not the Indemnifying Party
disputes the liability of the Indemnifying Party to the Indemnified Party
hereunder with respect to such claim or demand and (b) whether or not it desires
to defend the Indemnified Party against such claim or demand. All costs and
expenses incurred by the Indemnifying Party in defending such claim or demand
shall be a liability of, and shall be paid by, the Indemnifying Party; PROVIDED,
HOWEVER, that the amount of such costs and expenses that shall be a liability of
the Indemnifying Party hereunder shall be subject to the limitations set forth
in Sections 10.3(b) and (c) hereof. Except as hereinafter provided, in the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that it desires to defend the Indemnified Party against such claim or
demand, the Indemnifying Party shall have the right to defend the Indemnified
Party by appropriate proceedings using counsel reasonably satisfactory to the
Indemnified Party and shall have the power to direct and control such defense
with counsel satisfactory to the Indemnified Party, and such Indemnified Party
may participate in such defense, which participation by the Indemnified Party
will 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 and control 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 expenses and fees of the Indemnified Party's counsel shall be at the expense
of the Indemnifying Party. To the extent the Indemnifying Party shall direct,
control or participate in the defense or settlement of any third party claim or
demand, the Indemnified Party will give the Indemnifying Party and its counsel
reasonable access to, during normal business hours and upon reasonable notice,
the relevant business records and other documents, and shall permit them to
consult with the employees and counsel of the Indemnified Party. Regardless of
which Person assumes control of the defense of any claim, each party shall
cooperate in the defense thereof. The Indemnified Party shall not consent to the
entry of any judgment or enter into any settlement with respect to such matter
without the written consent of the Indemnifying Party (which shall not be
unreasonably withheld or delayed). The Indemnifying Party shall not consent to
the entry of judgment or any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
Indemnified Party of an unconditional release from all liability in respect of
such claim or litigation or which requires the Indemnified Party to concede any
fault or wrong-doing.
ARTICLE XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT.
This Agreement and the Joint Development Agreement constitute
the sole
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<PAGE>
understanding of the parties with respect to the subject matter hereof.
11.2 SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the Company's
successors and permitted assigns.
11.3 ASSIGNMENT.
Other than as expressly set forth herein, neither this Agreement
nor any rights or obligations hereunder shall be assignable.
11.4 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each
of which shall for all purposes be deemed to be an original and all of which
shall constitute the same instrument.
11.5 HEADINGS.
The headings of the Articles, Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
11.6 NO WAIVER.
No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party hereto, will be deemed to constitute
a waiver by the party taking any action of compliance with any representation,
warranty or agreement contained herein. The waiver by any party hereto of any
condition or of a breach of any other provision of this Agreement will not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party of any of the conditions precedent to its obligations
under the Agreement will not preclude it from seeking redress for breech of this
Agreement other than with respect to the condition so waived.
11.7 FEES AND EXPENSES.
The Company and Purchaser shall each pay all costs and expenses
incurred by it or on its behalf in connection with this Agreement and the
transactions contemplated hereby, including, without limiting the generality of
the foregoing, fees and expenses of its own financial consultants, accountants
and counsel.
11.8 NOTICES.
notice, request, instruction or other document to be given
hereunder by any party hereto to any other party hereto shall be in writing and
shall be deemed to have been duly given, if delivered personally, by telecopier
or sent by first class mail, postage prepaid, as follows (or to such other
address as shall be furnished in writing to the other parties hereto):
if to the Company to:
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<PAGE>
General Instrument Corporation
101 Tournament Drive
Horsham, Pennsylvania 19044
Attention: General Counsel
Telephone: 215-323-1000
Telecopier: 215-323-1293
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Lois Herzeca
Telephone: 212-859-8000
Telecopier: 212-859-4000
if to Purchaser to:
Sony Corporation of America
550 Madison Avenue
New York, New York 10022
Attention: Legal Department
Telephone: 212-833-6828
Telecopier: 212-833-4579
with a copy to:
White & Case
1155 Avenue of the Americas
New York, NY 10036-2787
Attention: William F. Wynne, Jr.
Telephone: 212-819-8200
Telecopier: 212-354-8113
Any notice shall be deemed given upon receipt.
11.9 AMENDMENTS.
This Agreement may be amended, supplemented or waived only by a
subsequent writing signed by each of the parties hereto.
11.10 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.
11.11 CONSENT TO JURISDICTION.
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<PAGE>
Each of Purchaser and the Company consents and submits to the
exclusive jurisdiction of the courts of the State of New York and of the courts
of the United States for the Southern District of the State of New York for all
purposes of this Agreement and any related document to which it is a party,
including, without limitation, any action or proceeding instituted for the
enforcement of any right, remedy, obligation or liability arising under or by
reason hereof and thereof (and agree not to commence any litigation relating
thereto except in such courts), and further agrees that service of any process,
summons, notice or document by U.S. registered mail to its respective address
set forth in Section 11.8 shall be effective service of process for any such
litigation brought in any such court. Each of Purchaser and the Company hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any such litigation in the courts of the State of New York or of the United
States of America in each case located in the County of New York and hereby
further irrevocably and unconditionally waives and agrees not to plead or clam
in any such court that any such litigation brought in any such court has been
brought in an inconvenient forum.
11.12 SPECIFIC PERFORMANCE.
Each party hereto acknowledges that, in view of the uniqueness
of the transactions contemplated by this Agreement, the other party would not
have an adequate remedy at law for money damages in the event that this
Agreement has not been performed in accordance with its terms. Each party
therefore agrees that the other party shall be entitled to specific enforcement
of the terms hereof in addition to any other remedy to which it may be entitled,
at law or in equity.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date first above written.
GENERAL INSTRUMENT CORPORATION
By: /s/ Edward D. Breen
-------------------------------------
Name: Edward D. Breen
Title: Chief Executive Officer
SONY Corporation of America
By: /s/ Howard Stringer
-------------------------------------
Name: Howard Stringer
Title: President
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<PAGE>
EXHIBIT 21
GENERAL INSTRUMENT CORPORATION SUBSIDIARIES
Access Control Center, Inc.
Incorporated: Delaware
Charger Industries
Incorporated: California
DBS Services, Inc.
Incorporated: California
Ensambladora de Matamoros, S.A. de C.V.
Incorporated: Mexico
Fuba Communications Systems GmbH
Incorporated: Germany
General Instrument (Argentina) S.A.
Incorporated: Argentina
General Instrument (Australia) Pty Ltd
Incorporated: Australia
General Instrument Authorization Services, Inc.
Incorporated: Delaware
General Instrument (Brasil) Ltda.
Incorporated: Brazil
General Instrument (Canada) Inc.
Incorporated: Canada
General Instrument Corporation (Chile) Limitada
Incorporated: Chile
General Instrument China Holdings, Inc.
Incorporated: Delaware
General Instrument Equity Corporation
Incorporated: Delaware
General Instrument (Europe) Ltd.
Incorporated: England
General Instrument (France) SAS
Incorporated: France
<PAGE>
General Instrument HDTV Corporation
Incorporated: Delaware
General Instrument Holdings (Taiwan), Inc.
Incorporated: Delaware
General Instrument (Hong Kong) Limited
Incorporated: Hong Kong
General Instrument (India), Inc.
Incorporated: Delaware
General Instrument International, Inc.
Incorporated: Delaware
General Instrument (Japan) Ltd.
Incorporated: Japan
General Instrument (Mauritius), Inc.
Incorporated: Delaware
General Instrument (Mexico), S.A. de C.V.
Incorporated: Mexico
General Instrument of Taiwan, Ltd.
Incorporated: Taiwan
General Instrument Packet Systems, Inc.
Incorporated: Delaware
General Instrument Purchasing Corp.
Incorporated: Delaware
General Instrument Services, Inc.
Incorporated: Delaware
General Instrument (Singapore) Pte. Ltd.
Incorporated: Singapore
GI India Pvt. Ltd.
Incorporated: India
GI Mauritius Holdings, Ltd.
Incorporated: Mauritius
Jerrold DC Radio, Inc.
Incorporated: Delaware
Magnitude Compression Systems, Inc.
Incorporated: California
<PAGE>
Next Level Communications
Incorporated: California
NextLevel Systems (Puerto Rico), Inc.
Incorporated: Delaware
The NextLevel Systems Foundation
Incorporated: Illinois
<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 9, 1999
included in this Annual Report on Form 10-K of General Instrument Corporation
for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GENERAL INSTRUMENT CORPORATION AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 148,675
<SECURITIES> 4,865
<RECEIVABLES> 343,872
<ALLOWANCES> (3,833)
<INVENTORY> 281,451
<CURRENT-ASSETS> 890,703
<PP&E> 513,039
<DEPRECIATION> (275,908)
<TOTAL-ASSETS> 2,187,760
<CURRENT-LIABILITIES> 453,678
<BONDS> 0
0
0
<COMMON> 1,734
<OTHER-SE> 1,648,437
<TOTAL-LIABILITY-AND-EQUITY> 2,187,760
<SALES> 1,987,825
<TOTAL-REVENUES> 1,987,825
<CGS> 1,431,327
<TOTAL-COSTS> 1,431,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,217
<INCOME-PRETAX> 93,649
<INCOME-TAX> (38,199)
<INCOME-CONTINUING> 55,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,450
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
</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. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The actual results of the Company may differ significantly from the
results discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, uncertainties relating to general
political, economic and competitive conditions in the United States and other
markets where the Company operates; uncertainties relating to government and
regulatory policies; uncertainties relating to customer plans and commitments;
the Company's dependence on the cable television industry and cable television
spending; Year 2000 readiness; the pricing and availability of equipment,
materials and inventories; technological developments; the competitive
environment in which the Company operates; changes in the financial markets
relating to the Company's capital structure and cost of capital; the
uncertainties inherent in international operations and foreign currency
fluctuations; authoritative generally accepted accounting principles or policy
changes from such standard-setting bodies as the Financial Accounting Standards
Board and the Securities Exchange Commission; and the factors as set forth
below.
FACTORS RELATING TO THE DISTRIBUTION
In a transaction that was consummated on July 28, 1997, the former
General Instrument Corporation (the "Distributing Company") (i) transferred all
the assets and liabilities relating to the manufacture and sale of broadband
communications products used in the cable television, satellite, and
telecommunications industries to the Company (which was then named "NextLevel
Systems, Inc." and was a wholly-owned subsidiary of the Distributing Company)
and transferred all the assets and liabilities relating to the manufacture and
sale of coaxial, fiber optic and other electric cable used in the cable
television, satellite and other industries to its wholly-owned subsidiary
CommScope, Inc. ("CommScope") and (ii) then distributed all of the outstanding
shares of capital stock of each of the Company and CommScope to its stockholders
on a pro rata basis as a dividend (the "Distribution"). Immediately following
the Distribution, the Distributing Company changed its corporate name to
"General Semiconductor, Inc" ("General Semiconductor"). Effective February 2,
1998, the Company changed its corporate name from "NextLevel Systems, Inc." to
"General Instrument Corporation."
The Distribution Agreement, dated as of June 12, 1997, among the
Company, CommScope and the Distributing Company (the "Distribution Agreement")
and certain other agreements executed in connection with the Distribution
(collectively, the "Ancillary Agreements") allocate among the Company,
CommScope, and General Semiconductor and their respective subsidiaries
responsibility for various indebtedness,
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liabilities and obligations. It is possible that a court would disregard this
contractual allocation of indebtedness, liabilities and obligations among the
parties and require the Company or its subsidiaries to assume responsibility for
obligations allocated to another party, particularly if such other party were to
refuse or was unable to pay or perform any of its allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, the Company has agreed to indemnify the other parties (and certain
related persons) from and after consummation of the Distribution with respect to
certain indebtedness, liabilities and obligations, which indemnification
obligations could be significant.
Although the Distributing Company has received a favorable ruling from
the Internal Revenue Service, if the Distribution were not to qualify as a tax
free spin-off (either because of the nature of the Distribution or because of
events occurring after the Distribution) under Section 355 of the Internal
Revenue Code of 1986, as amended, then, in general, a corporate tax would be
payable by the consolidated group of which the Distributing Company was the
common parent based upon the difference between the fair market value of the
stock distributed and the Distributing Company's adjusted basis in such stock.
The corporate level tax would be payable by General Semiconductor and could
substantially exceed the net worth of General Semiconductor. However, under
certain circumstances, the Company and CommScope have agreed to indemnify
General Semiconductor for such tax liability. In addition, under the
consolidated return rules, each member of the consolidated group (including the
Company and CommScope) is severally liable for such tax liability.
CERTAIN RESTRICTIONS UNDER CREDIT FACILITIES
The Credit Agreement dated as of July 23, 1997, as amended, among the
Company, certain banks, and The Chase Manhattan Bank, as Administrative Agent
(the "Credit Agreement"), contains certain restrictive financial and operating
covenants, including, among others, requirements that the Company satisfy
certain financial ratios. Significant financial ratios include (i) maintenance
of consolidated net worth above $600 million adjusted for 50% of cumulative
positive quarterly net income subsequent to June 30, 1997; (ii) maintenance of
an interest coverage ratio based on EBITDA (excluding $203 million of charges
incurred in 1997 and 1998) in comparison to net interest expense of greater than
5 to 1; and (iii) maintenance of a leverage ratio comparing total indebtedness
to EBITDA (excluding $203 million of charges incurred in 1997 and 1998) of less
than 3 to 1. The failure of the Company to satisfy the financial and/or
operating covenants contained in the Credit Agreement could cause the Company to
be unable to borrow under the Credit Agreement and would cause the Company to
seek alternative sources of working capital financing and, depending upon the
Company's financial condition 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 system operators for
constructing, rebuilding or upgrading their systems. The amount of this capital
spending, and, therefore the Company's sales and profitability, may be affected
by a variety of factors, including general economic conditions, the continuing
trend of cable system consolidation within the industry, the financial condition
of domestic cable television system operators and their access to financing,
competition from direct-to-home ("DTH"), satellite, wireless television
providers and telephone companies offering video programming, technological
developments that impact the deployment of equipment and new legislation and
regulations affecting the equipment used by cable television system operators
and their
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customers. There can be no assurance that cable television capital spending will
increase from historical levels or that existing levels of cable television
capital spending will be maintained.
Although the domestic cable television industry is comprised of
thousands of cable systems, a small number of large cable television multiple
systems operators ("MSOs") own a majority of cable television systems and
account for a significant portion of the capital expenditures made by cable
television system operators. The loss of business from a significant MSO could
have a material adverse effect on the business of the Company.
THE IMPACT OF REGULATION AND GOVERNMENT ACTION
In recent years, cable television capital spending has been affected by
new legislation and regulation, on the federal, state and local level, and many
aspects of such regulation are currently the subject of judicial proceedings and
administrative or legislative proposals. During 1993 and 1994, the Federal
Communications Commission (the "FCC") adopted rules under the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"),
regulating rates that cable television operators may charge for lower tiers of
service and generally not regulating the rates for higher tiers of service. In
1996, the Telecommunications Act of 1996 (the "Telecom Act") was enacted to
eliminate certain governmental barriers to competition among local and long
distance telephone, cable television, broadcasting and wireless services. The
FCC is continuing its implementation of the Telecom Act which, when fully
implemented, may significantly impact the communications industry and alter
federal, state and local laws and regulations regarding the provision of cable
and telephony services. Among other things, the Telecom Act eliminates
substantially all restrictions on the entry of telephone companies and certain
public utilities into the cable television business. Telephone companies may now
enter the cable television business as traditional cable operators, as common
carrier conduits for programming supplied by others, as operators of wireless
distribution systems, or as hybrid common carrier/cable operator providers of
programming on so-called "open video systems." The economic impact of the 1992
Cable Act, the Telecom Act and the rules thereunder on the cable television
industry and the Company is still uncertain.
On June 24, 1998, the FCC released a Report and Order entitled IN THE
MATTER OF IMPLEMENTATION OF SECTION 304 OF THE TELECOMMUNICATIONS ACT OF 1996 -
COMMERCIAL AVAILABILITY OF NAVIGATION DEVICES (the "Retail Sales Order"), which
promulgates rules providing for the commercial availability of navigation
devices, including set-top devices and other consumer equipment, used to receive
video signals and other services from multichannel video programming
distributors ("MVPDs"), including cable television system operators. The Retail
Sales Order mandates that (i) subscribers have a right to attach any compatible
navigation device to an MVPD system regardless of its source and (ii) service
providers are prohibited from taking actions which would prevent navigation
devices that do not perform conditional access functions from being made
available by retailers, manufacturers, or other affiliated vendors. To
accomplish subscribers' right to attach, the FCC has ordered that (i) MVPDs must
provide technical information concerning interface parameters necessary to
permit navigation devices to operate with their systems; (ii) MVPDs must
separate out security functions from non-security functions by July 1, 2000; and
(iii) after January 1, 2005, MVPDs may not provide new navigation devices for
sale, lease or use that perform both conditional access functions and other
functions in a single integrated device.
Unless modified or overturned, the Retail Sales Order will require
set-top device manufacturers, such as the Company, to develop a separate
security module to be available for sale to other manufacturers who want to
build set-top devices, as well as ultimately prevent the Company from offering
set-top devices in which the security and non-security functions are integrated.
In addition, the Retail Sales Order may require the Company to offer its set-top
devices through retail distribution channels, an area in which the Company has
limited experience. The competitive impact of the Retail Sales Order is still
uncertain, and
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there can be no assurance that the Company will be able to compete successfully
with other consumer electronics manufacturers interested in manufacturing
set-top devices, many of which have greater resources and retail sales
experience than the Company.
There can be no assurance that future legislation, regulations or
government action will not have a material adverse effect on the operations and
financial condition of the Company.
TELECOMMUNICATIONS INDUSTRY COMPETITION AND
TECHNOLOGICAL CHANGES AFFECTING THE COMPANY
The Company will be significantly affected by the competition among
cable television system operators, satellite television providers and telephone
companies to provide video, voice and data/Internet services. In particular,
although cable television operators have historically provided television
services to the majority of U.S. households, DTH satellite television has
attracted a growing number of subscribers and the regional telephone companies
have begun to offer competing cable and wireless cable services. This
competitive environment is characterized by rapid technological changes,
particularly with respect to developments in digital compression and broadband
access technology.
The Company believes that, as a result of its development of new
products based on emerging technologies and the diversity of its product
offerings, it is well positioned to supply each of the cable, satellite and
telephone markets. The future success of the Company, however, will be dependent
on its ability to market and deploy these new products successfully and to
continue to develop and timely exploit new technologies and market opportunities
both in the United States and internationally. There can be no assurance that
the Company will be able to continue to successfully introduce new products and
technologies, that it will be able to deploy them successfully on a large-scale
basis or that its technologies and products will achieve significant market
acceptance. The future success of the Company will also be dependent on the
ability of cable and satellite television operators to successfully market the
services provided by the Company's advanced digital terminals to their
customers. Further, there can be no assurance that the development of products
using new technologies or the increased deployment of new products will not have
an adverse impact on sales by the Company of certain of its other products. In
addition, because of the competitive environment and the nature of the Company's
business, there have been and may continue to be threats by third parties
asserting their intellectual property rights and challenging the Company's
ability to deploy new technologies.
COMPETITION
The Company's products compete with those of a substantial number of
foreign and domestic companies, some with greater resources, financial or
otherwise, than the Company, and the rapid technological changes occurring in
the Company's markets are expected to lead to the entry of new competitors. The
Company's ability to anticipate technological changes and to introduce enhanced
products on a timely basis will be a significant factor in the Company's ability
to expand and remain competitive. Existing competitors' actions and new entrants
may have an adverse impact on the Company's sales and profitability. For a
discussion of competitive factors in regards to retail consumer electronic
manufacturers see "The Impact of Regulation and Government Action". The Company
believes that it enjoys a strong competitive position because of its large
installed cable television equipment base, its strong relationships with the
major cable television system operators, its technological leadership and new
product development capabilities, and the likely need for compatibility of new
technologies with currently installed systems. 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.
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INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS
U.S. broadband system designs and equipment are being employed in
international markets, where cable television penetration is low. In addition,
the Company is developing new products to address international market
opportunities. However, the impact of the economic crises in Asia and Latin
America has significantly affected the Company's results in these markets. There
can be no assurance that international markets will rebound to historical levels
or that such markets will continue to develop or that the Company will receive
additional contracts to supply systems and equipment in international markets.
International exports of certain of the Company's products require
export licenses issued by the U.S. Department of Commerce prior to shipment in
accordance with export control regulations. The Company has made a voluntary
disclosure to the U.S Department of Commerce with respect to several violations
by the Company of these export control regulations. While the Company does not
expect these violations to have a material adverse effect on the Company's
operations or financial condition, there can be no assurance that these
violations will not result in the imposition of sanctions or restrictions on the
Company.
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. In addition, the Company's operations are
expanding into new international markets. These foreign operations are subject
to the usual risks inherent in situating operations abroad, including risks with
respect to currency exchange rates, economic and political destabilization,
restrictive actions by foreign governments, nationalizations, the laws and
policies of the United States affecting trade, foreign investment and loans, and
foreign tax laws. The Company's cost-competitive status relative to other
competitors could be adversely affected if the New Taiwan dollar or another
relevant currency appreciates relative to the U.S. dollar.
YEAR 2000 READINESS
The Company is preparing for the impact of the arrival of the Year 2000
on its business, as well as on the businesses of its customers, suppliers and
business partners. The "Year 2000 Issue" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominantly from the fact that many
software programs have historically categorized the "year" in a two-digit
format. The Year 2000 Issue creates potential risks for the Company, including
potential problems in the Company's products as well as in the Information
Technology ("IT") and non-IT systems that the Company uses in its business
operations. The Company may also be exposed to risks from third parties with
whom the Company interacts who fail to adequately address their own Year 2000
issues.
There can be no assurance that the Company will be successful in its
efforts to address all of its Year 2000 issues. If some of the Company's
products are not Year 2000 compliant, the Company could suffer lost sales or
other negative consequences, including, but not limited to, diversion of
resources, damage to the Company's reputation, increased service and warranty
costs and litigation, any of which could materially adversely affect the
Company's business operations or financial condition.
The Company is also dependent on third parties such as its customers,
suppliers, service providers and other business partners. If these or other
third parties fail to adequately address Year 2000 Issues, the Company could
experience a negative impact on its business operations or financial condition.
For example, the failure of certain of the Company's principal suppliers to have
Year 2000 compliant internal
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systems could impact the Company's ability to manufacture and/or ship its
products or to maintain adequate inventory levels for production.
The Company's Year 2000 statements, including without limitation,
anticipated costs and the dates by which the Company expects to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the ability to identify and remediate all relevant IT and non-IT
systems, results of Year 2000 testing, adequate resolution of Year 2000 Issues
by businesses and other third parties who are service providers, suppliers or
customers of the Company, unanticipated system costs, the adequacy of and
ability to develop and implement contingency plans and similar uncertainties.
DEVELOPMENTS RELATED TO PRIMESTAR, INC.
On January 22, 1999, PRIMESTAR, Inc. ("PRIMESTAR") announced that it
reached an agreement to sell its direct broadcast satellite ("DBS") medium-power
business and assets as well as its rights to acquire high-power satellite assets
to Hughes Electronics Corporation ("Hughes"). PRIMESTAR, the second largest
provider of satellite television entertainment in the United States, currently
operates a 160 channel medium-power DBS service. The Company is currently the
sole supplier of digital satellite receivers and digital satellite encoders to
PRIMESTAR, representing approximately 11% of the Company's sales for the year
ended December 31, 1998.
While the announcement stated that Hughes' DIRECTV expects to operate
PRIMESTAR's medium-power business for a period of approximately two years,
during which time it intends to transition PRIMESTAR subscribers to the
high-power DIRECTV service, the Company is currently uncertain whether and to
what extent PRIMESTAR will continue to order and purchase medium power-equipment
from the Company. Further, the Company does not expect to supply any high-power
equipment to PRIMESTAR. The announcement stated that if the proposed transaction
with Hughes is not consummated for any reason, PRIMESTAR intends to continue its
medium-power business.
Prior to this announcement, the Company estimated that 1999 revenues
from the sale of equipment to PRIMESTAR would be approximately $100 million.
The Company believes that, if the proposed acquisition is consummated, such
revenues will be substantially reduced. While the Company expects to minimize
the effect of the potential loss of revenue from PRIMESTAR through increased
sales of its digital cable systems and reductions in overhead expenses, there
can be no assurance that the Company will be successful in replacing this
lost revenue. The Company has evaluated its overhead structure and has taken
steps to further consolidate its San Diego, CA and Horsham, PA operations,
including reducing headcount by approximately 200. The Company expects to
take a pre-tax charge during the first quarter of 1999 of approximately $15
million, for severance and facility consolidation costs.
The loss of PRIMESTAR as a continuing customer will have a
significant impact on the Company's satellite business. However, absent the
failure of PRIMESTAR to honor its contractual commitments with the Company,
the Company believes that the loss of PRIMESTAR's business will not have a
material adverse effect on the Company's financial condition or results of
operations.
ENVIRONMENT
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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.
