UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1375 Lenoir Rhyne Boulevard, Hickory, North Carolina 28601
(Address of principal executive offices)
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
As of October 30, 1998 there were 49,202,555 shares of Common Stock outstanding.
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CommScope, Inc.
Form 10-Q
September 30, 1998
Table of Contents
Page No.
------------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statement of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 12 - 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
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<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
Net Sales $ 150,057 $ 147,269 $ 425,545 $ 454,434
-------------- ------------- -------------- -------------
Operating Costs and Expenses:
Cost of sales 112,776 115,328 327,999 343,882
Selling, general and administrative 13,229 12,732 38,697 37,412
Research and development 1,236 1,642 4,438 4,470
Amortization of goodwill 1,297 1,306 3,897 3,918
-------------- ------------- -------------- -------------
Total operating costs & expenses 128,538 131,008 375,031 389,682
-------------- ------------- -------------- -------------
Operating Income 21,519 16,261 50,514 64,752
Other income (expense), net 42 (433) 2,176 52
Interest expense (3,806) (3,857) (12,102) (9,193)
Interest income 96 8 436 78
-------------- ------------- -------------- -------------
Income before Income Taxes 17,851 11,979 41,024 55,689
Provision for income taxes (6,430) (4,555) (14,772) (21,160)
-------------- ------------- -------------- -------------
Net Income $ 11,421 $ 7,424 $ 26,252 $ 34,529
============== ============= ============== =============
Net income per common share - basic $ 0.23 (1) $ 0.53 (1)
Net income per common share -
assuming dilution $ 0.23 (1) $ 0.53 (1)
(1) Historical per share data is not considered relevant for the reasons
discussed in Note 1. Pro forma per share data is presented in Note 3.
See notes to condensed consolidated financial statements.
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3
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<S> <C> <C>
(unaudited)
September 30, December 31,
1998 1997
-------------- ---------------
Assets
Cash and cash equivalents $ 4,820 $ 3,330
Accounts receivable, less allowance for doubtful accounts of
$4,830 and $3,985, respectively 110,848 95,741
Inventories 31,111 42,223
Prepaid expenses and other current assets 1,459 2,439
Deferred income taxes 14,493 12,102
-------------- ---------------
Total current assets 162,731 155,835
Property, plant and equipment, net 133,238 133,235
Goodwill, net of accumulated amortization of
$42,098 and $38,263, respectively 165,322 170,345
Intangibles, net of accumulated amortization of
$28,629 and $26,573, respectively 20,136 22,192
Investments and other assets 1,662 1,932
-------------- ---------------
Total Assets $ 483,089 $ 483,539
============== ===============
Liabilities and Stockholders' Equity
Accounts payable $ 30,361 $ 18,533
Other accrued liabilities 34,821 24,516
-------------- ---------------
Total current liabilities 65,182 43,049
Long-term debt 213,800 265,800
Deferred income taxes 15,809 14,932
Other non-current liabilities 10,885 9,726
-------------- ---------------
Total Liabilities 305,676 333,507
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at September 30, 1998 and
December 31, 1997 -- --
Common Stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 49,202,555 at September 30, 1998;
49,108,874 at December 31, 1997 492 491
Additional paid-in capital 142,062 140,934
Retained earnings 34,859 8,607
-------------- ---------------
Total Stockholders' Equity 177,413 150,032
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 483,089 $ 483,539
============== ===============
See notes to condensed consolidate financial statements.
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4
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<S> <C> <C>
Nine Months Ended
September 30,
-------------------------------------
1998 1997
----------------- -----------------
Operating Activities:
Net income $ 26,252 $ 34,529
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 18,341 15,527
Gain on sale of assets of the high temperature aerospace and industrial cable business (1,873) --
Changes in assets and liabilities:
Accounts receivable (12,107) 1,163
Inventories 5,193 (10,447)
Prepaid expenses and other current assets 740 (480)
Deferred income taxes (1,514) (258)
Accounts payable and other accrued liabilities 22,419 10,218
Other non-current liabilities 1,159 841
Other 15 141
----------------- -----------------
Net cash provided by operating activities 58,625 51,234
Investing Activities:
Additions to property, plant and equipment (16,198) (24,809)
Sale of assets of the high temperature aerospace and industrial cable business 9,654 --
Other 280 --
----------------- -----------------
Net cash used in investing activities (6,264) (24,809)
Financing Activities:
Dividend paid to former parent company -- (265,212)
Net borrowings (repayments) under revolving credit facility (52,000) 260,000
Exercise of stock options 1,129 --
Financing fees paid -- (705)
Transfers to former parent company, net -- (15,838)
----------------- -----------------
Net cash used in financing activities (50,871) (21,755)
Change in cash and cash equivalents 1,490 4,670
Cash and cash equivalents, beginning of period 3,330 --
----------------- -----------------
Cash and cash equivalents, end of period $ 4,820 $ 4,670
================= =================
See notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share data)
Nine Months Ended September 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Additional Total
Number of Common Common Paid-In Retained Stockholders'
Shares Outstanding Stock Capital Earnings Equity
-------------------------------------------------------------------------
Balance December 31, 1997 49,108,874 $ 491 $ 140,934 $ 8,607 $ 150,032
Issuance of shares for stock option exercises 93,681 1 1,128 1,129
Net income 26,252 26,252
-------------------------------------------------------------------------
Balance September 30, 1998 49,202,555 $ 492 $ 142,062 $ 34,859 $ 177,413
=========================================================================
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par value.
No preferred stock is currently issued or outstanding.
See notes to condensed consolidated financial statements.
</TABLE>
6
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
CommScope, Inc. ("CommScope" or the "Company") was incorporated in Delaware in
January 1997 and, through its wholly owned subsidiary CommScope, Inc. of North
Carolina ("CommScope NC"), operates in the cable manufacturing business. The
Company designs, manufactures, markets and sells coaxial, fiber optic and high
performance electronic cables primarily used in communications, local area
network 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 communications markets, primarily the
cable television market.
CommScope NC formerly was a wholly owned indirect subsidiary of General
Instrument Corporation (the "Distributing Company"). Through a series of
transactions related to a spin-off of companies from the Distributing Company
(the "Distribution") that was consummated on July 28, 1997 (the "Distribution
Date"), CommScope NC became a wholly owned subsidiary of the Company. At the
Distribution Date, CommScope began operating as an independent entity with
publicly traded common stock.
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1998, the condensed
consolidated statements of income for the three months and the nine months ended
September 30, 1998 and 1997, the condensed consolidated statements of cash flows
for the nine months ended September 30, 1998 and 1997, and the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 1998 are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the interim period financial statements. There were no
adjustments of a non-recurring nature recorded during the three months and the
nine months ended September 30, 1998 and 1997. The results of operations for the
interim period are not necessarily indicative of the results of operations to be
expected for the full year. The condensed consolidated statements of income and
condensed consolidated statements of cash flows for the three months and the
nine months ended September 30, 1997 reflect the results of operations and cash
flows of CommScope that were transferred from the Distributing Company to
CommScope in connection with the Distribution.
The unaudited interim condensed consolidated financial statements of CommScope
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The condensed consolidated financial statements for 1997 include an allocation
of certain assets, liabilities and general corporate administrative expenses
from the Distributing Company prior to the Distribution, and accordingly reflect
the results of operations and changes in cash flows of CommScope as if it were a
separate entity prior to the Distribution. In the opinion of management, general
corporate administrative expenses were allocated to CommScope on a reasonable
and consistent basis using management's estimate of services provided to
CommScope by the Distributing Company. However, such allocations are not
necessarily indicative of the level of expenses which might have been incurred
had CommScope been operating as a separate, stand-alone entity during the 1997
periods presented.
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION (Continued)
Prior to the Distribution, CommScope participated in the Distributing Company's
cash management program, and the accompanying condensed consolidated statements
of income for 1997 include an allocation of net interest expense from the
Distributing Company. Net interest expense was allocated based upon CommScope's
net assets as a percentage of the total net assets of the Distributing Company.
The allocations were made consistently in each period, and management believes
the allocations are reasonable. However, these interest costs would not
necessarily be indicative of what the actual costs would have been had CommScope
operated as a separate, stand-alone entity during the periods presented. At the
Distribution Date, CommScope implemented a separate cash management program and
assumed responsibility for the costs associated with operating a public company.
CommScope's financial results include the costs incurred by the Distributing
Company related to the postretirement benefit plan for employees and retirees of
CommScope prior to the Distribution. Also, the provision for income taxes for
the three months and the nine months ended September 30, 1997 is based on
CommScope's expected annual effective tax rate, calculated assuming CommScope
had filed separate tax returns under its previously existing structure as a
wholly owned indirect subsidiary of the Distributing Company.
CommScope's earnings were part of the Distributing Company's results of
operations for all periods presented prior to the Distribution Date, including
27 days in the quarter ended September 30, 1997. Additionally, the capital
structure of the Company changed significantly as a result of borrowings under
the Company's credit facility on the Distribution Date, which were utilized
primarily to make a dividend payment to the Distributing Company in accordance
with the terms of the Distribution (see Note 4). Accordingly, no historical
earnings per share data has been presented for the three months and the nine
months ended September 30, 1997. Alternatively, pro forma earnings per share
data is presented as described in Note 3.
The financial information included herein does not necessarily reflect the
consolidated results of operations, financial position, and cash flows of
CommScope in the future or on a historical basis in 1997 had CommScope been a
separate, stand-alone entity for the 1997 periods presented. These interim
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 1997 audited consolidated financial statements and
notes thereto included in the Company's 1997 Annual Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
September 30, December 31,
1998 1997
------------- --------------
Raw materials $ 11,245 $ 16,376
Work in process 6,147 8,860
Finished goods 13,719 16,987
--------------- ---------------
$ 31,111 $ 42,223
=============== ===============
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CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
3. PRO FORMA FINANCIAL INFORMATION AND EARNINGS PER SHARE
The accompanying unaudited pro forma financial information was prepared to
present the 1997 net income of CommScope as if the Distribution had occurred on
January 1, 1997. The unaudited pro forma disclosures set forth below do not
purport to represent what CommScope's operations actually would have been or to
project CommScope's operating results for any future period.
The unaudited pro forma information has been prepared utilizing the historical
consolidated statements of income of CommScope which were adjusted to reflect a
net debt level of $275 million at the beginning of each period presented at an
assumed weighted average borrowing rate of 6.35% plus the amortization of debt
issuance costs associated with the new borrowings (see Note 4). Pro forma
earnings per share was calculated by dividing the pro forma net income for each
period presented by the pro forma common and common equivalent shares
outstanding for each period, and assumes that a total of 49.1 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, 1997.
Giving effect to the Distribution as of January 1, 1997, pro forma net income
for the Company for the three months and the nine months ended September 30,
1997 would have been $7,014 ($0.14 per basic and diluted share) and $31,675
($0.65 per basic share and $0.64 per diluted share), respectively.
Below is a reconciliation of weighted average common shares outstanding for
basic earnings per share to weighted average common and common equivalent shares
outstanding for diluted earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Nine Months Three Nine Months
Months Ended Months Ended
Ended September Ended September
September 30, 1998 September 30, 1997
30, 1998 30, 1997
------------- ------------- ------------- -------------
Average number of common shares outstanding - for
basic earnings per share 49,196 49,169 49,108 49,106
Dilutive effect of employee stock options 404 336 296 162
============= ============= ============= =============
Average number of common and common equivalent
shares outstanding - for diluted earnings per share
49,600 49,505 49,404 49,268
============= ============= ============= =============
</TABLE>
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CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
1998 1997
------------------ -----------------
Credit Agreement (as defined below) $ 203,000 $ 255,000
Alabama State Industrial Development
Authority Notes 10,800 10,800
------------------ -----------------
213,800 265,800
================== =================
On July 23, 1997 the Company entered into a $350 million revolving credit
agreement with a group of banks (the "Credit Agreement"). On the Distribution
Date, CommScope initially borrowed $266 million under the Credit Agreement which
was utilized to make a dividend payment to the Distributing Company in
accordance with the terms of the Distribution and to fund fees and expenses in
connection with the Credit Agreement. The Company intends to utilize the Credit
Agreement in the future for, among other things, general working capital needs,
financing strategic acquisitions, and other general corporate purposes.
5. BUSINESS DIVESTITURES
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business to
Alcatel for an adjusted price of $13 million. The Company recognized a pre-tax
gain from the sale of $2 million ($0.03 per share, net of tax effect).
6. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 will require
disclosure of comprehensive income (which is defined as "the change in equity
during a period excluding changes resulting from investments by shareholders and
distributions to shareholders") and its components. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, with reclassification of
comparative years required. The Company plans to provide appropriate financial
statement disclosures under SFAS No. 130 in its Form 10-K for the fiscal year
ended December 31, 1998. Had the new standard been applied for the three months
and nine months ended September 30, 1998, comprehensive income would not differ
from net income for all periods presented in the condensed consolidated
statements of income.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company plans to provide appropriate
financial statement disclosures under SFAS No. 131 in its Form 10-K for the
fiscal year ended December 31, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. Management is
currently evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2000. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
7. SUBSEQUENT EVENTS
In October 1998, the Company signed a definitive agreement to acquire
Alcatel's coaxial cable business in Seneffe, Belgium. The purchase price will be
finalized at the time of the closing, which is expected to occur in the fourth
quarter of 1998, and is expected to be in the $20 to $25 million range.
CommScope will also supply Alcatel with its future worldwide requirements of
CATV coaxial cable for a period of time to be determined. The acquisition gives
CommScope access to established European distribution channels and complementary
coaxial cable technologies.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the unaudited condensed consolidated
financial statements and accompanying notes included in this document as well as
the audited consolidated financial statements, related notes thereto and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 1997 included in the Company's Annual
Report on Form 10-K. Unless otherwise specified, capitalized terms used herein
are used as defined in the audited consolidated financial statements of
CommScope for the year ended December 31, 1997 or in the unaudited condensed
consolidated financial statements included in this document.
HIGHLIGHTS
CommScope reported net income of $11 million ($0.23 per basic and diluted share)
for the quarter ended September 30, 1998, an increase of $4 million (54%) from
the quarter ended September 30, 1997 historical and pro forma net income of $7
million ($0.14 per basic and diluted share pro forma).
For the nine months ended September 30, 1998, CommScope reported net income of
$26 million ($0.53 per basic and diluted share), a decrease of $9 million (24%)
from the nine months ended September 30, 1997 net income of $35 million. On a
pro forma basis, net income for the nine months ended September 30, 1997 was $32
million ($0.65 per basic share and $0.64 per diluted share).
Pro forma net income and earnings per share for 1997 reflect the impact of
CommScope's new capital structure immediately following the Distribution from
the Distributing Company which was consummated on the Distribution Date,
assuming that all common stock issued and long term debt borrowings as of the
Distribution Date were outstanding since January 1, 1997.
Net income for the nine months ended September 30, 1998 includes a one-time
pre-tax gain of $2 million related to the sale of the Company's high-temperature
aerospace and industrial cables business. Excluding the gain, net income for the
nine months ended September 30, 1998 was $25 million ($0.50 per share).
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 WITH THE THREE AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1997
NET SALES
Net sales for the third quarter and nine months ended September 30, 1998
increased $3 million (2%) to $150 million and decreased $29 million (6%) to $426
million, respectively, from the comparable prior year periods. The decrease in
net sales for the nine month period of 1998 compared to 1997 is due primarily to
a significant reduction in international sales due to the economic turmoil in
key overseas markets.
For the third quarter and nine months ended September 30, 1998 international
sales decreased by 20% and 35%, respectively, compared to the corresponding
periods in 1997, driven by reduced sales in the Asian and Latin American
markets. International sales for the nine months ended September 30, 1998
represented 24% of the Company's net sales compared to 35% for the comparable
period of 1997. However, international sales for the third quarter 1998
increased by 7% over the second quarter 1998.
Net sales to cable television and other video distribution markets ("CATV
Products") for the third quarter and nine months ended September 30, 1998
decreased $3 million (2%) to $119 million and $42 million (11%) to $336 million,
respectively, from the comparable prior year periods. These decreases primarily
reflect the lower international sales in 1998 as compared to 1997. Domestically,
excluding sales to telephone companies, sales of CATV Products increased by 13%
for the third quarter of 1998 compared to the third quarter of 1997.
Net sales for local area network and other data applications ("LAN Products")
for the third quarter and nine months ended September 30, 1998 decreased $1
million (6%) to $17 million and increased $5 million (10%) to $60 million,
respectively, over the comparable prior year periods. The sales decrease for LAN
Products in the third quarter of 1998 is due to unanticipated high inventory
levels of LAN cables by customers which temporarily delayed sales. The Company
expects a return to more normal customer inventory levels as early as the first
quarter of 1999. The sales increase for the nine month period of 1998 compared
to 1997 is due to continued growth of the LAN Product business. The Company
continues to capture market share through the continued development and
marketing of high-performance cable, such as the UltraMedia (TM) cable, which
supports gigabit transmission and exceeds the highest industry standards.
Sales of other cable products for the third quarter and nine months ended
September 30, 1998 were $14 million and $30 million, respectively, as compared
to $7 million and $22 million for the comparable periods in 1997.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the third quarter and nine months ended September 30, 1998 was
$37 million and $98 million, respectively, compared to $32 million and $110
million for the comparable prior year periods, an increase of 17% and a decrease
of 12%, respectively, for each period. The lower gross profit for the nine month
period of 1998 compared to 1997 is primarily the result of the lower sales and
slightly lower selling prices for CATV Products due to a competitive pricing
environment. Lower overhead costs in the nine month period ended September 30,
1997, driven primarily by reduced warranty-related provisions due to lower
expectations of claims, contributed partially to the higher 1997 gross profit.
The increase in gross profit for the third quarter of 1998 compared to 1997 is
due to slightly higher sales and other factors discussed below.
As a percentage of sales, gross profit declined from 24% for the nine months
ended September 30, 1997 to 23% for the comparable period of 1998. For the third
quarter 1998, gross profit as a percentage of sales was 25% compared to 22% for
the third quarter 1997 and 23% for the second quarter of 1998.
During the last half of fiscal 1997 gross profit percentages were negatively
affected by competitive pricing issues in the marketplace which reduced the
average selling price of the Company's products. Domestic pricing remained
relatively stable during the first three quarters of 1998. The improvement in
gross profit percentages also reflects the impact of the Company's focus on
engineered cost savings and manufacturing efficiencies which have positively
impacted gross profits in the second and third quarter of 1998. The Company
expects gross margins to remain relatively stable in the fourth quarter of 1998
with the potential to expand modestly in 1999, assuming selling prices remain
stable.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the third quarter and
nine months ended September 30, 1998 was $13 million and $39 million,
respectively, compared to $13 million and $37 million during the comparable
periods in 1997. As a percentage of net sales, SG&A expense was 9% for the third
quarter and nine months ended September 30, 1998, compared to 9% and 8% for the
comparable periods in 1997.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales was 1% during all
periods presented. The Company has ongoing programs to develop new products and
market opportunities for its products and core capabilities and new
manufacturing technologies to achieve cost reductions.
<PAGE>
OTHER INCOME, NET
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business to
Alcatel for an adjusted price of $13 million. The Company recognized a pre-tax
gain from the sale of $2 million ($0.03 per share, net of tax effect).
INTEREST EXPENSE
Interest expense for the third quarter and nine months ended September 30, 1998,
totaling $4 million and $12 million, respectively, represents actual interest
incurred on outstanding borrowings under the Company's credit facilities.
Interest expense for the third quarter and nine months ended September 30, 1997
represents an allocation of net interest expense from the Distributing Company,
which was based upon CommScope's net assets as a percentage of the total net
assets of the Distributing Company, through the Distribution Date and actual
interest incurred on outstanding borrowings after the Distribution Date.
Pro forma net interest expense for the third quarter and nine months ended
September 30, 1997, totaling $5 million and $14 million, respectively, reflects
the historical interest expense of the Company adjusted to reflect a net debt
level of $275 million at the beginning of 1997 presented at an assumed weighted
average borrowing rate of 6.35% plus the amortization of debt issuance costs
associated with the new borrowings incurred at the Distribution. These pro forma
net interest costs are not necessarily indicative of what the actual interest
costs would have been had CommScope operated as a separate, stand-alone entity.
The reduction in actual interest costs during 1998 as compared to the pro forma
interest costs for the comparable periods of 1997 is due to the reduction in
borrowings under the Company's credit facility since the Distribution.
INCOME TAXES
The effective tax rate was 36% for the third quarter and nine months ended
September 30, 1998 and 38% for the comparable periods of 1997. The provision for
income taxes for the three and nine months ended September 30, 1997 has been
determined as if the Company had filed separate tax returns under its previously
existing structure as an indirect wholly owned subsidiary of the Distributing
Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $59 million for the nine months ended September
30, 1998 compared to $51 million for the comparable prior year period, an
increase of $8 million or 14%. This increase primarily results from lower levels
of working capital at September 30, 1998 as compared to December 31, 1997.
Working capital was $98 million at September 30, 1998 compared to $113 million
at December 31, 1997, a decrease of $15 million, or 14%. The decrease in working
capital is due to lower inventory levels and an increase in accounts payable and
accrued liabilities offset partially by an increase in accounts receivable.
Based on current levels of orders and backlog, management of the Company
believes that working capital levels are appropriate to support future
operations.
During the nine months ended September 30, 1998 the Company invested $16 million
in equipment and facilities compared to $25 million for the comparable period in
1997. The capital spending in each period was primarily attributable to capacity
expansion, particularly for LAN Products, equipment upgrades and vertical
integration projects to meet increased current and anticipated future business
demands. During the nine months ended September 30, 1998 the Company received
initial cash proceeds of $10 million related to the sale of its high temperature
aerospace and industrial cables business.
The Company's principal sources of liquidity both on a short-term and long-term
basis are cash flows provided by operations and funds available under long-term
credit facilities. During the nine months ended September 30, 1998 the Company
repaid $52 million under its revolving credit facility. Based upon its analysis
of the Company's consolidated financial position and the expected results of its
operations in the future, management believes that the Company will have
sufficient cash flows from future operations and the financial flexibility to
attract both short-term and long-term capital on acceptable terms as may be
needed to fund operations, capital expenditures and other growth objectives.
There can be no assurance, however, that future industry-specific developments,
general economic trends or other situations will not adversely affect the
Company's operations or its ability to meet its cash requirements.
In the normal course of business, CommScope uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
Non-derivative 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 September 30, 1998, in management's
opinion, CommScope did not have any significant exposure to any individual
customer or counter-party, 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 September 30, 1998, 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 October 20, 1998, 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 April 1999 and October 2001,
respectively. 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 5.79% and 4.81%, respectively. Net payments or
receipts resulting from the swap agreements are recorded as adjustments to
interest expense in each quarter.
At September 30, 1998, the weighted average effective interest rate on
outstanding borrowings and associated credit fees under the Credit Agreement and
the Alabama State Industrial Development Authority Notes was 6.7%.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 will require
disclosure of comprehensive income (which is defined as "the change in equity
during a period excluding changes resulting from investments by shareholders and
distributions to shareholders") and its components. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, with reclassification of
comparative years required. The Company plans to provide appropriate financial
statement disclosures under SFAS No. 130 in its Form 10-K for the fiscal year
ended December 31, 1998. Had the new standard been applied for the three months
and nine months ended September 30, 1998, comprehensive income would not differ
from net income for all periods presented in the condensed consolidated
statements of income.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company plans to provide appropriate
financial statement disclosures under SFAS No. 131 in its Form 10-K for the
fiscal year ended December 31, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. Management is
currently evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2000. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
YEAR 2000
CommScope is currently addressing an issue common to most companies -
ensuring that its existing information technology ("IT") systems and
applications and other non-IT control devices are suitable for continued use
into and beyond the Year 2000. Many IT systems and applications and non-IT
control devices utilized by the Company use only two digits to identify a year
in the date field - and accordingly may recognize a date using "00" as the Year
1900 or some other date rather than the Year 2000. Failure to make appropriate
modifications or upgrades to critical IT systems and applications and non-IT
control devices could result in a system failure or miscalculations causing
significant disruptions to operations. Third parties with whom the Company
interacts also employ various computer systems with similar Year 2000 compliance
issues. Failure by third parties to adequately address their own Year 2000
compliance issues exposes the Company to business risks such as a reduced demand
for the Company's products or the lack of availability of critical raw materials
or services required for manufacturing the Company's products. CommScope's
products themselves - high performance, high bandwidth cables for the
telecommunications industry - are not affected by the Year 2000 problem. The
Year 2000 compliance discussion below is based on information currently
available to the Company. Readers are cautioned that forward-looking statements
contained in the Year 2000 section should be read in conjunction with the
Company's disclosures under the heading "Forward-Looking Statements".
To address the Year 2000 compliance issue, the Company has appointed a
corporate-wide Year 2000 compliance project team which is responsible for
coordinating the identification, evaluation, and implementation of changes to IT
systems and applications and non-IT control devices necessary to achieve a Year
2000 date conversion. The Year 2000 compliance project team is also
investigating significant third parties to determine the effectiveness of their
efforts toward achieving Year 2000 compliance.
The Year 2000 compliance project team has designed a systematic methodology
toward addressing the Year 2000 compliance issue, which includes: (1)
identification and evaluation of IT systems and applications and non-IT control
devices with Year 2000 compliance issues; (2) implementation of changes to IT
systems and applications and non-IT control devices to achieve Year 2000
compliance; (3) testing of the corrective actions taken to ensure Year 2000
compliance for the identified systems; and (4) development of contingency plans
in the event of the failure of third parties to become Year 2000 compliant.
A database of internal IT systems and applications and non-IT control
devices which rely on date-sensitive computer logic has been developed to
provide a starting framework from which to address the significant issues
related to Year 2000 compliance. Each of these systems, applications and devices
is being classified as a priority A, B, or C issue. Both A and B priority items
are deemed as critical systems which must be modified or upgraded into Year 2000
compliance. Priority C items are non-critical IT and non-IT systems which will
be upgraded into Year 2000 compliance upon completion of the modification of A
and B priority items.
The Year 2000 compliance project team has also accumulated a database of
significant third parties. Each of these third parties is being contacted and
asked to provide responses which will allow the Company to assess their ability
to achieve Year 2000 compliance. The Company will also evaluate third party
compliance through internal testing, where feasible, to verify that the
modifications are effective.
Modifications to most written programs for IT systems and applications
(which initially were developed in-house) have been in progress by Company
personnel since early 1997.Substantially all IT systems and applications
acquired from external sources are being upgraded to Year 2000 compliant
versions (if they are not already) through system upgrades or through the
purchase of new systems. It is expected that the Company will achieve 70% Year
2000 compliance for critical internal IT systems and applications by the end of
1998, with 100% Year 2000 compliance by the third quarter of 1999. Virtually all
critical non-IT systems (including a variety of equipment control devices) are
currently being modified for Year 2000 compliance through upgrades to Year 2000
compliant devices.
The Company plans to test the effectiveness of corrective actions taken to
achieve Year 2000 compliance during 1999, but to date it has not performed
compliance testing on systems or applications for which Year 2000 modifications
have been made. As compliance testing is completed and a full assessment of the
risks from potential Year 2000 systems failures can be made, the Company plans
to develop Year 2000 contingency plans. These contingency plans will factor in
business and operating decisions related to the potential failure of significant
third parties to become Year 2000 compliant.
The Company currently does not believe that the costs of addressing Year 2000
compliance issues will be material to CommScope's results of operations,
financial condition or cash flows. The Company estimates that, through September
30, 1998, it has spent $250,000 to remediate Year 2000 compliance issues for IT
systems and applications and $100,000 for non-IT devices. Future expenditures to
remediate Year 2000 compliance issues are currently estimated at $500,000 for IT
systems and applications and $500,000 for non-IT devices. All anticipated
expenditures are expected to be financed through cash flows from future
operations.
The Company believes that the corrective actions implemented under the direction
of the Year 2000 compliance project team will be completed on a timely basis in
a cost-effective manner to ensure that the Company's internal systems will be
operational and suitable for continued use in the Year 2000 and beyond. In
addition, the Company believes that significant third parties will become Year
2000 compliant or that adequate contingency plans will be developed and
implemented to ensure minimal business interruption to the Company's operations.
However, there can be no guarantee that problems associated with system failure
or deficient system operation due to Year 2000 compliance issues will not result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition.
SUBSEQUENT EVENTS
In October 1998, the Company signed a definitive agreement to acquire
Alcatel's coaxial cable business in Seneffe, Belgium. The purchase price will be
finalized at the time of the closing, which is expected to occur in the fourth
quarter of 1998, and is expected to be in the $20 to $25 million range.
CommScope will also supply Alcatel with its future worldwide requirements of
CATV coaxial cable for a period of time to be determined. The acquisition gives
CommScope access to established European distribution channels and complementary
coaxial cable technologies.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q 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,
international economic and political uncertainties and other specific factors
discussed in Exhibit 99 to this Form 10-Q. The information contained in this
Form 10-Q 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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
27 Financial Data Schedule
99 Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended September
30, 1998:
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
November 3, 1998 /s/ Jearld L. Leonhardt
Date Jearld L. Leonhardt
Executive Vice President,
Finance and Administration
Signing both in his
capacity as Executive Vice
President on behalf of the
Registrant and as Chief
Financial Officer of the
Registrant
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
CommScope, Inc. condensed consolidated financial statements as of and for
the nine months ended September 30, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0001035884
<NAME> CommScope, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 4,820
<SECURITIES> 0
<RECEIVABLES> 110,848
<ALLOWANCES> 4,830
<INVENTORY> 31,111
<CURRENT-ASSETS> 162,731
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<TOTAL-ASSETS> 483,089
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<COMMON> 492
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<TOTAL-LIABILITY-AND-EQUITY> 483,089
<SALES> 425,545
<TOTAL-REVENUES> 425,545
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<TOTAL-COSTS> 327,999
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 12,102
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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, 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, Asia, Latin America 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
In a transaction that was consummated on July 28, 1997, General
Instrument Corporation (the "Distributing Company") (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 then wholly-owned subsidiary NextLevel
Systems, Inc. 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 the Distributing Company) and (ii) then distributed all of the
outstanding shares of capital stock of each of NextLevel Systems, Inc. and the
Company to its stockholders on a pro rata basis as a dividend (the
"Distribution"). Immediately following the Distribution, the Distributing
Company changed its corporate name to General Semiconductor, Inc. ("General
Semiconductor"). Effective February 2, 1998, NextLevel Systems, Inc. changed its
corporate name to General Instrument Corporation ("General Instrument").
The Distribution Agreement, dated as of June 12, 1997, among the
Company, General Instrument and the Distributing Company (the "Distribution
Agreement") and certain other agreements executed in connection with the
Distribution (collectively, the "Ancillary Agreements") allocate among the
Company, the Distributing Company and General Instrument and their respective
subsidiaries responsibility for various indebtedness, liabilities and
obligations. It is possible that a court would disregard this contractual
allocation of indebtedness, liabilities and obligations among the parties and
require the Company or its subsidiaries to assume responsibility for obligations
allocated to another party, particularly if such other party were to refuse or
was unable to pay or perform any of its allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, the Company has agreed to indemnify the other parties (and certain
related persons) from and after consummation of the Distribution with respect to
certain indebtedness, liabilities and obligations, which indemnification
obligations could be significant.
Although the Distributing Company has received a favorable ruling from
the Internal Revenue Service, if the Distribution were not to qualify as a tax
free spin-off (either because of the nature of the Distribution or because of
events occurring after the Distribution) 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 the Distributing Company was the
common parent based upon the difference between the fair market value of the
stock distributed and the Distributing Company'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 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) 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 for the benefit of creditors.
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, acquisitions of cable television
operators by non-cable television operators, cable system consolidation within
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 and new
legislation and regulation of cable television operators. There can be no
assurance that cable television capital spending will increase from historical
levels or that existing levels 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. The FCC is continuing its implementation of the Telecom Act which,
when fully implemented, 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.
The Company believes that the anticipated merger of AT&T and TCI,
announced earlier in 1998, represents a long-term global catalyst for cable's
high capacity broadband platform for providing the most cost effective
infrastructure for multi-channel video, high-speed Internet access and
telephony. If the AT&T / TCI transaction is not consummated, it 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 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 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). Historically the Company has generally been able to pass
on increases in the price of these materials to its customers but has had some
difficulty doing so in recent years, and 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,
fluoronated-ethylene-propylene ("FEP") is the primary raw material used
throughout the industry for producing flame-retarding cables for LAN
applications. There are few worldwide producers of FEP and market supplies have
been periodically limited over the past several years. Availability of adequate
supplies of FEP will be critical to future LAN cable sales growth.
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. The Asian economic crisis, the strong U.S. dollar and
consolidation and merger activity among cable television operators in the United
Kingdom and Brazilian markets has also recently had a detrimental affect on the
Company's international sales.
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.
