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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-12925
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GENERAL INSTRUMENT CORPORATION
(FORMERLY, NEXTLEVEL SYSTEMS, INC.)
(Exact name of registrant as specified in its charter)
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DELAWARE 36-4134221
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 TOURNAMENT DRIVE 19044
HORSHAM, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
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(215) 323-1000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant was approximately $2.2 billion as of March 16,
1998 (based on the closing price for the Common Stock on the New York Stock
Exchange on that date). For purposes of this computation, shares held by
affiliates and by directors and officers of the registrant have been excluded.
Such exclusion of shares held by directors and officers is not intended, nor
shall it be deemed, to be an admission that such persons are affiliates of the
registrant. As of March 16, 1998 there were 150,130,388 shares of the
registrant's Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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EXPLANATORY NOTE
This Form 10-K/A ("Amendment No. 1") hereby amends, and replaces in their
entirety, Items 1, 6, 7, 7A, 8 and 14 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 (the "Form 10-K"), as set forth
below. The Company has not restated its financial statements. The information
contained herein has not been updated or revised to reflect changes in the
Company's business, or events occurring after March 31, 1998, the date on which
the Form 10-K was originally filed.
PART I
ITEM 1. BUSINESS
On July 25, 1997, the Company was spun off (the "Spin-off") from its former
parent company, General Instrument Corporation (the "Distributing Company")
under the name "NextLevel Systems, Inc.," through a distribution of the
Company's common stock, par value $.01 per share ("Common Stock"), to the
stockholders of the Distributing Company. Immediately following the Spin-off,
the Distributing Company changed its corporate name to "General Semiconductor,
Inc." Effective February 2, 1998, the Company changed its corporate name from
"NextLevel Systems, Inc." to "General Instrument Corporation." Unless the
context otherwise requires, references to the "Company" include General
Instrument Corporation and its direct or indirect subsidiaries and the business
of the Company as conducted by the Distributing Company prior to the Spin-off.
GENERAL
The Company is a leading worldwide supplier of systems and components for
high-performance networks, delivering video, voice and Internet/data services to
the cable, satellite and telephony markets. The Company is the world leader in
digital and analog set-top terminals and systems for wired and wireless cable
television networks, as well as hybrid fiber/coaxial network transmission
systems used by cable television operators and is a leading provider of digital
satellite television systems for programmers, direct-to-home satellite network
providers and private networks for business communications. Through its limited
partnership interest in Next Level Communications, L.P. (the "Partnership"), the
Company provides broadband telephony network solutions with the Partnership's
NLevel(3)-Registered Trademark- Switched Digital Access system.
RECENT DEVELOPMENTS
The Company recently entered into several transactions intended to provide a
strong foundation for the Company's future business and to reinforce its
position as the leading provider of the next generation of broadband
communication equipment and systems. The Company has completed definitive
agreements to supply 15 million advanced digital set-top terminals, in the
aggregate, to National Digital Television Center, Inc. ("NDTC"), a wholly-owned
subsidiary of Tele-Communications, Inc. ("TCI"), and eleven other leading cable
television multiple system operators ("MSOs") over the next three to five years.
The Company has issued warrants to purchase approximately 29 million shares of
the Company's Common Stock to NDTC and certain MSOs in connection with such
arrangements. The transactions with NDTC and the other MSOs are intended to
enable NDTC and the MSOs to deliver a range of new interactive cable services by
means of the digital set-top terminals and related systems and applications. The
Company has also agreed in principle to acquire from NDTC certain assets and a
license enabling the Company to conduct the set-top authorization business
presently operated by NDTC, which is intended to provide the cable industry with
a secure access control platform to support widespread deployment of digital
terminals and related systems, in exchange for the issuance to NDTC of
21,356,000 shares of Common Stock. In addition, the Company and Sony Corporation
("Sony") have announced plans to enter into a strategic alliance to develop
jointly digital television technologies for cable TV devices and high-definition
TV (HDTV) products, as well as to incorporate Sony's Home Network architecture
into the Company's advanced digital set-top terminals. Subject to the completion
of definitive agreements related to this
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alliance, Sony has agreed to purchase 7,500,000 newly issued shares of Common
Stock at a purchase price of $25.00 per share.
In February 1998, PRIMESTAR, the nation's second largest provider of
satellite television entertainment, entered into an agreement with the Company,
pursuant to which the Company will manufacture integrated receiver decoders
("IRDs") valued at more than $180 million for PRIMESTAR's high-power retail and
wholesale services expected to be launched during 1998 after PRIMESTAR receives
government approval related to the transition of an orbital slot. There can be
no assurance, however, that the Company will realize the full benefits of this
agreement if PRIMESTAR does not receive the necessary government approval.
Beginning in the fourth quarter of 1997 and continuing through the first
quarter of 1998, the Company made significant improvements in the cost structure
of its cable and satellite television operations. The Company reduced headcount
by 225 in its San Diego-based satellite television operations, closed its Puerto
Rico satellite receiver manufacturing facility, reducing headcount by 1,100, and
consolidated and relocated the Company's corporate headquarters from Chicago,
Illinois to Horsham, Pennsylvania.
In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of its Next Level Communications
subsidiary to the Partnership in exchange for approximately an 89% limited
partnership interest (subject to additional dilution). An entity controlled by
Spencer Trask & Co., the operating general partner, has acquired approximately
an 11% interest in the Partnership, and has the potential to acquire an
additional 11% interest in the Partnership in the future.
MARKET OVERVIEW
The Company is a leading worldwide supplier of systems and equipment for
high-performance networks delivering video, voice and data/Internet services.
The Company is the only company currently providing such systems and equipment
for broadband networks (I.E., networks having the capacity, or bandwidth, to
transmit large volumes of information) using all of the following architectures:
(i) wired systems including analog signals over the traditional hybrid fiber
coaxial cable television ("HFC") plant and digital signals over the HFC plant;
(ii) multichannel multipoint distribution systems ("wireless cable"); (iii)
direct-to-home ("DTH") satellite television systems; and, (iv) through the
Partnership, switched-digital technology over fiber-to-the-curb architecture
("FTTC"). The management of the Company believes that its technological
leadership position and its ability to deliver any type of content over any type
of network around the world make it well positioned to continue to be a leading
provider of broadband systems and equipment regardless of the network and
architecture used.
Sales of digital and analog addressable television systems, including
set-top terminals, and headend signal processing equipment, distribution
amplifiers, fiber optic transmission equipment and passive components for wired
cable television distribution systems in the United States accounted for
approximately 51% of the sales of the Company for the year ended December 31,
1997.
Wireless cable television operators and local telephone companies also have
begun competing with existing cable television operators to offer video
entertainment in many markets in the United States. The Company is the leading
supplier of analog and digital set-top terminals for wireless cable systems.
Cable television operators are facing competition from DTH programmers using
broadband networks to transmit television signals, via satellite, directly to
subscribers' home receivers. The Company is the exclusive supplier of digital
consumer receivers for PRIMESTAR, and is the exclusive supplier of encoders for
both DIRECTV-Registered Trademark- and PRIMESTAR. United States sales of
satellite products represented approximately 20% of the sales of the Company for
the year ended December 31, 1997.
In response to increasing consumer demand and competition, many cable
television operators have increased, or are planning to increase, the number of
channels they are capable of offering, either by upgrading the existing cable
plant using an HFC architecture, or by implementing digital compression
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technology over the existing cable plant. As a leading provider of HFC systems
and equipment, as well as the only company shipping digital cable headend
equipment and terminals in volume, the Company's management believes that the
Company is well positioned to serve its traditional customer base, whichever
path to increasing capacity the cable television operators choose.
The Company's management believes that international markets represent a key
growth opportunity for sales of broadband systems and equipment. International
sales by the Company represented approximately 29% of its total sales for the
year ended December 31, 1997. International markets employ the same types of
broadband network architectures used in the United States: traditional wired
cable television; wireless cable; and DTH systems.
BUSINESS STRATEGY
The Company's strategy is to use its technological leadership in providing
secure broadband systems and equipment to enhance its leading position in its
traditional markets while expanding into new markets. This strategy is based on
the belief that (i) consumers, both in the U.S. and international markets, will
continue to demonstrate an increasing demand for new entertainment and
information services and (ii) content and service providers will continue to
create new bandwidth-intensive video, voice and data applications at the upper
limits of network capabilities. The Company's management believes that these
factors will generate a continuing need for systems and equipment with greater
capacity for all networks and architectures.
In recent months, the Company has taken a number of actions intended to
provide a strong foundation for the Company's future business. The completion of
definitive agreements with most of the leading cable TV operators in North
America to supply 15 million of the Company's two-way, digital set-top terminals
over the next three to five years and the proposed strategic alliance with Sony
are expected to reinforce the Company's position as the leading provider of the
next generation of broadband communication equipment and systems.
BUSINESS UNITS
The Company is presently organized into four strategic business units:
Digital Network Systems, Advanced Network Systems, Transmission Network Systems
and Satellite Data Network Systems.
DIGITAL NETWORK SYSTEMS. The Company believes that the commercialization of
digital broadband systems and equipment, which provide for greatly expanded
channel capacity and programming options, improved quality and security of
signal transmission and the capability of delivering enhanced features and
services, is a strategic market for the Company. Management also believes that
the Company's position in this developing market is significantly enhanced by
its leadership in a key enabling technology, digital compression, which converts
television signals to a digital format and then compresses the signals of
several channels of television programming into the bandwidth currently used by
just one analog channel. The Company has developed and is deploying digital
television systems that enable cable television operators and satellite
programmers to deliver over their existing networks up to 16 times as much
information as is possible with existing analog technology.
The Company's digital terminals incorporate the Motion Picture Experts Group
2 ("MPEG-2") international standard, and the Company's digital television system
has the capacity to carry various video, audio and data elements through a
complex information infrastructure that will have an improved capability to
interact with other consumer devices using MPEG-2 compression. A digital video
broadcast ("DVB") version (European standard) of the Company's digital terminal
is expected to be available during 1998.
The Company will offer cable television operators what it believes is a
cost-effective family of digital terminals that also are able to deliver analog
programming. The terminals range from a lower-cost
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broadcast-only digital terminal to a highly capable, real-time two-way
interactive terminal, expected to be available by the end of 1998, with a
built-in high-speed cable modem enabling personal computer connectivity and
interactive sessions over a dedicated return path. Through December 31, 1997,
the Company had shipped more than 500 digital cable TV headend systems, passing
25 million homes, and more than 700,000 digital cable TV set-top terminals.
ADVANCED NETWORK SYSTEMS. Analog subscriber products offered by this
business unit include primarily addressable systems which permit control,
through a set-top terminal, of a subscriber's cable television services from a
central headend computer without requiring access to the subscriber's premises.
Addressable systems also enable a cable television operator to more easily
provide pay-per-view programming services and multiple tiers of programming
packages.
Beginning in early 1995, the Company began shipping its CFT advanced analog
terminals, with increased functionality and features from its prior analog
subscriber terminals. The CFT advanced analog terminals incorporate a user
feature platform that allows cable operators to deploy applications of their
choice for new services, and certain units include electronic program guides,
supplementary sports and entertainment information and play-along game shows,
and can be modularly upgraded to deliver digital audio, providing CD-quality
simulcasts of premium services. The Company shipped approximately 3.2 million
CFT advanced analog cable television terminals for the year ended December 31,
1997.
Throughout the last several years, the Company has been the market share
leader in the U.S. analog-addressable market, with more than 50% of that market.
However, due to the expected increased use of digital and advanced analog
systems, management expects that demand in North America for analog cable
products other than advanced analog products will continue to decline.
TRANSMISSION NETWORK SYSTEMS. Transmission products include headend signal
processing equipment, distribution amplifiers, fiber optic transmission
equipment and passive components for wired television distribution systems. The
Company's transmission products provide end-to-end solutions that enable the
transformation of the HFC network to a full service interactive network.
The Company's management expects cable television operators in the United
States and abroad to continue to upgrade their basic networks and invest in new
system construction primarily to compete with other television programming
sources, such as DTH and cable networks planned by some telephone companies, and
to develop, using U.S. architecture and systems, international markets where
cable penetration is low and demand for entertainment programming is growing.
SATELLITE DATA NETWORK SYSTEMS. The Company is the world's leading provider
of digital satellite television systems for programmers, DTH satellite network
providers and private networks for business communications and distance
learning. It offers a complete product line of digital compression and
transmission systems including MPEG-2, DVB and Advanced Television Systems
Committee (ATSC) compliant solutions. The Company is also a leader in the
development of high-speed data networks.
-Digital and Analog Satellite Products. The Company designs, manufactures
and sells analog and digital satellite uplink and downlink products for
commercial and consumer use. Using the Company's
DigiCipher-Registered Trademark- II digital technology, commercial customers are
able to compress their video, audio and data transmissions resulting in
significant cost savings over traditional analog transmission. The Company also
offers state-of-the-art network management and access control products and
services allowing program packagers to efficiently and cost-effectively manage
customer transactions and securely transmit their programming to only authorized
end-users. The Company is the leading manufacturer of access control and
scrambling and descrambling equipment used by television programmers for the
satellite distribution of proprietary programming.
The Company is the sole supplier of digital satellite receivers to PRIMESTAR
and digital satellite encoders for DTH providers PRIMESTAR and
DIRECTV-Registered Trademark-. The Company is also a leading supplier of
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digital satellite systems to private networks for such applications as business
communications and distance learning. The Company's digital satellite systems
are in use by organizations such as Ford Motor Company and South Carolina
Educational TV.
The analog satellite products of the Company are the exclusive systems for
the distribution of encrypted C-band (large dish) satellite-delivered
programming to cable television operators and large-diameter backyard satellite
dish owners. Sales of analog consumer descramblers have declined, as expected,
to minimal levels over the past two years, and are expected to continue to
decline as a result of the availability of competing digital satellite video
services. The Company introduced its first digital descramblers for the backyard
C-band market in 1997. This product, called 4DTV-Registered Trademark-, allows
C-band dish owners to take advantage of the wealth of digital programming now
being transmitted by satellite. There can be no assurance, however, as to the
degree of market acceptance of this new product, or whether significant
quantities of 4DTV-Registered Trademark- will be shipped.
-High-Speed Data Networks. The Company's management believes that the rapid
growth in personal computer ownership and, in particular, usage of on-line and
Internet access services, has created a demand for increased data transmission
speeds. The Company's high-speed cable modem is capable of delivering
information through the cable television network at speeds significantly faster
than a traditional telephone modem, while delivering instructions and other
information upstream from the consumer over telephone lines. The Company has
become the first company to launch cable modems with a major national computer
retailer -- CompUSA. In addition, in anticipation of mass distribution of
standardized cable modems, the Company has entered into a working relationship
with Cisco Systems to develop an interoperable MCNS-compliant, two-way cable
modem network using the Company's cable modems.
NEXT LEVEL COMMUNICATIONS, L.P.
In September 1995, the Distributing Company acquired Next Level
Communications ("NLC"), a California corporation, which was formed to design,
manufacture and market a next-generation telecommunications broadband access
system for the delivery of telephony, video, and data from a telephone company
central office or cable television headend to the home. Commencing in January
1998, the business of Next Level Communications has been operated through the
Partnership as described below. The Partnership's product,
NLevel(3)-Registered Trademark-, is designed to permit the cost-effective
delivery of a suite of standard telephony and advanced services such as
high-speed data/Internet, work-at-home, distance learning, video-on-demand and
video-telephony to the home from a single access platform. The
NLevel(3)-Registered Trademark- system is designed to work with and enhance
existing telephony networks and offers the capability to provide voice services
(POTS), ISDN, high-speed data/Internet and video services over both
copper-twisted-pair and FTTC networks.
In the fourth quarter of 1996, Next Level Communications entered into an
agreement with a subsidiary of NYNEX Corporation, now Bell Atlantic Corporation,
pursuant to which the Partnership will supply its
NLevel(3)-Registered Trademark- system for one million lines of telephone
service in metropolitan New York City and Boston. Initial deployment for the
greater Boston area began in the first quarter of 1997. Bell Atlantic also has
options to extend its deployment of the NLevel(3)-Registered Trademark- system
to up to five million lines. In the third quarter of 1997, Next Level
Communications entered into an agreement with U S WEST Communications, pursuant
to which the Partnership will supply its NLevel(3)-Registered Trademark- system
for 450,000 lines of broadband xDSL access.
In January 1998, the Company transferred at historical cost the business of
Next Level Communications, including its net assets, the underlying NLC
technology, and its management and workforce to the Partnership in exchange for
approximately an 89% limited partnership interest (subject to additional
dilution). Such transaction was accounted for at historical cost. An entity
controlled by Spencer Trask & Co., the operating general partner, has acquired
approximately an 11% interest in the Partnership and has the potential to
acquire up to an additional 11% in the future. The Company does not have the
option to
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acquire the operating general partner's interest in the Partnership. 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, 1997 were $208 million compared to
$198 million and $138 million for the years ended December 31, 1996 and 1995,
respectively. The Company's management expects research and development
expenditures to approximate $170 million in 1998. Research and development
expenditures reflect continued development of the next generation of cable
set-top terminals, which incorporate digital compression and multimedia
capabilities, broadband telephony, cable modems, advanced digital systems for
cable and satellite television distribution, next-generation direct broadcast
satellite systems and product development through strategic alliances.
SALES AND DISTRIBUTION
The broadband communications products and services of the Company are
marketed primarily to cable television operators, cable and satellite television
programmers and providers, and telephone companies. Demand for the Company's
products and services will depend primarily on capital spending by cable
television operators, satellite programmers and telephone companies for
constructing, rebuilding or upgrading their systems. The amount of this capital
spending and, therefore, a majority of the Company's sales and profitability,
will be affected by a variety of factors, including general economic conditions,
access by cable television operators to financing, regulation of
telecommunications service providers and technological developments in the
broadband communications industry. While the Company's management believes that
cable television capital spending is likely to increase as cable operators
upgrade their basic networks and move from basic analog to advanced analog and
digital systems, there can be no assurance that such increase will occur.
Broadband communications systems are sold primarily through the efforts of
sales personnel employed by the Company who are skilled in the technology of the
particular system.
Because a limited number of cable and satellite television operators provide
services to a large percentage of television households in the United States,
the loss of some of these operators as customers could have a material adverse
effect on the Company's sales. TCI, including its affiliates, and Time Warner
Cable, including its affiliates, each accounted for 14% of the consolidated net
sales of the Company for the year ended December 31, 1997.
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PATENTS
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that the Company considers important to the
development of its business. Although the Company's management believes that the
Company's patents provide a competitive advantage, the Company will rely equally
on its proprietary knowledge and ongoing technological innovation to develop and
maintain its competitive position.
BACKLOG
At December 31, 1997 and 1996, the Company had a backlog of approximately
$484 million and $406 million, respectively. Backlog includes only orders for
products scheduled to be shipped within six months. Orders may be revised or
canceled, either pursuant to their terms or as a result of negotiations;
consequently, it is impossible to predict accurately the amount of backlog
orders that will result in sales.
COMPETITION
The Company's products and services will compete with those of a substantial
number of foreign and domestic companies, some with greater resources, financial
or otherwise, than the Company, and the rapid technological changes occurring in
the Company's markets are expected to lead to the entry of new competitors. The
Company's ability to anticipate technological changes and introduce enhanced
products on a timely basis will be a significant factor in the Company's ability
to expand and remain competitive. Existing competitors' actions and new entrants
may have an adverse impact on the Company's sales and profitability. The
management of the Company believes that the Company will enjoy a strong
competitive position in its existing cable and satellite television markets due
to the Company's large installed cable and satellite television equipment base,
its strong relationships with the major cable television operators and satellite
television programmers, its technological leadership and new product development
capabilities, and the likely need for compatibility of new technologies with
currently installed systems. There can be no assurance, however, that
competitors will not be able to develop systems compatible with, or that are
alternatives to, the Company's proprietary technology or systems or that the
Company will be able to introduce new products and technologies on a timely
basis. In addition, the Partnership is competing in the local telephone access
equipment market with a number of well-established suppliers. There is no
assurance that the Partnership will be successful in this market.
RAW MATERIALS
The Company purchases raw materials from many sources in the United States,
as well as from sources in the Far East, Canada and Europe and its products
include certain components that are currently available only from single
sources. The Company has in effect inventory controls and other policies
intended to minimize the effect of any interruption in the supply of these
components. There is no single supplier the loss of which would have a
continuing material adverse effect on the Company.
ENVIRONMENT
The Company is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous materials.
The manufacturing facilities of the Company are believed to be in substantial
compliance with current laws and regulations. Compliance with current laws and
regulations has not had, and is not expected to have, a material adverse effect
on the Company's results of operations and financial condition.
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EMPLOYEES
At January 31, 1998, approximately 7,350 people were employed by the
Company. Of these employees, approximately 2,100, 2,200 and 2,700 were located
at the U.S., Taiwan and Mexico facilities, respectively, with the balance
located in Europe, Latin America and the Far East. As of January 31, 1998,
approximately 400 of the Company's employees were covered by collective
bargaining agreements. Of these employees, approximately 220 were located at the
Mexican facilities and approximately 180 were located at facilities in Germany.
The management of the Company believes that the Company's relations with both
its union and non-union employees are satisfactory.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
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YEAR ENDED DECEMBER 31,
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(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 (A) 1996 (B) 1995 (C) 1994 (D) 1993
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales........................................................ $ 1,764 $ 1,756 $ 1,533 $ 1,275 $ 783
Cost of sales.................................................... 1,336 1,350 1,080 878 529
Gross profit..................................................... 428 406 453 397 254
Selling, general and administrative.............................. 215 174 138 103 87
Research and development......................................... 208 198 138 105 68
Purchased in-process technology.................................. -- -- 140 -- --
NLC litigation costs............................................. -- 141 -- -- --
Amortization of excess of cost over fair value of
net assets acquired............................................ 15 14 14 15 15
Operating income (loss).......................................... (10) (122) 22 175 84
Interest expense, net............................................ (5) (26) (23) (27) (35)
Income (loss) before income taxes and cumulative effect of
changes in accounting principles............................... (10) (149) (2) 149 58
Net income (loss)................................................ $ (16) $ (96) $ 4 $ 121 $ 50
Pro forma loss per share--basic and diluted (e).................. (0.11) (0.65)
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DECEMBER 31,
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1997 1996 1995 1994 1993
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CONSOLIDATED BALANCE SHEET DATA:
Total assets....................................................... $ 1,675 $ 1,630 $ 1,354 $ 1,199 $ 970
Other non-current liabilities...................................... 66 188 75 78 103
Stockholders' equity............................................... 1,215 1,051 926 764 629
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(a) Includes charges of $110 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily related to the closure of various
facilities, including the Company's satellite TV manufacturing facility in
Puerto Rico, severance and other employee separation costs, the write-down
of 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 17 to the consolidated financial
statements).
(b) Includes charges of $226 million ($145 million net-of-tax) reflecting Next
Level Communications ("NLC") litigation costs and other charges primarily
related to the transition to the Company's next-
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generation digital products and the write-down of inventory to its lower of
cost or market (see Notes 5, 12 and 17 to the consolidated financial
statements).
(c) Includes a charge of $140 million ($90 million net-of-tax) for purchased
in-process technology in connection with the acquisition of NLC (see Note 6
to the consolidated financial statements).
(d) Includes an income tax benefit of $31 million, as a result of a reduction in
a valuation allowance related to domestic deferred income tax assets.
(e) Prior to the Distributions (see Note 1 to the consolidated financial
statements), the Company did not have its own capital structure, and pro
forma per share information has only been presented for the years ended
December 31, 1997 and 1996. The pro forma loss per share was calculated by
dividing the net loss by the pro forma weighted-average number of shares
outstanding. The pro forma weighted-average number of shares outstanding
used for 1996 equaled the number of common shares issued on the date of the
Distributions, and for 1997, included the number of common shares issued on
the date of the Distributions plus the actual share activity during the
period subsequent to the Distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF BUSINESS
General Instrument Corporation ("General Instrument" or the "Company"),
formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and
components of high-performance networks, delivering video, voice and
Internet/data services to the cable, satellite and telephony markets. The
Company was formerly the Communications Business of the former General
Instrument Corporation (the "Distributing Company"). In July 1997, the
Distributing Company distributed all of its outstanding shares of capital stock
of the Company to its stockholders, and the Company then began operating as an
independent entity with publicly traded stock.
The Company's consolidated financial statements and notes to the
consolidated financial statements, included elsewhere in this Form 10-K, should
be read as an integral part of the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 WITH
THE YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for the year ended December 31, 1997 were $1,764
million compared to $1,756 million for the year ended December 31, 1996. Net
sales in 1997 when compared to 1996 reflect higher sales of digital cable TV
systems and interactive advanced analog TV systems, offset by lower sales of
basic analog cable TV systems, cable transmission network systems, digital
satellite receivers and private/ commercial network satellite systems. Analog
and digital products represented 58% and 42%, respectively, of total sales in
1997 compared to 67% and 33%, respectively, of total sales in 1996.
Worldwide broadband sales (consisting of digital and analog cable and
wireless television systems and transmission network systems) increased $112
million, or 10%, to $1,293 million in 1997 primarily as a result of increased
U.S. sales volumes of digital cable TV terminals and headends and CFT advanced
analog cable TV terminals, partially offset by lower sales of basic analog cable
and transmission network systems. These sales reflect the increasing commitment
of U.S. cable television operators to deploy state-of-the-art digital and
interactive advanced analog systems in order to offer advanced entertainment,
interactive services and Internet access to their customers. International
broadband sales increased $11 million, or 3%, to $403 million in 1997 and
represented 31% of worldwide broadband sales in 1997 compared to 33% in 1996.
Worldwide satellite sales of $462 million for the year ended December 31, 1997
decreased $113 million, or 20%, from 1996 primarily as a result of lower sales
volumes of digital satellite receivers to PRIMESTAR. International satellite
sales increased $41 million, or 59%, to $110 million in
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1997, primarily as a result of higher Canadian sales. International satellite
sales represented 24% of worldwide satellite sales in 1997 compared to 12% in
1996. Next Level Communications' ("NLC") sales were $9 million in 1997.
GROSS PROFIT. Gross profit increased $22 million, or 5%, to $428 million in
1997 from $406 million in 1996 and was 24% of sales in 1997 compared to 23% in
1996. Gross profit for the year ended December 31, 1997 was reduced by $84
million of charges primarily related to the closure of the Company's Puerto Rico
satellite manufacturing facility, employee costs related to dividing the
Distributing Company's Taiwan operations between the Company and General
Semiconductor, Inc. and the write-down of inventories to their lower of cost or
market (see Notes 1, 5 and 17 to the consolidated financial statements). Gross
profit for the year ended December 31, 1996 was reduced by $71 million of
charges 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 17 to the consolidated financial statements). The higher gross profit
and gross profit margin in 1997 resulted from higher production volumes and
ongoing cost reduction programs on digital and advanced analog products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was $215 million in 1997 compared to $174 million in 1996 and
was 12% of sales in 1997 compared to 10% in 1996. SG&A expense for the year
ended December 31, 1997 included $28 million of charges related to severance and
other employee separation costs, costs associated with the closure of various
facilities and legal and other professional fees incurred in connection with the
Distributions (see Notes 1, 5 and 17 to the consolidated financial statements),
partially offset by a $5 million credit related to the collection of certain
receivables previously considered to be uncollectible. SG&A expense in 1996
included $14 million of charges primarily related to employee separation costs
due to the Distributing Company's plan to separate into three independent
companies, the write-down of various fixed assets to their estimated fair values
and the settlement of a litigation matter (see Notes 1, 5 and 17 to the
consolidated financial statements). SG&A base spending was also greater in 1997
than in 1996 as a result of increased marketing and field support for NLC's
NLevel(3)-Registered Trademark- telephony system and the Company's DVB-compliant
digital satellite products and increased sales force, field support and
marketing in international cable and satellite television markets.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expense
increased $10 million, or 5%, to $208 million in 1997 from $198 million in 1996
and was 12% of sales in 1997 compared to 11% in 1996. R&D expense for the year
ended December 31, 1997 included $9 million of charges primarily related to the
write-down of fixed assets used in R&D activities to their estimated fair values
(see Notes 5 and 17 to the consolidated financial statements). R&D spending in
1997 reflects: the continued development of next-generation products, including
high-speed data systems for cable and telephone networks, switched-digital
access systems for fiber and twisted-pair networks, as well as the modification
of existing products for international markets; the continued development of
enhanced addressable analog terminals and advanced digital systems for cable and
satellite television distribution; and product development and international
expansion through strategic alliances. In addition, in 1997, the Company
remained focused on reducing costs and enhancing the features of its digital
cable and satellite television systems.
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. The Company expects NLC to incur an
additional $70 to $75 million in research and development expenses over the next
two years to develop this technology for commercial deployment (see Notes 6 and
18).
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.
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INTEREST INCOME (EXPENSE)-NET. Net interest expense represents an
allocation of interest expense from the Distributing Company based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company through July 25, 1997, the date of the Distributions. Net interest
expense allocated to the Company was $15 million for the year ended December 31,
1997 compared to $26 million in 1996. Subsequent to July 25, 1997, net interest
income primarily represents actual interest earned on the Company's net cash
balance and the net reversal of accrued interest subsequent to receiving a
revised final judgment in the suit brought against NLC and the founders of NLC
by DSC Communications Corporation and DSC Technologies Corporation (the "NLC
Litigation").
On a pro forma basis, interest income was $6 million in 1997 compared to
interest expense of $8 million in 1996 (see Note 4 to the consolidated financial
statements).
INCOME TAXES. Through the date of the Distributions, income taxes were
determined as if the Company had filed separate tax returns under its then
existing structure for the periods presented. Accordingly, future tax rates
could vary from the historical effective tax rates depending on the Company's
future tax elections. The Company recorded a provision for income taxes of $6
million and a benefit for income taxes of $53 million for the years ended
December 31, 1997 and 1996, respectively. Excluding the restructuring and other
net charges recorded in 1997 and 1996, the effective tax rates were 38% and 36%,
respectively. The higher effective rate in 1997 resulted from a higher provision
for state income taxes (see Note 10 to the consolidated financial statements).
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 will reduce 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 will be 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 continue to
be sold by the Company. 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 has made severance
payments of $5 million to
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approximately 800 employees, and the remaining severance and other employee
separation costs will be paid in 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. The fixed assets are
expected to be disposed of by the end of 1998 and none are being utilized in the
Company's operations. These restructuring costs are expected to provide cost
savings in certain satellite production processes; however, declining demand for
certain satellite products will substantially offset the expected 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 S G & A expense
and related to the write-down of fixed assets to their estimated fair values and
settlement of a litigation matter. 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 a 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 by the end of 1998. The Company
incurred approximately $8 million of professional fees related to the assessment
of the satellite business.
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Of the $61 million of charges, $45 million were recorded as cost of sales,
$8 million were recorded as S G & 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 WITH
THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 were $1,756
million compared to $1,533 million for the year ended December 31, 1995, an
increase of $223 million, or 15%. This increase in net sales reflects higher
broadband sales, partially offset by lower satellite sales. Analog and digital
products represented 67% and 33%, respectively, of total sales in 1996, compared
to 70% and 30%, respectively, in 1995.
Worldwide broadband sales increased $273 million, or 30%, to $1,181 million
in 1996 primarily as a result of increased U.S. sales volumes of CFT advanced
analog set-top terminals, first-time sales of DCT-1000 MPEG-2 digital set-top
terminals and increased global sales volumes of mature analog addressable
set-top terminals and transmission network systems electronics. These sales
reflect the continued commitment of domestic cable television operators to
deploy state-of-the-art addressable systems and enhanced services and the
continued deployment of new cable television systems in international markets.
International broadband sales increased $107 million, or 37%, to $392 million in
1996 and represented 33% of worldwide broadband sales in 1996 compared to 31% in
1995. Worldwide satellite sales decreased $50 million, or 8%, to $575 million in
1996 due to lower sales volume of digital satellite receivers to PRIMESTAR and
VideoCipher RS-TM- analog satellite modules and receivers, partially offset by
higher sales volumes of DigiCipher-Registered Trademark- II/MPEG-2 digital
satellite systems and DVB-compliant satellite encoders. International satellite
sales increased $30 million, or 76%, to $69 million in 1996 and represented 12%
of worldwide satellite sales in 1996 compared to 6% in 1995.
GROSS PROFIT. Gross profit decreased $47 million, or 10%, to $406 million
in 1996 from $453 million in 1995 and was 23% of sales in 1996 compared to 30%
in 1995. The lower gross profit margin in 1996 reflects $71 million of charges
related to the write-down of inventories to their lower of cost or market and
the accrual of upgrade and product warranty liabilities primarily related to the
transition to the Company's next-generation digital products (see Note 17 to the
consolidated financial statements). The lower gross profit margin also reflects
the shift in product mix from higher margin VideoCipher RS-TM- analog satellite
receiver consumer modules to new advanced analog and digital television system
products, which initially carry lower margins.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense was $174 million in 1996
compared to $138 million in 1995 and was 10% of sales in 1996 compared to 9% of
sales in 1995. SG&A base spending was greater in 1996 than in 1995 as the
Company targeted new growth opportunities, including the marketing of NLC's
broadband access systems to telephone companies for interactive digital video,
voice and data services, and the Company increased its sales force, field
support and marketing activities to take advantage of continued growth
opportunities in international cable and satellite television and worldwide
telecommunications markets. SG&A expense in 1996 also included $14 million of
charges primarily related to the Distributing Company's plan to separate into
three independent companies, the write-down of various fixed assets to their
estimated fair values and the settlement of a litigation matter (see Notes 1, 5
and 17 to the consolidated financial statements). SG&A expense for 1995 included
a $5 million charge primarily related to the direct costs associated with the
consolidation of the Company's corporate headquarters and the reorganization of
its divisions and $14 million related to a national advertising campaign for
C-band satellite systems.
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RESEARCH AND DEVELOPMENT. The Company's R&D expense increased $60 million,
or 44%, to $198 million in 1996 from $138 million in 1995 and was 11% of sales
in 1996 compared to 9% in 1995. The increased level of spending reflects: the
continued development of next-generation products, including cable modems and
telephone company access products through NLC, as well as the modification of
existing products for international markets; continued development of enhanced
addressable analog terminals and advanced digital systems for cable and
satellite television distribution; ongoing cost-reduction programs; and product
development and international expansion through strategic alliances.
PURCHASED IN-PROCESS TECHNOLOGY. In connection with the acquisition of NLC
in September 1995 (see Note 6), the Company recorded a pre-tax charge of $140
million for purchased in-process technology. Through December 31, 1997, the
Company incurred approximately $50 million to develop this technology for
commercial deployment. In January 1998, such technology was transferred to the
Partnership (see Note 18).
NLC LITIGATION COSTS. In June 1996, the Company recorded a pre-tax charge
of $141 million reflecting the judgment and costs of litigation in the NLC
Litigation (see Note 12 to the consolidated financial statements).
INTEREST EXPENSE-NET. Net interest expense represents an allocation of
interest expense from the Distributing Company and was allocated based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company. Net interest expense allocated to the Company increased $3 million to
$26 million in 1996 from $23 million in 1995 as a result of higher net interest
expense of the Distributing Company.
INCOME TAXES. Income taxes have been determined as if the Company had filed
separate tax returns under its existing structure for the periods presented. The
Company recorded a tax benefit of $53 million and $7 million in 1996 and 1995,
respectively (see Note 10 to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Distributions, the Company participated in the Distributing
Company's cash management program. To the extent the Company generated positive
cash, such amounts were remitted to the Distributing Company. To the extent the
Company experienced temporary cash needs for working capital purposes or capital
expenditures, such funds were historically provided by the Distributing Company.
At the date of the Distributions, $125 million of cash was transferred to the
Company.
For the years ended December 31, 1997 and 1996, cash used by operations was
$1 million and $77 million, respectively. Cash used by operations in 1997
primarily reflects the payment of the judgment in the NLC Litigation and the
funding of NLC's operations, offset by cash generated by the operations of the
broadband business. Cash used in operations in 1996 primarily reflects the
Company's increased working capital requirements.
At December 31, 1997, working capital was $436 million compared to $372
million at December 31, 1996. Based on current levels of order input and
backlog, as well as significant sales agreements not yet reflected in order and
backlog levels, the Company believes that working capital levels are appropriate
to support future operations. There can be no assurance, however, that future
industry-specific developments or general economic trends will not alter the
Company's working capital requirements.
During the years ended December 31, 1997 and 1996, the Company invested $80
million and $134 million, respectively, in equipment and facilities. In 1998,
the Company expects to continue to expand its capacity to meet increased current
and anticipated future demands for advanced analog and digital products, with
capital expenditures for the year expected to approximate $140 million.
Additionally, during the years ended December 31, 1997 and 1996, the Company
made $40 million and $15 million, respectively, of strategic investments. The
Company's R&D expenditures were $208 million and $198 million for
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the years ended December 31, 1997 and 1996, respectively, and are expected to
approximate $170 million for the year ending December 31, 1998.
The Company has a bank credit agreement (the "Credit Agreement") which
provides a $600 million unsecured revolving credit facility and matures on
December 31, 2002. The Credit Agreement permits the Company to choose between
two competitive interest rate options. The Credit Agreement contains 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 $86 million of charges incurred in 1997) 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 $86
million of charges incurred in 1997) 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, 1997, the Company
was in compliance with all financial and operating covenants contained in the
Credit Agreement and had available credit of $513 million.
In January 1998, the Company announced that, subject to the completion of
definitive agreements, Sony Corporation will purchase 7.5 million new shares of
Common Stock of the Company for $188 million (see Note 14 to the consolidated
financial statements).
In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of NLC to a newly formed limited
partnership (the "Partnership") in exchange for approximately an 89% (subject to
additional dilution) limited partnership interest. Additionally, the Company
advanced to the Partnership $75 million, utilizing available operating funds and
borrowings under its Credit Agreement, in exchange for an 8% debt instrument
(the "Note"). Since the repayment of the Note is solely dependent upon the
results of the Partnership's research and development activities and the
commercial success of its product development, the Company recorded a charge to
fully reserve for the Note concurrently with the funding (see Note 18 to the
consolidated financial statements). Separately, the Company expects to incur an
additional $20 to $35 million of after-tax charges in the first quarter of 1998
related to additional severance, relocation and other employee separation costs
and move-related costs associated with the closure of various facilities. The
Company expects these amounts will be paid during 1998.
The Company's management assesses its liquidity in terms of its overall
ability to obtain cash to support its ongoing business levels and to fund its
growth objectives. The Company's principal sources of liquidity both on a
short-term and long-term basis are cash flows provided by operations and
borrowings under the Credit Agreement. The Company believes that based upon its
analysis of its consolidated financial position and its expected operating cash
flows from future operations, along with available funding under the Credit
Agreement (see Note 11 to the consolidated financial statements), cash flows
will be adequate to fund operations, research and development, capital
expenditures and strategic restructuring costs. There can be no assurance,
however, that future industry-specific developments or general economic trends
will not adversely affect the Company's operations or its ability to meet its
cash requirements.
NEW TECHNOLOGIES
The Company operates in a dynamic and competitive environment in which its
success will be dependent upon numerous factors, including its ability to
continue to develop appropriate technologies and successfully implement
applications based on those technologies. In this regard, the Company has made
significant investments to develop advanced systems and equipment for the cable
and satellite television, Internet/data delivery and local telephone access
markets.
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Management of the Company believes that the commercialization of digital
broadband systems and equipment, which provide for greatly expanded channel
capacity and programming options, improved quality and security of signal
transmission and the capability of delivering enhanced features and services, is
a strategic market for the Company. Management also believes that the Company's
position in this emerging market is significantly enhanced by the Company's
leadership in a key enabling technology, digital video compression, which
converts television signals to a digital format and then compresses the signals
of several channels of television programming into the bandwidth currently used
by just one analog channel. The Company has developed and is deploying digital
television systems that enable cable television operators and satellite
programmers to deliver over their existing networks up to 16 times as much
information as is possible with existing analog technology.
The Company will offer multiple system operators ("MSOs") what it believes
is a cost-effective family of open-standard digital terminals with analog
program capabilities as well. The terminals range from a lower-cost
broadcast-only digital terminal to a highly capable, real-time two-way
interactive terminal, expected to be available by the end of 1998, with a
built-in high-speed cable modem enabling personal computer connectivity and
interactive sessions over a dedicated return path. Through December 31, 1997,
the Company had shipped more than 500 digital cable TV headend systems, passing
25 million homes, and more than 700,000 digital cable TV set-top terminals.
Additionally, effective as of December 1997, the Company entered into agreements
to supply an aggregate of 15 million advanced digital terminals to most of the
leading North American MSOs over the next three to five years (see Note 14 to
the consolidated financial statements). Management of the Company expects these
MSOs to begin mass deployment of these terminals in their customers' homes over
the next several years in order to take advantage of the enhanced capabilities
of the digital networks. The future success of the Company, however, will be
dependent on its ability to develop, produce and sell these products
successfully and continue to develop and timely exploit new technologies and
market opportunities both in the United States and internationally.
Additionally, the future success of the Company will be dependent on the ability
of the cable and satellite television operators to successfully market the
services provided by the Company's advanced digital terminals to their
customers. Furthermore, as a result of the current higher costs of production,
digital products presently being shipped carry lower margins than the Company's
mature analog products.
Management of the Company expects cable television operators in the United
States and abroad to continue to purchase analog products to upgrade their basic
networks and invest in new system construction primarily to compete with other
television programming sources and to develop, using U.S. architecture and
systems, international markets where cable penetration is low and demand for
entertainment programming is growing. However, management expects that demand in
North America for its basic analog cable products will continue to decline.
Sales of analog satellite television consumer descramblers have declined, as
expected, to minimal levels over the past two years, and are expected to
continue to decline, as a result of the availability of competing digital
satellite video services. Today, this product line represents less than 1% of
consolidated net sales. In February 1998, PRIMESTAR entered into an agreement
with the Company, pursuant to which the Company will manufacture integrated
receiver decoders for PRIMESTAR's high-power retail and wholesale services
expected to be launched during 1998 after PRIMESTAR receives government approval
related to the transition of an orbital slot. There can be no assurance,
however, that the Company will realize the full benefits of this agreement if
PRIMESTAR does not receive the necessary government approval. Additionally the
Company introduced its first digital descramblers for the backyard C-band market
in 1997. This product, called 4DTV-Registered Trademark-, allows C-band dish
owners to take advantage of the wealth of digital programming now being
transmitted by satellite. There can be no assurance, however, as to the degree
of market acceptance of this new product, or whether significant quantities of
4DTV-Registered Trademark- will be shipped in 1998.
In September 1995, the Distributing Company, on behalf of the Company,
acquired NLC, which was formed to design, manufacture and market a
next-generation telecommunications broadband access
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system for the delivery of telephony, video and data from a telephone company
central office or cable television headend to the home. NLC's product,
NLevel(3)-Registered Trademark-, is designed to permit the cost-effective
delivery of a suite of standard telephony and advanced services such as
high-speed Internet/data, work-at-home, distance-learning, video-on-demand and
video-telephony to the home from a single access platform. The
NLevel(3)-Registered Trademark- system is designed to work with and enhance
existing telephony networks and offers the capability to provide voice services
(POTS), ISDN, high-speed Internet/data and video services over both
copper-twisted-pair and fiber-to-the-curb networks. In the fourth quarter of
1996, NLC entered into an agreement with NYNEX Corporation, now a part of Bell
Atlantic Corporation, pursuant to which NLC would deploy approximately one
million lines of transport electronics in the greater Boston and New York City
areas to carry voice, video and data services. Bell Atlantic Corporation also
has options to extend its deployment of the NLevel(3)-Registered Trademark-
system to up to five million lines. In the third quarter of 1997, NLC entered
into an agreement with U S WEST Communications to develop a product to support
450,000 lines of telephone, data and video service and to build an
infrastructure for one million households over five years. Commencing in January
1998, the business of NLC has been operated through the Partnership (see Note 18
to the consolidated financial statements). Since a significant amount of
research and development efforts will be required by the Partnership, there can
be no assurance that the Company will be able to recover its investment in NLC.
The Company commenced initial commercial deployment during the third quarter
of 1996 of its high-speed cable modem for cable networks, which enables network
operators to link subscribers to interactive video and data services at speeds
significantly faster than conventional telephone modems. Several cable operators
have selected the Company's high-speed cable modems in the U.S. and
internationally. However, there can be no assurance that this product line will
be commercially successful.
With these new technologies and applications under development, the Company
believes it is well positioned to take advantage of the opportunities presented
in its dynamic and competitive environment. There can be no assurance, however,
that these technologies and applications will be successfully developed, or, if
they are successfully developed, that the Company's customers will implement
them or that the Company will otherwise be able to successfully exploit these
technologies and applications.
FOREIGN EXCHANGE AND MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. In addition, as mentioned above, the Company's
sales of its equipment into international markets have increased. These foreign
operations are subject to market risk changes with respect to currency exchange
rate fluctuations, which could impact the Company's consolidated financial
statements. The Company monitors its underlying exchange rate exposures on an
ongoing basis and continues to implement selective hedging strategies to reduce
the market risks from changes in exchange rates (see Notes 3 and 15 to the
consolidated financial statements). On a selective basis, the Company enters
into contracts to 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, 1997, a hypothetical 10% fluctuation in the exchange
rate of foreign currencies applicable to the Company, principally the new Taiwan
and Canadian dollars, would result in a net $3 million gain or loss on the
contracts the Company has outstanding, which would offset the related net loss
or gain on the assets, liabilities and transactions being hedged.
17
<PAGE>
INTERNATIONAL MARKETS
Management of the Company believes that additional growth for the Company
will come from international markets. In order to support the Company's
international product and marketing strategies, it is currently expected that
the Company will add operations in foreign markets in the following areas, among
others: customer service, sales, finance and product warehousing. Although no
assurance can be given, management expects that the expansion of international
operations will not require significant capital expenditures and that increased
costs will be offset by increased sales in such markets.
Sales to the Asia Pacific region accounted for 4% of the Company's worldwide
sales for the year ended December 31, 1997. While the Company has not been
significantly affected by the current economic and currency uncertainty in this
region, the Company continues to monitor its backlog and future orders from its
customers in this region to evaluate any impact on shipments. Additionally, as a
result of reduced liquidity levels in this region, the Company continues to
review the credit position of its customers. There can be no assurance, however,
that this situation will not adversely impact the Company's business in the
future.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the past
few years, the rate of inflation has been low and has not had a material impact
on the Company's results of operations.
READINESS FOR YEAR 2000
The Company has identified and evaluated the changes to its computer systems
and products necessary to achieve a year 2000 date conversion, and any required
conversion efforts are currently underway. The Company is also communicating
with its suppliers, financial institutions and others with which it does
business to understand the impact of any year 2000 issues on the Company. The
Company does not believe the cost of achieving year 2000 compliance to be
material. Additionally, the Company believes, based on available information,
that it will be able to manage its total year 2000 transition without any
material adverse effect on its business operations, products or financial
prospects.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and other sections of
this Form 10-K may include forward-looking statements concerning, among other
things, the Company's prospects, developments and business strategies. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes," "subject to" and "scheduled." These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These risks include, but are not limited to, uncertainties relating
to general political and economic conditions, uncertainties relating to
government and regulatory policies, uncertainties relating to customer plans and
commitments, the Company's dependence on the cable television industry and cable
television spending, signal security, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations and authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. Reference is made to
Exhibit 99 to this Form 10-K, which is
18
<PAGE>
incorporated herein by reference, for a further discussion of such factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. In addition, the Company's sales of its
equipment into international markets have increased. These foreign operations
are subject to market risk changes with respect to currency exchange rate
fluctuations, which could impact the Company's consolidated financial
statements. The Company monitors its underlying exchange rate exposures on an
ongoing basis and continues to implement selective hedging strategies to reduce
the market risks from changes in exchange rates (see Notes 3 and 15 to the
consolidated financial statements contained in Item 8). On a selective basis,
the Company enters into contracts to 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, 1997, a hypothetical 10% fluctuation in the exchange
rate of foreign currencies applicable to the Company, principally the new Taiwan
and Canadian dollars, would result in a net $3 million gain or loss on the
contracts the Company has outstanding, which would offset the related net loss
or gain on the assets, liabilities and transactions being hedged.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the consolidated balance sheets of General Instrument
Corporation and its subsidiaries (formerly NextLevel Systems, Inc. and, prior
thereto, the Communications Business of the former General Instrument
Corporation) as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of General Instrument Corporation
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 14, 1998
(March 5, 1998 as to Note 19)
20
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
NET SALES............................................................... $ 1,764,088 $ 1,755,585 $ 1,532,595
Cost of sales........................................................... 1,336,482 1,349,815 1,079,916
------------ ------------ ------------
GROSS PROFIT............................................................ 427,606 405,770 452,679
------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative................................... 215,404 174,432 138,209
NLC litigation costs.................................................. -- 141,000 --
Research and development.............................................. 207,826 198,071 137,930
Purchased in-process technology....................................... -- -- 139,860
Amortization of excess of cost over fair value of net assets
acquired............................................................ 14,571 14,278 14,418
------------ ------------ ------------
Total operating expenses.............................................. 437,801 527,781 430,417
------------ ------------ ------------
OPERATING INCOME (LOSS)................................................. (10,195) (122,011) 22,262
Other income (expense), net............................................. 5,766 (1,427) (1,737)
Interest expense, net................................................... (5,210) (25,970) (22,933)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES................................................ (9,639) (149,408) (2,408)
(Provision) benefit for income taxes.................................... (6,474) 53,098 6,614
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ (16,113) $ (96,310) $ 4,206
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING........................... 147,523 147,315
PRO FORMA LOSS PER SHARE--BASIC AND DILUTED............................. $ (0.11) $ (0.65)
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 35,225 $ --
Short-term investments........................................... 30,346 --
Accounts receivable, less allowance for doubtful accounts of
$3,566 and $12,910, respectively............................... 343,625 392,984
Inventories...................................................... 288,078 263,829
Deferred income taxes............................................ 105,582 81,226
Other current assets............................................. 21,862 17,657
------------ ------------
Total current assets........................................... 824,718 755,696
Property, plant and equipment, net............................... 236,821 251,748
Intangibles, less accumulated amortization of $86,333 and
$76,077, respectively.......................................... 82,546 92,802
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $108,123 and $93,552,
respectively................................................... 471,186 478,783
Deferred income taxes............................................ 5,634 32,499
Investments and other assets..................................... 54,448 18,208
------------ ------------
TOTAL ASSETS..................................................... $1,675,353 $1,629,736
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................. $ 200,817 $ 201,382
Other accrued liabilities........................................ 188,250 182,782
------------ ------------
Total current liabilities...................................... 389,067 384,164
Deferred income taxes............................................ 5,745 6,353
NLC litigation liability......................................... -- 139,100
Other non-current liabilities.................................... 65,730 48,945
------------ ------------
Total liabilities.............................................. 460,542 578,562
------------ ------------
Commitments and contingencies (See Notes 12 and 19)
Stockholders' Equity:
Divisional net equity............................................ -- 1,051,174
Preferred Stock, $.01 par value; 20,000,000 shares authorized; no
shares issued.................................................. -- --
Common Stock, $.01 par value; 400,000,000 shares authorized;
148,358,188 shares issued at December 31, 1997................. 1,484 --
Additional paid-in capital....................................... 1,213,566 --
Accumulated deficit.............................................. (19,236) --
Unrealized gain on investments, net of taxes of $11,347.......... 18,999 --
------------ ------------
1,214,813 1,051,174
Less--Treasury Stock, at cost, 4,309 shares of Common Stock...... (2) --
------------ ------------
Total stockholders' equity..................................... 1,214,811 1,051,174
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $1,675,353 $1,629,736
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED COMMON TOTAL
--------------- PAID-IN ACCUMULATED GAIN ON STOCK IN DIVISIONAL STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS TREASURY NET EQUITY EQUITY
------- ------ ---------- ----------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995...... -- $-- $ -- $ -- $-- $-- $ 763,895 $ 763,895
Net income.................... 4,206 4,206
Transfers from the
Distributing Company........ 88,558 88,558
Other transactions with the
Distributing Company........ 69,509 69,509
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1995.... -- -- -- -- -- -- 926,168 926,168
Net loss...................... (96,310) (96,310)
Transfers from the
Distributing Company........ 226,370 226,370
Other transactions with the
Distributing Company........ (5,054) (5,054)
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1996.... -- -- -- -- -- -- 1,051,174 1,051,174
Net income (loss)............. (19,236) 3,123 (16,113)
Transfers from the
Distributing Company........ 125,310 125,310
Other transactions with the
Distributing Company........ 17,814 17,814
Unrealized gain on investment,
net of tax.................. 21,576 21,576
Spin-off from the Distributing
Company..................... 147,315 1,473 1,195,948 21,576 (1,218,997) --
Exercise of stock options and
related tax benefit......... 679 7 10,362 10,369
Stock issued in connection
with a business
acquisition................. 358 4 6,996 7,000
Net change in investments..... (2,577) (2,577)
Other......................... 6 260 (2) 258
------- ------ ---------- ----------- ----------- --- ---------- -------------
BALANCE, DECEMBER 31, 1997.... 148,358 $1,484 $1,213,566 $(19,236) $18,999 $ (2) $ -- $1,214,811
------- ------ ---------- ----------- ----------- --- ---------- -------------
------- ------ ---------- ----------- ----------- --- ---------- -------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (16,113) $ (96,310) $ 4,206
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 89,857 84,500 68,042
Gain on sale of short-term investment....................................... (10,667) -- --
NLC litigation costs, net................................................... -- 91,650 --
Losses from asset sales and write-downs, net................................ 19,486 11,974 --
Purchased in-process technology, net........................................ -- -- 90,000
Changes in assets and liabilities:
Accounts receivable....................................................... 57,557 (160,550) (40,809)
Inventories............................................................... (22,637) (42,450) (58,444)
Other current assets...................................................... 7,919 (2,185) (4,921)
Deferred income taxes..................................................... 5,237 (3,978) (173)
Non-current assets........................................................ 1,226 3,327 (12,281)
Accounts payable and other accrued liabilities............................ (11,245) 60,108 (16,917)
NLC litigation payment.................................................... (140,692) -- --
Other non-current liabilities............................................. 18,955 (26,079) (12,109)
Other....................................................................... 617 3,347 1,570
---------- ---------- ----------
Net cash provided by (used in) operating activities........................... (500) (76,646) 18,164
---------- ---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment.................................. (79,828) (134,353) (96,944)
Investments in other assets................................................. (32,770) (3,700) (7,003)
Acquisitions, net of cash acquired.......................................... (6,980) (11,671) (2,775)
Proceeds from sale of short-term investment................................. 10,667 -- --
Proceeds from sale of assets................................................ 10,529 -- --
---------- ---------- ----------
Net cash used in investing activities......................................... (98,382) (149,724) (106,722)
---------- ---------- ----------
FINANCING ACTIVITIES:
Transfers from Distributing Company......................................... 125,310 226,370 88,558
Proceeds from stock option exercises........................................ 9,363 -- --
Other....................................................................... (566) -- --
---------- ---------- ----------
Net cash provided by financing activities..................................... 134,107 226,370 88,558
---------- ---------- ----------
Change in cash and cash equivalents........................................... 35,225 -- --
Cash and cash equivalents, beginning of year.................................. -- -- --
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 35,225 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
1. COMPANY BACKGROUND
General Instrument Corporation ("General Instrument" or the "Company"),
formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and
components for high-performance networks, delivering video, voice and
Internet/data services to the cable, satellite and telephony markets. General
Instrument is the world leader in digital and analog set-top systems for wired
and wireless cable television networks, as well as hybrid fiber/coaxial network
transmission systems used by cable television operators and is a leading
provider of digital satellite systems for programmers, direct-to-home satellite
network providers and private networks for business communications. Through its
limited partnership interest in Next Level Communications, L.P. (the
"Partnership") (see Note 18), the Company provides telephone network solutions
through the Partnership's NLevel(3)-Registered Trademark- Switched Digital
Access system.
The Company was formerly the Communications Business of the former General
Instrument Corporation (the "Distributing Company"). In a transaction that was
consummated on July 28, 1997, the Distributing Company (i) transferred all the
assets and liabilities, 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, 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. To the extent the Company generated positive cash, such
25
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
2. BASIS OF PRESENTATION (CONTINUED)
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 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.
26
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INVESTMENTS. Equity securities held by the Company are classified as
"available-for-sale" securities and reported at fair value. Any unrealized
holding gains and losses, net of taxes, are excluded from operating results and
are recognized as a separate component of stockholders' equity until realized.
Fair value of the securities is determined based on market prices and gains and
losses are determined using the securities' cost. The Company held no debt
securities during any period presented.
Proceeds and the related gains from the sales of available-for-sale
securities during 1997 were $11 million. There were no sales of such securities
during 1996 or 1995. At December 31, 1997, short-term investments had a fair
value of $30 million, a cost basis of zero and gross unrealized gains of $30
million.
INVENTORIES. Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Provisions for depreciation are based on estimated useful lives of the
assets using the straight-line method. Average useful lives are 5 to 35 years
for buildings and improvements; economic useful life or lease term, whichever is
shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment.
INTANGIBLE ASSETS. Intangible assets consist primarily of patents, which
are being amortized on a straight-line basis over 5 to 17 years.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 30 to 40 years. Management continually reassesses the appropriateness
of both the carrying value and remaining life of the excess of cost over fair
value of net assets acquired by assessing recoverability based on forecasted
operating cash flows, on an undiscounted basis, and other factors. Management
believes that, as of December 31, 1997, the carrying value and remaining life of
the excess of cost over fair value of net assets acquired are appropriate.
LONG-LIVED ASSETS. Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles, and the goodwill related to those
assets, may not be recoverable, the Company evaluates the carrying values of
such assets using future undiscounted cash flows. 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. Management believes that, as of
December 31, 1997, the carrying values of such assets are appropriate. During
1996 and 1997 the Company recorded significant impairment losses (see Notes 5
and 17).
FOREIGN CURRENCY TRANSLATION. The Company has determined the U.S. dollar to
be the functional currency of all foreign operations. Accordingly, gains and
losses recognized as a result of translating foreign operations' monetary assets
and liabilities from local currencies to U.S. dollars are reflected in the
accompanying consolidated statements of operations. For periods prior to the
Distributions, the Company had been considered in the Distributing Company's
overall risk management strategy to reduce its exposure to adverse movements in
foreign exchange rates. To hedge foreign currency exposure on monetary assets
and liabilities the Distributing Company, on behalf of the Company, and
subsequent to the
27
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 will be included in the Distributing Company's consolidated U.S.
and state income tax returns and in the tax returns of certain of the
Distributing Company's foreign subsidiaries. Through the date of the
Distributions, the provision for income taxes was based on the Company's
expected annual effective tax rate calculated assuming the Company had filed
separate tax returns under its then existing structure. Accordingly, future tax
rates could vary from the historical effective tax rates depending upon the
Company's future tax elections. Subsequent to the Distributions, the provision
for income taxes is based on the Company's actual results for that period.
Deferred income taxes reflect the future tax consequences of differences between
the financial reporting and tax bases of assets and liabilities. Deferred income
taxes have been provided for the income tax liability that would be incurred on
the repatriation of undistributed earnings of the Company's foreign
subsidiaries, except for locations where the Company has designated earnings to
be permanently reinvested.
PRO FORMA EARNINGS (LOSS) PER SHARE. On December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," which replaces primary and fully diluted earnings per share
calculated under Accounting Principles Board Opinion No. 15, "Earnings per
Share," with basic and diluted earnings per share. Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number
of common shares outstanding. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted-average number of common and common
equivalent shares outstanding adjusted for the dilutive effect of stock options
and warrants (unless such common stock equivalents would be anti-dilutive), and
the computation of diluted earnings (loss) per share assumes the exercise of
stock options and warrants using the treasury stock method. Prior to the
Distributions, the Company did not have its own capital structure, and pro forma
per share information has been presented for the years ended December 31, 1997
and 1996. The pro forma weighted-average number of shares outstanding used in
the pro forma per share calculation for 1996 equaled the number of common shares
issued on the date of the Distributions, and for 1997, included the number of
common shares issued on the date of the Distributions plus the actual share
activity during the period subsequent to the Distributions. Further, since the
computation of diluted loss per share is anti-dilutive, the amounts reported for
pro forma basic and diluted loss per share are the same.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED.
OTHER COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
was issued in June 1997 and is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130
28
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements,
either in the statement of operations or as a separate statement. In
addition, it requires the display of the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
position. The Company will adopt SFAS No. 130 in the first quarter of 1998.
However, since this statement only requires additional disclosures, its
adoption will not have any impact on the Company's consolidated financial
position, results of operations or cash flows.
SEGMENT REPORTING. In June 1997, SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued and is effective for
fiscal periods beginning after December 15, 1997. SFAS No. 131 establishes
standards for the reporting of information about operating segments,
including related disclosures about products and services, geographic areas
and major customers, and requires the reporting of selected information
about operating segments in interim financial statements. The Company will
adopt SFAS No. 131 in the first quarter of 1998 and is currently evaluating
the disclosure requirements.
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma consolidated statements of operations presented
below were prepared to give effect to the Distributions as if they had occurred
on January 1, 1996. The unaudited pro forma statements of operations set forth
below do not purport to represent what the Company's operations actually would
have been had the Distributions occurred on January 1, 1996 or to project the
Company's operating results for any future period.
The unaudited pro forma information has been prepared utilizing the
historical consolidated statements of operations of the Company which were
adjusted to reflect: (i) an additional $4 million and $7 million of selling,
general and administrative ("SG&A") costs for the years ended December 31, 1997
and 1996, respectively, to eliminate the allocation of corporate expenses to
CommScope and General Semiconductor, as such costs subsequent to the
Distributions are no longer allocable and (ii) a net debt level of
29
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
$100 million at the beginning of each period presented through July 25, 1997,
the date of the Communications Distribution.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Net sales............................................................................. $ 1,764,088 $ 1,755,585
Cost of sales......................................................................... 1,336,482 1,349,815
------------ ------------
Gross profit.......................................................................... 427,606 405,770
------------ ------------
Operating expenses:
Selling, general and administrative................................................. 219,004 181,032
NLC litigation costs................................................................ -- 141,000
Research and development............................................................ 207,826 198,071
Amortization of excess of cost over fair value of net assets acquired............... 14,571 14,278
------------ ------------
Total operating expenses.......................................................... 441,401 534,381
------------ ------------
Operating loss........................................................................ (13,795) (128,611)
Other income (expense), net........................................................... 5,766 (1,427)
Interest income (expense), net........................................................ 5,631 (7,595)
------------ ------------
Loss before income taxes.............................................................. (2,398) (137,633)
(Provision) benefit for income taxes.................................................. (9,269) 48,989
------------ ------------
Net loss.............................................................................. $ (11,667) $ (88,644)
------------ ------------
------------ ------------
Weighted-average shares outstanding................................................... 147,523 147,315
Loss per share -- basic and diluted................................................... $ (0.08) $ (0.60)
</TABLE>
5. RESTRUCTURINGS
In the fourth quarter of 1997, 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
approximately 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 products previously manufactured in this facility will be
manufactured by subcontractors in the U.S. and will continue to be sold by the
Company and as such, the Company does not expect reduced revenues as a result of
the closure of this facility. The Company also announced it would move its
corporate headquarters from Chicago, Illinois to Horsham, Pennsylvania during
the first quarter of 1998.
As a result of the above actions, the Company recorded a pre-tax charge of
$36 million, 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
30
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
5. RESTRUCTURINGS (CONTINUED)
fixed assets as a result of the Company's decision to close 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 has made severance payments of $5 million to approximately 800
employees, and the remaining severance and other employee separation costs will
be paid in 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 year 2008. The fixed assets are expected to
be disposed of by the end of 1998 and none are being utilized in the Company's
operations. The Company expects to incur an additional $20 to $35 million of
restructuring and other after-tax charges in the first quarter of 1998 related
to additional severance, relocation and other employee separation costs and
move-related costs associated with the closure of various facilities. All
relocation and move related costs will be expensed as incurred since they did
not meet the criteria for accrual at December 31, 1997.
In connection with the Distributions (see Note 1), the Company recorded a
charge during 1997 of $18 million to cost of sales for employee costs, which
included a curtailment and settlement loss of $4 million (see Note 13), related
to dividing the Distributing Company's Taiwan operations between the Company and
General Semiconductor. The Company expects to fully pay these costs prior to the
end of the second quarter of 1998. Further, the Company recorded a charge of $6
million to SG&A expense for legal and other professional fees incurred in
connection with the Distributions. The $21 million and $18 million of
restructuring charges described above, which were recorded to cost of sales
during 1997, relate to the Puerto Rico and Taiwan 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.
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.
The following tabular reconciliation summarizes the restructuring activity
discussed above:
<TABLE>
<CAPTION>
1996 1997
------------------------ BALANCE AT ------------------------
AMOUNTS DECEMBER 31, AMOUNTS
ADDITIONS UTILIZED 1996 ADDITIONS UTILIZED
----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Property, Plant & Equipment(1).................... $ 4.2 $ (3.3) $ 0.9 $ 10.4 $ (3.5)
Facility Costs.................................... 3.0 -- 3.0 11.2 (3.7)
Severance......................................... 0.4 (0.4) -- 32.7 (12.8)
Professional Fees................................. -- -- -- 6.0 (6.0)
--- ----- --- ----- -----------
Total............................................. $ 7.6 $ (3.7) $ 3.9 $ 60.3 $ (26.0)
--- ----- --- ----- -----------
--- ----- --- ----- -----------
<CAPTION>
BALANCE AT
DECEMBER 31,
1997
---------------
<S> <C>
Property, Plant & Equipment(1).................... $ 7.8
Facility Costs.................................... 10.5
Severance......................................... 19.9
Professional Fees................................. --
-----
Total............................................. $ 38.2
-----
-----
</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.
31
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
6. ACQUISITIONS
In September 1997, the Company acquired Telenetworks, a specialized software
company, and in June 1996, the Company acquired the assets of the
Magnitude-Registered Trademark- MPEG-2/DVB product family of Compression Labs,
Inc. The aggregate net purchase price of these acquisitions was $19 million.
Such acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair value at
the date of each acquisition.
In September 1995, the Distributing Company, on behalf of the Company,
acquired all of the remaining outstanding shares of Next Level Communications
("NLC"), including shares issued upon conversion of all of NLC's outstanding
options and warrants. The total purchase price of $91 million consisted of 2.2
million common shares of the Distributing Company valued at $75 million,
Distributing Company stock options valued at $10 million and cash of $6 million.
NLC is involved with the development of a next-generation broadband access
system, NLevel(3)-Registered Trademark-, utilizing switched-digital video
technology. NLevel(3)-Registered Trademark- is designed to provide delivery of
video, voice and Internet/data services over both copper-twisted-pair and
fiber-to-the-curb networks. The acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition. The purchase price of $91
million, plus the $2 million of costs directly attributable to the completion of
the acquisition, have been allocated to the assets and liabilities acquired.
Approximately $90 million of the total purchase price represented the value, net
of deferred income taxes, of NLC's in-process technology, which was determined
by an independent appraiser based upon the present value of the future projected
earnings from the technology over its estimated useful life. Since technological
feasibility had not yet been achieved and there was no alternative future use
for the technology being developed, the amounts allocated to the in-process
technology were expensed concurrent with the purchase. The NLC business has
expended approximately $50 million in research and development costs from the
date of the 1995 acquisition through December 31, 1997. The Company expects NLC
to incur an additional $70 to $75 million in research and development expenses
over the next two years to develop this technology for commercial deployment.
The net-of-tax charge of $90 million included $140 million associated with this
technology charged to operating income, offset by a non-cash tax benefit of $50
million. See also Note 18.
7. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Raw materials....................................................... $ 111,148 $ 104,984
Work in process..................................................... 19,676 21,344
Finished goods...................................................... 157,254 137,501
----------- -----------
$ 288,078 $ 263,829
----------- -----------
----------- -----------
</TABLE>
32
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
8. PROPERTY, PLANT AND EQUIPMENT-NET
Property, plant and equipment-net consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Land and land improvements.......................................... $ 17,683 $ 17,678
Buildings, improvements and leasehold improvements.................. 37,443 23,111
Machinery and equipment............................................. 421,615 435,078
----------- -----------
476,741 475,867
Less accumulated depreciation....................................... (239,920) (224,119)
----------- -----------
$ 236,821 $ 251,748
----------- -----------
----------- -----------
</TABLE>
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Salaries and compensation liabilities............................... $ 49,831 $ 27,049
Payroll, state and local taxes...................................... 7,648 12,542
Product and warranty liabilities.................................... 54,594 77,291
Other............................................................... 76,177 65,900
----------- -----------
$ 188,250 $ 182,782
----------- -----------
----------- -----------
</TABLE>
10. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Domestic............................................... $ (23,157) $ (189,487) $ (42,964)
Foreign................................................ 13,518 40,079 40,556
----------- ----------- -----------
Total.................................................. $ (9,639) $ (149,408) $ (2,408)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
33
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. INCOME TAXES (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Current:
Federal.............................................. $ 7,583 $ (5,878) $ (17,823)
Foreign.............................................. 3,905 4,312 4,810
State................................................ 3,800 1,796 6,572
----------- ----------- -----------
15,288 230 (6,441)
----------- ----------- -----------
Deferred:
Federal.............................................. (11,039) (52,635) (305)
Foreign.............................................. 926 1,269 1,781
State................................................ 1,299 (1,962) (1,649)
----------- ----------- -----------
(8,814) (53,328) (173)
----------- ----------- -----------
Provision (benefit) for income taxes................... $ 6,474 $ (53,098) $ (6,614)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The provision for income taxes for the periods prior to the Distributions
was based on the Company's expected annual effective tax rate calculated
assuming the Company had filed separate tax returns under its then existing
structure. Subsequent to the Distributions, the provision for income taxes is
based on the Company's actual results for that period.
The following table presents the principal reasons for the difference
between the actual income tax provision (benefit) and the tax benefit computed
by applying the U.S. federal statutory income tax rate to the loss before income
taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Federal income tax benefit at 35%.......................................... $ (3,374) $ (52,293) $ (842)
State income taxes-net..................................................... 3,314 (108) 3,199
Foreign operations......................................................... 1,153 (6,655) (2,449)
Non-deductible purchase accounting item.................................... 4,997 4,997 5,046
Settlement of tax audits................................................... -- -- (12,000)
Other-net.................................................................. 384 961 432
---------- ---------- ----------
Provision (benefit) for income taxes....................................... $ 6,474 $ (53,098) $ (6,614)
---------- ---------- ----------
---------- ---------- ----------
Effective income tax rate.................................................. 67.2% (35.5%) (274.7%)
</TABLE>
34
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. INCOME TAXES (CONTINUED)
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET LIABILITY NET ASSET LIABILITY NET
---------- ----------- ---------- --------- ----------- ----------
Current Deferred Income Taxes:
Domestic net operating loss carryforwards (expiring
in 2012)........................................... $ 35,325 $ -- $ 35,325 $ -- $ -- $ --
Accounts receivable and inventory reserves........... 33,732 -- 33,732 27,600 -- 27,600
Product and warranty liabilities..................... 21,250 -- 21,250 23,357 -- 23,357
Employee benefits.................................... 13,444 -- 13,444 8,128 -- 8,128
Other current........................................ 1,831 -- 1,831 22,141 -- 22,141
---------- ----------- ---------- --------- ----------- ----------
$ 105,582 $ -- $ 105,582 $ 81,226 $ -- $ 81,226
---------- ----------- ---------- --------- ----------- ----------
---------- ----------- ---------- --------- ----------- ----------
Non-Current Deferred Income Taxes:
Tax credit carryforwards (expiring in 2012).......... $ 6,516 $ -- $ 6,516 $ -- $ -- $ --
Fixed and intangible assets.......................... (17,673) -- (17,673) (26,839) -- (26,839)
NLC litigation liability............................. -- -- -- 48,690 -- 48,690
Employee benefits.................................... 13,340 -- 13,340 6,865 -- 6,865
Other non-current.................................... 3,451 5,745 (2,294) 3,783 6,353 (2,570)
---------- ----------- ---------- --------- ----------- ----------
$ 5,634 $ 5,745 $ (111) $ 32,499 $ 6,353 $ 26,146
---------- ----------- ---------- --------- ----------- ----------
---------- ----------- ---------- --------- ----------- ----------
</TABLE>
In July 1997, the Company, General Semiconductor and CommScope entered into
a tax-sharing agreement that effectively provides that the Company will be
responsible for the consolidated tax liability of the Distributing Company for
all periods prior to the Distributions. As a result, the consolidated tax
liability of the Distributing Company was allocated to the Company at the date
of the Distributions.
At December 31, 1996 the federal and state income taxes which were currently
payable or receivable were settled with the Distributing Company through
divisional net equity. In addition, during the years ended December 31, 1996 and
1995, the Distributing Company settled certain tax matters which decreased the
Company's tax payable through divisional net equity to the Distributing Company
and resulted in credits of $5 and $2 million to goodwill for 1996 and 1995,
respectively, since these matters related to periods prior to the acquisition of
the Distributing Company by affiliates of Forstmann Little & Co. In addition,
during 1995, the Distributing Company had a favorable settlement of a tax matter
related to the Company that resulted in a $12 million benefit to the 1995 income
tax provision.
Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $6 million in 1997 as those earnings are considered to be
permanently reinvested. Determining the tax liability that would arise if these
earnings were remitted is not practicable. Income taxes received during the
period subsequent to the Distributions was $2 million.
11. LONG-TERM DEBT
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides a $600 million unsecured revolving credit facility
and matures on December 31, 2002. The Credit
35
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
11. LONG-TERM DEBT (CONTINUED)
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 (between 15.5 and 43.75
additional basis points). 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 of between 7 and 18.75 basis points 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. 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 $86 million of charges incurred in 1997) 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 $86 million of charges
incurred in 1997) of less than 3 to 1. In addition, under the Credit Agreement,
certain changes in control of the Company would result in an event of default,
and the lenders under the Credit Agreement could declare all outstanding
borrowings under the Credit Agreement immediately due and payable. None of the
restrictions contained in the Credit Agreement is expected to have a significant
effect on the Company's ability to operate, and as of December 31, 1997, the
Company was in compliance with all financial and operating covenants under the
Credit Agreement. At December 31, 1997, the Company had not borrowed under the
Credit Agreement and had available credit of $513 million. Interest paid during
the period subsequent to the Distributions was $5 million.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space, manufacturing and warehouse facilities and
transportation and other equipment under operating leases, which expire at
various dates through the year 2009. Rent expense was $16, $15 and $11 million
in 1997, 1996 and 1995, respectively. The Company has three seven-year operating
lease agreements for its domestic administrative facilities, and the total cost
of the facilities covered by these agreements approximates $140 million. These
leases provide for a substantial residual value guarantee (approximately 83% of
the total cost) which is due upon termination of the lease and include purchase
and renewal options. The Company can exercise its purchase option or the
facilities can 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.
36
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments required under operating leases as of December
31, 1997 were as follows:
<TABLE>
<S> <C>
1998............................................................... $ 13,035
1999............................................................... 13,052
2000............................................................... 11,908
2001............................................................... 11,379
2002............................................................... 11,063
Thereafter......................................................... 19,130
</TABLE>
The Company has approximately $87 million of letters of credit outstanding
at December 31, 1997.
The Company is either a plaintiff or a defendant in several pending legal
matters. In addition, the Company is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge and disposal of
hazardous materials. The Company's manufacturing facilities are believed to be
in substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
material adverse effect on the Company's 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. See also Note 19.
An action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL INSTRUMENT CORP.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleges that the Company infringes
BroadBand Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560 (the "560
Patent"), covering an electronic communications system which delivers television
signals, and seeks monetary damages and injunctive relief. On June 13, 1997, the
Distributing Company's motion to dismiss the complaint for lack of personal
jurisdiction was denied. The Partnership has assumed liability with respect to
this litigation (see Note 18).
In March 1997, NLC commenced an action against BBT in the United States
District Court for the Northern District of California for a declaratory
judgment that BBT's 560 Patent is invalid and unenforceable; for patent
infringement; and for violation of the antitrust laws of the United States. In
the patent infringement claim, NLC charges that BBT infringes two patents
relating to video compression and video signal processing. BBT has answered the
complaint and does not contest jurisdiction. On September 30, 1997, BBT's motion
to have the case transferred to North Carolina was denied. The Partnership has
assumed responsibility with respect to this litigation.
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
37
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
October 18, 1995. The complaint alleges that the Distributing Company and
certain of its officers and directors, as well as Forstmann Little & Co. and
certain related entities, violated the federal securities laws, namely, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), prior to the Distributions, by allegedly making false and
misleading statements and failing to disclose material facts about the
Distributing Company's planned shipments in 1995 of its CFT 2200 and
DigiCipher-Registered Trademark- products. Also pending in the same court, under
the same name, is a derivative action brought on behalf of the Distributing
Company. The derivative action alleges that, prior to the Distributions, the
members of the Distributing Company's Board of Directors, several of its
officers and Forstmann Little & Co. and related entities have breached their
fiduciary duties by reason of the matter complained of in the class action and
the defendants alleged use of material non-public information to sell shares of
the Distributing Company's stock for personal gain. Both actions seek
unspecified damages and attorney's fees and costs. The court had granted the
defendants' motions to dismiss the original complaints in both of these actions,
but allowed the plaintiffs in each action an opportunity to file amended
complaints. Amended complaints were filed on November 7, 1997. The defendants
have answered the amended consolidated complaint in the class actions, denying
liability, and have filed a renewed motion to dismiss the derivative action. The
Company intends to vigorously contest these actions.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by certain holders of preferred stock of NLC, which
merged into a subsidiary of the Distributing Company in September 1995. The
action was originally filed in the Northern District of California and was
subsequently transferred to the Northern District of Illinois. The plaintiffs
allege that the defendants violated federal securities laws by making
misrepresentations and omissions and breached fiduciary duties to NLC in
connection with the acquisition of NLC by the Distributing Company. Plaintiffs
seek, among other things, unspecified compensatory and punitive damages and
attorneys' fees and costs. On September 23, 1997, the district court dismissed
the complaint, without prejudice, and the plaintiffs were given until November
7, 1997 to amend their complaint. On November 7, 1997, plaintiffs served the
defendants with amended complaints, which contain allegations substantially
similar to those in the original complaint. The defendants have filed a motion
to dismiss parts of the amended complaint and have answered the balance of the
amended complaint, denying liability. The Company intends to vigorously contest
this action.
In connection with the Distributions, the Company has agreed to indemnify
General Semiconductor in respect of its obligations, if any, arising out of or
in connection with the matters discussed in the preceding two paragraphs.
While the ultimate outcome of the matters described above cannot be
determined, management does not believe that the final disposition of these
matters will have a material adverse effect on the Company's consolidated
financial statements.
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS. Prior to the Distributions, the Company participated in the
Distributing Company's domestic and foreign pension plans, and the Company's
consolidated financial statements reflect the costs experienced for its
employees and retirees while included in the Distributing Company's plans. The
Company, CommScope and General Semiconductor entered into an Employee Benefits
Allocation Agreement, which provided that, effective as of the Distributions,
the Company assumed responsibility for liabilities of the Distributing Company
under the Distributing Company's employee benefit plans with
38
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
respect to individuals who are employees or retirees of the Company. In
connection with dividing the Distributing Company's Taiwan operations between
the Company and General Semiconductor, a curtailment and settlement loss of $4
million was recorded by the Company.
Following the Distributions, the Company established separate defined
benefit plans for the employees and retirees of the Company. Assets included in
trusts under qualified pension plans were divided after the Distributions
between the trusts for the Distributing Company's qualified pension plans and
the Company's qualified pension plans. Each such domestic plan received the
legally required funding under the Employee Retirement Income Security Act of
1974 ("ERISA"), and foreign plans received funding as specified under the
applicable statutory requirements.
Net pension cost of the Company for the year ended December 31, 1997
consists of the following:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
----------- ---------
<S> <C> <C>
Service cost.............................................................. $ 2,651 $ 1,713
Interest.................................................................. 2,443 1,612
Return on plan assets..................................................... (4,263) (285)
Net amortization and deferral............................................. 2,497 578
Curtailment and settlement loss........................................... -- 4,282
----------- ---------
Net pension cost.......................................................... $ 3,328 $ 7,900
----------- ---------
----------- ---------
</TABLE>
The Company's share of the Distributing Company's consolidated net pension
costs which have been recorded in the accompanying statements of operations in
1996 and 1995 was $5 and $4 million, respectively. The net pension expense
presented above for 1997 includes the Company's share of the Distributing
Company's net pension cost for the period prior to the Distributions.
The funded status of the pension plans and the related amounts as recorded
in the accompanying consolidated balance sheet at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
---------- ----------
<S> <C> <C>
Actuarial present value of:
Vested benefits..................................................... $ 23,501 $ 6,058
---------- ----------
---------- ----------
Accumulated benefits................................................ $ 25,880 $ 9,353
---------- ----------
---------- ----------
Projected benefit obligation........................................ $ 37,986 $ 20,211
Market value of plan assets........................................... 25,680 912
---------- ----------
Funded status......................................................... (12,306) (19,299)
Unrecognized (gain) loss.............................................. (1,662) 7,752
---------- ----------
Accrued pension obligation............................................ $ (13,968) $ (11,547)
---------- ----------
---------- ----------
Actuarial assumptions:
Discount rate....................................................... 7.25% 6.75%
Investment return................................................... 9.00% 8.00%
Compensation increases.............................................. 4.75% 6.00%
</TABLE>
39
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company's share of the Distributing Company's consolidated actuarial
present value of vested benefits, accumulated benefits and the projected benefit
obligation was $27, $39 and $62 million, respectively, as of December 31, 1996.
The accrued pension obligation recorded in the accompanying consolidated balance
sheet at December 31, 1996 was $14 million.
The domestic pension plans consist principally of a qualified retirement
plan that has satisfied the full funding limitation requirements under ERISA. No
contributions were made to the plans during 1997. The Company maintains an
unfunded supplemental retirement plan for certain members of management, and net
pension cost and accrued pension obligations for this plan are included in the
amounts above. The Company's foreign pension plans consist principally of a
Taiwan pension plan, which is funded under Taiwan's statutory requirements. The
Company contributed $1 million to the Taiwan pension plan in 1997. The Company's
domestic plan's assets consist of fixed income and equity securities, and the
Taiwan plan's assets principally consist of fixed income securities.
SAVINGS PLAN. The Company maintains a voluntary savings plan covering all
non-union employees (prior to the Distributions, eligible employees of the
Company participated in the Distributing Company's savings plan). Eligible
employees may elect to contribute up to 10% of their salaries subject to certain
limitations. The Company contributes an amount equal to 50% of the first 6% of
the employee's salary that the employee contributes subject to certain
limitations. The Company's expense related to these savings plans was $4, $3 and
$2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
POSTRETIREMENT PLAN. Prior to the Distributions, the Company participated
in the Distributing Company's sponsored contributory health-care and life
insurance benefits plan. Following the Distributions, the Company established a
separate postretirement benefit plan for the employees and retirees of the
Company (the "Plan"). The Plan is an unfunded contributory group medical plan
for all full-time U.S. employees of the Company not covered by a collective
bargaining agreement and who meet defined age and service requirements. The
Company recognizes the cost of providing and maintaining postretirement benefits
during employees' active service periods. The Plan is the primary provider of
benefits for retirees up to age 65. After age 65, Medicare becomes the primary
provider.
Net postretirement benefit costs covering all of the Company's employees for
the year ended December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Service cost....................................................... $ 824
Interest........................................................... 531
Net amortization and deferral...................................... (181)
---------
Net postretirement benefit costs................................... $ 1,174
---------
---------
</TABLE>
The Company's share of the Distributing Company's consolidated net
postretirement benefit costs which have been recorded in the accompanying
statements of operations in 1996 and 1995 was $0.8 and $0.6 million,
respectively. The net postretirement benefit costs presented above for 1997
includes the Company's share of the Distributing Company's net postretirement
benefit cost for the period prior to the Distributions.
40
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the Plan and the related amounts as recorded in the
accompanying consolidated balance sheet at December 31, 1997 are as follows:
Accumulated postretirement benefit obligation ("APBO"):
<TABLE>
<S> <C>
Retirees......................................................... $ 2,325
Active participants.............................................. 6,203
---------
Total APBO......................................................... 8,528
Unrecognized prior service cost.................................... 1,800
Unrecognized gain.................................................. 1,515
---------
Accrued postretirement benefit obligation.......................... $ 11,843
---------
---------
Discount rate used in determining APBO............................. 7.25%
</TABLE>
The Company's share of the Distributing Company's consolidated
postretirement benefit obligation as of December 31, 1996 was $11 million.
The assumed rate of future increases in health care cost during 1997 was
12.5% for pre-age 65 retirees and 10% for post-age 65 retirees, and is expected
to decline to 6% by the year 2006. Under the Plan, the actuarially determined
effect of a one percentage point increase in the assumed health care cost trend
rate on annual net postretirement benefit cost and the APBO would be $0.3 and $2
million, respectively.
14. STOCKHOLDERS' EQUITY
COMMON SHARES. Pursuant to the Company's Amended and Restated Certificate
of Incorporation, the authorized capital stock of the Company consists of 400
million shares. As discussed in Note 1, approximately 147.3 million shares of
the Company's Common Stock, based on a ratio of one for one, were distributed to
the Distributing Company's stockholders of record on July 25, 1997.
STOCK OPTION AGREEMENTS. During 1997 and in prior years, certain employees
of the Company were granted awards under the Distributing Company's 1993
Long-Term Incentive Plan (the "Distributing Company Plan"). Awards issued to
employees of the Company consisted primarily of stock options.
Immediately following the Distributions, awards outstanding under the
Distributing Company Plan held by the Company's employees were replaced by
substitute awards under the Company's 1997 Long-Term Incentive Plan (the
"Plan"), and the substitute awards preserved the economic value of the canceled
Distributing Company options. Accordingly, the substitute options have the same
ratio of the exercise price per option to the market value per share, the same
aggregate intrinsic value (difference between market value per share and
exercise price) and the same vesting provisions, option period and other terms
and conditions as the Distributing Company options being replaced.
The Plan provides for the granting of stock options, stock appreciation
rights, restricted stock, performance units, performance shares and phantom
shares and phantom stock to employees of the Company and its subsidiaries and
the granting of stock options to directors of the Company. Generally, stock
options have a 10-year term and vest within three or four years of grant.
The number of shares of Distributing Company common stock subject to options
held by the Company's employees at December 31, 1996 and 1995 were approximately
9 and 8 million, respectively.
41
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity relating to the Company's
stock option plan subsequent to the Distributions.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
(IN THOUSANDS) PER SHARE
--------------- -----------------
<S> <C> <C>
Distributing Company options related to employees of the Company, and
outstanding at July 25, 1997.................................................. 11,349 $ 22.45
------
------
Company options substituted for Distributing Company Options, and outstanding at
July 25, 1997................................................................. 16,655 15.30
Granted......................................................................... 3,069 16.59
Exercised....................................................................... (679) 13.78
Canceled........................................................................ (2,117) 15.93
------
Outstanding at December 31, 1997................................................ 16,928 15.52
------
------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable under the Company's stock option plan.
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS
OUTSTANDING AT WEIGHTED- AVERAGE WEIGHTED- OPTIONS WEIGHTED-
DECEMBER 31, REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF 1997 CONTRACTUAL EXERCISE DECEMBER 31, 1997 EXERCISE
EXERCISE PRICES (IN THOUSANDS) TERM (YEARS) PRICE (IN THOUSANDS) PRICE
- -------------------- --------------- ----------------- ------------- ----------------- -------------
$ 1.03 - $ 1.87 130 5.0 $ 1.45 130 $ 1.45
10.82 - 13.82 441 4.4 10.91 432 10.86
14.14 - 15.75 12,485 8.1 15.17 5,232 14.72
16.00 - 17.80 3,267 7.0 17.12 1,750 17.19
18.57 - 20.88 605 9.6 20.43 8 19.93
</TABLE>
At December 31, 1997, 5.6 million shares were reserved for future awards
under the Company's stock award plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plan. Since the exercise price of all stock options granted was equal to the
closing price of the Common Stock on the New York Stock Exchange on the date of
grant, no compensation expense has been recognized by the Company under its
stock option plan. Compensation expense would have been $23 million in 1997 had
compensation cost for stock options awarded under the Plan and under the
Distributing Company Plan been determined based upon the fair value at the grant
date consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," and the Company's pro forma net loss and pro
forma loss per share (basic and diluted) would have been $31 million and $0.21
for 1997, respectively.
The incremental fair value of the Company's options was determined using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected holding period of 4 years; a risk-free interest rate of
6.08%; an expected volatility of 35%; and an expected dividend yield of 0%. The
42
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
weighted-average per share fair value of the options granted during 1997 was
estimated at $6.20. The pro forma effect on net loss and loss per share for 1997
may not be representative of the pro forma effect in future years because it
includes compensation cost on a straight-line basis over the vesting periods of
the grants and does not take into consideration the pro forma compensation costs
for grants made prior to 1995.
WARRANTS. 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 the next three to five years. 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, 7.3
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 will be 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.
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, 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
43
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
commencement of, or announcement of, an intention to commence a tender or
exchange offer, the consummation of which would result in beneficial ownership
of 15% or more of the Common Stock. Each right will entitle the holder to
purchase Common Stock of the Company having a market value (immediately prior to
such acquisition) of twice the exercise price of the right. If the Company is
acquired through a merger or other business combination transaction (other than
a Permitted Offer, as defined), each right will entitle the holder to purchase
common stock of the surviving company having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. The Company may
redeem the rights for $0.01 each at any time prior to such acquisition. The
rights will expire on June 10, 2007, unless earlier redeemed.
In connection with the rights plan, the Board of Directors approved the
creation of, out of the authorized but unissued shares of Common Stock of the
Company, a Series A Junior Participating Preferred Stock ("Participating
Preferred Stock"), consisting of 400,000 shares with a par value of $0.01 per
share. The holders of the Participating Preferred Stock are entitled to receive
dividends, if declared by the Board of Directors, from funds legally available.
Each share of Participating Preferred Stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of Participating Preferred
Stock are not redeemable by the Company or convertible into Common Stock or any
other security of the Company.
OTHER TRANSACTIONS. The Company and Sony Corporation ("Sony") have
announced preliminary plans to enter into a strategic alliance to jointly
develop digital television technologies. Subject to the completion of definitive
agreements related to this alliance, Sony will purchase 7.5 million new shares
of Common Stock of the Company at a purchase price of $25 per share. Separately,
in December 1997, the Company signed a memorandum of understanding to purchase
from National Digital Television Center, Inc., a subsidiary of
Tele-Communications, Inc., certain assets and rights of its authorization
business, which is intended to provide the cable industry with a secure access
control platform to support widespread deployment of digital terminals and
related systems, in exchange for 21,356,000 shares of the Company's Common
Stock. These transactions are expected to close in the first half of 1998.
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Derivative financial instruments are primarily used by the Company to reduce
market risk arising from changes in foreign exchange and interest rates. The
Company does not use derivative financial instruments for trading purposes, nor
does it engage in currency or interest rate speculation. Derivatives used by the
Company consist of foreign exchange instruments. The Company believes that the
various counterparties with which the Company enters into these agreements
consist of only financially sound institutions and, accordingly, believes that
the credit risk for non-performance of these contracts is remote. The Company
monitors its underlying market risk exposures on an ongoing basis and believes
that it can modify or adapt its hedging strategies as needed.
The Company enters into forward exchange contracts on a month-to-month basis
to 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 forward exchange contracts.
44
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
On a selective basis, the Company (and the Distributing Company, on behalf
of the Company, prior to the Distributions) enters into forward exchange and
purchased option contracts to hedge the currency exposure of contractual and
other firm commitments denominated in foreign currencies. The Company may also
use forward exchange and purchased option contracts designed to 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 hedges related to contractual and
other firm commitments are deferred and recognized in the Company's results of
operations in the same period as the gain or loss from the underlying
transactions. Gains and losses on forward exchange contracts used to limit the
exposure of anticipated, but not yet committed, transactions are recognized in
the Company's results of operations as changes in exchange rates for the
applicable foreign currencies occur. Historically, foreign exchange contracts
with respect to contractual and other firm commitments and anticipated, but not
yet committed, transactions have been short-term in nature. In addition,
purchased options have had no intrinsic value at the time of purchase.
The Company generally settles forward exchange contracts at maturity at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of the contract premium or
discount. The amortization of these premiums or discounts during each of the
three years in the period ended December 31, 1997 was not significant. As of
December 31, 1997 and 1996, the Company had outstanding forward exchange
contracts with notional amounts of $73 and $9 million, respectively, comprised
of foreign currencies that were to be purchased (principally the New Taiwan and
Canadian dollars in 1997 and the Pound Sterling in 1996) and $11 and $21
million, respectively, comprised of foreign currencies that were to be sold
(principally the Canadian dollar). All outstanding forward exchange contracts at
December 31, 1997 and 1996 mature within 12 months, and the fair values of such
contracts approximated their carrying values, which were not material.
Accordingly, deferred gains or losses on such contracts at December 31, 1997 and
1996 were not significant. Foreign currency transaction losses included in
operations were $2, $2 and $5 million in 1997, 1996 and 1995, respectively. As
of December 31, 1997 and 1996, the Company had no purchased option contracts
outstanding.
16. GEOGRAPHIC INFORMATION
The Company operates in a single-industry segment as a leading supplier of
systems and equipment for high-performance networks delivering video, voice and
data/Internet services. This segment includes digital and analog set-top
systems, network transmission systems, digital and analog satellite systems,
including digital compression and transmission system, and high-speed data
network and telephony network solutions.
A significant portion of the Company's products are manufactured or
assembled in Mexico and Taiwan. At December 31, 1997, the net assets of these
production operations were $20 and $34 million, respectively.
45
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION (CONTINUED)
Operating income (loss) represents net revenue less operating expenses,
which excludes interest and income taxes. Identifiable assets are those used in
the operations of each geographic area.
<TABLE>
<CAPTION>
U.S. (a) FOREIGN ELIMINATIONS COMBINED
----------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Net sales (b)........................................................... $ 1,555,319 $208,769 $ -- $ 1,764,088
Intercompany transfers (c).............................................. 197,622 148,873 (346,495) --
Net revenues.......................................................... 1,752,941 357,642 (346,495) 1,764,088
Operating income........................................................ 23,123(d) 2,154 -- 25,277(d)
Corporate expenses...................................................... -- -- -- (35,472)(e)
Identifiable assets..................................................... 1,375,809 137,380 -- 1,513,189
Corporate assets........................................................ -- -- -- 162,164
Year Ended December 31, 1996
Net sales (b)........................................................... 1,579,917 175,668 -- 1,755,585
Intercompany transfers (c).............................................. 140,123 177,060 (317,183) --
Net revenues.......................................................... 1,720,040 352,728 (317,183) 1,755,585
Operating income (loss)................................................. (119,109)(f) 14,514 -- (104,595)(f)
Corporate expenses...................................................... -- -- -- (17,416)
Identifiable assets..................................................... 1,462,886 150,947 -- 1,613,833
Corporate assets........................................................ -- -- -- 15,903
Year Ended December 31, 1995
Net sales (b)........................................................... 1,400,678 131,917 -- 1,532,595
Intercompany transfers (c).............................................. 118,445 110,314 (228,759) --
Net revenues.......................................................... 1,519,123 242,231 (228,759) 1,532,595
Operating income........................................................ 27,042(g) 15,218 -- 42,260(g)
Corporate expenses...................................................... -- -- -- (19,998)
Identifiable assets..................................................... 1,239,976 105,977 -- 1,345,953
Corporate assets........................................................ -- -- -- 8,385
</TABLE>
- ------------------------
(a) Included in the U.S. net sales amount are export sales of $304, $285 and
$193 million in 1997, 1996 and 1995, respectively.
(b) A limited number of cable and satellite television operators provide
services to a large percentage of television households in the U.S. The loss
of some of these operators as customers could have a material adverse effect
on the Company's sales. TCI and Time Warner, including affiliates, accounted
for 14%, 23% and 30% and 14%, 13% and 14% of the Company's consolidated net
sales in 1997, 1996 and 1995, respectively.
(c) Intercompany transfers reflect the originating geographic source of the
transfer and principally reflect product assembly, which is accounted for at
cost plus a nominal profit.
(d) Includes charges of $107 million reflecting $45 million of restructuring
charges (see Note 5) and $62 million of charges primarily related to the
closure of various facilities, the write-down of inventory to its lower of
cost or market and the write-down of fixed assets to their estimated fair
values (see Note 17).
(e) Includes $15 million of restructuring charges. Approximately $4 million of
such charges were recorded in the quarter ended June 30, 1997 in connection
with the Distributions. These charges represented
46
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION (CONTINUED)
legal and professional fees and are included in the $6 million charge to
SG&A expense discussed in Note 5. Approximately $11 million of these charges
were recorded in conjunction with the fourth quarter restructuring and are
included in the $14 million charged to SG&A expense as discussed in Note 5.
Such charges primarily include severance and facility closure costs related
to the Company's Chicago corporate office. Such charges are related to
corporate and are not attributable to any operating unit.
(f) Includes charges of $226 million reflecting $8 million of restructuring
charges (see Note 5), $141 million of NLC Litigation costs (see Note 12),
$57 million of charges primarily related to the transition to the Company's
next-generation digital products (see Note 17), and $20 million of other
charges related to the write-down of inventory to its lower of cost or
market and an accrual for a litigation matter (see Note 17).
(g) Includes a charge of $140 million for purchased in-process technology in
connection with the acquisition of NLC (see Note 6).
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------- ---------------------- ----------------------
1997(a) 1996 1997(b) 1996(c) 1997 1996 1997(d) 1996(e)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 408,028 $ 386,948 $ 450,403 $ 433,173 $ 464,582 $ 428,892 $ 441,075 $ 506,572
Gross profit............... 113,514 100,134 117,618 110,816 133,441 121,223 63,033 73,597
Net income (loss).......... $ 4,960 $ 5,843 $ 406 $ (86,129) $ 24,458 $ 16,813 $ (45,937) $ (32,837)
</TABLE>
- ------------------------
(a) Includes a pre-tax charge of $3 million ($2 million net-of-tax), recorded as
cost of sales, for employee costs related to dividing the Distributing
Company's Taiwan operations between the Company and General Semiconductor.
(b) Includes a pre-tax charge of $15 million ($11 million net-of-tax), recorded
as cost of sales, for employee costs related to dividing the Distributing
Company's Taiwan operations between the Company and General Semiconductor
and a pre-tax charge of $6 million ($4 million net-of-tax), recorded as SG&A
expense, related to legal and other professional fees incurred in connection
with the Distributions.
(c) Includes a charge of $141 million ($92 million net-of-tax) related to the
NLC Litigation (see Note 12).
(d) Includes pretax charges of $86 million reflecting $36 million ($24 million
net-of-tax) of restructuring charges (see Note 5) and $61 million ($44
net-of-tax) of other charges offset by $11 million ($7 million net of tax)
of other income, described below. Of these charges, $66 million were
recorded as cost of sales, $22 million were recorded as SG&A expense and $9
million were recorded as research and development expense.
In the fourth quarter of 1997, in conjunction with the assessment of the
satellite business, management concluded that future sales of certain
Satellite products would not be sufficient to
47
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
recover the carrying value of related inventory. Accordingly, the
Company recorded a 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 the production and
testing associated with these products and concluded that their carrying
values would no longer be recoverable since such assets would no longer
be utilized and, accordingly, the Company wrote down such assets 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 by the end
of 1998. 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.
See Note 5 for a reconciliation of restructuring activity during 1997.
Below is a tabular reconciliation of the other charges described above:
<TABLE>
<CAPTION>
PROPERTY, PROFESSIONAL
PLANT & FEES AND
INVENTORY(1) EQUIPMENT(1) OTHER COSTS
------------- --------------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
Other charges................................................ $ 42.6 $ 10.0 $ 7.7
Amounts Utilized............................................. (1.2) (1.6) (4.7)
----- ----- ---
Balance, December 31, 1997................................... $ 41.4 $ 8.4 $ 3.0
----- ----- ---
</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.
(e) Includes pre-tax charges of $85 million reflecting $8 million ($5 million
net-of-tax) of restructuring charges (see Note 5), $57 million ($35 million
net-of-tax) of charges related to the Company's transition to
next-generation digital products and $20 million ($13 million net-of-tax) of
other charges related to the write-down, to the lower of cost or market, of
inventory products the Company decided to discontinue 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 $14 million of charges were
recorded as SG&A expense and related to the restructuring charges, the
write-down of fixed assets to their estimated fair values and the settlement
of a litigation matter. 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 a 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
48
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
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 rates
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.
The basic and diluted earnings per share were $0.17 and $0.16, respectively,
for the third quarter of 1997, and the basic and diluted loss per share were
both $0.31 for the fourth quarter of 1997. Historical earnings (loss) per share
for all periods prior to the Distributions have been omitted since the Company
was not a separate company with a capital structure of its own.
The New York Stock Exchange is the principal market on which the Company's
securities are traded. The Company's Common Stock began trading on July 24,
1997, and the high and low prices during the third and fourth quarters were
$21 1/2 and $16 and $19 1/8 and $12 5/8, respectively. The Company did not pay
dividends on its Common Stock during 1997.
18. THE PARTNERSHIP
In January 1998, the Company transferred at historical cost the net assets,
the underlying NLC technology, and the management and workforce of NLC to a
newly formed limited partnership (the "Partnership") in exchange for
approximately an 89% limited partnership interest (subject to additional
dilution). Such transaction was accounted for at historical cost. 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 operating general partner's interest in the
Partnership.
Pursuant to the Partnership agreement, the operating general partner
controls the Partnership and is responsible for developing the business plan and
infrastructure necessary to position the Partnership as a stand-alone company.
The Company, as the limited partner, will have certain protective rights,
including the right to approve an alteration of the legal structure of the
Partnership, the sale of the Partnership's principal assets, the sale of the
Partnership and a change in the limited partner's financial interests in the
Partnership. The Company cannot 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 will not be consolidated with the
operating results of the Company going forward.
The technology transferred to the Partnership related to in-process research
and development, which was originally purchased by the Company in connection
with the acquisition of NLC in September 1995 (see Note 6), for the design and
marketing of a highly innovative next-generation telecommunication
49
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
18. THE PARTNERSHIP (CONTINUED)
broadband access system for the delivery of telephony, video and data from a
telephone company central office to the home. The in-process technology, at the
date of the 1995 acquisition and at the date of the transfer to the Partnership,
had not reached technological feasibility and had no alternative future use. 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 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.
The Company will account for its interest in the Partnership as an
investment under the equity method of accounting. Further, the Company's share
of the Partnership's losses related to future research and development
activities will be offset against the $75 million reserve discussed above.
19. SUBSEQUENT EVENTS
On February 19, 1998, a consolidated securities class action complaint
entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleges that the defendants violated Section 11 of the
Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 thereunder by making false an misleading statements about the
Company's business, finances and future prospects. The complaint seeks damages
in an unspecified amount. The Company intends to vigorously contest this action.
On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION V. NEXT
LEVEL COMMUNICATIONS, L.P. was filed in the Superior Court of the State of
Delaware in and for New Castle County. The plaintiffs allege that the defendants
have misappropriated trade secrets relating to a switched digital video product,
and that the defendants have conspired to misappropriate the trade secrets. The
plaintiffs seek monetary and exemplary damages in an unspecified amount and
attorney fees. The Company believes this litigation is duplicative of prior
litigation and intends to vigorously contest this action.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the financial statements of General Instrument Corporation and
its subsidiaries (formerly NextLevel Systems, Inc. and, prior thereto, the
Communications Business of the former General Instrument Corporation) as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated February 14, 1998
(March 5, 1998 as to Note 19); such report is included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of General
Instrument Corporation, listed in Item 14(a)2. This financial statement schedule
is the responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 14, 1998
51
<PAGE>
GENERAL INSTRUMENT CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
OF END OF
PERIOD ADDITIONS DEDUCTIONS OTHER(1) PERIOD
----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful Accounts:
Year ended December 31, 1997...................... $ 12,910 $ 437 $ (4,781) $ (5,000) $ 3,566
Year ended December 31, 1996...................... $ 10,144 $ 5,190 $ (2,424) $ -- $ 12,910
Year ended December 31, 1995...................... $ 3,791 $ 6,971 $ (618) $ -- $ 10,144
</TABLE>
- ------------------------
(1) Other represents the collection of certain receivables previously considered
to be uncollectable.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included in
Part II, Item 8.
2. FINANCIAL STATEMENT SCHEDULE.
The Financial Statement Schedule of the Company is included in Part
II, Item 8.
3. LIST OF EXHIBITS. See Index of Exhibits included on page 55.
(b) Reports on Form 8-K:
A Form 8-K dated as of December 17, 1997 was filed pursuant to Item 5
(Other Events).
A Form 8-K dated as of October 16, 1997 was filed pursuant to Item 5
(Other Events).
53
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to the registrant's 1997 Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL INSTRUMENT CORPORATION
Date: February 11, 1999 By: /s/ MARC E. ROTHMAN
------------------------------------------
Marc E. Rothman
VICE PRESIDENT AND CONTROLLER
54
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<S> <C>
2.1* Agreement of Merger, dated as of July 25, 1997, between the Company and NextLevel Systems of
Delaware, Inc.
3.1++ Certificate of Ownership and Merger, effective February 2, 1998 (amending Amended and Restated
Certificate of Incorporation of the Company).
3.2* Amended and Restated Certificate of Incorporation of the Company
3.3* Amended and Restated By-Laws of the Company.
4.1** Rights Agreement, dated as of June 12, 1997, between the Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (the "Rights Agreement"), which includes, as Exhibit A thereto,
the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock of the Company, as Exhibit B thereto, the Form of Right Certificate and as Exhibit C thereto,
the Summary of Rights to Purchase Preferred Shares.
4.2**** Amendment, dated as of December 16, 1997, to the Rights Agreement.
4.3++ Form of Warrant Issuance Agreement.
10.1* Employee Benefits Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope,
Inc. and General Semiconductor, Inc.
10.2* Debt and Cash Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc.
and General Semiconductor, Inc.
10.3* Insurance Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
Semiconductor, Inc.
10.4* Tax Sharing Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
Semiconductor, Inc.
10.5* Trademark License Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and
General Semiconductor, Inc.
10.6* Transition Services Agreement, dated as of July 25, 1997, between the Company and General
Semiconductor, Inc.
10.7* Transition Services Agreement, dated as of July 25, 1997, between the Company and CommScope, Inc.
10.8* Credit Agreement, dated as of July 23, 1997, among the Company, Certain Banks, The Chase Manhattan
Bank, as Administrative Agent, and The Chase Manhattan Bank, Bank of America National Trust and
Savings Association, BankBoston, N.A., The Bank of Nova Scotia, Bank of Tokyo-Mitsubishi Trust
Company, Caisse Nationale de Credit Agricole, CIBC Inc., Deutsche Bank, A.G., New York Branch and/or
Cayman Islands Branch, The Fuji Bank Limited and NationsBank, N.A. as Co-Agents.
10.9*+ The Company's 1997 Long-Term Incentive Plan.
10.10***+ Form of Severance Protection Agreement between the Company and certain executive officers.
10.11+++ The Company's Annual Incentive Plan.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<S> <C>
10.12+++ The Company's Deferred Compensation Plan.
10.13+++ The Company's Supplemental Executive Retirement Plan.
21++ Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27++ Financial Data Schedule.
99++ Forward-Looking Information.
</TABLE>
All other exhibits are not applicable.
- ------------------------
* Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 001-12925).
** Incorporated herein by reference from the Company's Registration Statement
on Form 8-A, filed with the Commission on June 30, 1997 (File No.
001-12925).
*** Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997 (File No. 001-12925).
****Incorporated herein by reference from the Company's Current Report on Form
8-K dated as of December 17, 1997 (File No. 001-12925).
+ Management contract or compensatory plan.
++ Previously filed.
56
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-29719 and 333-33399 of General Instrument Corporation (formerly NextLevel
Systems, Inc.) on Forms S-8 of our reports dated February 14, 1998 (March 5,
1998 as to Note 19) included in this Annual Report on Form 10-K/A (Amendment No.
1) of General Instrument Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 11, 1999
