UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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CommScope, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 36-4135495
incorporation or organization) (I.R.S. Employer 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)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant was approximately $575.5 million as of March
16, 1998 (based on the closing price for the Common Stock on the New York Stock
Exchange on that date). For purposes of this computation, shares held by
affiliates and by directors and officers of the Registrant have been excluded.
Such exclusion of shares held by directors and officers is not intended, nor
shall it be deemed, to be an admission that such persons are affiliates of the
Registrant. As of March 16, 1998 there were 49,154,751 shares of the
Registrant's Common Stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references to the "Company" or
"CommScope" include CommScope, Inc. and its direct or indirect subsidiaries
including CommScope, Inc. of North Carolina ("CommScope NC"), the Company's
principal operating subsidiary. Effective on July 28, 1997, the Company was
spun-off (the "Spin-off" or the "Distribution") from its parent company, General
Instrument Corporation (the "Distributing Company"), through a distribution of
the Company's shares to the stockholders of the Distributing Company.
Immediately following the Distribution, the Distributing Company changed its
corporate name to "General Semiconductor, Inc." On February 2, 1998 NextLevel
Systems, Inc. (which was also spun-off from the Distributing Company) changed
its name to General Instrument Corporation.
General
The Company designs, manufactures and markets coaxial cables and other
high-performance electronic and fiber optic cable products primarily for
communication applications. The principal use of the Company's coaxial cables is
in hybrid fiber coaxial ("HFC") cable systems being deployed in advanced
communication systems throughout the world. The primary end markets for the
Company's products are cable television systems, telephone companies that are
also providing video services, residential and commercial wiring markets for
video distribution such as satellite television and security, and commercial
markets for premise wiring of local area networks ("LAN"). For the year ended
December 31, 1997, approximately 82% of the Company's sales were to the
worldwide cable television and video distribution markets, 13% were for LAN
applications, and 5% were for other high-performance cable markets such as
airplane wiring, industrial and other applications.
The Company is the largest manufacturer and supplier of coaxial cable for
cable television applications in the United States in terms of sales volume,
with more than a 50% market share in 1997, and is a leading supplier of coaxial
cable for satellite television applications. Management of the Company believes
that its competitive strength in the coaxial cable market is due to its
extensive coaxial cable product line, its delivery and service capability and
its efficient, low-cost manufacturing operations. The Company also supplies the
developing market for high-bandwidth coaxial cables used in HFC networks that
provide local access to a combination of services that can include cable
television, telephone and Internet access. These "full service" or "broadband
service" HFC networks are being installed by cable operators and to a lesser
extent telephone companies. In the last several years, the Company has also
become a major supplier of coaxial cables to international markets for cable
television and broadband services. The Company's international sales, primarily
for coaxial cables, have increased from $66 million in 1992 to $200 million in
1997.
The Company has recently expanded into additional markets through internal
development of new products and by acquisition. Cell Reach is an internally
developed coaxial cable product designed to be installed on antenna towers for
cellular telephone, personal communication services (PCS) and other wireless or
cellular communication applications. The Company has recently started marketing
its Cell Reach cables and accessories to cellular network operators located in
the United States and certain international markets.
Business Strategy
The Company has achieved, and intends to expand and strengthen, its current
market position as a leading supplier of cable for worldwide broadband
telecommunications and other applications by emphasizing four business
strategies: (i) supplying high-quality products and services; (ii) international
expansion; (iii) seeking operating efficiencies through both economies of scale
and close monitoring of costs; and (iv) developing new product and marketing
opportunities. The key elements of the Company's strategy are set forth below.
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o High-Quality Products and Service Levels. The Company designs, manufactures
and markets an extensive product line of high-quality coaxial and fiber
optic cables available for cable television and broadband service
applications. These cables, as well as LAN cables, are produced to the
highest commercial standards of performance and are tested during and after
manufacture to insure final conformance to these specifications. The
Company's two largest manufacturing facilities are ISO 9001 certified. The
Company's management believes that its capacity to manufacture coaxial
cables is greater than that of any other manufacturer, which gives it a
unique high-volume service capability. The Company has quick order
turnaround capability due to its 24 hour, seven days per week continuous
manufacturing operations. The Company also provides material management and
logistics services to its cable product customers, including rapid delivery
services through a large company operated private trucking fleet. The
Company's cable television and LAN businesses seek to attain high levels of
customer satisfaction.
o International Expansion. The Company has identified certain international
markets, principally Europe, the Pacific Rim and Latin America, as
significant sources of future growth because of the size and potential of
these markets. The Company intends to capitalize on this potential by
continuing its international strategy of seeking to increase sales by
existing operations while developing manufacturing capability in new
markets. The Company intends to establish or acquire international
distribution and/or manufacturing facilities to further improve
capabilities in this regard, reduce shipping and importation costs and
enhance customer service.
o Improved Operating Efficiencies. The Company continues to effectively
manage the costs of its businesses and to implement procedures to lower
costs and increase profitability. The Company seeks to improve operating
efficiency through reductions in purchasing costs, developing and
implementing new manufacturing technologies and achieving unit cost
reduction through economies of scale.
o Development of New Products and Market Opportunities. The Company maintains
an active program to identify, develop and commercialize new products
and/or market opportunities for its products and core capabilities. In the
past, this strategy has led to the development of new products and entry
into new markets such as satellite cables, the LAN market, specialized
coaxial based telecommunication cables, broadcast audio and video cables,
coaxial cables in conduit and, most recently, cellular communication system
cables and accessories. This strategy may be augmented by the acquisition
of attractive cable or related component businesses that expand it's
capacity for existing products or that offer synergistic cable related
growth opportunities.
Business Units
The Company manufactures and sells cable for three broad market segments:
CATV and other video applications, LAN applications and other cable products.
Domestic Cable TV Market. The Company designs, manufactures and markets
primarily coaxial cable, most of which is used in the cable television industry.
The Company manufactures two primary types of coaxial cable: semi-flexible,
which has an aluminum or copper outer tubular shield or outer conductor; and
flexible, which is typically smaller in diameter than semi-flexible coaxial
cable and has a more flexible outer conductor typically made of metallic tapes
and braided fine wires. Semi-flexible coaxial cables are used in the trunk and
feeder distribution portion of cable television systems, and flexible coaxial
cables (also known as drop cables) are used for connecting the feeder cable to a
residence or business or used for some other communications applications.
Cable television service traditionally has been provided primarily by cable
television system operators ("MSOs") that have been awarded franchises from the
municipalities they serve. In response to increasing competitive pressures, MSOs
have been expanding the variety of their service
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offerings not only for video, but for Internet access and telephony, which
generally requires increasing amounts of cable and system bandwidth. MSOs have
generally adopted, and the Company's management believes that for the
foreseeable future will continue to adopt, HFC cable system designs when seeking
to increase system bandwidth. Such systems combine the advantages of fiber optic
cable in transmitting clear signals over a long distance without amplification,
and the advantages of coaxial cable in ease of installation, low cost and
compatibility with the receiving components of the customer's communications
devices. The Company's management believes that: (1) MSOs are likely to increase
their use of fiber optic cable for the trunk and feeder portions of their cable
systems; (2) there will be an ongoing need for high-capacity coaxial cable for
the local distribution and street-to-the-home portions of the cable system; and
(3) coaxial cable remains the most cost effective means for the transmission of
broadband signals to the home or business over shorter distances in cable
networks. For local distribution purposes, coaxial cable has the necessary
signal carrying capacity or bandwidth to handle upstream and downstream signal
transmission.
The construction, expansion and upgrade of cable systems require
significant capital investment by cable operators. MSOs have been significant
borrowers from the credit and capital markets, and, accordingly, capital
spending within the domestic cable television industry has historically been
cyclical, depending to a significant degree on the availability of credit and
capital. The cable television industry has also been subject to varying degrees
of both national and local government regulation, most recently, the
Telecommunications Act of 1996 ("Telecom Act") and the Cable Television Consumer
Protection and Competition Act of 1992 ("1992 Cable Act"), and its implementing
regulations adopted in 1993 and 1994. The RBOCs and other telephone service
providers have generally been subject to regulatory restrictions which prevented
them from offering cable television service within their franchise telephone
areas. However, the Telecom Act removes or phases out many of the regulatory and
sale restrictions affecting MSOs and telephone operating companies in the
offering of video and telephone services. The Company's management believes that
the Telecom Act will encourage competition among MSOs, telephone operating
companies and other communications companies in offering video, telephone and
data services such as Internet access to consumers, and that providers of such
services will upgrade their present communications delivery systems. The Company
has provided coaxial cables to most major U.S. telephone operating companies,
several of which are installing broadband networks for the delivery of video,
telephone and other services to some portion of their telephone service areas.
The broadband networks proposed by some of the telephone companies utilize HFC
technologies similar to those employed by many cable television operators.
International Markets. Cable system designs utilizing HFC technology are
increasingly being employed in international markets with low cable television
penetration. Based upon industry trade publications and reports from
telecommunications industry analysts, the Company's management estimates that
approximately 36% of the television households in Europe subscribe to some form
of multichannel television service as compared to a subscription rate of
approximately 70% in the United States. Based upon such sources, the Company's
management estimates subscription rates in the Asia/Pacific Rim and Latin
American/Caribbean markets are even lower at approximately 17% and 12%,
respectively. In terms of television households, it is estimated that there were
approximately 248 million television households in Europe, approximately 377
million in Asia/Pacific Rim and approximately 93 million in Latin America and
the Caribbean. This compares to approximately 96 million television households
in the United States.
International sales of the Company's coaxial cables have increased steadily
in recent years, from approximately $66 million in 1992 to approximately $200
million in 1997. In 1997, the Company had sales in approximately 85 countries.
Penetration of the international marketplace has been accomplished through a
network of distributors and agents located in major countries where the Company
does business. The Company also employs 13 international direct territory
managers to supplement and manage its network of distributors and agents. In
addition to new customers developed by the Company's network of distributors and
sales representatives, many large U.S. cable television
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operators, with whom the Company has had long established business
relationships, are active investors in cable television systems outside the
United States.
While Company management expects long-term growth opportunities in
international markets, management is cautious about near-term performance due to
the current monetary crises in key overseas markets, including the Pacific Rim
and South America. Industry consolidation and the strength of the U.S. dollar
versus local currencies could slow short-term demand. However, in the long run
the Company's management believes that continued growth in international
markets, including the developing markets in Asia, the Middle East and Latin
America, and the expected privatization of the telecommunications structure in
many European countries, represent significant future opportunities. While
growth in international revenues could serve to mitigate the effects of future
capital spending cycles by domestic cable operators, such growth may be subject
to political and economic uncertainties.
In 1995 the Company, along with the Pacific Dunlop Ltd., began a joint
venture located near Melbourne, Australia to manufacture certain coaxial cables
for the Australia market. Due to accelerated construction activity, the majority
of cables supplied by the joint venture were manufactured by CommScope in the
United States and exported into Australia. Export sales to Australia totaled
$20.2, $24.7 million and $10.3 million in 1995, 1996 and 1997, respectively.
However, after a rapid two-year build out of major Australia cities, the market
transitioned from a construction market to primarily a maintenance market.
Further, due to financial and regulatory issues, construction activity for the
two major cable TV service providers was sharply reduced in the second half of
1997. Because of these issues and the weakening Southeast Asia economic outlook,
the joint venture permanently ceased manufacturing activities in December 1997.
The Company took a $3.9 million pre-tax charge in connection with the
manufacturing shutdown in 1997. The joint venture is currently operating in 1998
as a distribution operation for CommScope coaxial cables for the Australian and
Pacific markets.
Video and Broadcast Applications (non-cable television). Many specialized
markets or applications are served by multiple cable media, (i.e., coaxial,
twisted pair (shielded or unshielded), fiber optic or combinations of each). The
Company has become a leading producer of composite cables made of flexible
coaxial and twisted copper pairs for full service communications providers
worldwide. In the satellite direct-to-home (DTH) cable market, where specialized
composite coaxial and copper cables transmit satellite-delivered video signals
and antenna positioning/control signals, the Company has developed a leading
market position. DTH cables are specified by leading original equipment
manufacturers ("OEMs"), distributors and service providers. The Company markets
an array of premium metallic and optical cable products directed at the
broadcasting and video production studio market. Because of the Company's
position in other video transport markets and access to distribution channels
within the market, these products are viewed by the Company's management as a
growth opportunity, although there can be no assurance that the Company will be
able to penetrate this market successfully.
LAN Market. The proliferation of personal computers, and more broadly the
practice of distributed computing, has created a need for products which enable
users to share files, applications and peripheral equipment such as printers and
data storage devices. LANs, typically consisting of at least one dedicated
computer (a "server"), peripheral devices, network software and interconnecting
cables, were developed in response to this demand. The Company manufactures a
variety of twisted pair, coaxial and fiber optic cables to transmit data for LAN
applications. The most widely used cable design for this application consists of
four high-performance twisted pairs that are capable of transmitting data at
rates in excess of 155 mbps. The Company focuses its products and marketing on
cables with enhanced electrical and physical performance such as its recently
introduced Ultra II unshielded twisted pair ("UTP"). The Company's management
believes that Ultra II cable is among the highest performing UTP cables in the
industry. Copper and fiber optic composite cables are frequently combined in a
single cable to reduce installation costs and support multimedia applications.
Cellular Communication Applications. Management of the Company believes
that the rapid deployment of cellular or "wireless" communication systems
throughout the United States and
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the rest of the world presents a growth opportunity for the Company.
Semi-flexible coaxial cables are used to connect the antennae located at the top
of cellular antenna towers to the radios and power sources located adjacent to
or near the antenna site. In 1996 and 1997, the Company developed Cell Reach(R)
products, a line of copper shielded semi-flexible coaxial cables and related
connectors and accessories to address this market. The Company has significant
manufacturing capacity in place for this product line and is currently
developing additional products and marketing programs for Cell Reach for both
the U.S. and certain international markets. Management of the Company began
receiving orders and making shipments of Cell Reach in the first quarter of
1997. There are larger, well established companies with significant financial
resources and brand recognition in the cellular market which have established
marketing channels for coaxial cables and accessories.
Other Markets. The Company has also developed a strategy for addressing
additional cable consuming markets. By combining narrowly focused product and
market management with its cable manufacturing and operational skills, the
Company is entering new markets for telephone central office, industrial control
and data, and other high-performance cable applications.
Manufacturing
The Company employs advanced cable manufacturing processes, the most
important of which are: thermoplastic extrusion for insulating wires and cables,
high-speed welding and swaging of metallic shields or outer conductors,
braiding, cabling and automated testing. Many of these processes are performed
on equipment that has been modified for the Company's purposes or specifically
built to the Company's specifications, often internally in the Company's own
machine shop facilities. The Company fabricates very few of the raw material
components used in making most of its cables, such as wire, tapes, tubes and
similar materials, but the Company's management believes such fabrication, to
the extent economically feasible, could be done by the Company instead of being
outsourced. The manufacturing processes of the three principal types of cable
manufactured by the Company-coaxial cables, twisted copper pair cables and fiber
optic cables-are further described below.
Coaxial Cables. The Company employs a number of advanced plastic and metal
forming processes in the manufacture of coaxial cable. Three fundamental process
sequences are common to almost all coaxial cables.
First, a plastic insulation material, called the dielectric, is melt
extruded around a metallic wire or center conductor. Current, state-of-the-art
dielectrics consist of foamed plastics to enhance the electrical properties of
the cable. Precise control of the foaming process is critical to achieve the
mechanical and electrical performance required for broadband services and
cellular communications applications. The Company's management believes that
plastic foam extrusion, using proprietary materials, equipment and control
systems, is a core competency of the Company.
The second step involves sheathing the dielectric material with a metallic
shield or outer conductor. Three basic shield designs and processes are used.
For semi-flexible coaxial cables, solid aluminum or copper shields are applied
over the dielectric by either pulling the dielectric insulated wire into a long,
hollow metallic tube or welding the metallic tube directly over the dielectric.
Welding allows the use of thinner metal, resulting in more flexible products.
The Company uses a proprietary welding process that achieves significantly
higher process speeds than those achievable using other cable welding methods.
The same welding process has led to extremely efficient manufacturing processes
of copper shielded products for cellular communications. For both hollow and
welded tubes, the cable is passed through tools that form the metallic shield
tightly around the dielectric.
Flexible coaxial cables, which are usually smaller in diameter than semi-
flexible coaxial cables, generally are made with the third shield design.
Flexible outer shield designs typically involve laminated metallic foils and
braided fine wires which are used to enhance flexibility which is more desirable
for indoor wiring or for connecting subscribers in drop cable applications.
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The third and usually final process sequence is the melt extrusion of
thermoplastic jackets to protect the coaxial cable. A large number of variations
are produced during this sequence including: incorporating an integral strength
member, customer specified extruded stripes and printing for identification;
abrasion and crush resistant jackets and adding moisture blocking fillers.
Twisted Copper Pairs. Single copper wires are insulated using high-speed
thermoplastic extrusion techniques. Two insulated copper singles are then
twinned (twisted into an electrically balanced pair unit) in a separate process
and then bunched or cabled (the grouping of two or more pair units into larger
units for further processing) in one or more further processes depending on the
number of pairs desired within the completed cable. The cabled units are then
shielded and jacketed or simply jacketed without applying a metallic shield in
the jacketing process (the extrusion of a plastic jacket over a shielded or
unshielded cable core). The majority of the sales of the Company's twisted
copper pairs are derived from plenum rated unshielded twisted pair cables for
LAN applications. Plenum cables are cables rated under the National Electrical
Code as safe for installation within the air plenum areas of office buildings
due to their flame retarding and low smoke generating characteristics when
heated. Plenum cables are made from more costly thermoplastic insulating
materials which have significantly higher extrusion temperature profiles that
require more costly extrusion equipment than non-plenum rated cables. The
Company believes that the processing of plenum rated materials is one of its
core competencies.
Fiber Optic Cables. To manufacture fiber optic cables, the Company
purchases bulk uncabled optical fiber singles, then colors and buffers them
before cabling them into unjacketed core units. Protective outer jackets and,
sometimes, shields and jackets are then applied in a final process before
testing. Manufacturing and test equipment for fiber optic cables are distinct
from that used to manufacture coaxial and copper twisted pair cables. The
majority of fiber optic cables produced by the Company are sold to the cable
television and LAN industry. Some of these fiber-optic cables are produced under
licenses acquired from other fiber and fiber-optic cable manufacturers.
Composite Cables. Cables that are combinations of some or all of coaxial
cables, copper singles or twisted copper pairs and fiber optic cables within a
single cable are also produced by the Company for a variety of applications. The
most significant of the composite cables manufactured by the Company are
combination coaxial and copper twisted pairs within a common outer jacket which
are being used by some telephone companies and cable operators to provide both
cable television services and telephone services to the same households over HFC
networks. Nearly all markets currently addressed by the Company have
applications for composite cables which the Company is capable of manufacturing.
Research and Development
The Company's research, development and engineering expenditures for the
creation and application of new and improved products and processes were $6
million, $5 million and $4 million for the years ended December 31, 1997, 1996
and 1995, respectively. The Company focuses its research and development efforts
primarily on those product areas that it believes have the potential for broad
market applications and significant sales within a one-to-three year period. The
Company's management anticipates that the level of spending on product
development activities will accelerate in future years. Total research and
development expenditures are expected to be approximately $7 million in 1998.
The widespread deployment of broadband services and HFC systems is expected to
provide opportunities for the Company to enhance its coaxial cable product lines
and to improve its manufacturing processes. Additionally, the Company's
management expects that its participation in the LAN, cellular communications
and other new markets now identified will require higher rates of product
development spending in relation to sales generated than has been the case in
recent years.
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Sales and Distribution
The Company markets its products worldwide through a combination of more
than 80 direct sales, territory managers and manufacturers' representative
personnel. The Company supports its sales organization with regional service
centers in: North Carolina; California; Alabama; Birmingham; England; and
Melbourne, Australia. In addition, the Company utilizes local inventories, sales
literature, internal sales service support, design engineering services and a
group of product engineers who travel with sales personnel and territory
managers and assist in product application issues, and conduct technical
seminars at customer locations to support its sales organization. A key aspect
of the Company's customer support and distribution chain is the use of its
private truck fleet.
The Company's products are sold and used in a wide variety of applications.
The Company's products primarily are sold both directly to cable system
operators and telecommunications companies, OEMs and through distributors. There
has been a trend on the part of OEM customers to consolidate their lists of
qualified suppliers to companies that have a global presence, can meet quality
and delivery standards, have a broad product portfolio and design capability,
and have competitive prices. The Company has concentrated its efforts on service
and productivity improvements including advanced computer aided design and
manufacturing systems, statistical process controls and just-in-time inventory
programs to increase product quality and shorten product delivery schedules. The
Company's strategy is to provide a broad selection of products in the areas in
which it competes. The Company has achieved a preferred supplier designation
from many of its cable television, telephone and OEM customers.
Cable television services in the United States are provided primarily by
MSOs. It is estimated that the six largest MSOs account for more than 60% of the
cable television subscribers in the United States. The major MSOs include such
companies as Tele-Communications, Inc. ("TCI"), Time Warner, Continental
Cablevision, Comcast Cable Communications and Cablevision Systems. Many of the
major MSOs are customers of the Company, including those listed above. During
1997, sales to no single customer accounted for 10% or more of the Company's net
sales and TCI was the only customer which accounted for 10% or more of the net
sales of the Company during 1996 and 1995. Certain RBOCs and other
telecommunications companies who have recently begun providing cable television
services have become significant customers of the Company.
Patents
The Company pursues an active policy of seeking intellectual property
protection, namely patents, for new products and designs. The Company holds 84
patents worldwide and has 65 pending applications. Although the Company
considers its patents to be valuable assets, no single patent is considered to
be material to its operations as a whole. The Company intends to rely on its
proprietary knowledge and continuing technological innovation to develop and
maintain its competitive position.
Backlog
At December 31, 1997, 1996 and 1995, the Company had an order backlog of
approximately $55 million, $36 million and $33 million, respectively. Orders
typically fluctuate from quarter to quarter based on customer demand and general
business conditions. Backlog includes only orders for products scheduled to be
shipped within six months. Unfilled orders may be canceled prior to shipment of
goods; however, such cancellations historically have not been material. However,
significant elements of the Company's business, such as sales to the cable
television industry, distributors, the computer industry, and other commercial
customers, generally have short lead times. Therefore, current order backlog may
not be indicative of future demand.
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Competition
The Company encounters competition in substantially all areas of its
business. The Company competes primarily on the basis of product specifications,
quality, price, engineering, customer service and delivery time. Competitors
include large, diversified companies, some of which have substantially greater
assets and financial resources than the Company, as well as medium to small
companies. The Company also faces competition from certain smaller companies
that have concentrated their efforts in one or more areas of the coaxial cable
market. The Company's management believes that it enjoys a strong competitive
position in the coaxial cable market due to its position as a low-cost,
high-volume coaxial cable producer and reputation as a high-quality provider of
state-of-the-art cables with a strong orientation toward customer service. The
Company's management also believes that it enjoys a strong competitive position
in electronic cable market due to the existence of one of the larger direct
field sales organizations within the LAN segment, the comprehensive nature of
its product line, and its long established reputation for quality.
Raw Materials
In the manufacture of coaxial and twisted pair cables, the Company
processes metal tubes, tapes and wires including bi-metallic wires (wires made
of aluminum or steel with thin outer skins of copper) that are fabricated from
high-grade aluminum, copper and steel. Most of these fabricated metal components
are purchased under supply arrangements with some portion of the unit pricing
indexed to commodity market prices for these metals. The Company has adopted a
hedging policy pursuant to which it may, from time to time, attempt to match
futures contracts or option contracts for a specific metal with some portion of
the anticipated metal purchases for the same periods. Other major raw materials
used by the Company include polyethelenes, polyvinylchlorides,
fluoronated-ethylene-propylene (FEP) and other plastic insulating materials,
optical fibers, and wood and cardboard shipping and packaging materials. In
1997, approximately 14% of the Company's raw material purchases were for
bi-metallic center conductors for coaxial cables, nearly all of which were
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. FEP is
produced by two manufacturers and is currently under allocation by these
suppliers. Availability of adequate supplies of FEP will be critical to future
LAN cable sales growth. With respect to all other major raw materials used by
the Company, alternative sources of supply or access to alternative materials
are generally available. Supplies of all raw materials used by the Company are
generally adequate and expected to remain so for the foreseeable future.
Environment
The Company uses some hazardous substances and generates some solid and
hazardous waste in the ordinary course of its business. Consequently, the
Company is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous materials.
Because of the nature of its business, the Company has incurred, and will
continue to incur, costs relating to compliance with such environmental laws.
Although the Company's management believes that it is in substantial compliance
with such environmental requirements, and the Company has not in the past been
required to incur material costs in connection therewith, there can be no
assurance its cost to comply with such requirements will not increase in the
future. Although the Company is unable to predict what legislation or
regulations may be adopted in the future with respect to environmental
protection and waste disposal, compliance with existing legislation and
regulations has not had and is not expected to have a material adverse effect on
the Company's financial condition.
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Employees
At December 31, 1997, approximately 2,700 people were employed by
CommScope. Substantially all employees are located in the United States. The
Company's management believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's administrative, production and research and development
facilities are located in Hickory, Catawba, Claremont and Statesville, North
Carolina and Scottsboro, Alabama. The Hickory, North Carolina facility occupies
approximately 38,000 square feet pursuant to a lease expiring in December 1999
and is the location of the Company's executive offices, sales office and
customer service department.
The Catawba, North Carolina facility occupies approximately 1,000,000
square feet and is owned by the Company. The Catawba facility manufactures
coaxial cables, is the major distribution facility for cable television products
and houses certain administrative and engineering activities.
The Claremont, North Carolina facility occupies approximately 450,000
square feet and is owned by the Company. The Claremont facility manufactures
coaxial, copper twisted pair and fiber optic cables and houses certain
administrative, sales and engineering activities for the Company.
During 1997, CommScope purchased a 310,000 square foot facility in
Statesville, North Carolina, which will house and houses certain LAN cable
manufacturing, cable-in-conduit manufacturing, recycling activities, research
and development, and engineering activities.
The Scottsboro, Alabama facility occupies 150,000 square feet and is owned
by the Company. The Scottsboro facility manufactures coaxial cables.
The Company's management does not believe there is any material long-term
excess capacity in its facilities, although utilization is subject to change
based on customer demand. Furthermore, the Company's management believes that
its facilities and equipment generally are well maintained, in good operating
condition and suitable for its purposes and adequate for its present operations.
In February 1998, the Company sold the Elm City facility, which occupied
approximately 250,000 square feet. See Note 5 of the "Notes to Consolidated
Financial Statements" contained in Item 8.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business. The
Company's management does not believe that any such claims or lawsuits will have
a material adverse effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the three months ended December 31, 1997.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Distribution, the Company's Common Stock has been traded on the
New York Stock Exchange under the symbol CTV. The following table sets forth the
high and low sale prices as reported by the New York Stock Exchange for the
period July 28, 1997 through December 31, 1997. The stock price information
shown below does not include "when-issued" trading prior to the Distribution.
"CTV"
-----
Year Ended December 31, 1997 High Low
---------------------------- ---- ---
July 28th through September 30th 19 12 3/4
Fourth Quarter 14 7/16 10 3/8
As of March 16, 1998, the approximate number of registered stockholders of
record of the Company's Common Stock was 860.
The Company does not currently intend to pay dividends in the foreseeable
future, but to reinvest earnings in the Company's business. The Company's
ability to pay cash dividends on its Common Stock is limited by certain
covenants contained in a credit agreement to which the Company is a party. See
Note 9 of the consolidated financial statements, included in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995 1994 1993
----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Results of Operations:
Net Sales $ 599,216 $ 572,212 $ 485,160 $ 445,328 $ 341,789
Gross profit 141,000 155,089 129,428 127,862 98,124
Operating income 79,182 100,254 85,263 87,770 64,713
Net income 37,458 57,122 47,331 45,096 27,336
Pro forma net income(1) 34,604 51,908 (1) (1) (1)
Basic and diluted earnings per
share - pro forma(1) 0.70 1.06 (1) (1) (1)
Balance Sheet Data:
Total assets $ 483,539 $ 479,885 $ 412,378 $ 397,843 $ 336,281
Working capital 112,786 107,220 72,908 69,269 31,928
Long-term debt, including current maturities(2) 265,800 10,800 10,800 - -
Stockholders' equity(2) 150,032 393,560 339,177 343,169 300,786
Other Information:
Gross profit percentage 23.5% 27.1% 26.7% 28.7% 28.7%
Year end shares outstanding 49,108,874 (1) (1) (1) (1)
Earnings before net interest(4),
taxes and depreciation and
amortization ("EBITDA")(3) $ 96,606 $ 121,045 $ 102,597 $ 104,188 $ 80,892
</TABLE>
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<PAGE>
(1) Basic and diluted earnings per share - historical and year end shares
outstanding had not been presented since the Company, through its
wholly-owned subsidiary CommScope NC, was formerly a wholly-owned indirect
subsidiary of the Distributing Company with no separately issued or
outstanding equity securities prior to July 28, 1997, the date of the
Spin-off from the Distributing Company. The unauditied pro forma
information for 1997 and 1996 has been prepared utilizing the historical
consolidated statements of income of CommScope 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 and a total of 49.1
million commons shares outstanding and 49.2 million common and common
equivalent shares outstanding for basic and diluted earnings per share,
respectively.
(2) Giving effect to transactions related to the Spin-off as if they had
occurred on December 31, 1996, on a pro forma basis long-term debt was
$276,800 and stockholders' equity was $128,348.
(3) EBITDA is presented not as an alternative measure of operating results or
cash flow (as determined in accordance with generally accepted accounting
principles), but rather to provide additional information related to the
Company's ability to service debt.
(4) For purposes of the EBITDA calculation, 1997 net interest excludes
amortization of deferred financing fees of $70, which is included in
depreciation and amortization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview of the Business and Financial Highlights
CommScope designs, manufactures and markets coaxial, fiber optic and high
performance electronic cables primarily used in communications, local area
network and industrial applications. CommScope is a leading manufacturer and
supplier of coaxial cable for cable television applications and other
communications applications in the United States. CommScope is also a leading
supplier of coaxial cable to international cable television markets.
The Company is the largest manufacturer and supplier of coaxial cable for cable
television applications in the United States in terms of sales volume and is a
leading supplier of coaxial cable for satellite television and other video
applications such as in-home video wiring, broadcast and security (collectively
referred to as "CATV Products"). Management of the Company believes that its
competitive strength in the coaxial cable market is due to its extensive coaxial
cable product line, its delivery and service capability and its efficient,
low-cost manufacturing operations. The Company supplies the developing market
for high-bandwidth coaxial cables used in hybrid fiber coaxial ("HFC") networks
that provide local access to a combination of services that can include cable
television, telephone and Internet access. These "full service" or "broadband
service" HFC networks, which are a combination of fiber optic lines and coaxial
cable lines, are capable of handling voice, video and data transmissions. HFC
networks are being installed primarily by cable television operators and, to a
lesser extent, telephone companies. The installation of HFC networks by cable
television operators in the United States has contributed greatly to the overall
growth in sales from $341.8 million in 1993 to $599.2 million in 1997.
In the last several years, the Company has also become a major supplier of
coaxial cables to international markets for cable television and broadband
services. The Company's international sales, primarily for coaxial cables, have
increased from approximately $66.0 million in 1992 to $200.4 million in
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<PAGE>
1997. Management of the Company intends to maintain its international market
leadership. Currently, the Company's international presence includes one
commercial warehouse in the United Kingdom, international sales offices located
in certain targeted international markets and participation in an Australian
joint venture for the distribution of coaxial cables. Although the Company
believes future growth in the international markets will be a significant
contributor to the Company's overall business over the long term, the current
environment in the international markets, including Asia and the Pacific Rim, is
expected to have a negative impact on 1998 international sales. Although the
precise amount of such impact cannot be determined at this time, the Company
currently estimates that international sales could be lower by 20% or more in
1998 as compared to 1997.
Sales of products used in local area network applications ("LAN Products"),
primarily in the domestic market, has been a significant growth area for the
Company in recent years, and represented about 13% of total net sales in 1997.
As a leader in the concept of high-performance (Category 5) premise wiring
cable, sales of LAN products have grown from approximately $25.0 million in 1993
to $76.6 million in 1997. As demand continues to increase for high-performance
LAN Products, the Company has responded by improving production capability to
meet market demands. Industrywide capacity restraints for FEP, a
high-temperature plastic material used in the production of many of the
high-performance LAN Products, serves as a potential limitation to future growth
in the LAN market. Lead times for some high-temperature LAN Products is as much
as six months. To date, the Company has been able to acquire sufficient access
to FEP to support increased demands for the Company's LAN Products.
The Company has recently expanded into additional markets through the internal
development of new products such as Cell Reach, which is a coaxial cable product
designed to be installed on antenna towers for cellular telephone, personal
communication services (PCS), paging and other wireless or cellular
communication applications. During 1997 the Company has been marketing its Cell
Reach cables and accessories to cellular network operators located in the United
States and certain international markets.
During the past few years, the Company has maintained a gross profit as a
percentage of net sales between 27% to 28%. Due primarily to increasing price
competition in the marketplace, increased raw material costs for products linked
to the commodity markets and higher initial costs to introduce new products such
as Cell Reach to the marketplace, in 1997 gross profit as a percentage of sales
was 23.5%. In response to these external competition factors, the Company has
identified and is implementing several key initiatives to address its gross
profit percentage performance in 1998 and beyond. These initiatives include a
three-year plan of vertical integration and a complete review of operations with
a focus on "right-sizing" the business during the current slowdown in the
international markets. Also, in February 1998 the Company sold its Elm City,
North Carolina facility, equipment and inventories, which were used in the
production of high-temperature aerospace and industrial products (the
"High-Temperature Aerospace and Industrial Cable Products Business") for
approximately $12 million. Because this business represented a non-strategic
operation of CommScope, the sale of the High-Temperature Aerospace and
Industrial Cable Products Business allows the Company to better focus on its
primary products and eliminates a product line which had a negative impact on
gross profit percentage. However, gross profit percentages will continue to be
influenced by marketplace price competition and changes in raw material costs.
Operating as either a corporate division, subsidiary or privately held
corporation, CommScope has been in business since approximately 1965. From
August 1990 until July 1997 the Company's wholly-owned subsidiary, CommScope,
Inc. of North Carolina ("CommScope North Carolina") operated as a wholly-owned
indirect subsidiary of General Instrument Corporation ("General Instrument"),
which has since changed its corporate name to General Semiconductor, Inc.
As the result of a spin-off (the "Distribution") from General Instrument
through a series of transactions that were consummated on July 28, 1997 (the
"Distribution Date"), CommScope North Carolina became a wholly-owned
subsidiary of the Company, and the Company now operates as an independent
entity with publicly traded common stock.
-13-
<PAGE>
CommScope reported net income of $37.5 million for the year ended December 31,
1997 compared with net income of $57.1 million and $47.3 million for the years
ended December 31, 1996 and 1995, respectively. Historical results of CommScope
for periods prior to the Distribution were included in General Instrument's
results of operations. 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. Accordingly, no historical earnings per share data has been
presented for all periods presented through December 31, 1997.
Giving effect to the Distribution as if it occurred on January 1, 1996, pro
forma net income for the years ended December 31, 1997 and 1996 was $34.6
million ($0.70 per share) and $51.9 million ($1.06 per share), respectively. Pro
forma financial information has been prepared utilizing the historical
consolidated statements of income of CommScope 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. Pro forma earnings per share is
computed as the pro forma net income for each period divided by the pro forma
common and common equivalent shares outstanding for each period, and assumes
that a total of 49.1 million common shares outstanding for basic earnings per
share and 49.2 million common and common equivalent shares outstanding for
diluted earnings per share at the Distribution Date were outstanding since
January 1, 1996. The pro forma information does not purport to represent what
CommScope's operations actually would have been or to project CommScope's
operating results for any future period.
The Company's consolidated financial statements and notes to consolidated
financial statements, included in Item 8, should be read as an integral part
of the financial highlights and the following financial review.
Comparison of Results of Operations for the Year Ended December 31, 1997 with
the Year Ended December 31, 1996
Net Sales
Net sales for the year ended December 31, 1997 were $599.2 million compared to
$572.2 million in 1996, an increase of 5%. The following table presents
CommScope's revenues (in millions) by product line and domestic versus
international sales for the years ended December 31, 1997 and 1996,
respectively:
1997 Net % of 1997 1996 Net % of 1996
Sales Net Sales Sales Net Sales
--------------------------------------------
CATV Products $491.5 82.0 $489.4 85.5
LAN Products 76.6 12.8 66.5 11.6
Other products 31.1 5.2 16.3 2.9
--------------------------------------------
Total $599.2 100.0 $572.2 100.0
============================================
Domestic sales $398.8 66.6 $371.3 64.9
International sales 200.4 33.4 200.9 35.1
--------------------------------------------
Total $599.2 100.0 $572.2 100.0
============================================
Sales of CATV Products in 1997 were essentially equal to 1996 levels.
Domestically, sales of CATV Products were primarily to multiple system operators
using HFC networks, who continued their upgrading activities. Excluding sales to
our largest domestic customer, sales to domestic multiple system operators
-14-
<PAGE>
increased by approximately 10% in 1997 as compared to 1996. These domestic sales
increases were mostly offset by lower sales volume to the Company's largest
customer.
International sales of CATV Products, which represent most of the Company's
international sales activity, were also equal to 1996 international sales
levels. Excluding sales to Asia and the Pacific Rim market, international sales
increased approximately 11% in 1997 compared to 1996. However, sales to the
Pacific Rim region decreased by $15 million primarily as a result of economic
conditions in the region and changes in the Australian market due to certain
governmental regulation changes and other events affecting the market for cable
products in that country. CATV Product sales to Australia were $10.3 million in
1997, a decrease of $14.4 million from 1996 sales of $24.7 million, and could
potentially be lower in 1998.
Sales of LAN Products increased 15% in 1997 compared to 1996, primarily due to
higher sales volume for premise wiring of local area networks. The higher sales
volumes of LAN Products has been achieved through the expansion of manufacturing
capacity and facilities dedicated to these products, the introduction of cable
products with enhanced electrical and physical performance and the acquisition
of LAN product lines from Teledyne Industries, Inc. in May 1996.
Average selling prices for both CATV Products and LAN Products were down in 1997
compared to 1996, primarily attributable to competitive price reductions in the
market for these products, and offset favorable unit sales volume growth for
most products.
Sales of other products, which increased $14.8 million in 1997 compared to 1996,
primarily represent sales of the High-Temperature Aerospace and Industrial Cable
Products Business, acquired along with certain other assets primarily used in
the production of certain LAN Products from Teledyne Industries, Inc. in May
1996. Sales of the High-Temperature Aerospace and Industrial Cable Products
Business totalled $16.5 million in 1997 and $7.3 million in 1996 subsequent to
the acquisition, representing $9.2 million of the increase in sales of other
products for 1997. In February 1998 the Company sold the facility, equipment and
inventories of the High-Temperature Aerospace and Industrial Cable Products
Business for approximately $12 million. Other sales, primarily of wiring
products used in telecommunication applications, totalled $14.6 million in 1997
compared to $9.0 million in 1996. Sales of Cell Reach products, included in
other sales, were less than 1% of net sales in both 1997 and 1996.
Gross Profit (Net Sales less Cost of Sales)
Gross profit decreased $14.1 million, or 9%, to $141.0 million in 1997 compared
to 1996 gross profit of $155.1 million. Gross profit as a percentage of net
sales was 23.5% in 1997 and 27.1% in 1996. The reduction in gross profit and
gross profit percentage is attributable to the competitive pricing in the
marketplace, increased raw material costs (particularly in aluminum and
plastics, which account for more than 50% of the Company's total raw material
costs), low gross profit percentages in the High-Temperature Aerospace and
Industrial Cable Products Business, and negative gross profit percentages
generated during the introduction phase of the Cell Reach product.
During 1997, particularly in the third and fourth quarters, the Company made
significant progress in the introduction of the Cell Reach product. More than
500 cellular and PCS sites were successfully installed and began operation of
Cell Reach products, including customers such as NEXTEL, BellSouth, Sprint and
Air Touch. The Company believes that this product offers growth opportunities
for 1998 and beyond because of its superior technical performance and installed
cost advantages and expects to achieve at least a break-even gross profit on the
Cell Reach product line in 1998. For 1997, Cell Reach manufacturing start-up
costs negatively impacted gross profit percentage by approximately 70 basis
points.
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<PAGE>
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $6.1 million, or
14%, in 1997 to $50.4 million compared to $44.3 million in 1996, primarily due
to increased marketing and selling expenditures in support of the higher sales
volumes for CATV Products and LAN Products and the development of a sales force
to support the sale of Cell Reach products. The Company increased its sales
force, field support and marketing activities to take advantage of increased
growth opportunities in international cable and network markets. General and
administrative expenditures related to the Distribution also contributed
slightly to the increase in overall SG&A costs. As a percentage of net sales,
SG&A expense was 8.4% in 1997 and 7.7% in 1996.
Research and development expense increased $0.9 million, or 17%, to $6.2 million
in 1997 compared to $5.3 million in 1996. The increase resulted from the
Company's ongoing programs to develop new products and market opportunities for
its products and core capabilities and from programs to develop new
manufacturing technologies designed to achieve cost reductions.
Other Income (Expense), Net
Other expense, net was $4.2 million in 1997 and other income, net was $1.8
million in 1996. These amounts primarily reflect the Company's share of income
or loss generated by its 49% investment in an Australian joint venture (acquired
in August 1995).
Due to certain governmental regulation changes and other events affecting the
market for cable products in Australia during 1997, manufacturing operations of
the joint venture were suspended in August 1997 and formally discontinued by
decision of the joint venture's directors in December 1997. During the fourth
quarter of 1997, CommScope recorded pre-tax charges of $3.9 million as other
expense to reduce its total current financial investment in the joint venture to
expected net realizable value. Net of tax benefits of $0.8 million, these
charges reduced 1997 net income by $3.1 million ($0.06 per share).
Net Interest Expense and Income Taxes
Net interest expense prior to the Distribution represents an allocation of
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. Net interest expense subsequent to the Distribution 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 $13.5 million in 1997 compared to $10.0
million in 1996.
On a pro forma basis, net interest expense was $18.1 million in 1997 compared to
$18.4 million in 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 prior to the Distribution 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.
The reduction in pro forma net interest expense is attributable to the reduction
in borrowings under the Company's Credit Agreement since the Distribution Date.
The provision for income taxes has been determined as if the Company had filed
separate tax returns under its existing structure for the periods presented
prior to the Distribution. The Company's effective tax rate was 38% in both 1996
and in 1997 up to the Distribution. The effective tax rate for the year ended
December 31, 1997 was 39.1%, with the increase in the effective rate
attributable to the fourth quarter charges related to the Australian joint
venture which will be partially nondeductible for tax purposes. As an
independent taxpayer subsequent to the Distribution, CommScope's effective tax
rates in future years could vary from historical effective tax rates depending
on the Company's future tax elections.
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<PAGE>
Comparison of Results of Operations for the Year Ended December 31, 1996 with
the Year Ended December 31, 1995
Net Sales
Net sales for the year ended December 31, 1996 were $572.2 million compared to
$485.2 million in 1995, an increase of 18%. The following table presents
CommScope's revenues by product line and domestic versus international sales for
the years ended December 31, 1996 and 1995 (in millions):
1996 Net % of 1996 1995 Net % of 1995
Sales Net Sales Sales Net Sales
--------------------------------------------
CATV Products $489.4 85.5 $419.9 86.5
LAN Products 66.5 11.6 58.7 12.1
Other products 16.3 2.9 6.6 1.4
--------------------------------------------
Total $572.2 100.0 $485.2 100.0
============================================
Domestic sales $371.3 64.9 $320.7 66.1
International sales 200.9 35.1 164.5 33.9
--------------------------------------------
Total $572.2 100.0 $485.2 100.0
============================================
Sales of CATV Products increased 17% in 1996 compared to 1995, 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. Sales of LAN Products increased 13% in 1996 compared to 1995,
primarily due to higher sales volume for premise wiring of local area networks.
Average selling prices for both CATV Products and LAN Products were down in 1996
compared to 1995, primarily attributable to competitive price reductions in the
market for these products, and partially offset favorable unit sales volume
growth for most products.
Sales of other products increased $9.7 million in 1996 compared to 1995. The
1996 amounts include sales of the High-Temperature Aerospace and Industrial
Cable Products Business of $7.3 million subsequent to the May 1996 acquisition
of this business from Teledyne Industries, Inc. Other sales, primarily of wiring
products used in telecommunication applications, totalled $9.0 million in 1996
compared to $6.6 million in 1995.
International sales increased $36.4 million, or 22%, to $200.9 million in 1996
compared to $164.5 million in 1995. The increase in international sales was
attained through sales increases in most of the geographic regions in which the
Company has a presence, most notably in the Latin America and Pacific Rim
markets.
Gross Profit (Net Sales less Cost of Sales)
Gross profit increased $25.7 million, or 20%, to $155.1 million in 1996 compared
to $129.4 million in 1995 and as a percentage of net sales was 27.1% in 1996 and
26.7% in 1995. The higher gross profit reflects the increased sales volume,
reduced material costs and improved per unit labor and overhead costs resulting
from production efficiencies partially offset by the lower average selling
prices described above.
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<PAGE>
Operating Expenses
SG&A expense increased $9.5 million, or 27%, in 1996 to $44.3 million compared
to $34.8 million in 1995, primarily due to increased marketing and selling
expenditures in support of the higher sales volumes. The Company increased its
sales force, field support and marketing activities to take advantage of
increased growth opportunities in international cable and network markets. SG&A
expense in 1996 also reflects marketing and selling expenses for aerospace and
industrial products. As a percentage of net sales, SG&A expense was 7.7% in 1996
and 7.2% in 1995.
Research and development expense increased $1.0 million, or 26%, to $5.3 million
in 1996 compared to $4.3 million in 1995. The increase resulted from the
Company's ongoing programs to develop new products and market opportunities for
its products and core capabilities and from programs to develop new
manufacturing technologies designed to achieve cost reductions.
Other Income (Expense), Net
Other income, net was $1.8 million and $0.1 million in 1996 and 1995,
respectively, and primarily reflect the Company's share of income or loss
generated by its Australian joint venture investment.
Net Interest Expense and Income Taxes
Net interest expense in 1996 and 1995 represents an allocation of 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. Net
interest expense was $10.0 million in 1996 compared to $8.7 million in 1995, an
increase of $1.3 million, or 15%, primarily due to higher net interest expense
incurred by General Instrument.
The provision for income taxes has been determined as if the Company had filed
separate tax returns under its existing structure for the periods presented
prior to the Distribution. The Company's effective tax rate was 38% in 1996 and
38.3% in 1995.
Cash Flows
Cash provided by operating activities was $59.7, $52.0 and $63.5 million in
1997, 1996 and 1995, respectively. Cash provided by operating activities
primarily represents net income plus non-cash charges for depreciation and
amortization, adjusted for the change in working capital.
Cash used in investing activities was $29.6, $51.0 and $28.4 million in 1997,
1996 and 1995, respectively. During 1997, 1996 and 1995 the Company invested
$29.9, $33.2 and $27.2 million, respectively, in equipment and facilities in
support of capacity expansion across the business units to meet increased
current and anticipated future demands for CommScope products. In 1996 the
Company also utilized $17.8 million to acquire the High-Temperature Aerospace
and Industrial Cable Products Business, along with certain other assets
primarily used in the production of certain LAN Products, from Teledyne
Industries, Inc., and the 1995 expenditures include $1.8 million to acquire a
49% investment in an Australian joint venture. Planned capital expenditures for
equipment and facilities during 1998 are $34 million.
Cash used in financing activities was $26.8, $1.0 and $35.2 million in 1997,
1996 and 1995, respectively. Prior to the Distribution, 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. Net transfers to General Instrument were $15.8, $1.0 and
$46.0 million, respectively, in 1997, 1996 and 1995. The
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<PAGE>
Company established an independent cash management program on the Distribution
Date to support future business levels and growth objectives.
During 1997 the Company borrowed $266 million under a new Credit Agreement (see
discussion below), which was utilized to make a dividend payment to General
Instrument of $265.2 million in accordance with the terms of the Distribution
and to fund debt issuance costs of the Credit Agreement exceeding $0.7 million.
From the Distribution Date to December 31, 1997, net repayments of initial
borrowings under the Credit Agreement totalled $11.0 million.
Financial Condition, Liquidity and Capital Resources
Working capital increased from $72.9 million at December 31, 1995 to $107.2
million at December 31, 1996 and $112.8 million at December 31, 1997. The $34.3
million increase in working capital in 1996 compared to 1995 is primarily due to
increases in accounts receivable associated with significantly increased
revenues and inventories to support the increase in the Company's current and
future business levels. The 1997 increase in working capital of $5.6 million is
primarily the result of $3.3 million in cash and cash equivalents retained by
the Company under its independent cash management program at December 31, 1997.
Based on current levels of orders and backlog, management of the Company
believes that working capital levels are appropriate to support future
operations. There can be no assurance, however, that future industry-specific
developments or general economic trends will not alter the Company's working
capital requirements.
On July 23, 1997 the Company entered into an unsecured $350 million revolving
credit agreement with a group of banks (the "Credit Agreement"). Interest on
outstanding borrowings under the Credit Agrement is generally payable quarterly
in arrears, and all amounts borrowed are due on December 31, 2002. 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 maintaining certain minimum levels of
consolidated net worth, leverage ratio and interest coverage ratio. The Company
was in compliance with these covenants at December 31, 1997. Other details of
the terms and conditions of the Credit Agreement are described more fully in
Note 9 of the consolidated financial statements. The weighted average variable
interest rate on outstanding borrowings under long-term debt facilities at
December 31, 1997 was 6.3%.
The Company intends to utilize the Credit Agreement in the future for, among
other things, general working capital needs, financing capital expenditures and
other general corporate purposes. Management believes that the Company will have
sufficient access to the capital markets to obtain financial resources of a
short- and long-term nature on acceptable terms as may be needed to fund
operations, capital expenditures and other growth objectives to the extent not
provided by cash flows from operations.
In the normal course of business, CommScope uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
Nonderivative financial instruments include letters of credit and commitments to
extend credit (accounts receivable). The Company controls its exposure to credit
risk associated with its financial instruments through credit approvals, credit
limits and monitoring procedures. At December 31, 1997, in management's opinion,
CommScope did not have any significant exposure to any individual customer or
counterparty, nor did CommScope have any significant concentration of credit
risk related to any financial instrument.
Derivative financial instruments utilized by CommScope, which are not entered
into for speculative purposes, include commodity pricing contracts, foreign
currency exchange contracts, and contracts hedging exposure to interest rates.
At December 31, 1997, the Company evaluated its commodity pricing and foreign
currency exchange exposures and concluded that it was not currently beneficial
to use financial instruments to hedge its current positions with respect to
those exposures. As of
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<PAGE>
December 31, 1997, the Company had entered into interest rate swap agreements to
effectively convert an aggregate amount of $100 million of outstanding
variable-rate borrowings to a fixed-rate basis. Contracts for notional amounts
of $50 million each expire in February and April 1999, respectively. The
contract expiring in April 1999 may be terminated at the option of the
counterparty to the swap agreement in October 1998. Under the agreements,
interest settlement payments will be made quarterly based upon the spread
between the three month LIBOR, as adjusted quarterly, and fixed rates of 5.92%
and 5.79%, respectively. Net payments or receipts resulting from the swap
agreements are recorded as adjustments to interest expense in each quarter.
The ratio of total debt to total capital (debt plus equity) was 64% at December
31, 1997 compared to 68% on a pro forma basis at December 31, 1996. The pro
forma ratio of total debt to total capital for 1996 gives effect to transactions
related to the Distribution as if they had occurred on December 31, 1996.
Effects 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.
The principal raw materials purchased by CommScope (fabricated aluminum, copper
and plastics) are subject to changes in market price as these materials are
linked to the commodity markets. To the extent that CommScope is unable to pass
on cost increases to customers, the cost increases could have a significant
impact on the results of operations of CommScope. In 1997 commodity prices
related to raw materials made of aluminum, copper and plastics increased at
rates higher than general inflation and, if this trend continues, could have a
negative effect on operating results in 1998 compared to 1997.
Other Items and Impact of Newly Issued Accounting Standards
CommScope is either a plaintiff or a defendant in several pending legal matters
in the normal course of business, none of which management believes will have a
material adverse effect on CommScope's financial statements upon final
disposition. In addition, CommScope is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge and disposal of
hazardous materials. CommScope's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Although CommScope is
unable to predict what legislation or regulations may be adopted in the future
with respect to environmental protection and waste disposal, compliance with
current laws and regulations has not had, and is not expected to have, a
material adverse effect on CommScope's financial statements.
The Company recognizes the need to ensure its operations will not be adversely
impacted by processing errors potentially arising from calculations using the
Year 2000 date. The Company has identified the computer systems and programs for
which date-sensitive calculations related to the Year 2000 date require upgrade,
and is currently addressing the required programming modifications through a
combination of software and system upgrades to Year 2000 compliant applications
and program coding modifications for other applications. Management does not
believe that the costs of addressing the Year 2000 software issue will be
material to CommScope's results of operations, financial condition or cash
flows.
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 requires 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 the Company beginning with the year ending December 31, 1998 and requires
reclassification of comparative years. Comprehensive income would not differ
from net income during the three years ended December 31, 1997.
-20-
<PAGE>
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. SFAS No. 131 is
effective for the Company beginning with the year ending December 31, 1998.
Management is evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
Forward-Looking Statements
Certain statements in this Form 10-K which are other than historical facts are
intended to be "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of
1995 and other related laws. These forward-looking statements are identified by
their use of such terms and phrases as "intends", "intend", "intended", "goal",
"estimate", "estimates", "expects", "expect", "expected", "project", "projects",
"projected", "projections", "plans", "anticipates", "anticipated", "should",
"designed to", "foreseeable future", "believe", "believes" and "scheduled" and
similar expressions. These statements are subject to various risks and
uncertainties, many of which are outside the control of the Company, such as the
level of market demand for the Company's products, competitive pressures, the
ability to achieve reductions in costs and to continue to integrate
acquisitions, price fluctuations of materials and the potential unavailability
thereof, foreign currency fluctuations, technological obsolescence, and other
specific factors discussed in Exhibit 99 to the Company's Form 10-K for the year
ended December 31, 1997, which is incorporated by reference herein. The
information contained in this Form 10-K represents the Company's best judgment
at the date of this report based on information currently available. However,
the Company does not intend to update this information to reflect developments
or information obtained after the date of this report and disclaims any legal
obligation to do so.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules Page
----
Independent Auditors' Report. 22
Consolidated Statements of Income for the Years ended 23
December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets at December 31, 1997 and 1996. 24
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995. 25
Consolidated Statements of Stockholders' Equity for the
Years ended December, 31, 1997, 1996 and 1995. 26
Notes to Consolidated Financial Statements 27-41
Schedule II - Valuation and Qualifying Accounts 42
-21-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CommScope, Inc.
Hickory, North Carolina
We have audited the accompanying consolidated balance sheets of CommScope, Inc.
and subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CommScope, Inc. and subsidiary at
December 31, 1997 and 1996, and the results of their operations and cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Hickory, North Carolina
February 2, 1998
-22-
<PAGE>
CommScope, Inc.
Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Sales (Notes 4, 5 and 16) $ 599,216 $ 572,212 $ 485,160
--------- --------- ---------
Operating Costs and Expenses:
Cost of sales 458,216 417,123 355,732
Selling, general and administrative 50,361 44,342 34,835
Research and development 6,234 5,348 4,255
Amortization of goodwill 5,223 5,145 5,075
--------- --------- ---------
Total operating costs and expenses 520,034 471,958 399,897
--------- --------- ---------
Operating Income 79,182 100,254 85,263
Other income (expense), net (Note 4) (4,183) 1,839 115
Interest expense (13,685) (10,091) (8,891)
Interest income 200 101 226
--------- --------- ---------
Income before Income Taxes 61,514 92,103 76,713
Provision for income taxes (Note 11) (24,056) (34,981) (29,382)
--------- --------- ---------
Net Income $ 37,458 $ 57,122 $ 47,331
========= ========= =========
</TABLE>
Historical per share data is not considered relevant for the reasons discussed
in Note 2.
Pro forma per share data is presented in Note 3.
See notes to consolidated financial statements.
-23-
<PAGE>
CommScope, Inc.
Consolidated Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
As of December 31,
1997 1996
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,330 $ --
Accounts receivable, net of allowance for doubtful accounts of
$3,985 and $3,761, respectively 95,741 101,817
Inventories (Note 6) 42,223 41,136
Prepaid expenses and other current assets 2,439 1,287
Deferred income taxes (Note 11) 12,102 13,742
-------- --------
Total current assets 155,835 157,982
Property, plant and equipment, net (Note 7) 133,235 117,022
Goodwill, net of accumulated amortization of $38,263
and $33,040, respectively 170,345 175,568
Other intangibles, net of accumulated amortization of $26,573
and $23,809, respectively 22,192 24,956
Investments and other assets (Note 4) 1,932 4,357
-------- --------
Total Assets $483,539 $479,885
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ 18,533 $ 18,953
Other accrued liabilities (Note 8) 24,516 31,809
-------- --------
Total current liabilities 43,049 50,762
Long-term debt (Note 9) 265,800 10,800
Deferred income taxes (Note 11) 14,932 15,198
Other non-current liabilities (Note 10) 9,726 9,565
-------- --------
Total Liabilities 333,507 86,325
Stockholders' Equity (Notes 1, 12 and 13):
Divisional equity -- 393,560
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at December 31, 1997 and 1996
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 49,108,874 at December 31, 1997;
None at December 31, 1996 491 --
Additional paid-in capital 140,934 --
Retained earnings 8,607 --
-------- --------
Total Stockholders' Equity 150,032 393,560
-------- --------
Total Liabilities and Stockholders' Equity $483,539 $479,885
======== ========
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE>
CommScope, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income $ 37,458 $ 57,122 $ 47,331
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,677 18,952 17,219
Changes in assets and liabilities:
Accounts receivable 6,076 (19,775) (4,329)
Inventories (1,087) (12,059) (4,761)
Prepaid expenses and other current assets (1,152) (705) 159
Deferred income taxes 1,374 1,030 (1,895)
Accounts payable (420) 2,903 7,024
Other accrued liabilities (7,293) 3,783 (249)
Other non-current liabilities 161 2,139 1,365
Other 2,894 (1,426) 1,646
--------- --------- ---------
Net cash provided by operating activities 59,688 51,964 63,510
Investing Activities:
Additions to property, plant and equipment (29,871) (33,218) (27,281)
Acquisition of Teledyne Industries, Inc. assets, net -- (17,849) --
Investment in joint venture -- -- (1,844)
Other 268 65 770
--------- --------- ---------
Net cash used in investing activities (29,603) (51,002) (28,355)
Financing Activities:
Dividend paid to former parent company (265,212) -- --
Net borrowings under revolving credit facility 255,000 -- --
Debt issuance costs (705) -- --
Proceeds from issuance of long-term debt -- -- 10,800
Transfers to former parent company, net (15,838) (962) (45,955)
--------- --------- ---------
Net cash used in financing activities (26,755) (962) (35,155)
Change in cash and cash equivalents 3,330 -- --
Cash and cash equivalents, beginning of year -- -- --
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,330 $ -- $ --
========= ========= =========
</TABLE>
See notes to consoildated financial statements.
-25-
<PAGE>
CommScope, Inc.
Consolidated Statements of
Stockholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Number of
Common Additional Total
Shares Common Paid-In Divisional Retained Stockholders'
Outstanding Stock Capital Equity Earnings Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 -- $ -- $ -- $ 343,169 $ -- $ 343,169
Transfers to former parent (45,955) (45,955)
company, net
Other transactions with former (5,368) (5,368)
parent company
Net income 47,331 47,331
---------------------------------------------------------------------------------------
Balance December 31, 1995 -- -- -- 339,177 -- 339,177
Transfers to former parent (962) (962)
company, net
Other transactions with former (1,777) (1,777)
parent company
Net income 57,122 57,122
---------------------------------------------------------------------------------------
Balance December 31, 1996 -- -- -- 393,560 -- 393,560
Transfers to former parent (15,838) (15,838)
company, net
Dividend paid to former (265,212) (265,212)
parent company
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 -- 64 64
Net income from July 28, 1997
to December 31, 1997 8,607 8,607
---------------------------------------------------------------------------------------
Balance December 31, 1997 49,108,874 $ 491 $ 140,934 $ -- $ 8,607 $ 150,032
=======================================================================================
</TABLE>
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par
value.
No preferred stock is currently issued or outstanding - See Note 13.
See notes to consolidated financial statements.
-26-
<PAGE>
Notes to Consolidated Financial Statements
(In Thousands, Unless Otherwise Noted)
1. Background and Description of the Business
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 indirect subsidiary of General Instrument
Corporation ("General Instrument"), operates in the cable manufacturing
business. CommScope designs, manufactures and markets coaxial, fiber optic and
high performance electronic cables primarily used in communications, local area
network and industrial applications. CommScope is a leading manufacturer and
supplier of coaxial cable for cable television applications and other
communications applications in the United States. CommScope is also a leading
supplier of coaxial cable to international cable television markets.
General Instrument (i) transferred 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 and 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 (ii) distributed all of the outstanding shares of
capital stock of each of CommScope and NextLevel Systems to its stockholders on
a pro rata basis as a dividend in a series of transactions that was consummated
on July 28, 1997 (the "Distribution Date"). Approximately 147.3 million shares
of NextLevel Systems Common Stock, based on a 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 a 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, CommScope and
NextLevel Systems began operating as independent entities with publicly traded
common stock. General Instrument retained no ownership interest in either
CommScope or NextLevel Systems. Additionally, following the NextLevel
Distribution, General Instrument was renamed General Semiconductor, Inc.
("General Semiconductor") and effected a one for four reverse stock split.
Effective February 2, 1998, NextLevel Systems changed its name to General
Instrument Corporation ("GI").
For the purpose of governing certain of the ongoing relationships among
CommScope, NextLevel Systems and General Semiconductor after the Distribution
and to provide mechanisms for an orderly transition, CommScope, GI and General
Semiconductor have entered into various agreements, including a transition
services agreement and a tax sharing agreement, 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.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include CommScope and its
wholly-owned subsidiaries. All material intercompany accounts and transactions
are eliminated in consolidation.
Basis of Presentation
The accompanying financial statements for periods prior to the Distribution Date
include the assets, liabilities, revenues and expenses directly attributable to
CommScope's operations and an allocation of certain assets, liabilities, general
corporate and administrative expenses, and net interest expense from
-27-
<PAGE>
General Instrument. General corporate and administrative expenses were allocated
to CommScope on a consistent basis using management's estimate of services
provided to CommScope by General Instrument. Consolidated net interest expense
of General Instrument for each period prior to the Distribution was allocated to
CommScope based upon CommScope's net assets as a percentage of the total net
assets of General Instrument. The provision for income taxes for all periods
prior to the Distribution is based on CommScope's expected annual effective tax
rate, calculated assuming CommScope had filed separate tax returns as a
separate, free-standing entity. The allocation of expenses from General
Instrument were made consistently in each period. Although CommScope management
believes these allocations are reasonable, the financial results prior to the
Distribution do not necessarily reflect what the financial position and results
of operations of CommScope would have been had it operated as a separate,
free-standing entity, and may not be indicative of future operations or
financial position.
Divisional equity, as presented in the consolidated balance sheets and the
consolidated statements of stockholders' equity, reflects 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. Transfers of capital to / from General Instrument by the
Company reflect the net cash generated or used by the Company during each period
prior to the Distribution as a participant in the General Instrument cash
management program. After the dividend payment made to General Instrument in
accordance with the terms of the Distribution, the remaining divisional equity
was contributed to the Company by General Instrument and is reflected as common
stock and additional paid-in capital. Net income of the Company after the
Distribution is reflected as a component of retained earnings.
At the Distribution Date, CommScope implemented a separate cash management
program and assumed responsibility for the general corporate and administrative
expenses, financing costs and income taxes associated with operating a separate,
free-standing public company.
CommScope's earnings were included in General Instrument's results of operations
for all periods presented prior to the Distribution. 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 9). Accordingly, no historical earnings
per share data has been presented for all periods included in the consolidated
financial statements. Alternatively, pro forma earnings per share data is
presented as described in Note 3.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at the time of purchase.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out
("FIFO") basis, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Provisions for depreciation
are based on estimated useful lives of the assets using the straight-line
method. Average useful lives are 10 to 35 years for buildings and improvements
and 3 to 10 years for machinery and equipment. Expenditures for repairs and
maintenance are charged to expense as incurred.
Goodwill, Other Intangibles and Other Long-Lived Assets
-28-
<PAGE>
Goodwill is being amortized on a straight-line basis over 35 to 40 years. Other
intangibles consist primarily of patents and customer lists which are being
amortized on a straight-line basis over approximately 17 years.
Management continually reassesses the appropriateness of both the carrying value
and remaining life of long-lived assets by assessing recoverability based on
forecasted operating cash flows, on an undiscounted basis, and other factors.
Management believes that, as of December 31, 1997, the carrying value and
remaining life of recorded goodwill, other intangibles and other long-lived
assets is appropriate.
Income Taxes
CommScope's operating results were part of General Instrument's consolidated
federal and certain state income tax returns prior to the Distribution,
including 1997 income tax returns for the period up to the Distribution Date.
Federal and certain state income taxes which were currently payable or
receivable and changes in deferred tax assets and liabilities prior to the
Distribution were settled with General Instrument through divisional equity.
Deferred income taxes reflect the future tax consequences of differences between
the financial reporting and tax bases of assets and liabilities.
The provision for income taxes has been determined as if CommScope had filed
separate tax returns for the periods presented prior to the Distribution. Future
tax rates could vary from the historical effective tax rates depending upon
CommScope's future legal structure and tax elections.
Under the tax sharing agreement entered into with GI and General Semiconductor
in connection with the Distribution, adjustments to taxes paid by General
Instrument in the pre-Distribution period that are clearly attributable to the
business of CommScope will be the responsibility of the Company.
Advertising Costs
Advertising costs are expensed in the period in which they are incurred.
Advertising expense was $1.2, $0.8 and $0.5 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Use of Estimates in the Preparation of the Financial Statements
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
Impact of Newly Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 requires disclosure
of comprehensive income (which is defined as "the change in equity during a
period excluding changes resulting from investments by stockholders and
distributions to stockholders") and its components. SFAS No. 130 is effective
for the Company beginning with the year ending December 31, 1998 and requires
reclassification of comparative years. Comprehensive income would not differ
from net income during the three years ended December 31, 1997.
-29-
<PAGE>
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. SFAS No. 131 is
effective for the Company beginning with the year ending December 31, 1998.
Management is evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
3. Pro Forma Financial Information and Earnings Per Share
The accompanying unaudited pro forma financial information presents 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 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 9). Pro forma earnings per
share is computed as the pro forma net income for each period presented divided
by the pro forma common and common equivalent shares outstanding for each
period, and assumes that a total of 49.1 million common shares outstanding for
basic earnings per share and 49.2 million common and common equivalent shares
outstanding for diluted earnings per share at the Distribution Date were
outstanding since January 1, 1996. Additionally, the weighted average number of
common and common equivalent shares outstanding for the year ended December 31,
1997 gives effect to changes in common shares outstanding and in the dilutive
effect of stock options subsequent to the Distribution Date.
Giving effect to the Distribution as of January 1, 1996, the following table
presents pro forma net income and earnings per share for the Company and
reconciles the weighted average number of common shares outstanding to the
weighted average number of common and common equivalent shares outstanding used
in the computation of basic and diluted earnings per share:
Pro Forma (A)
Year Ended
December 31,
-------------------
1997 1996
------- -------
Net Income $34,604 $51,908
======= =======
Basic and diluted earnings per share $ 0.70 $ 1.06
======= =======
Average number of common shares outstanding -
for basic earnings per share
49,107 49,105
Dilutive effect of employee stock options 131 95
------- -------
Average number of common and common equivalent
shares outstanding - for diluted earnings per share 49,238 49,200
======= =======
(A) Assumes a net debt level of $275 million at the beginning of each period
presented, net interest expense of $18.1 million and income tax expense of $22.3
million for the year ended December 31, 1997, and net interest expense of $18.4
million and income tax expense of $31.8 million for the year ended December 31,
1996.
For additional information regarding the outstanding employee stock options, see
Note 12.
-30-
<PAGE>
4. Joint Venture
In August 1995, CommScope entered into a joint venture agreement with Pacific
Dunlop Ltd. to produce cable in Australia, acquiring a 49% ownership interest.
The Company's share of income and losses from the joint venture is recorded as
other income (expense) in the consolidated statements of income using the equity
method of accounting. The Company's share of income from the joint venture was
$1.3 million in 1996 and was not significant in 1995. The Company's share of
losses from the joint venture in 1997 was $6.1 million, including the
significant fourth quarter charges discussed below.
Due to certain governmental regulation changes and other events affecting the
market for cable products in Australia during 1997, manufacturing operations of
the joint venture were suspended in August 1997 and formally discontinued by
decision of the joint venture's directors in December 1997. During the fourth
quarter of 1997, CommScope recorded pre-tax charges of $3.9 million as other
expense to reduce its total current financial investment in the joint venture to
expected net realizable value. Net of tax benefits of $0.8 million, these
charges reduced 1997 net income by $3.1 million ($0.06 per share).
During 1997, 1996 and 1995 CommScope sold $10.3, $24.7 and $20.2 million,
respectively, of cable products to the joint venture. Gross profit from
CommScope's sale of cable products remaining in the joint venture's inventory
has been eliminated to the extent of CommScope's ownership interest.
5. Acquisitions and Divestitures
In May 1996, CommScope acquired certain assets of the high performance wire and
cable manufacturing operation of Teledyne Industries, Inc. ("Teledyne"), which
specializes in high temperature aerospace and industrial cables (the
"High-Temperature Aerospace and Industrial Cable Products Business") and local
area network cables, for a net purchase price of $17.8 million. The acquisition
was accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair value at the date of the
acquisition.
In February 1998, the Company sold certain real and personal property and
inventories of the High-Temperature Aerospace and Industrial Cable Products
Business to Alcatel NA Cable Systems, Inc. for approximately $12 million. Sales
from the High-Temperature Aerospace and Industrial Cable Products Business
totaled $16.5 million in 1997 and $7.3 million in 1996 subsequent to the
acquisition from Teledyne.
6. Inventories
December 31,
---------------------------
1997 1996
------- -------
Raw materials $16,376 $23,206
Work in process 8,860 4,978
Finished goods 16,987 12,952
------- -------
$42,223 $41,136
======= =======
The principal raw materials purchased by CommScope (fabricated aluminum, copper
and plastics) are subject to changes in market price as these materials are
linked to the commodity markets. To the extent that CommScope is unable to pass
on cost increases to customers, the cost increases could have a significant
impact on the results of operations of CommScope.
-31-
<PAGE>
7. Property, Plant and Equipment
December 31,
-----------------------------
1997 1996
--------- ---------
Land and land improvements $ 3,218 $ 2,586
Buildings and improvements 47,202 33,534
Machinery and equipment 142,618 107,263
Construction in process 7,375 27,947
--------- ---------
200,413 171,330
Accumulated depreciation (67,178) (54,308)
--------- ---------
$ 133,235 $ 117,022
========= =========
8. Other Accrued Liabilities
December 31,
-----------------------------
1997 1996
--------- ---------
Salaries and compensation liabilities $ 14,515 $ 18,618
Product reserves 1,791 4,757
Interest 2,540 53
Other 5,670 8,381
--------- ---------
$ 24,516 $ 31,809
========= ==========
9. Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------------------
1997 1996
--------- ---------
Credit Agreement (as defined below) $255,000 $ --
IDA Notes (as defined below) 10,800 10,800
-------- --------
265,800 10,800
Less current portion -- --
-------- --------
$265,800 $ 10,800
======== ========
On July 23, 1997 the Company entered into an unsecured $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 debt issuance costs of
the Credit Agreement. The Company intends to utilize the Credit Agreement in the
future for, among other things, general working capital needs, financing capital
expenditures 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, none of which are outstanding at December 31, 1997. All
amounts borrowed under the Credit Agreement are due on December 31, 2002.
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<PAGE>
At the Company's option, advances under the Revolving Credit Loans are available
by choosing from one of the following types of loans, which primarily are
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 are 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 maintaining certain
minimum levels of consolidated net worth, leverage ratio and interest coverage
ratio. The Company was in compliance with these covenants at December 31, 1997.
In January 1995, CommScope entered into a $10.8 million loan agreement in
connection with the issuance of notes by the Alabama State Industrial
Development Authority (the "IDA Notes"). Borrowings under the IDA Notes bear
interest at variable rates based upon current market conditions for short-term
financing. All outstanding borrowings under the IDA Notes are due on January 1,
2015. The IDA Notes also provide for the issuance of letters of credit up to
$11.0 million, none of which was outstanding at December 31, 1997.
At December 31, 1997 the weighted average interest rate on outstanding
borrowings under the Credit Agreement and the IDA Notes was 6.3%.
As of December 31, 1997, the Company had entered into interest rate swap
agreements to effectively convert an aggregate amount of $100 million of
outstanding variable-rate borrowings to a fixed-rate basis. Contracts for
notional amounts of $50 million each expire in February and April 1999,
respectively. The contract expiring in April 1999 may be terminated at the
option of the counterparty to the swap agreement in October 1998. Under the
agreements, interest settlement payments will be made quarterly based upon the
spread between the three month LIBOR, as adjusted quarterly, and fixed rates of
5.92% and 5.79%, respectively. Net payments or receipts resulting from the swap
agreements are recorded as adjustments to interest expense in each quarter.
Interest paid during the fiscal years ended December 31, 1997, 1996 and 1995
totaled $5.5, $0.6 and $0.6 million, respectively. Interest costs incurred prior
to the Distribution, with the exception of interest on the IDA Notes, were
settled with General Instrument through divisional equity.
10. Employee Benefit Plans
Profit Sharing and Savings Plan. The Company sponsors the CommScope, Inc. of
North Carolina Employees' Profit Sharing and Savings Plan (the "Profit Sharing
and Savings Plan"). The majority of contributions to the Profit Sharing and
Savings Plan are made at the discretion of CommScope's Board of Directors. In
addition, eligible employees may elect to contribute up to 10% of their
salaries.
-33-
<PAGE>
CommScope contributes an amount equal to 50% of the first 4% of the employee's
salary that the employee contributes. During each of the years ended December
31, 1997, 1996 and 1995 CommScope contributed $8.4, $6.5 and $7.0 million,
respectively, to the Profit Sharing and Savings Plan, of which $7.0, $5.5 and
$6.0 million each year was discretionary.
Retirement Plan. CommScope also sponsors a non-qualified unfunded supplemental
executive retirement plan that provides certain executives with defined pension
benefits. Net pension cost consisted of interest costs of approximately $0.3
million during the year ended December 31, 1997 and $0.2 million during each of
the years ended December 31, 1996 and 1995, respectively.
The funded status of the supplemental executive retirement plan and the related
amounts accrued at each balance sheet date, included in other non-current
liabilities, are as follows:
December 31,
-------------------------
1997 1996
------- -------
Actuarial present value of:
Vested benefits $ 2,299 $ 1,165
======= =======
Accumulated benefits $ 3,210 $ 2,436
======= =======
Projected benefit obligation $ 4,785 $ 3,445
Market value of plan assets -- --
------- -------
Unfunded benefit obligation 4,785 3,445
Unrecognized gain (loss) (593) 463
------- -------
Accrued pension obligation $ 4,192 $ 3,908
======= =======
Actuarial assumptions:
Discount rate 7.25% 7.75%
Compensation increases 4.75% 4.75%
Postretirement. CommScope sponsors an unfunded postretirement group medical and
dental plan (the "Postretirement Plan") that provides benefits to full-time
employees who retire from the Company at age 65 or greater with a minimum of 10
years of active service. The Postretirement Plan is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance, with Medicare as the primary provider of
health-care benefits for eligible retirees. The accounting for the
Postretirement Plan anticipates future cost-sharing changes to the written plan
that are consistent with the Company's expressed intent to maintain a consistent
level of cost sharing with retirees. The Company recognizes the cost of
providing and maintaining postretirement benefits during employees' active
service periods.
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<PAGE>
The funded status of the Postretirement Plan and the related amounts accrued at
each balance sheet date, included in other non-current liabilities, are as
follows:
December 31,
-------------------
1997 1996
------- -------
Accumulated postretirement benefit obligation ("APBO"):
Retirees $ 219 $ 31
Active participants 8,362 4,232
------- -------
Total APBO 8,581 4,263
Unrecognized loss (3,449) (460)
------- -------
Accrued postretirement benefit obligation $ 5,132 $ 3,803
======= =======
Discount rate used in determining APBO 7.25% 7.75%
Net postretirement benefit cost for the Postretirement Plan consists of the
following components:
Year Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
Service cost $ 701 $ 412 $ 242
Interest 549 263 182
Net amortization and deferral 113 -- (10)
------ ------ ------
Net postretirement benefit cost $1,363 $ 675 $ 414
====== ====== ======
The assumed rate of future increases in health care costs is 10% for 1998 (11%
for 1997) and is assumed to decrease gradually to 4.5% for 2005 and remain at
that level thereafter (compared to a long-term rate of inflation of 6% for
1996). Increasing the assumed health care cost trend rate by one percentage
point in each year would increase the APBO as of December 31, 1997 and 1996 by
$2.3 million and $1.4 million, respectively, and net postretirement benefit cost
for the years ended December 31, 1997 and 1996 by $0.4 million and $0.2 million,
respectively. The increase in the APBO, accrued postretirement benefit
obligation and net postretirement benefit cost as of and for the years ended
December 31, 1997 as compared to December 31, 1996 reflect actuarial changes in
expected future claims costs.
-35-
<PAGE>
11. Income Taxes
The components of the provision for income taxes and the reconciliation of the
statutory U.S. federal income tax rate to the Company's effective rate are as
follows:
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Current:
Federal $ 20,200 $ 29,928 $ 27,796
State 2,482 4,023 3,481
-------- -------- --------
Current income tax provision 22,682 33,951 31,277
-------- -------- --------
Deferred:
Federal 1,176 1,044 (1,782)
State 198 (14) (113)
-------- -------- --------
Deferred income tax provision 1,374 1,030 (1,895)
-------- -------- --------
Total provision for income taxes $ 24,056 $ 34,981 $ 29,382
======== ======== ========
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.7 2.8 2.8
Foreign sales corporation benefit (2.8) (2.2) (2.3)
Permanent items and other 3.1 2.4 2.8
Non-deductible capital losses 1.1 -- --
-------- -------- --------
Effective income tax rate 39.1% 38.0% 38.3%
======== ======== ========
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<PAGE>
The components of deferred income tax assets and liabilities and the
classification of deferred tax balances on the balance sheet are as follows:
December 31,
----------------------
1997 1996
-------- --------
Deferred tax assets:
Accounts receivable and inventory reserves $ 6,347 $ 4,775
Product reserves 681 1,785
Employee benefits 3,208 4,399
Capital loss carryforward 1,764 --
Postretirement benefits 3,543 2,894
State tax credit carryforwards 2,412 --
Other 1,868 2,950
-------- --------
19,823 16,803
Valuation allowance (3,090) --
-------- --------
Total deferred tax assets 16,733 16,803
Deferred tax liabilities:
Property, plant and equipment and intangibles (19,563) (18,259)
-------- --------
Net deferred tax liability $ (2,830) $ (1,456)
======== ========
Current deferred tax asset $ 12,102 $ 13,742
Noncurrent deferred tax liability (14,932) (15,198)
-------- --------
Net deferred tax liability $ (2,830) $ (1,456)
======== ========
The valuation allowance at December 31, 1997 relates to capital loss
carryforwards and certain state tax credit carryforwards expiring in the years
2000 - 2004 for which the available benefits are uncertain.
The federal and certain state income taxes which were currently payable or
receivable prior to the Distribution were settled with General Instrument
through divisional equity. Prior to the Distribution, General Instrument settled
certain tax matters which decreased CommScope's amount payable through
divisional equity to General Instrument and resulted in credits of $1.8 and $5.4
million to goodwill for 1996 and 1995, respectively, since these matters related
to periods prior to the acquisition of General Instrument by affiliates of
Forstmann Little & Co. Subsequent to the Distribution, income tax payments made
by the Company for the tax period from the Distribution Date to December 31,
1997 totalled $9.0 million.
12. Stock Compensation Plans
Prior to the Distribution, the Company participated in the General Instrument
Corporation 1993 Long-Term Incentive Plan (the "General Instrument Incentive
Plan"). During 1997, the Company adopted the CommScope, Inc. 1997 Long-Term
Incentive Plan (the "CommScope Incentive Plan"), which is substantially
identical in design with the General Instrument Incentive Plan. Under the
CommScope Incentive Plan, designated employees of the Company are eligible to
receive awards in the form of stock options, stock appreciation rights,
restricted stock grants and performance shares. Awards of stock options made to
Company employees and non-employee directors of General Instrument prior to the
Distribution under the General Instrument Incentive Plan were transferred to the
CommScope Incentive Plan at the
Distribution Date (the "Substitute Options"). An aggregate of 2,149,030 shares
of Substitute Options were transferred at the Distribution, and an additional
2,200,000 shares were initially reserved for future
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<PAGE>
issuance ("LTIP Options") under the CommScope Incentive Plan. Substitute Options
that are forfeited due to employee termination or other reasons do not increase
the amount of shares available for future issuance. As of December 31, 1997,
stock options have been granted with terms of 10 years, vesting in equal amounts
during periods ranging from the first two to the first four anniversaries of the
grant date.
As approved by the Company's Board of Directors, each director who is neither an
employee nor a general partner of a partnership affiliated with Forstmann Little
& Co., upon initial election to the Company's Board, will receive 1,000 shares
of common stock, which will be immediately vested, and granted an option to
purchase 20,000 shares of common stock at the fair market value on the grant
date vesting in equal amounts on each of the first three anniversaries of the
grant date. If a director remains in office, a similar option to purchase 20,000
shares of common stock will be granted every three years.
The following table summarizes the Company's stock option activity and related
information from the Distribution Date:
Weighted Average
Options Exercise Price
------- ---------------
Substitute options transferred from
General Instrument Incentive Plan 2,149,030 $ 12.70
Granted 1,674,200 12.31
Canceled (15,617) 13.19
---------- -----------
Outstanding at December 31, 1997 3,807,613 $ 12.53
========== ===========
Exercisable at December 31, 1997 927,601 $ 12.55
========== ===========
Authorized shares reserved for future
issuance at December 31, 1997
525,800
==========
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Options Life Price Options Price
- --------- ------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
$1 to $12 228,560 5.1 $ 8.87 220,212 $ 8.90
12 to 14 3,489,348 9.0 12.68 701,313 13.67
14 to 20 89,705 9.3 15.88 6,076 16.08
------------------------------------------- ---------------------------
$1 to $20 3,807,613 8.8 $ 12.53 927,601 $ 12.55
============================================ ===========================
</TABLE>
The Company has elected to account for stock options under Accounting Principles
Board Opinion No. 25 and has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized for the CommScope Incentive Plan. Had compensation cost
for stock options been determined based on the fair value of the option at the
date of grant consistent with the requirements of SFAS No. 123, pro forma net
income and earnings per share (basic and diluted) for the years ended December
31, 1997 and 1996, after pro forma
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<PAGE>
adjustments giving effect to the Distribution (see Note 3), would have been
$32,546 ($0.66 per share) and $51,520 ($1.05 per share), respectively.
The weighted average fair value of LTIP Options granted in 1997 was $5.87. The
fair value of each option grant (including Substitute Options) was estimated on
the date of grant using the Black-Scholes option pricing model with a risk free
interest rate of 6.0%, expected term of 4.5 years, expected volatility of
47.59%, and expected dividend yield of 0.0% for both 1997 and 1996. The pro
forma results under SFAS No. 123 include compensation cost recognized on a
straight-line basis over the vesting periods of the grants and does not take
into consideration the pro forma compensation costs for grants made prior to
1995. Accordingly, the resulting pro forma disclosures at December 31, 1997 may
not be representative of those to be expected in future years.
13. Stockholder Rights Plan
On June 10, 1997, the Board of Directors adopted a stockholder rights plan
designed to protect stockholders from various abusive takeover tactics,
including attempts to acquire control of the Company at an inadequate price.
Under the rights plan, each stockholder, subsequent to the distribution date of
July 29, 1997, received a dividend of one right for each outstanding share of
Common Stock. The rights are attached to, and presently only trade with, the
Common Stock and currently are not exercisable. Except as specified below, upon
becoming exercisable, all rights holders will be entitled to purchase from the
Company one one-thousandth of a share of Series A Junior Participating Preferred
Stock ("Participating Preferred Stock") at a price of $60.
The rights become exercisable and will begin to trade separately from the Common
Stock upon the earlier of (i) the first date of public announcement that a
person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock or (ii) 10 business days following a person's or
group's commencement of, or announcement of, and intention to commence a tender
or exchange offer, the consummation of which would result in beneficial
ownership of 15% or more of the Common Stock. The rights will entitle holders
(other than an Acquiring Person, as defined) to purchase Common Stock having a
market value (immediately prior to such acquisition) of twice the exercise price
of the right. If the Company is acquired through a merger or other business
combination transaction (other than a Permitted Offer, as defined), each right
will entitle the holder to purchase $120 worth of the surviving company's common
stock for $60. The Company may redeem the rights for $0.01 each at any time
prior to such acquisitions. The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved the creation
of, out of the authorized but unissued shares of preferred stock of the Company,
Participating Preferred Stock, consisting of 0.4 million shares with a par value
of $0.01 per share. The holders of the Participating Preferred Stock are
entitled to receive dividends, if declared by the Board of Directors, from funds
legally available. Each share of Participating Preferred Stock is entitled to
one thousand votes on all matters submitted to stockholder vote. The shares of
Participating Preferred Stock are not redeemable by the Company nor convertible
into Common Stock or any other security of the Company.
14. Concentrations of Credit Risk and Financial Instruments
Concentrations of credit risk with respect to trade receivables are limited due
to the wide variety of customers and markets into which the Company's products
are sold, as well as their dispersion across many different geographic areas. As
a result, at December 31, 1997 and 1996 the Company did not consider itself to
have any significant concentrations of credit risk.
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and interest
rate swap contracts. At December 31, 1997 and 1996 the book values of each of
these financial instruments are considered representative of their respective
fair
-39-
<PAGE>
values due to their variable interest rates and/or short terms to maturity. Fair
value of the Company's debt is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
arrangements.
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 December 31,
1997, the Company evaluated its foreign-exchange and commodity exposures and
concluded that it was not currently beneficial to use financial instruments to
hedge its current positions with respect to those exposures. Financial
instruments utilized to reduce market risk exposures resulting from interest
rate fluctuations are discussed in Note 9.
15. Commitments and Contingencies
CommScope leases certain equipment under operating leases which expire at
various dates through the year 2008. Rent expense was $3.0, $3.9 and $3.0
million in 1997, 1996 and 1995, respectively. Future minimum rental payments
required under operating leases with initial terms of one year or more as of
December 31, 1997 are: $2,724 in 1998; $2,490 in 1999; $1,870 in 2000; $1,487 in
2001; $1,085 in 2002; and $2,778 thereafter.
CommScope is either a plaintiff or a defendant in several pending legal matters
in the normal course of business, none of which management believes will have a
material adverse effect on CommScope's financial statements upon final
disposition. In addition, CommScope is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge and disposal of
hazardous materials. CommScope'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 CommScope's financial statements.
16. Industry Segments, Major Customers and Geographical Information
The Company's operations are conducted within one business segment which
designs, manufactures and markets coaxial, fiber optic and high performance
electronic cables primarily used in communications, local area network and
industrial applications.
Sales of coaxial cable products to a major customer are approximately 7%, 11%
and 13% of net sales in 1997, 1996 and 1995, respectively. No other customer
accounts for 10% or more of net sales during any of the three fiscal years ended
December 31, 1997.
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<PAGE>
Export sales from the United States comprise 33%, 35% and 34% of net sales for
1997, 1996 and 1995, respectively. Export sales by geographic region are as
follows (in millions):
Years Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
Latin America $ 74.3 $ 62.9 $ 47.4
Asia / Pacific Rim 57.6 72.6 55.0
Europe 48.0 45.0 41.9
Canada 17.5 17.7 14.1
Other 3.0 2.7 6.1
------------------------------------
Total $200.4 $200.9 $164.5
====================================
17. Quarterly Financial Data (unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1997:
<S> <C> <C> <C> <C>
Net sales $147,874 $159,291 $147,269 $144,782
Gross profit 39,240 39,371 31,941 30,448
Operating income 25,353 23,138 16,261 14,430
Net income 14,155 12,950 7,424 2,929
Pro forma net income 12,997 11,664 7,014 n/a
Pro forma basic and diluted earnings per share (1) .26 .24 .14 n/a
Fiscal 1996:
Net sales $130,913 $142,014 $148,580 $150,705
Gross profit 34,408 36,640 40,252 43,789
Operating income 22,250 23,216 26,809 27,979
Net income 12,550 12,942 15,439 16,191
Pro forma net income 11,176 11,697 14,089 14,946
Pro forma basic and diluted earnings per share (1) .23 .24 .29 .30
</TABLE>
(1) Historical earnings per share data is not applicable through September 30,
1997 as CommScope's earnings were part of the results of General Instrument -
see Note 1. Historical earnings per share (basic and diluted) for the fourth
quarter of 1997 is $0.06. Pro forma net income and earnings per share has been
prepared in a manner consistent with the presentation of pro forma financial
information in Note 3.
-41-
<PAGE>
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
--------------------------
Charged to
Other
Balance at Charged to Accounts Deductions Balance
Beginning of Costs and (Describe) (Describe) at End
Description Period Expenses (1) (2) of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 1997 $3,761 $ 525 $ -- $ 301 $3,985
Year ended December 31, 1996 $3,114 $ 750 $ 150 $ 253 $3,761
Year ended December 31, 1995 $2,765 $ 420 $ -- $ 71 $3,114
</TABLE>
(1) Valuation accounts of acquired company. Reserves are deducted from assets
to which they apply.
(2) Uncollectible customer accounts written off, net of recoveries of
previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-42-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections captioned
"Management of the Company--Board of Directors of the Company", "Management of
the Company--Committees of the Board of Directors--Board Meetings", and
"Management of the Company--Section 16(a) Beneficial Ownership Reporting
Compliance" included in the Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders ("1998 Proxy Statement"), which sections are
incorporated herein by reference.
Executive Officers
Set forth below is certain information with respect to the executive
officers of the Company as of March 1, 1998.
Name and Title Age Business Experience
- -------------- --- -------------------
Frank M. Drendel 53 Frank M. Drendel has been Chairman and
Chairman and Chief Chief Executive Officer of the Company
Executive Officer since the Spin-off. He has served as
Chairman and President of CommScope NC,
currently a wholly-owned subsidiary of
the Company, from 1986 to the Spin-off
and has served as Chief Executive
Officer of CommScope NC since 1976. Mr.
Drendel is a director of General
Instrument Corporation and Nextel
Communications, Inc.
Brian D. Garrett 49 Brian D. Garrett has been President and
President and Chief Chief Operating Officer of the Company
Operating Officer since October, 1997. He has served as
Executive Vice President, Operations of
CommScope NC since 1997. From 1996 to
1997, he was Executive Vice President
and General Manager of the Network Cable
Division of CommScope NC and Vice
President and General Manager of the
Network Cable Division from 1986 to
1996.
Jearld L. Leonhardt 49 Jearld L. Leonhardt has been Executive
Executive Vice President, Vice President, Finance and
Finance and Administration Administration of the Company since the
Spin-off. He was Treasurer of the
Company from the Spin-off until
September 1997. He has served as
Executive Vice President, Finance and
Administration of CommScope NC since
1983 and Treasurer of CommScope NC from
1983 until September 1997.
William R. Gooden 56 William R. Gooden has been Senior Vice
Senior Vice President President and Controller of the Company
and Controller since the Spin-off. He has served as
Senior Vice President and Controller of
CommScope NC since 1996 and was Vice
President and Controller from 1991 to
1996.
Larry W. Nelson 55 Larry W. Nelson has been Executive Vice
Executive Vice President, President, Development of the Company
Development since the Spin-off. He has served as
Executive Vice President, Development of
CommScope NC since 1997. From 1988 to
1997, he was Executive Vice President
and General Manager of the Cable TV
Division of CommScope NC.
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<PAGE>
Name and Title Age Business Experience
- -------------- --- -------------------
Frank J. Logan 55 Frank J. Logan has been Executive Vice
Executive Vice President, President, International of the Company
International since the Spin-off. He has served as
Executive Vice President, International
of CommScope NC since 1996. From 1989 to
1996, he was Vice President,
International of CommScope NC.
Gene W. Swithenbank 58 Gene W. Swithenbank has been Executive
Executive Vice President, Vice President, Sales and Marketing of
Sales and Marketing the Company since the Spin-off. He has
served as Executive Vice President,
Sales and Marketing for CommScope NC
since 1997 and Executive Vice President,
CATV Sales and Marketing since 1996.
From 1992 to 1996, Mr. Swithenbank was
Senior Vice President CATV Sales of
CommScope NC.
Randall Crenshaw 41 Randall Crenshaw has been Executive Vice
Executive Vice President, President, Procurement/Logistics of the
Procurement/Logistics Company since the Spin-off. He has
served as Executive Vice President,
Procurement/Logistics of CommScope NC
since 1997. From 1994 to 1997, Mr.
Crenshaw was Vice President Operations
for the Network Cable Division of
CommScope NC. Prior to that time, Mr.
Crenshaw has held various positions with
CommScope NC since 1985.
Frank B. Wyatt, II 35 Frank B. Wyatt, II has been Vice
Vice President, General President, General Counsel and Secretary
Counsel and Secretary of the Company since the Spin-off. He
has served as Vice President of
CommScope NC since May 1997 and General
Counsel and Secretary of CommScope NC
since April 1996. From 1987 to March
1996, he was an attorney with the law
firm of Bell, Seltzer, Park & Gibson,
P.A. (now Alston & Bird LLP).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the section captioned
"Management of the Company" in the Company's 1998 Proxy Statement and is
incorporated by reference herein. The sections captioned "Management of the
Company--Compensation Committee Report on Compensation of Executive Officers"
and "Performance Graph" in the Company's 1998 Proxy Statement are not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in the sections captioned
"Beneficial Ownership of Common Stock" and "Management of the Company--Stock
Options" in the Company's 1998 Proxy Statement, which sections are incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section captioned
"Management of the Company--Certain Relationships and Related Transactions" in
the Company's 1998 Proxy Statement and is incorporated by reference herein.
-44-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements.
The following consolidated financial statements of CommScope,
Inc. are included under Part II, Item 8:
Independent Auditors' Report.
Consolidated Statements of Income for the Years
ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts. Included under
Part II, Item 8.
Certain schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
None.
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CommScope, Inc.
Date: March 31, 1998
By: /s/ Frank M. Drendel
------------------------------------
Frank M. Drendel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Frank M. Drendel Chairman of the Board and March 31, 1998
- ------------------------- Chief Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President, March 31, 1998
- ------------------------- Finance and Administration
Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President March 31, 1998
- ------------------------- and Controller
William R. Gooden (Principal accounting officer)
/s/ Edward D. Breen Director March 31, 1998
- -------------------------
Edward D. Breen
/s/ Nicholas C. Forstmann Director March 31, 1998
- -------------------------
Nicholas C. Forstmann
/s/ Boyd L. George Director March 31, 1998
- -------------------------
Boyd L. George
/s/ George N. Hutton Director March 31, 1998
- -------------------------
George N. Hutton
/s/ James N. Whitson Director March 31, 1998
- -------------------------
James N. Whitson
-46-
<PAGE>
Index of Exhibits
Exhibit No. Description
- ----------- -----------
3.1* Amended and Restated Certificate of Incorporation of CommScope,
Inc.
3.2* Amended and Restated By-Laws of CommScope, Inc.
4.1** Rights Agreement, dated June 12, 1997, between CommScope, Inc.
and ChaseMellon Shareholder Services, L.L.C.
10.1* Employee Benefits Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.2* Debt and Cash Allocation Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.3* Insurance Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
10.4* Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
10.5* Trademark License Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.6* Transition Services Agreement, dated as of July 25, 1997, between
NextLevel Systems, Inc. and CommScope, Inc.
10.7* Credit Agreement, dated as of July 23, 1997, among CommScope,
Inc. of North Carolina, Certain Banks, The Chase Manhattan Bank,
as Administrative Agent and The Chase Manhattan Bank, Bank of
America National Trust and Savings Association, BankBoston, N.A.,
Bank of Tokyo-Mitsubishi Trust Company, CIBC, Inc., Credit
Lyonnais Atlanta Agency, First Union National Bank, The Fuji
Bank, Limited, Atlanta Agency, NationsBank, N.A., Toronto
Dominion (New York), Inc. and Wachovia Bank, N.A. as Co-Agents.
10.8*+ The CommScope, Inc. 1997 Long-Term Incentive Plan.
10.9***+ Form of Severance Protection Agreement between the Company and
certain executive officers.
10.10+ Employment Agreement between Frank Drendel, General Instrument
Corporation and CommScope, Inc. of North Carolina, the letter
Agreement related thereto dated May 20, 1993 and Amendment to
Employment Agreement dated July 25, 1997 (collectively, the
"Drendel Employment Agreement").
21. Subsidiaries of the Registrant.
23. Consent of Deloitte & Touche LLP.
27. Financial Data Schedule (Filing only for the Electronic Data
Gathering, Analysis and Retrieval system of the U.S. Securities
and Exchange Commission.)
99. Forward-Looking Information
- ----------
* Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1997 (File No. 1-12929).
** Incorporated herein by reference from the Registration Statement on Form
8-A filed June 30, 1997 (File No. 1-12929).
*** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (File No. 1-12929).
+ Management Compensation
Exhibit 10.10
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment (the "Amendment") is made as of July 25, 1997 by and between
Frank M. Drendel (the "Executive") and General Instrument Corporation, a
Delaware corporation ("General Instrument").
WHEREAS, Comm/Scope Company ("CommScope"), a North Carolina corporation,
the Executive, and General Instrument entered into an employment agreement (the
"Agreement") as of November 28, 1988;
WHEREAS, Section 11 of the Agreement provides that the Executive and
General Instrument may modify the provisions of the Agreement which apply to
General Instrument;
WHEREAS, the Board of Directors of General Instrument has approved in
principle a spin-off transaction, subject to certain conditions, pursuant to
which the outstanding shares of common stock of NextLevel Systems, Inc., a
Delaware corporation ("NextLevel Systems"), would be distributed on a pro rata
basis to the stockholders of General Instrument followed by the distribution
(the "Distribution") on a pro rata basis to the holders of common stock of
NextLevel Systems (which holders also will be the stockholders of General
Instrument) of the outstanding shares of common stock of CommScope, Inc., the
parent company of CommScope;
WHEREAS, after the date of the Distribution (the "Distribution Date"),
General Instrument intends that Section 8 and the applicable provisions of
Sections 9 through 18 of the Agreement will no longer apply to General
Instrument, the Executive wishes to no longer be bound by such provisions, and
the Executive and General Instrument wish to modify the Agreement to reflect
their intentions;
NOW, THEREFORE, the Executive and General Instrument agree as follows:
Effective as of the Distribution Date, Section 8 will no longer apply to
General Instrument and Section 8 and each reference to General Instrument in
Sections 9 through 18 of the Agreement are hereby deleted.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
/s/ Frank M. Drendel
-------------------------------
Frank M. Drendel
GENERAL INSTRUMENT CORPORATION
By: /s/ Thomas A. Dumit
--------------------------------
Title:
<PAGE>
[Letterhead of General Instrument]
[RECEIVED
MAR 20 1997
LEGAL DEPT.]
May 20, 1993
Mr. Frank M. Drendel, President
Comm/Scope, Inc.
1375 Lenoir-Rhyne Boulevard
P.O. Box 339
Hickory, NC 28601
Re: Employment Agreement
Dear Frank:
This letter confirms our agreement that, while you are employed by General
Instrument Corporation ("GI"), if GI maintains a management incentive
compensation plan for the benefit of its executive officers, your participation
in that plan on a substantially similar basis as the presidents of GI's other
broadband divisions shall satisfy Section 4 of that certain Employment
Agreement, dated as of November 28, 1988, by and between Comm/Scope, Inc.
(formerly Comm/Scope Company) and you.
Very truly yours,
/s/ Thomas A. Dumit
Accepted and Agreed to:
/s/ Frank M. Drendel
- ---------------------------------
Frank M. Drendel
<PAGE>
EMPLOYMENT AGREEMENT
This AGREEMENT is made as of November 28, 1988 by and between COMM/SCOPE
COMPANY, a North Carolina corporation (the "Company"), and FRANK M. DRENDEL (the
"Executive"). General Instrument Corporation, a Delaware corporation ("General
Instrument"), is also a party to this Agreement to the extent set forth in
Section 8 hereof and the related provisions of Sections 9 through 18 hereof.
WHEREAS, pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") dated as of November 28, 1988 by and between General Instrument,
Cable/Home Communication Corp., the Company, the Executive and FMD Acquisition
Corp. ("FMD"), FMD has agreed to merge with and into the Company;
WHEREAS, it is a condition of the Merger Agreement that the Executive enter
into this Agreement providing for the continued employment of the Executive by
the Company from and after the Effective Time (as such term is defined in the
Merger Agreement), and providing for the non-competition and other arrangements
set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the continued employment of the Executive, and other good and
valuable consideration, the parties agree as follows:
1. Employment Term.
The Company hereby employs the Executive, and the Executive hereby accepts
exclusive full-time employment with the Company. Such employment shall commence
at the Effective Time and continue until terminated pursuant to Section 5
hereof. The period during which the Executive is employed hereunder shall be
referred to as the "Employment Term".
2. Duties.
The Executive shall serve as the President and Chief Executive Officer of
the Company and shall have such powers, duties and responsibilities as are
prescribed from time to time consistent with such offices by the by-laws and the
board of directors of the Company (the "Board of Directors"). The Executive
agrees faithfully to discharge such duties and responsibilities and, generally,
to perform such other functions consistent with such offices for the Company.
The compensation herein provided to be paid to the Executive shall cover and
include all services and functions performed by the Executive for the Company.
Except as otherwise provided herein, the terms of the Executive's employment by
the Company shall be in accordance with the policies established by the Board of
Directors as to working facilities, vacation, sick leave and all other benefits
for, and restrictions upon, its senior executives, to the extent that such
policies are applicable to the President and Chief Executive Officer. The
Executive shall comply at all times with the requirements of all policies,
rules, practices and procedures established by the Board of Directors relating
to the conduct of the Company's senior executives, as in effect from time to
time during the Employment Term and to the extent applicable to the President
and Chief Executive Officer, except as otherwise expressly provided herein.
-1-
<PAGE>
3. Extent of Services; Place of Performance.
(a) The Executive agrees that during the Employment Term he will devote his
normal working time (except for vacations and periods of illness), attention and
best efforts to the business and interests of the Company, that he will perform
all duties and responsibilities assigned to him and that he will do his utmost
to enhance and develop the business, interests and welfare of the Company and
shall not, without the prior written consent of the Board of Directors, work for
any other employer or take any other position or undertake any activity (whether
or not compensated) not related to his employment that would in the aggregate
require any substantial portion of his working time or otherwise adversely
affect his ability to perform hereunder.
(b) The Executive shall perform his duties at the principal office of the
Company in Hickory, North Carolina, except to the extent the Executive may
reasonably be required to travel and render services in different locations from
time to time incident to the performance of such duties.
4. Compensation.
The Executive's compensation, including any participation in bonus, stock
option and other employee benefit plans and arrangements and other fringe
benefits, is set forth in Exhibit A attached hereto and made a part hereof. In
addition, unless otherwise expressly provided in this Agreement or Exhibit A,
the Executive shall be eligible to participate in all benefit plans, programs
and arrangements available to senior executives in accordance with the terms
thereof and as the same may be amended from time to time during the Employment
Term. Notwithstanding the foregoing, the Board of Directors may increase the
Executive's compensation at any time during the Employment Term.
5. Termination.
(a) Subject to the provisions of paragraphs (b) and (c) of this Section 5,
the initial term of this Agreement shall extend from the date hereof to November
28, 1991; provided, however, that, subject to such provisions, commencing on
November 29, 1989 and on each day thereafter, the remaining term of this
Agreement shall be two years from such day. Commencing on November 29, 1989,
unless earlier terminated pursuant to paragraph (b) or (c) of this Section 5,
this Agreement shall terminate on the second anniversary of the day on which
either party shall have given notice to the other party that such party has
elected to terminate this Agreement. The provisions of Sections 6, 7, 8 and 9
hereof shall survive any termination of this Agreement.
(b) This Agreement shall be terminated automatically upon the Executive's
death and may be terminated at the discretion of the Board of Directors if the
Executive is unable satisfactorily to render services to the Company for a
period of six (6) continuous months due to physical or mental disability. A
condition of disability under this Agreement shall be determined by the Board of
Directors on the basis of competent medical advice. A written opinion of a
licensed physician certified in his field of specialization and acceptable to
the Board of Directors, or the Executive's receipt of or entitlement to
disability benefits under any insurance policy or employee benefit plan provided
or made available by the Company or under Federal Social Security laws, shall be
conclusive evidence of disability.
(c) The Board of Directors shall have the right at any time, upon not less
than sixty (60) days' written notice, to terminate the Executive's employment
for cause, with the facts relating thereto to be specified in such notice,
unless such cause shall have been removed or otherwise cured to the satisfaction
of the Board of Directors prior to the termination date specified in such
notice. "Cause" shall
-2-
<PAGE>
mean (i) a material failure by the Executive to perform his duties as provided
in Sections 2 and 3 hereof or to comply with the provisions of Sections 6 and 7
hereof; (ii) the willful engaging by the Executive, in his capacity as an
employee of the Company, in gross misconduct; or (iii) the Executive's fraud,
embezzlement, theft, conviction of a felony or any act of moral turpitude that,
in the good faith opinion of the Board of Directors, is harmful to the Company.
(d) Upon termination of the Executive's employment pursuant to this Section
5 or for any other reason except breach of this Agreement by the Company, all
further compensation to which the Executive would otherwise have been entitled
under Section 4 hereof shall cease.
6. Non-Disclosure of Confidential Information.
(a) The Executive recognizes and acknowledges that as a consequence of or
through his employment with the Company the Executive may have access to certain
confidential information regarding the Business (as defined below). Confidential
information regarding the Business ("Confidential Information") includes,
without limitation, the following insofar as they relate to the Business:
technical know-how; customer lists; credit information; sources of supply;
private processes, techniques and formulae; research and development activities
and data; and inventions; but does not include any of the foregoing or other
information which otherwise than by the Executive's action (i) is or becomes
generally available or known to the public or in the industry in which the
Company is or may be engaged, (ii) was or became available to the Executive
prior to its disclosure to the Executive by the Company, or (iii) becomes
available to the Executive on a nonconfidential basis from a person other than
the Company or any of its employees or agents. The Executive further recognizes
and acknowledges that the Company may suffer irreparable damage if, except as
may be necessary in the proper performance of the Executive's duties hereunder,
any Confidential Information is obtained by or disclosed to any person engaged
in a business similar to or that is or might be competitive with the Company, or
is used by the Executive or any other person in any way in competition with the
Company. As used herein, "Business" means the business in which the Company is
engaged from time to time other than activities that are not at such time
material to the business of the Company or that were not engaged in during the
Employment Term.
(b) The Executive covenants and agrees that all Confidential Information
shall be the sole property of the Company, and its successors and assigns, and
that during the Employment Term and after the termination of the Employment
Term, without the express prior written consent of the Board of Directors, he
will not disclose in whole or in part any Confidential Information to any person
for any reason or purpose whatsoever or make use of any Confidential Information
for his own purposes or for the benefit of any person (except the Company) under
any circumstances except (i) as may be necessary in the proper performance of
the Executive's duties hereunder, (ii) to the extent Confidential Information
becomes lawfully obtainable from other sources or (iii) as required by law,
provided that in the case of (iii) above the Executive shall have given the
Company prior written notice setting forth the scope of such required
disclosure.
(c) Upon termination of the Employment Term, all documents, records,
notebooks and similar repositories of Confidential Information, including all
copies thereof, then in the Executive's possession or control, whether prepared
by him or others, will be delivered to the Company.
-3-
<PAGE>
7. Non-Competition Covenants of the Executive.
(a) The Executive covenants and agrees that during the Employment Term he
will not engage in any business that is in competition with the Business as it
exists at such time.
(b) The Executive further covenants and agrees that, for a period of five
years after the last day of the Employment Term, he will not, directly or
indirectly, either for himself or as a principal, stockholder, director,
officer, partner, investor, affiliate, licensee, employee, agent, consultant,
manager, trustee or representative of, or in any other regard or capacity for,
on behalf of, or in conjunction with, any person other than the Company (i)
engage, in any country where the Company then conducts business, in any business
that is in competition with the Business as it exists at such time, or (ii) call
upon, solicit, divert or take away any of the then existing customers or patrons
of the Company for the purpose of causing or attempting to cause any such person
to purchase products sold or services rendered by the Company from any person
other than the Company or otherwise divert any business from the Company.
(c) Notwithstanding anything in Section 7(a) and 7(b) to the contrary, the
Executive shall not be prohibited from holding (i) as a passive investment,
securities of a business organization listed on a national securities exchange
in the United States or abroad or whose securities are otherwise regularly
publicly traded, provided that the Executive does not beneficially own in excess
of 5% of the outstanding voting securities of any such business organization
which is engaged in the Business, and (ii) the investments listed on Exhibit B
attached hereto and made a part hereof.
(d) The Executive further covenants and agrees that, for a period of five
years after the last day of the Employment Term, he will not influence or
persuade, or attempt to influence or persuade, any employee, agent, distributor
or supplier of the Company to terminate such employee's, agent's, distributor's
or supplier's relationship with the Company.
(e) The Executive agrees that the specified duration of the covenants set
forth in this Section 7 shall be extended by and for the term of any period
during which the Executive is in violation of any such covenant.
(f) If the Executive wishes to engage in any conduct that would otherwise
be proscribed by a covenant set forth in this Section 7, he shall solicit the
prior written consent of the Board of Directors by submitting a written request
therefor setting forth in full all facts pertinent to the proposed conduct. Any
such consent will be binding upon the Company unless it shall be subsequently
discovered that such consent was given based upon a statement of facts by the
Executive that was incorrect, incomplete or misleading in any material respect.
8. Additional Non-Competition Covenants of the Executive.
The Executive covenants and agrees that his non-competition covenants set
forth in Section 7 hereof shall also extend to General Instrument, except that
for the purposes of such extension the references in Section 7 hereof shall be
deemed to be modified as follows: (i) references to the "Company" (other than
such references in the definition of "affiliated" and references to "affiliated
with the Company") shall be deemed to be references to General Instrument, (ii)
references to the "Business" shall be deemed to be references to the Broadband
Business, as described in Exhibit C attached hereto
-4-
<PAGE>
and made a part hereof, in which General Instrument shall be engaged from time
to time, and (iii) references to the "Board of Directors" shall be deemed to be
references to General Instrument.
9. Breach of Covenants.
The Executive and the Company agree that it may be impossible to measure in
money the damages that will accrue to the Company in the event that the
Executive breaches any of the provisions of Section 6 or 7 hereof, and the
Executive and General Instrument agree that it may be impossible to measure in
money the damages that will accrue to General Instrument in the event that the
Executive breaches any of the provisions of Section 8 hereof. Therefore, if the
Company (in the case of Section 6 or 7) or General Instrument (in the case of
Section 8) shall institute any action or proceeding to enforce such provisions,
the Executive hereby waives the claim or defense that the Company or General
Instrument, as the case may be, has an adequate remedy at law and agrees not to
assert in any such action or proceeding the claim or defense that the Company or
General Instrument, as the case may be, has an adequate remedy at law. The
foregoing shall not prejudice the right of the Company or General Instrument, as
the case may be, (i) to require the Executive to account for and pay over to it
the compensation, profits, monies, accruals or other benefits derived or
received by him as a result of any transaction constituting a breach of any of
the provisions of Section 6 or 7 hereof (in the case of the Company) or Section
8 hereof (in the case of General Instrument) or (ii) to receive from the
Executive an amount equal to the damages actually suffered by the Company or
General Instrument, as the case may be, as a result of such breach.
10. Benefit and Assignability.
This Agreement shall be binding upon the Executive and, except with respect
to Sections 1, 2, 3, 4 and 5, his legal representatives, heirs and distributees.
Except as expressly permitted herein, the Executive may not assign any of his
rights or duties hereunder or any interest herein without the prior written
approval of the Board of Directors. The Company shall not unreasonably withhold
its consent to the Executive's assignment of his rights to compensation
hereunder.
11. Modification; Waiver.
No provision of this Agreement may be changed, modified or discharged
unless such change, modification or discharge is agreed to in writing by the
Executive and the Board of Directors, or in the case of Section 8 hereof or any
other provision hereof applicable to General Instrument, by the Executive and by
General Instrument. No waiver by either party hereto of any breach by the other
party of any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same time or at any prior or subsequent time.
-5-
<PAGE>
12. Severability.
In the event any section, provision, term or clause of this Agreement, or
any combination of the same, shall be found or held to be illegal, invalid or
unenforceable at law or in equity under present or future laws, such finding or
holding shall not in any way affect the remainder of this Agreement which shall
continue in full force and effect. If the time periods, territorial
restrictions, activities or subjects contained in the covenants of Section 7 or
Section 8 are deemed invalid or unenforceable in law or equity, they shall be
deemed amended by the parties to be for such period, territories, activities or
subjects as shall be valid and enforceable.
13. Entire Agreement.
This Agreement and the Merger Agreement constitute the entire agreement of
the parties relating to the subject matter hereof and there are no written or
oral terms or representations made by either party other than those contained
herein and therein. Any prior agreements or understandings of the Executive, the
Company and General Instrument with respect to the subject matter hereof are
hereby terminated and superseded.
14. Governing Law.
The construction and performance of this Agreement shall be governed by the
law of the State of North Carolina.
15. Counterparts.
This Agreement may be executed in counterparts, each of which shall be
considered an original and taken together shall constitute one and the same
instrument.
16. Captions.
The captions of the various sections of this Agreement are inserted only as
a matter of convenience and for reference, and in no way define, limit, amplify,
explain or in any way affect the scope or intent of this Agreement or any of the
terms of this Agreement.
17. Notices.
Any notice required or permitted to be given to any party hereto pursuant
to this Agreement shall be in writing and shall be delivered personally or sent
by registered or certified mail, return receipt requested. Notices to the
Executive may be delivered or sent to the Executive at 1375 Lenoir-Rhyne
Boulevard, Hickory, North Carolina 28601, Attention: Mr. Frank M. Drendel.
Notices to the Company may be delivered or sent to the Company at 1375
Lenoir-Rhyne Boulevard, Hickory, North Carolina 28601, Attention: Jearld L.
Leonhardt, with a copy to General Instrument Corporation, 767 Fifth Avenue, New
York, New York 10153, Attention: Richard M. Hoffman, Esq. Notices to General
instrument may be delivered or sent to General Instrument at 767 Fifth Avenue,
New York, New York 10153, Attention: Richard M. Hoffman, Esq., with a copy to
Cleary, Gottlieb, Steen & Hamilton, One State Street Plaza, New York, New York
10004, Attention: Ned B. Stiles, Esq. The parties may designate other addresses
by notice given in accordance with the requirements of this Section 17. Notices
shall be deemed given upon receipt.
-6-
<PAGE>
18. Miscellaneous.
(a) Wherever used herein, the singular of any word may denote two or more,
the plural may denote only one and words of one gender may denote or include
another gender, wherever appropriate under the actual circumstances.
(b) As used in this Agreement, the term "person" includes any natural
person, corporation, partnership, association, organization or other entity and
the term "affiliate" means any person directly or indirectly controlling,
controlled by or under common control with another person including, without
limitation, a subsidiary and a parent of such person.
(c) All references herein to General Instrument (except for such references
with respect to the solicitation by the Executive of the written consent of
General Instrument and such references in Section 11 hereof) shall be deemed to
refer to General Instrument and its affiliates other than (i) the Company and
(ii) any person directly or indirectly controlled by the Company. References to
the Company in Sections 6 and 7 hereof (except for such references with respect
to notice or delivery to the Company and in the definition of "affiliated" and
in references to "affiliated with the Company") shall be deemed to refer to the
Company and any person directly or indirectly controlled by the Company.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
/s/ FRANK M. DRENDEL
------------------------------------------
FRANK M. DRENDEL
COMM/SCOPE COMPANY
By: /s/
--------------------------------------
Title: V.P.
GENERAL INSTRUMENT CORPORATION
By: /s/
--------------------------------------
Title: V.P.
-8-
<PAGE>
Exhibit A
COMPENSATION
Base Salary: $230,000 per annum.
Target Bonus Opportunity: Up to 50% of Base Salary under the
Management Incentive Compensation Plan
expected to be adopted by the Company
or otherwise.
-9-
<PAGE>
Exhibit B
PERMITTED INVESTMENTS
Investments in corporations or other entities the principal business of
which is providing cable television services to subscribers.
-10-
<PAGE>
Exhibit C
DESCRIPTION OF GENERAL INSTRUMENT'S
BROADBAND BUSINESS
General Instrument's "Broadband Business" consists of General Instrument's
activities with respect to (i) the design, development, manufacture, sale and
installation of electronic equipment and systems, subscriber terminals and
distribution electronics for community antenna television ("CATV") systems
(other than wire and cable), (ii) the design, development, manufacture and sale
of encryption/decryption equipment and software for the scrambling and
descrambling of satellite-delivered television programming, (iii) the
construction and management of construction of turnkey CATV systems and (iv) the
provision, to CATV operators and franchise holders, of on-site signal analysis
and system designs for antennas, headend and distribution equipment.
-11-
CommScope, Inc. Subsidiaries
CommScope, Inc. of North Carolina
Incorporated: North Carolina
Cable Transport, Inc.
Incorporated: North Carolina
CommScope Foreign Sales, Inc.
Incorporated: Barbados
CommScope International, Inc.
Incorporated: Delaware
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-33555 and 333-29725 of CommScope, Inc. on Forms S-8 of our report dated
February 2, 1998, appearing in this Annual Report on Form 10-K of CommScope,
Inc. for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Hickory, North Carolina
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
CommScope, Inc. consolidated financial statements as of and for the twelve
months ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 3,330
<SECURITIES> 0
<RECEIVABLES> 95,741
<ALLOWANCES> 3,985
<INVENTORY> 42,223
<CURRENT-ASSETS> 155,835
<PP&E> 200,413
<DEPRECIATION> 67,178
<TOTAL-ASSETS> 483,539
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0
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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 for the year
ended December 31, 1997, 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 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 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 stockholders
on a pro rata basis as a dividend (the "Distribution"), in a transaction that
was consummated on July 28, 1997. Immediately following the Distribution,
General Instrument Corporation changed its name to General Semiconductor, Inc.
General Instrument Corporation prior to the Distribution is herein referred to
as "GI" and following the Distribution is referred to herein as "General
Semiconductor". On February 2, 1998, NextLevel Systems changed its name to
General Instrument Corporation.
The Company is a smaller and less diversified company than GI was prior to
the Distribution. 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 transferred to NextLevel Systems or retained by 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.
<PAGE>
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, General Instrument
Corporation, 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 GI 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 General Instrument Corporation 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 General Instrument Corporation) 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 General Instrument Corporation for the benefit of
creditors.
<PAGE>
Dependence of the Company on the Cable Television Industry and Cable Television
Capital Spending
The majority of the Company's revenues come from sales to the cable
television industry. Demand for the Company's 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.
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
<PAGE>
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.
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.
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. Additionally,
flouronated-ethylene-propylene (FEP) is produced by only two manufacturers and
is currently under allocation by these suppliers. Availability of adequate
supplies of FEP will be critical to future LAN cable sales growth.
<PAGE>
International Operations
The Company's sales to international markets will continue to be an
important focus of the Company in the future. Although the Company believes that
future growth in international markets will be a significant contributor to the
Company's overall business over the long-term, the current environment in the
international markets is expected to have a negative impact on 1998
international sales. There can be no assurance that international markets will
expand in the future.
International operations are subject to the usual risks inherent in sales
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.
