UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission file number 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1375 Lenoir Rhyne Boulevard, Hickory, North Carolina 28601
(Address of principal executive offices)
(Zip Code)
(704) 324-2200
(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
(*) Registrant became subject to the filing requirements on June 13, 1997.
As of November 6, 1997 there were 49,108,874 shares of Common Stock outstanding.
<PAGE>
CommScope, Inc.
Form 10-Q
September 30, 1997
Table of Contents
Page No.
---------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 14 - 18
Part II - Other Information
Item 5. Other Information 19
Item 6. Exhibits and Repoorts on Form 8-K 19
Signatures 20
2
<PAGE>
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in Thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------------- ------------- -------------- -------------
Net Sales $ 147,269 $ 148,580 $ 454,434 $ 421,507
-------------- ------------- -------------- -------------
Operating Costs and Expenses:
Cost of sales 115,328 108,328 343,882 310,207
Selling, general and administrative 12,732 10,848 37,412 31,284
Research and development 1,642 1,272 4,470 3,901
Amortization of excess of cost over fair value
of net assets acquired 1,306 1,323 3,918 3,840
-------------- ------------- -------------- -------------
Total operating costs & expenses 131,008 121,771 389,682 349,232
-------------- ------------- -------------- -------------
Operating Income 16,261 26,809 64,752 72,275
Other income (expense), net (433) 507 52 1,122
Interest expense, net (3,849) (2,422) (9,115) (7,398)
-------------- ------------- -------------- -------------
Income before Income Taxes 11,979 24,894 55,689 65,999
Provision for income taxes (4,555) (9,455) (21,160) (25,068)
-------------- ------------- -------------- -------------
Net Income $ 7,424 $ 15,439 $ 34,529 $ 40,931
============== ============= ============== =============
Earnings per share (A) n/a n/a n/a n/a
</TABLE>
(A) As described more fully in Note 1, CommScope's earnings were part of
General Instrument's results of operations for part of all periods
presented. Accordingly, no historical earnings per share information is
presented.
See notes to condensed consolidated financial statements.
3
<PAGE>
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
<TABLE>
<S> <C> <C>
(Unaudited)
September 30, December 31,
1997 1996
--------------- ---------------
Assets
Cash $ 4,670 $ --
Accounts receivable, less allowance for doubtful accounts of
$4,141 and $3,761, respectively 100,654 101,817
Inventories (Note 2) 51,583 41,136
Prepaid expenses and other current assets 1,767 1,287
Deferred income taxes 13,704 13,742
--------------- ---------------
Total current assets 172,378 157,982
Property, plant and equipment, net 132,425 117,022
Intangibles, less accumulated amortization of
$25,883 and $23,809, respectively 22,882 24,956
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $36,958 and $33,040, respectively 171,650 175,568
Investments and other assets 4,792 4,357
--------------- ---------------
Total Assets $ 504,127 $ 479,885
=============== ===============
Liabilities and Stockholders' Equity
Accounts payable $ 25,262 $ 18,953
Income taxes payable 6,371 2,148
Other accrued liabilities 29,347 29,661
--------------- ---------------
Total current liabilities 60,980 50,762
Long-term debt (Note 4) 270,800 10,800
Deferred income taxes 14,902 15,198
Other non-current liabilities 10,406 9,565
--------------- ---------------
Total Liabilities 357,088 86,325
Commitments and contingencies
Stockholders' Equity
Divisional retained earnings (Note 1) -- 393,560
Common Stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 49,108,874 at September 30, 1997 491 --
Additional paid-in capital 140,870 --
Retained earnings 5,678 --
--------------- ---------------
Total Stockholders' Equity 147,039 393,560
--------------- ---------------
Total Liabilities and Stockholder's Equity $ 504,127 $ 479,885
=============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in Thousands)
<TABLE>
<S> <C> <C>
Nine Months Ended
September 30,
----------------------------------------
1997 1996
------------------ ------------------
Operating Activities:
Net income $ 34,529 $ 40,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 15,527 13,932
Changes in assets and liabilities:
Accounts receivable 1,163 (23,570)
Inventories (10,447) (1,184)
Prepaid expenses and other current assets (480) (380)
Deferred income taxes (258) (3,334)
Accounts payable, income taxes payable and other accrued liabilities 10,218 8,430
Other non-current liabilities 841 2,000
Other 141 (810)
------------------ ------------------
Net cash provided by operating activities 51,234 36,015
Investing Activities:
Additions to property, plant and equipment (24,809) (15,292)
Acquisition of Teledyne Thermatics assets, net -- (17,849)
Other -- 65
------------------ ------------------
Net cash used in investing activities (24,809) (33,076)
Financing Activities:
Dividend paid to sole stockholder (265,212) --
Net borrowings under revolving credit facility 260,000 --
Financing fees paid (705) --
Transfers to sole stockholder (15,838) (2,939)
------------------ ------------------
Net cash used in financing activities (21,755) (2,939)
Change in cash and cash equivalents 4,670 --
Cash and cash equivalents, beginning of period -- --
------------------ ------------------
Cash and cash equivalents, end of period $ 4,670 $ --
================== ==================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in Thousands, Except Share Amounts)
Nine Months Ended September 30, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of
Common Additional Divisional Total
Shares Common Paid-In Retained Retained Stockholders'
Outstanding Stock Capital Earnings Earnings Equity
---------------------------------------------------------------------------
Balance December 31, 1996 -- $ -- $ -- $ 393,560 $ -- $ 393,560
Transfers to sole stockholder (15,838) (15,838)
Dividend paid to sole stockholder (265,212) (265,212)
Net income from January 1, 1997 to July 27, 1997 28,851 28,851
Issuance of 49,104,874 shares 49,104,874 491 140,870 (141,361) --
Issuance of 4,000 shares 4,000 --
Net income from July 28, 1997 to September 30, 1997 5,678 5,678
---------------------------------------------------------------------------
Balance September 30, 1997 49,108,874 $ 491 $ 140,870 $ -- $ 5,678 $ 147,039
===========================================================================
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par
value. No preferred stock is currently issued or outstanding.
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CommScope, Inc. ("CommScope" or the "Company") was incorporated in Delaware in
January 1997 and, through its wholly owned subsidiary CommScope, Inc. of North
Carolina, formerly a wholly-owned subsidiary of General Instrument Corporation
("General Instrument"), operates in the cable manufacturing business. The
Company designs, manufactures, markets and sells coaxial, fiber optic and high
performance electronic cables primarily used in communications, local area
network, aerospace and industrial applications. CommScope is the largest
manufacturer and supplier of coaxial cable for cable television applications in
the United States and is a leading supplier of coaxial cable for satellite
television applications. CommScope is also a major supplier of coaxial cable to
international communications markets, primarily the cable television market.
General Instrument (i) transferred all the assets and liabilities relating to
the manufacture and sale of broadband communications products used in the cable
television, satellite, and telecommunications industries to its wholly-owned
subsidiary NextLevel Systems, Inc. ("NextLevel Systems") and all the assets and
liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electronic cable used in the cable television, satellite and other
industries to CommScope, Inc. (then a wholly-owned subsidiary of General
Instrument) and (ii) distributed all of the outstanding shares of capital stock
of each of NextLevel Systems and CommScope to its stockholders on a pro rata
basis as a dividend in a transaction that was consummated on July 28, 1997 (the
"Distribution Date"). Approximately 147.3 million shares of NextLevel Systems
Common Stock, based on an exchange ratio of one for one, were distributed to
General Instrument's stockholders of record on July 25, 1997 (the "NextLevel
Distribution"). On the Distribution Date, approximately 49.1 million shares of
CommScope Common Stock, based on an exchange ratio of one for three, were
distributed to NextLevel Systems' stockholders of record on that date (the
"CommScope Distribution" and together with the NextLevel Distribution,
collectively the "Distribution"). On the Distribution Date, NextLevel Systems
and CommScope began operating as independent entities with publicly traded
common stock. General Instrument retained no ownership interest in either
NextLevel Systems or CommScope. Additionally, following the NextLevel
Distribution, General Instrument was renamed General Semiconductor, Inc.
("General Semiconductor") and effected a one for four reverse stock split.
For the purpose of governing certain of the ongoing relationships among
NextLevel Systems, CommScope and General Semiconductor after the Distribution
and to provide mechanisms for an orderly transition, NextLevel Systems,
CommScope and General Semiconductor have entered into various agreements which
the companies believe are fair to each of the parties and are comparable to
those which would have been reached in arm's length negotiations with
unaffiliated parties.
BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements reflect the
results of operations, financial position, and cash flows of CommScope that were
transferred from General Instrument to the Company in connection with the
Distribution. The condensed consolidated balance sheet as of September 30, 1997,
the condensed consolidated statements of income for the three months and the
nine months ended September 30, 1997 and 1996, the condensed consolidated
statements of cash flows for the nine months ended September 30, 1997 and 1996,
and the condensed consolidated statement of stockholders' equity for the nine
months ended September 30, 1997 are unaudited and reflect all adjustments of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of the interim period financial statements. There were no
adjustments of a non-recurring nature recorded during the three and nine months
ended September 30, 1997 and 1996. The results of operations for the interim
period are not necessarily indicative of the results of operations to be
expected for the full year.
7
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION (Continued)
The unaudited interim condensed consolidated financial statements of CommScope
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The condensed consolidated financial statements include an allocation of certain
assets, liabilities and general corporate administrative expenses from General
Instrument prior to the Distribution, and accordingly reflect the results of
operations and changes in cash flows of the Company as if it were a separate
entity prior to the Distribution. In the opinion of management, general
corporate administrative expenses were allocated to CommScope on a reasonable
and consistent basis using management's estimate of services provided to
CommScope by General Instrument. However, such allocations are not necessarily
indicative of the level of expenses which might have been incurred had CommScope
been operating as a separate, stand-alone entity during the periods presented.
Prior to the Distribution, CommScope participated in General Instrument's cash
management program, and the accompanying financial statements include an
allocation of net interest expense from General Instrument. Net interest expense
was allocated based upon CommScope's net assets as a percentage of the total net
assets of General Instrument. 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 CommScope operated as a separate, stand-alone entity during
the periods presented. At the Distribution Date, CommScope implemented a
separate cash management program and assumed responsibility for the costs
associated with operating a public company.
CommScope's financial results include the costs incurred by General Instrument
related to the postretirement benefit plan for employees and retirees of
CommScope prior to the Distribution. Also, the provision for income taxes for
the nine months ended September 30, 1997 and 1996 is based on CommScope's
expected annual effective tax rate, calculated assuming CommScope had filed
separate tax returns under its previously existing structure as a wholly-owned
subsidiary of General Instrument.
Divisional retained earnings, as presented in the unaudited condensed
consolidated balance sheets and the unaudited condensed consolidated statement
of shareholders' equity, reflect the consolidated results of operations of the
Company and transfers of capital to / from General Instrument by the Company
prior to the Distribution, as this activity was included in the consolidated
results of operations and financial position of General Instrument. After the
dividend payment made to General Instrument in accordance with the terms of the
Distribution, the remaining divisional retained earnings were contributed to the
Company by General Instrument and are reflected as common stock and additional
paid-in capital. Net income of the Company after the Distribution Date is
reflected as a component of retained earnings.
CommScope's earnings were part of General Instrument's results of operations for
all periods presented prior to the Distribution Date, including 27 days in the
quarter ended September 30, 1997. Additionally, the capital structure of the
Company changed significantly as a result of borrowings under the Company's
credit facility on the Distribution Date, which were utilized primarily to make
a dividend payment to General Instrument in accordance with the terms of the
Distribution (see Note 4). Accordingly, no historical earnings per share has
been presented for all periods included in the condensed consolidated financial
statements.
Alternatively, pro forma earnings per share data is presented as described in
Note 3.
8
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION (Continued)
The financial information included herein does not necessarily reflect the
consolidated results of operations, financial position, and cash flows of
CommScope in the future or on a historical basis had CommScope been a separate
stand-alone entity for the periods presented. These interim condensed
consolidated financial statements should be read in conjunction with the
Company's December 31, 1996 audited consolidated financial statements and notes
thereto included in the Company's Prospectus dated June 13, 1997.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
September 30, December 31,
1997 1996
-------------- ------------
Raw materials $ 17,294 $ 23,206
Work in process 11,696 4,978
Finished goods 22,593 12,952
-------------- ------------
$ 51,583 $ 41,136
============== ============
3. PRO FORMA FINANCIAL INFORMATION AND EARNINGS PER SHARE
The accompanying unaudited pro forma financial information was prepared to
present the consolidated statements of income of CommScope as if the
Distribution had occurred on January 1, 1996. The unaudited pro forma statements
of income set forth below do not purport to represent what CommScope's
operations actually would have been or to project CommScope's operating results
for any future period.
The unaudited pro forma information has been prepared utilizing the historical
consolidated statements of income of CommScope which were adjusted to reflect a
net debt level of $275 million at the beginning of each period presented at an
assumed weighted average borrowing rate of 6.35% plus the amortization of debt
issuance costs associated with the new borrowings (see Note 4). Pro forma
earnings per share was calculated by dividing the pro forma net income for each
period presented by the pro forma common and common equivalent shares
outstanding for each period, and assumes that a total of 49.2 million common and
common equivalent shares outstanding at the Distribution Date were outstanding
since January 1, 1996. Additionally, the weighted average number of common and
common equivalent shares outstanding for the three and nine months ended
September 30, 1997 has been presented after giving effect to changes in common
shares outstanding and in the dilutive effect of stock options subsequent to the
Distribution Date.
9
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
3. PRO FORMA FINANCIAL INFORMATION AND EARNINGS PER SHARE (Continued)
Giving effect to the Distribution as of January 1, 1996, pro forma results for
the Company would have been as follows:
<TABLE>
Pro Forma (A) Pro Forma (A)
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net Income $ 7,014 $ 14,089 $ 31,675 $ 36,962
============= ============= ============= =============
Weighted average number of common and
common equivalent shares outstanding 49,403 49,200 49,268 49,200
============= ============= ============= =============
Primary earnings per share (B) $ 0.14 $ 0.29 $ 0.64 $ 0.75
============= ============= ============= =============
</TABLE>
(A) Assumes a net debt level of $275 million at the beginning of each period
presented, interest expense of $4.5 million and $13.7 million for the three and
nine months ended September 30, 1997, and interest expense of $4.6 million and
$13.8 million for the three and nine months ended September 30, 1996.
(B) Pro forma fully diluted earnings per share is not presented because it does
not differ from pro forma primary earnings per share.
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", was issued to simplify the standards for computing
earnings per share ("EPS") and to make them comparable to international EPS
standards. SFAS No. 128 is effective for periods ending after December 15, 1997
and can not be adopted at an earlier date. SFAS No. 128 will require dual
presentation of basic and diluted EPS on the face of the statement of income and
a reconciliation of the components of the basic and diluted EPS calculations in
the notes to the financial statements. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is similar to fully diluted EPS pursuant
to Accounting Principles Board ("APB") Opinion No. 15. The Company will adopt
SFAS No. 128 in the quarter and year ending December 31, 1997. Had the new
standard been applied in the quarter ending September 30, 1997, pro forma basic
and diluted EPS would have been the same as pro forma primary and fully diluted
EPS under APB Opinion No. 15.
10
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
1997 1996
------------- ------------
Credit Agreement (as defined below) $ 260,000 $ --
Alabama State Industrial Development
Authority Notes 10,800 10,800
------------- ------------
270,800 10,800
Less current portion -- --
------------- ------------
$ 270,800 $ 10,800
============= ============
On July 23, 1997 the Company entered into a $350 million revolving credit
agreement with a group of banks (the "Credit Agreement"). On the Distribution
Date, the Company borrowed $266 million under the Credit Agreement which was
utilized to make a dividend payment to General Instrument in accordance with the
terms of the Distribution and to fund fees and expenses in connection with the
Credit Agreement. The Company intends to utilize the Credit Agreement in the
future for, among other things, general working capital needs, financing
strategic acquisitions, and other general corporate purposes.
The Credit Agreement provides a total of $350 million in available revolving
credit commitments through (i) loans available at various interest rates and
interest maturity periods (collectively, the "Revolving Credit Loans") and (ii)
the issuance of standby or commercial letters of credit ("Letters of Credit") of
up to $50 million. All amounts borrowed under the Credit Agreement are due on
December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are available
by choosing from one of the following types of loans, which are primarily
differentiated by the interest rates available: (i) an ABR Loan (as defined in
the Credit Agreement), with interest based on the highest of the prime rate of
The Chase Manhattan Bank, the Base CD Rate (as defined in the Credit Agreement)
plus 1%, or the Federal Funds Effective Rate (as defined in the Credit
Agreement) plus 0.5%; (ii) a Eurodollar Loan (as defined in the Credit
Agreement), with interest based on the Eurodollar Rate (LIBOR) plus a margin
which will vary based on the Company's performance with respect to certain
calculated financial ratios as defined in the Credit Agreement; (iii) an
Absolute Rate Bid Loan (as defined in the Credit Agreement), with interest
determined through competitive bid procedures among qualified lenders under the
Credit Agreement; and (iv) a Swing Line Loan (as defined in the Credit
Agreement) for up to an aggregate amount of $30 million, with interest based on
a money market rate, the ABR Loan rate, or a combination thereof.
Interest on the Revolving Credit Loans generally is payable quarterly in arrears
or, for a Eurodollar Loan, at the end of an interest period date which is
specified at the time funds are advanced to the Company, not to exceed three
months. A facility fee based on the total commitment under the Credit Agreement
and a fee for outstanding letters of credit is payable quarterly.
The Credit Agreement contains certain financial and operating covenants,
including restrictions on incurring indebtedness and liens, entering into
transactions to acquire or merge with any entity, making certain other
fundamental changes, selling assets, paying dividends, and requirements to
maintain certain minimum levels of consolidated net worth, leverage ratio, and
interest coverage ratios. The Company was in compliance with these covenants at
September 30, 1997.
At September 30, 1997 interest rates on outstanding borrowings under the Credit
Agreement and the Alabama State Industrial Development Authority Notes ranged
from 5.69% to 6.23%.
11
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
5. DERIVATIVE FINANCIAL INSTRUMENTS
Prior to the Distribution, CommScope was considered in General Instrument's
overall risk management strategy. As part of this strategy, General Instrument
used certain financial instruments primarily to reduce its exposure to adverse
movements in foreign exchange rates and interest rates. General Instrument did
not utilize derivative financial instruments for trading purposes. As part of
implementing its strategy, General Instrument allocated to CommScope the income
and expense associated with certain interest rate cap or swap agreements as part
of the total allocation of net interest costs to the Company. The net effect of
interest rate instruments on the Company's results of operations for all periods
presented prior to the Distribution was not material.
CommScope has established a risk management strategy which includes the use of
derivative financial instruments for purposes other than trading, principally to
reduce exposures to market risks resulting from adverse fluctuations in
commodity prices, interest rates, and foreign exchange rates. At September 30,
1997, the Company evaluated its foreign-exchange and commodity exposures and
concluded that it was not beneficial to use financial instruments to hedge its
current positions with respect to those exposures.
Effective October 30, 1997 the Company entered into an interest rate swap
agreement to effectively convert an aggregate amount of $50 million of
outstanding variable-rate borrowings to a fixed-rate basis. The contract has an
eighteen month term and matures on April 30, 1999, unless terminated at the
option of the counterparty to the swap agreement on October 30, 1998. Under the
agreement, interest settlement payments will be made quarterly based upon the
spread between the 3 month LIBOR, as adjusted quarterly, and a fixed rate of
5.79%. Net payments or receipts resulting from the swap agreement will be
recorded as adjustments to interest expense.
6. JOINT VENTURE OPERATIONS
In August 1997, Vision Cables Pty. Ltd. ("Vision Cables"), an Australian company
in which CommScope owns a 49% minority interest, suspended manufacturing
operations at its facility near Melbourne, Australia. The joint venture company
was established in 1995 with Pacific Dunlop Ltd. of Australia ("Pacific
Dunlop"), the 51% owner. Vision Cables has been supplying the Australian cable
television market with both CommScope manufactured coaxial cables imported from
the United States and coaxial cables produced by Vision Cables in Australia.
CommScope and Pacific Dunlop are together evaluating options for future
manufacturing operations at the Melbourne facility. If the manufacturing
operations are permanently discontinued, CommScope may need to record its
minority interest share of the one-time charges related to the closing of $1
million to $3 million after tax ($0.02 to $0.06 per share) as early as the
fourth quarter of 1997.
The Company's share of the net income or loss of the joint venture is included
in the consolidated statements of income using the equity method of accounting.
Since 1995, CommScope has recorded pre-tax income of approximately $1 million
from its minority interest investment in the joint venture and sold
approximately $55 million of CommScope exported products to the Australian
market through the Vision Cables distribution arrangement.
12
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
7. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued. SFAS
No. 130 will require disclosure of comprehensive income (which is defined as
"the change in equity during a period excluding changes resulting from
investments by shareholders and distributions to shareholders") and its
components. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997, with reclassification of comparative years required, and will be
adopted by the Company in the year ending December 31, 1998. Had the new
standard been applied in the quarter ended September 30, 1997, comprehensive
income would not differ from net income for all periods presented in the
condensed consolidated statements of income.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997, and will be adopted by the Company in the
year ending December 31, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. Management is currently
evaluating the effect of SFAS No. 131 on the Company's current disclosures.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the unaudited condensed consolidated
financial statements and accompanying notes included in this document as well as
the audited consolidated financial statements, related notes thereto and
management's discussion and analysis of results of operations and financial
position for the year ended December 31, 1996 included in the Company's
Prospectus dated June 13, 1997. Unless otherwise specified, capitalized terms
used herein are used as defined in the audited consolidated financial statements
of CommScope for the year ended December 31, 1996.
HIGHLIGHTS
CommScope's earnings were part of General Instrument's results of operations for
all periods presented prior to the Distribution Date, including 27 days in the
quarter ended September 30, 1997. Additionally, the capital structure of the
Company changed significantly as a result of borrowings under the Company's
credit facility on the Distribution Date, which were utilized primarily to make
a dividend payment to General Instrument in accordance with the terms of the
Distribution (see Note 4). Accordingly, no historical earnings per share has
been presented for all periods included in the condensed consolidated financial
statements.
CommScope reported net income of $7 million for the quarter ended September 30,
1997, a decrease of $8 million (52%) from the third quarter of 1996 net income
of $15 million. For the nine months ended September 30, 1997, net income
decreased 16% to $35 million, compared to $41 million for the same period in
1996.
CommScope reported pro forma net income of $7 million ($0.14 per pro forma
share) for the quarter ended September 30, 1997, a decrease of $7 million (50%)
from the third quarter of 1996 pro forma net income of $14 million. For the nine
months ended September 30, 1997 pro forma net income was $32 million ($0.64 per
pro forma share), compared to $37 million ($0.75 per pro forma share) for the
same period in 1996, a decrease of 14%. Pro forma net income and earnings per
share reflect the impact of CommScope's new capital structure immediately
following the Distribution (see Liquidity and Capital Resources below), assuming
that all common stock issued and long term debt borrowings as of the
Distribution Date were outstanding since January 1, 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 WITH THE THREE AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996
NET SALES
Net sales for the third quarter and nine months ended September 30, 1997
decreased $1 million (1%) to $147 million and increased $33 million (8%) to $454
million, respectively, from the comparable prior year periods. The decrease in
third quarter net sales is due primarily to lower international sales to
Australia. International sales to Australia were $1 million during the third
quarter of 1997 and $10 million during the third quarter of 1996. Excluding
sales to Australia, international sales increased 4% for the third quarter of
1997 as compared to the third quarter of 1996. For the nine months ended
September 30, the increase in net sales in 1997 as compared to 1996 reflects
higher sales in cable television and other video distribution markets and strong
growth in the local area network ("LAN") product line. International sales,
including the effects of reduced sales to Australia, increased 9% for the nine
months ended September 30, 1997 as compared to the same period in 1996.
International sales for the nine months ended September 30 represented 35% of
the Company's net sales in 1997 compared to 34% in 1996.
14
<PAGE>
Net sales to cable television and other video distribution markets ("CATV
Products") for the third quarter of 1997 decreased $3 million (3%) to $122
million from the third quarter of 1996 and for the nine months ended September
30, 1997 increased $14 million (4%) over the comparable prior year period to
$379 million. Excluding the effects of the decreased sales to Australia, net
sales of CATV Products for the third quarter and nine months ended September 30,
1997 increased $5 million (5%) and $23 million (7%). These increases are
primarily due to higher sales volume of both semi-flexible coaxial cables used
in the trunk and feeder distribution portion of cable television systems and
flexible coaxial (drop) cable primarily used for connecting the feeder cable to
the cable television subscriber's residence. These sales have been driven by
increased deployment of hybrid fiber coaxial ("HFC") networks for new cable
television systems in international markets and continued domestic growth,
offset in part by a slow down in such spending by a major cable television
operator in the United States.
Net sales for LAN and other data applications for the third quarter ended
September 30, 1997 were the same as in the prior year ($18 million) and for the
nine months ended September 30, 1997 increased $8 million (17%) to $54 million
over the comparable prior year period. The increase in sales for the comparative
nine month periods reflect higher sales volume for premise wiring of LANs.
Decreases in the average selling prices of both CATV products and LAN products
during the third quarter and nine months ended September 30, 1997 have partially
offset volume increases in sales for both products.
Sales of other cable products for the third quarter and nine months ended
September 30, 1997 were $7 million and $21 million, respectively, compared to $5
million and $10 million, respectively, for the third quarter and nine months
ended September 30, 1996. This increase is primarily due to sales of
high-temperature aerospace and industrial cable products from the Company's Elm
City, North Carolina facility, which was acquired along with certain other
assets of the Thermatics Division of Teledyne Industries, Inc. in May 1996.
Sales of high-temperature aerospace and industrial cable products for the three
and nine months ended September 30, 1997 were $4 million and $12 million,
respectively, compared with sales for the third quarter and four months ended
September 30, 1996 (subsequent to the acquisition of the Elm City facility) of
$3 million and $4 million, respectively.
.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the third quarter and nine months ended September 30, 1997 was
$32 million and $111 million, respectively, compared to $40 million and $111
million for the comparable prior year periods, a decrease of 20% for the third
quarter with no comparative change for the nine months ended September 30. The
lower gross profit is the result of several factors, including the impact of
significantly reduced sales to Australia, lower selling prices due to a
competitive pricing environment, higher raw material costs, manufacturing issues
related to the production of unshielded twisted pair LAN products, and
manufacturing costs related to new product development. As a percentage of
sales, gross margin declined from 27% in the third quarter of 1996 to 22% for
the third quarter of 1997. For the nine months ended September 30, 1997 and 1996
gross margin as a percentage of sales was 24% and 26%, respectively. Due to the
competitive pricing environment and higher raw material costs, the Company
expects gross margin percentages to remain below 23% for the remainder of fiscal
1997.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expense for the third quarter and nine months ended September 30, 1997
increased $2 million (17%) to $13 million and $6 million (20%) to $37 million,
respectively, over the comparable prior year periods. As a percentage of sales,
SG&A expense for the third quarters ended September 30, 1997 and 1996 was 9% and
7%, respectively, and for the nine month periods ended September 30, 1997 and
1996 was 8% and 7%, respectively. The increase in SG&A expense was principally
attributable to increased sales and marketing expenditures to support product
expansion and growth opportunities in international cable and network markets.
15
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of sales was 1% and was
unchanged for the third quarter and nine months ended September 30, 1997 as
compared with the corresponding periods in 1996. The Company has ongoing
programs to develop new products and market opportunities for its products and
core capabilities and new manufacturing technologies to achieve cost reductions.
INTEREST EXPENSE, NET
Net interest expense up to the Distribution Date represents an allocation of net
interest expense from General Instrument and was allocated based upon the
Company's net assets as a percentage of the total net assets of General
Instrument. Subsequent to the Distribution Date, net interest expense represents
the actual interest expense on outstanding borrowings under the Company's credit
facilities offset by interest income earned primarily on money market cash
deposits. Net interest expense was $4 million and $9 million for the third
quarter and nine months ended September 30, 1997, respectively, an increase of
$2 million (59%) and $2 million (23%) from each of the corresponding periods of
1996.
Pro forma net interest expense reflects the historical interest expense of the
Company adjusted to reflect a net debt level of $275 million at the beginning of
each period presented at an assumed weighted average borrowing rate of 6.35% for
each period plus the amortization of debt issuance costs associated with the new
borrowings (see Liquidity and Capital Resources below). These pro forma net
interest costs are not necessarily indicative of what the actual interest costs
would have been had CommScope operated as a separate, stand-alone entity.
INCOME TAXES
The provision for income taxes has been determined as if the Company had filed
separate tax returns under its previously existing structure as a wholly owned
subsidiary of General Instrument for the periods presented. Accordingly, future
tax rates could vary from the historical effective tax rates depending on the
Company's future tax elections.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $51 million for the nine months ended September
30, 1997 compared to $36 million for the comparable prior year period, an
increase of $15 million or 42%. This increase primarily results from lower
working capital increases during the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996, partially offset by the
decrease in net income for the nine months ended September 30, 1997 from the
comparable nine month period in 1996.
Working capital was $111 million at September 30, 1997 compared to $107 million
at December 31, 1996, an increase of $4 million, or 4%. The increase in working
capital is primarily due to increased inventory to support business growth and
for the introduction of new products, partially offset by the related increases
in accounts payable. Working capital levels were also affected by an increase in
cash, due to the implementation of a separate cash management program as an
independently operated company, offset by an increase in income taxes payable
due to the timing of certain federal and state income tax deposits. Prior to the
Distribution, federal income taxes and certain state income taxes were settled
with General Instrument through divisional retained earnings. Based on current
levels of orders and backlog, management of the Company believes that working
capital levels are appropriate to support future operations.
During the nine months ended September 30, 1997, the Company invested $24
million in equipment and facilities compared to $15 million for the comparable
period in 1996. This level of capital spending was attributable to capacity
expansion across the business units of the Company and vertical integration to
meet increased current and anticipated future business demands. During the nine
months ended September 30, 1996, the Company utilized $18 million to acquire
certain assets of the Thermatics Division of Teledyne Industries, Inc.
16
<PAGE>
Management of the Company assesses its liquidity in terms of its overall ability
to obtain cash to support its ongoing business levels and to fund its growth
objectives. Prior to the Distribution Date, the Company participated in the
General Instrument cash management program. To the extent the Company generated
positive cash, such amounts were remitted to General Instrument. To the extent
the Company experienced temporary cash needs for working capital purposes or
capital expenditures, such funds historically were provided by General
Instrument. The net effect of these transactions has been reflected in
divisional retained earnings. Effective as of the Distribution Date, the Company
has independently established a cash management program to support future
business levels and growth objectives.
The Company's principal sources of liquidity both on a short-term and long-term
basis have been cash flows provided by operations and funds provided by General
Instrument prior to the Distribution. Net cash transfers to General Instrument
were $16 million for the nine months ended September 30, 1997 compared to $3
million for the nine months ended September 30, 1996. Management believes that,
based upon its analysis of the Company's consolidated financial position and the
expected results of its operations in the future, the Company will have
sufficient cash flows from future operations and the financial flexibility to
attract both short- and long-term capital on acceptable terms as may be needed
to fund operations, capital expenditures and other growth objectives. 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.
On July 23, 1997 the Company entered into a $350 million revolving credit
agreement with a group of banks (the "Credit Agreement"). On the Distribution
Date, the Company borrowed $266 million under the Credit Agreement which was
utilized to make a dividend payment to General Instrument in accordance with the
terms of the Distribution and to fund fees and expenses in connection with the
Credit Agreement. The Company intends to utilize the Credit Agreement in the
future for, among other things, general working capital needs, financing
strategic acquisitions, and other general corporate purposes.
The Credit Agreement provides a total of $350 million in available revolving
credit commitments through (i) loans available at various interest rates and
interest maturity periods (collectively, the "Revolving Credit Loans") and (ii)
the issuance of standby or commercial letters of credit ("Letters of Credit") of
up to $50 million. All amounts borrowed under the Credit Agreement are due on
December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are available
by choosing from one of the following types of loans, which are primarily
differentiated by the interest rates available: (i) an ABR Loan (as defined in
the Credit Agreement), with interest based on the highest of the prime rate of
The Chase Manhattan Bank, the Base CD Rate (as defined in the Credit Agreement)
plus 1%, or the Federal Funds Effective Rate (as defined in the Credit
Agreement) plus 0.5%; (ii) a Eurodollar Loan (as defined in the Credit
Agreement), with interest based on the Eurodollar Rate (LIBOR) plus a margin
which will vary based on the Company's performance with respect to certain
calculated financial ratios as defined in the Credit Agreement; (iii) an
Absolute Rate Bid Loan (as defined in the Credit Agreement), with interest
determined through competitive bid procedures among qualified lenders under the
Credit Agreement; and (iv) a Swing Line Loan (as defined in the Credit
Agreement) for up to an aggregate amount of $30 million, with interest based on
a money market rate, the ABR Loan rate, or a combination thereof.
Interest on the Revolving Credit Loans generally is payable quarterly in arrears
or, for a Eurodollar Loan, at the end of an interest period date which is
specified at the time funds are advanced to the Company, not to exceed three
months. A facility fee based on the total commitment under the Credit Agreement
and a fee for outstanding letters of credit is payable quarterly.
The Credit Agreement contains certain financial and operating covenants,
including restrictions on incurring indebtedness and liens, entering into
transactions to acquire or merge with any entity, making certain other
fundamental changes, selling assets, paying dividends, and requirements to
maintain certain minimum levels of consolidated net worth, leverage ratio, and
interest coverage ratios. The Company was in compliance with these covenants at
September 30, 1997.
17
<PAGE>
At September 30, 1997 interest rates on outstanding borrowings under the Credit
Agreement and the Alabama State Industrial Development Authority Notes ranged
from 5.69% to 6.23%.
CONTINGENT MATTERS
In August 1997, Vision Cables Pty. Ltd. ("Vision Cables"), an Australian company
in which CommScope owns a 49% minority interest, suspended manufacturing
operations at its facility near Melbourne, Australia. The joint venture company
was established in 1995 with Pacific Dunlop Ltd. of Australia ("Pacific
Dunlop"), the 51% owner. Vision Cables has been supplying the Australian cable
television market with both CommScope manufactured coaxial cables imported from
the United States and coaxial cables produced by Vision Cables in Australia.
CommScope and Pacific Dunlop are together evaluating options for future
manufacturing operations at the Melbourne facility. If the manufacturing
operations are permanently discontinued, CommScope may need to record its
minority interest share of the one-time charges related to the closing of $1
million to $3 million after tax ($0.02 to $0.06 per share) as early as the
fourth quarter of 1997.
The Company's share of the net income or loss of the joint venture is included
in the consolidated statements of income using the equity method of accounting.
Since 1995, CommScope has recorded pre-tax income of approximately $1 million
from its minority interest investment in the joint venture and sold
approximately $55 million of CommScope exported products to the Australian
market through the Vision Cables distribution arrangement.
18
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
(a) Negotiations With Alcatel Cable France ("Alcatel")
In Note 4 to the Company's Form 10-Q for the quarter ended June 30,
1997 and in a press release dated August 7, 1997, the Company announced
that it had reached a non-binding understanding with Alcatel that would
establish a European base of operations for CommScope.
The tentative agreement centered around a transfer by Alcatel to
CommScope of its CATV coaxial cable business in Seneffe, Belgium.
Alcatel also would have purchased its future requirements of CATV
coaxial cable from CommScope for a period of time to be determined. As
part of the arrangement, Alcatel would have received substantially all
of the assets from CommScope's high-temperature aerospace and
industrial cable business in Elm City, North Carolina.
On September 23, 1997, the Company issued a press release announcing
that the previously announced negotiations related to CommScope's
acquisition of Alcatel's coaxial cable business in Seneffe, Belgium had
ended. However, discussions continue regarding other opportunities with
Alcatel.
Sales from CommScope's aerospace and industrial cable business totaled
approximately $12 million for the nine months ended September 30, 1997.
(b) Appointment of Deloitte & Touche LLP as
Independent Public Accountants
On August 27, 1997 the Board of Directors appointed Deloitte & Touche
LLP as the independent public accountants for the Company for the
fiscal year ending December 31, 1997.
(c) Election of Brian D. Garrett as President
and Chief Operating Officer
On October 16, 1997 the Board of Directors elected Brian D. Garrett as
President and Chief Operating Officer of the Company. Mr. Garrett has
been Executive Vice President of Operations at CommScope since early
1997. Previously, he served as General Manager, Vice President and
Executive Vice President of the Network Cable Division from 1986 to
1996 and Vice President of Engineering from 1980 to 1986.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
10.1 The CommScope, Inc. Deferred Compensation Plan for
Directors, dated as of August 27, 1997
27 Financial Data Schedule
99 Forward Looking Information
(b) Reports on Form 8-K filed during the three months ended
September 30, 1997:
None
19
<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.
COMMSCOPE, INC.
November 12, 1997 /s/ Jearld L. Leonhardt
- ----------------- -----------------------
Date Jearld L. Leonhardt
Executive Vice President,
Finance and Administration
Signing both in his
capacity as Executive Vice
President on behalf of the
Registrant and as Chief
Financial Officer of the
Registrant
20
Exhibit 10.1
THE COMMSCOPE, INC.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
Effective as of August 27, 1997
<PAGE>
THE COMMSCOPE, INC. DEFERRED COMPENSATION PLAN FOR DIRECTORS
ARTICLE I - INTRODUCTION
The Company has adopted the Plan set forth herein to provide a means by which
each Director may elect to defer receipt of fees that would otherwise be payable
to him for services performed as a Director. The Plan is effective as of August
27, 1997. Benefits payable under the Plan are unfunded and are payable, when
due, from the general assets of the Company or, in the sole discretion of the
Plan Administrator, from the Trust.
ARTICLE 2 - DEFINITIONS
Wherever used herein, the following terms have the meanings set forth
below, unless a different meaning is clearly required by the context:
2.1 Account means, for each Participant, the bookkeeping account established for
his or her benefit under Section 4. 1.
2.2 Change of Control shall have the same meaning as the term, "Change of
Control" contained in the CommScope, Inc. 1997 Long Term Incentive Plan.
2.3 Code means the Internal Revenue Code of 1986, as amended from time to time.
Reference to any section or subsection of the Code includes reference to any
comparable or succeeding provisions of any legislation which amends, supplements
or replaces such section or subsection.
2.4 Company means CommScope, Inc. and any successor to all or a major portion of
the Company's assets or business which assumes the obligations of the Company.
2.5 Director means each member of the Company's Board of Directors.
2.6 Election Form means the participation election form as approved and
prescribed by the Plan Administrator.
2.7 Elective Deferral means the portion of fees that would otherwise be payable
to the Director for services performed as a Director and which is deferred by
the Participant under Section 3. 1.
2.8 Participant means any Director who participates in the Plan in accordance
with Article 3.
2.9 Plan means the CommScope Deferred Compensation Plan for Directors and all
amendments thereto.
2.10 Plan Administrator means the person, persons or entity designated by
CommScope, Inc. from time to time to administer the Plan and to serve as the
agent for the Company with respect to the Trust as contemplated by the agreement
establishing the Trust. If no such person or entity is so serving at any time,
CommScope, Inc. shall be the Plan Administrator.
2.11 Plan Year means the 12-month period beginning January 1 and ending
December 31.
2.12 Trust means the applicable trust established by the Company which is a
grantor trust within the meaning of section 671 of the Code and that identifies
the Plan as a plan with respect to which assets are to be held by the Trustee.
2.13 Trustee means the trustee or trustees under the Trust.
1
<PAGE>
ARTICLE 3 - PARTICIPATION AND DEFERRALS
3.1 Commencement of Participation. Each Director, by completing an Election Form
and filing it with the Plan Administrator, may elect to defer all or a portion
(expressed in a whole percentage or dollar amount) of one or more payments of
fees that would otherwise be payable to him for services performed as a Director
and which are earned and payable to the Director after the date on which he or
she files the Election Form. The Director shall become a Participant in the Plan
as of the date of his first deferral.
3.2 Disposition of Amounts Deferred. Amounts deferred hereunder shall be paid by
the Company to the Trust as soon as practicable after such amounts otherwise
would have been paid to the Director and credited to the Participant's Account
as of the date the amounts are received by the Trustee.
3.3 Duration of Deferral Election. A deferral election for any Plan Year shall
apply for only that Plan Year. Each Director must make a new deferral election
as of the first day of any Plan Year by giving written notice to the Plan
Administrator before the first day of the Plan Year.
ARTICLE 4 - ACCOUNTS
4.1 Accounts. The Plan Administrator shall establish a bookkeeping Account for
each Participant reflecting Elective Deferrals made for the Participant's
benefit together with any adjustments for income, gain or loss and any payments
from the Account. The Plan Administrator may cause the Trustee to maintain and
invest separate asset accounts corresponding to each Participant's Account. The
Plan Administrator shall establish sub-accounts for each Participant that has
more than one election in effect under Section 5. 1 and such other sub-accounts
as are necessary for the proper administration of the Plan. The Plan
Administrator shall provide, at least annually, the Participant with a statement
of his or her Account reflecting the income, gains and losses (realized and
unrealized), amounts of deferrals, and distributions of such Account since the
prior statement.
4.2 Vested Interest in Accounts. A Participant shall be immediately vested in,
i.e., shall have a nonforfeitable right to, all Elective Deferrals, and all
income and gain attributable thereto, credited to his or her Account.
4.3 Investment of Elective Deferrals. The assets of the Trust shall be invested
in accordance with the terms of the Trust document. The Plan Administrator will
direct the trustee with respect to the investment of the Trust's assets; the
Plan Administrator may take into account Participants' investment directions
when directing the Trustee.
ARTICLE 5 - PAYMENTS
5.1 Election as to Time and Form of Payment. A Participant shall elect
irrevocably on the Election Form the date at which the Participant's Account
will commence to be paid to the Participant. Such date must be at least five
years following the date at which such Elective Deferrals commence. The
Participant shall also elect thereon for payments to be paid in either:
a. a single lump sum; or
b. annual installments over a period elected by the Participant up to 10
years, the amount of each installment to equal the balance of his or
her Account immediately prior to the installment divided by the number
of installments remaining to be paid ("Annual Installments ").
Each such election will be effective only for Elective Deferrals (including any
earnings or losses attributable thereto) for the Plan Year for which they are
made. Except as otherwise provided below, payment of a Participant's Account
shall be made in accordance with the Participant's election under this Section
5. 1.
2
<PAGE>
5.2 Change of Control. Immediately prior to the consummation of a transaction
resulting in a Change of Control or, if not possible, as soon as possible
following a Change of Control, each Participant's Account (or remainder thereof)
shall be paid to the Participant, according to the Participant's irrevocable
election on the Election Form, in a single lump sum, or in Annual Installments
over a period elected by the Participant up to 10 years.
5.3 Death. If a Participant dies prior to the complete distribution of his or
her Account, the balance of the Account shall be paid, according to the
Participant's irrevocable election on the Election Form, to the Participant's
designated beneficiary or beneficiaries, in a single lump sum as soon as
practicable following the end of the quarter in which death occurs, or in Annual
Installments over a period elected by the Participant up to 10 years, commencing
the year immediately following the year in which death occurs.
Any designation of beneficiary and form of payment to such beneficiary shall be
made by the Participant on a Beneficiary Designation Form filed with the Plan
Administrator and may be changed by the Participant at any time by filing
another Beneficiary Designation Form containing the revised instructions. If no
beneficiary is designated or no designated beneficiary survives the Participant,
payment shall be made to the Participant's surviving spouse, or, if none, to his
or her issue per stirpes, in a single payment. If no spouse or issue survives
the Participant, payment shall be made in a single lump sum to the Participant's
estate.
ARTICLE 6 - PLAN ADMINISTRATOR
6.1 Plan Administration and Interpretation. The Plan Administrator shall be
responsible for administering the Plan. The Plan Administrator shall have
complete control and authority to determine the rights and benefits and all
claims, demands and actions arising out of the provisions of the Plan of any
Participant, beneficiary, deceased Participant, or other person having or
claiming to have any interest under the Plan. The Plan Administrator shall have
complete discretion to interpret the Plan and to decide all matters under the
Plan. Such interpretation and decision shall be final, conclusive and binding on
all Participants and any person claiming under or through any Participant, in
the absence of clear and convincing evidence that the Plan Administrator acted
arbitrarily and capriciously. Any individual serving as Plan Administrator who
is a Participant will not vote or act on any matter relating solely to himself
or herself. In such case, the Company will appoint an individual to act as Plan
Administrator to take such actions. When making a determination or calculation,
the Plan Administrator shall be entitled to rely on information furnished by a
Participant, a beneficiary, the Company or the Trustee.
6.2 Indemnification of Plan Administrator. The Company agrees to indemnify and
to defend to the fullest extent permitted by law any officer(s) or employees)
who serve as Plan Administrator (including any such individual, whether a
present or former employee, who formerly served as Plan Administrator) against
all liabilities, damages, costs and expenses (including attorneys' fees and
amounts paid in settlement of any claims approved by the Company) occasioned by
any act or omission to act in connection with the Plan, if such act or omission
is in good faith.
ARTICLE 7 - AMENDMENT AND TERMINATION
7.1 Amendments. The Company shall have the right to amend the Plan from
time to time, subject to Section 7.3.
7.2 Termination of Plan. The Company reserves the right to terminate the Plan at
any time, subject to Section 7.3. Upon termination, the Company may (a) elect to
continue to maintain the Trust to pay benefits hereunder as they become due as
if the Plan had not terminated or (b) amend the Trust as provided therein to
require prompt payment to Participant's (or their beneficiaries) of the balance
of their Accounts.
7.3 Existing Rights. No amendment or termination of the Plan shall adversely
affect the rights of any Participant with respect to amounts that have been
credited to his or her Account prior to the date of such amendment or
termination.
3
<PAGE>
ARTICLE 8 - MISCELLANEOUS
8.1 Non-assignability. None of the benefits, payments, proceeds or claims of any
participant or beneficiary shall be subject to any claim of any creditor of any
Participant or beneficiary, nor shall any Participant or beneficiary have any
right to alienate, anticipate, commute, pledge, encumber or assign any of the
benefits or payments or proceeds which he or she may expect to receive,
contingently or otherwise, under the Plan.
8.2 Limitation of Participant's Rights. Nothing contained in the Plan shall be
interpreted as a contract of employment or inducement for a Director to perform
services for the Board or the Company.
8.3 Participants Bound. Any action with respect to the Plan taken by or at the
direction of the Company, the Plan Administrator or the Trustee shall be
conclusive upon all Participants and beneficiaries entitled to benefits under
the Plan.
8.4 Receipt and Release. Any payment to any Participant or beneficiary in
accordance with the provisions of the Plan shall, to the extent thereof, be in
satisfaction of claims against the Company, the Plan Administrator and the
Trustee under the Plan, and the Plan Administrator may require such Participant
or beneficiary, as a condition precedent to such payment, to execute a receipt
and release to such effect. If any Participant or beneficiary is determined by
the Plan Administrator to be incompetent by reason of physical or mental
disability, including minority, to give a valid receipt and release, the Plan
Administrator may cause the payment or payments becoming due to such person to
be made to another person for his or her benefit without responsibility on the
part of the Plan Administrator, the Company or the Trustee to follow the
application of such funds.
8.5 Governing Law. The Plan shall be construed, administered, and governed in
all respects under and by the laws of the State of North Carolina. If any
provision shall be held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
8.6 Headings and Subheadings. Headings and subheadings in this Plan are
inserted for convenience only and are not to be considered in the construction
of the provisions hereof.
SIGNED AT HICKORY, NORTH CAROLINA THIS ___ DAY OF AUGUST, 1997.
COMMSCOPE, INC.
By ________________________________
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
CommScope, Inc. condensed consolidated financial statements as of and for the
nine months ended September 30, 1997 (Unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035884
<NAME> CommScope, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 4,670
<SECURITIES> 0
<RECEIVABLES> 100,654
<ALLOWANCES> 4,141
<INVENTORY> 51,583
<CURRENT-ASSETS> 172,378
<PP&E> 132,425
<DEPRECIATION> 0
<TOTAL-ASSETS> 504,127
<CURRENT-LIABILITIES> 60,980
<BONDS> 0
0
0
<COMMON> 491
<OTHER-SE> 146,548
<TOTAL-LIABILITY-AND-EQUITY> 504,127
<SALES> 454,434
<TOTAL-REVENUES> 454,434
<CGS> 343,882
<TOTAL-COSTS> 343,882
<OTHER-EXPENSES> 45,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,115
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<INCOME-TAX> 21,160
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<NET-INCOME> 34,529
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</TABLE>
COMMSCOPE, INC.
EXHIBIT 99 - FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. The Company's Form 10-K, the Company's
Annual Report to Stockholders, any Form 10-Q or Form 8-K of the Company, or any
other oral or written statements made by or on behalf of the Company, may
include forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projects," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The actual results of the Company may differ significantly from the
results discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States and other markets where the
Company operates; (b) changes in capital availability or costs, such as changes
in interest rates, market perceptions of the industry in which the Company
operates, or security ratings; (c) employee workforce factors; (d) authoritative
generally accepted accounting principles or policy changes from such
standard-setting bodies as the Financial Accounting Standards Board and the
Securities and Exchange Commission, and the factors set forth below.
Factors Relating to the Distribution
General Instrument Corporation (i) transferred all the assets and
liabilities relating to the manufacture and sale of broadband communications
products used in the cable television, satellite, and telecommunications
industries (the "Communications Business") to its wholly-owned subsidiary
NextLevel Systems, Inc. ("NextLevel Systems") and all the assets and liabilities
relating to the manufacture and sale of coaxial, fiber optic and other
electronic cable used in the cable television, satellite and other industries
(the "Cable Manufacturing Business") to the Company (then a wholly-owned
subsidiary of GI) and (ii) then distributed all of the outstanding shares of
capital stock of each of NextLevel Systems and the Company to its shareholders
on a pro rata basis as a dividend (the "Distribution"), in a transaction that
was consummated on July 28, 1997. General Instrument Corporation prior to the
Distribution is herein referred to as "GI" and following the Distribution is
referred to herein as "General Semiconductor".
The Company is a smaller and less diversified company than GI was prior
to the Distribution and the Company has no recent operating history as a
separate entity. The ability of the Company to satisfy its obligations and
maintain profitability will be solely dependent upon its own future performance,
and the Company will not be able to rely on the capital resources and cash flows
of the businesses of NextLevel Systems or General Semiconductor. The future
performance and cash flows of the Company will be subject to prevailing economic
conditions and to financial, business and other factors affecting the business
operations of the Company, including factors beyond its control.
The division of GI may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of the Company, and will also result in the duplication of
certain personnel, administrative and other expenses required for the operation
of an independent company. The management of the Company has not previously
operated its businesses as a separate public company so there can be no
assurance that the transition will not alter or disrupt, at least temporarily,
the management and operations of the Company's business.
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The Distribution Agreement, dated as of June 12, 1997, among the
Company, NextLevel Systems and GI (the "Distribution Agreement") and certain
other agreements executed in connection with the Distribution (collectively, the
"Ancillary Agreements") allocate among the Company, NextLevel Systems, and
General Semiconductor and their respective subsidiaries responsibility for
various indebtedness, liabilities and obligations. It is possible that a court
would disregard this contractual allocation of indebtedness, liabilities and
obligations among the parties and require the Company or its subsidiaries to
assume responsibility for obligations allocated to another party, particularly
if such other party were to refuse or was unable to pay or perform any of its
allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, the Company has agreed to indemnify the other parties (and certain
related persons) from and after consummation of the Distribution with respect to
certain indebtedness, liabilities and obligations, which indemnification
obligations could be significant.
Although the Company has received a favorable ruling from the Internal
Revenue Service, if the Distribution were not to qualify as a tax free spin-off
under Section 355 of the Internal Revenue Code of 1986, as amended, then, in
general, a corporate tax would be payable by the consolidated group of which GI
was the common parent based upon the difference between the fair market value of
the stock distributed and the distributing corporation's adjusted basis in such
stock. The corporate level tax would be payable by General Semiconductor and
could substantially exceed the net worth of General Semiconductor. However,
under certain circumstances, the Company and NextLevel Systems have agreed to
indemnify General Semiconductor for such tax liability. In addition, under the
consolidated return rules, each member of the consolidated group (including the
Company and NextLevel Systems) is severally liable for such tax liability.
Leverage; Certain Restrictions Under Credit Facilities
The Company is substantially leveraged. The degree to which the Company
is leveraged could have important consequences, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be impaired; (ii) a portion of the
Company's and its subsidiaries' cash flow from operations must be dedicated to
the payment of the principal of and interest on its indebtedness; (iii) the
Credit Agreement, dated as of July 23, 1997, among CommScope, Inc., of North
Carolina, a wholly owned subsidiary of the Company, certain banks, and The Chase
Manhattan Bank, as Administrative Agent, contains certain restrictive financial
and operating covenants, including, among others, requirements that the Company
satisfy certain financial ratios; (iv) a significant portion of the Company's
borrowings will be at floating rates of interest, causing the Company to be
vulnerable to increases in interest rates; (v) the Company's degree of leverage
may make it more vulnerable to a downturn in general economic conditions; and
(vi) the Company's degree of leverage may limit its flexibility in responding to
changing business and economic conditions.
In addition, in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, a court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and to require
that the stockholders return the special dividend (in whole or in part) to
General Semiconductor or require the Company to fund certain liabilities of
General Semiconductor and NextLevel Systems for the benefit of creditors.
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Dependence of the Company on the Cable Television Industry and Cable Television
Capital Spending
The majority of the Company's revenues come from sales of systems and
equipment to the cable television industry. Demand for these products depends
primarily on capital spending by cable television operators for constructing,
rebuilding or upgrading their systems. The amount of this capital spending, and,
therefore, the Company's sales and profitability will be affected by a variety
of factors, including general economic conditions, consolidation in the
industry, the financial condition of domestic cable television operators and
their access to financing, competition from satellite and wireless television
providers and telephone companies, technological developments in the broadband
communications industry and new legislation and regulation of cable television
operators as described below. Capital spending in the cable television industry
fell sharply in the middle of 1990 compared to 1989 and remained at a low level
until it began to recover in mid-1992. Although the Company believes that the
constraining pressures on domestic cable television capital spending eased and
that cable television capital spending generally increased from mid-1992 through
1996, there can be no assurance that such increases will continue or that such
increased level of cable television capital spending will be maintained.
In recent years, cable television capital spending has also been
affected by new legislation and regulation, on the federal, state and local
level, and many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. During 1993 and 1994,
the Federal Communications Commission (the "FCC") adopted rules under the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), regulating rates that cable television operators may charge for lower
tiers of service and generally not regulating the rates for higher tiers of
service. In 1996, the Telecommunications Act of 1996 (the "Telecom Act") was
enacted to eliminate certain governmental barriers to competition among local
and long distance telephone, cable television, broadcasting and wireless
services. When fully implemented by the FCC, the Telecom Act may significantly
impact the communications industry and alter federal, state and local laws and
regulations regarding the provision of cable and telephony services. Among other
things, the Telecom Act eliminates substantially all restrictions on the entry
of telephone companies and certain public utilities into the cable television
business. Telephone companies may now enter the cable television business as
traditional cable operators, as common carrier conduits for programming supplied
by others, as operators of wireless distribution systems, or as hybrid common
carrier/cable operator providers of programming on so-called "open video
systems." The economic impact of the 1992 Cable Act, the Telecom Act and the
rules thereunder on the cable television industry and the Company is still
uncertain.
Although the domestic cable television industry is comprised of
approximately 11,200 cable systems, a small number of cable television operators
own a majority of cable television systems and account for a majority of the
capital expenditures made by cable television operators. The loss of some or all
of the Company's principal cable television customers could have a material
adverse effect on the business of the Company.
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Telecommunications Industry Competition and Technological Changes Affecting
the Company
Many of the markets that the Company serves are characterized by
advances in information processing and communications capabilities which require
increased transmission speeds and greater capacity ("bandwidth") for carrying
information. These advances require ongoing improvements in the capabilities of
wire and cable products. The Company believes that its future success will
depend in part upon its ability to enhance existing products and to develop and
manufacture new products that meet or anticipate such changes. The failure to
introduce successful new or enhanced products on a timely and cost- competitive
basis could have an adverse impact on the Company's operations and financial
condition.
Fiber optic technology presents a potential substitute for the products
that comprise the majority of the Company's sales. To date, fiber optic cables
have penetrated the cable television and local area network ("LAN") markets
served by the Company in high-bandwidth point-to-point and trunking
applications. Fiber optic cables have not, to date, significantly penetrated the
local distribution and residential application markets served by the Company
because of the high relative cost of electro-optic interfaces and the high cost
of fiber termination and connection. At the same time, advances in data
transmission equipment and copper cable technologies have increased the relative
performance of copper-based cables which are the Company's principal product
offerings. However, a significant decrease in the cost of fiber optic systems
could make such systems superior on a price/performance basis to copper systems.
While the Company is a fiber optic cable manufacturer and supplier to a small
portion of the cable television market and certain specialty markets, such a
significant decrease in the cost of fiber optic systems would likely have an
adverse effect on the Company.
The Company's sales to international markets have recently increased
substantially and will continue to be an important focus of the Company in the
future. However, there can be no assurance that international markets will
continue to expand, or that growth and profitability in international sales will
not be affected by political uncertainties, currency exchange rate fluctuations
or variations in capital spending cycles in developing countries.
Competition
The Company's coaxial, fiber optic and electronic cable products
compete with those of a substantial number of foreign and domestic companies,
some with greater resources, financial or otherwise, than the Company, and the
rapid technological changes occurring in the telecommunications industry could
lead to the entry of new competitors. Existing competitors' actions and new
entrants may have an adverse impact on the Company's sales and profitability.
The Company believes that it enjoys a strong competitive position in the coaxial
cable market because of its position as a low-cost, high-volume coaxial cable
producer and its reputation as a high-quality provider of state-of-the-art
cables, along with its strong orientation toward customer service. However,
there can be no assurance that the Company will continue to compete successfully
with its existing competitors or that it will be able to compete successfully
with new competitors.
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Impact of Price Fluctuations of Raw Materials on the Company; Sources of
Raw Materials
Fabricated aluminum, copper and plastics are the principal raw
materials purchased by the Company, and the Company's profitability may be
affected by changes in the market price of these materials (which are linked to
the commodity markets). Although the Company has generally been able to pass on
increases in the price of these materials to its customers, there can be no
assurance that the Company will be able to do so in the future. Additionally,
significant increases in the price of the Company's products due to increases in
the cost of raw materials could have a negative effect on demand for the
Company's products.
A significant portion of the Company's raw material purchases are
bi-metallic center conductors for coaxial cables, nearly all of which are
purchased from Copperweld Corporation under a long-term supply arrangement
expiring in March 2000. In addition to bi-metallic wires, fine aluminum wire is
purchased primarily from a single source; neither of these major raw materials
could be readily replaced in sufficient quantities if all supplies from the
respective primary sources were disrupted for an extended period.
International Operations; Foreign Currency Risks
U.S. broadband system designs and equipment are increasingly being
employed in international markets, where cable television penetration is low.
However, there can be no assurance that international markets will continue to
develop or that the Company will receive additional contracts to supply its
systems and equipment in international markets.
In addition, sales of equipment into international markets by the
Company have recently grown. These foreign operations are subject to the usual
risks inherent in situating operations abroad, including risks with respect to
currency exchange rates, economic and political destabilization, restrictive
actions by foreign governments, nationalizations, the laws and policies of the
United States affecting trade, foreign investment and loans, and foreign tax
laws.
Environment
The Company is subject to various federal, state, local and foreign
laws and regulations governing the use, discharge and disposal of hazardous
materials. The Company's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had and is not expected to have a material
adverse effect on the Company's financial condition.
The Company's present and past facilities have been in operation for
many years, and over that time in the course of those operations, such
facilities have used substances which are or might be considered hazardous, and
the Company has generated and disposed of wastes which are or might be
considered hazardous. Therefore, it is possible that additional environmental
issues may arise in the future which the Company cannot now predict.
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