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, 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 jurisdiction of (I.R.S. Employer 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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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 $939.6 million as of
March 19, 1999 (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 19, 1999 there were
50,509,737 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1999 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 is a leading worldwide designer, manufacturer and marketer
of a broad line of coaxial cables and other high-performance electronic and
fiber optic cable products primarily for communications applications
including cable television, telephony and Internet access. The Company is
the largest manufacturer and supplier of coaxial cable for hybrid fiber
coaxial ("HFC") cable systems in the United States, with over 50% market
share in 1998 (by sales volume), and is a leading supplier of coaxial cable
for video distribution applications such as satellite television and
security surveillance. The Company is also a leading provider of
high-performance premise wiring for local area networks ("LAN") and the
Company's management believes that it has developed a next generation
wireless antenna cable. The Company sells its products to approximately
2,400 customers in more than 85 countries. The Company is expanding its
global presence through its acquisition of Alcatel's cable television
("CATV") coaxial cable business, which is Europe's largest manufacturer of
CATV coaxial cable.
For the year ended December 31, 1998, approximately 80% of the
Company's revenues were for the cable television and video distribution
markets, 13% were for LAN applications and 7% were for other
high-performance cable markets including cable for wireless applications,
industrial and other wiring applications. The Company's revenues and net
income for the year ended December 31, 1998 were $571.7 million and $39.2
million, respectively. Approximately $139.8 million (24.4%) of the
Company's revenues were from international customers.
The Company's management believes that the Company is the world's most
technologically advanced, low-cost provider of coaxial cable. As a result
of the Company's leading product offerings, cost-efficient manufacturing
processes and economies of scale resulting from its leading market share,
management believes that the Company is well positioned to capitalize on
the opportunity provided by the convergence of video, voice and data and
the resulting demand for bandwidth and high-speed access. The Company's
management also believes that the following industry trends will drive
demand for its products: (i) the endorsement of HFC cable systems by major
cable, telephone and technology companies; (ii) increasing use of the
Internet; (iii) increasing demand for high-speed LAN access; and (iv) the
continuing rapid deployment of wireless communications systems worldwide.
GROWTH STRATEGY
The Company has adopted a growth strategy to expand, strengthen and
leverage its current market position as the leading worldwide supplier of
coaxial cable for broadband communications. The principal elements of the
Company's growth strategy are the following:
o CAPITALIZE ON HFC PARADIGM SHIFT. To date, a vast majority of video
networks worldwide, such as cable service provider networks, have
adopted the HFC network architecture for video service delivery.
Recent events involving major telecommunications and cable service
providers create the potential to expand the role of HFC networks from
a video-centric focus to a key platform for delivery of a variety of
broadband services. These events include AT&T Corporation's
acquisition of TCI, Microsoft Corporation's $1 billion investment in
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Comcast and investments in cable television in Europe and the United
Kingdom, Paul Allen's acquisitions of Marcus Cable and Charter, and
the recent success of high-speed cable data services such as @Home
Corporation and MediaOne. The Company believes that the HFC network
architecture provides the most cost-effective bandwidth into the home,
enabling both cable and telecommunications service providers to offer
new products and services such as high-speed Internet access, video on
demand, IP telephony and HDTV. The Company believes it is well
positioned to benefit from the build out, upgrade and maintenance of
such networks in both domestic and international markets.
o DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. The
Company maintains an active program to identify new market
opportunities and develop and commercialize products that leverage its
core technology and manufacturing competencies. This strategy has led
to the development of new products and entry into new markets such as
satellite cables, LAN cables, specialized coaxial based
telecommunication cables, broadcast audio and video cables and coaxial
cables in conduit. For example, the Company leveraged its coaxial
cable technology to enter the LAN cable market and developed
UltraMedia, a high-end LAN cable product targeted for high-speed LAN
applications. The Company has also recently developed a thin-wall foam
FEP design for twisted pair cables on which a patent is pending. In
addition, the Company leveraged its expertise in aluminum coaxial
cable technology to develop Cell Reach, a superior copper coaxial
cable solution for the wireless antenna market. Cell Reach is a
technologically superior product with a lower total lifetime cost of
ownership than the current industry standard and has been installed to
date in more than 1,200 cellular and PCS sites with leading service
providers such as Nextel Communications, Inc., Sprint Corporation and
Sprint affiliates. The Company's internal product development strategy
is augmented by acquisitions of cable or related component businesses
that enhance the Company's existing product portfolio or that offer
synergistic cable-related growth opportunities.
o CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. The Company has invested
approximately $86 million in state-of-the-art manufacturing facilities
and new technologies during the past three fiscal years. These
investments have increased capacity and operating efficiencies,
improved management control and provided more consistent product
quality. As a result, the Company believes that it has become one of
the few cable manufacturers capable of satisfying volume production,
time-to-market, time-to-volume and technology requirements of
customers in the communications industry. The Company believes that
its breadth and scale permit it to cost-effectively invest in
improving its operating efficiency through investments in engineering
and cost-management programs and to capture value in the supply chain
through vertical integration projects.
o LEVERAGE GLOBAL PLATFORM. In the past few years, the Company has
become a major supplier of coaxial cable to international markets,
principally Europe, Latin America and the Pacific Rim, for the cable
television and broadband services industries. In 1998 the Company had
approximately 350 international customers in more than 85 countries
representing approximately $139.8 million (24.4%) of the Company's
1998 revenue. To support its international sales efforts, the Company
has sales representatives based in Europe, Latin America and the
Pacific Rim. In addition, the Company is able to leverage its domestic
cable customer base with respect to those customers who are also
equity investors in international cable service providers. Although
there is current uncertainty in international markets, the Company
believes that it is well positioned to benefit over the long term from
future international growth opportunities. To further improve its
ability to service international customers as well as reduce shipping
and importation costs, the Company intends to establish or acquire
international distribution and/or manufacturing facilities. For
example, the Company recently acquired Alcatel's CATV coaxial cable
business in Seneffe, Belgium. This acquisition gives CommScope access
to established European distribution channels and complementary
coaxial cable technologies. See "--Business Units--International
Markets."
o PROVIDE SUPERIOR CUSTOMER SERVICE. The Company believes that its
coaxial cable manufacturing capacity is greater than that of any other
manufacturer, which enables the
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Company to provide its customers a unique high-volume service
capability. As a result of its 24-hour, seven days per week continuous
manufacturing operations, the Company is able to offer quick order
turnaround services. In addition, management believes that the ability
to offer rapid delivery services, materials management and logistics
services to customers through its private truck fleet is an important
competitive advantage.
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 for some other communications applications. The Company also
manufactures fiber optic cable primarily for the cable television industry.
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 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 Telecom Act and the 1992 Cable Act, and
their implementing regulations adopted in 1993 and 1994. Regional Bell
Operating Companies ("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.
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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 that 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
from approximately $66 million in 1992 to approximately $200 million in
1997, before declining to approximately $139.8 million in 1998. In 1998,
the Company had sales in more than 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 16 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
operators, with whom the Company has had long established business
relationships, are active investors in cable television systems outside the
United States.
Management remains guarded about the near-term outlook for
international sales. During 1998, international sales decreased by
approximately 30%, or $60.6 million, compared to 1997, due to monetary
crises in key overseas markets, including the Pacific Rim and South
America. Excluding the Seneffe acquisition, which is expected to provide
approximately 5% sales growth in 1999, management expects 1999
international sales to be relatively unchanged compared to 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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. However, the Company
cannot predict with certainty the outlook for international sales in 1999
and beyond due to unpredictable political and economic uncertainties.
The Company recently completed its acquisition of Alcatel's CATV
coaxial cable business in Seneffe, Belgium. This acquisition gives
CommScope access to established European distribution channels and
complementary coaxial cable technologies. CommScope believes that it will
also supply Alcatel with its future worldwide requirements of CATV coaxial
cable for a period of time to be determined. The Company believes that this
acquisition provides access to key strategic markets and creates the
opportunity for growth in sales, cash flow and stockholder value over the
long term. While the Company expects the transaction to be neutral to
slightly negative to 1999 earnings, it expects it to be accretive
thereafter.
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.
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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 UltraMedia
unshielded twisted pair ("UTP"). The Company's management believes that
UltraMedia 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 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 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. Cell Reach has been installed to date in more than 1,200
cellular and PCS sites with leading service providers such as Nextel
Communications, Inc., Sprint Corporation and Sprint affiliates. There are,
however, 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. For
example, the Company recently acquired the clad wire fabrication equipment
and technology of Texas Instruments Incorporated for manufacturing
copper-clad aluminum wire and copper-clad steel wire. This acquisition
allows the Company to further vertically integrate its processes, providing
an opportunity to significantly reduce cost. The Company also intends to
pursue fine wire drawing to produce braid wires for flexible coaxial
cables. 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
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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.
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,
such as FEP. These materials 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. In addition, the Company
recently announced an engineering breakthrough for the extrusion of FEP.
The patent pending thin-wall foam FEP process improves signal velocity and
uses significantly less raw material in a smaller diameter cable in typical
applications. The Company believes that this process enhances its ability
to grow and serve customers in all LAN segments. The Company has
incorporated this new foaming technology in certain products, continues to
ramp up production and expects to reach full production capacity during
1999.
FIBER OPTIC CABLES. To manufacture fiber optic cables, the Company
purchases bulk uncabled optical fiber singles and 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
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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, $6 million and $5 million for the years ended December 31,
1998, 1997 and 1996, 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. 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.
SALES AND DISTRIBUTION
The Company markets its products worldwide through a combination of
more than [100] direct sales, territory managers and manufacturers'
representative personnel. The Company supports its sales organization with
regional service centers in: North Carolina; California; Alabama; Seneffe,
Belgium, 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. The Company is expanding its
global presence through its acquisition of Europe's largest manufacturer of
CATV coaxial cable. See "--Business Units--International Markets."
A key aspect of the Company's customer support and distribution chain
is the use of its private truck fleet. Management believes that the ability
to offer rapid delivery services, materials management and logistics
services to customers through its private truck fleet is an important
competitive advantage.
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 TCI (recently purchased by AT&T), Time
Warner Cable, MediaOne of Delaware, Inc., Comcast and Cablevision Systems
Corporation. Many of the major MSOs are customers of the Company, including
those listed above. During 1998 and 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. 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
44 patents worldwide and has 63 pending applications. Although the Company
considers its patents to be valuable assets, no single patent is
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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, 1998, 1997 and 1996, the Company had an order backlog
of approximately $43 million, $55 million and $36 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.
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. More 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, FEP and other plastic
insulating materials, optical fibers, and wood and cardboard shipping and
packaging materials. In 1998, approximately 13% 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. However, the
Company recently acquired the clad wire fabrication equipment and
technology of Texas Instruments Incorporated for manufacturing copper-clad
aluminum wire and copper-clad steel wire. At full capacity, this
acquisition will give the Company the ability to produce a significant
portion of the bi-metal center conductors used by the Company. In addition
to bi-metallic wires, fine aluminum wire, which is a smaller raw material
purchase than bi-metallic wire, is purchased primarily from a single
source. However, the Company also intends to pursue fine wire drawing to
produce braid wires for flexible coaxial cables. 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 and the Company was unable to vertically integrate the production of
these products. 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. The Company has demonstrated an ability, on a limited
basis, to successfully foam FEP. The Company's ability to successfully foam
FEP on a large scale commercial basis would help moderate the impact of any
limitation of the FEP supply. With respect to all other major raw materials
used by the Company, alternative sources of supply or access to alternative
8
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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 operations and
financial condition.
EMPLOYEES
At December 31, 1998, approximately 2,600 people were employed by the
Company. 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; Scottsboro, Alabama; and Seneffe, Belgium. 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 the Company's
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.
The Scottsboro, Alabama facility occupies 150,000 square feet and is
owned by the Company. The Scottsboro facility manufactures coaxial cables.
The Statesville, North Carolina facility occupies approximately
315,000 square feet and is owned by the Company. The Statesville facility
houses certain LAN cable manufacturing, cable-in-conduit manufacturing,
recycling activities, research and development, and engineering activities.
During 1999, the Company purchased an approximately 120,000 square
foot facility in Seneffe, Belgium, which houses certain coaxial cable
manufacturing activities.
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.
9
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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, 1998.
10
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Spin-off, 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 periods indicated. The stock price information shown below
does not include "when-issued" trading prior to the Spin-off.
COMMON
STOCK PRICE
RANGE
-----------------------
HIGH LOW
----------- -----------
1997
Third Quarter (beginning July 28) $19 $ 12 3/4
Fourth Quarter $14 7/16 $ 10 3/8
1998
First Quarter $15 3/16 $ 11 5/8
Second Quarter $17 7/16 $ 13 5/16
Third Quarter $20 11/16 $ 9 3/8
Fourth Quarter $17 1/4 $ 8 3/4
As of March 11, 1999, the approximate number of registered
stockholders of record of the Company's Common Stock was 775.
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)
Years ended
December 31 1998 1997 1996 1995 1994
- ----------- ---- ---- ---- ---- ----
RESULTS OF
OPERATIONS:
Net sales $ 571,733 $ 599,216 $ 572,212 $ 485,160 $445,328
Gross profit 134,593 141,000 155,089 129,428 127,862
Operating income 70,970 79,182 100,254 85,263 87,770
Net income 39,231 37,458 57,122 47,331 45,096
NET INCOME PER
SHARE INFORMATION
(1)
Pro forma net
income -- $ 34,604 $ 51,908 -- --
Weighted average
number of shares
outstanding:
Basic 49,221 49,107 49,105 -- --
Assuming dilution 49,521 49,238 49,200 -- --
Net income per
share - pro forma
except for 1998:
Basic $ 0.80 $0.70 $1.06 -- --
11
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Assuming dilution $ 0.79 $0.70 $1.06 -- --
OTHER INFORMATION:
Earnings before net
interest, taxes,
depreciation and
amortization
("EBITDA") (2) $ 99,616 $ 96,606 $ 121,045 $ 102,597 $ 104,188
Depreciation and
amortization 24,662 21,677 18,952 17,219 16,422
Capital expenditures 22,784 29,871 33,218 27,281 33,089
BALANCE SHEET DATA:
Total assets $ 465,327 $ 483,539 $ 479,885 $ 412,378 $ 397,843
Working capital 93,982 112,786 107,220 72,908 69,269
Long-term debt,
including current
maturities (3) 181,800 265,800 10,800 10,800 --
Stockholders'
equity (3) 203,972 150,032 393,560 339,177 343,169
(1) Pro forma net income, weighted average number of shares outstanding
and net income per share have not been presented for 1995 and 1994
since the Company, through its wholly owned subsidiary CommScope, Inc.
of North Carolina ("CommScope NC"), was formerly a wholly owned
indirect subsidiary of General Instrument Corporation ("General
Instrument") prior to July 28, 1997 (the "Distribution Date"). On the
Distribution Date, through a series of transactions and stockholder
dividends initiated by General Instrument (the "Distribution"),
CommScope NC became a wholly owned subsidiary of the Company. The
unaudited 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 incurred at the Distribution Date.
A total of 49.1 million common shares outstanding and 49.2 million
common and common equivalent shares outstanding at the Distribution
Date are assumed to be outstanding since January 1, 1996.
(2) 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. The EBITDA measure
included herein may not be comparable to similarly titled measures
reported by other companies. For purposes of the EBITDA calculation,
amortization of deferred financing fees of $150 for 1998 and $70 for
1997 is excluded from net interest. These amounts are included in
depreciation and amortization.
(3) Giving effect to transactions of the Distribution 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY 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"), formerly a wholly owned
indirect subsidiary of General Instrument Corporation ("General
Instrument"), operates in the cable manufacturing business. The Company's
operations are conducted within one business segment that 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
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<PAGE>
other communications applications in the United States. CommScope is also a
leading supplier of coaxial cable to international cable television
markets.
On July 28, 1997 (the "Distribution Date"), through a series of
transactions and stockholder dividends initiated by General Instrument (the
"Distribution"), CommScope NC became a wholly owned subsidiary of the
Company. General Instrument retained no ownership interest in CommScope NC
or the Company, which commenced operations as an independent entity with
publicly traded common stock on the Distribution Date.
The Company's consolidated financial statements for periods prior to
the Distribution Date reflect the financial position, results of operations
and cash flows of CommScope NC that were included in the consolidated
financial statements of General Instrument. These financial results include
the assets, liabilities, revenues and expenses directly attributable to the
Company's operations and an allocation of certain assets, liabilities,
general corporate and administrative expenses, and net interest expense
from General Instrument. Management believes the assumptions underlying
these financial statements are reasonable, although these financial
statements may not necessarily reflect the results of operations or
financial position had CommScope been a separate, stand-alone entity.
FINANCIAL HIGHLIGHTS
For the three year period 1996-1998, CommScope reported the following
(in thousands, except per share amounts):
Year Ended December 31,
--------------------------------------
1998 1997 (A) 1996 (A)
---------- ----------- -----------
Net income $ 39,231 $ 34,604 $ 51,908
Net income per share - assuming $ 0.79 $ 0.70 $ 1.06
dilution
Net income, excluding
certain one-time events $ 35,931 $ 37,686 $ 51,908
Net income per share - assuming
dilution, excluding certain
one-time events $ 0.73 $ 0.77 $ 1.06
(A) Net income and net income per share information for 1997 and 1996 are
presented on a pro forma basis, giving effect to the Distribution in
July 1997.
One-time events during 1998 include an after-tax profit of $1.4
million related to the sale of certain real and personal property and
inventories of the High Temperature Aerospace and Industrial Cable Business
and an after-tax benefit of $1.9 million related to the partial reversal of
1997 after-tax charges associated with a closed Australian joint venture.
One-time events during 1997 include an after-tax charge of $3.1 million
associated with the closing of an Australian joint venture.
The Company's consolidated financial statements and related notes,
included elsewhere in the 1998 Annual Report, should be read as an integral
part of the financial highlights and the following financial review.
13
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 WITH
THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales for the year ended December 31, 1998 were $571.7 million
compared to $599.2 million in 1997, a decrease of 5%. The following table
presents the Company's revenues (in millions) by product line and domestic
versus international sales for the years ended December 31, 1998 and 1997,
respectively:
1998 Net % of 1998 1997 Net % of 1997
Sales Net Sales Sales Net Sales
----------------------------------------------
CATV Products $ 457.2 80.0 $ 491.5 82.0
LAN Products 74.8 13.1 76.6 12.8
Other products 39.7 6.9 31.1 5.2
----------------------------------------------
Total $ 571.7 100.0 $ 599.2 100.0
==============================================
Domestic sales $ 431.9 75.6 $ 398.8 66.6
International sales 139.8 24.4 200.4 33.4
----------------------------------------------
Total $ 571.7 100.0 $ 599.2 100.0
==============================================
CommScope is a leading manufacturer and supplier of coaxial cable for
cable television applications and other video telecommunications
applications (including in-home video wiring, broadcast and security) -
collectively referred to as "CATV Products" - in the United States and
internationally. Sales of CATV Products represented 80% of the Company's
net sales in 1998, compared to 82% in 1997.
Overall sales of CATV Products in 1998 decreased by 7% compared to
1997. Domestically, sales of CATV Products increased by 8%, driven
primarily by increased sales to multiple system operators using HFC
networks, who continued their system upgrading activities.
International sales (of which over 96% are for CATV Products)
decreased 30%, or $60.6 million, in 1998 from 1997 international sales of
$200.4 million. Sales to Latin America and the Pacific Rim were affected
due to the economic turmoil experienced in those regions during 1998. Sales
to the Pacific Rim were also negatively affected by decreased sales
activity in Australia ($0.9 million in 1998 compared to $10.3 million in
1997).
Management remains guarded about the near term outlook for
international sales. Excluding the Seneffe acquisition (discussed below),
which is expected to provide approximately 5% sales growth in 1999,
management expects the Company's overall 1999 international sales to be
relatively unchanged compared to 1998. The Company cannot predict with
certainty the outlook for international sales in 1999, however, and the
continued economic turmoil in international markets could result in lower
international sales in 1999 compared to 1998.
The Company expects that international sales in 1999 should be
impacted favorably by the announced acquisition of Alcatel's coaxial cable
business in Seneffe, Belgium (effective January 1, 1999). This acquisition
provides the Company with a European base of operations, access to
established distribution channels and complementary coaxial cable
technologies.
To complement its offering of CATV Products, the Company continues to
focus on growth opportunities for products used in local area network
applications ("LAN Products"). As a leader in the concept of high
performance premise wiring cable, sales of LAN Products have grown from
approximately $25 million in 1993 to $76.6 million in 1997, before
decreasing 2% in 1998 to $74.8 million. Although the sales of "enhanced"
cable continued to be strong, many of the distributors of "generic" cable
had unanticipated high inventory levels late in 1998 resulting in reduced
sales to those
14
<PAGE>
distributors. The Company anticipates that the lower sales levels of the
fourth quarter 1998 are temporary and expects increased sales of LAN
Products in 1999.
Many of the Company's LAN Products utilize the raw material
fluorinated-ethylene-propylene ("FEP") to produce flame-retarding cables.
There are few worldwide producers of FEP and market supplies of this
product have been periodically limited over the past several years. In
1998, the Company announced that it had developed a patent pending
thin-wall foam FEP process that will use approximately 30% less FEP in
typical product designs and improve signal velocity. Customer response to
initial use of the new products has been positive, and the Company expects
to increase production of the new product designs during 1999.
Overall average selling prices for CATV Products for the full fiscal
year 1998 decreased slightly from 1997, but were generally more stable than
in recent years. Overall average selling prices for LAN Products were
stable for 1998 as compared to 1997 due to a stronger mix of enhanced
cables, which provide higher unit prices than standard grade cables.
However, overall average selling prices for LAN Products were lower during
the second half of 1998.
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 communications applications. Initial marketing of Cell Reach
cables and accessories as the lowest loss, lowest life-cycle cost solution
for wireless applications to cellular network operators in the United
States and certain international markets began in 1997. Sales of Cell Reach
products represented approximately 2% of total net sales in 1998. Recent
contracts with Airgate Wireless and Sprint PCS, announced late in 1998,
confirm that the Cell Reach product is gaining industry recognition in the
wireless and cellular market.
Sales of other products increased by $8.6 million in 1998 compared to
1997. Included in these amounts are sales of wiring products used in
telecommunication applications, Cell Reach product sales, and sales from
the High Temperature Aerospace and Industrial Cable Business (that was sold
in February 1998).
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit decreased $6.4 million, or 5%, to $134.6 million in 1998
compared to 1997 gross profit of $141.0 million. Gross profit margin was
23.5% in 1998 and 1997. The decrease in gross profit is due to the lower
sales volume in 1998 as compared to 1997.
Gross profit margin, while stable on a year-to-year basis, improved
significantly throughout 1998. Gross profit margins were 20.6% for the
first quarter of 1998, 23.0% for the second quarter of 1998, 24.8% for the
third quarter of 1998 and 25.3% for the fourth quarter of 1998. The gross
profit margin improvement of almost 500 basis points during the last three
calendar quarters of 1998 is due primarily to the following factors:
o A stabilization of market prices for the Company's coaxial cable
products
o Engineered manufacturing efficiencies including "value capture"
vertical integration
o Raw material cost improvements (including costs for commodity raw
materials)
o Improving Cell Reach product profitability
The Company has focused intensely on developing or acquiring
manufacturing capabilities that allow for the in-house production or
modification of materials and components used in the production of its
finished products that are more efficient than commercially practiced. As
the Company continues to capitalize on its competitive cost advantages by
expanding the reach of its vertical integration projects, the overall cost
of production is expected to improve. The Company currently has two key
projects planned that should maintain its cost reduction momentum during
1999.
The Company's Cell Reach product generated negative gross profit
margin during initial marketing and test installations in 1997. For 1997,
Cell Reach manufacturing start-up costs negatively impacted gross profit
margin by approximately 70 basis points. As Cell Reach has gained industry
recognition
15
<PAGE>
during 1998, product sales have increased and the product has produced
positive gross profit margin in 1998.
The Company anticipates continued improvements in gross profit margins
in 1999 due to the pricing and cost initiatives in place. However, these
improvements may be moderated by the implementation of a new factory
information management system and the impact of the acquisition and
transition of the coaxial cable business operations in Seneffe, Belgium.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expense increased $2.4
million, or 5%, to $52.8 million in 1998 compared to $50.4 million in 1997.
The increase in SG&A expense is due primarily to expanded sales and
marketing efforts for the Company's products. As a percentage of net sales,
SG&A expense was 9.2% in 1998 and 8.4% in 1997.
With the additional costs of the Seneffe operations, the planned
expansion of sales and marketing efforts, and the planned implementation of
a new information management system planned during 1999, SG&A expense for
1999 is expected to increase from 1998 levels.
Research and development expense was 1% of net sales in both 1998 and
1997.
OTHER INCOME (EXPENSE), NET
Other income, net was $4.1 million in 1998 and other expense, net was
$4.2 million in 1997. Other income, net includes a $2.0 million benefit for
the partial reversal of 1997 pretax charges related to the Company's
financial investment in an Australian joint venture and a one-time gain
from the sale of its High Temperature Aerospace and Industrial Cable
Business of $1.9 million. Other expense, net in 1997 primarily reflects
pretax charges of $3.9 million to reduce the Company's total current
financial investment in an Australian joint venture to expected net
realizable value.
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 pretax
charges of $3.9 million to other expense to reduce its total current
financial investment in the joint venture to expected net realizable value.
Tax benefits were recorded at the Company's effective tax rate reduced by a
$0.7 million valuation allowance established for expected non-deductible
capital losses resulting from the investment. Net of tax benefits of $0.8
million, these charges reduced 1997 net income by $3.1 million ($0.06 per
share).
In July 1998, a formal termination and dissolution agreement for the
joint venture was completed. The liquidation of the joint venture's assets
in 1998, which was impacted by the terms of the formal termination and
dissolution agreement between the partners, resulted in improved
expectations for the financial position of the joint venture at final
dissolution than was anticipated at December 1997. Accordingly, $2.0
million of the 1997 pretax charges related to the Company's financial
investment in the joint venture were reversed into other income ($0.04 per
share after taxes, including reversal of the capital loss valuation
allowance established in 1997).
NET INTEREST EXPENSE AND INCOME TAXES
Net interest expense was $14.9 million in 1998 compared to $13.5
million in 1997. On a pro forma basis (giving effect to the Distribution as
if it had occurred on January 1, 1997), net interest expense was $18.1
million in 1997. The reduction in net interest expense in 1998 compared to
pro forma net interest expense in 1997 is attributable to an $84 million
reduction in borrowings under the Company's revolving credit facility in
1998 (and a total reduction of $95 million from the Distribution Date to
December 31, 1998).
The Company's effective tax rate in 1998 was 34.8% (representing a 36%
normal effective tax rate reduced primarily by the effects of the change in
a capital loss valuation allowance of 1.1%). The Company's effective tax
rate in 1997 was 39.1% (representing a 38% normal effective tax rate
increased by 1.1% for the establishment of a capital loss valuation
allowance). The capital loss valuation allowance established in 1997
relates to expected non-deductible capital losses resulting from the
16
<PAGE>
Company's equity investment in an Australian joint venture. The 200 basis
point reduction in the normal effective tax rate for 1998 compared to 1997
is due to increased tax benefits from foreign sales and the utilization of
state investment tax credits.
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 the Company'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 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 in 1997.
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.
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
lower 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 from the High Temperature
Aerospace and Industrial Cable Business, acquired along with certain other
assets primarily used in the production of certain LAN Products, from
Teledyne Industries, Inc. in May 1996. Sales from the High Temperature
Aerospace and Industrial Cable Business (which was sold in February 1998)
were $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. Other sales, primarily of wiring products used in
telecommunication applications, were $14.6 million in 1997 compared to $9.0
17
<PAGE>
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 margin was
23.5% in 1997 and 27.1% in 1996. The decrease in gross profit and gross
profit margin were due to market price competition, higher raw material
costs, low gross profit margin in the High Temperature Aerospace and
Industrial Cable Business, and negative gross profits 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. For 1997, Cell Reach manufacturing
start-up costs negatively impacted gross profit margin by approximately 70
basis points.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expense increased $6.1
million, or 14%, to $50.4 million in 1997 compared to $44.3 million in
1996. The increase in SG&A expense is due primarily to expanded sales and
marketing efforts for the Company's products, particularly for growth
opportunities in international cable and network markets, and the
development of a sales force to support the sale of Cell Reach products.
General and administrative expenditures related to the Distribution also
contributed slightly to the overall increase in SG&A expense. As a
percentage of net sales, SG&A expense was 8.4% in 1997 and 7.7% in 1996.
Research and development expense was 1% of net sales in both 1997 and
1996.
OTHER INCOME (EXPENSE), NET
Other expense, net was $4.2 million in 1997 and other income, net was
$1.8 million in 1996. Other expense, net in 1997 primarily reflects pretax
charges of $3.9 million to reduce its total current financial investment in
an Australian joint venture to expected net realizable value. Other income,
net in 1996 primarily reflects the Company's share of income generated by
its 49% investment in the Australian joint venture (acquired in August
1995).
NET INTEREST EXPENSE AND INCOME TAXES
Net interest expense, as recorded in the consolidated statements of
income, was $13.5 million in 1997 compared to $10.0 million in 1996.
On a pro forma basis (giving effect to the Distribution as if it had
occurred on January 1, 1996), net interest expense was $18.1 million in
1997 compared to $18.4 million in 1996. Pro forma interest expense was
computed using an assumed weighted-average borrowing rate of 6.35% plus the
amortization of debt issuance costs associated with borrowings initially
outstanding under the Company's credit facilities at the Distribution Date.
The reduction in pro forma net interest expense in 1997 compared to 1996 is
attributable to an $11.0 million reduction in borrowings under the
Company's revolving credit facility from the Distribution Date to December
31, 1997.
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
39.1% in 1997 (representing a 38% normal effective tax rate increased by
1.1% for the establishment of a valuation allowance related to expected
non-deductible capital losses resulting from the Company's equity
investment in an Australian joint venture) and 38% in 1996.
CASH FLOWS
Cash provided by operating activities was $82.9 million in 1998, $59.7
million in 1997 and $52.0 million in 1996. Cash provided by operating
activities primarily represents net income plus non-cash
18
<PAGE>
charges for depreciation, amortization and changes in deferred income
taxes, adjusted for the change in working capital.
Cash used in investing activities was $12.8 million in 1998, $29.6
million in 1997 and $51.0 million in 1996. The Company invested $22.8
million in 1998, $29.9 million in 1997 and $33.2 million in 1996 to acquire
equipment and facilities in support of capacity expansion across the
business units to meet increased current and anticipated future demands for
CommScope products. Cash proceeds from the sale of assets of the High
Temperature Aerospace and Industrial Cable Business in 1998 totaled $9.7
million. In 1996 the Company utilized $17.8 million to acquire the High
Temperature Aerospace and Industrial Cable Business, along with certain
other assets primarily used in the production of certain LAN Products, from
Teledyne Industries, Inc. Planned capital expenditures for equipment and
facilities during 1999 are $37 million, and will be impacted by the pace of
spending for vertical integration activities.
Cash used in financing activities was $69.3 million in 1998, $26.8
million in 1997 and $1.0 million in 1996. During 1998, the Company made net
repayments of $84.0 million of amounts borrowed under its revolving credit
facility. The Company received cash proceeds of $13.5 million from the
issuance of stock in a secondary public offering (completed primarily for
the sale of existing shares of stock held by partnerships associated with
Forstmann Little & Co.) and cash proceeds from the exercise of stock
options during 1998 of $1.2 million.
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 initially borrowed $266 million under
the Credit Agreement. The initial borrowings were 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
totaled $11.0 million.
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 million
in 1997 and $1.0 million in 1996. The Company established an independent
cash management program on the Distribution Date to support future business
levels and growth objectives.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital was $94.0 million at December 31, 1998 compared to
$112.8 million and $107.2 million at December 31, 1997 and 1996,
respectively. The 1998 decrease in working capital of $18.8 million is
primarily the result of a $12.2 million reduction in inventory 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.
Currently, the Company's primary source of funds for general working
capital needs, financing capital expenditures and other general corporate
purposes is the $350 million Credit Agreement, of which $171 million in
borrowings are outstanding at December 31, 1998. Interest on outstanding
borrowings under the Credit Agreement 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, which are
described more fully in Note 9 of the consolidated financial statements.
The Company was in compliance with these loan covenants at December 31,
1998. The weighted-average variable interest rate on outstanding borrowings
and associated credit fees under long-term debt facilities at December 31,
1998 was 6.16%.
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<PAGE>
The Company utilizes the Credit Agreement 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.
The ratio of total debt to total capital (debt plus equity) was 47% at
December 31, 1998 compared to 64% at December 31, 1997. The decrease in the
ratio was primarily due to net repayments of borrowings under the Company's
Credit Agreement of $84 million, net income for 1998, and $13.5 million in
proceeds from the issuance of stock in the secondary offering.
RISK MANAGEMENT
In the normal course of business, CommScope is exposed to the risk of
loss from non-performance by its customers under outstanding extensions of
credit (accounts receivable). The Company controls exposures to credit risk
associated with these financial instruments through credit approvals,
credit limits and monitoring procedures. At December 31, 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.
CommScope is exposed to market risk from changes in commodity raw
material prices, changes in foreign currency exchange rates and increases
in interest rates, which could impact its results of operations and
financial condition. CommScope manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments.
Derivative financial instruments are not used for speculative or trading
purposes.
Many of the raw materials utilized in the Company's manufacturing
operations are commodity products that are openly traded on exchange
markets, and are subject to significant changes in market prices. Changes
in the prices of commodity raw materials used by the Company could result
in higher overall production costs, thereby negatively impacting the
Company's gross profit margin. As of December 31, 1998, the Company had
entered into a commodity price swap agreement to effectively lock in a
fixed price for a portion of its third quarter 1999 aluminum purchases. The
total value of aluminum covered by the commodity price swap agreement in
place at December 31, 1998 equates to less than 1% of the Company's average
quarterly cost of sales. As of December 31, 1997 the Company had not
entered into any derivative financial instruments to hedge its exposures to
changes in the market prices of commodity products.
The Company primarily bills customers in foreign countries in U.S.
dollars. However, a significant decline in the value of currencies used in
certain regions of the world as compared to the U.S. dollar can adversely
affect product sales in those regions because CommScope products may become
more expensive for those customers to pay for in their local currency. The
Company had not entered into any derivative financial instruments related
to foreign currency exchange rates at December 31, 1998 or 1997.
The Company's primary source of funds currently (other than cash flows
from operations) is borrowings available under the $350 million Credit
Agreement. Amounts borrowed under the Credit Agreement incur interest at
variable rates that are based on an underlying market rate such as LIBOR or
the prime rate. The interest term for individual borrowings under the
Credit Agreement cannot exceed six months, at which time the underlying
market rate of the individually outstanding borrowings is reset to the
current market rates. As of December 31, 1998, the Company had entered into
interest rate swap agreements to effectively convert an aggregate amount of
$100 million of 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 interest rate swap agreements are
recorded as adjustments to interest expense in each quarter. The Company
had similar interest rate swap agreements outstanding at December 31, 1997.
20
<PAGE>
The fair value of the Company's commodity price and interest rate swap
agreements was not material to the Company's financial position at December
31, 1998 or 1997.
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, plastics, bi-metals, copper and optical fiber) 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.
OTHER
CommScope is either a plaintiff or a defendant in pending legal
matters in the normal course of business; however, management believes none
of these legal matters will have a materially adverse effect on the
Company'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. 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
materially adverse effect on the Company's financial statements.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income", on January 1, 1998.
Comprehensive income is defined as "all changes in stockholders' equity
exclusive of transactions with owners". Examples of items to be reported as
"other comprehensive income" include unrealized gains or losses on
available-for-sale securities, translation adjustments on investments in
consolidated foreign subsidiaries and certain changes in minimum pension
liabilities. There were no transactions representing other comprehensive
income during the years ended December 31, 1998, 1997 or 1996.
Comprehensive income will also include gains and losses on certain
derivative transactions that qualify as hedges, as computed under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 was issued in June 1998 and will be adopted by the Company on
January 1, 2000. SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes special accounting
standards for derivatives that qualify as fair value hedges, cash flow
hedges and hedges of foreign currency exposures of net investments in
foreign operations. Management is evaluating the impact of the adoption of
SFAS No. 133 on the Company's financial position and operations.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies, and adopted the Euro as their new common legal currency. As of
that date, the Euro trades on currency exchanges. The legacy currencies of
the participating countries will remain legal tender for a transition
period between January 1, 1999 and January 1, 2002. The Company conducts
business in member countries.
During the transition period, cash-less payments (for example, wire
transfers) can be made in the Euro, and parties to individual transactions
can elect to pay for goods and services using either the Euro or the legacy
currency. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and eventually withdraw all
legacy currencies so that they will no longer be available.
The Company is addressing the issues involved with the introduction of
the Euro. Among the issues facing the Company are the assessment and
conversion of information technology ("IT") systems to allow for
transactions to take place in both the legacy currencies and the Euro and
the eventual
21
<PAGE>
elimination of the legacy currencies. In addition, the Company is reviewing
certain existing contracts for potential modification and assessing its
pricing/marketing strategies in the affected European markets.
Based on current information, CommScope does not expect that the Euro
conversion will have a material adverse effect on its business, results of
operations, cash flows or financial condition.
YEAR 2000
CommScope is currently addressing an issue common to most companies -
ensuring that its existing 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. The Company'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 of 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. Almost all of the Company's
suppliers are still engaged in executing their Year 2000 compliance
efforts. As a result, the Company at this time cannot fully evaluate the
Year 2000 risks to its supply of goods and services. The Company maintains
a list of alternative suppliers as part of its contingency plan in the
event current suppliers do not timely complete their compliance efforts.
However, because there are limited sources of certain materials used in
manufacturing the Company's products, the Company may not be able to
develop an alternative source of supply if the operations of its current
suppliers are interrupted as a result of Year 2000 non-compliance.
CommScope will continue to
22
<PAGE>
monitor the Year 2000 status of its suppliers to minimize this risk and
will develop or modify, as appropriate, contingency plans as the risks
become more clear.
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. In addition, certain non-compliant systems and
applications have been or are being replaced with Year 2000 compliant
systems and products. 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. The Company believes that it has achieved 77% Year
2000 compliance for critical internal IT systems and applications at
December 31, 1998, with 100% Year 2000 compliance expected by the third
quarter of 1999. Virtually all the critical non-IT systems (including a
variety of equipment control devices) are currently being identified,
evaluated and modified, as appropriate, 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 for such
risks. 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 the Company's results of
operations, financial condition or cash flows. The Company estimates that,
through December 31, 1998, it has spent $350,000 to address Year 2000
compliance issues for IT systems and applications and $100,000 for non-IT
devices. Future expenditures to address Year 2000 compliance issues are
currently estimated at $400,000 for IT systems and applications and
$500,000 for non-IT devices. The Company expects to finance expenditures
for Year 2000 compliance modifications through cash flows from future
operations.
Due to the Company's dependence upon, and its current uncertainty
with, the Year 2000 compliance of certain third-party suppliers and
vendors, the Company is unable to determine at this time its most
reasonably likely worst case scenario. The Company expects its Year 2000
compliance efforts to reduce significantly the Company's current level of
uncertainty regarding the impact of these Year 2000 issues.
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
Effective January 1, 1999, the Company acquired certain assets and
assumed certain liabilities of Alcatel's coaxial cable business in Seneffe,
Belgium. The acquisition provides the Company with a European base of
operations, access to established distribution channels and complementary
coaxial cable technologies. The operation in Seneffe is the largest CATV
coaxial cable manufacturer in Europe with annual sales by Alcatel of
approximately $35 million in 1998.
The acquisition will be accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities
will be recorded at their estimated fair value at the date of the
acquisition of approximately $20 million. Payment for the acquired business
will be financed primarily by borrowings under a new credit agreement for
15 million Euros (approximately $17 million) entered into by the Company in
the first quarter of 1999.
23
<PAGE>
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", "think", "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 this
Form 10-K, 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.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE #
------------------------------------------------------------------------
Independent Auditors' Report. 26
Consolidated Statements of Income for the Years ended
December 31, 1998, 1997 and 1996. 27
Consolidated Balance Sheets at December 31, 1998 and
1997. 28
Consolidated Statements of Cash Flows for the Years
ended December 31, 1998, 1997 and 1996. 29
Consolidated Statements of Stockholders' Equity for
the Years ended December 31, 1998, 1997 and 1996. 30
Notes to Consolidated Financial Statements. 31-45
Schedule II - Valuation and Qualifying Accounts. 46
25
<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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998 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
January 29, 1999
26
<PAGE>
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- ------------
Net Sales (Notes 4, 5 and 16) % 571,733 $ 599,216 572,212
------------- ------------- ------------
Operating costs and expenses:
Cost of sales 437,140 458,216 417,123
Selling, general and 52,817 50,361 44,342
administrative
Research and development 5,612 6,234 5,348
Amortization of goodwill 5,194 5,223 5,145
------------- ------------- ------------
Total operating costs and expenses 500,763 520,034 471,958
------------- ------------- ------------
Operating Income 70,970 79,182 100,254
Other income (expense), net (Note 4) (4,134) (4,183) 1,839
Interest expense (15,448) (13,685) (10,091)
Interest income 558 200 101
------------- ------------- ------------
Income Before Income Taxes 60,214 61,514 92,103
Provision for income taxes (Note 11) (20,983) (24,056) (34,981)
------------- ------------- ------------
Net Income $ 39,231 37,458 57,122
============= ============= ============
Net income per share:
Basic $ 0.80
Assuming dilution $ 0.79
Weighted-average shares outstanding:
Basic 49,221
Assuming dilution 49,521
Historical net income per share data for 1997 and 1996 is not considered
relevant for the reasons provided in Notes 2 and 3. Pro forma net income
per share data is presented in Note 3.
See notes to consolidated financial statements.
27
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COMMSCOPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As of December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $4,129 $ 3,330
Accounts receivable, less allowance for doubtful
accounts of $4,126 and $3,985, respectively 93,627 95,741
Inventories (Note 6) 29,986 42,223
Prepaid expenses and other current assets 3,745 2,439
Deferred income taxes (Note 11) 12,925 12,102
------------ ------------
Total current assets 144,412 155,835
Property, plant and equipment, net (Note 7) 135,082 133,235
Goodwill, net of accumulated amortization of
$43,396 and $38,263, respectively 164,024 170,345
Other intangibles, net of accumulated amortization of
$29,314 and $26,573, respectively 19,451 22,192
Investments and other assets (Note 4) 2,358 1,932
------------ ------------
Total Assets $ 465,327 $ 483,539
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 23,717 $18,533
Other accrued liabilities (Note 8) 26,713 24,516
------------ ------------
Total current liabilities 50,430 43,049
Long-term debt (Note 9) 181,800 265,800
Deferred income taxes (Note 11) 17,543 14,932
Other long-term liabilities (Note 10) 11,582 9,726
------------ ------------
Total 261,355 333,507
Liabilities
Commitments and contingencies (Note 15)
Stockholders' Equity (Notes 1, 9,12 and 13):
Preferred stock, $.01 par value; Authorized shares:
20,000,000;
Issued and outstanding shares:
None at December 31, 1998 and 1997 -- --
Common Stock, $.01 par value; Authorized shares:
300,000,000;
Issued and outstanding shares: 50,254,467 at
December 31, 1998;
49,108,874 at December 31, 1997 503 491
Additional paid-in capital 155,631 140,934
Retained earnings 47,838 8,607
------------ ------------
Total Stockholders' Equity 203,972 150,032
------------ ------------
Total Liabilities and Stockholders' Equity $ 465,327 $ 483,539
============ ============
See notes to consolidated financial statements.
28
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COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------ ----------------- ---------------
OPERATING ACTIVITIES:
Net income $ 39,231 $ 37,458 $57,122
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and 24,662 21,677 18,952
amortization
Gain on sale of assets of
the high temperature
aerospace and industrial (1,873) -- --
cable business
Changes in assets and
liabilities:
Accounts receivable 5,114 6,076 (19,775)
Inventories 6,318 (1,087) (12,059)
Prepaid expenses and
other current assets (1,546) (1,125) (705)
Deferred income taxes 1,788 1,374 1,030
Accounts payable and
other accrued liabilities 7,667 (7,713) 6,686
Other long-term 1,856 161 2,139
liabilities
Other (340) 2,894 (1,426)
-------------- --------------- ---------------
Net cash provided by operating 82,877 59,688 51,964
activities -------------- --------------- ---------------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment (22,784) (29,871) (33,218)
Acquisition of Teledyne
Industries, Inc. assets, net -- -- (17,849)
Sale of assets of the high
temperature aerospace and
industrial cable business 9,654 -- --
Other 343 268 65
Net cash used in investing (12,787) (29,603) (51,002)
activities -------------- --------------- ---------------
FINANCING ACTIVITIES:
Net borrowings (repayments)
under revolving credit (84,000) 255,000 --
facility
Debt issuance costs -- (705) --
Dividend paid to former
parent company -- (265,212) --
Proceeds from exercise of
stock options 1,235 -- --
Proceeds from issuance of
shares in secondary offering 13,474 -- --
Transfers to former parent
company, net -- (15,838) (962)
Net cash used in financing (69,291) (26,755) (962)
activities -------------- --------------- ---------------
Increase in cash and cash 799 3,330 --
equivalents
Cash and cash equivalents,
beginning of year 3,330 -- --
-------------- --------------- ---------------
Cash and cash equivalents, end $ 4,129 $ 3,330 $ --
of year ============== =============== ===============
See notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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, -- $ -- $ -- $339,177 $ -- $ 339,177
1995
Transfers to former
parent company, net -- -- -- (962) -- (962)
Other transactions
with former parent -- -- -- (1,777) -- (1,777)
company
Net income (and
comprehensive income) -- -- -- 57,122 -- 57,122
-------------------------------------------------------------------
Balance December 31, 1996 -- -- -- 393,560 -- 393,560
Transfers to former
parent company, net -- -- -- (15,838) -- (15,838)
Dividend paid to
former parent company -- -- -- (265,212) -- (265,212)
Net income (and
comprehensive
income) from January
1, 1997 to July 27, 1997 -- -- -- 28,851 -- 28,851
Issuance of shares in
the Distribution 49,104,874 491 140,870 (141,361) -- --
(Note 1)
Issuance of 4,000 shares 4,000 -- 64 -- -- 64
Net income (and
comprehensive
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
Issuance of shares in
secondary offering 1,050,573 11 13,463 -- -- 13,474
Issuance of shares
for stock option 95,020 1 1,234 -- -- 1,234
exercises
Net income (and
comprehensive income) -- -- -- -- 39,231 39,231
-------------------------------------------------------------------
Balance December 31, 50,254,467 $ 503 $155,631 -- 47,838 $ 203,972
1998
===================================================================
Comprehensive income is equal to net income during all periods presented.
During all periods presented, the Company has no individual items comprising
other comprehensive income.
See notes to consolidated financial statements.
</TABLE>
30
<PAGE>
COMMSCOPE, INC.
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 ("CommScope NC"), formerly a wholly owned indirect
subsidiary of General Instrument Corporation ("General Instrument"),
operates in the cable manufacturing business. The Company's operations are
conducted within one business segment that 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.
On July 28, 1997 (the "Distribution Date"), through a series of
transactions and stockholder dividends initiated by General Instrument (the
"Distribution"), CommScope NC became a wholly owned subsidiary of the
Company. General Instrument retained no ownership interest in CommScope NC
or the Company, which commenced operations as an independent entity with
publicly traded common stock on the Distribution Date.
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 the Company's operations and an allocation of certain
assets, liabilities, general corporate and administrative expenses, and net
interest expense from General Instrument. General corporate and
administrative expenses were allocated to the Company 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
the Company'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 the Company's expected annual effective tax rate,
calculated assuming CommScope had filed tax returns as a separate,
free-standing entity. The allocations of expenses from General Instrument
were made consistently in each period. Although management believes these
allocations are reasonable, the financial results prior to the Distribution
do not necessarily reflect the financial position and results of operations
of CommScope had it operated as a separate, free-standing entity during
these periods, and may not be indicative of future operations or financial
position.
The financial results of the Company and transfers of capital to/from
General Instrument by the Company prior to the Distribution were included
in the consolidated results of operations and financial position of General
Instrument. Accordingly, all transactions affecting stockholders' equity
prior to the Distribution Date are presented as divisional equity in the
consolidated statements of stockholders' equity. 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 was 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 an independent cash management
program and assumed
31
<PAGE>
responsibility for the general corporate and administrative expenses,
financing costs and income taxes associated with operating a separate,
free-standing public company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent amounts on deposit in banks and cash
invested temporarily in various instruments with a maturity 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 three 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
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, 1998, the
carrying value and remaining life of recorded goodwill, other intangibles
and other long lived assets is appropriate.
INCOME TAXES
The Company'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. For periods prior to the Distribution, currently payable
or refundable federal income taxes (plus certain state income taxes) and
changes in deferred tax assets and liabilities were settled with General
Instrument through divisional equity.
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 the Company's future legal structure and tax
elections.
Under a tax-sharing agreement entered into with General Instrument and
other previously related parties 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.
Deferred income taxes reflect the future tax consequences of differences
between the financial reporting and tax bases of assets and liabilities.
Investment tax credits are recorded using the flow-through method.
REVENUE RECOGNITION
Revenue from sales of the Company's products is recorded at the time the
goods are shipped and title passes.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are incurred.
Advertising expense was $0.9 million in 1998, $1.2 million in 1997 and $0.8
million in 1996.
32
<PAGE>
NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Net income per
share (basic) is computed by dividing net income by the weighted-average
number of common shares outstanding. Net income per share (assuming
dilution) is computed by dividing net income by the weighted-average number
of common and common equivalent shares outstanding. The following table
reconciles shares outstanding for each computation of net income per share
under SFAS No. 128:
Year Ended December 31,
--------------------------------
1998 1997 (A) 1996 (A)
--------- --------- -----------
Weighted-average number of common
shares outstanding 49,221 49,107 49,105
Dilution effect of employee stock 300 131 95
options (B) --------- --------- ---------
Weighted-average number of common
and
common equivalent shares 49,521 49,238 49,200
outstanding ========= ========= =========
(A) Weighted-average shares outstanding information for 1997 and 1996 is
presented on a pro forma basis, and assumes that a total of 49.1
million common shares and 49.2 million common and common equivalent
shares were outstanding from January 1, 1996 to the Distribution Date.
Additionally, the weighted-average share information for 1997 reflects
the impact of changes in common shares outstanding and stock option
dilution subsequent to the Distribution Date. Pro forma net income per
share information is presented in Note 3.
(B) For additional information regarding employee stock options, see Note
12.
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 that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates are
based on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual results.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", on
January 1, 1998. Comprehensive income is defined as "all changes in
stockholders' equity exclusive of transactions with owners". Examples of
items to be reported as "other comprehensive income" include unrealized
gains or losses on available-for-sale securities, translation adjustments
on investments in consolidated foreign subsidiaries and certain changes in
minimum pension liabilities. There were no transactions representing other
comprehensive income during the years ended December 31, 1998, 1997 or
1996.
Comprehensive income will also include gains and losses on certain
derivative transactions that qualify as hedges, as computed under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 was issued in June 1998 and will be adopted by the Company on
January 1, 2000. SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes special accounting
standards for derivatives that qualify as fair value hedges, cash flow
hedges and hedges of foreign currency exposures of net investments in
foreign operations. Management is evaluating the impact of the adoption of
SFAS No. 133 on the Company's financial position and operations.
3. PRO FORMA FINANCIAL INFORMATION
The Company'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
33
<PAGE>
significantly as a result of initial 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 net income per share
data has been presented for 1997 and 1996.
The unaudited pro forma financial information below presents the
consolidated statements of income of CommScope as if the Distribution had
occurred on January 1, 1996. The unaudited pro forma financial information
does not purport to represent what the Company's operations actually would
have been for the years presented or to project the Company's operating
results for any future period.
The unaudited pro forma information below was prepared by adjusting the
historical consolidated statements of income of the Company to reflect
interest expense based on a net debt level of $275 million at the beginning
of each period presented. Pro forma interest expense was computed using an
assumed weighted-average borrowing rate of 6.35% plus the amortization of
debt issuance costs associated with borrowings initially outstanding under
the Company's credit facilities at the Distribution Date. Weighted-average
common and common equivalent shares outstanding at the Distribution Date
are assumed to be outstanding since January 1, 1996 (see Note 2 for
additional information on weighted-average shares outstanding).
Giving effect to the Distribution as of January 1, 1996, pro forma net
income was $34,604 for the year ended December 31, 1997 ($0.70 per share -
basic and assuming dilution) and $51,908 for the year ended December 31,
1996 ($1.06 per share - basic and assuming dilution). Pro forma net income
for 1997 was calculated based on net interest expense of $18.1 million and
income tax expense of $22.3 million. Pro forma net income for 1996 was
calculated based on net interest expense of $18.4 million and income tax
expense of $31.8 million.
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. The
Company's share of losses from the joint venture in 1997 was $6.1 million,
including the significant fourth quarter 1997 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 pretax charges of
$3.9 million to other expense to reduce its total current financial
investment in the joint venture to expected net realizable value. Tax
benefits were recorded at the Company's effective tax rate reduced by a
$0.7 million valuation allowance established for expected non-deductible
capital losses resulting from the investment (see Note 11 for additional
information on income taxes). Net of tax benefits of $0.8 million, these
charges reduced 1997 net income by $3.1 million ($0.06 per share).
In July 1998, a formal termination and dissolution agreement for the joint
venture was completed. The liquidation of the joint venture's assets in
1998, which was impacted by the terms of the formal termination and
dissolution agreement between the partners, resulted in improved
expectations for the financial position of the joint venture at final
dissolution than was anticipated at December 1997. Accordingly, $2.0
million of the 1997 pretax charges related to the Company's financial
investment in the joint venture were reversed into other income ($0.04 per
share after taxes, including reversal of the capital loss valuation
allowance established in 1997).
Sales of cable products to the joint venture by CommScope totaled $0.9
million in 1998, $10.3 million in 1997 and $24.7 million in 1996.
34
<PAGE>
5. ACQUISITIONS AND DIVESTITURES
In May 1996, CommScope acquired certain assets and assumed certain
liabilities of a specialty high performance wire and cable manufacturing
operation from Teledyne Industries, Inc. ("Teledyne") for a net purchase
price of $17.8 million. The acquired operation specializes in high
temperature aerospace and industrial cables (the "High Temperature
Aerospace and Industrial Cable Business") and local area network cables.
The acquisition was accounted for as a purchase business combination and,
accordingly, the acquired assets and assumed 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 Business
to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. The
Company retained the LAN manufacturing equipment previously purchased from
Teledyne. The Company recognized a pre-tax gain from the sale of $1,873 in
other income.
Sales from the High Temperature Aerospace and Industrial Cable Business
totaled $2.4 million in 1998 prior to the sale, $16.5 million in 1997 and
$7.3 million in 1996 subsequent to the acquisition from Teledyne.
6. INVENTORIES
December 31,
---------------------------
1998 1997
-------------- -------------
Raw materials $ 12,379 $ 16,376
Work in process 5,811 8,860
Finished goods 11,796 16,987
-------------- -------------
$ 29,986 $ 42,223
============== =============
The principal raw materials purchased by CommScope (fabricated aluminum,
plastics, bi-metals, copper and optical fiber) 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.
7. PROPERTY, PLANT AND EQUIPMENT
December 31,
---------------------------
1998 1997
-------------- --------------
Land and land improvements $ 3,577 $ 3,218
Buildings and improvements 43,639 47,202
Machinery and equipment 158,333 142,618
Construction in progress 10,418 7,375
-------------- --------------
215,967 200,413
Accumulated depreciation (80,885) (67,178)
============== ==============
$ 135,082 $ 133,235
============== ==============
35
<PAGE>
8. OTHER ACCRUED LIABILITIES
---------------------------
December 31,
---------------------------
1998 1997
-------------- -------------
Salaries and compensation
liabilities $ 12,379 $ 8,904
Post-retirement benefit liabilities 5,063 5,611
Product reserves 1,799 1,791
Interest 697 2,540
Other 6,775 5,670
-------------- -------------
$ 26,713 $ 24,516
============== =============
9. LONG-TERM DEBT
December 31,
---------------------------
1998 1997
-------------- -------------
Credit Agreement (as defined below) $ 171,000 $255,000
IDA Notes (as defined below) 10,800 10,800
--------------
181,800 265,800
- -------------------------------------
Less current portion -- --
- -------------------------------------
============== =============
$ 181,800 $265,800
============== =============
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 initially borrowed $266 million under
the Credit Agreement. The initial borrowings were 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 utilizes the Credit Agreement 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, of which $0.6 million
was outstanding at December 31, 1998. All amounts borrowed under the Credit
Agreement are due on December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are
available by choosing from one of the following types of loans, which
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 that 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
that 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
36
<PAGE>
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, 1998.
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.
In addition to the above borrowings, the Company also had an outstanding
letter of credit at December 31, 1998 of $20.3 million related to the
acquisition of a coaxial cable business in Seneffe, Belgium (see Note 18).
At December 31, 1998 the weighted-average effective interest rate on
outstanding borrowings and associated credit fees under the Credit
Agreement and the IDA Notes was 6.16%.
As of December 31, 1998, the Company had entered into interest rate swap
agreements to effectively convert an aggregate amount of $100 million of
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.
Interest paid by the Company totaled $17.1 million in 1998, $5.5 million in
1997 and $0.6 million in 1996. 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
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 the Company's Board of Directors. In addition,
eligible employees may elect to contribute up to 10% of their salaries.
CommScope contributes an amount equal to 50% of the first 4% of the
employee's salary that the employee contributes. CommScope contributed $6.8
million in 1998, $8.4 million in 1997 and $6.5 million in 1996 to the
Profit Sharing and Savings Plan, of which $5.4 million, $7.0 million and
$5.5 million each year was discretionary.
The Company also sponsors an unfunded post-retirement group medical and
dental plan (the "Post-Retirement Health 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 Post-Retirement Health 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 Post-Retirement Health 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 post-retirement benefits during employees' active service
periods.
Additionally, the Company sponsors a non-qualified unfunded supplemental
executive retirement plan ("SERP") that provides certain executives with
defined pension benefits.
Amounts accrued under the Post-Retirement Health Plan and SERP
(collectively, the "Defined Benefit Plans") are included in other long-term
liabilities. The following table summarizes combined information for the
Defined Benefit Plans:
December 31,
--------------------------
1998 1997
----------- --------------
Change in benefit obligation:
Post-retirement benefit obligation,
beginning of year $ 13,366 $ 7,708
Service cost 726 701
Interest cost 860 833
37
<PAGE>
Plan participants' contributions 24 15
Curtailment due to divestiture (see (1,348) --
Note 5)
Actuarial loss 391 4,158
Benefits paid (104) (49)
----------- ------------
Post-retirement benefit obligation, end 13,915 13,366
of year
----------- ------------
Change in plan assets:
Fair value of plan assets, beginning of -- --
year
Employer and plan participant 104 49
contributions
Benefits paid (104) (49)
----------- ------------
Fair value of plan assets, end of year -- --
----------- ------------
Funded status (post-retirement benefit
obligation in excess of fair value of 13,915 13,366
plan assets)
Unrecognized net actuarial loss (3,020) (4,042)
=========== ============
Accrued benefit cost, end of year $ 10,895 $ 9,324
=========== ============
Discount rate 6.75% 7.25%
Rate of compensation increase 4.75% 4.75%
Components of net periodic benefit cost for the Defined Benefit Plans
consist of the following components:
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
Service cost $ 726 $ 701 $ 412
Interest 860 833 506
Recognized actuarial loss 65 113 --
------------ ------------ ------------
Net periodic benefit cost $ 1,651 $ 1,647 $ 918
============ ============ ============
For measurement purposes, a 9% annual rate of increase in health care costs
was assumed for 1999 and is assumed to decrease gradually to 4% for 2007
and remain at that level thereafter. The increase in the post-retirement
benefit obligation in 1997 reflects actuarial losses primarily related to
changes in expected future post-retirement health care claim costs.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the Post-Retirement Health Plan. A
one-percentage-point change in assumed health care cost trend rates would
have the following effects:
One One
Percentage- Percentage-
Point Point
Increase Decrease
------------------------------
Effect on total of service and interest
cost components of net periodic benefit
cost $ 383 (281)
Effect on post-retirement benefit 2,382 (1,787)
obligation
38
<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,
-------------------------------------
1998 1997 1996
----------- ---------- -----------
Current:
Federal $ $ $
17,464 20,200 29,928
State 1,731 2,482 4,023
----------- -------- ---------
Current income tax provision 19,195 22,682 33,951
----------- -------- ---------
Deferred:
Federal 1,721 1,176 1,044
State 67 198 (14)
----------- -------- ---------
Deferred income tax 1,788 1,374 1,030
provision
----------- -------- ---------
Total provision for income
taxes $ 20,983 $ 24,056 34,981
=========== ======== =========
Statutory U.S. federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of 2.0 2.7 2.8
federal benefit
Foreign sales corporation (3.8) (2.8) (2.2)
benefit
Permanent items and other 2.7 3.1 2.4
Change in valuation allowance
for capital
loss carry-forward (1.1) 1.1 --
----------- -------- ---------
Effective income tax rate 34.8% 39.1% 38.0%
=========== ======== =========
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,
---------------------------
1998 1997
-------------- -------------
Deferred tax assets:
Accounts receivable and inventory $ 6,358 $ 6,347
reserves
Product reserves 683 681
Employee benefits 3,421 3,208
Capital loss carry-forward -- 1,764
Post-retirement benefits 4,140 3,543
Other 2,934 1,868
-------------- -------------
17,536 17,411
Valuation allowance -- (678)
-------------- -------------
Total deferred tax assets 17,536 16,733
Deferred tax liabilities:
Property, plant and equipment and (22,154) (19,563)
intangibles
-------------- -------------
Net deferred tax liability $ (4,618) $ (2,830)
============== =============
Deferred taxes as recorded on the
balance sheet:
Current deferred tax asset $ 12,925 $ 12,102
39
<PAGE>
Non-current deferred tax liability (17,543) (14,932)
-------------- -------------
Net deferred tax liability $ (4,618) $ (2,830)
============== =============
The valuation allowance at December 31, 1997 relates to a portion of a
capital loss carry-forward resulting from the Company's equity investment
in an Australian joint venture. The capital losses incurred from the equity
investment were lower than anticipated at December 1997 and, accordingly,
the valuation allowance was reversed in 1998.
At December 31, 1998 the Company had approximately $2.9 million in state
investment tax credits which can be utilized to reduce state income tax
liabilities for future tax years through 2005.
For periods prior to the Distribution, currently payable or refundable
federal income taxes (plus certain state income taxes) and changes in
deferred tax assets and liabilities were settled with General Instrument
through divisional equity. Prior to the Distribution, General Instrument
settled certain tax matters relating to periods prior to the acquisition of
General Instrument by affiliates of Forstmann Little & Co. The settlement
of these tax matters decreased the amount payable through divisional equity
by the Company to General Instrument and resulted in a credit of $1.8
million to goodwill in 1996. Income tax payments made by the Company in
1998 and for the tax period from the Distribution Date to December 31, 1997
were $18.0 million and $9.0 million, respectively.
12. STOCK COMPENSATION PLANS
Prior to the Distribution, the Company participated in the General
Instrument Corporation 1993 Long Term Incentive Plan (the "GI Incentive
Plan"). During 1997, the Company adopted the Amended and Restated
CommScope, Inc. 1997 Long Term Incentive Plan (the "CommScope Incentive
Plan"), which is substantially identical in design to the GI Incentive
Plan. The Company's stockholders formally approved the CommScope Incentive
Plan in 1998.
The CommScope Incentive Plan provides for the granting of stock options,
restricted stock grants, performance share units and phantom shares to
employees of the Company and its subsidiaries and the granting of stock
options to non-employee directors of the Company. Awards of stock options
made to Company employees and non-employee directors of General Instrument
prior to the Distribution under the GI Incentive Plan were transferred to
the CommScope Incentive Plan at the Distribution Date (the "Substitute
Options"). A total of 2.1 million shares of Substitute Options were
transferred at the Distribution Date, and 4.6 million additional shares are
authorized for issuance under the CommScope Incentive Plan. Stock options
expire 10 years from the date they are granted. Options vest over service
periods that range from two to five years. Upon initial election to the
Company's board of directors, a non-employee director is granted 1,000
shares of stock which are fully vested and transferable upon issuance.
The following tables summarize the Company's stock option activity from the
Distribution Date and information about stock options outstanding at
December 31, 1998 (in thousands, except per share information):
Weighted
Average
Shares Exercise
(000's) Price Per
Share
--------------- ---------------
Substitute Options transferred from GI 2,149 $ 12.70
Incentive Plan
Granted 1,674 12.31
Cancelled (15) 13.19
--------------- ---------------
Stock options outstanding at December 3,808 12.53
31, 1997
Granted 1,178 15.16
Cancelled (359) 12.28
40
<PAGE>
Exercised (95) 12.01
=============== ===============
Stock options outstanding at December 4,532 $ 13.25
31, 1998
=============== ===============
Stock options exercisable at December 1,690 $ 12.70
31, 1998
=============== ===============
Shares reserved for future issuance at
at December 31, 1998 2,122
===============
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted-
Average Weighted- Weighted-Average
Remaining Average Exercise
Range of Contractual Exercise Price Per
Exercise Shares Life (in Price Per Shares Exercise Price
Prices (000's) Years) Share (000's) Per Share
- ------------ --------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
$8 to $10 176 4.1 $ 8.75 176 $ 8.75
10 to 15 3,182 8.0 12.74 1,480 13.10
15 to 18 1,174 9.8 15.29 34 15.95
======================================== ================================
$8 to $18 4,532 8.3 $ 13.25 1,690 $12.70
======================================== ================================
</TABLE>
41
<PAGE>
Disclosures required by SFAS No. 123 are as follows:
Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- ---------- ------------
Valuation assumptions:
Expected option term (years) 4.5 4.5 4.5
Expected volatility 50.0% 47.4% 47.4%
Expected dividend yield 0.0% 0.0% 0.0%
Risk free interest rate 6.0% 6.0% 6.0%
Weighted average fair value per $ 7.35 $ 6.06 $ 5.99
option (A)
Pro forma effects of SFAS No.
123 (B):
Net income $ 37,803 $ 32,546 $ 51,520
Net income per share - basic 0.77 0.66 1.05
Net income per share - 0.76 0.66 1.05
assuming dilution
(A) Estimated using Black-Scholes option pricing model.
(B) 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".
Pro forma information presents net income and net income per share if
compensation expense for grants made after January 1, 1995 had been
recorded under SFAS No. 123. The 1997 and 1996 pro forma information
is presented after giving effect to the pro forma adjustments for the
Distribution - see Note 3.
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 received a dividend of one
right for each outstanding share of Common Stock, which was distributed on
July 29, 1997. 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 the FLC Entities or pursuant to a
Permitted Offer, each 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.
42
<PAGE>
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. Accordingly, the Company does not consider itself to have
any significant concentrations of credit risk at December 31, 1998 and
1997. The Company's financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables, debt instruments and
interest rate and commodity price swap contracts. At December 31, 1998 and
1997, the book values of each of the financial instruments recorded on the
Company's balance sheet are considered representative of their respective
fair values due to their variable interest rates and / or short terms to
maturity. The fair values of the interest rate and commodity price swap
contracts outstanding at each balance sheet date, which are not recorded on
the Company's balance sheet, are not material to the Company's financial
position. 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.
CommScope has established a risk management strategy that includes the use
of derivative financial instruments primarily to reduce its exposure to
market risks resulting from adverse fluctuations in commodity prices,
interest rates and foreign currency exchange rates. CommScope does not
utilize derivative financial instruments for trading purposes, nor does it
engage in speculation. The Company believes that the various
counter-parties with which the Company enters into derivative agreements
consist of only financially sound institutions and, accordingly, believes
that the credit risk for non-performance of these contracts is remote.
As of December 31, 1998 the Company had entered into a commodity price swap
agreement to effectively lock in a fixed price for a portion of its third
quarter 1999 aluminum purchases. The total value of aluminum covered by the
commodity price swap agreement equates to less than 1% of the Company's
average quarterly cost of sales. Also as of December 31, 1998, the Company
had two outstanding interest rate swap agreements with financial
institutions to effectively convert an aggregate amount of $100 million of
variable-rate borrowings to a fixed-rate basis (discussed more completely
in Note 9). The Company had not entered into any derivative financial
instruments related to foreign currency exchange rates at December 31,
1998.
15. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment under operating leases expiring at
various dates through the year 2008. Rent expense was $4.2 million in 1998,
$3.0 million in 1997 and $3.9 million in 1996. Future minimum rental
payments required under operating leases with initial terms of one year or
more as of December 31, 1998 are: $2,674 in 1999; $2,053 in 2000; $1,674 in
2001; $1,272 in 2002; $1,044 in 2003; and $3,672 thereafter.
CommScope is either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, management believes none of these
legal matters will have a materially adverse effect on the Company'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. 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 materially
adverse effect on the Company's financial statements.
16. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND
GEOGRAPHICAL INFORMATION
The Company's operations are conducted within one business segment that
designs, manufactures and markets coaxial, fiber optic and high performance
electronic cables primarily used in communications, local area network and
industrial applications.
43
<PAGE>
Sales of coaxial cable products to a major customer were approximately 9%,
7% and 11% of net sales in 1998, 1997 and 1996, respectively. No other
customer accounts for 10% or more of net sales during any of the three
fiscal years in the period ended December 31, 1998.
Sales to related parties were less than 2% of net sales in 1998 and less
than 1% of net sales in 1997. Purchases from related parties were less than
1% of cost of sales and operating expenses in 1998.
Export sales from the United States comprised 24%, 33% and 35% of net sales
in 1998, 1997 and 1996, respectively. Export sales by geographic region and
sales by product are as follows (in millions):
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------------------------------------
Latin America $ 43.0 $ 74.3 $ 62.9
Asia / Pacific Rim 40.1 57.6 72.6
Europe 39.2 48.0 45.0
Canada 14.9 17.5 17.7
Other 2.6 3.0 2.7
----------------------------------------
Total export sales $ 139.8 $ 200.4 $ 200.9
========================================
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------------------------------------
Cable television and other video
application
products $ 457.2 $ 491.5 $ 489.4
Local area network products 74.8 76.6 66.5
Other products 39.7 31.1 16.3
----------------------------------------
Total sales by product $ 571.7 $ 599.2 $ 572.2
========================================
17. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------
Fiscal 1998:
Net sales $133,602 $141,886 $150,057 $146,188
Gross profit 27,568 32,697 37,281 37,047
Operating income 11,979 17,016 21,519 20,456
Net income 6,332 8,499 11,421 12,979
Net income per share, basic and
assuming 0.13 0.17 0.23 0.26
dilution (1)
Fiscal 1997:
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 (2) 12,997 11,664 7,014 n/a
Pro forma net income per share,
basic and assuming dilution (2) 0.26 0.24 0.14 n/a
(1) Net income per share (basic) for the year ended December 31, 1998 is
$0.80.
44
<PAGE>
(2) Historical net income per share data is not applicable through
September 30, 1997, as the Company's earnings were part of the results
of General Instrument - see Notes 1 and 2. Pro forma net income and
net income per share has been prepared in a manner consistent with the
presentation of pro forma financial information in Note 3. Historical
net income and net income per share (basic and assuming dilution) for
the fourth quarter of 1997 is $2,929 and $0.06, respectively.
18. SUBSEQUENT EVENT
Effective January 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Seneffe,
Belgium. The acquisition provides the Company with a European base of
operations, access to established distribution channels and complementary
coaxial cable technologies. The operation in Seneffe is the largest CATV
coaxial cable manufacturer in Europe with annual sales by Alcatel of
approximately $35 million in 1998.
The acquisition will be accounted for as a purchase business combination
and, accordingly, the acquired assets and assumed liabilities will be
recorded at their estimated fair value at the date of the acquisition of
approximately $20 million. Payment for the acquired business will be
financed primarily by borrowings under a new credit agreement for 15
million Euros (approximately $17 million) entered into by the Company in
the first quarter of 1999.
45
<PAGE>
<TABLE>
<CAPTION>
CommScope, Inc.
Schedule II - Valuation and Qualifying Accounts
Additions
----------------------
Charged to
Other
Balance at Charged to Accounts Deductions Balance at
Description Beginning Costs and (Describe) (Describe) End of
of Period Expenses (1) (2) Period
- -------------------------------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 1998 $3,985 $ 995 $ -- $ 854 $ 4,126
Year ended December 31, 1997 $3,761 $ 525 $ -- $ 301 $ 3,985
Year ended December 31, 1996 $3,114 $ 750 $ 150 $ 253 $ 3,761
(1) Valuation accounts of acquired company. Reserves are deducted from
assets to which they apply.
(2) Uncollectable customer accounts written off, net of recoveries of
previously written off customer accounts.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
<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 1999 Annual Meeting of Stockholders ("1999 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, 1999.
Name and Title Age Business Experience
- -------------- --- -------------------
Frank M. Drendel 54 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,
Nextel Communications, Inc., C-SPAN and the
National Cable Television Association.
Brian D. Garrett 50 Brian D. Garrett has been President and
President and Chief Chief Operating Officer of the Company
Operating Officer since 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 50 Jearld L. Leonhardt has been Executive Vice
Executive Vice President President and Chief Financial Officer since
and Chief Financial February 1999. He has served as Executive
Officer Vice President, Finance and Administration
of the Company from the Spin-off until
February 1999. He was Treasurer of the
Company from the Spin-off until 1997. He has
served as Executive Vice President and Chief
Financial Officer of CommScope NC since
February 1999. He has served as Executive
Vice President, Finance and Administration
of CommScope NC from 1983 until February
1999 and Treasurer of CommScope NC from 1983
until 1997.
William R. Gooden 57 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 56 Larry W. Nelson has been Executive Vice
Executive Vice President, Development of the Company since
President, the Spin-off. He has served as Executive
Development Vice President, Development of
47
<PAGE>
CommScope NC since 1997. From 1988 to 1997,
he was Executive Vice President and General
Manager of the Cable TV Division of CommScope
NC.
Frank J. Logan 56 Frank J. Logan has been Executive Vice
Executive Vice President, International of the Company
President, since the Spin-off. He has served as
International Executive Vice President, International of
CommScope NC since 1996. From 1989 to
1996, he was Vice President, International
of CommScope NC.
Gene W. Swithenbank 59 Gene W. Swithenbank has been Executive Vice
Executive Vice President, Sales and Marketing of the
President, Company since the Spin-off. He has served
Sales and Marketing 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 42 Randall Crenshaw has been Executive Vice
Executive Vice President, Procurement/Logistics of the
President, Company since the Spin-off. He has served
Procurement/Logistics 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 36 Frank B. Wyatt, II has been Vice President,
Vice President, General General Counsel and Secretary of the
Counsel and Secretary Company since the Spin-off. He has served
as Vice President of CommScope NC since
1997 and General Counsel and Secretary of
CommScope NC since 1996. From 1987 to
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 1999 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 1999 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 1999 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 1999 Proxy Statement and is incorporated by
reference herein.
48
<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, 1998, 1997 and 1996.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1998, 1997 and 1996.
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:
On November 30, 1998, the Company filed a current report on
Form 8-K announcing the Company's agreement to acquire Texas
Instruments' wire clad fabrication equipment and technology.
49
<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 25, 1999 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 25, 1999
- ----------------------------- Chief Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and March 25, 1999
- ----------------------------- Chief Financial Officer
Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President and March 25, 1999
- ----------------------------- Controller (Principal
William R. Gooden accounting officer)
/s/ Edward D. Breen Director March 25, 1999
- -----------------------------
Edward D. Breen
/s/ Duncan M. Faircloth Director March 25, 1999
- -----------------------------
Duncan M. Faircloth
/s/ Boyd L. George Director March 25, 1999
- -----------------------------
Boyd L. George
/s/ George N. Hutton Director March 25, 1999
- -----------------------------
George N. Hutton
/s/ James N. Whitson Director March 25, 1999
- -----------------------------
James N. Whitson
50
<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*****+ Amended and Restated 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.
10.11 Credit Agreement dated February 26, 1999, between First Union
National Bank and CommScope, Inc. of North Carolina.
10.12*****+The CommScope, Inc. Annual Incentive Plan.
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).
1
<PAGE>
** 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).
**** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-12929).
***** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998 (File No. 1-12929).
+ Management Compensation.
2
<PAGE>
Exhibit 10.11
===============================================================================
CREDIT AGREEMENT
dated the 26th day of February, 1999
by and between
FIRST UNION NATIONAL BANK
and
COMMSCOPE, INC. OF NORTH CAROLINA
===============================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I - DEFINITIONS.................................................1
1.1 Certain Definitions...............................................1
1.2 Accounting Terms and Determinations..............................10
ARTICLE II - TERM LOAN FACILITY.........................................10
2.1 Term Loan........................................................10
2.2 Procedure for Advance of Term Loan...............................10
2.3 Repayment of Term Loan...........................................10
2.4 Prepayment.......................................................11
2.5 Note.............................................................11
ARTICLE III - GENERAL LOAN PROVISIONS...................................12
3.1 Interest.........................................................12
3.2 Crediting of Payments and Proceeds...............................13
3.3 Facility Fee.....................................................13
ARTICLE IV - REPRESENTATIONS AND WARRANTIES.............................13
4.1 Financial Condition..............................................13
4.2 Corporate Existence, Compliance with Law.........................14
4.3 Corporate Power; Authorization...................................14
4.4 Enforceable Obligations..........................................14
4.5 No Legal Bar.....................................................15
4.6 No Material Litigation...........................................15
4.7 Investment Company Act...........................................15
4.8 Federal Regulation...............................................15
4.9 No Default.......................................................15
4.10 No Burdensome Restrictions.......................................16
4.11 Taxes............................................................16
4.12 Subsidiaries.....................................................16
4.13 Ownership of Property; Liens.....................................16
4.14 ERISA............................................................16
4.15 Accuracy of Disclosure...........................................17
4.16 Intellectual Property............................................17
<PAGE>
ARTICLE V - AFFIRMATIVE COVENANTS.......................................17
5.1 Financial Statements.............................................17
5.2 Certificates; Other Information..................................19
5.3 Payment of Obligations...........................................20
5.4 Conduct of Business and Maintenance of Existence.................20
5.5 Maintenance of Property; Insurance...............................21
5.6 Inspection of Property; Books and Records; Discussions...........21
5.7 Notices..........................................................21
5.8 Additional Subsidiary Guarantors.................................22
5.9 Year 2000 Compatibility..........................................23
5.10 Hedging Agreement................................................23
5.11 Use of Proceeds..................................................23
5.12 Further Assurances...............................................23
ARTICLE VI - NEGATIVE COVENANTS.........................................24
6.1 Limitation on Liens..............................................24
6.2 Limitation on Guaranty Obligations...............................26
6.3 Prohibition of Fundamental Changes...............................26
6.4 Limitation on Sale of Assets.....................................26
6.5 Limitation on Investments, Loans and Advances....................27
6.6 Maintenance of Consolidated Net Worth............................27
6.7 Maintenance of Interest Coverage.................................27
6.8 Maintenance of Leverage Ratio....................................27
6.9 Limitation on Dividends and Stock Repurchases....................27
6.10 Transactions with Affiliates.....................................28
6.11 Foreign Exchange Contracts.......................................28
6.12 Commodity Hedges.................................................29
6.13 Fiscal Year......................................................29
6.14 Limitation on Indebtedness.......................................29
ARTICLE VII - UNCONDITIONAL GUARANTY....................................30
7.1 Guaranty of Obligations..........................................30
7.2 Nature of Guaranty...............................................31
7.3 Demand by the Bank...............................................31
7.4 Waivers..........................................................32
7.5 Modification of Loan Documents etc...............................32
7.6 Reinstatement....................................................32
7.7 Mutual Grant of Present Right of Contribution and Indemnity......33
7.8 No Subrogation...................................................33
<PAGE>
7.9 Joint and Several Liability......................................33
7.10 Release of Guarantor.............................................33
ARTICLE VIII - CONDITIONS TO BANK'S OBLIGATIONS.........................34
8.1 Conditions to Closing............................................34
ARTICLE IX - DEFAULT....................................................36
9.1 Events of Default...............................................36
9.2 Consequence of Event of Default..................................39
9.3 Rights and Remedies Cumulative...................................39
ARTICLE X - SPECIAL PROVISIONS AS TO EURO LIBOR MARKET RATE.............39
10.1 Additional Costs.................................................40
10.2 Capital Requirements.............................................40
10.3 Taxes............................................................41
10.4 Regulatory Limitation............................................41
10.5 Indemnity........................................................41
10.6 Mitigation Obligations...........................................41
ARTICLE XI - JURISDICTION, SERVICE AND JUDGMENT CURRENCY................42
11.1 Binding Arbitration; Waiver of Jury Trial........................42
11.2 Currency Indemnity...............................................44
ARTICLE XII - MISCELLANEOUS.............................................44
12.1 Collection Expenses..............................................44
12.2 Fees and Expenses................................................44
12.3 Governing Law....................................................44
12.4 Captions.........................................................44
12.5 Notices..........................................................44
12.6 Set-off..........................................................45
12.7 Benefit..........................................................46
12.8 Severability.....................................................46
12.9 Singular and Plural, Etc.........................................46
12.10 Counterparts.....................................................46
12.11 Entire Agreement.................................................46
12.12 Term of Agreement................................................47
12.13 Amendment........................................................47
<PAGE>
EXHIBITS
--------
A - Note
B - Joinder Agreement
C - Existing Credit Facility
SCHEDULES
---------
4.12(a)- Domestic Subsidiaries of the Borrower
4.12(b)- Foreign Subsidiaries of the Borrower
6.2 - Guaranty Obligations
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT (this "Agreement"), dated the 26th day of
February, 1999 by and among FIRST UNION NATIONAL BANK, a national banking
association (the "Bank"), COMMSCOPE, INC. OF NORTH CAROLINA, a North
Carolina corporation (the "Borrower") and the guarantors listed on the
signature page hereto (the "Guarantors").
Statement Of Purpose
--------------------
The Borrower has requested that the Bank enter into this Agreement to
make available the 15,000,000 EUR (Fifteen Million Euros) credit facility
described herein on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Bank, the Borrower and
the Guarantors hereby agree as follows:
ARTICLE I
Definitions
1.1 Certain Definitions. The terms defined in this Article I have, for
all purposes of this Agreement, the meanings specified in this Article I,
unless defined elsewhere herein or the context clearly requires otherwise:
"Affiliate" means, as of any Person, (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled
by, or is under common control with such Person, or (b) any Person who is a
director or officer (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above. For purposes
of this definition, control of a Person shall mean the power, direct or
indirect, either to (i) vote 10% or more of the securities having ordinary
voting power for the election of directors of such Person, or (ii) direct
or cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Agreed Currency" shall have the meaning set forth in Section 11.2 of
this Agreement.
"Agreement" means this Credit Agreement, as amended, restated,
supplemented or otherwise modified from time to time.
"Applicable Insolvency Laws" shall have the meaning set forth in
Section 7.1 of this Agreement.
"Applicable Margin" means 0.75%.
1
<PAGE>
"Arbitration Rules" shall have the meaning set forth in Section
11.1(a) of this Agreement.
"Business Day" means any day (other than a Saturday or Sunday) on
which banks are generally open for business in New York City and prime
banks in London generally provide quotations for deposits denominated in
Euros.
"Closing Date" means the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations thereunder, each as amended or supplemented from time to time.
"Commonly Controlled Entity" means an entity, whether or not
incorporated, which is under common control with the Borrower within the
meaning of Section 4001 of ERISA or is part of a group which includes the
Borrower and which is treated as a single employer under Section 414 of the
Code.
"Consolidated EBITDA" means, for any period, Consolidated Net Income
((i) including earnings and losses from discontinued operations and (ii)
excluding extraordinary non-cash gains and losses) of Holdings and its
Subsidiaries for such period, plus to the extent reflected as a charge in
the statement of consolidated net income for such period, the sum of (a)
interest expense (net of interest income), amortization and write-offs of
debt discount and debt issuance costs and commissions, discounts and the
fees and charges associated with letters of credit, (b) taxes measured by
income, (c) depreciation and amortization expenses and (d) non-cash
compensation expenses arising from the sale of stock, the granting of stock
options, the granting of stock appreciation rights and similar
arrangements.
"Consolidated Interest Expense" means, for any period, the amount of
interest expense both expensed and capitalized (excluding amortization and
write-offs of debt discount and debt issuance costs and including any
increase in interest expense resulting from the Hedging Agreements and
similar investments), net of interest income, of Holdings and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP
for such period.
"Consolidated Net Worth" means all items which in conformity with GAAP
would be included under shareholders' equity on a consolidated balance
sheet of Holdings and its Subsidiaries at such date, provided, that such
amount shall be increased, on a cumulative basis from January 1, 1999, for
(i) amortization and write-offs of debt discount and debt issuance costs
and (ii) any amount reflected as a charge in Holdings' consolidated income
statements for non-cash compensation arising from the sale of stock, the
granting of stock options, the granting of stock appreciation rights and
similar arrangements.
"Consolidated Net Income" means, for any period, the net income or net
loss of Holdings and its Subsidiaries for such period, determined in
accordance with GAAP on a consolidated basis.
2
<PAGE>
"Consolidated Total Indebtedness" means, as of any date of
determination, all Indebtedness of Holdings and its Subsidiaries which
would be reflected as debt on a consolidated balance sheet of Holdings
prepared in accordance with GAAP.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or
undertaking to which such Person is a party or by which it or any of the
property owned by it is bound.
"Conversion Date" shall have the meaning set forth in Section 11.2 of
this Agreement.
"Credit Facility" means the term loan credit facility established
pursuant to Article II hereof.
"Credit Parties" means the collective reference to Holdings and each
Subsidiary which is a party, or which at any time becomes a party, to a
Loan Document.
"Default" means any event or occurrence which, with the passage of
time or any required notice or both, would become an Event of Default.
"Disputes" shall have the meaning set forth in Section 11.1 of this
Agreement.
"Domestic Subsidiary" means, with respect to any Person, any
Subsidiary of that Person which is organized under the laws of any State of
the United States or the District of Columbia.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or governmental authorities, relating
to the protection of the environment, including, but not limited to,
requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting,
licensing, permitting, investigation or remediation of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
the rules and regulations thereunder, each as amended, supplemented or
otherwise modified.
"Euro" means the single currency of Participating Member States
introduced on the date of commencement of the Third Stage of EMU.
"Euro LIBOR Market Rate" means the rate of interest per annum (rounded
upward, if necessary, to the nearest one-hundredth of one percent (1/100%))
determined by the Bank pursuant to the following formula:
Euro LIBOR Market = Euro LIBOR Market Index Rate
-----------------------------
Rate 1.00 - Reserve Requirement
For the purposes of this definition: (a) "Euro LIBOR Market Index Rate"
means, for any day, the percentage rate of interest per annum (rounded
upward, if necessary, to the nearest one-
3
<PAGE>
sixteenth of one percent (1/16%)) for deposits in Euros for a period of
three (3) months as reported on Telerate page 3750 as of 11:00 a.m. (London
time) on the date of which such rate would be in effect, or if such day is
not a Business Day, then the immediately preceding Business Day (or if not
so reported, then as determined by the Bank from another recognized source
or interbank quotation), and (b) "Reserve Requirement" means, for any day,
the maximum daily arithmetic reserve requirement imposed by the Board of
Governors of the Federal Reserve System (or any successor) under Regulation
D on Eurocurrency liabilities (as defined in Regulation D) for a three (3)
month interest period. For purposes of calculating the "Reserve
Requirement", the reserve requirement shall be as set forth in Regulation D
without benefit of credit for prorations, exemptions or offsets under
Regulation D, and further without regard to whether or not the Bank elects
to actually fund the Term Loan or portion thereof with Eurocurrency
liabilities. The Euro LIBOR Market Rate shall be recalculated as of the end
of each Interest Period, and each calculation by the Bank of the Euro LIBOR
Market Rate shall be conclusive and binding for all purposes, absent
manifest error.
"Event of Default" means any one or more of the events or occurrences
so designated in Section 9.1.
"Existing Credit Facility" means the Credit Agreement among the
Borrower, Chase Manhattan Bank, as Administrative Agent, the Co-Agents
listed therein and the Banks listed therein, dated July 22, 1997, as the
same may be amended, modified, waived or refinanced from time to time in
accordance with the terms thereof.
"FL Affiliate" means any of FL Co., the partners of FL Co. on the
Closing Date, any subordinated debt and equity partnership controlled by FL
Co., any equity partnership controlled by FL Co., any of the present or
former partners of any such partnership, any Affiliate of FL Co., any
directors, executive officers or other employees or other members of the
management of Holdings, the Borrower or any Subsidiary thereof (or any
"associate" (as defined in Rule 405 under the Securities Act of 1933, as
amended) of any thereof or employee benefit plan beneficially owned by any
thereof), the Borrower or any Subsidiary thereof on the Closing Date, or
any combination of the foregoing.
"FL Co." means Forstmann Little Co., a New York partnership.
"Foreign Subsidiary" means any Subsidiary of the Borrower or Holdings
(a) which is organized under the laws of any jurisdiction outside the
United States (within the meaning of Section 7701(a)(9) of the Code), or
(b) whose principal assets consist of capital stock or other equity
interests of one or more Persons which conduct the major portion of their
business outside the United States (within the meaning of Section
7701(a)(9) of the Code).
"GAAP" means generally accepted accounting principles in the United
States of America in effect from time to time.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
4
<PAGE>
"Guaranteed Obligations" shall have the meaning set forth in Section
7.1 of this Agreement.
"Guarantors" means Holdings, all Subsidiaries of Holdings and the
Borrower identified as Guarantors on the signature page hereto and all
Material Subsidiaries of the Borrower and Holdings added as Guarantors
pursuant to Section 5.8.
"Guaranty" means the unconditional guaranty agreement of the
Guarantors set forth in Article VII.
"Guaranty Obligations" means, as to any Person, any obligation of such
Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of such Person, whether or
not contingent (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor
or otherwise to maintain the net worth or solvency of the primary obligor,
(c) to purchase property, securities or services primarily for the purpose
of assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (d) otherwise
to assure or hold harmless the owner of any such primary obligation against
loss in respect thereof; provided, however, that the term Guaranty
Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business. The amount of any Guaranty
Obligation shall be deemed to be an amount equal to the stated or
determinable amount (based on the maximum reasonably anticipated net
liability in respect thereof as determined by the Borrower in good faith)
of the primary obligation or portion thereof in respect of which such
Guaranty Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated net liability in respect thereof (assuming such
Person is required to perform thereunder) as determined by the Borrower in
good faith; provided, however that the amount of any Guaranty Obligation
associated with the Borrower's vendor financing programs shall be deemed to
be the amount estimated by the Borrower to be its liability in connection
therewith and for which the Borrower has estimated reserves in accordance
with GAAP.
"Hazardous Materials" means any substances or materials (a) which are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
applicable law, (b) which are toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to
human health or the environment and are or become regulated by any
Governmental Authority, (c) the presence of which require remediation under
any applicable law, (d) the discharge or emission or release of which
requires a permit or license under any applicable law or other governmental
approval, (e) which pose a health or safety hazard to persons or
neighboring properties, (f) which consist of underground or aboveground
storage tanks, whether empty, filled or partially filled with any
substance, or (g) which contain, without limitation, asbestos,
polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum
5
<PAGE>
hydrocarbons, petroleum derived substances or waste, crude oil, nuclear
fuel, natural gas or synthetic gas.
"Hedging Agreement" means any agreement with respect to an interest
rate swap, collar, cap, floor or a forward rate agreement or other
agreement regarding the hedging of interest rate risk exposure executed in
connection with hedging the interest rate exposure of the Borrower, and any
confirming letter executed pursuant to such hedging agreement, all as
amended, restated, supplemented or otherwise modified.
"Holdings" means CommScope, Inc., a Delaware corporation.
"Increased Costs" shall have the meaning set forth in Section 10.1 of
this Agreement.
"Indebtedness" means, with respect to any Person, without duplication,
all indebtedness of that Person for borrowed money, all indebtedness of
that Person, created or incurred as deferred purchase price in connection
with the acquisition of property (other than current trade payables or
liabilities), and all indebtedness secured by any lien, pledge or other
encumbrance on the property of that Person whether or not such indebtedness
is assumed by that Person; all liability of that Person by way of
endorsements (other than for collection or deposit in the ordinary course
of business); all Guaranty Obligations in respect of Indebtedness of any
other Person by that Person; the face amount of all letters of credit in
respect of which that Person is obligated whether as account party; and all
Lease Obligations which in accordance with GAAP applied on a consistent
basis should be capitalized, but excluding (y) customer deposits and
interest payable thereon in the ordinary course of business and (z) trade
and other accounts and accrued expenses payable in the ordinary course of
business in accordance with customary trade terms and in the case of both
clauses (y) and (z) above, which are not overdue for a period of more than
90 days or, if overdue for more than 90 days, as to which a dispute exists
and adequate reserves in conformity with GAAP have been established on the
books of such Person.
"Insolvency" means, with respect to a Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of such term as
used in Section 4245 of ERISA.
"Interest Coverage Ratio" means, as of the last day of any fiscal
quarter of Holdings, the ratio of (a) Consolidated EBITDA for the period of
four fiscal quarters ending on such date on a consolidated basis of
Holdings and its Subsidiaries, to (b) Consolidated Interest Expense for the
period of four fiscal quarters ending on such day.
"Interest Period" means (i) the period commencing on the date on which
the Term Loan is funded and ending three (3) months thereafter, and (ii)
thereafter a period commencing on the last day of the immediately preceding
Interest Period and ending three (3) months thereafter.
"Joinder Agreement" means any Joinder Agreement executed by a Domestic
Subsidiary of the Borrower pursuant to Section 5.8 and substantially in the
form of Exhibit B, as amended, restated, supplemented or otherwise
modified.
"Judgment Currency" shall have the meaning set forth in Section 11.2
of this Agreement.
6
<PAGE>
"Lease Obligations" means, as of the date of any determination
thereof, the rental commitments of the Borrower and its Subsidiaries
determined on a consolidated basis, if any, under leases for real and/or
personal property (net of rental commitments from subleases thereof),
excluding, however, obligations under leases which are classified as
Indebtedness.
"Leverage Ratio" means, as of the last day of any fiscal quarter, the
ratio of Consolidated Total Indebtedness on such day to Consolidated EBITDA
for the period of four consecutive fiscal quarters ending on such date.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference,
priority or other security agreement or preferential arrangement of any
kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the
filing of any effective financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction in respect of any of the
foregoing, except for the filing of financing statements in connection with
Lease Obligations incurred by the Borrower or its Subsidiaries to the
extent that such financing statements relate to the property subject to
such Lease Obligations).
"Loan Documents" means this Agreement, the Note and each and every
other document or instrument executed by the Borrower and the Guarantors in
connection herewith or therewith.
"Material Subsidiaries" means any Subsidiary of the Borrower or
Holdings which at any time has a total asset book value (including the
total asset book values of any Subsidiaries of such Subsidiary), or for
which Holdings, the Borrower or any of its Subsidiaries shall have paid
consideration (including the assumption of Indebtedness) in connection with
the acquisition of the stock or the assets of such Subsidiary, in excess of
$50,000,000, other than Foreign Subsidiaries or other Subsidiaries if more
than 75% of the assets of such Subsidiaries are securities of foreign
companies (such determination to be made on the basis of fair market
value). A Subsidiary which is a Material Subsidiary shall continue to be a
Material Subsidiary notwithstanding that its total asset book value may
fall to less than $50,000,000.
"Multiemployer Plan" means a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Non U.S. Bank" means any Person that is not a citizen or resident of
the United States of America, a corporation, partnership or other entity
created or organized in or under the laws of the United States of America,
or any estate or trust that is subject to U.S. federal income taxation
regardless of the source of its income.
"Note" means the term note of even date herewith made by the Borrower
payable to the Bank in the form of Exhibit A hereto, as amended, restated,
supplemented or otherwise modified from time to time.
7
<PAGE>
"Notice of Prepayment" shall have the meaning assigned thereto in
Section 2.4.
"Obligations" means the unpaid principal of and interest on the Term
Loan and all other obligations and liabilities of the Borrower to the Bank,
whether direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter incurred, which may arise under, out of, or in
connection with, this Agreement, the other Loan Documents or any other
document made, delivered or given in connection therewith, including,
without limitation, any Hedging Agreement with the Bank specifically
related to the Term Loan, whether on account of principal, interest,
reimbursement obligations, fees indemnities, costs, expenses (including,
without limitation, all fees and disbursements of counsel to the Bank) or
otherwise but excluding Obligations under the Existing Credit Agreement.
"Other Taxes" shall have the meaning set forth in Section 10.3(b) of
this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
"Participating Member States" means a state which adopts a single
currency in accordance with the Treaty on European Union.
"Person" means an individual, partnership, limited liability company,
corporation, trust, unincorporated organization, association, joint venture
or a government or agency or political subdivision or instrumentality
thereof.
"Plan" means any pension plan which is covered by Title IV of ERISA
and in respect of which the Borrower or a Commonly Controlled Entity is an
"employer" as defined in Section 3(5) of ERISA.
"Regulatory Change" means any change after the date of this Agreement
in United States federal, state, foreign or Bank of England laws or
regulations or the adoption or making after such date of any
interpretations, directives or requests applying to a class of banks
including the Bank, or its overseas branches or affiliates, of or under any
United States federal, state, foreign or Bank of England laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof, excluding, however, any such change which results
in an adjustment of the rate at which Reserve Requirements are imposed
against eurocurrency liabilities and the effect of which is reflected in a
change in the Euro LIBOR Market Rate as provided in the definitions of such
terms in this Article I.
"Reorganization" means, with respect to a Multiemployer Plan, the
condition that such Plan is in reorganization as such term is used in
Section 4241 of ERISA.
"Reportable Event" means any of the events set out in Section 4043(c)
of ERISA or the regulations thereunder.
8
<PAGE>
"Requirement of Law," means, as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation (including, without
limitation, Environmental Laws) or determination of an arbitrator or a
court or other Governmental Authority, in each case applicable to or
binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer" means the chief executive officer or the chief
operating officer of the Borrower or, with respect to financial matters,
the chief financial officer or controller of the Borrower.
"Restricted Payments" shall have the meaning set forth in Section 6.09
of this Agreement.
"Single Employer Plan" means any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Solvent" means, as to Holdings, the Borrower and any Guarantor on a
particular date, that any such Person (a) has capital sufficient to carry
on its business and transactions and all business and transaction in which
it is about to engage and is able to pay its debts as they mature, (b) owns
property having a value, both at fair valuation and at present fair
saleable value, greater than the amount required to pay its probable
liabilities (including contingencies), and (c) does not believe that it
will incur debts or liabilities beyond its ability to pay such debts or
liabilities as they mature
"Spin-Off," "Spin-Off Documents" and "Spin-Off Transactions" all have
the meanings as defined in the Existing Credit Facility as in effect on the
Closing Date, attached hereto as Exhibit C.
"Subsidiary" means, as to any Person, any corporation, partnership or
other entity of which shares of stock of each class or other equity
interests having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership
or other entity are at the time owned by such Person or by one or more
Subsidiaries of such Person or by such Person and one or more Subsidiaries
of such Person. A Subsidiary shall be deemed wholly-owned by a Person who
owns all of the voting shares of such Subsidiary except for directors'
qualifying or similar shares.
"Term Loan" means the Term Loan to be made to the Borrower by the Bank
in the amount of 15,000,000 EUR (Fifteen Million Euros) pursuant to Section
2.1 of this Agreement.
"Term Loan Maturity Date" means March 1, 2006.
"Third Stage of EMU" means the third stage of Economic and Monetary
Union, implemented on January 1, 1999, as contemplated by the Treaty on
European Union.
9
<PAGE>
"Treaty on European Union" means the treaty establishing the European
Community signed in Rome on March 25, 1957, as amended from time to time.
"UCC" means the Uniform Commercial Code as in effect in the State of
North Carolina, as amended, restated or otherwise modified.
1.2 Accounting Terms and Determinations. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared, in
accordance with GAAP applied on a consistent basis.
ARTICLE II
Term Loan Facility
2.1 Term Loan. Subject to the terms and conditions of this Agreement,
the Bank agrees to make the Term Loan to the Borrower on the Closing Date.
2.2 Procedure for Advance of Term Loan. On March 1st, 1999 the
Borrower hereby irrevocably authorizes the Bank to disburse the proceeds of
the Term Loan in immediately available funds by wire transfer to such
Person or Persons as may be designated by the Borrower.
2.3 Repayment of Term Loan. The Borrower shall repay the aggregate
outstanding principal amount of the Term Loan in consecutive quarterly
installments on the first Business Day of each of March, June, September
and December commencing June 1, 2001 in the amounts as set forth below:
10
<PAGE>
-----------------------------------------------------------
YEAR PAYMENT DATE PRINCIPAL INSTALLMENT
(EUR)
-----------------------------------------------------------
2001
-----------------------------------------------------------
June 1 750,000
-----------------------------------------------------------
September 1 750,000
-----------------------------------------------------------
December 1 750,000
-----------------------------------------------------------
March 1 750,000
2002
-----------------------------------------------------------
June 1 750,000
-----------------------------------------------------------
September 1 750,000
-----------------------------------------------------------
December 1 750,000
-----------------------------------------------------------
March 1 750,000
2003
-----------------------------------------------------------
June 1 750,000
-----------------------------------------------------------
September 1 750,000
-----------------------------------------------------------
December 1 750,000
-----------------------------------------------------------
March 1 750,000
2004
-----------------------------------------------------------
June 1 750,000
-----------------------------------------------------------
September 1 750,000
-----------------------------------------------------------
December 1 750,000
-----------------------------------------------------------
March 1 750,000
2005
-----------------------------------------------------------
June 1 750,000
-----------------------------------------------------------
September 1 750,000
-----------------------------------------------------------
December 1 750,000
-----------------------------------------------------------
March 1 750,000
2006
-----------------------------------------------------------
If not sooner paid, the Term Loan shall be paid in full, together with
accrued interest thereon, on the Term Loan Maturity Date.
2.4 Prepayment. The Term Loan may be prepaid in whole or in part,
without premium or penalty. Each partial prepayment shall be applied
against the principal installments in the inverse order of their maturity.
Each prepayment shall be accompanied by any amount required to be repaid
pursuant to Section 10.5 hereof.
2.5 Note. The Term Loan and the obligation of the Borrower to repay
the Term Loan shall be evidenced by the Note payable to the order of the
Bank. The Note shall be dated as of the Closing Date and shall bear
interest on the unpaid principal amount thereof at the applicable interest
rate per annum specified in Section 3.1.
11
<PAGE>
ARTICLE III
General Loan Provisions
3.1 Interest.
--------
(a) Rate of Interest. Subject to the provisions of this Section 3.1,
the Term Loan shall bear interest at the Euro LIBOR Market Rate plus the
Applicable Margin.
(b) Default Rate. In the event and so long as any Default or Event of
Default shall exist under any Loan Document, interest shall be payable
daily on the unpaid principal balance of the Term Loan at a per annum rate
equal to the rate of interest then applicable to the Term Loan plus two
percent (2%) per annum.
(c) Interest Payment and Computation. Subject to prepayment and
acceleration of the Term Loan as provided herein and to the provisions of
Article X hereof, interest on the Term Loan shall be payable in arrears on
the first Business Day of each March, June, September and December,
commencing on June 1, 1999, and on the Term Loan Maturity Date. Interest on
the Term Loan and all other fees and commissions provided for herein shall
be computed on the basis of a 360-day year and assessed for the actual
number of days elapsed from the first day of the period over which interest
is being calculated to, but not including, the last day thereof.
(d) Date and Method for Payments.
----------------------------
(i) In the event any date for the payment of principal or
interest on the Term Loan or the Note or any other amount due
hereunder falls on a day which is not a Business Day, such payment
shall be due on the next succeeding Business Day and, in any event,
interest shall continue to accrue on the Loans and the Note until paid
on such next succeeding Business Day.
(ii) All payments due hereunder and under the Note on account of
the principal of or interest on the Term Loan or of any fee,
commission or other amounts shall be paid by wire transfer of
immediately available funds in Euros at such places and as directed by
the Bank from time to time no later than 12:00 noon (Charlotte time)
on the date specified for payment and without any set-off,
counterclaim or deduction whatsoever and all wire transfer and similar
charges shall be paid by the Borrower. Any such payment received after
such time but before 2:00 p.m. (Charlotte time) shall be deemed a
payment on such date for the purpose of Section 9.1, but for all other
purposes shall be deemed to have been made on the next succeeding
Business Day. Any such payment received after 2:00 p.m. (Charlotte
time) shall be deemed to have been made on the next succeeding
Business Day for all purposes.
(e) Savings Clause. Anything contained herein, the Note or any other
document executed pursuant to this Agreement notwithstanding, if for any
reason the effective rate of interest on any advance hereunder shall exceed
the maximum lawful rate of interest, the effective
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rate of interest shall be deemed to be reduced to and shall be such maximum
lawful rate, and any sums of interest which have been collected in excess
of such maximum lawful rate shall be applied by the Bank as a credit
against the unpaid principal amount due thereunder.
3.2 Crediting of Payments and Proceeds. In the event that the Borrower
shall fail to pay any of the Obligations when due and the Obligations have
been accelerated pursuant to Section 9.2, all payments received by the Bank
upon the Note and the other Obligations and all net proceeds from the
enforcement of the Obligations shall be applied in the sole discretion of
the Bank.
3.3 Facility Fee. On the Closing Date, the Borrower shall pay to the
Bank a one-time facility fee equal to .125% of the amount of the Term Loan.
ARTICLE IV
Representations and Warranties
To induce the Bank to enter into this Agreement and to make the Term
Loan, the Borrower hereby represents and warrants to the Bank (which
representations and warranties shall survive the execution and delivery of
the Note), on and as of the Closing Date, that:
4.1 Financial Condition.
(a) The consolidated balance sheets of Holdings and its Subsidiaries
as of December 31, 1997 and the related statements of income and retained
earnings and cash flows for the fiscal years then ended and the unaudited
consolidated balance sheet of Holdings and its Subsidiaries at September
30, 1998 and the related consolidated statements of stockholders' equity
and cash flows and the consolidated statements of income of Holdings and
its Subsidiaries for the fiscal period ended on such date, copies of which
have been previously furnished to the Bank, are correct and complete and
fairly present in all material respects the assets, liabilities and
financial condition of Holdings and its Subsidiaries. All such financial
statements, including the related schedules and notes thereto, have been
prepared in accordance with GAAP applied consistently throughout the
periods involved (subject to normal year-end adjustments). Neither Holdings
nor any of its Subsidiaries has any material direct or contingent
Indebtedness, obligations or other unusual forward or long-term commitments
as of the date of this Agreement which are not provided for or reflected in
such financial statements or referred to in notes thereto except as would
not have a material adverse effect on the business, financial condition,
properties, results of operations or prospects of Holdings and its
Subsidiaries taken as a whole (a "Material Adverse Effect").
(b) Since December 31, 1997, there has been no material adverse change
in the properties, business, operations, or condition (financial or
otherwise) of Holdings and its Subsidiaries taken as a whole.
4.2 Corporate Existence, Compliance with Law. Each Credit Party and
its Subsidiaries (a) is a corporation duly organized, validly existing and
in good standing under the
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laws of the jurisdiction of its incorporation, (b) has the corporate power
and authority and the legal right to own and operate its property, to lease
the property it operates and to conduct the business in which it is
currently engaged, except to the extent that the failure to possess such
corporate power and authority and such legal right would not, in the
aggregate, have a Material Adverse Effect, (c) is duly qualified as a
foreign corporation and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect and (d)
is in compliance with all Requirements of Law (including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act, any so-called "Superfund" or "Superlien" law, or any
applicable federal, state, local or other statute, law, ordinance, code,
rule, regulation, order or decree regulating, relating to, or imposing
liability or standards of conduct concerning, any Hazardous Materials),
except to the extent that the failure to comply therewith would not, in the
aggregate, have a Material Adverse Effect.
4.3 Corporate Power; Authorization. Each Credit Party has the
corporate power and authority and the legal right to make, deliver and
perform the Loan Documents to which it is a party; and the Borrower has the
corporate power and authority and legal right to borrow hereunder. Each
Credit Party has taken all necessary corporate action to authorize the
execution, delivery and performance of the Loan Documents to which it is a
party and, in case of the Borrower, to authorize the borrowings hereunder.
No consent or authorization of, or filing with, any Person (including,
without limitation, any Governmental Authority) is required in connection
with the execution, delivery or performance by any Credit Party, or the
validity or enforceability against any Credit Party, of any Loan Document
to the extent that it is a party thereto.
4.4 Enforceable Obligations. Each of the Loan Documents has been duly
executed and delivered on behalf of each Credit Party which is a party
thereto and each of such Loan Documents constitutes the legal, valid and
binding obligation of such Credit Party, enforceable against such Credit
Party in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or similar laws affecting creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
4.5 No Legal Bar. The performance of each Loan Document, the guarantee
of the Obligations pursuant to the Guaranty and the use of the proceeds of
the Term Loan will not violate any Requirement of Law or any Contractual
Obligation applicable to or binding upon any Credit Party, any of its
Subsidiaries or any of its properties or assets, which violations,
individually or in the aggregate, would have a material adverse effect on
the ability of such Credit Party to perform its obligations under the Loan
Documents to the extent that it is a party thereto, or which would give
rise to any liability on the part of the Bank, or which would have a
Material Adverse Effect, and will not result in the creation or imposition
(or the obligation to create or impose) of any Lien on any of its or their
respective properties or assets pursuant to any Requirement of Law
applicable to it or them, as the case may be, or any of its or their
Contractual Obligations.
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4.6 No Material Litigation. No litigation, investigation known to the
Borrower or proceeding of or by any Governmental Authority or any other
Person is pending against any Credit Party or any of its Subsidiaries, (a)
with respect to the validity, binding effect or enforceability of any Loan
Document or with respect to the Term Loan made hereunder or the use of
proceeds thereof and the other transactions contemplated hereby or thereby,
or (b) which would have a Material Adverse Effect.
4.7 Investment Company Act. Neither any Credit Party nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" (as each of the quoted terms is defined or used in the
Investment Company Act of 1940, as amended).
4.8 Federal Regulation. No part of the proceeds of any of the Term
Loan will be used for any purpose which violates, or which would be
inconsistent with, the provisions of Regulation G, T, U or X of the Board.
Neither the Borrower nor any of its Subsidiaries is engaged or will engage,
principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" within the respective meanings of each of the quoted terms under
said Regulation U.
4.9 No Default. Neither the Borrower nor any of its Subsidiaries is in
default in the payment or performance of any of its or their Contractual
Obligations in any respect which would have a Material Adverse Effect.
Neither the Borrower nor any of its Subsidiaries is in default under any
order, award or decree of any Governmental Authority or arbitrator binding
upon or affecting it or them or by which any of its or their properties or
assets may be bound or affected in any respect which would have a Material
Adverse Effect, and no such order, award or decree would materially
adversely affect the ability of the Borrower and its Subsidiaries taken as
a whole to carry on their businesses as presently conducted or the ability
of the Credit Parties to perform their Obligations under the Loan
Documents.
4.10 No Burdensome Restrictions. Neither the Borrower nor any of its
Subsidiaries is a party to or is bound by any Contractual Obligation or
subject to any Requirement of Law or other corporate restriction which has
a Material Adverse Effect.
4.11 Taxes. Each of the Borrower and its Subsidiaries has filed or
caused to be filed or has timely requested an extension to file or has
received an approved extension to file all tax returns which, to the
knowledge of the Borrower, are required to have been filed, and has paid
all taxes shown to be due and payable on said returns or extension requests
or on any assessments made against it or any of its property and all other
taxes, fees or other charges imposed on it or any of its property by any
Governmental Authority (other than those the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been provided in the
books of the Borrower or its Subsidiaries, as the case may be), except any
such filings or taxes, fees or charges, the making of or the payment of
which, or the failure to make or pay, would not have a Material Adverse
Effect; and, to the knowledge of the Borrower, no claims are being asserted
with respect to any such taxes, fees or other charges (other than those the
amount or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which reserves in conformity
with GAAP have been provided in
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the books of the Borrower or its Subsidiaries, as the case may be), except
as to any such taxes, fees or other charges, the payment of which, or the
failure to pay, would not have a Material Adverse Effect.
4.12 Subsidiaries. The Subsidiaries of the Borrower listed on Schedule
4.12(a) constitute all of the Domestic Subsidiaries of the Borrower and the
Subsidiaries listed on Schedule 4.12(b) constitute all of the Foreign
Subsidiaries of the Borrower as of the Closing Date. The Borrower has no
Material Subsidiaries on the Closing Date.
4.13 Ownership of Property; Liens. The Borrower and each of its
Subsidiaries has good and marketable title to, or valid and subsisting
leasehold interests in, all its respective material real property, and good
title to all its respective material other property, and none of such
property is subject, except as permitted hereunder, to any lien (including,
without limitation, Federal, state and other tax liens).
4.14 ERISA. No "prohibited transaction" (as defined in Section 406 of
ERISA or Section 4975 of the Code) or "accumulated funding deficiency" (as
defined in Section 302 of ERISA) or Reportable Event (other than a
Reportable Event with respect to which the 30-day notice requirement under
Section 4043 of ERISA has been waived) has occurred during the five years
preceding the Closing Date with respect to any Plan in any case the
consequences of which would have a Material Adverse Effect. The present
value of all accrued benefits under each Single Employer Plan maintained by
the Borrower or a Commonly Controlled Entity (based on those assumptions
used to fund such Plan) did not, as of the most recent annual valuation
date in respect of each such Plan, exceed the fair market value of the
assets of the Plan (including for these purposes accrued but unpaid
contributions) allocable to such benefits by an amount that would be
materially adverse to the business, financial condition, properties,
results of operations, value or prospects of the Borrower and its
Subsidiaries taken as a whole. The liability to which the Borrower or any
Commonly Controlled Entity would become subject under ERISA if the Borrower
or any such Commonly Controlled Entity were to withdraw completely from all
Multiemployer Plans as of the valuation date most closely preceding the
date hereof would not have a Material Adverse Effect. To the Borrower's
knowledge, no Multiemployer Plan is either in Reorganization or Insolvent
in any case the consequences of which would have a Material Adverse Effect.
4.15 Accuracy of Disclosure. All written information, other than
financial projections, which has been made available to the Bank by the
Borrower or any of its representatives and all other information which has
been made available to the Bank by any officers of the Borrower and its
Subsidiaries in connection with this Agreement is complete and correct in
all material respects and does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements contained therein not materially misleading.
4.16 Intellectual Property. The Borrower and each of its Subsidiaries
owns, or is licensed to use, all trademarks, tradenames, copyrights,
technology, know-how and processes necessary for the conduct of its
business as currently conducted except for those the failure to own or
license which would not have any reasonable likelihood of having a Material
Adverse Effect.
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ARTICLE V
Affirmative Covenants
The Borrower hereby agrees that, so long as the Term Loan remains
outstanding and unpaid, or any other amount is owing to the Bank hereunder,
it shall, and, in the case of the agreements contained in Sections 5.3,
5.4, 5.5, 5.6, 5.8, 5.9 and 5.12 cause each of its Subsidiaries to:
5.1 Financial Statements. Furnish to the Bank:
(a) as soon as available, but in any event within 90 days after
the end of each fiscal year of Holdings, a copy of the consolidated
balance sheet of Holdings and its consolidated Subsidiaries as at the
end of such year and the related consolidated statements of
operations, stockholders' equity and cash flows for such year, setting
forth in each case in comparative form the figures for the previous
year, reported on without a "going concern" or like qualification or
exception, or qualification arising out of the scope of the audit by
Deloitte & Touche LLP or other independent certified public
accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each
fiscal year of Holdings the unaudited consolidated balance sheet of
Holdings and its consolidated Subsidiaries as at the end of such
quarter, the related unaudited consolidated statements of
stockholders' equity and cash flows of Holdings and its consolidated
Subsidiaries from the beginning of such fiscal year through the end of
such quarter and the related unaudited consolidated statements of
operations of Holdings and its consolidated Subsidiaries for such
quarter, setting forth in each case in comparative form the figures
for the previous year, certified by a Responsible Officer as being
fairly stated in all material respects (subject to normal year-end
audit adjustments); and
(c) as soon as available, but in any event within 90 days after
the beginning of each fiscal year of Holdings to which such budget
relates, and a consolidated operating budget for Holdings and its
Subsidiaries taken as a whole, in each case as adopted by the Board of
Directors of Holdings.
All financial statements shall be complete and correct in all material
respects (subject, in the case of interim statements, to normal year-end
audit adjustments) and shall be prepared in reasonable detail (except that
interim statements may be condensed and may exclude detailed footnote
disclosure to the extent consistent with the rules and regulations of the
Securities and Exchange Commission relating to the presentation of
financial information in Quarterly Reports on Form 10-Q) and in accordance
with GAAP applied consistently throughout the periods reflected therein and
with prior periods (except as concurred in by such accountants or officer,
as the case may be, and disclosed therein and except that interim financial
statements need not be restated for changes in accounting principles which
require retroactive application, and operations which
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have been discontinued (as defined in Accounting Principles Board Opinion
No. 30) during the current year need not be shown in interim financial or
statements as such either for the current period or comparable prior
period), provided that if for any reason whatsoever the unaudited
consolidated balance sheet of Holdings and its consolidated Subsidiaries
and the related unaudited consolidated statements of operations,
stockholders' equity and cash flows for such quarter would be materially
different than the unaudited consolidated balance sheet of the Borrower and
its consolidated Subsidiaries and or the related unaudited consolidated
statements of operations, stockholders' equity and cash flows for such
quarter, then the Borrower shall also provide, as soon as available, but in
any event not later than 45 days after the end of each of the first three
quarterly periods of each fiscal year of the Borrower, the unaudited
consolidated balance sheet of the Borrower and its consolidated statements
of operations, stockholders' equity and cash flows of the Borrower and its
consolidated Subsidiaries for such quarter and the portion of the fiscal
year through the end of such quarter, setting forth in each case in
comparative form the figures for the previous year, certified by a
Responsible Officer as being fairly stated in all material respects
(subject to normal year-end audit adjustments);
In the event Holdings changes its accounting methods because of changes in
GAAP, or any change in GAAP occurs which increases or diminishes the
protection and coverage afforded to the Bank under current GAAP accounting
methods, the Borrower or the Bank, as the case may be, may request of the
other parties to this Agreement an amendment of the financial covenants
contained in this Agreement to reflect such changes in GAAP and to provide
the Bank with protection and coverage equivalent to that existing prior to
such changes in accounting methods or GAAP, and the Borrower and the Bank
agree to consider such request in good faith.
5.2 Certificates; Other Information. Furnish to the Bank:
(a) concurrently with the delivery of the consolidated financial
statements referred to in Section 5.1(a), a letter from the
independent certified public accountants reporting on such financial
statements (i) stating that their audit examination has included a
review of the terms of Sections 6.2(b), 6.6, 6.7 and 6.8 of this
Agreement and any definitions set forth in this Agreement relating
thereto, in each case as they relate to accounting matters, and (ii)
stating whether, in connection with their audit examination, any
condition or event that constitutes any Default or Event of Default
has come to their attention and, if such a condition or event has come
to their attention, specifying the nature and period of existence
thereof, provided that such accountants shall not be liable by reason
of any failure to obtain knowledge of any such Default or Event of
Default that would not be disclosed in the course of their audit
examination;
(b) concurrently with the delivery of the financial statements
referred to in Sections 5.1(a) and (b), a certificate of the chief
financial officer of the Borrower (i) stating that such officer has
obtained no knowledge of any Default or Event of Default except as
specified in such certificate; (ii) showing in detail as of the end of
the related fiscal period the figures and calculations supporting such
statement in respect of clause (b) of Section 6.2, clause (i) of
Section 6.1, clause (f) of Section 6.14 and Sections 6.6, 6.7, and
6.8; (iii) if not specified in the financial statements delivered
pursuant to Section 5.1, specifying the aggregate amount of interest
paid or accrued by Holdings, the
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Borrower and their respective Subsidiaries, and the aggregate amount
of depreciation, depletion and amortization charged on the books of
Holdings and its Subsidiaries, during such accounting period; and (iv)
listing all Indebtedness for borrowed money (other than Indebtedness
hereunder) in each case incurred since the date of the previous
consolidated balance sheet of Holdings delivered pursuant to Section
5.1(a) or (b);
(c) promptly upon receipt thereof, copies of all final reports
submitted to Holdings and the Borrower by independent certified public
accountants in connection with each annual, interim or special audit
of the books of Holdings and the Borrower made by such accountants,
including, without limitation, any final comment letter submitted by
such accountants to management in connection with their annual audit;
(d) promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent or
made available generally by Holdings, the Borrower or any of their
respective Subsidiaries and all regular and periodic reports and all
final registration statements and final prospectuses, if any, filed by
the Borrower or any of its Subsidiaries with any securities exchange
or with the Securities and Exchange Commission or any Governmental
Authority succeeding to any of its functions;
(e) concurrently with the delivery of the financial statements
referred to in Sections 5.1(a) and (b), a management summary
describing and analyzing the performance of Holdings, the Borrower and
their respective Subsidiaries during the periods covered by such
financial statements to the extent not included in the reports filed
by Holdings with the Securities and Exchange Commission which are
delivered to the Bank; and
(f) promptly, such additional financial and other information as
the Bank may from time to time reasonably request.
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all
of its obligations and liabilities of whatever nature, except (a) when the
amount or validity thereof is currently being contested in good faith by
appropriate proceedings and reserves in conformity with GAAP with respect
thereto have been provided on the books of the Borrower or any of its
Subsidiaries, as the case may be, (b) for delinquent obligations which do
not have a material adverse effect on the business, financial condition,
properties, results of operations, value or prospects of the Borrower and
its Subsidiaries taken as a whole and (c) for trade and other accounts
payable in the ordinary course of business in accordance with customary
trade terms and which are not overdue for a period of more than 90 days (or
any longer period if longer payment terms are accepted in the ordinary
course of business) or, if overdue for more than 90 days (or such longer
period), as to which a dispute exists and adequate reserves in conformity
with GAAP have been established on the books of the Borrower or any of its
Subsidiaries, as the case may be.
5.4 Conduct of Business and Maintenance of Existence. Continue to
engage in business of the same general type as now conducted by it, and
preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights,
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privileges and franchises necessary or desirable in the normal conduct of
its business except for rights, privileges and franchises the loss of which
would not in the aggregate have a material adverse effect on the business,
financial condition, properties, results of operations, value or prospects
of the Borrower and its Subsidiaries taken as a whole, and except as
otherwise permitted by Sections 6.3 and 6.4; and comply with all applicable
Requirements of Law except to the extent that the failure to comply
therewith would not, in the aggregate, have a material adverse effect on
the business, financial condition, properties, results of operations, value
or prospects of the Borrower and its Subsidiaries taken as a whole.
5.5 Maintenance of Property; Insurance. (a) Keep all property useful
and necessary in its business in good working order and condition (ordinary
wear and tear excepted); and
(b) Maintain with financially sound and reputable insurance companies
insurance on all its property in at least such amounts and with only such
deductibles as are usually maintained by, and against at least such risks
as are usually insured against in the same general area by, companies
engaged in the same or a similar business; provided that the Borrower may
implement programs of self insurance in the ordinary course of business and
in accordance with industry standards for a company of similar size so long
as reserves are maintained in accordance with GAAP for the liabilities
associated therewith.
5.6 Inspection of Property; Books and Records; Discussions. Keep
proper books of record and account in which full, true and correct entries
are made of all dealings and transactions in relation to its business and
activities in accordance with GAAP and all Requirements of Law; and permit
representatives of the Bank upon reasonable notice to visit and inspect any
of its properties and examine and make abstracts from any of its books and
records at any reasonable time and as often as may reasonably be desired
upon reasonable notice, and to discuss the business, operations, properties
and financial and other condition of the Borrower and its Subsidiaries with
officers and employees thereof and with their independent certified public
accountants.
5.7 Notices. Promptly give notice to the Bank:
(a) of the occurrence of any Default or Event of Default;
(b) of any (i) default or event of default under any instrument
or other agreement, guarantee or collateral document of Holdings or
any of its Subsidiaries which default or event of default has not been
waived and would have a material adverse effect on the business,
financial condition, properties, results of operations, value or
prospects of the Borrower and its Subsidiaries taken as a whole, or
(ii) litigation, investigation or proceeding which may exist at any
time between Holdings or any of its Subsidiaries and any Governmental
Authority, or receipt of any notice of any environmental claim or
assessment against Holdings or any of its Subsidiaries by any
Governmental Authority, which in any such case would have a material
adverse effect on the business, financial condition, properties,
results of operations, value or prospects of the Borrower and its
Subsidiaries taken as a whole;
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(c) of any litigation or proceeding affecting the Borrower or any
of its Subsidiaries (i) in which more than $25,000,000 of the amount
claimed is not covered by insurance or (ii) in which injunctive or
similar relief is sought which if obtained would have a material
adverse effect on the business, financial condition, properties,
results of operations, value or prospects of the Borrower and its
Subsidiaries taken as a whole;
(d) of the following events, as soon as practicable after, and in
any event within 30 days after, the Borrower knows thereof: (i) the
occurrence of any Reportable Event with respect to any Single Employer
Plan which Reportable Event would have a material adverse effect on
the business, financial condition, properties, results of operations,
value or prospects of the Borrower and its Subsidiaries taken as a
whole, or (ii) the institution of proceedings or the taking of any
other action by PBGC, the Borrower or any Commonly Controlled Entity
to terminate, withdraw from or partially withdraw from any Plan and,
with respect to a Multiemployer Plan, the Reorganization or Insolvency
of such Plan, in each of the foregoing cases which would have a
material adverse effect on the business, financial condition,
properties, results of operations, value or prospects of the Borrower
and its Subsidiaries taken as a whole, and in addition to such notice,
deliver to the Bank whichever of the following may be applicable: (A)
a certificate of the chief financial officer of the Borrower setting
forth details as to such Reportable Event and the action that the
Borrower or such Commonly Controlled Entity proposes to take with
respect thereto, together with a copy of any notice of such Reportable
Event that may be required to be filed with PBGC, or (B) any notice
delivered by PBGC evidencing its intent to institute such proceedings
or any notice to PBGC that such Plan is to be terminated, as the case
may be; and
(e) of a material adverse change known to the Borrower or any of
its Subsidiaries in the business, financial condition, properties,
results of operations, value or prospects of Holdings, the Borrower
and their respective Subsidiaries taken as a whole.
Each notice pursuant to this Section 5.7 shall be accompanied by a
statement of the chief executive officer or the chief financial officer of
the Borrower setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto.
5.8 Additional Subsidiary Guarantors. (a) If any Domestic Subsidiary
that is wholly owned by the Borrower or Holdings (whether presently
existing or hereafter created or acquired) shall become a Material
Subsidiary, the Borrower or Holdings shall cause to be delivered to the
Bank, (i) a Joinder Agreement duly executed by the parent of such
Subsidiary and such Subsidiary pursuant to which such Subsidiary shall
become a Guarantor hereunder, (ii) such closing documents and closing
certificates, including, without limitation, an opinion of counsel, as may
reasonably be requested by the Bank, and (iii) such other documents
reasonably requested by the Bank in order that such Subsidiary shall become
bound by all of the terms, covenants and agreements contained in this
Agreement and any other Loan Document applicable to such Subsidiary.
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(b) In the event that there shall be a change in law which eliminates
the adverse tax consequences to the Borrower, Holdings or any of their
respective Subsidiaries which would have resulted on the date hereof from
the guarantee by a Subsidiary, which would be a Material Subsidiary but for
the fact that 75% of the assets of such Subsidiary are securities of
foreign companies, of the Term Loan and the other obligations of the
Borrower hereunder, the Borrower shall promptly thereafter cause any such
Subsidiary that has not previously executed and delivered a Joinder
Agreement because of such adverse tax consequences to deliver a Joinder
Agreement to the Bank to the extent such Joinder Agreement can be so
executed and delivered without adverse tax consequences to the Borrower,
Holdings or any of their respective Subsidiaries.
5.9 Year 2000 Compatibility. Take all actions reasonably necessary to
assure that the computer based systems of Holdings and its Subsidiaries are
able, in all respects material to Holdings and its Subsidiaries taken as a
whole, to operate and effectively process data which includes dates on and
after January 1, 2000. At the request of the Bank, Holdings or any of its
Subsidiaries shall provide reasonable assurances reasonably satisfactory to
the Bank of their Year 2000 compatibility.
5.10 Hedging Agreement. Maintain, until all obligations under this
Agreement are paid in full, a Hedging Agreement with minimum notional
amount at any date of determination equal to one hundred percent (100%) of
the outstanding principal balance on the Term Loan at an interest rate,
with a counterparty and upon other terms and conditions reasonably
satisfactory to the Bank.
5.11 Use of Proceeds. Use the proceeds of the Term Loan to finance
acquisitions by the Borrower and to fund the working capital of the
Borrower.
5.12 Further Assurances. Make, execute and deliver all such additional
and further acts, things, deeds and instruments as the Bank may reasonably
require to document and consummate the transactions contemplated hereby and
to vest completely in and insure the Bank its rights under this Agreement,
the Note and the other Loan Documents.
ARTICLE VI
Negative Covenants
The Borrower hereby agrees that from and after the Closing Date it
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly so long as the Term Loan remains outstanding and unpaid or any
other amount is owing to the Bank:
6.1 Limitation on Liens. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets, income or profits, whether now owned
or hereafter acquired, except:
(a) Liens for taxes, assessments or other governmental charges
not yet due or which are being contested in good faith and by
appropriate proceedings if adequate
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reserves with respect thereto are maintained on the books of the
Borrower or such Subsidiary, as the case may be, in accordance with
GAAP;
(b) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other like Liens arising in the ordinary
course of business in respect of obligations which are not yet due or
which are being contested in good faith and by appropriate proceedings
if adequate reserves with respect thereto are maintained on the books
of the Borrower or such Subsidiary, as the case may be, in accordance
with GAAP;
(c) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security
legislation;
(d) Liens or deposits to secure the performance of bids, tenders,
trade or government contracts (other than for borrowed money), leases,
licenses, statutory obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature incurred in the ordinary
course of business;
(e) easements, right-of-way, zoning and similar restrictions and
other similar encumbrances or title defects incurred, or leases or
subleases granted to others, in the ordinary course of business, which
do not interfere with or adversely affect in any material respect the
ordinary conduct of the business of the Borrower and its Subsidiaries
taken as a whole;
(f) Liens in favor of the Bank pursuant to the Loan Documents or
in favor of the Lenders pursuant to the Existing Credit Facility and
bankers' liens arising by operation of law;
(g) Liens on assets of corporations which became or become
Subsidiaries of the Borrower, provided that such Liens exist at the
time such corporations became or become Subsidiaries and are not
created in anticipation thereof,
(h) Liens on documents of title and the property covered thereby
securing Indebtedness in respect of the letters of credit under the
Existing Credit Facility which are Commercial L/Cs (as defined by the
Existing Credit Facility);
(i) Liens not otherwise permitted by this Section 6.1 securing
any Indebtedness permitted under this Agreement, provided that (i) the
aggregate principal amount of Indebtedness secured by such Liens
permitted by this paragraph (i) shall at no time exceed $75,000,000
and (ii) no such Liens shall encumber any capital stock of Holdings,
the Borrower or any of their Subsidiaries;
(j) any judgment or judicial attachment Lien with respect to any
judgment that does not constitute an Event of Default;
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(k) license or leases in the ordinary course of business of
patents, copyrights, trademarks, trade names and other intellectual
property owned by the Borrower or any of its Subsidiaries, which do
not in the aggregate materially detract from the value of its property
or other assets or materially impair the use thereof in the operation
of its business, and rights to royalties, fees and other compensation
in respect of intellectual property licensed, leased or used by the
Borrower or any of its Subsidiaries;
(l) liens arising solely out of consignments of inventory and
work-in-process in the ordinary course of business; and
(m) liens on fixed or capital assets acquired or improved by the
Borrower or any of its Subsidiaries; provided that (i) such security
interests secure Indebtedness permitted by clause (d) of Section 6.14,
(ii) such security interests and the Indebtedness secured thereby are
incurred prior to or within 180 days after such acquisition or the
completion of such improvements and the Indebtedness secured thereby
does not exceed 100% of the cost of acquiring or improving such fixed
or capital assets and (iv) such security interests shall not apply to
any other property or assets of Holdings, the Borrower or any of their
Subsidiaries.
6.2 Limitation on Guaranty Obligations. Create, incur, assume or
suffer to exist any Guaranty Obligation except:
(a) guarantees of obligations to third parties made in the
ordinary course of business in connection with relocation of employees
of the Borrower or any of its Subsidiaries;
(b) guarantees not otherwise permitted by this Section 6.2 by the
Borrower and its Subsidiaries incurred in the ordinary course of
business for an aggregate amount not to exceed $75,000,000;
(c) Guaranty Obligations existing on the Closing Date and
described in Schedule 6.2;
(d) Guaranty Obligations in respect of foreign currency exchange
contracts permitted by Section 6.11 and commodity hedge agreements
permitted by Section 6.12;
(e) Guaranteed Obligations pursuant to the Guaranty;
(f) guarantees by the Borrower of Indebtedness and other
obligations of its Subsidiaries and by its Subsidiaries of
Indebtedness and other obligations of other Subsidiaries and the
Borrower, in each case as permitted under this Agreement;
(g) indemnities and other similar Guaranty Obligations arising
out of the Spin-Off Documents; and
(h) Guaranty Obligations under the Existing Credit Facility.
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6.3 Prohibition of Fundamental Changes. Enter into any transaction of
acquisition of, or merger or consolidation or amalgamation with, any other
Person (including any Subsidiary or Affiliate of the Borrower or any of its
Subsidiaries), or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or make any material change in the present
method of conducting business or engage in any type of business other than
of the same general type now conducted by it, except for the transactions
otherwise permitted pursuant to Sections 6.4 and 6.5.
6.4 Limitation on Sale of Assets. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, tax benefits, receivables and leasehold
interests), whether now owned or hereafter acquired except (a) for the sale
or other disposition of any property that in the reasonable judgment of the
Borrower, has become uneconomic, obsolete or worn out, and which is
disposed of in the ordinary course of business; (b) for sales of inventory
and receivables made in the ordinary course of business; (c) that any
Subsidiary of the Borrower may sell, lease, transfer or otherwise dispose
of any or all of its assets (upon voluntary liquidation or otherwise) to
the Borrower or a wholly-owned Subsidiary of the Borrower and any
Subsidiary of the Borrower may sell or otherwise dispose of, or part with
control of any or all of, the stock of any Subsidiary to a wholly-owned
Subsidiary of the Borrower or a Subsidiary of the Borrower may merge with
the Borrower (so long as the Borrower is the surviving corporation) or
another Subsidiary of the Borrower; and (d) for the sale or other
disposition by the Borrower or any of its Subsidiaries of other assets
consummated after the Closing Date, provided that (i) such sale or other
disposition shall be made for fair value on an arm's-length basis and (ii)
the aggregate fair market value of all such assets sold or disposed of
under this clause (d) shall not exceed 25% of the consolidated total assets
of the Borrower and its Subsidiaries as of the date of such sale; provided
that in no event shall the Borrower or any of its Subsidiaries sell any
assets pursuant to this clause (d) if the revenue generated by such assets
would have exceeded 25% of the consolidated net revenue of the Borrower and
its Subsidiaries for the he preceding fiscal year.
6.5 Limitation on Investments, Loans and Advances. Make any advance,
loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of, or make any other
investment in, any Person, unless after giving effect to such loan,
advance, extension of credit to, or acquisition of or investment in such
other Person, the Borrower shall be in pro forma compliance with Sections
6.6, 6.7 and 6.8 and no Default or Event or Default shall have occurred and
be continuing or shall result therefrom.
6.6 Maintenance of Consolidated Net Worth. Permit Consolidated Net
Worth at any time to be less than the sum (without duplication of any item)
of (i) $100,000,000 and (ii) 50% of the Consolidated Net Income of
Holdings, if positive, for each fiscal quarter (commencing with the fiscal
quarter beginning on or about July 1, 1997).
6.7 Maintenance of Interest Coverage. Permit the Interest Coverage
Ratio on the last day of any fiscal quarter to be less than 4.25 to 1.0.
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6.8 Maintenance of Leverage Ratio. Permit, as of the last day of any
fiscal quarter, the Leverage Ratio to be greater than 3.25 to 1.0.
6.9 Limitation on Dividends and Stock Repurchases. Declare any
dividends on any shares of any class of stock, or make any payment on
account of, or set apart assets for a sinking or other analogous fund for,
the purchase, redemption, retirement or other acquisition of any shares of
any class of stock (including the outstanding capital stock of Holdings),
whether now or hereafter outstanding, or make any other distribution in
respect thereof, either directly or indirectly, whether in cash or property
or in obligations of the Borrower or any of its Subsidiaries (all of the
foregoing being referred to herein as Restricted Payments"); except that:
(a) Subsidiaries may pay dividends directly or indirectly to the
Borrower or other Subsidiaries of the Borrower and each other owner of
an equity interest in such Subsidiary on a pro rata basis based on
their relative ownership interests, and Foreign Subsidiaries of the
Borrower may pay dividends directly or indirectly to Foreign
Subsidiaries of the Borrower and each other owner of an equity
interest in such Foreign Subsidiary on a pro rata basis based on their
relative ownership interests;
(b) the Borrower may pay dividends to Holdings in an amount equal
to the amount required for Holdings to pay franchise taxes, fees and
expenses necessary to maintain its status as a corporation and other
fees required to maintain its corporate existence, provided that
Holdings shall promptly pay such taxes, fees and expenses; and
(c) the Borrower at any time may make Restricted Payments in an
aggregate amount not exceeding the sum of (i) $40,000,000 and (ii) 50%
of positive Consolidated Net Income after July 1, 1997, so long as (x)
after giving effect to such Restricted Payments, the Borrower shall be
in pro forma compliance with Section 6.6 and (y) at the time thereof
and after giving effect thereto, no Default or Event of Default shall
have occurred and be continuing or shall result therefrom.
6.10 Transactions with Affiliates. Enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of
property or the rendering of any service, with any Affiliate except (a) for
transactions which are otherwise permitted under this Agreement and which
are in the ordinary course of the Borrower's or a Subsidiary of the
Borrower's business and which are upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than it would obtain in a
hypothetical comparable arm's length transaction with a Person not an
Affiliate, (b) as permitted under Sections 6.2(a) and (f), Section 6.5 and
Section 6.9 or (c) any transactions entered into as part of the Spin-Off
Transactions.
6.11 Foreign Exchange Contracts. Enter into any foreign currency
exchange contracts other than (i) in the ordinary course of business and
(ii) among the Borrower and/or one or more of its wholly-owned
Subsidiaries.
6.12 Commodity Hedges. Enter into any commodity hedge agreements other
than in the ordinary course of business.
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6.13 Fiscal Year. Permit the fiscal year of the Borrower to end on a
day other than December 31, unless the Borrower shall have given at least
45 days prior written notice to the Bank.
6.14 Limitation on Indebtedness. Create, incur, assume or suffer to
exist any Indebtedness (including any Indebtedness of any of its
Subsidiaries), except:
(a) Indebtedness of the Borrower under this Agreement and the
Note;
(b) (i) Indebtedness of the Borrower to any of its Subsidiaries
and of any wholly-owned Domestic Subsidiary to the Borrower or any
other Subsidiary of the Borrower; and (ii) Indebtedness of any
wholly-owned foreign Subsidiary to the Borrower or any other
Subsidiary of the Borrower to the extent permitted by Section 6.5;
(c) Indebtedness consisting of reimbursement obligations under
surety, indemnity, performance, release and appeal bonds and
guarantees thereof and letters of credit required in the ordinary
course of business or in connection with the enforcement of rights or
claims of the Borrower or its Subsidiaries;
(d) Capital lease obligations, mortgage financings, purchase
money Indebtedness and industrial revenue bond issues in respect of
real property or equipment incurred by the Borrower prior to or within
180 days after a capital expenditure in order to finance the purchase
or improvement of properties;
(e) Indebtedness consisting of foreign currency exchange
contracts permitted under Section 6.11 or commodity hedge agreements
permitted under Section 6.12;
(f) Indebtedness not otherwise permitted by the preceding clauses
of this Section 6.14 not exceeding $100,000,000 less the dollar amount
of the principal of the Term Loan outstanding at any one time
outstanding; and
(g) Indebtedness under the Existing Credit Facility.
ARTICLE VII
Unconditional Guaranty
7.1 Guaranty of Obligations. Each Guarantor hereby unconditionally
guarantees to the Bank, its successors, endorsees, transferees and assigns,
the prompt payment and performance of all obligations of the Borrower under
this Agreement and the Note, whether primary or secondary (whether by way
of endorsement or otherwise), whether now existing or hereafter arising,
whether or not from time to time reduced or extinguished (except by payment
thereof) or hereafter increased or incurred, whether or not recovery may be
or hereafter become barred by the statute of limitations, whether
enforceable or unenforceable as against Borrower, whether or not
discharged, stayed or otherwise affected by any bankruptcy, insolvency or
other
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similar law or proceeding, whether created directly with the Bank or
acquired by the Bank through assignment, endorsement or otherwise, whether
matured or unmatured, whether joint or several, as and when the same become
due and payable (whether at maturity or earlier, by reason of acceleration,
mandatory repayment or otherwise), in accordance with the terms of any such
instruments evidencing any such obligations, including all renewals,
extensions or modifications thereof (all obligations of the Borrower under
this Agreement and the Note to the Bank, including all of the foregoing,
being hereinafter collectively referred to as the "Guaranteed
Obligations"), provided that notwithstanding anything to the contrary
contained in this Agreement, it is the intention of each Guarantor and the
Bank that, in any proceeding involving the bankruptcy, reorganization,
arrangement, adjustment of debts, relief of debtors, dissolution or
insolvency or any similar proceeding with respect to any Guarantor or its
assets, the amount of such Guarantor's obligations with respect to the
Guaranteed Obligations shall be in, but not in excess of, the maximum
amount thereof not subject to avoidance or recovery by operation of
applicable law governing bankruptcy, reorganization, arrangement,
adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent
transfers or conveyances or other similar laws (including, without
limitation, 11 U.S.C. ss.547, ss.548, ss.550 and other "avoidance"
provisions of Title 11 of the United States Code) applicable in any such
proceeding to such Guarantor and this Guaranty (collectively, "Applicable
Insolvency Laws"). To that end, but only in the event and to the extent
that such Guarantor's obligations with respect to the Guaranteed
Obligations or any payment made pursuant to the Guaranteed Obligations
would, but for the operation of the foregoing proviso, be subject to
avoidance or recovery in any such proceeding under Applicable Insolvency
Laws, the amount of such Guarantor's obligations with respect to the
Guaranteed Obligations shall be limited to the largest amount which, after
giving effect thereto, would not, under Applicable Insolvency Laws, render
such Guarantor's obligations with respect to such Guaranteed Obligations
unenforceable or avoidable or otherwise subject to recovery under
Applicable Insolvency Laws. To the extent any payment actually made
pursuant to the Guaranteed Obligations exceeds the limitation of the
foregoing proviso and is otherwise subject to avoidance and recovery in any
such proceeding under Applicable Insolvency Laws, the amount subject to
avoidance shall in all events be limited to the amount by which such actual
payment exceeds such limitation and the Guaranteed Obligations as limited
by the foregoing proviso shall in all events remain in full force and
effect and be fully enforceable against such Guarantor. The foregoing
proviso is intended solely to preserve the rights of the Bank hereunder
against such Guarantor in such proceeding to the maximum extent permitted
by Applicable Insolvency Laws and neither such Guarantor, the Borrower, any
other guarantor nor any other Person shall have any right or claim under
such proviso that would not otherwise be available under Applicable
Insolvency Laws in such proceeding.
7.2 Nature of Guaranty. Each Guarantor agrees that the Guaranty
provided for in Section 7.1 is a continuing, unconditional guaranty of
payment and performance and not of collection, and that its obligations
under the Guaranty shall be primary, absolute and unconditional,
irrespective of, and unaffected by (a) the genuineness, validity,
regularity, enforceability or any future amendment of, or change in, this
Agreement or any other Loan Document or any other agreement, document or
instrument to which Borrower is or may become a party, (b) the absence of
any action to enforce the Guaranty, this Agreement or any other Loan
Document or the waiver or consent by the Bank with respect to any of the
provisions of the Guaranty, this Agreement or any other Loan Document, (c)
the existence,
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value or condition of, or failure to perfect its lien against, any security
for or other guaranty of the Guaranteed Obligations or any action, or the
absence of any action, by the Bank in respect of such security or guaranty
(including, without limitation, the release of any such security or
guaranty) or (d) any other action or circumstances which might otherwise
constitute a legal or equitable discharge or defense of a surety or
guarantor; it being agreed by each Guarantor that its obligations under the
Guaranty shall not be discharged until the final and indefeasible payment
and performance, in full, of the Guaranteed Obligations and the termination
of the Credit Facility. Each Guarantor expressly waives all rights it may
now or in the future have under any statute (including, without limitation,
North Carolina General Statutes Section 26-7, et seq. or similar law), or
at law or in equity, or otherwise, to compel the Bank to proceed in respect
of the Guaranteed Obligations against Borrower or any other party or
against any security for or other guaranty of the payment and performance
of the Guaranteed Obligations before proceeding against, or as a condition
to proceeding against, the Guarantors. Each Guarantor further expressly
waives and agrees not to assert or take advantage of any defense based upon
the failure of the Bank to commence an action in respect of the Guaranteed
Obligations against Borrower or any other party or any security for the
payment and performance of the Guaranteed Obligations. Each Guarantor
agrees that any notice or directive given at any time to the Bank which is
inconsistent with the waivers in the preceding two sentences shall be null
and void and may be ignored by the Bank, and, in addition, may not be
pleaded or introduced as evidence in any litigation relating to the
Guaranty for the reason that such pleading or introduction would be at
variance with the written terms of the Guaranty, unless the Bank have
specifically agreed otherwise in writing. The foregoing waivers are of the
essence of the transaction contemplated by the Loan Documents and, but for
the Guaranty and such waivers, the Bank would decline to enter into this
Agreement.
7.3 Demand by the Bank. In addition to the terms set forth in Section
7.2, and in no manner imposing any limitation on such terms, if all or any
portion of the then outstanding Guaranteed Obligations under this Agreement
are declared to be immediately due and payable, then the Guarantors shall,
upon demand in writing therefor by the Bank to the Guarantors, pay all or
such portion of the outstanding Guaranteed Obligations then declared due
and payable. Payment by the Guarantors shall be made to the Bank, to be
credited and applied upon the Guaranteed Obligations, in immediately
available funds in Euros to an account designated by the Bank.
7.4 Waivers. In addition to the waivers contained in Section 7.2, each
Guarantor waives, and agrees that it shall not at any time insist upon,
plead or in any manner whatever claim or take the benefit or advantage of,
any appraisal, valuation, stay, extension, marshalling of assets or
redemption laws, or exemption, whether now or at any time hereafter in
force, which may delay, prevent or otherwise affect the performance by the
Guarantors of their obligations under, or the enforcement by the Bank of,
the Guaranty provided for in this Article VII. Each Guarantor further
hereby waives diligence, presentment, demand, protest and notice of
whatever kind or nature with respect to any of the Guaranteed Obligations
and waives the benefit of all provisions of law which are or might be in
conflict with the terms of the Guaranty. Each Guarantor represents,
warrants and agrees that its obligations under the Guaranty are not and
shall not be subject to any counterclaims, offsets or defenses of any kind
against the Bank or the Borrower, whether now existing or which may arise
in the future.
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7.5 Modification of Loan Documents etc. If the Bank shall at any time
or from time to time, with or without the consent of, or notice to, the
Guarantors (a) change or extend the manner, place or terms of payment of,
or renew or alter all or any portion of, the Guaranteed Obligations, (b)
take any action under or in respect of the Loan Documents in the exercise
of any remedy, power or privilege contained therein or available to it at
law, in equity or otherwise, or waive or refrain from exercising any such
remedies, powers or privileges, (c) amend or modify, in any manner
whatsoever, the Loan Documents, (d) extend or waive the time for
performance by the Guarantors, Borrower or any other Person of, or
compliance with, any term, covenant or agreement on its part to be
performed or observed under a Loan Document (other than the Guaranty), or
waive such performance or compliance or consent to a failure of, or
departure from, such performance or compliance, (e) take and hold security
or collateral for the payment of the Guaranteed Obligations or sell,
exchange, release, dispose of, or otherwise deal with, any property
pledged, mortgaged or conveyed, or in which the Bank has been granted a
lien, to secure any Indebtedness of the Guarantors or Borrower to the Bank,
(f) release anyone who may be liable in any manner for the payment of any
amounts owed by the Guarantors or Borrower to the Bank, (g) modify or
terminate the terms of any intercreditor or subordination agreement
pursuant to which claims of other creditors of the Guarantors or Borrower
are subordinated to the claims of the Bank or (h) apply any sums by
whomever paid or however realized to any amounts owing by the Guarantors or
Borrower to the Bank on account of the obligations under this Agreement and
the Note in such manner as the Bank shall determine in its reasonable
discretion; then the Bank shall not incur any liability to the Guarantors
as a result thereof, and no such action shall impair or release the
obligations of the Guarantors under this Guaranty.
7.6 Reinstatement. Each Guarantor agrees that, if any payment made by
the Borrower or any other Person applied to the Obligations is at any time
annulled, set aside, rescinded, invalidated, declared to be fraudulent or
preferential or otherwise required to be refunded or repaid, or the
proceeds of collateral are required to be returned by the Bank to the
Borrower, its estate, trustee, receiver or any other party, including,
without limitation, the Guarantors, under any applicable law or equitable
cause, then, to the extent of such payment or repayment, the Guarantors'
liability hereunder (and any lien or collateral securing such liability)
shall be and remain in full force and effect, as fully as if such payment
had never been made, and, if prior thereto, the Guaranty shall have been
canceled or surrendered (and if any lien or collateral securing the
Guarantors' liability hereunder shall have been released or terminated by
virtue of such cancellation or surrender), the Guaranty (and such lien or
collateral) shall be reinstated in full force and effect, and such prior
cancellation or surrender shall not diminish, release, discharge, impair or
otherwise affect the obligations of the Guarantors in respect of the amount
of such payment (or any lien or collateral securing such obligation).
7.7 Mutual Grant of Present Right of Contribution and Indemnity. To
the extent that the value as of the time of execution of this Agreement of
the benefits received by any Guarantor by reason of matters stated in the
preamble (whether determined under a standard of "fair value," "reasonably
equivalent value" or any other valuation standard under applicable law) is
less than the sum of the obligations incurred by such Guarantor to the Bank
plus such Guarantor's liability under this Section 7.7, then subject only
to the following Section 7.8 and in
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addition to all other rights and remedies such Guarantor has or may have
under applicable law, the Borrower and each remaining Guarantor
respectively agrees that such Guarantor has the present right to recover
the amount of such excess from the Borrower and the remaining Guarantors,
which right shall be enforceable jointly and severally against the Borrower
and the remaining Guarantors to the full extent that the obligations are
enforceable against such Guarantor. Without limiting the foregoing, in the
event any Guarantor is required, by reason of this Agreement, to pay an
amount in excess of the value of the benefit such Guarantor is deemed to
have received by reason of matters described in the preamble of this
Agreement, the Borrower and the remaining Guarantors jointly and severally
agree to pay such Guarantor, upon demand, the amount of such excess.
Subject only to the provisions of the following Section 7.8, such Guarantor
shall be subrogated to any and all rights of the Bank against the Borrower
and the remaining Guarantors to the extent of such excess payment.
7.8 No Subrogation. Until all amounts owing to the Bank on account of
the obligations under this Agreement and the Note are paid in full and the
Credit Facility is terminated, each Guarantor hereby waives any claims or
other rights which it may now or hereafter acquire against Borrower that
arise from the existence or performance of the Guarantors' obligations
under the Guaranty, including, without limitation, any right of
subrogation, reimbursement, exoneration, indemnification, any right to
participate in any claim or remedy of the Bank against Borrower or any
collateral which the Bank may now have or may hereafter acquire, whether or
not such claim, remedy or right arises in equity or under contract, statute
or common law, by any payment made hereunder or otherwise, including
without limitation, the right to take or receive from Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim or other rights. If any amount
shall be paid to any Guarantor on account of such rights at any time when
all of the obligations under this Agreement and the Note shall not have
been paid in full, such amount shall be held by such Guarantor in trust for
the Bank, segregated from other funds of such Guarantor, and shall,
forthwith upon receipt by such Guarantor, be turned over to the Bank in the
exact form received by such Guarantor (duly indorsed by such Guarantor to
the Bank, if required) to be applied against the Obligations, whether
matured or unmatured, in such order as set forth herein.
7.9 Joint and Several Liability. The obligations of all of the
Guarantors under the Guaranty provided for in this Article VII shall be
joint and several among all of the Guarantors.
7.10 Release of Guarantor. Upon the sale by the Borrower of all the
shares of capital stock of any Guarantor and provided no Default or Event
of Default exists under this Agreement or would result therefrom, the
obligations of such Guarantor under this Guaranty shall automatically be
discharged and released without any further action by the Bank, provided
that Bank agrees, upon the request of the Borrower, to execute and deliver
any instrument or other document in a form acceptable to the Bank which may
reasonably be required to evidence such discharge and release.
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ARTICLE VIII
Conditions to Bank's Obligations
8.1 Conditions to Closing. The Bank's obligation to close this
Agreement and to fund the Term Loan is subject to the fulfillment of the
following conditions:
(a) Loan Documents. The Loan Documents shall have been duly
executed by the Borrower and delivered to the Bank.
(b) General Certificate. The Borrower shall have delivered to the
Bank a general certificate as to the due organization and authority of
the Borrower to execute, deliver and perform the Loan Documents and
any Hedging Agreement with the Bank and the incumbency of its officers
in form and substance satisfactory to the Bank.
(c) Officer's Certificate. The Bank shall have received a
certificate from the chief executive officer or chief financial
officer of the Borrower, in form and substance reasonably satisfactory
to the Bank, to the effect that all representations and warranties of
the Borrower contained in this Agreement and the other Loan Documents
are true, correct and complete in all material respects; that the
Borrower is not in violation of any of the covenants contained in this
Agreement and the other Loan Documents; that, after giving effect to
the transactions contemplated by this Agreement, no Default or Event
of Default has occurred and is continuing; and that the Borrower has
satisfied each of the closing conditions.
(d) Fees and Expenses. The Bank shall have received all fees,
charges and other expenses (including, without limitation, legal fees
and expenses) due in connection with the transactions contemplated
hereby.
(e) Consents; Defaults.
(i) Governmental and Third Party Approvals. The Borrower
shall have obtained all necessary approvals, authorizations and
consents of any Person and of all Governmental Authorities and
courts having jurisdiction with respect to the transactions
contemplated by this Agreement and the other Loan Documents.
(ii) No Injunction, Etc. No action, proceeding,
investigation, regulation or legislation shall have been
instituted, threatened or proposed before any Governmental
Authority to enjoin, restrain, or prohibit, or to obtain
substantial damages in respect of, or which is related to or
arises out of this Agreement or the other Loan Documents or the
consummation of the transactions contemplated hereby or thereby,
or which, in the Bank's sole discretion, would make it
inadvisable to consummate the transactions contemplated by this
Agreement and such other Loan Documents.
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(iii) No Event of Default. No Default or Event of Default
shall have occurred and be continuing.
(f) Financial Matters.
(i) Financial Statements. The Bank shall have received the
most recent audited consolidated financial statements of Holdings
and its Subsidiaries referred to in Section 4.1(a) of this
Agreement, all in form and substance reasonably satisfactory to
the Bank.
(ii) Financial Condition Certificate. The Borrower shall
have delivered to the Bank a certificate, in form and substance
satisfactory to the Bank, and certified as accurate by a
Responsible Officer, that (A) Holdings and each of its
Subsidiaries are each Solvent, and (B) the Borrower's payables
are current and not past due, except as would not have a Material
Adverse Effect.
(g) Miscellaneous. All opinions, certificates, documents, other
instruments and all proceedings in connection with the transactions
contemplated by this Agreement shall be reasonably satisfactory in
form and substance to the Bank. The Bank shall have received copies of
all other instruments and other evidence as the Bank may reasonably
request, in form and substance reasonably satisfactory to the Bank,
with respect to the transactions contemplated by this Agreement and
the taking of all actions in connection therewith.
ARTICLE IX
Default
9.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) The Borrower shall fail to (i) pay any principal of the Term
Loan when due in accordance with the terms hereof or (ii) pay any
interest on the Term Loan or any other amount payable hereunder within
five days after any such interest or other amount becomes due in
accordance with the terms thereof or hereof, or
(b) Any representation or warranty made or deemed made by any
Credit Party in any Loan Document or which is contained in any
certificate, guarantee, document or financial or other statement
furnished under or in connection with this Agreement shall prove to
have been incorrect in any material respect on or as of the date made
or deemed made; or
(c) The Borrower shall default in the observance or performance
of any agreement contained in Section 5.7(a) or Article VI of this
Agreement or any Guarantor shall default in the observance or
performance of any agreement contained in Article VII of this
Agreement; or
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(d) The Borrower or any other Credit Party shall default in the
observance or performance of any other agreement contained in any Loan
Document, and such default shall continue unremedied for a period of
30 days; or
(e) Holdings or any of its Subsidiaries shall (i) default in any
payment of principal of or interest on any Indebtedness or in the
payment of any Guaranty Obligation, beyond the period of grace, if
any, provided in the instrument or agreement under which such
Indebtedness or Guaranty Obligation was created; or (ii) default in
the observance or performance of any other agreement or condition
relating to any such Indebtedness or Guaranty Obligation or contained
in any instrument or agreement evidencing, securing or relating
thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit
the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Guaranty Obligation (or a trustee or agent on
behalf of such holder of holders or beneficiary or beneficiaries) to
cause, with the given of notice if required, such Indebtedness to
become due prior to its stated maturity, any applicable grace period
having expired, or such Guaranty Obligation to become payable, any
applicable grace period having expired, provided that the aggregate
principal amount of all such Indebtedness and Guaranty Obligations
under clauses (i) and (ii) equals or exceeds $12,500,000; or
(f) (i) Holdings, the Borrower or any other Guarantor shall
commence any case, proceeding or other action (A) under any existing
or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief or debtors, seeking
to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or
Holdings, the Borrower or any of their respective Subsidiaries shall
make a general assignment for the benefit of its creditors; or (ii)
there shall be commenced against Holdings, the Borrower or any other
Guarantor any case, proceeding or other action of a nature referred to
in clause (i) above which (A) results in the entry of an order for
relief or any such adjudication or appointment or (B) remains
undismissed, undischarged or unbonded for a period of 60 days; or
(iii) there shall be commenced against Holdings, the Borrower or any
other Guarantor any case, proceeding or other action seeking issuance
of a warrant or attachment, execution, distraint or similar proceeding
against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or (iv) Holdings, the Borrower or any other
Guarantor shall take any action in furtherance of, or indicating its
consent to, approval of, or acquiescence in, any of the acts set forth
in clause (i), (ii), or (iii) above; or (v) Holdings, the Borrower or
any other Guarantor shall generally not, or shall be unable to, or
shall admit in writing its inability to, pay its debts as they become
due; or
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(g) (i) Any Person shall engage in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist
with respect to any Plan, (iii) a Reportable Event (other than a
Reportable Event with respect to which the 30-day notice requirement
under Section 4043 of ERISA has been waived) shall occur with respect
to, or proceedings to have a trustee appointed shall commence with
respect to, or a trustee shall be appointed to administer or to
terminate, any Single Employer Plan, which Reportable Event or
institution of proceedings or appointment of a trustee is, in the
reasonable opinion of the Bank, likely to result in the termination of
such Plan for purposes of Title IV of ERISA, and, in the case of a
Reportable Event, such Reportable Event shall continue unremedied for
ten days after notice of such Reportable Event is given and, in the
case of the institution of proceedings, such proceedings shall
continue for ten days after commencement thereof or (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA; and
in each case in clauses (i) through (iv) above, such event or
condition, together with all other such events or conditions relating
to such Plans, if any, could subject the Borrower or any Guarantor to
any tax, penalty or other liabilities which in the aggregate are
material in relation to the business, financial condition, properties,
results of operations, value or prospects of the Borrower and its
Subsidiaries taken as a whole; or
(h) one or more final judicial judgments or decrees shall be
entered against the Borrower or any Guarantor involving in the
aggregate for all such Persons a liability (not paid or fully covered
by insurance) of $10,000,000 or more and all such judgments or decrees
shall not have been vacated, discharged, stayed or bonded pending
appeal within the time required by the terms of such judgment; or
(i) Holdings shall cease to own 100% of the issued and
outstanding capital stock of the Borrower, free and clear of all
Liens; or Holdings shall conduct, transact or otherwise engage in any
business or operations, incur, create, assume or suffer to exist any
Indebtedness, Guaranty Obligations or other liabilities or obligations
or Liens, or own, lease, manage or otherwise operate any properties or
assets, other than (i) incident to the ownership of all of the
outstanding shares of capital stock of the Borrower or the issuance of
debt and equity securities, provided that the net proceeds of such
issuance are concurrently advanced to, or contributed to the capital
of, the Borrower, unless such other business owned by Holdings is
related to the business of the Borrower and such business is
effectively contributed to the Borrower by merger, purchase or any
other acquisition transaction, within 90 days of the acquisition by
Holdings of such business, (ii) the issuance of guarantees of
Indebtedness of the Borrower and its Subsidiaries and of reimbursement
obligations of the Borrower and its Subsidiaries under surety,
indemnity, performance and appeal bonds, letters of credit and like
instruments and other obligations that the Borrower or any Subsidiary
is permitted to incur or (iii) the performance by Holdings of its
obligations under the Spin-Off Documents; or
(j) (i) Any Person or two or more Persons (except FL Affiliates)
acting in concert shall have acquired beneficial ownership (within the
meaning of Rule l3d-3 of the
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Securities and Exchange Commission promulgated under the Exchange Act)
of more than 33% of the outstanding shares of voting stock of
Holdings; or (ii) any Person or two or more Persons (except FL
Affiliates) acting in concert shall acquire the power to elect a
majority of the Board of Directors of Holdings; or
(k) Any Event of Default (as such term is defined in the Existing
Credit Facility) occurs under the Existing Credit Facility; or
(l) Any termination payment shall be due by the Borrower under
any Hedging Agreement to which the Borrower is a party and such amount
is not paid within thirty (30) days of the due date thereof or any
other default or event of default exists thereunder after the
expiration of any applicable grace or cure period.
9.2 Consequence of Event of Default.
(a) Acceleration; Termination of the Credit Facility. Should any
one or more of the above defined Events of Default occur and be
continuing, the Bank may, at its option, terminate the Credit Facility
and any commitments to the Borrower arising under this Agreement or
otherwise, and the Bank may declare all Obligations (other than any
obligation under any Hedging Agreement) to be immediately due and
payable, regardless of the stated maturities thereof and the Borrower
shall forthwith pay all Obligations without presentment, demand,
protest, or notice of any kind, all of which are hereby expressly
waived, anything conditioned herein or in any other document to the
contrary notwithstanding. Should there occur an Event of Default
described in Section 9.1(f), the Credit Facility and the commitments
to the Borrower arising under this Agreement or otherwise shall
automatically terminate and all Obligations shall automatically become
immediately due and payable.
(b) Rights of Collection. Should any one or more of the above
defined Events of Default occur and be continuing, the Bank may, at
its option, exercise all of its other rights and remedies under this
Agreement, the other Loan Documents and any applicable law, in order
to satisfy all of the Obligations.
9.3 Rights and Remedies Cumulative. No right or remedy herein
conferred upon the Bank is intended to be exclusive of any other right or
remedy contained herein, or in any instrument or document delivered
pursuant to or in connection with this Agreement (including without
limitation the Note) and every such right or remedy contained herein and
therein or now or hereafter existing at law, or in equity, or by statute,
or otherwise shall be cumulative. The Bank may pursue, or refrain from
pursuing, any remedy available to it at such times and in such order as the
Bank in its sole discretion shall determine.
ARTICLE X
Special Provisions as to LIBOR Market Rate
10.1 Additional Costs.
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(a) If, as a result of any Regulatory Change,
(i) the basis of taxation of payments to the Bank of the
principal of or interest on the Term Loan, the Note or any other
amounts payable under this Agreement in respect thereof (other
than taxes imposed on the overall net income of the Bank for
loans of such type by the jurisdiction in which the Bank has its
principal office) is changed; or
(ii) any reserve, special deposit or similar requirements
relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of, the Bank are imposed,
modified or deemed applicable; or
(iii) any other condition affecting this Agreement, the Term
Loan or the Note is imposed on the Bank;
and the Bank reasonably determines that, by reason thereof, the cost to the
Bank of making or maintaining the Term Loan at the Euro LIBOR Market Rate
is increased, or any amount receivable by the Bank hereunder in respect of
the Term Loan or the Note while bearing interest at the Euro LIBOR Market
Rate is reduced, in each case by an amount deemed by the Bank to be
material (such increases in cost and reductions in amounts receivable being
herein called "Increased Costs"), then the Borrower shall pay to the Bank
upon its request such additional amount or amounts as will compensate the
Bank for such Increased Costs. The Bank will notify the Borrower of any
event occurring after the date hereof which will entitle the Bank to
compensation pursuant to this Section 10.1(a) as promptly as practicable
after it obtains knowledge thereof and determines to request such
compensation. If the Bank requests compensation under this Section 10.1(a),
the Borrower may, by notice to the Bank, require that the Bank furnish to
the Borrower a statement setting forth the basis for requesting such
compensation and the method for determining the amount thereof.
(b) Determinations by the Bank for purposes of this Section 10.1
of the effect of any Regulatory Change on its costs of making or
maintaining the Term Loan at the Euro LIBOR Market Rate or on amounts
receivable by it in respect of the Term Loan bearing interest at the
Euro LIBOR Market Rate, and of the additional amounts required to
compensate the Bank in respect of any Increased Costs, shall be
conclusive, provided that such determinations are made reasonably and
in good faith.
10.2 Capital Requirements. If either (a) the introduction of, or any
change in, or in the interpretation of, any applicable law or (b)
compliance with any guideline or request from any central bank or
comparable agency or other Governmental Authority (whether or not having
the force of law), has or would have the effect of reducing the rate of
return on the capital of, or has affected or would affect the amount of
capital required to be maintained by the Bank or any corporation
controlling the Bank as a consequence of, or with reference to the Term
Loan and other commitments of this type, below the rate which the Bank or
such other corporation could have achieved but for such introduction,
change or compliance, then within five (5) Business Days after written
demand by the Bank, the Borrower shall pay to the Bank from time to time as
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specified by the Bank additional amounts sufficient to compensate the Bank
or other corporation for such reduction. A certificate as to such amounts
submitted to the Borrower by the Bank, shall, in the absence of manifest
error, be presumed to be correct and binding for all purposes.
10.3 Taxes.
(a) The Borrower shall pay any present or future stamp,
registration, recordation or documentary taxes or any other similar
fees or charges or excise or property taxes, levies of the United
States or any state or political subdivision thereof or any applicable
foreign jurisdiction which arise from any payment made hereunder or
from the execution, delivery or registration of, or otherwise with
respect to, this Agreement, the Term Loan, the other Loan Documents,
or the perfection of any rights or security interest in respect
thereto (hereinafter referred to as "Other Taxes").
(b) Indemnity. The Borrower shall indemnify the Bank for the full
amount of Other Taxes (including, without limitation, any Taxes and
Other Taxes imposed by any jurisdiction on amounts payable under this
Section 10.3) paid by the Bank and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto,
whether or not such Other Taxes were correctly or legally asserted.
Such indemnification shall be made within thirty (30) days from the
date the Bank makes written demand therefor.
(c) Evidence of Payment. Within thirty (30) days after the date
of any payment of Other Taxes, the Borrower shall furnish to the Bank,
the original or a certified copy of a receipt evidencing payment
thereof or other evidence of payment satisfactory to the Bank.
(d) Survival. Without prejudice to the survival of any other
agreement of the Borrower hereunder, the agreements and obligations of
the Borrower contained in this Section 10.3 shall survive the payment
in full of the Term Loan and the Note and the termination of this
Agreement.
10.4 Regulatory Limitation. In the event, as a result of increases in
the value of the Euro against the Dollar or for any other reason, the
obligation of the Bank to make the Term Loan (taking into account the
dollar amount of the obligations of the Borrower under the Loan Documents
and all other indebtedness required to be aggregated under 12 U.S.C.A.
ss.84, as amended, the regulations promulgated thereunder and any other
applicable law) is determined by the Bank to exceed its then applicable
legal lending limit under 12 U.S.C.A. ss.84, as amended, and the
regulations promulgated thereunder, or any other applicable law, the amount
of the Term Loan the Bank shall be obligated to make or issue hereunder
shall immediately be reduced to the maximum amount which the Bank may
legally advance (as determined by the Bank), and the Borrower shall reduce,
or cause to be reduced, complying to the extent practicable with the
remaining provisions hereof, the obligations of the Borrower under the Loan
Documents which are outstanding hereunder by an amount sufficient to comply
with such maximum amounts.
10.5 Indemnity. The Borrower hereby indemnifies the Bank against any
loss or expense which may arise or be attributable to the Bank's obtaining,
liquidating or employing deposits or other funds acquired to effect, fund
or maintain the Term Loan (a) as a consequence of any failure by the
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Borrower to make any payment when due of any amount due hereunder in
connection with the Term Loan, or (b) due to any payment or prepayment of
the Term Loan on a date other than the last day of any Interest Period. If
the Bank requests indemnification under this Section, the Bank shall
furnish to the Borrower a certificate setting forth the basis and amount of
such request, which certificate shall be prima facie evidence of the
matters stated therein. Determinations by the Bank of the amount of any
claim for indemnification under this Section shall be made on a reasonable
basis and in good faith, based upon the assumption that the Bank funded the
Term Loan in the London interbank market, and using any reasonable
attribution or averaging methods which the Bank deems appropriate and
practical. This covenant shall survive termination of this Agreement and
payment of the outstanding Obligations.
10.6 Mitigation Obligations. If the Bank requests compensation under
Section 10.1, 10.2 or 10.3, then the Bank shall use reasonable efforts to
designate a different lending office for funding or booking the Term Loan
or to assign its rights and obligations hereunder to another of its
offices, branches or affiliates, if, in the judgment of the Bank, such
designation or assignment (i) would eliminate or reduce amounts payable
pursuant to Sections 10.1, 10.2 or 10.3, and (ii) would not subject the
Bank to any unreimbursed cost or expense and would not otherwise be
disadvantageous to the Bank. The Borrower hereby agrees to pay all
reasonable costs and expenses incurred by the Bank in connection with any
such designation or assignment. The Borrower's indemnification obligations
under Section 10.5 shall apply to the transactions described in this
Section 10.6.
ARTICLE XI
Jurisdiction, Service and Judgment Currency
11.1 Binding Arbitration; Waiver of Jury Trial.
(a) Binding Arbitration. Upon demand of any party, whether made
before or after institution of any judicial proceeding (but in no
event later than 30 days after the institution of any judicial
proceeding), any dispute, claim or controversy arising out of,
connected with or relating to the Note or any other Loan Documents
("Disputes"), between or among parties to the Note or any other Loan
Document shall be resolved by binding arbitration as provided herein.
Institution of a judicial proceeding by a party does not waive the
right of that party to demand arbitration hereunder. Disputes may
include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed
in the future, disputes as to whether a matter is subject to
arbitration, or claims concerning any aspect of the past, present or
future relationships arising out of or connected with the Loan
Documents. Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration
Rules") of the American Arbitration Association and Title 9 of the
U.S. Code. All arbitration hearings shall be conducted in Charlotte,
North Carolina. The expedited procedures set forth in Rule 51, et seq.
of the Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any
Dispute. A judgment upon the award may be entered in any court having
jurisdiction. Notwithstanding anything foregoing to the contrary, any
arbitration proceeding demanded hereunder shall begin within ninety
(90) days after such demand thereof and shall be concluded within one
hundred and twenty (120) days after such demand. These time
limitations may not
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be extended unless a party hereto shows cause for extension and then
such extension shall not exceed a total of sixty (60) days. The panel
from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure
shall be a retired judge from the highest court of general
jurisdiction, state or federal, of the state where the hearing will be
conducted. The parties hereto do not waive any applicable Federal or
state substantive law except as provided herein. Notwithstanding the
foregoing, this paragraph shall not apply to any Hedging Agreement
that is a Loan Document.
(b) Jury Trial. THE BANK, THE BORROWER AND EACH GUARANTOR HEREBY
ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
IRREVOCABLY WAIVED THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH
RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY
DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR THE OTHER LOAN
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE
PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the
preceding binding arbitration provisions, the parties hereto and the
other Loan Documents preserve, without diminution, certain remedies
that such Persons may employ or exercise freely, either alone, in
conjunction with or during a Dispute. Each such Person shall have and
hereby reserves the right to proceed in any court of proper
jurisdiction or by self help to exercise or prosecute the following
remedies: (i) all rights to foreclose against any real or personal
property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure
and sale, (ii) all rights of self help including peaceful occupation
of property and collection of rents, set off, and peaceful possession
of property, (iii) obtaining provisional or ancillary remedies
including injunctive relief, sequestration, garnishment, attachment,
appointment of receiver and in filing an involuntary bankruptcy
proceeding, and (iv) when applicable, a judgment by confession of
judgment. Preservation of these remedies does not limit the power of
an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
11.2 Currency Indemnity. If for the purpose of obtaining judgment in
any court in any country it becomes necessary to convert into any other
currency (the "Judgment Currency") any amount in Euros due hereunder
(hereinafter referred to as the "Agreed Currency"), then the date on which
the rate of exchange is fixed by such court for that conversion shall be
known as the "Conversion Date". If there is a change in the rate of
exchange prevailing between the Conversion Date and the date of payment of
the amount due under such judgment, the Borrower will, notwithstanding such
judgment, pay such additional or lesser amounts, if any, as may be
necessary to ensure that the amount paid in the Judgment Currency when
converted at the rate of exchange prevailing on the date of payment will
produce the amount then due to the Bank from the Borrower in connection
with any such judgement in the Agreed Currency. For this purpose "rate of
exchange" means the rate at which the Bank is able on the relevant date (or
nearest date) to purchase the Agreed Currency with the Judgment Currency.
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ARTICLE XII
Miscellaneous
12.1 Collection Expenses. Upon the occurrence of any Event of Default,
Borrower shall pay all the costs and expenses incurred by the Bank in
collecting, enforcing or protecting its interest with respect to the Loan
Documents, or any instrument or document delivered pursuant to the Loan
Documents, or in protecting the rights of any holder or holders with
respect thereto, including attorneys' fees, and the Bank or any such holder
or holders may take judgment for all such amounts, in addition to the
unpaid principal balance of all Indebtedness owed by the Borrower and the
accrued interest thereon.
12.2 Fees and Expenses. The Borrower shall reimburse the Bank for all
out-of-pocket costs and expenses (including legal fees not to exceed
$15,000) incurred by it with respect to the preparation and negotiation of
the Loan Documents and enforcing the terms thereof.
12.3 Governing Law. This Agreement, the Note and the other Loan
Documents, unless otherwise expressly set forth therein, shall be construed
in accordance with and governed by the laws of the State of North Carolina,
without reference to the conflicts or choice of law principles thereof.
12.4 Captions. Except for the captions to the definitions contained in
Section 1.1, the captions of the Articles and Sections of this Agreement
are inserted for convenience only and shall not be deemed to constitute a
part of this Agreement.
12.5 Notices. All notices, requests, demands and other communications
provided for herein or in any instrument or document delivered pursuant
hereto shall be in writing and shall be conclusively deemed to have been
received by a party hereto and to be effective on the day on which
delivered to such party at the address set forth below (or at such other
address as such party shall specify to the others by notice in accordance
with the provisions of this section) or if sent by registered or certified
mail, postage prepaid, return receipt requested, (unless sooner delivered)
on the second Business Day after the day on which mailed:
TO FIRST UNION: First Union National Bank
201 South College Street
Charlotte, NC 28288-0334
Attention: Sarah T. Warren
Telephone: (704) 383-4498
Telecopy: (704) 383-6647
TO BORROWER: CommScope, Inc. of North Carolina
1375 Lenoir Rhyne Boulevard
Hickory, North Carolina 28601
Attention: Frank B. Wyatt, II
Telephone: (828) 323-4917
Telecopy: (828) 431-2520
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6519 CommScope Road
Post Office Box 199
Catawba, North Carolina 28609-0199
Attention: Barry Graham
Telephone: (828) 241-6013
Telecopy: (828) 241-2347
With a Copy to: Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: F. William Rendel
Telephone: (212) 853-8000
Telecopy: (212) 853-4000
12.6 Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon and
after the occurrence of any Event of Default and during the continuance
thereof, the Bank and each of its affiliates is hereby authorized by the
Borrower at any time or from time to time, without notice to the Borrower
or to any other Person, any such notice being hereby expressly waived, to
set off and to appropriate and to apply any and all deposits (general or
special, time or demand, including, but not limited to, indebtedness
evidenced by certificates of deposit, whether matured or unmatured), any
other indebtedness at any time held or owing by the Bank or such affiliate
to or for the credit or the account of the Borrower, or any other property
of the Borrower, including without limitation, securities and certificates
of deposit, now or hereafter maintained by the Borrower for its or their
own account with the Bank or such affiliate (even if effecting such set-off
results in a loss or reduction of interest or the imposition of a penalty
applicable to the early withdrawal of time deposits), against and on
account of the obligations due hereunder irrespective of whether or not (a)
the Bank shall have made any demand under this Agreement or any of the
other Loan Documents or (b) the Bank shall have declared any or all of the
obligations due hereunder to be due and payable as permitted by Section 9.2
and although such obligations shall be contingent or unmatured. The
Borrower further authorizes any affiliate of the Bank, upon and following
the occurrence of an Event of Default, at the request of the Bank, and
without notice to the Borrower or any other Person, to turn over to the
Bank, any property of the Borrower, including without limitation, funds and
securities held by such affiliate for the Borrower's account and to debit,
for the benefit of the Bank, any deposit account maintained by the Borrower
with such affiliate (even if such deposit account is not then due or there
results a loss or reduction of interest or the imposition of a penalty in
accordance with law applicable to the early withdrawal of time deposits),
in the amount requested by the Bank up to the amount of the obligations due
hereunder, and to pay or transfer such amount or property to the Bank for
application to the obligations due hereunder. In addition, the Borrower
authorizes the Bank and any of its affiliates to purchase with moneys
standing to the credit of any such account such other currencies
(including, without limitation, the Euro) as may be necessary to effect any
such setoff, appropriation and application set forth herein.
12.7 Benefit. This Agreement shall be binding upon and inure to the
benefit of the Borrower, the Bank and their respective successors and
assigns, provided that the Borrower
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may not assign its rights hereunder without the prior written consent of
the Bank; provided, further, that the Bank will not assign its rights
hereunder to a Non U.S. Bank or any other Person payments to which would be
subject to withholding tax under Sections 881 or 871 of the Code.
12.8 Severability. In case any one or more of the provisions contained
in this Agreement, or any instrument or other document delivered pursuant
to this Agreement, should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired thereby.
12.9 Singular and Plural, Etc. As used herein, the singular shall
include the plural, the plural the singular, and the use of any gender
shall be applicable to all genders.
12.10 Counterparts. This Agreement may be executed in any number of
counterparts and all the counterparts taken together shall be deemed to
constitute one and the same instrument.
12.11 Entire Agreement. This Agreement (including the Exhibits and
Schedules hereto) constitutes the final, exclusive and complete expression
of the agreement of the parties hereto with respect to the subject matter
hereof and all other prior or contemporaneous agreements with respect to
the subject matter hereof are superceded hereby.
12.12 Term of Agreement. This Agreement shall remain in effect from
the Closing Date through and including the date upon which all obligations
of the Borrower under this Agreement and the other Loan Documents shall
have been indefeasibly and irrevocably paid and satisfied in full. No
termination of this Agreement shall affect the rights and obligations of
the parties hereto arising prior to such termination.
12.13 Amendment. If (a) the Existing Credit Facility is amended,
supplemented or otherwise modified prior to its maturity or (b) the
Existing Credit Facility is replaced or renewed before, at or after its
maturity, the Bank may, at its election, amend this Agreement to
incorporate terms, covenants, representations, warranties and conditions
that, as determined by the Bank in its sole discretion, correspond to the
Existing Credit Facility as so amended, supplemented, modified, renewed or
replaced; provided, however, that the Bank must make such election within
60 days after the Borrower has notified the Bank of such amendment,
supplement, modification, renewal or replacement.
43
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
above written.
BORROWER:
COMMSCOPE, INC. OF NORTH CAROLINA
[CORPORATE SEAL]
By:/s/ Jearld L. Leonhardt
---------------------------------
Name: Jearld L. Leonhardt
Title: Executive Vice President
and Chief Financial Officer
<PAGE>
BANK:
FIRST UNION NATIONAL BANK
By:/s/ Sarah T. Warren
---------------------------------
Name: Sarah T. Warren
Title: Vice President
<PAGE>
GUARANTOR:
COMMSCOPE, INC.
By:/s/ Jearld L. Leonhardt
---------------------------------
Name: Jearld L. Leonhardt
Title: Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT A
---------
TERM NOTE
---------
<PAGE>
EXHIBIT B
---------
FORM OF JOINDER AGREEMENT
-------------------------
THIS JOINDER AGREEMENT, dated as of the ____ day of __________, ____
(the "Agreement"), to the Credit Agreement referred to below is entered
into by and among CommScope, Inc. of North Carolina, a corporation
organized under the laws of North Carolina (the "Company"), on behalf of
itself and the Guarantors party to such Credit Agreement (collectively, the
"Credit Parties"), ______________________, a corporation organized under
the laws of _________________ (the "New Subsidiary"), and FIRST UNION
NATIONAL BANK, as Bank under such Credit Agreement (the "Bank").
Statement of Purpose
--------------------
The Credit Parties and the Bank are parties to the Credit Agreement
dated as of February ___, 1999 (as supplemented hereby and as further
amended, restated, supplemented or otherwise modified, the "Credit
Agreement").
Pursuant to Section 5.8 of the Credit Agreement, the New Subsidiary is
required to execute, among other documents, a joinder agreement in order to
become a Guarantor under the Credit Agreement.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
1.01 Credit Agreement Supplement.
---------------------------
(a) Joinder of the New Subsidiary as a Guarantor.
--------------------------------------------
(i) The New Subsidiary hereby agrees to unconditionally guarantee
to the Bank and its successors, endorsees, transferees and assigns,
the prompt payment and performance of all Obligations of the Borrower
under the Credit Agreement and the Note to the same extent and upon
the same terms and conditions as are contained in the Credit
Agreement.
(ii) Pursuant to Section 5.8 of the Credit Agreement, the New
Subsidiary hereby agrees that it is a Guarantor under the Credit
Agreement as if a signatory thereof on the Closing Date, and the New
Subsidiary shall comply with and be subject to and have the benefit of
all of the terms, conditions, covenants, agreements and obligations
set forth therein. The New Subsidiary hereby agrees that each
reference to a "Guarantor" or the "Guarantors" in the Credit Agreement
and other Loan Documents shall include the New Subsidiary.
(b) The Credit Agreement. The New Subsidiary hereby agrees that each
reference to the Credit Agreement or "Agreement" as used therein shall mean
the Credit Agreement as
<PAGE>
supplemented hereby. The New Subsidiary acknowledges that it has received a
copy of the Credit Agreement and that it has read and understands the terms
thereof.
(c) Schedules to the Credit Agreement. Attached hereto as Annex A are
updated copies of each Schedule referenced in the Credit Agreement revised
to include all information required to be provided therein with respect to
the New Subsidiary.
2.01 General Provisions.
------------------
(a) Representations and Warranties.
------------------------------
(i) The Borrower hereby confirms that each representation and
warranty made by Holdings, the Borrower and its Subsidiaries under the
Loan Documents is true and correct in all material respects as of the
date hereof and that no Default or Event of Default has occurred or is
continuing under the Credit Agreement.
(ii) The Borrower hereby represents and warrants that as of the
date hereof there are no claims or offsets against or defenses or
counterclaims to the obligations of the Credit Parties under the
Credit Agreement or any other Loan Document.
(iii) The New Subsidiary hereby acknowledges it has received a
copy of the Credit Agreement and the other Loan Documents and that it
has read and understands the terms thereof.
(b) Limited Effect. Except as supplemented hereby, the Credit
Agreement and each other Loan Document shall continue to be, and shall
remain, in full force and effect. This Agreement shall not be deemed (i) to
be a waiver of, or consent to, or a modification or amendment of, any other
term or condition of the Credit Agreement or any other Loan Document or
(ii) to prejudice any right or rights which the Bank may now have or may
have in the future under or in connection with the Credit Agreement or the
other Loan Documents or any of the instruments or agreements referred to
therein, as the same may be amended or modified from time to time.
(c) Costs and Expenses. The Borrower, on behalf of itself and the
other Credit Parties, hereby agrees that the Credit Parties shall pay or
reimburse the Bank for all of its reasonable and customary out-of-pocket
costs and expenses incurred in connection with the preparation, negotiation
and execution of this Agreement including, without limitation, the
reasonable fees and disbursements of counsel.
(d) Counterparts. This Agreement may be executed by one or more of the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
(e) Definitions. All capitalized terms used and not defined herein
shall have the meanings given thereto in the Credit Agreement.
<PAGE>
(f) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH
CAROLINA, WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES
THEREOF.
IN WITNESS WHEREOF the undersigned hereby cause this Agreement to be
executed and delivered as of the date first above written.
COMMSCOPE, INC. OF
NORTH CAROLINA
By:
---------------------------------
Name:
Title:
[CORPORATE SEAL]
FIRST UNION NATIONAL BANK
By:
---------------------------------
[NEW SUBSIDIARY]
By:
---------------------------------
Name:
Title:
[CORPORATE SEAL]
<PAGE>
Exhibit C
Existing Credit Facility as in effect on the Closing Date
[Attached]
EXHIBIT 21
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
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-33555, 333-29725 and 333-54017 of CommScope, Inc. and subsidiary on
Forms S-8 of our report dated January 29, 1999, appearing in this Annual
Report on Form 10-K of CommScope, Inc. for the year ended December 31,
1998.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Hickory, North Carolina
March 23, 1999
<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, 1998 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-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 4,129
<SECURITIES> 0
<RECEIVABLES> 93,627
<ALLOWANCES> 4,126
<INVENTORY> 29,986
<CURRENT-ASSETS> 144,412
<PP&E> 215,967
<DEPRECIATION> 80,885
<TOTAL-ASSETS> 465,327
<CURRENT-LIABILITIES> 50,430
<BONDS> 181,800
0
0
<COMMON> 503
<OTHER-SE> 203,469
<TOTAL-LIABILITY-AND-EQUITY> 465,327
<SALES> 571,733
<TOTAL-REVENUES> 571,733
<CGS> 437,140
<TOTAL-COSTS> 437,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,448
<INCOME-PRETAX> 60,214
<INCOME-TAX> 20,983
<INCOME-CONTINUING> 39,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,231
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.79
</TABLE>
EXHIBIT 99
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, 1998, 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," "think", "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; (e) potential disruption from the "Year 2000" problem,
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 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 are 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.
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.
TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING
THE COMPANY
Many of the markets that the Company serves are characterized by
advances in information processing and communications capabilities which
require increased transmission speeds and greater capacity ("bandwidth")
for carrying information. These advances require ongoing improvements in
the capabilities of wire and cable products. The Company believes that its
future success will depend in part upon its ability to enhance existing
products and to develop and manufacture new products that meet or
anticipate such changes. The failure to introduce successful new or
enhanced products on a timely and cost-competitive basis could have an
adverse impact on the Company's operations and financial condition.
Fiber optic technology presents a potential substitute for the
products that comprise the majority of the Company's sales. To date, fiber
optic cables have penetrated the cable television and local area network
("LAN") markets served by the Company in high-bandwidth point-to-point and
trunking applications. Fiber optic cables have not, to date, significantly
penetrated the local distribution and residential application markets
served by the Company because of the high relative cost of electro-optic
interfaces and the high cost of fiber termination and connection. At the
same time, advances in data transmission equipment and copper cable
technologies have increased the relative performance of copper-based cables
which are the Company's principal product offerings. However, a significant
decrease in the cost of fiber optic systems could make such systems
superior on a price/performance basis to copper systems. While the Company
is a fiber optic cable manufacturer and supplier to a small portion of the
cable television market and certain specialty markets, such a significant
decrease in the cost of fiber optic systems would likely have an adverse
effect on the Company.
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, plastics, bi-metals, copper and optical fiber 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. However, the Company recently acquired the clad
wire fabrication equipment and technology of Texas Instruments Incorporated
for manufacturing copper-clad aluminum wire and copper-clad steel wire. At
full capacity, this acquisition will give the Company the ability to
produce a significant portion of the bi-metal center conductors used by the
Company. In addition to bi-metallic wires, fine aluminum wire, which is a
smaller raw material purchase than bi-metallic wire, is purchased primarily
from a single source. However, the Company also intends to pursue fine wire
drawing to produce braid wires for flexible coaxial cables. 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 and the Company was unable to vertically
integrate the production of these products. Additionally,
fluorinated-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
Management remains guarded about the near-term outlook for
international sales. During 1998, international sales decreased by
approximately 30%, or $60.6 million, compared to 1997, due to monetary
crises in key overseas markets, including the Pacific Rim and South
America. Excluding the Seneffe acquisition, which is expected to provide
approximately 5% sales growth in 1999, management expects 1999
international sales to be relatively unchanged compared to 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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. However, the Company
cannot predict with certainty the outlook for international sales in 1999
and beyond due to unpredictable political and economic uncertainties.
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.
