<PAGE>
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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 JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 001-12925
GENERAL INSTRUMENT CORPORATION
(Exact name of registrant as specified in its charter)
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 July 15, 1998, there were 151,746,136 shares of Common Stock outstanding.
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<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 June 30, 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 July 31, 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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
(UNAUDITED)
Cash and cash equivalents............................................................. $ 82,854 $ 35,225
Short-term investments................................................................ 25,659 30,346
Accounts receivable, less allowance for doubtful accounts of $3,120 and $3,566,
respectively........................................................................ 323,000 343,625
Inventories........................................................................... 261,031 288,078
Deferred income taxes................................................................. 121,494 105,582
Other current assets.................................................................. 14,112 21,862
----------- ------------
Total current assets................................................................ 828,150 824,718
Property, plant and equipment, net.................................................... 226,918 236,821
Intangibles, less accumulated amortization of $91,547 and $86,333, respectively....... 76,171 82,546
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $114,919 and $108,123, respectively..................... 457,418 471,186
Deferred income taxes................................................................. 19,889 5,634
Investments and other assets.......................................................... 84,723 54,448
----------- ------------
TOTAL ASSETS.......................................................................... $1,693,269 $1,675,353
----------- ------------
----------- ------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
(UNAUDITED)
Accounts payable...................................................................... $ 203,780 $ 200,817
Other accrued liabilities............................................................. 170,993 188,250
----------- ------------
Total current liabilities........................................................... 374,773 389,067
Deferred income taxes................................................................. 5,663 5,745
Other non-current liabilities......................................................... 62,525 65,730
----------- ------------
Total liabilities................................................................... 442,961 460,542
----------- ------------
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; 151,686,994 and
148,358,188 shares issued at June 30, 1998 and December 31, 1997, respectively...... 1,517 1,484
Additional paid-in capital............................................................ 1,282,428 1,213,566
Accumulated deficit................................................................... (49,165) (19,236)
Accumulated other comprehensive income, net of taxes of $9,129 and $11,347,
respectively........................................................................ 15,530 18,999
----------- ------------
1,250,310 1,214,813
Less-Treasury Stock, at cost, 6,134 shares of Common Stock............................ (2) (2)
----------- ------------
Total stockholders' equity............................................................ 1,250,308 1,214,811
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $1,693,269 $1,675,353
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET SALES........................................................ $ 488,505 $ 450,403 $ 905,425 $ 858,431
Cost of sales.................................................... 347,384 332,785 671,316 627,299
---------- ---------- ---------- ----------
GROSS PROFIT..................................................... 141,121 117,618 234,109 231,132
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative............................ 45,883 51,890 101,768 94,644
Research and development....................................... 42,266 49,630 158,169 100,675
Amortization of excess of cost over fair value of net assets
acquired..................................................... 3,562 3,560 7,123 7,118
---------- ---------- ---------- ----------
Total operating expenses................................... 91,711 105,080 267,060 202,437
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................................... 49,410 12,538 (32,951) 28,695
Other expense--net (including equity interest in Partnership
losses of $6,562 and $17,852 for the three and six months ended
June 30, 1998)................................................. (796) (1,324) (9,804) (1,853)
Interest expense--net............................................ (284) (6,420) (1,264) (13,511)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................................ 48,330 4,794 (44,019) 13,331
Benefit (provision) for income taxes............................. (18,367) (4,388) 14,090 (7,965)
---------- ---------- ---------- ----------
NET INCOME (LOSS)................................................ $ 29,963 $ 406 $ (29,929) $ 5,366
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE--BASIC................................. $ 0.20 $ (0.20)
---------- ----------
---------- ----------
EARNINGS (LOSS) PER SHARE--DILUTED............................... $ 0.19 $ (0.20)
---------- ----------
---------- ----------
PRO FORMA EARNINGS PER SHARE--BASIC AND DILUTED.................. $ -- $ 0.04
---------- ----------
---------- ----------
WEIGHTED-AVERAGE SHARES OUTSTANDING-- BASIC...................... 151,226 150,450
WEIGHTED-AVERAGE SHARES OUTSTANDING-- DILUTED.................... 160,863 150,450
PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING.................... 148,700 148,700
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENT 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, JANUARY 1, 1998......... 148,358 $ 1,484 $ 1,213,566 $ (19,236) $ 18,999 $ (2) $1,214,811
Net loss......................... (29,929) (29,929)
Exercise of stock options and
related tax benefit............ 3,329 33 57,216 57,249
Warrant costs related to customer
purchases...................... 11,646 11,646
Net change in investments........ (3,469) (3,469)
--
--------- --------- ------------ ------------ ------- ------------
BALANCE, JUNE 30, 1998........... 151,687 $ 1,517 $ 1,282,428 $ (49,165) $ 15,530 $ (2) $1,250,308
--
--
--------- --------- ------------ ------------ ------- ------------
--------- --------- ------------ ------------ ------- ------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED--IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ (29,929) $ 5,366
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization......................................................... 38,661 45,660
Warrant costs related to customer purchases........................................... 11,646 --
Gain on sale of short-term investment................................................. (4,529) --
Losses from asset sales and write-downs, net.......................................... 6,714 --
Loss from equity investments.......................................................... 17,852 --
Changes in assets and liabilities:
Accounts receivable................................................................. 13,103 49,560
Inventories......................................................................... 13,133 (18,800)
Prepaid expenses and other current assets........................................... 2,427 779
Deferred income taxes............................................................... (28,031) 4,620
Non-current assets.................................................................. (436) --
Accounts payable and other accrued liabilities...................................... (1,458) (21,806)
Other non-current liabilities....................................................... (3,206) 3,041
Other................................................................................... (901) (2,105)
---------- ----------
Net cash provided by operating activities................................................. 35,046 66,315
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment.............................................. (40,091) (36,547)
Investments in other assets............................................................. (1,995) (20,778)
Proceeds from sale of short-term investment............................................. 4,529 --
---------- ----------
Net cash used in investing activities..................................................... (37,557) (57,325)
---------- ----------
FINANCING ACTIVITIES:
Transfers to Distributing Company....................................................... -- (8,990)
Proceeds from stock option exercises.................................................... 50,140 --
---------- ----------
Net cash provided by (used in) financing activities....................................... 50,140 (8,990)
---------- ----------
Change in cash and cash equivalents....................................................... 47,629 --
Cash and cash equivalents, beginning of period............................................ 35,225 --
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 82,854 $ --
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<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 NLevel3-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, par value $.01 per share (the "Common
Stock"), based on a ratio of one for one, were distributed to the Distributing
Company's stockholders of record on July 25, 1997 (the "Communications
Distribution"). On July 28, 1997, approximately 49.1 million shares of CommScope
common stock, based on a ratio of one for three, were distributed to the
Company's stockholders of record on that date (the "CommScope Distribution" and,
together with the Communications Distribution, the "Distributions"). On July 28,
1997, the Company and CommScope began operating as independent entities with
publicly traded common stock, and the Distributing Company retained no ownership
interest in either the Company or CommScope. Additionally, immediately following
the Communications Distribution, the Distributing Company was renamed General
Semiconductor, Inc. ("General Semiconductor") and effected a one for four
reverse stock split.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements reflect the
results of operations, financial position, changes in stockholders' equity and
cash flows of General Instrument. The consolidated balance sheet as of June 30,
1998, the consolidated statements of operations for the three and six months
ended June 30, 1998 and 1997, the consolidated statement of stockholders' equity
for the six months ended June 30, 1998 and the consolidated statements of cash
flows for the six months ended June 30, 1998 and 1997 of General Instrument are
unaudited and reflect all adjustments of a normal recurring nature (except for
those charges disclosed in Notes 5, 9, 10 and 12) 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.
6
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
2. BASIS OF PRESENTATION (CONTINUED)
The consolidated statements of operations for the three and six months ended
June 30, 1997 include an allocation of general corporate expenses from the
Distributing Company. In the opinion of management, general corporate
administrative expenses have been allocated to the Company on a reasonable and
consistent basis 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 statements
of operations for the three and six months ended June 30, 1997 include an
allocation of net interest expense from the Distributing Company. To the extent
the Company generated positive cash, such amounts were remitted to the
Distributing Company. To the extent the Company experienced temporary cash needs
for working capital purposes or capital expenditures, such funds were
historically provided by the Distributing Company. 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 and
six months ended June 30, 1998, income taxes were 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 statements of operations presented
below give effect to the Distributions as if they had occurred on January 1,
1997. 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, 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 and
7
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
3. PRO FORMA FINANCIAL INFORMATION (CONTINUED)
$3.6 million of selling, general and administrative costs for the three and six
months ended June 30, 1997, respectively, to eliminate the allocation of
corporate expenses to CommScope and General Semiconductor, as such costs
subsequent to the Distributions were no longer allocable and were expected to be
incurred by the Company in the future; and (ii) a net debt level of $100 million
at January 1, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------- ----------------
<S> <C> <C>
Net sales.................................................................. $ 450,403 $ 858,431
Cost of sales.............................................................. 332,785 627,299
-------- --------
Gross profit............................................................... 117,618 231,132
Operating expenses:
Selling, general and administrative...................................... 53,690 98,244
Research and development................................................. 49,630 100,675
Amortization of excess of cost over fair value of net assets acquired.... 3,560 7,118
-------- --------
Total operating expenses................................................... 106,880 206,037
-------- --------
Operating income........................................................... 10,738 25,095
Other expense--net......................................................... (1,324) (1,853)
Interest expense--net...................................................... (1,900) (3,800)
-------- --------
Income before income taxes................................................. 7,514 19,442
Provision for income taxes................................................. (5,488) (10,387)
-------- --------
Net income................................................................. $ 2,026 $ 9,055
-------- --------
-------- --------
Weighted-average shares outstanding........................................ 148,700 148,700
Earnings per share--basic and diluted...................................... $ 0.01 $ 0.06
-------- --------
-------- --------
</TABLE>
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------- --------------------
<S> <C> <C>
Raw materials............................................................... $ 107,144 $ 111,148
Work in process............................................................. 17,054 19,676
Finished goods.............................................................. 136,833 157,254
-------------- --------
Total inventories........................................................... $ 261,031 $ 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
8
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
has not had, and is not expected to have, a material adverse effect on the
Company's consolidated financial statements.
On May 5, 1998, the action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL
INSTRUMENT CORP., pending in the United States District Court for the Eastern
District of North Carolina, was dismissed with prejudice. In addition, on May 4,
1998, the action entitled NEXT LEVEL COMMUNICATIONS V. BROADBAND TECHNOLOGIES,
INC., was dismissed with prejudice. These dismissals were entered pursuant to a
settlement agreement under which, among other things, the Partnership has paid
BroadBand Technologies $5 million and BroadBand Technologies and the Partnership
have entered into a perpetual cross-license of patents applied for or issued
currently or during the next five years. The Company also has granted BroadBand
Technologies a covenant not to sue on all Company patents applied for or issued
currently or during the next five years. 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.
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 attorneys' 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 Next Level
Communications ("NLC"), which merged into a subsidiary of the Distributing
Company in September 1995. The action was originally filed in the Northern
District of California and was subsequently transferred to the Northern District
of Illinois. The plaintiffs allege that the defendants violated federal
securities laws by making misrepresentations and omissions and breached
fiduciary duties to NLC in connection with the acquisition of NLC by the
9
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 alleged that the defendants
misappropriated trade secrets relating to a switched digital video product, and
that the defendants conspired to misappropriate the trade secrets. The
plaintiffs sought monetary and exemplary damages in an unspecified amount and
attorneys' fees. On May 14, 1998, the United States District Court for the
Eastern District of Texas issued a preliminary injunction preventing DSC from
proceeding with this litigation. DSC has filed a notice of appeal of that order.
On July 6, 1998, the defendants filed a motion for summary judgment with the
district court requesting a permanent injunction preventing DSC from proceeding
with this litigation.
In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for
Arbitration against the Company alleging that the Company breached the terms of
a license agreement with StarSight by (a) developing a competing product that
wrongfully incorporates StarSight's technology and inventions claimed within a
certain StarSight patent, (b) failing to promote and market the StarSight
product as required by the license agreement, and (c) wrongfully using
StarSight's technical information, confidential information and StarSight's
graphical user interface in breach of the license agreement. StarSight is
seeking injunctive relief as well as damages in an unspecified amount. The
Company has denied StarSight's allegations and is vigorously defending the
arbitration action. The arbitration proceeding was originally scheduled to begin
before an arbitration panel of the American Arbitration Association in San
Francisco, California in July 1998. Due to the resignation of one of the panel
members two days before the arbitration proceeding was expected to begin, the
proceeding has been postponed until a third arbitrator is selected and a new
scheduling order is issued. The Company currently anticipates the proceeding to
begin in 1999.
10
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 inclusion of such common stock
equivalents would be anti-dilutive). The dilutive effect of options and warrants
of 9,637 shares for the Second Quarter 1998 was computed using the treasury
stock method. Further, since the computation of diluted loss per share is anti-
dilutive for the six months ended June 30, 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
and six months ended June 30, 1997. The pro forma weighted-average number of
shares outstanding used in the pro forma per share calculation for the three and
six months ended June 30, 1997 equaled the number of common shares issued and
common equivalent shares existing on 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 June 30, 1998, the Company was in compliance with all
financial and operating covenants under the Credit
11
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
7. LONG-TERM DEBT (CONTINUED)
Agreement. At June 30, 1998, the Company had available credit of $500 million
under the Credit Agreement. The Company had approximately $109 million of
letters of credit outstanding at June 30, 1998.
8. OTHER EXPENSE-NET
Other expense-net for the Second Quarter 1998 and for the six months ended
June 30, 1998 includes $7 million and $18 million, respectively, related to the
Company's share of the Partnership losses, including the charges described in
Note 12, partially offset by $2 million and $5 million, respectively, related to
a gain on the sale of a portion of the Company's investment in Ciena Corporation
and $5 million for both periods related to proceeds received from the settlement
of an insurance claim.
9. 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. The Company recorded
an additional $15 million of related charges during the three months ended June
30, 1997. 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 during the three months ended June 30, 1997. These charges were
fully paid as of March 31, 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 manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are currently being manufactured by subcontractors in the U.S. and
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
12
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
9. RESTRUCTURINGS (CONTINUED)
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 June 30, 1998, the
Company has made severance and other restructuring related payments of $6
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.
The following tabular reconciliation summarizes the restructuring activity
from January 1, 1997 through June 30, 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 $ (2.7)
Facility Costs........................... 3 .0 11.2 (3.7) 10.5 3.3 (7.3)
Severance................................ -- 32.7 (12.8) 19.9 7.6 (24.3)
Professional Fees........................ -- 6.0 (6.0) -- -- --
--- ----- ----------- ----- ----- -----------
Total.................................... $ 3.9 $ 60.3 $ (26.0) $ 38.2 $ 15.5 $ (34.3)
--- ----- ----------- ----- ----- -----------
--- ----- ----------- ----- ----- -----------
<CAPTION>
BALANCE AT
JUNE 30,
1998
-----------
<S> <C>
Property, Plant & Equipment(1)........... $ 9.7
Facility Costs........................... 6.5
Severance................................ 3.2
Professional Fees........................ --
-----
Total.................................... $ 19.4
-----
-----
</TABLE>
- ------------------------------
(1) The amount provided represents a direct reduction to the property, plant and
equipment balance to reflect these identified impaired assets at their fair
value. The amounts utilized reflect the disposition of such identified
impaired assets.
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 the
newly formed Partnership in exchange for approximately an 89% limited
partnership interest (subject to additional dilution). Such transaction was
accounted for at historical cost. The limited partnership interest is included
in "investments and other assets" in the accompanying consolidated balance sheet
at June 30, 1998. The operating general partner, which was formed by Spencer
Trask & Co., an unrelated third party, has acquired approximately an 11%
interest in the Partnership and has the potential to acquire up to an additional
11% in the future. The Company does not have the option to acquire the remaining
interest in the Partnership. Net assets transferred to the Partnership of $45
million primarily included property, plant and equipment, inventories and
accounts receivable partially offset by accounts payable and accrued expenses.
The Company's net equity investment in the Partnership was $27 million at June
30, 1998.
Pursuant to the Partnership agreement, the operating general partner
controls the Partnership and is responsible for developing the business plan and
infrastructure necessary to position the Partnership as a stand-alone company.
The Company, as the limited partner, has certain protective rights, including
the right to approve an alteration of the legal structure of the Partnership,
the sale of the Partnership's principal assets, the sale of the Partnership and
a change in the limited partner's financial interests in the Partnership. The
Company can not remove the general partner, except for cause, however, it has
the right to approve a change in the general partner. Since the operating
general partner controls the day-to-day operations of the Partnership and has
the ability to make decisions typical of a controlling party, including
13
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
10. THE PARTNERSHIP (CONTINUED)
the execution of agreements on all material matters affecting the Partnership's
business, the Partnership's operating results have not been consolidated with
the operating results of the Company subsequent to the January 1998 transfer.
The 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 will make an additional $50
million equity investment in the Partnership beginning in November 1998 to fund
the Partnership's growth and assist the Partnership in meeting its forecasted
working capital requirements.
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 and six months ended June 30, 1998, the Company's share of the
Partnership's losses was $7 million and $18 million, respectively, (net of the
Company's share of research and development expenses of $10 million and $19
million, respectively). 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 and six months ended June 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------- -----------------
<S> <C> <C>
Net sales............................................ $ 3,090 $ 5,829
Gross profit......................................... (806) (1,922)
Loss before income taxes............................. (20,748) (45,058)
Operating cash flow.................................. (18,519) (40,789)
</TABLE>
14
<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 and six months ended June 30, 1998 and 1997, other
comprehensive income comprised unrealized gains and losses on investments.
Comprehensive income is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- ---------- ---------
Net income (loss)..................................................... $ 29,963 $ 406 $ (29,929) $ 5,366
Other comprehensive income (loss)..................................... 3,904 7,307 (3,469) 18,487
--------- --------- ---------- ---------
Total comprehensive income (loss)..................................... $ 33,867 $ 7,713 $ (33,398) $ 23,853
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
12. 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
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 5) and compensation expense related to key executives of an acquired
company. The balance of these reserves was $18 million at June 30, 1998 and
relates primarily to inventory.
13. INVESTMENTS
At June 30, 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 and six months ended June 30, 1998 were $2 million and $5 million,
respectively. There were no such sales during the three or six months ended June
30, 1997. Realized gains were determined using the securities' cost. Short-term
investments consisted of the following at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
FAIR UNREALIZED UNREALIZED COST FAIR UNREALIZED UNREALIZED COST
VALUE GAINS LOSSES BASIS VALUE GAINS LOSSES BASIS
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marketable Equity Securities $ 25,659 $ 24,871 $ (212) $ 1,000 $ 30,346 $ 30,346 $ -- $ --
--------- ----------- ----- --------- --------- ----------- ----------- ---------
--------- ----------- ----- --------- --------- ----------- ----------- ---------
</TABLE>
15
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
14. 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 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 and six months ended June 30, 1998, the
Company recorded $8.5 million and $11.6 million, respectively, to cost of sales
related to these warrants.
15. 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 the above two statements only revise financial statement disclosures,
their adoption will not have any impact on the Company's consolidated financial
position, results of operations or cash flows.
DERIVATIVE AND HEDGE ACCOUNTING--In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued and is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all
derivative instruments be measured at fair value and
16
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
15. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (CONTINUED)
recognized in the balance sheet as either assets or liabilities. The Company is
currently evaluating the impact this pronouncement will have on its consolidated
financial statements.
16. SUBSEQUENT EVENT
On June 17, 1998, the Company entered into an Asset Purchase Agreement (the
"Agreement") with two affiliates of Tele-Communications, Inc., TCIVG-GIC, Inc.
("TCIVG") and NDTC Technology, Inc. ("NDTC Technology" and, collectively with
TCIVG, "TCI") pursuant to which the Company agreed to acquire from TCIVG, in
exchange for 21,356,000 unregistered shares of the Company's Common Stock,
certain assets, a license to certain intellectual property from NDTC Technology
which will enable the Company to conduct authorization services and future cash
consideration as discussed below. The shares issued to TCI are restricted in
that they are not registered and are not transferrable to any unrelated party
other than in the event of change of control of the Company for a period of
three years following their date of issuance. The Company's provision of
services under the aforementioned license is intended to provide the cable
industry with a secure access control platform to support widespread deployment
of digital terminals and related systems and applications. On July 17, 1998 the
transaction was consummated. The Agreement provides the Company with minimum
revenue guarantees from TCI over the first nine years from the date of closing.
The Company has contracted with NDTC Technology for certain support services
during the first nine years following the date of closing, with renewable
one-year terms. The Agreement gives the Company the right to license the
technology for a period of 20 years. As mentioned above, the Agreement contains
a provision for TCIVG to pay the Company $50 million over the first five years
from the date of closing in equal monthly installments which represents a
reduction of purchase price. The net purchase price of approximately $400
million will be allocated to the license and the assets acquired based on their
respective estimated fair values. The Company expects to amortize the license
over the license term of 20 years.
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 June 30, 1998 ("Second Quarter 1998")
were $489 million compared to $450 million for the three months ended June 30,
1997 ("Second Quarter 1997"), an increase of $39 million, or 9%. Net sales for
the six months ended June 30, 1998 were $905 million compared to $858 million
for the six months ended June 30, 1997, an increase of $47 million, or 5%. The
increases in net sales for the three and six month periods reflect increased
sales of digital cable systems, partially offset by lower sales of analog cable
terminals and satellite systems for private and commercial networks. Analog and
digital products each represented approximately 50% of total sales of the
Company for the six months ended June 30, 1998, compared to approximately 63%
and 37%, respectively, for the six months ended June 30, 1997.
Worldwide broadband sales (consisting of digital and analog cable and
wireless television systems and network transmission systems) of $380 million
and $689 million for Second Quarter 1998 and for the six months ended June 30,
1998, respectively, increased $61 million, or 19%, and $71 million, or 11%,
respectively, from the comparable 1997 periods primarily as a result of
increased U.S sales volume of digital cable terminals and headends, 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 Second Quarter 1998 and Second Quarter 1997, net
broadband sales in the U.S. were 83% and 70%, respectively, combined U.S. and
Canadian sales were 84% and 73%, respectively, and all other international sales
were 16% and 27%, respectively, of total worldwide broadband sales. For the six
months ended June 30, 1998 and 1997, net broadband sales in the U.S. were 82%
and 69%, respectively, combined U.S. and Canadian sales were 84% and 73%,
respectively, and all other international sales were 16% and 27%, respectively,
of total worldwide broadband sales.
Worldwide satellite sales of $109 million and $216 million for Second
Quarter 1998 and the six months ended June 30, 1998, respectively, decreased $22
million, or 17%, and $24 million, or 10%, respectively, from the comparable 1997
periods primarily as a result of lower private and commercial network sales.
During the Second Quarter 1998 and Second Quarter 1997, net satellite sales in
the U.S. were 96% and 75%, respectively, combined U.S. and Canadian sales were
96% and 85%, respectively, and all other international sales were 4% and 15%,
respectively, of total worldwide satellite sales. For the six months ended June
30, 1998 and 1997, net satellite sales in the U.S. were 95% and 79%,
respectively, combined U.S. and Canadian sales were 98% and 86%, respectively,
and all other international sales were 2% and 14%, respectively, of total
worldwide satellite sales.
The decrease in broadband and satellite international sales during the 1998
periods was experienced in all international regions. The largest decreases in
sales during the first half of 1998 were experienced in the Asia/Pacific and
Latin American regions and there can be no assurance that international sales
will return to 1997 levels in the near term.
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
six months ended June 30, 1998, TCI, Primestar and Time Warner accounted for
approximately 24%, 14% and 11% of total Company sales, respectively.
GROSS PROFIT
Gross profit of $141 million and $234 million for Second Quarter 1998 and
the six months ended June 30, 1998, respectively, increased $23 million, or 20%,
and $3 million, or 1%, respectively, from the
18
<PAGE>
comparable 1997 periods. Gross profit was 29% and 26% of sales for Second
Quarter 1998 and the six months ended June 30, 1998, respectively, compared to
26% and 27%, respectively, for the comparable 1997 periods. Gross profit for the
six months ended June 30, 1998 included $9 million of restructuring charges (see
Note 9 and "Restructurings" below) and $18 million of other charges (see Note 12
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 Second Quarter 1997 and the six months ended June
30, 1997 included $16 million and $18 million, respectively, of charges for
employee costs related to dividing the Distributing Company's Taiwan operations
between the Company and General Semiconductor. Gross profit increases primarily
reflect increased sales levels.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general & administrative ("SG&A") expense was $46 million and $102
million for the Second Quarter 1998 and the six months ended June 30, 1998,
respectively, compared to $52 million and $95 million, respectively, for the
comparable 1997 periods. SG&A expense as a percentage of sales was 9% and 11%
for the Second Quarter 1998 and the six months ended June 30, 1998,
respectively, and 12% and 11%, respectively, for the 1997 periods. SG&A spending
for the six months ended June 30, 1998 included $6 million of restructuring
charges (see Note 9 and "Restructurings" below) and $7 million of other charges
(see Note 12 and "Other Charges" below) recorded in the first quarter of 1998,
primarily related to severance and other employee separation costs, costs
associated with the closure of various facilities, including moving costs, and
costs associated with changing the Company's corporate name. SG&A spending for
the Second Quarter 1997 and the six months ended June 30, 1997 included $6
million of charges primarily for legal and other professional fees directly
related to the Communications Distribution (see Note 1). SG&A spending for the
1997 periods also included SG&A expenses related to NLC.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expense was $42 million and $158 million
for the Second Quarter 1998 and six months ended June 30, 1998, respectively,
compared to $50 million and $101 million, respectively, for the comparable 1997
periods. R&D expense for the six months ended June 30, 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).
19
<PAGE>
OTHER EXPENSE--NET
Other expense was $1 million and $10 million for the Second Quarter 1998 and
the six months ended June 30, 1998, respectively, compared with $1 million and
$2 million, respectively, for the comparable 1997 periods. Other expense
increased in the first half of 1998 from the comparable 1997 period primarily
due to the Company's equity interest in the Partnership's loss (see Notes 8 and
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 a portion of the Company's investment in Ciena Corporation
and settlement of an insurance claim.
INTEREST EXPENSE--NET
Net interest expense for the three and six months ended June 30, 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
Communications Distribution. Net interest expense allocated to the Company was
$6 million and $14 million for the Second Quarter 1997 and for the six months
ended June 30, 1997, respectively. Subsequent to July 25, 1997, the date of the
Communications Distribution, net interest represents actual net interest expense
incurred by the Company.
Pro forma interest expense for the Second Quarter 1997 and the six months
ended June 30, 1997 includes a reduction of interest expense of $5 million and
$10 million, respectively, to reflect an assumed net debt level of $100 million
at January 1, 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 provision for income taxes of $18 million and a benefit for income
taxes of $14 million for the Second Quarter 1998 and the six months ended June
30, 1998, respectively, and a provision for income taxes of $4 million and $8
million, respectively, for the comparable 1997 periods based upon the expected
annual effective tax rate.
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. The Company recorded
an additional $15 million of related charges during the three months ended June
30, 1997. 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 during the three months ended June 30, 1997. These charges were
fully paid as of March 31, 1998. These charges did not result in the reduction
of future expenses; therefore, they have not had and are not expected to have a
significant impact on the Company's results of operations and cash flows.
In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
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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 June 30, 1998, the
Company has made severance and other restructuring related payments of $6
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.
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
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 5) and compensation expense related to key executives of an acquired
company. The balance of these reserves was $18 million at June 30, 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 six months ended June 30, 1998 and 1997, cash provided by operations
was $35 million and $66 million, respectively. Cash provided by operations in
the first half of 1998 primarily reflects cash generated from operations,
partially offset by the funding provided to the Partnership related to its R&D
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activities and payments related to the restructuring. Cash provided by
operations in the first half of 1997 primarily represents cash generated by the
broadband business, partially offset by increased inventory levels to support
business growth.
At June 30, 1998 and December 31, 1997, working capital was $453 million and
$436 million, respectively. The Company believes that working capital levels are
adequate to support the growth of the digital business, however, 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 six months ended June 30, 1998 and 1997, the Company invested $40
million and $37 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 $158 million (including the $75 million funding related to the
Partnership's R&D activities) and $101 million during the first six months of
1998 the first six months of 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 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 June 30,
1998, the Company was in compliance with all financial and operating covenants
contained in the Credit Agreement and had available credit of $500 million.
In January 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 will make an additional $50 million equity
investment in the Partnership beginning in November, 1998 to fund the
Partnership's growth and assist the Partnership in meeting its forecasted
working capital requirements.
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
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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 and capital expenditures.
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 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 the above two statements only revise financial statement disclosures,
their adoption will not have any impact on the Company's consolidated financial
position, results of operations or cash flows.
DERIVATIVE AND HEDGE ACCOUNTING--In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued and is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all
derivative instruments be measured at fair value and recognized in the balance
sheet as either assets or liabilities. The Company is currently evaluating the
impact this pronouncement will have on its consolidated financial statements.
NEW TECHNOLOGIES
The Company operates in a dynamic and competitive environment in which its
success will be dependent upon numerous factors, including its ability to
continue to develop appropriate technologies and successfully implement
applications based on those technologies. In this regard, the Company has made
significant investments to develop advanced systems and equipment for the cable
and satellite television, Internet/data delivery and local telephone access
markets. Additionally, the future success of the Company will be dependent on
the ability of the cable and satellite television operators to successfully
market the services provided by the Company's advanced digital terminals to
their customers. Furthermore, as a result of the higher costs of initial
production, digital products presently being shipped carry lower margins than
the Company's mature analog products.
Management of the Company expects cable television operators in the United
States and abroad to continue to purchase analog products to upgrade their basic
networks and to develop, using U.S. architecture and systems, international
markets where cable penetration is low and demand for entertainment programming
is growing. However, management expects that demand in North America for its
basic analog cable products will continue to decline.
As the Company continues to introduce new products and technologies and such
technologies gain market acceptance, there can be no assurance that sales of
products based on new technologies will not affect the Company's product sales
mix and/or will not have an adverse impact on sales of certain of the Company's
other products.
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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 in the first half of 1998 in comparison to the prior year, and there
can be no assurance that international sales will increase to 1997 levels in the
near future. In order to support the Company's international product and
marketing strategies, it is currently expected that the Company will add
operations in foreign markets in the following areas, among others: customer
service, sales, finance, product warehousing and expansion of manufacturing
capacity at existing facilities. Although no assurance can be given, management
expects that the expansion of international operations will not require
significant increased levels of capital expenditures.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the past
few years, the rate of inflation has been low and has not had a material impact
on the Company's results of operations.
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 and testing efforts are currently underway and are expected to be
completed by mid 1999. The Company continues to communicate with its suppliers,
customers and others with which it does business to understand the impact of any
year 2000 issues on the Company. However, there can be no assurance that the
companies with which the Company does business will achieve a year 2000
conversion in a timely fashion, or that such failure to convert by another
company will not have an adverse effect on the Company. The Company does not
expect the cost of achieving year 2000 compliance will exceed $5 million.
Additionally, based on the current status of these efforts, the Company believes
that it will be able to manage its total year 2000 transition without any
material adverse effect on its business operations, products or financial
prospects.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and other sections of
this Form 10-Q may include forward-looking statements concerning, among other
things, the Company's prospects, developments and business strategies. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes," "subject to" and "scheduled." These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These risks include, but are not limited to, uncertainties relating
to general political and economic conditions, uncertainties relating to
government and regulatory policies, uncertainties relating to customer plans and
commitments, the Company's dependence on the cable television industry and cable
television spending, signal security, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations and authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. Reference is made to
Exhibit 99 in this Form 10-Q for a further discussion of such factors. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made. The Company undertakes
no
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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 June 30, 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 $2 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.
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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>
February 11, 1999
Date
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