<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 001-12925
GENERAL INSTRUMENT CORPORATION
(FORMERLY, NEXTLEVEL SYSTEMS, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 36-4134221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 TOURNAMENT DRIVE, HORSHAM, PENNSYLVANIA, 19044
(Address of principal executive offices)
(Zip Code)
(215) 323-1000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of April 30, 1998, there were 150,882,770 shares of Common Stock
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Form 10-Q/A ("Amendment No. 1") hereby amends, and replaces in their
entirety, Items 1, 2, and 3 of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998 (the "Form 10-Q"), 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 May 15, 1998, the date on which the Form
10-Q was originally filed.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................................................ $ 26,712 $ 35,225
Short-term investments............................................................... 18,259 30,346
Accounts receivable, less allowance for doubtful accounts of $2,822 and $3,566,
respectively....................................................................... 371,683 343,625
Inventories.......................................................................... 253,795 288,078
Deferred income taxes................................................................ 116,800 105,582
Other current assets................................................................. 18,507 21,862
------------ ------------
Total current assets............................................................... 805,756 824,718
Property, plant and equipment, net................................................... 220,316 236,821
Intangibles, less accumulated amortization of $88,838 and $86,333, respectively...... 78,879 82,546
Excess of cost over fair value of net assets acquired, less accumulated amortization
of $111,357 and $108,123, respectively............................................. 460,979 471,186
Deferred income taxes................................................................ 37,901 5,634
Investments and other assets......................................................... 87,895 54,448
------------ ------------
TOTAL ASSETS................................................................... $ 1,691,726 $1,675,353
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounts payable..................................................................... $ 213,254 $ 200,817
Other accrued liabilities............................................................ 179,138 188,250
------------ ------------
Total current liabilities........................................................ 392,392 389,067
Deferred income taxes................................................................ 5,745 5,745
Long-term debt....................................................................... 40,000 --
Other non-current liabilities........................................................ 64,967 65,730
------------ ------------
Total liabilities................................................................ 503,104 460,542
------------ ------------
Commitments and contingencies (See Note 5)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized; no shares issued.... -- --
Common Stock, $.01 par value; 400,000,000 shares authorized; 150,628,270 shares and
148,358,188 shares issued at March 31, 1998 and December 31, 1997,
respectively..................................................................... 1,506 1,484
Additional paid-in capital........................................................... 1,254,619 1,213,566
Accumulated deficit.................................................................. (79,127) (19,236)
Accumulated other comprehensive income, net of taxes of $6,633 and $11,347,
respectively....................................................................... 11,626 18,999
------------ ------------
1,188,624 1,214,813
Less--Treasury Stock, at cost, 4,309 shares of Common Stock.......................... (2) (2)
------------ ------------
Total stockholders' equity....................................................... 1,188,622 1,214,811
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 1,691,726 $1,675,353
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
NET SALES.............................................................................. $ 416,920 $ 408,028
Cost of sales.......................................................................... 323,932 294,514
---------- ----------
GROSS PROFIT........................................................................... 92,988 113,514
---------- ----------
OPERATING EXPENSES:
Selling, general and administrative.................................................. 55,885 42,754
Research and development............................................................. 115,903 51,045
Amortization of excess of cost over fair value of net assets acquired................ 3,562 3,558
---------- ----------
Total operating expenses........................................................... 175,350 97,357
---------- ----------
OPERATING INCOME (LOSS)................................................................ (82,362) 16,157
Other expense--net (including equity interest in Partnership losses of $11,290 for the
three months ended March 31, 1998)................................................... (9,008) (529)
Interest expense--net.................................................................. (979) (7,091)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................................................... (92,349) 8,537
Benefit (Provision) for income taxes................................................... 32,458 (3,577)
---------- ----------
NET INCOME (LOSS)...................................................................... $ (59,891) $ 4,960
---------- ----------
---------- ----------
PRO FORMA EARNINGS PER SHARE--BASIC AND DILUTED........................................ $ 0.03
----------
----------
LOSS PER SHARE--BASIC AND DILUTED...................................................... $ (0.40)
----------
----------
PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING.......................................... 148,700
WEIGHTED-AVERAGE SHARES OUTSTANDING.................................................... 149,666
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED--IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER COMMON TOTAL
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCK IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME TREASURY EQUITY
--------- --------- ------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997........ 148,358 $ 1,484 $ 1,213,566 $ (19,236) $ 18,999 $ (2) $1,214,811
Net loss.......................... (59,891) (59,891)
Exercise of stock options and
related tax benefit............. 2,270 22 37,916 37,938
Warrant costs related to customer
purchases....................... 3,137 3,137
Net change in investments......... (7,373) (7,373)
--------- --------- ------------ ------------ ------- ----------- ------------
BALANCE, MARCH 31, 1998........... 150,628 $ 1,506 $ 1,254,619 $ (79,127) $ 11,626 $ (2) $1,188,622
--------- --------- ------------ ------------ ------- ----------- ------------
--------- --------- ------------ ------------ ------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED--IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ (59,891) $ 4,960
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................ 18,266 23,048
Warrant costs related to customer purchases.......................................... 3,137 --
Gain on sale of short-term investment................................................ (3,025) --
Losses from asset sales and write-downs, net......................................... 4,328 --
Loss from equity investment.......................................................... 11,290 --
Changes in assets and liabilities:
Accounts receivable................................................................ (36,915) 46,839
Inventories........................................................................ 20,369 (13,257)
Prepaid expenses and other current assets.......................................... (2,013) (3,189)
Deferred income taxes.............................................................. (38,772) 1,503
Non-current assets................................................................. 1,246 --
Accounts payable and other accrued liabilities..................................... 16,290 (23,015)
Other non-current liabilities...................................................... (764) 4,781
Other.................................................................................. (66) (3,244)
---------- ----------
Net cash provided by (used in) operating activities.................................... (66,520) 38,426
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment............................................. (17,825) (17,169)
Investments in other assets............................................................ (1,995) (17,374)
Proceeds from sale of short-term investment............................................ 3,025 --
---------- ----------
Net cash used in investing activities.................................................. (16,795) (34,543)
---------- ----------
FINANCING ACTIVITIES:
Transfers to Distributing Company...................................................... -- (3,883)
Proceeds from stock option exercises................................................... 34,802 --
Net borrowings under Credit Agreement.................................................. 40,000 --
---------- ----------
Net cash provided by (used in) financing activities.................................... 74,802 (3,883)
---------- ----------
Change in cash and cash equivalents.................................................... (8,513) --
Cash and cash equivalents, beginning of period......................................... 35,225 --
---------- ----------
Cash and cash equivalents, end of period............................................... $ 26,712 $ --
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. COMPANY BACKGROUND
General Instrument Corporation ("General Instrument" or the "Company"),
formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and
components for high-performance networks, delivering video, voice and
Internet/data services to the cable, satellite and telephony markets. General
Instrument is the world leader in digital and analog set-top systems for wired
and wireless cable television networks, as well as hybrid fiber/coaxial network
transmission systems used by cable television operators and is a leading
provider of digital satellite systems for programmers, direct-to-home satellite
network providers and private networks for business communications. Through its
limited partnership interest in Next Level Communications, L.P. ("the
Partnership") (see Note 10), the Company provides telephone network solutions
through the Partnership's NLeve13-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 accompanying interim consolidated financial statements reflect the
results of operations, financial position, changes in stockholders' equity and
cash flows of General Instrument Corporation. The consolidated balance sheet as
of March 31, 1998, the consolidated statements of operations for the three
months ended March 31, 1998 and 1997, the consolidated statement of
stockholders' equity for the three months ended March 31, 1998 and the
consolidated statements of cash flows for the three months ended March 31, 1998
and 1997 of General Instrument Corporation are unaudited and reflect all
adjustments of a normal recurring nature (except for those charges disclosed in
Notes 5, 8, 9 and 10) which are, in the opinion of management, necessary for a
fair presentation of the interim period financial statements. The results of
operations for the interim period are not necessarily indicative of the results
of operations to be expected for the full year.
The consolidated statements of operations for the three months ended March
31, 1997 include an allocation of general corporate expenses from the
Distributing Company. In the opinion of management, general corporate
administrative expenses have been allocated to the Company on a reasonable and
7
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
2. BASIS OF PRESENTATION (CONTINUED)
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
allocation 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 statement
of operations for the three months ended March 31, 1997 includes an allocation
of net interest expense from the Distributing Company. To the extent the Company
generated positive cash, such amounts were remitted to the Distributing Company.
To the extent the Company experienced temporary cash needs for working capital
purposes or capital expenditures, such funds were historically provided by the
Distributing Company. Net interest expense has been allocated based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company. The allocations were made consistently in each period, and management
believes the allocations are reasonable. However, these interest costs would not
necessarily be indicative of what the actual costs would have been had the
Company operated as a separate, stand-alone entity. Subsequent to the
Distributions, the Company is responsible for all cash management functions
using its own resources or purchased services and is responsible for the costs
associated with operating as a public company.
Prior to the Distributions, the Company's financial results included the
costs incurred under the Distributing Company's pension and postretirement
benefit plans for employees and retirees of the Company. Subsequent to the
Distributions, the Company's financial results include the costs incurred under
the Company's own pension and postretirement benefit plans. The provision for
income taxes for the periods prior to the Distributions was based on the
Company's expected annual effective tax rate calculated assuming the Company had
filed separate tax returns under its then existing structure. For the three
months ended March 31, 1998, the income tax benefit was computed based upon the
expected annual effective tax rate.
The financial information included herein, related to the periods prior to
the Distributions, may not necessarily reflect the consolidated results of
operations, financial position and cash flows of the Company since the Company
was not a separate stand-alone entity.
3. PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations presented below
gives effect to the Distributions as if they had occurred on January 1, 1997.
The unaudited pro forma statement of operations set forth below does not purport
to represent what the Company's operations actually would have been had the
Distributions occurred on January 1, 1997 or to project the Company's operating
results for any future period.
The unaudited pro forma information has been prepared utilizing the
historical consolidated statements of operations of the Company which were
adjusted to reflect: (i) an additional $1.8 million of selling, general and
administrative costs for the three months ended March 31, 1997 to eliminate the
allocation of corporate expenses to CommScope and General Semiconductor, as such
costs subsequent to
8
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
3. PRO FORMA FINANCIAL INFORMATION (CONTINUED)
the Distributions are no longer allocable and are expected to be incurred by the
Company in the future; and (ii) a net debt level of $100 million at the
beginning of the year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------
<S> <C>
Net sales.................................................................................... $ 408,028
Cost of sales................................................................................ 294,514
--------
Gross profit................................................................................. 113,514
--------
Operating expenses:
Selling, general and administrative........................................................ 44,554
Research and development................................................................... 51,045
Amortization of excess of cost over fair value of net assets acquired...................... 3,558
--------
Total operating expenses................................................................. 99,157
--------
Operating income............................................................................. 14,357
Other expense--net........................................................................... (529)
Interest expense--net........................................................................ (1,899)
--------
Income before income taxes................................................................... 11,929
Provision for income taxes................................................................... (4,866)
--------
Net income................................................................................... $ 7,063
--------
--------
Earnings per share--basic and diluted........................................................ $ 0.05
--------
--------
Weighted-average shares outstanding.......................................................... 148,700
</TABLE>
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials............................................. $ 98,230 $ 111,148
Work in process........................................... 23,112 19,676
Finished goods............................................ 132,453 157,254
-------------- --------
Total inventories......................................... $ 253,795 $ 288,078
-------------- --------
-------------- --------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company is either a plaintiff or a defendant in several pending legal
matters. In addition, the Company is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge and disposal of
hazardous materials. The Company's manufacturing facilities are believed to be
in substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
material adverse effect on the Company's consolidated financial statements.
9
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
An action entitled BroadBand Technologies, Inc. v. General Instrument Corp.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleged that the Company infringes
BroadBand Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560 (the "560
Patent"), covering an electronic communications system which delivers television
signals, and sought monetary damages and injunctive relief.
In March 1997, the Company's Next Level Communications ("NLC") subsidiary
commenced an action against BBT entitled Next Level Communications v. BroadBand
Technologies, Inc. in the United States District Court for the Northern District
of California for a declaratory judgment that BBT's 560 Patent is invalid and
unenforceable; for patent infringement; and for violation of the antitrust laws
of the United States.
On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General
Instrument Corp. was dismissed with prejudice. In addition, on May 4, 1998, the
action entitled Next Level Communications v. BroadBand Technologies, Inc., was
dismissed with prejudice. These dismissals were entered pursuant to a settlement
agreement under which, among other things, the Partnership has paid BroadBand
Technologies $5 million and BroadBand Technologies and the Partnership have
entered into a perpetual cross-license of patents applied for or issued
currently or during the next five years. At the time of the formation of the
Partnership (see Note 10), the Company, as limited partner, and Spencer Trask,
as general partner, estimated that no liability existed with respect to the BBT
litigation. Further, the Partnership indemnified the Company with respect to
this litigation because such litigation was directly related and attributable to
the technology transferred to the Partnership. As such, the Partnership recorded
the $5 million charge with respect to this matter. The Company accounts for its
interest in the Partnership under the equity method and, accordingly, its share
of the Partnership's loss, including the aforementioned settlement costs, is
reflected in "other expense--net" in the accompanying statement of operations
for the three months ended March 31, 1998. The Company also has granted
BroadBand Technologies a covenant not to sue on all Company patents applied for
or issued currently or during the next five years.
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, In re General
Instrument Corporation Securities Litigation. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's common
stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
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.
10
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Amended complaints were filed on November 7, 1997. The defendants have answered
the amended consolidated complaint in the class actions, denying liability, and
have filed a renewed motion to dismiss the derivative action. The Company
intends to vigorously contest these actions.
An action entitled BKP Partners, L.P. v. General Instrument Corp. was
brought in February 1996 by certain holders of preferred stock of NLC, which
merged into a subsidiary of the Distributing Company in September 1995. The
action was originally filed in the Northern District of California and was
subsequently transferred to the Northern District of Illinois. The plaintiffs
allege that the defendants violated federal securities laws by making
misrepresentations and omissions and breached fiduciary duties to NLC in
connection with the acquisition of NLC by the Distributing Company. Plaintiffs
seek, among other things, unspecified compensatory and punitive damages and
attorneys' fees and costs. On September 23, 1997, the district court dismissed
the complaint, without prejudice, and the plaintiffs were given until November
7, 1997 to amend their complaint. On November 7, 1997, plaintiffs served the
defendants with amended complaints, which contain allegations substantially
similar to those in the original complaint. The defendants have filed a motion
to dismiss parts of the amended complaint and have answered the balance of the
amended complaint, denying liability. The Company intends to vigorously contest
this action.
In connection with the Distributions, the Company has agreed to indemnify
General Semiconductor in respect of its obligations, if any, arising out of or
in connection with the matters discussed in the preceding two paragraphs.
On February 19, 1998, a consolidated securities class action complaint
entitled In re NextLevel Systems, Inc. Securities Litigation was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleged that the defendants violated Sections 11 and 15 of
the Securities Act of 1933, as amended (the "Securities Act"), and Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false
and misleading statements about the Company's business, finances and future
prospects. The complaint seeks damages in an unspecified amount. On April 9,
1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May
5, 1998, the defendants served upon the plaintiffs a motion to dismiss the
remaining counts of the complaint.
On March 5, 1998, an action entitled DSC Communications Corporation v. Next
Level Communications, L.P. was filed in the Superior Court of the State of
Delaware in and for New Castle County. DSC alleges that the defendants have
misappropriated trade secrets relating to a switched digital video product, and
that the defendants have conspired to misappropriate the trade secrets. The
plaintiffs seek monetary and exemplary damages in an unspecified amount and
attorneys' fees. On April 4, 1998, the defendants filed an application to the
United States District Court for the Eastern District of Texas requesting a
preliminary injunction preventing DSC from proceeding with this litigation. At a
hearing on May 8, 1998, the district court ruled from the bench that it would
issue such a preliminary injunction against DSC.
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.
11
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
6. EARNINGS (LOSS) PER SHARE AND PRO FORMA EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding adjusted for the dilutive
effect of stock options and warrants (unless such common stock equivalents would
be anti-dilutive), and the computation of diluted earnings (loss) per share
assumes the exercise of stock options and warrants using the treasury stock
method. Further, since the computation of diluted loss per share is
anti-dilutive for the three months ended March 31, 1998, the amounts reported
for basic and diluted loss per share are the same.
Prior to the Distributions, the Company did not have its own capital
structure, and pro forma per share information has been presented for the three
months ended March 31, 1997. The pro forma weighted-average number of shares
outstanding used in the pro forma per share calculation for the three months
ended March 31, 1997 equaled the number of common shares issued and common
equivalent shares existing on the the date of the Distributions.
7. LONG-TERM DEBT
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides a $600 million unsecured revolving credit facility
and matures on December 31, 2002. The Credit Agreement permits the Company to
choose between two interest rate options: an Adjusted Base Rate (as defined in
the Credit Agreement), which is based on the highest of (i) the rate of interest
publicly announced by The Chase Manhattan Bank as its prime rate, (ii) 1% per
annum above the secondary market rate for three-month certificates of deposit
and (iii) the federal funds effective rate from time to time plus 0.5%, and a
Eurodollar rate (LIBOR) plus a margin which varies based on certain performance
criteria (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 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 $203 million of charges
incurred in 1997 and 1998) in comparison to net interest expense of greater than
5 to 1; and (iii) maintenance of a leverage ratio comparing total indebtedness
to EBITDA (excluding $203 million of charges incurred in 1997 and 1998) of less
than 3 to 1. In addition, under the Credit Agreement, certain changes in control
of the Company would result in an event of default, and the lenders under the
Credit Agreement could declare all outstanding borrowings under the Credit
Agreement immediately due and payable. None of the restrictions contained in the
Credit Agreement is expected to have a significant effect on the Company's
ability to operate. As of March 31, 1998, the Company was in compliance with all
financial and operating covenants under the Credit Agreement. At March 31, 1998,
the Company had available credit of $460 million under the Credit Agreement. The
Company had approximately $100 million of letters of credit outstanding at March
31, 1998.
12
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
8. RESTRUCTURINGS
In connection with the Distributions (see Note 1), during the first quarter
of 1997, the Company recorded a pre-tax charge to cost of sales of $3 million
for employee costs related to dividing the Distributing Company's Taiwan
operations between the Company and General Semiconductor. These charges were
fully paid as of June 30, 1997.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are being manufactured by subcontractors in the U.S. and 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.
Substantially all of the fourth quarter severance and other employee separation
costs have been paid. Costs associated with the closure of facilities ("Facility
Costs") include vacated long-term leases which are payable through the end of
the lease terms which extend through the year 2008. The fixed assets are
expected to be disposed of by the end of 1998 and none are being utilized in the
Company's operations.
As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense. Through March 31, 1998, the
Company has made severance and other restructuring related payments of $5
million related to these first quarter 1998 charges. Substantially all of the
remaining severance and other employee separation costs are expected to be paid
during 1998 and the fixed assets are expected to be disposed of by the end of
1998.
13
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
8. RESTRUCTURINGS (CONTINUED)
The following tabular reconciliation summarizes the restructuring activity
from January 1, 1997 through March 31, 1998:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 1, AMOUNTS DECEMBER 31, AMOUNTS
1997 ADDITIONS UTILIZED 1997 ADDITIONS UTILIZED
------------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Property, Plant & Equipment(1)........... $ 0.9 $ 10.4 $ (3.5) $ 7.8 $ 4.6 $ (2.1)
Facility Costs........................... 3.0 11.2 (3.7) 10.5 3.3 (6.8)
Severance................................ -- 32.7 (12.8) 19.9 7.6 (19.8)
Professional Fees........................ -- 6.0 (6.0) -- -- --
--- ----- ----------- ----- ----- -----------
Total.................................... $ 3.9 $ 60.3 $ (26.0) $ 38.2 $ 15.5 $ (28.7)
<CAPTION>
BALANCE AT
MARCH 31,
1998
-----------
<S> <C>
Property, Plant & Equipment(1)........... $ 10.3
Facility Costs........................... 7.0
Severance................................ 7.7
Professional Fees........................ --
-----
Total.................................... $ 25.0
</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.
9. OTHER CHARGES
The Company incurred certain other pre-tax charges during the first quarter
of 1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and, accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut-down expenses and legal fees. The above charges
totalled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 5) and compensation expense related to key executives of an acquired
company. The balance of these reserves was $20 million at March 31, 1998 and
relates primarily to inventory.
10. 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 limited
partnership interest is included in "investments and other assets" in the
accompanying consolidated balance sheet at March 31, 1998. The operating general
partner, which was formed by Spencer Trask & Co., 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.
Net assets transferred to the Partnership of $45 million primarily included
property, plant and equipment, inventories and accounts receivable partially
offset by accounts payable and accrued expenses.
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
14
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
10. THE PARTNERSHIP (CONTINUED)
stand-alone company. The Company, as the limited partner, has certain protective
rights, including the right to approve an alteration of the legal structure of
the Partnership, the sale of the Partnership's principal assets, the sale of the
Partnership and a change in the limited partner's financial interests in the
Partnership. The Company 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 subsequent to the January 1998 transfer.
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, for the design and marketing of a
highly innovative next-generation telecommunication broadband access system for
the delivery of telephony, video and data from a telephone company central
office to the home. 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 research and
development expense during the quarter ended March 31, 1998 to fully reserve for
the Note concurrent with the funding. The proceeds of the Note are being
utilized to fund the research and development activities of the Partnership
through 1999 to develop the aforementioned telecommunication technology for
widespread commercial deployment.
The Company is accounting for its interest in the Partnership as an
investment under the equity method of accounting. Further, the Company's share
of the Partnership's losses related to future research and development
activities will be offset against the $75 million reserve discussed above. For
the three months ended March 31, 1998, the Company's share of the Partnership's
losses were $11 million (net of the Company's share of research and development
expenses of $9 million). The Company has eliminated its interest income from the
Note against its share of the Partnership's related interest expense on the
Note.
The following summarized financial information is provided for the
Partnership for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
-------------------
<S> <C>
Net sales................................................................ $ 2,739
Gross profit............................................................. (1,116)
Loss before income taxes................................................. (24,310)
Operating cash flow...................................................... (22,270)
</TABLE>
15
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
11. COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement requires that an enterprise report the change in its net assets during
the period from nonowner sources. Since this statement only requires additional
disclosures, it had no impact on the Company's consolidated financial position
or cash flows. For the three months ended March 31, 1998 and 1997, other
comprehensive income comprised unrealized gains and losses on investments.
Comprehensive income is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
<S> <C> <C>
1998 1997
---------- ---------
Net Income (loss)...................................................... $ (59,891) $ 4,960
Other comprehensive income (loss)...................................... (4,348) 11,180
---------- ---------
Total comprehensive income (loss)...................................... $ (64,239) $ 16,140
---------- ---------
---------- ---------
</TABLE>
12. INVESTMENTS
At March 31, 1998 and December 31, 1997, all of the Company's marketable
equity securities were classified as "available-for-sale." Proceeds and the
related realized gains from the sales of available-for-sale securities for the
three months ended March 31, 1998 were $3 million. There were no such sales
during the three months ended March 31, 1997. Realized gains were determined
using the securities' cost. Short-term investments consisted of the following at
March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS GROSS GROSS
FAIR UNREALIZED UNREALIZED COST FAIR UNREALIZED UNREALIZED COST
VALUE GAINS LOSSES BASIS VALUE GAINS LOSSES BASIS
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Marketable Equity Securities $ 18,259 $ 18,259 $ -- $ -- $ 30,346 $ 30,346 $ -- $ --
</TABLE>
13. WARRANT COSTS
In December 1997, the Company entered into agreements to supply an aggregate
of 15 million of its two-way, interactive digital cable terminals to nine of the
leading North American cable television multiple system operators ("MSOs") over
a three to five year period. 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 weighted-average per share fair value of the warrants granted during 1997
approximated $3.50 using the Black-Scholes pricing
16
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
13. WARRANT COSTS (CONTINUED)
model with the following weighted average assumptions: a risk-free interest rate
of 6.08%; an expected volatility of 35%; an expected dividend yield of 0%; and
expected holding periods ranging from 2.5 to 4.5 years. The value of the
warrants is being expensed to cost of sales based upon actual units shipped to
the MSOs in a year in relation to the total threshold number of units required
to be purchased by the MSOs in such year. During the three months ended March
31, 1998, the Company recorded $3.1 million to cost of sales related to these
warrants.
14. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Segment Reporting--In June 1997, SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued and is effective for
fiscal periods beginning after December 15, 1997. SFAS No. 131 establishes
standards for the reporting of information about operating segments, including
related disclosures about products and services, geographic areas and major
customers, and requires the reporting of selected information about operating
segments in interim financial statements. The Company is currently evaluating
the disclosure requirements of this statement and will include the necessary
disclosures in the year-end financial statements as required in the initial year
of adoption.
Pension and Other Postretirement Disclosures--In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits--an amendment of FASB Statements No. 87, 88 and 106."
This statement, which is effective for fiscal years beginning after December 15,
1997, requires revised disclosures about pension and other postretirement
benefit plans. Since this statement only revises financial statement
disclosures, its adoption will not have any impact on the Company's consolidated
financial position, results of operations or cash flows.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended March 31, 1998 were $417 million, an
increase of $9 million, or 2%, over net sales of $408 million for the three
months ended March 31, 1997. This increase in net sales for the three-month
period reflects increased sales of digital cable systems and interactive
advanced analog systems, partially offset by lower sales of basic analog cable
terminals and satellite systems for private and commercial networks. Analog and
digital products represented 51% and 49%, respectively, of total sales for the
three months ended March 31, 1998 compared to 64% and 36%, respectively, of
total sales for the three months ended March 31, 1997.
Broadband sales (consisting of digital and analog cable and wireless
television systems and network transmission systems) were $309 million and $299
million for the three months ended March 31, 1998 and 1997, respectively.
Broadband sales increased $10 million, or 3% for the 1998 period from the
comparable 1997 period. The increases were primarily a result of increased U.S.
sales volume of digital cable terminals and headends and advanced analog set-top
terminals, partially offset by the expected decline in sales of basic analog
cable network systems. These sales reflect the increasing commitment of cable
television operators to deploy state-of-the-art digital and interactive advanced
analog systems in order to offer advanced entertainment, interactive services
and Internet access to their customers. During the three months ended March 31,
1998 and 1997, net broadband sales in the U.S. were 81% and 67%, respectively,
combined U.S. and Canadian sales were 83% and 74%, respectively, and all other
international sales were 17% and 26%, respectively, of total worldwide broadband
sales. The decrease in international sales from the first quarter of 1997 was
experienced in all international regions and international sales are not
expected to return to 1997 levels in the near-term. The largest decrease in
sales from the first quarter of 1997 was experienced in the Asia/Pacific region.
Satellite sales of $108 million for the three months ended March 31, 1998
decreased $1 million from the comparable 1997 period primarily as a result of
lower private and commercial network sales. During the three months ended March
31, 1998 and 1997, net satellite sales in the U.S. were 93% and 83%,
respectively, combined U.S. and Canadian sales were 99% and 87%, respectively,
and all other international sales were 1% and 13%, respectively, of total
worldwide satellite sales.
TCI and Time Warner, including affiliates, each represented approximately
14% of the revenues of the Company for the year ended December 31, 1997. For the
three months ended March 31, 1998, TCI, Primestar and Time Warner accounted for
approximately 21%, 16% and 11% of total Company sales, respectively.
GROSS PROFIT
Gross profit was $93 million and $114 million for the three months ended
March 31, 1998 and 1997, respectively. Gross profit was 22% and 28% of sales for
the three months ended March 31, 1998 and 1997, respectively. Gross profit for
the three months ended March 31, 1998 included $9 million of restructuring
charges (see Note 8 and "Restructurings" below) and $18 million of other charges
(see Note 9 and "Other Charges" below) recorded in the first quarter of 1998,
primarily related to severance and other employee separation costs, costs
associated with the closure of various facilities, the write-down of fixed
assets to their estimated fair values and the write-down of inventories to their
lower of cost or market.
Gross profit for the three months ended March 31, 1997 was reduced by $3
million of charges in connection with the Distributions for employee costs
related to dividing the Distributing Company's Taiwan operations between the
Company and General Semiconductor.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general & administrative ("SG&A") expense was $56 million and $43
million for the three months ended March 31, 1998 and 1997, respectively. SG&A
expense increased as a percentage of sales to 13% for the three months ended
March 31, 1998 from 10% for the three months ended March 31, 1997. SG&A spending
for the three months ended March 31, 1998 was greater than the comparable 1997
period as a result of $6 million of restructuring charges (see Note 8 and
"Restructurings" below) and $7 million of other charges (see Note 9 and "Other
Charges" below) recorded in the first quarter of 1998, primarily related to
severance and other employee separation costs, costs associated with the closure
of various facilities, including moving costs and costs associated with changing
the Company's corporate name.
Pro forma SG&A costs for the three months ended March 31, 1997 reflect an
additional $2 million of corporate costs previously allocated to CommScope and
General Semiconductor, as such costs are no longer allocable and are expected to
be incurred by the Company in the future.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expense was $116 million and $51 million
for the three months ended March 31, 1998 and 1997, respectively. R&D expense
for the three months ended March 31, 1998 included a $75 million charge to fully
reserve the Partnership Note (see Note 10). Proceeds of the Partnership Note are
being utilized by the Partnership to fund research and development activities
through 1999 to develop, for widespread commercial deployment, the
next-generation telecommunications technology for the delivery of telephony,
video, and data from the telephone company central office to the home. Such
widespread deployment is not expected until the latter part of 1999 or early in
2000, however, there can be no assurance that the development activities
currently being undertaken will result in successful commercial deployment. R&D
spending in 1998 is focused on new product opportunities, including advanced
digital services, high-speed internet and data systems, and next generation
transmission network systems. In addition, the Company is incurring R&D expense
to develop analog and digital products for international markets, reduce costs
and expand the features of its digital cable and satellite systems.
PURCHASED IN-PROCESS TECHNOLOGY
In connection with the acquisition of NLC in September 1995, 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 10).
OTHER EXPENSE--NET
Other expense was $9 million and $1 million for the three months ended March
31, 1998 and 1997, respectively. Other expense increased in the first quarter of
1998 from the comparable 1997 period primarily due to the Company's equity
interest in the Partnership's loss (see Note 10), which includes the BBT
litigation settlement (see Note 5) and compensation expense related to key
executives of an acquired company, partially offset by a gain on the sale of
certain short-term investments.
INTEREST EXPENSE--NET
Net interest expense for the three months ended March 31, 1997 represents an
allocation of interest expense from the Distributing Company and was allocated
based upon the Company's net assets as a percentage of the total net assets of
the Distributing Company for the period prior to the date of the Distribution.
Net interest expense allocated to the Company was $7 million for the three
months ended March 31, 1997. Subsequent to July 25, 1997, the date of the
Distribution, net interest represents actual interest expense incurred by the
Company, partially offset by interest earned on the Company's cash balance.
19
<PAGE>
Pro forma interest expense for the three months ended March 31, 1997
includes a reduction of interest expense of $5 million to reflect a net debt
level of $100 million at the beginning of 1997.
INCOME TAXES
Through the date of the Distributions, income taxes were determined as if
the Company had filed separate tax returns under its existing structure for the
periods presented. Accordingly, future tax rates could vary from the historical
effective tax rates depending on the Company's future tax elections. The Company
recorded a benefit for income taxes of $32 million and a provision for income
taxes of $4 million for the three months ended March 31, 1998 and 1997,
respectively. Excluding the restructuring and other charges recorded during the
three months ended March 31, 1998 and the charges related to the Distributions
recorded in the three months ended March 31, 1997, the effective tax rate was
approximately 38% for both periods.
RESTRUCTURINGS
In connection with the Distributions (see Note 1), during the three months
ended March 31, 1997, the Company recorded pre-tax charges to cost of sales of
$3 million for employee costs related to dividing the Distributing Company's
Taiwan operations between the Company and General Semiconductor. These charges
were fully paid as of June 30, 1997. These charges have not had and are not
expected to have a significant impact on the Company's results of operations and
cash flows.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are being manufactured by subcontractors in the U.S. and 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.
Substantially all of the fourth quarter severance and other employee separation
costs have been paid. 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.
As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense. Through March 31, 1998, the
Company has made severance and other restructuring related payments of $5
million related to
20
<PAGE>
these first quarter 1998 charges. Substantially all of the remaining severance
and other employee separation costs are expected to be paid during 1998 and the
fixed assets are expected to be disposed of by the end of 1998.
OTHER CHARGES
The Company incurred certain other pre-tax charges during the first quarter
of 1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and, accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut-down expenses and legal fees. The above charges
totalled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 5) and compensation expense related to key executives of an acquired
company. The balance of these reserves was $20 million at March 31, 1998 and
relates primarily to inventory.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Distributions, the Company participated in the Distributing
Company's cash management program. To the extent the Company generated positive
cash, such amounts were remitted to the Distributing Company. To the extent the
Company experienced temporary cash needs for working capital purposes or capital
expenditures, such funds were historically provided by the Distributing Company.
At the date of the Distributions, $125 million of cash was transferred to the
Company.
For the three months ended March 31, 1998 and 1997, cash used by operations
was $67 million and cash provided by operations was $38 million, respectively.
Cash used by operations in the first quarter of 1998 primarily reflects the
funding provided to the Partnership related to its R&D activities, payments
related to the restructuring and increased working capital requirements,
partially offset by cash generated by the broadband and satellite businesses.
Cash provided by operations in the first quarter of 1997 primarily represents
cash generated by the broadband business.
At March 31, 1998, working capital was $413 million compared to $436 million
at December 31, 1997. The Company believes that working capital levels will
increase to support the growth of the digital business and there can be no
assurance that future industry-specific developments or general economic trends
will not continue to alter the Company's working capital requirements.
During the three months ended March 31, 1998 and 1997, the Company invested
$18 million and $17 million, respectively, in equipment and facilities. The
Company expects to continue to expand its capacity to meet increased current and
anticipated future demands for digital products, with capital expenditures for
the year expected to approximate $120 million. The Company's R&D expenditures
were $116 million (including the $75 million funding related to the
Partnership's R&D activities) and $51 million during the first quarter of 1998
and 1997, respectively. The Company expects total R&D expenditures to
approximate $245 million (including the $75 million funding related to the
Partnership) for the year ending December 31, 1998.
The Company has a bank credit agreement (the "Credit Agreement") which
provides a $600 million unsecured revolving credit facility and matures on
December 31, 2002. The Credit Agreement permits the Company to choose between
two competitive interest rate options. The Credit Agreement contains financial
and operating covenants, including limitations on guarantee obligations, liens
and the sale of assets, and requires the maintenance of certain financial
ratios. Significant financial ratios include (i) maintenance of consolidated net
worth above $600 million adjusted for 50% of cumulative positive
21
<PAGE>
quarterly net income subsequent to June 30, 1997; (ii) maintenance of an
interest coverage ratio based on EBITDA (excluding $203 million of charges
incurred in 1997 and 1998) in comparison to net interest expense of greater than
5 to 1; and (iii) maintenance of a leverage ratio comparing total indebtedness
to EBITDA (excluding $203 million of charges incurred in 1997 and 1998) of less
than 3 to 1. None of the restrictions contained in the Credit Agreement is
expected to have a significant effect on the Company's ability to operate. As of
March 31, 1998, the Company was in compliance with all financial and operating
covenants contained in the Credit Agreement and had available credit of $460
million.
In January 1998, the Company announced that, subject to the completion of
definitive agreements, Sony Corporation of America will purchase 7.5 million new
shares of common stock of the Company for $188 million.
In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of NLC to a newly formed limited
partnership in exchange for approximately an 89% (subject to additional
dilution) limited partnership interest. The technology transferred to the
Partnership related to in-process research and development for the design and
marketing of a highly innovative next-generation telecommunication broadband
access system for the delivery of telephony, video and data from a telephone
company central office to the home. Additionally, the Company advanced to the
Partnership $75 million, utilizing available operating funds and borrowings
under its Credit Agreement, in exchange for the Note. Since the repayment of the
Note is solely dependent upon the results of the Partnership's research and
development activities and the commercial success of its product development,
the Company recorded a charge to fully reserve for the Note concurrent with the
funding (see Note 10).
The Company's management assesses its liquidity in terms of its overall
ability to obtain cash to support its ongoing business levels and to fund its
growth objectives. The Company's principal sources of liquidity both on a
short-term and long-term basis are cash flows provided by operations and
borrowings under the Credit Agreement. The Company believes that based upon its
analysis of its consolidated financial position and its expected operating cash
flows from future operations, along with available funding under the Credit
Agreement, cash flows will be adequate to fund operations, research and
development, capital expenditures and strategic restructuring costs. There can
be no assurance, however, that future industry-specific developments or general
economic trends will not adversely affect the Company's operations or its
ability to meet its cash requirements.
NEW TECHNOLOGIES
The Company operates in a dynamic and competitive environment in which its
success will be dependent upon numerous factors, including its ability to
continue to develop appropriate technologies and successfully implement
applications based on those technologies. In this regard, the Company has made
significant investments to develop advanced systems and equipment for the cable
and satellite television, Internet/data delivery and local telephone access
markets. Additionally, the future success of the Company will be dependent on
the ability of the cable and satellite television operators to successfully
market the services provided by the Company's advanced digital terminals to
their customers. Furthermore, as a result of the higher costs of initial
production, digital products presently being shipped carry lower margins than
the Company's mature analog products.
Management of the Company expects cable television operators in the United
States and abroad to continue to purchase analog products to upgrade their basic
networks and invest in new system construction primarily to compete with other
television programming sources and to develop, using U.S. architecture and
systems, international markets where cable penetration is low and demand for
entertainment programming is growing. However, management expects that demand in
North America for its basic analog cable products will continue to decline.
As the Company continues to introduce new products and technologies and such
technologies gain market acceptance, there can be no assurance that sales of
products based on new technologies will not
22
<PAGE>
affect the Company's product sales mix and/or will not have an adverse impact on
sales of certain of the Company's other products.
FOREIGN EXCHANGE AND MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. These foreign operations are subject to market
risk changes with respect to currency exchange rate fluctuations, which could
impact the Company's consolidated financial statements. The Company monitors its
underlying exchange rate exposures on an ongoing basis and continues to
implement selective hedging strategies to reduce the market risks from changes
in exchange rates. On a selective basis, the Company enters into contracts to
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 March 31, 1998, a hypothetical 10% fluctuation in the exchange rate
of foreign currencies applicable to the Company, principally the new Taiwan and
Canadian dollars, would result in a net $3 million gain or loss on the contracts
the Company has outstanding, which would offset the related net loss or gain on
the assets, liabilities and transactions being hedged.
INTERNATIONAL MARKETS
Management of the Company believes that additional growth for the Company
will come from international markets, although the Company's international sales
decreased from the three months ended March 31, 1997 to the three months ended
March 31, 1998, and there can be no assurance that international sales will
increase to 1997 levels in the near future. In order to support the Company's
international product and marketing strategies, it is currently expected that
the Company will add operations in foreign markets in the following areas, among
others: customer service, sales, finance and product warehousing. Although no
assurance can be given, management expects that the expansion of international
operations will not require significant capital expenditures and that increased
costs will be offset by increased sales in such markets.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the past
few years, the rate of inflation has been low and has not had a material impact
on the Company's results of operations.
READINESS FOR YEAR 2000
The Company has identified and evaluated the changes to its computer systems
and products necessary to achieve a year 2000 date conversion, and required
conversion efforts are currently underway. The Company is also communicating
with its suppliers, financial institutions and others with which it does
business to understand the impact of any year 2000 issues on the Company. The
Company does not believe the cost of achieving year 2000 compliance to be
material. Additionally, the Company believes, based on available information,
that it will be able to manage its total year 2000 transition without any
material adverse effect on its business operations, products or financial
prospects.
23
<PAGE>
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and other sections of
this Form 10-Q may include forward-looking statements concerning, among other
things, the Company's prospects, developments and business strategies. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes," "subject to" and "scheduled." These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These risks include, but are not limited to, uncertainties relating
to general political and economic conditions, uncertainties relating to
government and regulatory policies, uncertainties relating to customer plans and
commitments, the Company's dependence on the cable television industry and cable
television spending, signal security, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations and authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. Reference is made to
Exhibit 99 in this Form 10-Q for a further discussion of such factors. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company's products are manufactured or
assembled in Taiwan and Mexico. These foreign operations are subject to market
risk changes with respect to currency exchange rate fluctuations, which could
impact the Company's consolidated financial statements. The Company monitors its
underlying exchange rate exposures on an ongoing basis and continues to
implement selective hedging strategies to reduce the market risks from changes
in exchange rates. On a selective basis, the Company enters into contracts to
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 March 31, 1998, a hypothetical 10% fluctuation in the exchange rate
of foreign currencies applicable to the Company, principally the new Taiwan and
Canadian dollars, would result in a net $3 million gain or loss on the contracts
the Company has outstanding, which would offset the related net loss or gain on
the assets, liabilities and transactions being hedged.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
GENERAL INSTRUMENT CORPORATION
/s/ MARC E. ROTHMAN
-----------------------------------------
Marc E. Rothman
VICE PRESIDENT AND CONTROLLER
</TABLE>
Date February 11, 1999
25
