<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996
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 1-5442
GENERAL INSTRUMENT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3575653
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
8770 WEST BRYN MAWR AVENUE 60631
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code (773) 695-1000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- - -------------------------------------------------------------- --------------------------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
5% Convertible Junior Subordinated Notes due 2000 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 / /.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2.8 billion as of March 6, 1997 (based on the
closing price of the 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.
Number of shares of Common Stock, par value $.01 per share, outstanding as
of March 6, 1997: 136,934,426.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1996 are incorporated by reference in Parts I, II and IV.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references to the "Company" or "GI"
include General Instrument Corporation and its direct or indirect subsidiaries,
including General Instrument Corporation of Delaware ("GI Delaware"), the
Company's principal operating subsidiary.
GENERAL
The Company is a leading worldwide supplier of systems and equipment for
high-performance networks delivering video, voice and data/Internet services and
a world leader in the design, manufacture and sale of discrete semiconductors.
The Company's Broadband Communications segment, which is comprised of the
Broadband Networks Group, Satellite Data Networks Group, Next Level
Communications ("NLC") and CommScope, Inc. of North Carolina ("CommScope")
business units, represented 87% of the Company's consolidated sales for the year
ended December 31, 1996. Broadband Communications offers a variety of products
and services for the cable and satellite television industries, including
digital and analog set-top systems, hybrid fiber/coaxial network transmission
systems, digital satellite systems, telephone network solutions and coaxial and
other high-performance cable. The Power Semiconductor Division represented 13%
of the Company's consolidated sales for the year ended December 31, 1996, and is
a world leader in the sale of low- to medium-power rectifiers and transient
voltage suppression components used in consumer electronics, computers,
telecommunications, lighting ballasts, home appliances and automotive and
industrial products. The Company was organized in 1990 in connection with the
acquisition of General Instrument Corporation, then a publicly traded company,
by affiliates of Forstmann Little & Co., a private investment firm. Additional
information regarding the Company's industry segments appears in Note 14 to the
Company's consolidated financial statements included in the Annual Report to
Stockholders for the year ended December 31, 1996 (the "1996 Annual Report"),
incorporated herein by reference.
RECENT DEVELOPMENTS
On January 7, 1997, the Company announced that its Board of Directors had
approved a strategic restructuring plan to divide the Company into three
separate public companies. The restructuring, expected to be completed in the
third quarter of 1997 through a tax-free spin-off to stockholders (the
"Distribution"), will create three independent companies:
NextLevel Systems, Inc., which will be a leading worldwide supplier of
systems and equipment for high-performance networks delivering video, voice and
data/Internet services.
CommScope, Inc., which will be the leading worldwide supplier of coaxial
cable for broadband communications.
General Semiconductor, Inc., now the Company's Power Semiconductor Division,
which will be a world leader in the design, manufacture and sale of low- to
medium-power rectifiers and transient voltage suppression components.
The restructuring plan is subject to, among other things, the approval of
the holders of a majority of the outstanding shares of the Company's Common
Stock and the receipt of a ruling from the Internal Revenue Service that the
separation of the three companies is not taxable to the Company or its
stockholders.
This Annual Report on Form 10-K presents information with respect to the
business of the Company as a whole. In connection with the Distribution, a proxy
statement will be mailed to the stockholders of the Company containing detailed
information with respect to each of NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc.
1
<PAGE>
MARKET OVERVIEW
The Company is a leading worldwide supplier of systems and equipment for
high-performance networks delivering video, voice and data/Internet services.
The Company is the only company currently providing such systems and equipment
for broadband networks (i.e., networks having the capacity, or bandwidth, to
transmit large volumes of information) using all of the following architectures:
(i) wired systems including analog signals over the traditional hybrid fiber
coaxial cable television plant ("HFC"), digital signals over the HFC plant, and
switched-digital technology over fiber-to-the-curb architecture ("FTTC"); (ii)
multichannel multipoint distribution systems ("wireless cable"); and (iii)
direct-to-home ("DTH") satellite television systems. The Company believes that
its technological leadership position and its ability to deliver any type of
content over any type of network around the world makes it well positioned to
continue to be a leading provider of broadband systems and equipment regardless
of the network and architecture used.
U.S. VIDEO NETWORKS. Historically, broadband video networks in the United
States have been used predominantly by cable television operators in a wired
cable television architecture. Accordingly, the Company has been focused
primarily on supplying traditional analog systems and equipment to cable
television multiple systems operators ("MSOs").
The Company believes that consumer demand for video entertainment is
increasing, creating the need for more and varied types of programming. Based on
data presented in industry trade publications and reports prepared by
telecommunications industry analysts, the Company believes that the number of
national cable programming networks has more than doubled since 1990. This
expansion, however, is limited by the channel capacity of cable systems. Based
on the sources indicated above, the Company estimates that of the more than
11,000 cable systems in the United States, only approximately 14% have the
capacity to deliver 54 or more channels.
Cable television operators are facing competition from DTH programmers using
broadband networks to transmit television signals, via satellite, directly to
subscribers' home receivers. Historically, most consumers had only one option
for receiving multi-channel video entertainment--the local cable television
operator. Currently, consumers also have access to national DTH digital
television services which provide up to approximately 200 channels of
programming, with high-quality digital video and audio. DIRECTV and PRIMESTAR
Partners ("PRIMESTAR"), the two leading small dish DTH providers, have gained
more than four million subscribers since the introduction of these digital
services in 1994. The Company is the exclusive supplier of digital consumer
receivers for PRIMESTAR, and is the exclusive supplier of encoders for both
DIRECTV and PRIMESTAR.
In addition, wireless cable television operators and local telephone
companies have begun competing with existing cable television companies to offer
video entertainment in many markets in the United States. Wireless cable is an
architecture in which signals are sent from transmitter towers over the airwaves
to small antennas that reside on customer homes. The Company is the leading
supplier of set-top terminals for analog and digital wireless cable systems. Of
the telephone companies offering video services, GTE Corporation ("GTE") has
selected the Company to supply equipment for the first three sites of GTE's
broadband network.
In response to increasing consumer demand and competition, many cable
television operators have increased, or are planning to increase, the number of
channels they are capable of offering, either by upgrading the existing cable
plant using an HFC architecture, or by implementing digital compression
technology over the existing cable plant. HFC combines fiber optic and radio
frequency technologies to increase the capacity, reliability and capability of a
broadband network by connecting a headend to a neighborhood node using fiber
optic cable and connecting the neighborhood node to the home subscriber using
coaxial cable. Digital compression technology allows cable television operators
to transmit the equivalent of four to ten channels of video information on the
bandwidth used by one analog channel. In addition, digital signals are more
resistant to noise and distortion than analog signals. Thus, digital systems
2
<PAGE>
will allow cable television operators to offer a very large number of
high-quality video and music channels and user-friendly features, such as
interactive program guides and still leave capacity to offer near-video-
on-demand services. As a leading provider of HFC systems and equipment, as well
as the only company shipping digital cable headend equipment and terminals in
volume, the Company believes that it is well positioned to serve its traditional
customer base, whichever path to increasing capacity the cable television
operators choose.
INTERNATIONAL VIDEO NETWORKS. The Company believes that international
markets represent a key growth opportunity for sales of broadband networks. In
1996, international sales by the the Broadband Communications segment
represented 28% of its total sales, and management's goal is to increase that
percentage to approach 50% over the next several years. Based on data presented
in industry trade publications and reports prepared by telecommunications
industry analysts, the Company estimates that more than 80% of the television
households in the world are outside the United States; however, despite the
growing demand for entertainment programming in these markets, the penetration
of multichannel services is approximately 21% in these markets compared to
approximately 72% in the United States.
International markets employ the same types of broadband network
architectures used in the United States: traditional wired cable television;
wireless cable; and DTH systems. In certain countries, like the United Kingdom,
operators have been using system architectures that are similar to systems used
by U.S. cable networks, partly because many of these systems are being developed
by affiliates of certain U.S. cable television operators and telephone
companies. The Company believes that it has a competitive advantage in these
markets because of its leadership in the cable equipment market in the United
States, its relationship with the U.S. cable operators, its technological
leadership and its fully integrated product line. The Company also believes that
it is more likely that significant growth in sales of its analog systems will be
attributable to increased international deployment of broadband equipment.
Wireless cable systems are being used internationally in areas where the
cost of installing a cable television infrastructure is not justified due to the
low density of homes, a relatively small subscriber base or geographical
constraints. The Company believes that it has supplied a majority of the
addressable cable and wireless cable systems currently in use in international
markets.
DTH systems have become increasingly popular in international markets,
particularly as digital compression technology allows satellite service
providers and programmers to maximize their limited transponder capacity in
order to reach geographically dispersed subscribers. The Company's digital
satellite television technology, DigiCipher-TM- II, which incorporates the
Motion Picture Experts Group 2 ("MPEG-2") international standard for digital
compression and transport, has been widely accepted in North America, but has
not been widely deployed in international markets. Many of these markets have
adopted a different technology, Digital Video Broadcast ("DVB"). In 1996, the
Company acquired the DVB compliant Magnitude-TM- digital satellite product line
from Compression Labs, Inc. The Company has, to date, employed DVB technology
only in encoders and not in consumer receivers. The Company expects to have DVB
compliant consumer receivers available beginning in the third quarter of 1997,
and believes that the introduction of this product will enable it to compete
more effectively in the international DTH market.
HIGH-SPEED DATA NETWORKS. The Company believes that the rapid growth in
personal computer ownership and, in particular, usage of on-line and Internet
access services, has created a demand for increased data transmission speeds.
Based on data presented in industry trade publications and reports prepared by
telecommunications industry analysts, the Company estimates that there are now
approximately 39 million computer households in the United States, compared with
approximately 22 million in 1990, and that approximately 17 million computer
households subscribe to on-line services, compared to approximately two million
in 1990. Traditional telephone modems, typically delivering up to 28.8 kilobits
of information per second, may not be adequate to service the proliferation of
Internet sites and the increasing amounts of data, sophisticated graphics and
video.
3
<PAGE>
The Company has developed a high-speed modem that delivers information via
the cable television infrastructure instead of telephone lines. The Company's
SURFboard-TM- modem, which began commercial shipment to cable television
operators in the third quarter of 1996, is capable of delivering information
down the cable at speeds up to nearly 1,000 times faster than a traditional
telephone modem, while delivering instructions and other information upstream
from the consumer over telephone lines. Most of the competing modems currently
on the market are "two-way" cable, meaning that the information both delivered
to the consumer and sent back from the consumer to the network travels over the
cable plant. Because only a small percentage of existing cable systems are
capable of effective two-way communications, the Company believes that its
SURFboard cable modem with telephone return path is the optimal product for the
current environment. The Company expects to introduce its SURFboard two-way
cable product line by 1998, as more cable systems become capable of two-way
communications. The Company is also developing SURFboard product lines for
satellite and wireless cable applications.
TELEPHONY NETWORKS. The Company entered a new market, the telephone local
loop access market, with its purchase of NLC in September 1995. Based on data
presented in industry trade publications and reports prepared by
telecommunication industry analysts, the Company estimates that local telephone
companies in the United States spend approximately $2 billion per year to
rebuild their local loop equipment. Although the local telephone companies have
been concentrating on their core business of voice transmission, they have begun
to implement video and data services. The Company believes that NLC's
next-generation NLevel(3) switched-digital broadband access system, which
provides an integrated suite of voice, video and data services over an FTTC
architecture, is an ideal solution because it allows telephone companies to
upgrade their systems to provide voice-only services currently while migrating
to data and video services over time. FTTC is a fiber-rich switched digital
architecture in which fiber is deployed to very small neighborhood nodes, each
serving eight to 50 customer homes, and the customer homes are connected to the
nodes through copper cable for telephone services and coaxial or copper cable
for video services.
The Regional Bell Operating Companies ("RBOCs") are currently evaluating
various architectures available to provide upgraded voice, as well as video and
data services, and may determine to deploy several architectures. In the first
quarter of 1997, NLC began delivering equipment under an agreement with a
subsidiary of NYNEX Corporation ("NYNEX") to supply its NLevel(3) system for one
million lines of telephone service in metropolitan New York and Boston. NYNEX
also has options to extend its deployment of the NLevel(3) system up to five
million lines. As of March 20, 1997, three of the other RBOCs had announced
their intention to employ FTTC architectures using switched-digital video
technology in their planned broadband networks, and four others had announced
their intention to use HFC networks. Several of the RBOCs are also evaluating
DTH and wireless cable.
THE COMPANY'S BROADBAND COMMUNICATIONS STRATEGY
The Company's strategy is to use its technological leadership in secure
broadband systems and equipment to enhance its leading position in its
traditional markets while expanding into new markets. This strategy is based on
the belief that (i) consumers, both in the U.S. and international markets, will
continue to demonstrate an increasing demand for new entertainment and
information services and (ii) content and service providers will continue to
create new bandwidth-intensive video, voice and data applications at the upper
limits of network capabilities. The Company believes that these factors will
generate a continuing need for systems and equipment with greater capacity for
all networks and architectures. The key elements of the Company's strategy are
set forth below.
- TECHNOLOGICAL LEADERSHIP IN ADVANCED DIGITAL NETWORKS. The Company intends
to build upon its world leadership in the development and implementation
of advanced broadband communications systems and equipment. The Company
recently began commercial deployment of two of the most advanced
communications systems in the world: its MPEG-2 digital cable television
system, which provides more than 100 channels of high-quality digital
video and audio, including greatly expanded
4
<PAGE>
pay-per-view offerings; and its NLevel(3) switched-digital broadband
access system, which provides advanced voice, data and video services for
the telephone local loop. The Company believes that it is the only company
currently shipping digital cable headend equipment and terminals in volume
and that its leadership position in core enabling technologies, such as
digital compression, will enhance its ability to compete successfully in
new markets.
- DELIVERY OF ANY TYPE OF CONTENT OVER ANY NETWORK. The Company supplies a
broad range of end-to-end systems that provide the capability to deliver
any type of content or services--video, voice or data--over any type of
network and architecture (wired analog and digital, wireless cable,
satellite and FTTC). The Company believes that it is the only company
capable of serving all of the service providers in this increasingly
competitive environment, making it uniquely positioned to expand its
leadership position in the provision of broadband networks.
- RAPID INTERNATIONAL EXPANSION. The Company believes that a significant
amount of its growth will come from international markets. There is a
growing demand for entertainment programming in these markets, but the
penetration of multi-channel video services is low. The Company intends to
focus on expanding its international sales with the goal that
international sales will approach 50% of its total sales over the next
several years.
- PROVIDE INTERNET AND DATA TRAFFIC SOLUTIONS. The Company believes that
high-speed data networks are an emerging growth opportunity. Until
recently, the principal barrier to expanding the bandwidth available to
home users has been the speed limitations on data transmitted over copper
telephone wires. The Company recently began commercial shipment of its
SURFboard modem, which provides Internet and multimedia services to homes
and businesses at speeds up to nearly 1,000 times faster than conventional
telephone modems. The Company intends to focus on the development of its
cable modem products and expects to introduce its two-way cable modem by
1998.
BUSINESS UNITS
The Company's Broadband Communications segment, which represented 87%, 83%
and 84% of the Company's consolidated sales for the years ended December 31,
1996, 1995 and 1994, respectively, is organized into four business units: the
Broadband Networks Group; the Satellite Data Networks Group; NLC; and CommScope.
The Broadband Networks Group is the world leader in digital and analog
set-top systems for wired and wireless cable television networks, as well as HFC
network transmission systems used by network operators.
The Satellite Data Networks Group is the world's leading provider of digital
satellite systems for programmers, DTH satellite network providers, and private
networks for business communications and distance learning. It offers a complete
product line of digital compression and transmissions systems including MPEG-2,
DVB and Advanced Television Systems Committee (ATSC) compliant solutions. The
Satellite Data Networks Group is also a leader in the development of high-speed
data networks.
NLC provides telephony network solutions through its next-generation
NLevel(3) switched digital services system. This system supports both
residential and small business communications services over a high-speed,
digital broadband transport architecture.
CommScope is the leading worldwide supplier of coaxial cable for broadband
communications. CommScope is the largest manufacturer and supplier of coaxial
cable for cable television applications and is a leading supplier of coaxial
cable for satellite television and other broadband video distribution
applications. CommScope also manufactures and sells electrical and optical cable
for local area network ("LAN") and other high-performance cable applications.
5
<PAGE>
BROADBAND NETWORKS GROUP
ADVANCED NETWORK SYSTEMS AND TRANSMISSION NETWORK SYSTEMS. The principal
analog products of the Broadband Networks Group represented 48% 45%, and 47% of
the sales of the Broadband Communications segment in the years ended December
31, 1996, 1995 and 1994, respectively. Subscriber products include primarily
addressable systems which permit control, through a set-top terminal, of a
subscriber's cable television services from a central headend computer without
requiring access to the subscriber's premises. Addressable systems also enable a
cable television operator to more easily provide pay-per-view programming
services and multiple tiers of programming packages. Transmission products
include headend signal processing equipment, distribution amplifiers, fiber
optic transmission equipment and passive components for wired television
distribution systems.
Throughout the last several years, the Broadband Networks Group has been the
market share leader in the U.S. analog-addressable market, with more than 50% of
that market. The Company believes that cable television operators have sought to
improve the quality, capacity and capabilities of their networks during this
period by increasing their capital spending for addressable systems and
transmission infrastructure upgrades. The Company expects cable television
operators in the United States and abroad to continue to upgrade their basic
networks and invest in new system construction primarily to compete with other
television programming sources, such as DTH and cable networks planned by some
telephone companies, and to develop, using U.S. architecture and systems,
international markets where cable penetration is low and demand for
entertainment programming is growing.
Beginning in the second quarter of 1995, the Broadband Networks Group began
shipping its CFT-2200 advanced analog terminal, which increased the
functionality and features of its prior analog addressable subscriber terminals.
The CFT-2200 incorporates a user feature platform that allows cable operators to
deploy applications of their choice for new services, including electronic
program guides, supplementary sports and entertainment information and
play-along game shows, and can be modularly upgraded to deliver digital audio,
providing CD-quality simulcasts of premium services. The CFT-2200 can also be
upgraded to the Broadband Networks Group's second generation end-to-end digital
television system, which is compatible with the MPEG-2 international standard
for digital compression and transport. The Broadband Networks Group had shipped
more than 1.8 million CFT-2200 units by December 31, 1996, and as of March 20,
1997, the Broadband Networks Group had received commitments and letters of
intent for approximately 3.5 million additional CFT-2200 terminals.
DIGITAL NETWORK SYSTEMS. The Company believes that the commercialization of
advanced digital broadband systems and equipment, which provide for greatly
expanded channel capacity and programming options, improved quality and security
of signal transmission and the capability of delivering enhanced features and
services, is an important market for GI. The Company also believes that its
position in this developing market is significantly enhanced by the Broadband
Networks Group's leadership in a key enabling technology, digital compression,
which allows the broadcast of multiple digital channels in the same bandwidth
occupied by one uncompressed video channel. The Broadband Networks Group,
through its Digital Network Systems business unit, is deploying its digital
television system that enables satellite programmers and cable television
operators to deliver over their existing networks four to ten times as much
information as is possible with existing analog technology. This system was the
first digital video compression system to demonstrate capabilities over cable
and satellite television networks. The Broadband Networks Group began shipping
its first-generation digital encoders and decoders for satellite programmers and
cable television commercial headend operators in 1993.
The Company expects that cable and other broadband network operators will
begin to deploy digital terminals in their customers' homes in order to take
advantage of the enhanced capabilities of the digital networks. The rate of
deployment will depend largely on consumer demand for new services made
available through the digital network and the relative cost of the more advanced
digital terminals. The Broadband Networks Group sold its first 100,000 DCT-1000
digital subscriber terminals in the fourth
6
<PAGE>
quarter of 1996, and also sold 12 headend systems with the capacity to deliver
digital services to more than two million subscribers. As of March 20, 1997, the
Broadband Networks Group had obtained commitments and letters of intent for more
than four million DCT-1000 and DWT-1000 terminals from major North American
cable and wireless cable system operators and GTE. The Broadband Networks Group
has entered into an agreement to supply network equipment, featuring CFT-2200
and DCT-1000 digital terminals, for the first three sites of GTE's planned HFC
network. The Broadband Networks Group is working with AT&T Network Systems to
bring advanced services to GTE's customers in these new video dial-tone
networks.
The Broadband Networks Group's digital terminals incorporate the MPEG-2
international standard, and the Company's digital television system has the
capacity to carry various video, audio and data elements through a complex
information infrastructure that will have an improved capability to interact
with other consumer devices using MPEG-2 compression.
SATELLITE DATA NETWORKS GROUP
DIGITAL AND ANALOG SATELLITE PRODUCTS. The Satellite Data Networks Group
designs, manufactures and sells analog and digital satellite uplink and downlink
products for commercial and consumer use. Using the Company's DigiCipher digital
technology, commercial customers are able to compress their video, audio and
data transmissions resulting in significant cost savings over traditional analog
transmission. The Satellite Data Networks Group also offers state-of-the-art
network management and access control products and services allowing program
packagers to efficiently and cost-effectively manage customer transactions and
securely transmit their programming to only authorized end-users. For consumers,
the Satellite Data Networks Group provides "user friendly" graphical user
interfaces, excellent video quality and high-end audio reception. Satellite
products represented 25%, 31% and 27% of the sales of the Broadband
Communications segment for the years ended December 31, 1996, 1995 and 1994,
respectively. The Satellite Data Networks Group is the leading manufacturer of
access control and scrambling and descrambling equipment used by television
programmers for the satellite distribution of proprietary programming.
The Satellite Data Networks Group was a pioneer in digital satellite
television with its DigiCipher I system, the world's first digital compression,
access control and encryption transport system designed for the delivery of
video entertainment signals. The digital system relies on encoders located at
the point where programming originates, and decoders located at either
commercial headends or at consumers' homes for use with their satellite dishes.
In the second quarter of 1994, the Satellite Data Networks Group began
deployment of DigiCipher I consumer receivers to PRIMESTAR, a consortium of
cable television operators and GE Americom, which offers a medium-power Ku-band
DTH television system, and, through December 31, 1996, had delivered
approximately 2.3 million DigiCipher I receivers to PRIMESTAR. The Satellite
Data Networks Group began shipment of its second generation, MPEG-2 compatible
DigiCipher II system and Magnitude system, which utilizes the DVB standard, in
1996.
The Satellite Data Networks Group is the sole supplier of digital satellite
receivers to PRIMESTAR and digital satellite encoders for DTH providers
PRIMESTAR, DIRECTV, USSB, Galaxy Latin America and DIRECTV Japan. The Satellite
Data Networks Group is also a leading supplier of digital satellite systems to
private networks for such applications as business communications and distance
learning. The group's digital satellite systems are in use by organizations such
as Ford Motor Company and South Carolina Educational TV.
The analog satellite products of the Company are the exclusive systems for
the distribution of encrypted C-band (large dish) satellite-delivered
programming to cable television operators and large-diameter backyard satellite
dish owners. The system consists primarily of scramblers, which are installed at
7
<PAGE>
the point where the programming originates, and descramblers, which are
installed at the commercial headends of cable television systems or purchased by
consumers for use with their backyard C-band satellite dishes.
Sales of analog consumer descramblers have declined, as expected, to minimal
levels over the past two years as a result of the availability of competing
satellite video services. The Company plans to introduce, in the second quarter
of 1997, its first digital descramblers for the backyard C-band market. This
product, called 4DTV-TM-, will allow C-band dish owners to take advantage of the
wealth of digital programming now being transmitted by satellite. There can be
no assurance, however, that volume shipments of 4DTV will commence in 1997 or as
to the degree of market acceptance of this new product.
HIGH-SPEED DATA NETWORKS. The Company believes that high-speed data
networks are an emerging growth opportunity for the Satellite Data Networks
Group. The initial product offered by the group is the SURFboard cable modem,
which provides Internet and multimedia services to homes and businesses at
speeds up to nearly 1,000 times faster than conventional telephone modems.
Initial commercial shipment of SURFboard modems for cable networks commenced
during the third quarter of 1996. SURFboard modems are scheduled to be deployed
by several cable television operators in the United States and abroad. Most of
the competing modems currently on the market are "two-way" cable, meaning that
the information both delivered to the consumer and sent back from the consumer
to the network travels over the cable plant. Because only a small percentage of
existing cable systems are capable of effective two-way communications, the
Company believes that its SURFboard cable modem with telephone return path is
the optimal product for the current environment. The Company expects to
introduce its SURFboard two-way cable product line by 1998, as more cable
systems become capable of two-way communications. There can be no assurance that
this new product will be available for volume shipments in 1997 or as to the
degree of its market acceptance. The Company is currently developing versions of
the SURFboard modem for use in wireless and satellite networks.
NLC
In September 1995, the Company acquired NLC, which was formed to design,
manufacture and market a next-generation telecommunications broadband access
system for the delivery of telephony, video, and data from a telephone company
central office or cable television headend to the home. NLC's product,
NLevel(3), is designed to permit the cost-effective delivery of a suite of
standard telephony and advanced services such as high-speed data/Internet,
work-at-home, distance learning, video-on-demand and video-telephony to the home
from a single access platform. The NLevel(3) system is designed to work with and
enhance existing telephony networks and offers the capability to provide voice
services (POTS), ISDN, high-speed data/Internet and video services over both
copper-twisted-pair and FTTC networks.
In the fourth quarter of 1996, NLC entered into an agreement with a
subsidiary of NYNEX, pursuant to which NLC will supply its NLevel(3) system for
one million lines of telephone service in metropolitan New York and Boston.
Initial shipments for the greater Boston area began in the first quarter of
1997. NYNEX also has options to extend its deployment of the NLevel(3) system up
to five million lines. NLC has also demonstrated NLevel(3) for the other RBOCs,
and three of those RBOCs have announced their intention to employ FTTC
architectures using switched-digital video technology in their planned broadband
networks.
A significant amount of research and development expenditures will be
required to fund the successful deployment and market growth of telephony
networks. The Company does not expect NLC to generate significant revenues until
1998, and there can be no assurance that delays will not occur in the deployment
of NLC's products or that such products will be commercially successful.
8
<PAGE>
COMMSCOPE
CommScope is the leading worldwide supplier of coaxial cable for broadband
communications. As cable television, telephone, Internet access and other
communication services converge, broadband communication systems are
increasingly being configured in a hybrid design that includes both fiber optic
and coaxial cables. CommScope also manufactures and sells electrical and optical
cable for LANs and other high-performance applications.
CommScope is the largest manufacturer and supplier of coaxial cable for
cable television applications in the United States in terms of sales volume,
with more than a 50% market share in 1996, and is a leading supplier of coaxial
cable for satellite television and other broadband video distribution
applications. The Company believes that CommScope's competitive strength in the
coaxial cable market is due to its extensive coaxial cable product line, its
delivery and service capability and its efficient, low-cost manufacturing
operations. CommScope also supplies the developing market for high-bandwidth
coaxial cables used in HFC networks that provide local access to a combination
of services that can include cable television, telephone and Internet access.
Cable television service has traditionally been provided primarily by cable
television system operators or 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 require increasing
amounts of system bandwidth. MSOs have generally adopted, and the Company
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 believes that while MSOs are
likely to increase their use of fiber optic cable for the trunk and feeder
portions of their cable systems, 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 because coaxial cable remains the most cost effective means for the
transmission of broadband signals to the home 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.
As of January 1997, CommScope has provided coaxial cables to most major U.S.
telephone operating companies, several of which have announced plans to install
broadband networks for the delivery of video, telephone and other services to
some portion, or all, of their telephone service areas. The broadband networks
that are being proposed by some of the telephone companies utilize HFC
technologies similar to those employed by many cable television operators. While
there is no assurance that these proposed networks will be built, to the extent
they are implemented, they could represent a significant incremental sales
opportunity for CommScope beyond its traditional cable television customer base.
The acquisition of the Thermatics Division of Teledyne Industries, Inc. in
May 1996 enhanced CommScope's LAN cable manufacturing capability and expanded
CommScope's product capability and market presence into other high-performance
cable markets. These markets include aircraft and aerospace wiring, industrial,
automotive and other specialty cable markets that require cables to perform in
extremely hostile operating environments. As a result of this acquisition,
CommScope broadened its array of cable manufacturing process and product
capabilities.
POWER SEMICONDUCTOR DIVISION
The Power Semiconductor Division (which represented 13%, 17% and 16% of the
Company's consolidated sales in the years ended December 31, 1996, 1995 and
1994, respectively) is a world leader in the design, manufacture and sale of
low- to medium-power rectifiers and transient voltage suppression components in
axial, bridge, surface mount and array packages. These products are used
throughout the
9
<PAGE>
electrical and electronics industries to condition current and voltage and to
protect electrical circuits from power surges. Applications include components
for circuits in consumer electronics, computers, telecommunications, computers,
lighting ballasts, home appliances and automotive and industrial products.
The use of semiconductors has expanded well beyond computer systems, to
applications such as communication systems, automotive systems, consumer goods
and industrial automation and control systems as product performance has been
enhanced and size and cost have decreased. In addition, system users and
designers now demand systems with more functionality, higher levels of
performance, greater reliability and shorter design cycle times, all in smaller
packages and at lower costs. These demands have resulted in increased
semiconductor content as a percentage of system content. Other industry market
segments where semiconductors are becoming more prevalent include: industrial
applications (manufacturing systems, industrial controls, security and energy
management and medical equipment); consumer applications (audio, video, personal
electronics, video games and appliances); and automotive systems (engine
management, anti-lock braking systems, climate control, collision warning and
in-car entertainment). The increasing semiconductor content in these products
combined with a broadening of end markets in all regions worldwide have created
a more stable demand for semiconductor suppliers that sell globally into
multiple markets.
Given the growing prevalence of semiconductors in other market segments, the
Company believes that new products and technologies will play a significant role
in the Power Semiconductor Division's growth. The Company further believes that,
based upon its current product offerings, the Power Semiconductor Division is
well positioned to compete for market share in these other segments. For
example, the Power Semiconductor Division's patented Passivated Anisotrophic
Rectifier process is increasing the reliability of many automotive electronics
applications. In addition, the Power Semiconductor Division has developed a new
line of transient voltage protection devices and a new line of rectifiers for
automotive applications.
The Company believes that the competitive strengths of the Power
Semiconductor Division are its continued commitment to global distribution and
customer service, value-added manufacturing, technological leadership and new
product innovation. The Power Semiconductor Division is a leader in sales of
low-to medium-power rectifiers and transient voltage suppression components in
North America, Southeast Asia and Europe, with 72% of its worldwide sales for
the year ended December 31, 1996 generated from international sales.
The Power Semiconductor Division has undertaken a significant capacity
expansion in order to meet the demand for its products worldwide. The Power
Semiconductor Division owns a manufacturing facility in the Peoples' Republic of
China and expects to begin production of bridge and standard rectifiers at this
facility in the third quarter of 1997.
TECHNOLOGY AND LICENSING
The Company believes it is in the unique position of currently producing the
majority of the world's analog-addressable systems, while also leading the
deployment of the digital technology that will eventually replace these systems.
As a result, the Company will seek to build upon its core enabling technologies,
digital compression, encryption and conditional access and control, in order to
lead the transition of the market for broadband communications networks from
analog to digital systems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--New Technologies" incorporated
herein by reference from the 1996 Annual Report.
GI began shipment of its MPEG-2 system to satellite television programmers
in early 1996, and began delivery of MPEG-2 systems to cable television
operators in the fourth quarter of 1996. To allow for broad deployment of the
Company's MPEG-2 system, a number of semiconductor manufacturers have received
licenses, including Motorola, SGS-THOMSON Microelectronics, LSI Logic, C-Cube
Microsystems and Samsung Electronics. To ensure the availability of
interoperable equipment to cable television operators
10
<PAGE>
and other digital providers, DigiCipher II/MPEG-2 technology has been licensed
to Hewlett-Packard, Zenith and Pace Micro Technology, Ltd., a major supplier of
DTH satellite television systems in international markets.
The Company has also entered into other license agreements, both as licensor
and licensee, covering certain products and processes with various companies.
Under one such agreement, the Company holds a non-exclusive worldwide license
under an unaffiliated third party's patent regarding encryption and decryption
of satellite television signals. These license agreements require the payment of
certain royalties which are not expected to be material to the Company's
consolidated financial statements.
RESEARCH AND DEVELOPMENT
The Company actively pursues the development of new technologies and
applications. Research and development expenditures for the year ended December
31, 1996 were $209 million and are expected to be approximately $225 million for
the year ending December 31, 1997, compared to $147 million and $111 million for
the years ended December 31, 1995 and 1994, respectively. Research and
development expenditures reflect continued development of the next generation of
cable set-top terminals, which incorporate digital compression and multimedia
capabilities, broadband telephony and switched digital video products, cable
modems, advanced digital systems for cable and satellite television
distribution, next-generation direct broadcast satellite systems and product
development through strategic alliances.
SALES AND DISTRIBUTION
The Company's Broadband Communications products and services are marketed
primarily to cable television operators, cable and satellite television
programmers and providers, and telephone companies. Demand for the Company's
products and services depends primarily on capital spending by cable television
operators, satellite programmers and telephone companies for constructing,
rebuilding or upgrading their systems. The amount of this capital spending and,
therefore, a majority of GI's sales and profitability, are affected by a variety
of factors, including general economic conditions, access by cable television
operators to financing, regulation of telecommunications service providers and
technological developments in the broadband communications industry. Although GI
believes that cable television capital spending has increased, there can be no
assurance that such increases will continue or that such increased level of
cable television capital spending will be maintained.
Broadband communications systems are sold primarily through the efforts of
sales engineers or other sales personnel employed by the Company who are skilled
in the technology of the particular system. The Power Semiconductor Division's
products are targeted primarily to the computer, automotive, telecommunications
and consumer electronics industries. They are sold primarily through
distributors and sales representatives as well as directly by the division's
sales personnel.
Because a limited number of cable and satellite television operators provide
services to a large percentage of television households in the United States,
the loss of some of these operators as customers could have a material adverse
effect on the Company's sales. Tele-Communications, Inc., including its
affiliates, accounted for 17% of GI's consolidated net sales for the year ended
December 31, 1996, and was the only customer of GI that accounted for 10% or
more of the Company's consolidated net sales during this period.
PATENTS
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that the Company considers important to the
development of its business. Although the Company believes that its patents
provide a competitive advantage, the Company relies equally on its proprietary
knowledge and continuing technological innovation to develop and maintain its
competitive position.
11
<PAGE>
BACKLOG
The backlog information set forth below includes only orders for products
scheduled to be shipped within six months. Orders may be revised or canceled,
either pursuant to their terms or as a result of negotiations; consequently, it
is impossible to predict accurately the amount of backlog orders that will
result in sales.
<TABLE>
<CAPTION>
BACKLOG
(IN MILLIONS)
--------------------------------
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1996 1995
--------------- ---------------
Broadband Communications......................................... $ 442 $ 531
Power Semiconductor.............................................. 141 248
----- -----
Total............................................................ $ 583 $ 779
----- -----
----- -----
</TABLE>
COMPETITION
The Company's products and services 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 Company's markets are expected to lead to the entry of new competitors. The
Company's ability to anticipate technological changes and introduce enhanced
products on a timely basis will be a significant factor in its ability to expand
and remain competitive. 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 its existing cable and satellite
television markets due to its large installed cable television equipment base,
its strong relationships with the major cable television operators and satellite
television programmers, its technological leadership and new product development
capabilities, and the likely need for compatibility of new technologies with
currently installed systems. There can be no assurance, however, that
competitors will not be able to develop systems compatible with, or that are
alternatives to, the Company's proprietary technology or systems or that the
Company will be able to introduce new products and technologies on a timely
basis. In addition, the Company, through NLC, has entered into a new market, the
local telephone access equipment market, in which NLC will be competing with a
number of well-established existing suppliers. There is no assurance that the
Company will be successful in this market.
EMPLOYEES
At December 31, 1996, approximately 14,200 people were employed by GI. Of
these employees, approximately 5,200, 4,500 and 2,600 were located at GI's U.S.,
Taiwan and Mexico facilities, respectively, with the balance located in Puerto
Rico, Europe and the Far East. GI believes its relations with its employees,
and, where they are represented by unions, its relations with their unions, are
good. As of December 31, 1996, approximately 5,300 of GI's employees were
covered by collective bargaining agreements. Of these employees, approximately
4,400 were located at its Taiwan facilities, approximately 400 were located at
its Mexico facilities, approximately 400 were located at its Ireland facilities
and the balance were located at its Westbury, New York, and certain Far East
facilities.
RAW MATERIALS
The Company purchases raw materials from many sources in the United States,
as well as from sources in the Far East, Canada and Europe and its products
include certain components that are currently available only from single
sources. The Company has in effect inventory controls and other policies
intended to minimize the effect of any interruption in the supply of these
components. There is no single supplier the loss of which would have a
continuing material adverse effect on the Company.
12
<PAGE>
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 is involved in remediation
programs, principally with respect to former manufacturing sites, that are
proceeding in conjunction with federal and state regulatory oversight. In
addition, the Company is currently named as a "potentially responsible party"
with respect to the disposal of hazardous waste at nine hazardous waste sites
located in six states and Puerto Rico.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. The Company's
management assesses the input from these independent consultants along with
other information known to the Company in its effort to continually monitor
these potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named a
"potentially responsible party." Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. Although the Company estimates, based on assessments
and evaluations made by management, that its exposure with respect to these
environmental matters could be as high as $58 million, the Company believes that
the reserve for environmental matters of $38 million at December 31, 1996 is
reasonable and adequate. However, there can be no assurance that the ultimate
resolution of these matters will approximate the amount reserved. Further
information regarding the Company's environmental matters appears in Note 9 to
the Company's consolidated financial statements included in the 1996 Annual
Report, incorporated herein by reference.
CAPITAL EXPENDITURES
Capital expenditures were $228 million, $159 million and $136 million in the
years ended December 31, 1996, 1995 and 1994, respectively. Such expenditures
were primarily in support of capacity expansion across all businesses to meet
increased current and future demands for analog and digital products, coaxial
cable and power rectifiers. In 1997, the Company expects to continue to expand
its capacity to meet current and future demands, with capital expenditures for
the year ending December 31, 1997 expected to approximate $250 million.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the 1996 Annual Report,
any Form 10-Q or any Form 8-K of the Company or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are
identified by their use of such terms and phrases as "intends," "intend,"
"intended," "goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projects," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "forseeable future," "believe,"
"believes," and "scheduled." These forward-looking statements are subject to
certain uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other factors
include, but are not limited to, uncertainties relating to general political and
economic conditions, uncertainties relating to government and regulatory
policies, uncertainties relating to customer plans and commitments, the
Company's dependence on the cable television industry and cable television
spending, signal security, the pricing and availability of equipment, materials
and inventories, technological developments, the competitive environment in
which the Company operates, changes in the financial markets relating to the
Company's capital structure and cost of
13
<PAGE>
capital, the uncertainties inherent in international operations, foreign
currency fluctuations and authoritative generally accepted accounting principles
or policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. 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.
ITEM 2. PROPERTIES
The Company has manufacturing, warehouse, sales, research and development
and administrative facilities worldwide which have an aggregate floor space of
approximately 3.9 million square feet. Of these facilities, aggregate floor
space of approximately 1.3 million square feet is leased, and the remainder is
owned by GI. Leases expire on various dates through the year 2009. GI operates
manufacturing facilities in 13 locations worldwide containing aggregate floor
space of approximately two million square feet. The Power Semiconductor Division
utilizes four manufacturing facilities with an aggregate floor space of
approximately 0.6 million square feet, including its facility in Tianjin, China,
which is expected to begin production in the third quarter of 1997. GI does not
believe there is any material long-term excess capacity in its facilities,
although utilization is subject to change based on customer demand. GI believes
that its facilities and equipment generally are well maintained, in good
operating condition and suitable for GI's purposes and adequate for its present
operations.
ITEM 3. LEGAL PROCEEDINGS
On June 11, 1996, the United States District Court for the Eastern District
of Texas entered judgment against NLC and two of its founders for $136.7 million
plus interest in an action entitled DSC COMMUNICATIONS CORPORATION AND DSC
TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATION, THOMAS R. EAMES AND PETER
W. KEELER, Case No. 4:95cv96, which had been brought on April 10, 1995 by DSC
Communications Corporation and DSC Technologies Corporation (collectively,
"DSC") alleging, among other things, that the individual defendants diverted a
corporate opportunity of DSC and misappropriated its trade secrets and that NLC
made use of or benefited from these actions. The judgment was entered on the
corporate opportunity count and a related conspiracy count. The District Court
denied DSC's request to aggregate amounts awarded by the jury on the various
claims so as to arrive at a total judgment in excess of $369 million plus
pre-judgment interest and attorneys' fees, and it also denied DSC's request for
entry of permanent injunctive relief. In connection with the acquisition of NLC,
the Company agreed to indemnify the founders, to the extent permitted by
applicable law, for any judgment awarded against them in the matter, and
following entry of judgment the Company recorded a charge to earnings of $141
million reflecting the judgment and costs of litigation. On February 28, 1997,
the Court of Appeals affirmed the denial of DSC's request for injunctive relief,
ruled that the claim for diversion of a corporate opportunity was legally
insufficient and remanded the case to the District Court for entry of judgment
on the jury award for misappropriation of trade secrets which, as revised by the
District Court, would be for not more than $137.7 million (including the award
on a related conspiracy count), plus accrued interest. Enforcement of the
judgment was stayed pending the determination of the appeal. Both parties have
filed motions for rehearing with the Court of Appeals, and these motions have
not been decided as of the date hereof.
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalves and as
representatives of a class of purchasers of the Company's Common Stock during
the period March 21, 1995 through October 18, 1995. The complaint alleges that
the Company and certain of its officers and directors, as well as Forstmann
Little & Co. and certain related entities, violated the federal securities laws,
namely, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), by allegedly making false
14
<PAGE>
and misleading statements and failing to disclose material facts about the
Company's planned shipments in 1995 of its CFT-2200 and DigiCipher II products.
The plaintiffs have moved for class certification. The Company has filed a
motion to dismiss the Consolidated Amended Class Action Complaint. Also pending
in the same court, under the same name, is a derivative action brought on behalf
of the Company. The derivative action alleges that the members of the Company's
Board of Directors, several of its officers and Forstmann Little & Co. and
related entities had breached their fiduciary duties by reason of the matter
complained of in the class action and the defendants' alleged use of material
non-public information to sell shares of the Company's stock for personal gain.
The Company has filed a motion to dismiss the derivative complaint.
An action entitled BKP PARTNERS. L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by shareholders of NLC, which was merged into a
subsidiary of the Company in September 1995. The action was originally filed in
the Northern District of California and was subsequently transferred to the
Northern District of Illinois. The complaint alleges that the Company's Common
Stock, which was received by the plaintiffs as a result of the merger, was
overpriced because of the matters complained of in the class action and the
Company's failure to disclose information concerning a significant reduction in
its gross margin. The Company has filed a motion to dismiss the complaint.
While the ultimate outcome of the matters described above cannot be
determined, management does not believe that the final disposition of these
matters beyond the amounts previously provided for in the financial statements
will have a material adverse effect on the Company's financial statements. GI is
involved in various other litigation matters, none of which are expected to have
a material adverse effect on the Company's 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, 1996.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this Item is contained in Note 15 to the
consolidated financial statements included in the 1996 Annual Report,
incorporated herein by reference.
As of March 6, 1997, the approximate number of registered stockholders of
record of the Company's Common Stock was 921.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is contained in the Five Year Summary
included in the 1996 Annual Report, incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this Item is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in the
1996 Annual Report, incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is contained in the consolidated financial
statements of the Company as of December 31, 1996 and 1995 and for each of the
years ended December 31, 1996, 1995 and 1994, the notes to the consolidated
financial statements, and the independent auditors' report thereon, and in the
Company's unaudited quarterly financial data for the two-year period ended
December 31, 1996, included in the 1996 Annual Report, incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the directors and executive officers of the Company as
of March 20, 1997. Certain executive officers of the Company also serve as
president of the various divisions and subsidiaries of GI Delaware. Officers
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- - -------------------------- --------- -------------------------------------------------------------------------
<S> <C> <C>
Richard S. Friedland 46 Chairman of the Board and Chief Executive Officer
Nicholas C. Forstmann 50 Director
Theodore J. Forstmann 57 Director
John Seely Brown 56 Director
Lynn Forester 42 Director
Steven B. Klinsky 40 Director
Alex M. Mandl 53 Director
J. Tracy O'Rourke 62 Director
Felix G. Rohatyn 68 Director
Frank M. Drendel 52 Director and Chairman, President and Chief Executive Officer, CommScope,
Inc. of North Carolina, a subsidiary of GI Delaware
Richard D. Badler 46 Vice President, Corporate Communications
Paul J. Berzenski 44 Vice President and Controller
Charles T. Dickson 42 Vice President and Chief Financial Officer
Thomas A. Dumit 54 Vice President, General Counsel and Chief Administrative Officer
Susan M. Meyer 53 Vice President, Secretary and Deputy General Counsel
Kenneth Pelowski 37 Vice President, Corporate Development
Richard C. Smith 52 Vice President, Taxes and Treasurer
Clark E. Tucker 47 Vice President, Human Resources
Michael R. Bernique 53 Vice President and President, Satellite Data Networks Group
Edward D. Breen 41 Vice President and President, Broadband Networks Group
Ronald A. Ostertag 56 Vice President and President, Power Semiconductor Division
</TABLE>
The principal occupations and positions for the past several years of each
of the directors and executive officers of the Company are as follows:
Richard S. Friedland has been a director of the Company since October 1993.
He became President and Chief Operating Officer of the Company in October 1993,
Chief Executive Officer of the Company in August 1995 and Chairman of the Board
of Directors of the Company in December 1995. He was Chief Financial Officer of
the Company and GI Delaware from March 1992 to January 1994 and Vice President,
Finance of the Company from May 1991 to October 1993. He was Vice President,
Finance and Assistant Secretary of GI Delaware from October 1990 to October 1993
and Vice President and Controller of GI Delaware from November 1988 to January
1994. Mr. Friedland is a director of Department 56, Inc.
Nicholas C. Forstmann served as a director of GI Delaware from August 1990
to March 1992, when he was elected to serve as a director of the Company. He has
been a General Partner of FLC Partnership, L.P., the General Partner of
Forstmann Little & Co., since he co-founded Forstmann Little & Co. in 1978. He
is a director of Department 56, Inc. and Gulfstream Aerospace Corporation.
Theodore J. Forstmann served as a director of GI Delaware from August 1990
to March 1992, when he was elected to serve as a director of the Company. He has
been a General Partner of FLC Partnership, L.P., the General Partner of
Forstmann Little & Co., since he co-founded Forstmann Little & Co. in 1978. He
is a director of Gulfstream Aerospace Corporation.
17
<PAGE>
John Seely Brown has been a director of the Company since July 1993. He has
been Chief Scientist of Xerox Corporation since 1992 and Corporate Vice
President of Xerox Corporation since 1990. He is also the director for the Xerox
Palo Alto Research Center. He is a Fellow of the American Association for
Artificial Intelligence and a member of the National Academy of Education.
Lynn Forester has been a director of the Company since February 1995. She
has been President and Chief Executive Officer of FirstMark Holdings, Inc.,
since 1984, and of NetWave, Inc., an Internet company, since 1996. From 1989 to
December 1994, she was Chairman and Chief Executive Officer of TPI
Communications International, Inc., a radio common carrier and paging company.
She is a director of Gulfstream Aerospace Corporation and Vice Chairman of the
Corporate Commission on Educational Technology.
Steven B. Klinsky served as a director of GI Delaware from August 1990 to
March 1992, when he was elected to serve as a director of the Company. He has
been a General Partner of FLC Partnership, L.P., the General Partner of
Forstmann Little & Co., since December 1986.
Alex M. Mandl has been a director of the Company since December 1996. Mr.
Mandl is Chairman and Chief Executive Officer of Associated Communications.
Prior to joining Associated Communications in September 1996, Mr. Mandl had
served with AT&T, as President and Chief Operating Officer from January 1996 to
August 1996; from 1993-1995, as Executive Vice President of AT&T and Chief
Executive Officer of AT&T Communications Services Group; and from 1991-1993, as
Chief Financial Officer and Group Executive of AT&T. He is a director of
Warner-Lambert Company, Carnegie Hall and WETA-TV-FM Washington.
J. Tracy O'Rourke served as a director of GI Delaware from September 1990 to
March 1992, when he was elected to serve as a director of the Company. He has
been Chairman and Chief Executive Officer of Varian Associates, Inc., a
manufacturer of health care systems, semiconductor manufacturing equipment and
analytical instruments, since early 1990. He is a director of National
Semiconductor Corp.
Felix G. Rohatyn has been a director of the Company since October 1993. He
has been a managing director of Lazard Freres & Co. LLC, Investment Bankers,
since 1960 and served as Chairman of the Municipal Assistance Corporation for
The City of New York from 1975 to October 1993. He is a director of Crown, Cork
& Seal Co., Inc. and Pfizer Inc.
Frank M. Drendel served as a director of GI Delaware and its predecessors
from 1987 to March 1992, when he was elected to serve as a director of the
Company. He has served as Chairman and President of CommScope since 1986 and has
served as Chief Executive Officer of CommScope since 1976.
Richard D. Badler became Vice President, Corporate Communications of the
Company in February 1996. He was an Executive Vice President and Account
Director of Golin/Harris Communications from September 1993 to February 1996 and
Director of Public Affairs for Kraft General Foods from May 1990 to September
1993.
Paul J. Berzenski became Controller of the Company in January 1994 and Vice
President of the Company in November 1994. He was Assistant Controller of GI
Delaware from January 1991 to January 1994.
Charles T. Dickson became Vice President and Chief Financial Officer of the
Company in January 1994. He was Vice President-Finance and Administration of
several divisions of MCI Communications Corporation from 1988 to 1993.
Thomas A. Dumit became Vice President, General Counsel and Secretary of the
Company in 1991 and Chief Administrative Officer of the Company in December
1995.
Susan M. Meyer became Vice President and Secretary of the Company in
December 1995, and has been Deputy General Counsel of the Company since February
1991. Ms. Meyer was Assistant Secretary of GI Delaware from June 1992 to
December 1995.
18
<PAGE>
Kenneth Pelowski became Vice President, Corporate Development of the Company
in June 1996. Mr. Pelowski was Vice President, Corporate Planning and
Development with Quantum Corporation from May 1995 to June 1996 and from 1989 to
1995, he was Senior Director, Corporate Planning and Development at Sun
Microsystems.
Richard C. Smith has been Vice President of GI Delaware since March 1989 and
Treasurer of the Company since September 1991. Mr. Smith has been Vice President
and Assistant Secretary of the Company since May 1991 and has been Treasurer of
the Company since March 1992.
Clark E. Tucker has been Vice President, Human Resources of GI since May
1995. From August 1992 until November 1994, Mr. Tucker was Vice President, Human
Resources for Witco Corporation; from April 1990 until August 1992, he served as
a management consultant with Towers, Perrin, Forster & Crosby.
Michael R. Bernique has been Vice President of the Company and President of
the Company's Satellite Data Networks Group since June 1996. From December 1993
to December 1995, Mr. Bernique was Senior Vice President North American Sales
and Service of DSC Communications and from December 1992 to December 1993, he
was Vice President and General Manager of Transmission Products for DSC
Communications.
Edward D. Breen became President of the Company's Broadband Networks Group
in February 1996 and Vice President of the Company in November 1994. He was
Executive Vice President, Terrestrial Systems, from October 1994 to January 1996
and Senior Vice President of Sales from June 1988 to October 1994.
Ronald A. Ostertag has been Vice President of the Company since February
1989 and President of the Power Semiconductor Division since September 1990.
Theodore J. Forstmann and Nicholas C. Forstmann, both of whom are directors
of the Company, are brothers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and holders of more than 10% of the Company's Common Stock to
file with the Securities and Exchange Commission reports of ownership and
changes in ownership of the Company's Common Stock and other equity securities
of the Company on Forms 3, 4 and 5. The Company undertakes to make such filings
on behalf of its directors and officers. Based on written representations of
reporting persons and a review of those reports, the Company believes that
during the year ended December 31, 1996, its officers and directors and holders
of more than 10% of the Company's Common Stock complied with all applicable
Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth individual compensation information for all
services rendered in all capacities during the periods described below for the
individuals who served as Chief Executive Officer during 1996 and the four most
highly compensated executive officers of the Company (other than the Chief
Executive Officer) who were serving as executive officers at December 31, 1996.
The following table sets forth compensation information for each of those
individuals for the years ended December 31, 1996, 1995 and 1994.
19
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES ALL OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(#)(B) SATION
- - ----------------------------------------------------------------------------- ---- -------- -------- ------------- ---------
Richard S. Friedland......................................................... 1996 $750,000 $ -- 250,000 $ 5,460(c)
Chairman and Chief Executive Officer 1995 589,583(d) 214,445(d) 560,000 5,460
1994 420,000 327,600 270,000 5,460
Frank M. Drendel............................................................. 1996 $410,016 $ 93,275 24,000 $17,976(e)
Chairman, President and Chief Executive Officer of CommScope, Inc. of North 1995 410,016 114,185 24,000 19,937
Carolina and Director of the Company 1994 398,808 163,757 72,000 17,154
Thomas A. Dumit.............................................................. 1996 $345,000 $ -- 42,000 $ 5,460(c)
Vice President, General Counsel and Chief Administrative Officer 1995 320,000 89,120 24,000 5,460
1994 310,999 134,753 48,000 5,460
Ronald A. Ostertag........................................................... 1996 $320,000 $ -- 30,000 $ 5,460(c)
Vice President and President, Power Semiconductor Division 1995 305,000 195,810 24,000 5,460
1994 280,000 110,122 72,000 6,516
Edward D. Breen.............................................................. 1996 $300,000 $ 62,820 60,000 $ 4,568(f)
Vice President and President, Broadband Networks Group 1995 227,872 25,339 16,000 3,618
1994 199,770 95,216 104,000 3,517
</TABLE>
- - ------------------------
(a) Amounts reported for 1996 reflect cash bonus awards paid pursuant to the
General Instrument Corporation Annual Incentive Plan (the "Annual Incentive
Plan") in 1997 with respect to performance in 1996. Amounts reported for
1995 reflect cash bonus awards paid pursuant to the Annual Incentive Plan in
1996 with respect to performance in 1995. Amounts reported for 1994 reflect
cash bonus awards paid pursuant to the Annual Incentive Plan in 1995 with
respect to performance in 1994.
(b) Reflects the number of shares of the Company's Common Stock underlying
options granted. All of the options were granted pursuant to the General
Instrument Corporation 1993 Long-Term Incentive Plan (the "1993 Long-Term
Incentive Plan"). Each grant set forth for 1994 was made in connection with
the cancellation of an option to purchase the same number of shares,
previously granted in 1994, except the grant set forth to Mr. Friedland,
with respect to which an option to purchase 70,000 shares had previously
been granted in 1994 and the remainder had been granted in 1993. Those
options granted, and subsequently canceled, in 1994 are not reflected in the
table for the named executive officer.
(c) Reflects payment by the Company in 1996 of (i) premiums for term life
insurance of $960 and (ii) the matching contribution for 1996 by the Company
under the General Instrument Corporation Savings Plan (the "Savings Plan")
in the amount of $4,500.
(d) Reflects compensation of Mr. Friedland for the full year 1995. Effective
August 1995, Mr. Friedland was promoted to Chief Executive Officer. Prior to
that date Mr. Friedland was President and Chief Operating Officer. In
December 1995, Mr. Friedland also became Chairman of the Board.
(e) Reflects (i) the matching contribution under the CommScope Employees Profit
Sharing and Savings Plan (the "CommScope Savings Plan") in the amount of
$2,733 for 1996, (ii) the allocation of $13,813 to Mr. Drendel's account
under the CommScope Savings Plan for 1996 and (iii) payment by CommScope in
1996 of premiums of $1,430 for term life insurance on behalf of Mr. Drendel.
20
<PAGE>
(f) Reflects payment by the Company in 1996 of (i) premiums for term life
insurance of $960 and (ii) the matching contribution for 1996 by the Company
under the Savings Plan in the amount of $3,608.
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth further information with respect to grants of
stock options during the year ended December 31, 1996 to the executives listed
in the Summary Compensation Table. These grants were made pursuant to the 1993
Long-Term Incentive Plan and are reflected in the Summary Compensation Table. No
stock appreciation rights were granted during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED FISCAL YEAR(A) ($/SHARE)(B) EXPIRATION DATE 5%($) 10%($)
- - -------------------------------- ----------- ----------------- ------------- --------------- ------------ -------------
Richard S. Friedland............ 250,000(c) 14.0 $ 26.75 2/21/06 $ 4,213,125 $ 10,633,125
Frank M. Drendel................ 24,000(d) 1.3 27.25 2/14/06 412,020 1,039,860
Thomas A. Dumit................. 42,000(d) 2.3 27.25 2/14/06 721,035 1,819,755
Ronald A. Ostertag.............. 30,000(d) 1.7 27.25 2/14/06 515,025 1,299,825
Edward D. Breen................. 60,000(d) 3.4 27.25 2/14/06 1,030,050 2,599,650
</TABLE>
- - ------------------------
(a) Percentages included are based on a total of 1,789,676 options granted to
245 employees of the Company during 1996.
(b) The Board of Directors has authorized the Company to offer to the optionees
that these options be cancelled as of January 10, 1997, and new options in
respect of the same number of shares ("repriced options") be granted as of
such date at an exercise price of $23.125 per share, the closing market
price per share of the Company's Common Stock on such date. The repriced
options would become exercisable with respect to one-third of the shares
covered thereby on each of the following dates: July 10, 1997, January 10,
1998 and January 10, 1999. The price reported here is the exercise price on
the date of grant which equaled the closing market price per share of the
Company's Common Stock on the date of grant.
(c) The option becomes exercisable with respect to one-third of the shares
covered thereby on February 21 in each of 1997, 1998 and 1999.
(d) The option becomes exercisable with respect to one-third of the shares
covered thereby on February 14 in each of 1997, 1998 and 1999.
OPTION EXERCISES AND VALUES FOR FISCAL YEAR 1996
The following table sets forth as of December 31, 1996, for each of the
executives listed in the Summary Compensation Table (i) the total number of
shares received upon exercise of options during 1996, (ii) the value realized
upon such exercise, (iii) the total number of unexercised options to purchase
the Company's Common Stock (exercisable and unexercisable) held and (iv) the
value of such options which were in-the-money at December 31, 1996 (based on the
difference between the closing price of the Company's Common Stock at December
31, 1996 and the exercise price of the option on such date). None of the
executive officers hold stock appreciation rights.
21
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(A)
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
Richard S. Friedland..................... -- $ -- 393,667 722,333 $ 158,625 $ 52,875
Frank M. Drendel......................... 17,000 272,000 56,000 72,500 -- 49,938
Thomas A. Dumit.......................... -- -- 62,500 81,500 132,188 44,063
Ronald A. Ostertag....................... -- -- 72,000 78,000 94,000 47,000
Edward D. Breen.......................... -- -- 65,250 110,584 30,844 30,844
</TABLE>
- - ------------------------
(a) Based on the difference between the closing price of $21.75 per share at
December 31, 1996, as reported on the New York Stock Exchange Composite
Tape, and the exercise price of the option on such date.
GI PENSION PLAN AND GI SERP
The following table shows, as of December 31, 1996, estimated aggregate
annual benefits payable upon retirement at age 65 under the General Instrument
Corporation Pension Plan for Salaried and Hourly Paid Non-Union Employees (the
"GI Pension Plan") and the General Instrument Corporation Supplemental Executive
Retirement Plan (the "GI SERP").
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS
UPON RETIREMENT, WITH
YEARS OF SERVICE INDICATED
------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL BASIC REMUNERATION
DURING SIXTY CONSECUTIVE CALENDAR
MONTHS PRIOR TO RETIREMENT 15 YEARS 20 YEARS 25 YEARS 30 YEARS
- - ---------------------------------------------------------------------- --------- --------- --------- ---------
$125,000.............................................................. $ 26,057 $ 34,742 $ 43,428 $ 52,114
150,000.............................................................. 31,682 42,242 52,803 63,364
175,000.............................................................. 37,307 49,742 62,178 74,614
200,000.............................................................. 42,932 57,242 71,553 85,864
225,000.............................................................. 48,557 64,742 80,928 97,114
250,000.............................................................. 54,182 72,242 90,303 108,364
300,000.............................................................. 54,182 72,242 90,303 108,364
</TABLE>
The compensation covered by the GI Pension Plan and the GI SERP is
substantially that described under the "Salary" column of the Summary
Compensation Table. However, pursuant to Section 401(a)(17) of the Internal
Revenue Code of 1986, as amended (the "Code"), the maximum amount of
compensation that could be considered in computing benefits under the GI Pension
Plan for 1996 was $150,000. Under the GI SERP, compensation for 1996 in excess
of $150,000, but not exceeding $250,000, was considered in computing benefits.
Accordingly, the total compensation covered by the GI Pension Plan and the GI
SERP for the calendar year 1996 for each of Messrs. Friedland, Dumit, Ostertag
and Breen was $250,000. Credited years of service under both the GI Pension Plan
and the GI SERP as of December 31, 1996 are as follows: Mr. Friedland, 18 years;
Mr. Dumit, five years; Mr. Ostertag, 18 years; and Mr. Breen, 18 years. Mr.
Drendel does not participate in the GI Pension Plan or the GI SERP because he is
an employee of CommScope. Estimated benefits set forth in the Pension Plan Table
were calculated on the basis of a single
22
<PAGE>
life annuity and Social Security covered compensation as in effect during 1996.
Such estimated benefits are not subject to any deduction for Social Security or
other offset amounts.
COMMSCOPE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
CommScope maintains the CommScope Supplemental Executive Retirement Plan
(the "CommScope SERP") for the benefit of certain executives of CommScope and
its subsidiaries. The CommScope SERP provides for the payment of a monthly
retirement (or early retirement) benefit to participants who retire from
CommScope on or after age 65 (or, for early retirement benefits, on or after age
55 with ten years of service). Frank M. Drendel is the only executive named in
the Summary Compensation Table who participates in the CommScope SERP. Mr.
Drendel, as well as all other individuals who were participants in the CommScope
SERP on August 22, 1990, is fully vested in his benefits under the CommScope
SERP and, thus, could retire prior to attaining age 65 (or age 55 in the case of
early retirement) and receive a deferred benefit.
The benefits provided under the CommScope SERP are payable over 15 years and
are equal to a specified percentage, which does not exceed 50%, of the
participant's highest consecutive 12 months earnings during the participant's
final 60 months of employment. Early retirement benefits are subject to
actuarial reductions. Based on compensation earned for the calendar year which
ended December 31, 1996, the estimated annual benefit payable to Mr. Drendel on
or after attaining age 65 is $136,671.
DIRECTOR COMPENSATION
Prior to July 1993, directors did not receive any fees for serving on the
Company's Board of Directors, or any committees thereof, but were reimbursed for
their out-of-pocket expenses arising from attendance at meetings of the
Company's Board of Directors or committees thereof. In addition, each director
who was neither a partner in FLC Partnership, L.P., the general partner of
Forstmann Little & Co., nor a current or former officer of the Company or its
subsidiaries was granted an option to purchase 80,000 shares of the Company's
Common Stock in connection with his election to the board of directors of GI
Delaware or, after the Company's initial public offering in June 1992, the Board
of Directors of the Company.
Effective as of July 28, 1993 (as adjusted on February 15, 1995 to reflect
the two-for-one split of the Company's Common Stock in August 1994), the
Company's Board of Directors approved the following standard compensation
arrangements for non-employee directors: (i) each non-employee director receives
$1,000 for attending, whether in person or by telephone, each meeting of the
Board of Directors or any committee thereof of which he or she is a member and
is reimbursed for all actual expenses in connection with attending any meeting
of the Board of Directors or any committee thereof of which he or she is a
member (limited to the cost of first class travel on a commercial airline with
respect to air travel expenses); (ii) the Company provides, for the benefit of
each non-employee director, an insurance policy in the face amount of $200,000,
payable in the event of accidental death or dismemberment of the director while
in attendance at, or traveling in connection with, a meeting of the Board of
Directors or any committee thereof, or while engaged in or traveling in
connection with other business of the Company; and (iii) each non-employee
director elected on or after July 28, 1993 receives, effective as of the date of
such election, a grant of an option to purchase 80,000 shares of the Company's
Common Stock pursuant to the 1993 Long-Term Incentive Plan at an exercise price
per share equal to the fair market value of a share of the Company's Common
Stock on the date of grant, which option becomes exercisable with respect to
one-third of the underlying shares on each of the first three anniversaries of
the date of grant. The Company also requests that each non-employee director
directly or indirectly own at least 1,000 shares of the Company's Common Stock
while a director of the Company. The non-employee directors of the Company who
are partners of Forstmann Little & Co. have declined to receive any of the
foregoing compensation.
23
<PAGE>
EMPLOYMENT ARRANGEMENTS
In November 1988, Frank M. Drendel entered into an employment agreement with
GI Delaware and CommScope, providing for his employment as President and Chief
Executive Officer of CommScope for an initial term ending on November 28, 1991.
The agreement provides for a minimum salary, which is less than Mr. Drendel's
current salary, and provides that Mr. Drendel will participate, on a
substantially similar basis as the presidents of the other broadband divisions
of the Company, in any management incentive compensation plan for executive
officers that the Company maintains. Commencing on November 29, 1989 (subject to
early termination by reason of death or disability or for cause), the agreement
extends automatically so that the remaining term is always two years, unless
either party gives notice of termination, in which case the agreement will
terminate two years from the date of such notice. As of the date of this Form
10-K, neither party has given notice of termination. Pursuant to the agreement,
Mr. Drendel is eligible to participate in all benefit plans available to
CommScope senior executives. The agreement prohibits Mr. Drendel, for a period
of five years following the term of the agreement, from engaging in any business
in competition with the business of CommScope or the other broadband
communications businesses of GI Delaware in any country where CommScope or GI
Delaware's other broadband communications divisions then conduct business.
SEVERANCE PROTECTION AND OTHER AGREEMENTS
The Company intends to enter into severance protection agreements with its
Chief Executive Officer and its other executive officers. These agreements will
have a two-year term which is automatically extended for one year upon the first
anniversary of the agreement and every anniversary thereafter unless
notification is given to either the Company or the executive.
The agreements will provide severance pay and other benefits in the event of
a termination of employment within 24 months of a Change in Control (as defined
in the agreement) of the Company if such termination is for any reason other
than by the Company for cause or disability, by reason of the executive's death
or by the executive for other than Good Reason (as defined in the agreement).
Such severance pay will be in an amount equal to two times the sum of the
executive's base salary and the highest bonus that would be payable to the
executive in the year of termination in the case of the Chief Executive Officer
and one and one-half times such sum in the case of all other executive officers;
provided that such amount may be increased by up to one-half times such sum if
an executive officer has not become employed within 24 months following such
termination, in the case of the Chief Executive Officer, or 18 months following
such termination, in the case of any other executive officer. The executive's
benefits will be continued for either 24 months, in the case of the Chief
Executive Officer, or 18 months in the case of all other executive officers. The
executive will also receive a PRO RATA bonus (calculated up to the executive's
termination date), reimbursement for outplacement, tax and financial planning
assistance and reimbursement for relocation under certain circumstances. If the
executive's employment is terminated without cause (i) within six months prior
to a Change in Control or (ii) prior to the date of a Change in Control but (A)
at the request of a third party who effectuates a Change in Control or (B)
otherwise in connection with, or in anticipation of, a threatened Change in
Control which actually occurs, such termination shall be deemed to have occurred
after the Change in Control.
In the case of a termination by the Company for disability or due to the
executive's death, the executive will receive a PRO RATA bonus in addition to
accrued compensation.
The agreements will provide for a gross-up payment by the Company in the
event that the total payments the executive receives under the agreement or
otherwise are subject to the excise tax under Section 4999 of the Code. In such
an event, the Company will pay an additional amount so that the executive is
made whole on an after-tax basis from the effect of the excise tax.
Mr. Ostertag and certain other executives of the Power Semiconductor
Division have executed a letter agreement (the "Letter Agreement") with the
Company providing for payments for: (i) remaining with the
24
<PAGE>
Power Semiconductor Division (or a successor) until six months after a sale of
all or substantially all the assets of the Power Semiconductor Division or sale
of stock of the Company or any Company subsidiary containing all the assets of
the Power Semiconductor Division (the "Sale") or until May 31, 1998, if the Sale
has not occurred by such date, unless the executive's employment is terminated
by the Company other than For Cause (as defined in the Letter Agreement) or the
executive terminates employment For Good Reason (as defined in the Letter
Agreement) prior to the end of such six-month period (or May 31, 1998 if the
Sale has not occurred by such date) (the "Stay Incentive"); (ii) upon completion
of the Sale if such Sale occurs by December 31, 1998 and the executive is still
employed by the Power Semiconductor Division or an affiliate of the Company on
that date (the "Sale Incentive"); and (iii) upon termination of employment by
the Company other than For Cause or by the executive For Good Reason or
termination of employment by reason of the executive's death or permanent and
total disability if such termination takes place within two years after a Sale
(the "Special Severance Arrangement"). The Stay Incentive and Sale Incentive for
Mr. Ostertag are each $160,000.
Benefits under the Special Severance Arrangement include guaranteed base
salary continuation for the Guarantee Period which is 24 months for Mr.
Ostertag, and generally 12 months for the other executives (each such period of
time being defined as the "Guarantee Period" in the applicable Letter
Agreement). If any executive accepts full-time employment during the Guarantee
Period, such executive's remaining monthly payments will be accelerated and paid
in a lump sum. If the executive has not accepted full-time employment by the end
of the Guarantee Period, the monthly payments will continue until the earlier
of: the date the executive accepts full-time employment or the end of an
additional 12 months in the case of Mr. Ostertag and an additional six months in
the case of the other executives. If employment is terminated during the two
years after the Sale due to the executive's death or permanent and total
disability, the executive or his spouse or other beneficiary will receive both
the guaranteed and additional monthly payments. Health benefits will continue
for as long as the executive receives monthly payments with the same monthly
costs, deductibles and co-payments as are applicable to active employees. The
Special Severance Arrangement also includes outplacement assistance for a
minimum period of six months. Payments under the Special Severance Arrangement
are conditioned upon the executive's signing an agreement with confidentiality,
non-compete and release provisions.
Except for the severance protection agreements described above, the GI
Pension Plan, the GI SERP, the CommScope SERP, the Savings Plan, the CommScope
Savings Plan, the 1993 Long-Term Incentive Plan, the Annual Incentive Plan, the
General Instrument Corporation of Delaware Voluntary Non-Qualified Deferred
Compensation Plan (under which certain employees may elect to defer receipt of a
designated percentage or amount of their compensation) and each Letter
Agreement, there are no compensatory plans or arrangements with respect to any
of the executive officers named in the Summary Compensation Table which are
triggered by, or result from, the resignation, retirement or any other
termination of such executive's employment, a change in control of the Company
or a change in such executive's responsibilities following a change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In connection with the Company's initial public offering in June 1992, the
Company's Board of Directors established a Compensation Committee composed of
three non-employee directors. Nicholas C. Forstmann, Lynn Forester and J. Tracy
O'Rourke served as members of the Compensation Committee during 1996.
Nicholas C. Forstmann served as President of the Company from June 30, 1990
through March 30, 1992, which was prior to the Company's initial public offering
in June 1992. Nicholas C. Forstmann received no compensation from the Company
for services rendered in such capacity.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's Common Stock, as of March 6,
1997, by each beneficial owner of more than five percent of the outstanding
Common Stock of the Company, by each of the Company's directors, by each of the
executives named in the Summary Compensation Table and by all current directors
and officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OWNED CLASS(1)
- - ------------------------------------------------------------------------ ----------------- --------------------
<S> <C> <C>
MBO-IV(2)............................................................... 10,161,657 7.4%
Instrument Partners(2).................................................. 11,547,008 8.4
Oppenheimer Group, Inc.(3).............................................. 13,970,650 10.2
Brinson Partners, Inc.(4)............................................... 11,305,062 8.3
J.P. Morgan & Co . Incorporated(5)...................................... 10,113,201 7.4
Edward D. Breen(6)(9)................................................... 113,032 *
John Seely Brown(7)..................................................... 39,000 *
Frank M. Drendel(8)..................................................... 360,138 *
Thomas A. Dumit(9)(10).................................................. 146,747 *
Lynn Forester(11)....................................................... 54,333 *
Nicholas C. Forstmann(2)................................................ 21,708,665 15.9
Theodore J. Forstmann(2)................................................ 21,708,665 15.9
Richard S. Friedland(9)(12)............................................. 686,255 *
Winston W. Hutchins(2).................................................. 21,708,665 15.9
Steven B. Klinsky(2).................................................... 21,708,665 15.9
Wm. Brian Little(2)..................................................... 11,547,008 8.4
Alex M. Mandl........................................................... 0 *
Ronald A. Ostertag(9)(13)............................................... 133,985 *
J. Tracy O'Rourke(14)................................................... 22,210 *
Felix G. Rohatyn(15).................................................... 82,000 *
John A. Sprague(2)...................................................... 11,547,008 8.4
All current directors and officers of the Company as a group (21
persons)(2)(10)(13)(16)............................................... 23,681,689 18.2
</TABLE>
- - ------------------------
* The percentage of shares of Common Stock beneficially owned does not exceed
one percent of the outstanding shares of Common Stock.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares Common Stock which such person has the
right to acquire within 60 days following March 6, 1997. For purposes of
computing the percentage of outstanding shares of Common Stock held by each
person or group of persons named above, any security which such person or
persons has or have the right to acquire within 60 days following March 6,
1997 is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) The general partner of Instrument Partners, a New York limited partnership
("Instrument Partners"), is FLC XXII Partnership, a general partnership of
which Messrs. Wm. Brian Little, Nicholas C. Forstmann, John A. Sprague,
Steven B. Klinsky and Winston W. Hutchins, and TJ/JA L.P., a Delaware
limited partnership ("TJ/JA L.P."), are general partners. The general
partner of TJ/JA L.P. is Theodore J. Forstmann. The general partner of
Forstmann Little & Co. Subordinated Debt and Equity Management Buyout
Partnership-IV, a New York limited partnership ("MBO-IV"), is FLC
Partnership, L.P., a limited partnership of which Messrs. Theodore J.
Forstmann, Nicholas C. Forstmann, Steven B. Klinsky, Winston W. Hutchins,
Ms. Sandra J. Horbach and Mr. Thomas H. Lister are general partners.
Accordingly, each of such individuals and partnerships (other than
26
<PAGE>
Ms. Horbach and Mr. Lister, for the reasons described below) may be deemed
the beneficial owners of shares owned by MBO-IV and Instrument Partners in
which such individual or partnership is a general partner and, for purposes
of this table, such beneficial ownership is included. Ms. Horbach and Mr.
Lister do not have any voting or investment power with respect to, or any
economic interest in, the shares of Common Stock held by MBO-IV; and,
accordingly, Ms. Horbach and Mr. Lister are not deemed to be the beneficial
owners thereof. Theodore J. Forstmann and Nicholas C. Forstmann are
brothers. Mr. Little is a special limited partner in FLC Partnership, L.P.
and each of FLC Partnership, L.P. and FLC XXII Partnership is a limited
partner of Instrument Partners. None of the other limited partners in each
of MBO-IV and Instrument Partners is otherwise affiliated with the Company,
GI Delaware or Forstmann Little & Co. The address of MBO-IV and Instrument
Partners is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New York
10153.
(3) This information is obtained from a Schedule 13G, dated February 20, 1997,
filed with the Commission jointly by Oppenheimer Group, Inc. ("Oppenheimer")
and Oppenheimer Capital. Oppenheimer reports beneficial ownership of
13,970,650 shares of Common Stock and claims shared voting power and shared
dispositive power with respect to all of such shares. Oppenheimer Capital, a
registered investment advisor and a subsidiary of Oppenheimer, reports
beneficial ownership of 13,929,450 of such shares and claims shared voting
power and shared dispositive power with respect to all 13,929,450 shares.
The Schedule 13G states that: Oppenheimer is a holding and service company
owning a variety of companies engaged in the securities business; 70.78% of
the issued and outstanding common stock of Oppenheimer is owned by
Oppenheimer & Co., L.P. ("Oppenheimer LP"); and management of the affairs of
Oppenheimer's subsidiaries and of certain investment advisory clients,
including decisions respecting disposition and/or voting of the shares of GI
Common Stock, resides in the respective officers and directors of such
companies and is not directed by Oppenheimer or Oppenheimer LP. The address
of the principal business of each of Oppenheimer and Oppenheimer Capital is
Oppenheimer Tower, World Financial Center, New York, New York 10281.
(4) This information is obtained from a Schedule 13G, dated February 12, 1997,
filed with the Commission by Brinson Partners, Inc. ("BPI") on behalf of
itself, Brinson Trust Company ("BTC"), Brinson Holdings, Inc. ("BHI"), SBC
Holding (USA), Inc. ("SBUSA") and Swiss Bank Corporation ("SBC"). BTC is a
wholly owned subsidiary of BPI. The Schedule 13G states that: BPI is a
wholly owned subsidiary of BHI; BHI is a wholly owned subsidiary of SBUSA;
and SBUSA is a wholly owned subsidiary of SBC. BPI reports beneficial
ownership of 11,305,062 shares of Common Stock and claims shared voting
power and shared dispositive power with respect to all of such shares. BTC
reports beneficial ownership of 2,268,600 shares of Common Stock and claims
shared voting power and shared dispositive power with respect to all of such
shares. BHI reports beneficial ownership of 11,305,062 shares of Common
Stock and claims shared voting power and shared dispositive power with
respect to all of such shares. SBUSA reports beneficial ownership of
11,406,476 shares of Common Stock and claims shared voting power and shared
dispositive power with respect to all of such shares. SBC reports beneficial
ownership of 11,406,476 shares of Common Stock and claims shared voting
power and shared dispositive power with respect to all of such shares. The
Schedule 13G states that by virtue of their corporate relationships, SBC,
SBUSA, BHI and BPI may be deemed to beneficially own and have the power to
dispose and vote or direct the disposition or voting of the Common Stock
held by BTC and BPI. Each of BPI, BTC and BHI's principal business office is
located at 209 South LaSalle, Chicago, Illinois 60604-1295. SBUSA's
principal business office is located at 222 Broadway, New York, New York
10038. SBC's principal business office is located at Aeschenplatz 6 CH-4022,
Basel, Switzerland.
(5) This information is obtained from a Schedule 13G, dated January 31, 1997,
filed with the Commission by J.P. Morgan & Co. Incorporated. J.P. Morgan &
Co. Incorporated reports beneficial ownership of 10,113,201 shares as
follows: 9,690,046 shares and 423,155 shares where there is a right to
acquire. J.P. Morgan & Co Incorporated claims sole voting power with respect
to 6,549,568 shares, shared voting
27
<PAGE>
power with respect to 65,105 shares, sole dispositive power with respect to
9,976,366 shares and shared dispositive power with respect to 130,285
shares. J.P. Morgan & Co. Incorporated's principal business office is
located at 60 Wall Street, New York, New York 10260.
(6) Includes 110,500 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997.
(7) Includes 38,000 shares subject to options which are exercisable currently or
within 60 days of March 6, 1997.
(8) Includes 104,500 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997. Includes 600 shares which were held by
the trustee of the CommScope Savings Plan and were allocated to Frank M.
Drendel's account under the CommScope Savings Plan as of March 6, 1997.
(9) Includes the number of shares which were held by the trustee of the Savings
Plan and were allocated to the individual's respective account under the
Savings Plan as of March 6, 1997 as follows: Edward D. Breen, 2,532 shares;
Thomas A. Dumit, 2,759 shares; Richard S. Friedland, 10,793 shares; and
Ronald A. Ostertag, 10,975 shares.
(10) Includes 108,000 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997. Includes 8,032 shares held by the Thomas
A. Dumit Charitable Remainder Trust, dated April 27, 1994, of which Mr.
Dumit is the trustee and a beneficiary. Also includes 27,956 shares held by
Barbara K. Dumit, the spouse of Thomas A. Dumit, as to which shares Mr.
Dumit disclaims beneficial ownership.
(11) Includes 53,333 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997.
(12) Includes 596,000 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997.
(13) Includes 122,000 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997. Also includes 900 shares held by the
spouse of Ronald A. Ostertag.
(14) Includes 20,210 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997.
(15) Includes 80,000 shares subject to options which are exercisable currently
or within 60 days of March 6, 1997.
(16) Includes 1,494,207 shares subject to options exercisable currently or
within 60 days of March 6, 1997. Includes an aggregate of 46,283 shares
which were held by the trustees of the Savings Plan and the CommScope
Savings Plan and were allocated to the current officers' respective accounts
under the Savings Plan or the CommScope Savings Plan as of March 6, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An affiliate of Forstmann Little & Co. provides aircraft maintenance
services to the Company and charged the Company $2.1 million for services in
1996. The Company believes that the terms of these transactions were no less
favorable to the Company than the terms which could be obtained from an
unrelated third party.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Balance Sheets at December 31, 1996 and 1995
For the years ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
Independent Auditors' Report
I. Condensed financial information--Parent Company only
II. Valuation and qualifying accounts
All other schedules have been omitted because they are not applicable, not
required or the information required is included in the consolidated financial
statements or notes thereto.
3. Exhibits
The exhibits are listed in the accompanying Index to Exhibits.
(b) Reports on Form 8-K
None.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the consolidated financial statements of General Instrument
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and have
issued our report thereon dated February 3, 1997 (February 28, 1997 as to Note
16); such consolidated financial statements and report are included in your 1996
Annual Report to Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedules of General Instrument
Corporation, listed in Item 14(a)2. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
- - --------------------------------------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 1997
30
<PAGE>
GENERAL INSTRUMENT CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
ASSETS
Investment in subsidiaries............................................................ $ 853,296 $ 877,638
Note receivable from subsidiary....................................................... 500,000 500,000
Receivable from subsidiary............................................................ 45,521 25,872
Deferred financing fees, less accumulated amortization of $3,285 and $5,081,
respectively........................................................................ 3,232 8,999
------------ ------------
Total assets.......................................................................... $ 1,402,049 $ 1,412,509
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued interest payable............................................................ $ 475 $ 1,030
Accrued liabilities................................................................. 470 1,751
------------ ------------
Total current liabilities............................................................. 945 2,781
------------ ------------
Convertible Junior Subordinated Notes................................................. 227,951 494,385
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.0l par value; 20,000,000 shares authorized; no shares issued..... -- --
Common Stock, $.0l par value; 400,000,000 shares authorized; 137,144,412 and
126,034,911 shares issued at December 31, 1996 and 1995, respectively............. 1,371 1,260
Additional paid-in capital.......................................................... 925,166 666,190
Retained earnings................................................................... 254,552 256,416
------------ ------------
1,181,089 923,866
Less--Treasury Stock, at cost, 231,527 and 229,011 shares of Common
Stock at December 31, 1996 and 1995, respectively................................. (7,271) (7,246)
--Unearned compensation.......................................................... (665) (1,277)
------------ ------------
Total stockholders' equity........................................................ 1,173,153 915,343
------------ ------------
Total liabilities and stockholders' equity............................................ $ 1,402,049 $ 1,412,509
------------ ------------
------------ ------------
</TABLE>
- - ------------------------
Note: Investment in subsidiaries is accounted for under the equity method of
accounting
See notes to consolidated financial statements included in the 1996 Annual
Report, incorporated herein by reference.
31
<PAGE>
GENERAL INSTRUMENT CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income.............................................................. $ 47,500 $ 47,500 $ 47,500
Interest Expense............................................................. (19,462) (26,868) (27,011)
---------- ---------- ----------
Interest Income--net..................................................... 28,038 20,632 20,489
Income Taxes................................................................. (9,813) (7,221) (7,171)
---------- ---------- ----------
Income--Parent Company....................................................... 18,225 13,411 13,318
Income of Subsidiaries....................................................... (20,089) 110,371 233,217
---------- ---------- ----------
Net Income (Loss)............................................................ $ (1,864) $ 123,782 $ 246,535
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- - ------------------------
Note 1: The parent company files a consolidated income tax return with its
subsidiaries. The consolidated income tax provisions were $7,381,
$38,566 and $9,714 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Note 2: Statements of cash flows are not required since the parent company did
not have any cash flows from operations. Interest income--net for the
years ended December 31, 1996, 1995 and 1994 relates to intercompany
transactions.
See notes to consolidated financial statements included in the 1996 Annual
Report, incorporated herein by reference.
32
<PAGE>
GENERAL INSTRUMENT CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING
OF BALANCE AT END
PERIOD ADDITIONS DEDUCTIONS(1) OTHER OF PERIOD
----------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful Accounts:
Year ended December 31, 1996...................... $ 14,321 $ 6,099 ($ 2,884) -- $ 17,536
--
--
----------- ----------- ------------- -------
----------- ----------- ------------- -------
Year ended December 31, 1995...................... $ 7,582 $ 7,946 ($ 1,207) -- $ 14,321
--
--
----------- ----------- ------------- -------
----------- ----------- ------------- -------
Year ended December 31, 1994...................... $ 7,012 $ 1,967 ($ 1,397) -- $ 7,582
--
--
----------- ----------- ------------- -------
----------- ----------- ------------- -------
</TABLE>
- - ------------------------
(1) Accounts receivable written off--net of recoveries
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL INSTRUMENT CORPORATION
BY: /S/ RICHARD S. FRIEDLAND
-----------------------------------------
Richard S. Friedland
Chairman and Chief Executive Officer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - --------------------------------------------- ----------------------------------------------- -----------------
<S> <C> <C>
/s/ RICHARD S. FRIEDLAND
- - ------------------------------------ Chairman and Chief Executive Officer and March 21, 1997
Richard S. Friedland Director (Principal Executive Officer)
/s/ CHARLES T. DICKSON
- - ------------------------------------ Vice President and Chief Financial Officer March 21, 1997
Charles T. Dickson (Principal Financial Officer)
/s/ PAUL J. BERZENSKI
- - ------------------------------------ Vice President and Controller (Principal March 21, 1997
Paul J. Berzenski Accounting Officer)
/s/ JOHN SEELY BROWN
- - ------------------------------------ Director March 21, 1997
John Seely Brown
/s/ FRANK M. DRENDEL
- - ------------------------------------ Director March 21, 1997
Frank M. Drendel
/s/ LYNN FORESTER
- - ------------------------------------ Director March 21, 1997
Lynn Forester
/s/ NICHOLAS C. FORSTMANN
- - ------------------------------------ Director March 21, 1997
Nicholas C. Forstmann
/s/ THEODORE J. FORSTMANN
- - ------------------------------------ Director March 21, 1997
Theodore J. Forstmann
/s/ STEVEN B. KLINSKY
- - ------------------------------------ Director March 21, 1997
Steven B. Klinsky
/s/ ALEX MANDL
- - ------------------------------------ Director March 21, 1997
Alex Mandl
/s/ J. TRACY O'ROURKE
- - ------------------------------------ Director March 21, 1997
J. Tracy O'Rourke
/s/ FELIX G. ROHATYN
- - ------------------------------------ Director March 21, 1997
Felix G. Rohatyn
</TABLE>
34
<PAGE>
GENERAL INSTRUMENT CORPORATION
INDEX TO EXHIBITS
(ITEM 14(C))
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- - ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of July 1, 1990, among FLGI Acquisition Corp. and General
Instrument Corporation.*
3.1 Amended and Restated Certificate of Incorporation of the Company.**
3.2 Amended and Restated By-Laws of the Company.*****
4.1 Specimen Form of Company's Common Stock Certificate.***
4.2 Indenture, dated as of June 15, 1993, between General Instrument Corporation and Continental Bank.****
10.1 Second Amended and Restated Credit Agreement, dated as of June 30, 1994, among General Instrument
Corporation, the banks and other financial institutions from time to time parties thereto, Chemical Bank,
as Administrative Agent for the Banks, and Chemical Bank, Continental Bank N.A., Deutsche Bank AG, The
Nippon Credit Bank, Ltd., The Bank of Nova Scotia, The Toronto-Dominion Bank, National Westminster Bank
PLC, and the Bank of Tokyo Trust Company, as Co-agents.*****
10.2 Amended and Restated Guarantee, dated as of July 7, 1994, by the Company in favor of Chemical Bank. *****
10.3 Amended and Restated Guarantee, dated as of July 7, 1994 by Cable/Home Communication Corporation and
CommScope, Inc. in favor of Chemical Bank. *****
10.4 Form of Employee Subscription Agreement, dated as of December 1990, between the Company and certain
Management Investors.*+
10.5 Form of Employee Subscription Agreement, dated as of March 21, 1992, between the Company and certain
Management Investors.*+
10.6 Form of Waiver of Certain Company Rights under the agreement referred to in 10.5.*+
10.7 Form of Stock Option Agreement, dated as of August 15, 1990, in connection with the purchase of CommScope
(including form of Stockholder's Agreement).*+
10.8 Form of Outside Director Stock Option Agreement (including form of Outside Director Stockholder's
Agreement).*+
10.9 Employment Agreement, dated as of November 28, 1988, between CommScope and Frank M. Drendel.*+
10.10 Form of Indemnification Agreement between the Company and its directors and executive officers.*****
10.11 Registration Rights Agreement between the Company, GI Corporation, MBO-IV and Instrument Partners.*
10.12 Form of Amendment to Outside Director Stock Option Agreement (including form of Outside Director
Stockholder's Agreement) between the Company and each of James M. Denny, J. Tracy O'Rourke, Derald H.
Ruttenberg and William C. Lowe.*+
10.13 The General Instrument Corporation 1993 Long-Term Incentive Plan (including form of Stock Option
Agreement).****+
10.14 General Instrument Corporation Annual Incentive Plan.*****+
10.15 GI Deferred Compensation Plan.*****+
11. Computation of Earnings (Loss) Per Share.
13. Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1996 which are
incorporated by reference into this Form 10-K.
21. Subsidiaries of the Company.
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.)
</TABLE>
35
<PAGE>
All other Exhibits are not applicable.
- - ------------------------
* Incorporated by reference from Registration Statement No. 33-46854.
** Incorporated by reference from Registration Statement No. 33-63152.
*** Incorporated by reference from Registration Statement No. 33-50215.
****Incorporated by reference from Annual Report on Form 10-K for the year ended
December 31, 1993.
*****Incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1994.
+ Management contract or compensatory plan
36
<PAGE>
EXHIBIT 11
GENERAL INSTRUMENT CORPORATION
EXHIBIT 11 -- COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY:
Income (loss) before cumulative effect of change in accounting
principle............................................................. $ (1,864) $ 123,782 $ 248,452
Cumulative effect of change in accounting principle.................... -- -- (1,917)
---------- ---------- ----------
Net Income (Loss).................................................... $ (1,864) $ 123,782 $ 246,535
---------- ---------- ----------
Weighted average common shares outstanding............................. 131,723 123,483 120,937
Incremental shares under stock option plans.......................... 667 891 2,456
---------- ---------- ----------
Weighted average common and common equivalent shares outstanding..... 132,390 124,374 123,393
---------- ---------- ----------
Primary earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting
principle.......................................................... $ (.01) $ 1.00 $ 2.01
Cumulative effect of change in accounting principle.................. -- -- (.01)
---------- ---------- ----------
Net Income (Loss).................................................... $ (.01) $ 1.00 $ 2.00
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Income (loss) before cumulative effect of change in accounting
principle............................................................. $ (1,864) $ 123,782 $ 248,452
Interest and amortization of debt issuance costs related to the
Convertible Junior Subordinated Notes, net of income tax effects... 11,867 16,383 25,877
---------- ---------- ----------
Adjusted income before cumulative effect of change in accounting
principle.......................................................... 10,003 140,165 274,329
Cumulative effect of change in accounting principle.................. -- -- (1,917)
---------- ---------- ----------
Adjusted net income.................................................. $ 10,003 $ 140,165 $ 272,412
---------- ---------- ----------
Weighted average common shares outstanding............................. 131,723 123,483 120,937
Incremental shares under stock option plans.......................... 667 904 2,607
Incremental shares attributable to Convertible Junior
Subordinated Notes................................................. 15,000 21,019 21,053
---------- ---------- ----------
Adjusted weighted average shares outstanding......................... 147,390 145,406 144,597
---------- ---------- ----------
Fully diluted earnings per share:
Income before cumulative effect of change in accounting principle.... $ .07(a) $ .96 $ 1.89
Cumulative effect of change in accounting principle.................. -- -- (.01)
---------- ---------- ----------
Net Income........................................................... $ .07(a) $ .96 $ 1.88
---------- ---------- ----------
</TABLE>
Note: The computations of primary and fully diluted earnings (loss) per share
assume incremental shares under stock option plans using the treasury
method.
(a) Differs from loss per share as reported in the Consolidated Statements of
Operations because the effect of the Convertible Junior Subordinated Notes
was anti-dilutive.
<PAGE>
Exhibit 13
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
(In millions, except per share data) 1996* 1995* 1994* 1993* 1992*
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales .......................................... $2,690 $2,432 $2,036 $1,393 $1,075
Cost of sales ...................................... 1,998 1,691 1,404 956 755
Selling, general and administrative................. 266 224 180 149 137
Research and development............................ 209 147 111 74 58
Purchased in-process technology..................... -- 140 -- -- --
NLC litigation costs ............................... 141 -- -- -- --
Operating income ................................... 52 205 316 188 98
Interest expense--net .............................. (46) (41) (53) (72) (110)
Income (loss) before extraordinary item
and cumulative effect of changes in
accounting principles ........................... (2) 124 248 90 (41)
Net income (loss) .................................. $ (2) $ 124 $ 247 $ 91 $ (53)
Weighted average shares outstanding ................ 132 124 123 122 98
Primary earnings (loss) per share before
extraordinary item and cumulative effect
of changes in accounting principles ............. $ (.01) $ 1.00 $ 2.01 $ .74 $ (.42)
Fully diluted earnings (loss) per share before
extraordinary item and cumulative effect
of changes in accounting principles ............. (.01) .96 1.89 .74 (.42)
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (negative) ......................... $ 548 $ 362 $ 213 $ (16) $ (14)
Property, plant and equipment--net ................. 571 437 344 262 266
Total assets ....................................... 2,707 2,301 2,109 1,776 1,727
Long-term debt, including current maturities ....... 703 743 797 840 989
Stockholder's equity ............................... 1,173 915 677 389 291
- - ----------------------------------------------------------------------------------------------------
</TABLE>
*1996 includes charges of $237 ($151 net-of-tax), or $1.14 per primary share,
reflecting restructuring charges related to the Company's plan to separate
into three independent companies, NLC litigation costs and other charges
primarily related to the transition to the Company's next-generation digital
products and the write-down of certain assets. (See Notes 2, 9 and 15 to the
consolidated financial statements.)
*1995 includes a charge of $140 ($90 net-of-tax), or $.72 per primary share
and $.62 per fully diluted share, for purchased in-process technology in
connection with the Company's acquisition of NLC.
*1994 includes an income tax benefit of $30, or $.24 per primary share and
$.20 per fully diluted share, as a result of a reduction in a valuation
allowance, as of December 31, 1994, related to domestic deferred income tax
assets.
*1993 includes a cumulative effect credit of $10 and a cumulative effect
charge of $10 to reflect the adoption of Statements of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," respectively.
*1992 includes a $12 extraordinary charge for the write-off of deferred
financing costs in connection with the early extinguishment of debt.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in millions)
- - ---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------
SEGMENT
INFORMATION:
Net Sales
Broadband
Communications............. $ 2,328 $ 2,018 $ 1,720
Power
Semiconductor.............. 362 414 316
--------- --------- --------
Total $ 2,690 $2,432 $ 2,036
--------- --------- --------
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 WITH
THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 were $2,690
compared to $2,432 for the year ended December 31, 1995, an increase of $258,
or 11%. This increase in net sales reflects higher sales in the Broadband
Communications segment, partially offset by lower sales in the Power
Semiconductor segment.
Broadband Communications sales for the year ended December 31, 1996 were
$2,328 compared to $2,018 for the year ended December 31, 1995. Worldwide
terrestrial broadband sales (consisting of digital and analog cable and wireless
television systems, network transmission systems and coaxial, fiber optic and
other high-performance electronic cables) increased $360, or 26%, from 1995 to
$1,753 in 1996 primarily as a result of increased U.S. sales volume of CFT-2200
advanced analog set-top terminals, first-time sales of DCT-1000 MPEG-2 digital
set-top terminals and increased global sales volume of mature analog addressable
set-top terminals, transmission electronics and CommScope cables. These sales
reflect the continued commitment of domestic cable television operators to
deploy state-of-the-art addressable systems and enhanced services and the
continued deployment of new cable television systems in international markets.
International terrestrial broadband sales increased $149, or 33%, to $599 in
1996 and represented 34% of worldwide terrestrial broadband sales in 1996
compared to 32% in 1995. Worldwide satellite broadband sales decreased $50, or
8%, from 1995 to $575 in 1996 due to lower sales volume of digital satellite
receivers to PRIMESTAR Partners and VideoCipher RS(Trademark) analog satellite
modules and receivers, partially offset by higher sales volumes of
DigiCipher(Registered Trademark)II/MPEG-2 digital satellite systems and
digital video broadcast (DVB) compliant Magnitude(Registered Trademark)
satellite encoders.
Power Semiconductor sales decreased $52, or 13%, from 1995 to $362 in 1996.
This decrease reflects the overall slowdown in the semiconductor industry as
Power Semiconductor's OEM customers and distributors aligned their inventories
with future needs. International sales decreased $41, or 14%, to $261 and
represented 72% of the division's worldwide sales in 1996 compared to 73% in
1995.
GROSS PROFIT (NET SALES LESS COST OF SALES). Gross profit decreased $49,
or 7%, to $692 in 1996 from $741 in 1995 and was 26% of sales in
2
<PAGE>
1996 compared to 30% in 1995.
Broadband Communications segment gross profit decreased $21, or 4%, from
1995 to $561 in 1996 and was 24% of sales in 1996 compared to 29% in 1995.
The lower gross profit margin in 1996 included $71 of charges recorded in the
fourth quarter of 1996 for the write-down of inventories to their estimated
net realizable values and the accrual of upgrade and product warranty
liabilities primarily related to the transition to the Company's
next-generation digital products. (See Note 15 to the consolidated financial
statements.) The lower gross profit margin also reflects the shift in
product mix from higher margin VideoCipher RS(Trademark) analog satellite
receiver consumer modules to new advanced analog and digital television
system products, which initially carry lower margins. Power Semiconductor
gross profit in 1996 decreased 18% from 1995 and decreased as a percentage of
sales to 36% in 1996 from 38% in 1995 as a result of lower volume and pricing
pressures due to the slowdown in the industry discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was $266 in 1996 compared to $224 in 1995 and was 10% of sales
in 1996 compared to 9% of sales in 1995. SG&A base spending was greater in 1996
than in 1995 as the Company targeted new growth opportunities, including the
marketing of NLC broadband access systems to telephone companies for interactive
digital video, voice and data services, and the Company increased its sales
force, field support and marketing activities to take advantage of continued
growth opportunities in international cable and satellite television and
worldwide telecommunications markets. SG&A expense in 1996 also included $23 of
charges for costs related to the Company's plan to separate into three
independent companies, the write-down of various fixed assets to their estimated
net realizable values and accruals for environmental and litigation matters.
(See Note 15 to the consolidated financial statements.) SG&A expenses incurred
for the year ended December 31, 1995 included a $7 restructuring charge for
costs related to the reorganization of the Company's Communications Division and
the consolidation of the Company's corporate headquarters into one location and
$14 related to a national advertising campaign for C-band satellite systems.
RESEARCH AND DEVELOPMENT. Research and development expense increased $62,
or 42%, to $209 in 1996 from $147 in 1995 and was 8% of sales in 1996 compared
to 6% in 1995. The increased level of spending reflects: the continued
development of next-generation products, including cable modems and telephone
company access products through NLC, as well as the modification of existing
products for international markets; continued development of enhanced
addressable analog terminals and advanced digital systems for cable and
satellite television distribution; ongoing cost-reduction programs; and product
development and international expansion through strategic alliances. The
Company's research and development expenditures are expected to approximate $225
for the year ending December 31, 1997.
NLC LITIGATION COSTS. In June 1996, the Company recorded a pre-tax charge
of $141 reflecting the judgment and costs of litigation in the case involving
NLC, its founders and DSC Communications Corporation (the "NLC Litigation").
(See Notes 9 and 16 to the consolidated financial statements.)
INTEREST EXPENSE-NET. Net interest expense increased $5 to $46 in 1996
from $41 in 1995. This increase reflects a $7 benefit recorded in 1995 for the
settlement of certain tax matters and $4 of interest
3
<PAGE>
accrued in 1996 related to the NLC Litigation, partially offset by lower
weighted-average borrowings in 1996 compared to 1995.
INCOME TAXES. Income tax expense was $7 in 1996 compared to $39 in 1995,
with effective tax rates of 134% and 24% in 1996 and 1995, respectively.
Excluding the NLC-related charges and related tax benefits recorded in June 1996
and September 1995 and the $12 credit related to the settlement of certain tax
matters during the first quarter of 1995, the effective tax rates would have
been 39% in 1996 and 33% in 1995. (See Note 7 to the consolidated financial
statements.)
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 WITH
THE YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales for the year ended December 31, 1995 were $2,432
compared to $2,036 for the year ended December 31, 1994, an increase of $396, or
19%. This increase reflects continued higher sales volume in both the Broadband
Communications and Power Semiconductor segments.
Broadband Communications sales increased $298, or 17%, to $2,018 in 1995,
primarily as a result of increased sales volume of DigiCipher(Registered
Trademark) digital television system products, CFT-2200 advanced analog
addressable terminals and CommScope cable products, partially offset by
decreased sales of C-band satellite systems. The higher sales volume primarily
reflects commercialization of digital broadband systems in the United States and
deployment of new cable television systems in international markets.
International sales of cable television electronics and CommScope cables
increased $86, or 24%, to $450 for the year ended December 31, 1995 in
comparison to 1994 and represented 32% of total cable television electronics and
CommScope cable sales in 1995 compared to 29% in 1994. The increased
DigiCipher(Registered Trademark) digital television system product sales in 1995
consisted primarily of sales of digital satellite consumer receivers to
PRIMESTAR Partners. Sales of DigiCipher(Registered Trademark) products
represented 20% of 1995 Broadband Communications sales. In 1994, the Company
had significant sales of VideoCipher RS(Trademark) analog satellite receiver
consumer modules to persons who had been receiving without authorization (or
"pirating") the commercial satellite programming data signals. In 1995, sales
of these modules were at lower levels as expected.
Power Semiconductor sales increased $98, or 31%, to $414 in 1995 in
comparison to 1994. This increase reflects continued broad-based global demand,
primarily from automotive, computer, telecommunications and consumer electronics
customers, for power rectifiers and protection devices. International sales
increased $78, or 35%, to $302 for the year ended December 31, 1995 in
comparison to 1994 and represented 73% of total Power Semiconductor net sales in
1995.
GROSS PROFIT (NET SALES LESS COST OF SALES). Gross profit increased
$108, or 17%, to $741 in 1995 from $633 in 1994 and was 30% of sales in 1995
compared to 31% in 1994.
Broadband Communications segment gross profit in 1995 increased 11% over
1994. Gross profit margin for Broadband Communications was 29% in 1995, down
from 31% in 1994, as a result of a shift in product mix from higher margin
VideoCipher RS(Trademark) analog satellite receiver
4
<PAGE>
consumer modules to CFT-2200 advanced analog and DigiCipher(Registered
Trademark) digital television system products, new products which initially
carry lower margins. The decrease in gross profit resulting from a shift in
product mix was partially offset by higher margins earned on mature products as
a result of cost-reduction programs. Power Semiconductor gross profit in 1995
increased 49% over 1994 and increased as a percentage of sales to 38% in 1995
from 34% in 1994, primarily as a result of volume efficiencies and favorable
product mix.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense was $224 in 1995
compared to $180 in 1994 and represented 9% of sales in each period. SG&A
expense in 1995, reflecting higher sales volume, included: marketing and
selling costs incurred by the Company to increase its sales force; field support
and marketing activities to take advantage of increased growth opportunities in
international cable and satellite television and worldwide telecommunications
markets; a national advertising campaign to support sales of C-Band satellite
systems; and a $7 restructuring charge for costs primarily related to the
reorganization of the Company's Communications Division and the consolidation of
the Company's corporate headquarters into one location.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$36, or 32%, to $147 in 1995 from $111 in 1994 and was 6% of sales in 1995
compared to 5% in 1994. Research and development expenditures reflect continued
development of the next generation of cable set-top terminals, which incorporate
digital compression and multimedia capabilities, cable modems, telephone company
access products, advanced digital systems for cable and satellite television
distribution, next-generation direct broadcast satellite systems and product
development through strategic alliances. Emerging research and development
activities include development of broadband telephony products and interactive
multimedia technologies for broadband networks.
PURCHASED IN-PROCESS TECHNOLOGY. In connection with the completion of the
acquisition of NLC in September 1995, the Company recorded a pre-tax charge of
$140 for purchased in-process technology which had not yet reached technological
feasibility and had no alternative future use. Further development expenditures
primarily consist of costs for design, prototype development and lab and field
testing.
INTEREST EXPENSE-NET. Net interest expense decreased $12, to $41 in 1995
from $53 in 1994. The decrease resulted from lower weighted-average borrowings
in 1995 and a $7 benefit related to the settlement of certain tax matters,
partially offset by higher interest rates.
INCOME TAXES. Income tax expense was $39 in 1995 and $10 in 1994.
Before the NLC-related charge and related tax benefit and the settlement of
certain tax matters in 1995 and the release of valuation reserves in 1994, the
Company's effective tax rate would have been 33% in 1995 and 45% in 1994. The
decrease in the effective rate in 1995 reflects the utilization of foreign tax
credits and a decision to permanently reinvest the undistributed earnings of
certain foreign entities. (See Note 7 to the consolidated financial
statements.)
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the year ended December 31, 1996 was $44
compared to $232 and $162 for 1995 and 1994, respectively. Cash
5
<PAGE>
provided by operations decreased by $188 in 1996 compared to 1995 due to lower
operating income, adjusted for non-cash items, recorded in 1996 and increased
working capital in 1996. Cash provided by operations increased $70 in 1995
compared to 1994 due primarily to lower working capital increases in 1995
compared to 1994.
At December 31, 1996, working capital was $548 compared to $362 at
December 31, 1995 and $213 at December 31, 1994. The working capital increases
in 1996 over 1995 and in 1995 over 1994 were due primarily to increased sales
volume and corresponding increases in accounts receivable and inventory build-up
to support business growth and the introduction of new products, partially
offset by related increases in accounts payable. Based on current levels of
order input and backlog, as well as significant sales agreements not yet
reflected in order and backlog levels, 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.
During the year ended December 31, 1996, the Company invested $228 in
equipment and facilities compared with $159 and $136 in 1995 and 1994,
respectively. The higher levels of capital spending were attributable to
capacity expansion across all businesses to meet increased current and expected
future demands for analog and digital products, coaxial cable and discrete
semiconductors. In 1997, the Company expects to continue to expand its capacity
to meet increased current and expected future demands with capital expenditures
for the year expected to approximate $250.
The Company's research and development expenditures were $209 for the
year ended December 31, 1996 compared to $147 and $111 in 1995 and 1994,
respectively, and are expected to approximate $225 for the year ending December
31, 1997. (See "Comparison of Results of Operations for the Year Ended December
31, 1996 with the Year Ended December 31, 1995-Research and Development" above.)
At December 31, 1996, the Company had $20 of cash and cash equivalents on
hand compared to $36 and $5 at December 31, 1995 and 1994, respectively. At
December 31, 1996, long-term debt (including current maturities) was $703,
compared to $743 and $797 at December 31, 1995 and 1994, respectively.
In 1996, the Company strengthened its balance sheet and enhanced its
financial flexibility through the conversion of $260 of its original $500 of 5%
Convertible Junior Subordinated Notes ("Convertible Notes") into Common Stock.
(See Note 8 to the consolidated financial statements.)
In August 1996, the Company amended and restated its senior bank credit
agreement (as further amended and restated, the "Credit Agreement") to lower its
interest costs and commitment fees, increase available credit commitments and
obtain greater operating flexibility with less restrictive financial and
operating covenants. The Credit Agreement provides for a $650 unsecured
revolving credit facility and matures on December 31, 2001. Amounts outstanding
under this facility are classified as long-term based on the Company's intent
and ability to maintain these loans on a long-term basis. The Credit Agreement
contains financial and operating covenants, including limitations on contingent
obligations and liens, and requires the maintenance of certain financial ratios.
None of the restrictions contained in the Credit Agreement are expected to have
a significant effect on the ability of the Company to operate. At December 31,
1996, the Company
6
<PAGE>
was in compliance with all financial and operating covenants and had borrowings
of $414.
In June 1996, a final judgment against NLC and the individual defendants
was entered in the NLC Litigation which, in February 1997, was affirmed in part,
reversed in part and remanded to the trial court by the U.S. Court of Appeals
for the Fifth Circuit. The Company expects the judgment on remand to result in
a damage award of not more than $138 plus accrued interest. The Company has the
ability and intent to pay this judgment utilizing borrowings under the Credit
Agreement.
During 1997, the Company expects to incur $50 to $70 of after-tax charges
for costs related to dividing the Company's Taiwan operations between NextLevel
Systems, Inc. and General Semiconductor, Inc. and additional transaction costs
related to the restructuring, of which approximately 50% will be payable in
1997. (See Note 2 to the consolidated financial statements.) The Company
intends to borrow under the Credit Agreement and from existing lenders to fund
amounts payable in 1997.
Prior to the completion of the restructuring of the Company, the Company
intends to issue a notice to redeem all outstanding Convertible Notes. The
Company believes it will be able to obtain adequate bank financing to fund
Convertible Notes which are not converted but are redeemed for cash.
The Company's principal sources of liquidity both on a short-term and
long-term basis are cash flow provided by operations and borrowings under the
Credit Agreement. The Company believes that, based upon its analysis of its
consolidated financial position, its cash flow during the past 12 months and the
expected results of operations in the future, operating cash flow, funding under
the Credit Agreement and additional funding from existing lenders will be
adequate to fund operations, research and development expenditures, capital
expenditures and debt service for the next 12 months. The Company intends to
repay its remaining indebtedness primarily with cash flow from operations.
There can be no assurance, however, that future industry-specific developments
or general economic trends will not adversely affect the Company's operations or
its ability to meet its cash requirements.
On a selective basis, the Company enters into interest rate cap or swap
agreements to reduce the potential negative impact of increases in interest
rates on its outstanding variable-rate debt. In the fourth quarter of 1994, the
Company entered into two interest rate cap agreements to hedge an aggregate
notional amount of $150 of outstanding variable-rate borrowings under the Credit
Agreement. The interest rate cap agreements expired on January 3, 1996. The
Company monitors its underlying interest rate exposures on its variable-rate
debt on an ongoing basis and believes that it can modify or adapt its hedging
strategies as needed. (See Note 13 to the consolidated financial statements for
additional information on the Company's hedging strategies.)
NEW TECHNOLOGIES
The Company has entered a new competitive environment in which its success will
be dependent upon numerous factors, including its ability to continue to develop
appropriate technologies and successfully implement applications based on those
technologies. In this regard, the Company has made significant investments to
develop advanced
7
<PAGE>
systems and equipment for the cable and satellite television, local telephone
access, and Internet/data delivery markets.
The Company believes that a key step in the evolution of cable television
system architecture and satellite delivery of programming is the implementation
of digital video compression, which converts television signals to a digital
format and then compresses the signals of several channels of television
programming into the bandwidth currently used by just one analog channel. The
Company has developed and is deploying digital television systems that enable
cable television operators and satellite programmers to deliver over their
existing networks up to 16 times as much information as is possible with
existing analog technology.
As a result of the high costs of initial production, digital products
currently being shipped carry substantially lower margins than the Company's
mature analog products. As the Company progresses through the initial stages of
production of its digital products, the Company expects these margins to
improve.
In September 1995, the Company acquired NLC, which was formed to
design, manufacture and market a next-generation telecommunications broadband
access system for the delivery of telephony, video and data from a telephone
company central office or cable television headend to the home. NLC's
product, NLevel(3), is designed to permit the cost-effective delivery of a
suite of standard telephony and advanced services such as high-speed
Internet/data, work-at-home, distance-learning, video-on-demand and
video-telephony to the home from a single access platform. The NLevel(3)
system is designed to work with and enhance existing telephony networks and
offers the capability to provide voice services (POTS), ISDN, high-speed
Internet/data and video services over both copper-twisted-pair and
fiber-to-the-curb networks. In the fourth quarter of 1996, NYNEX Corporation
entered into an agreement with NLC to deploy approximately one million lines
of transport electronics in the greater Boston and New York City areas to
carry voice, video and data services. NYNEX also has options to extend its
deployment of the NLevel(3) system up to five million lines. A significant
amount of research and development expenditures will be required to fund the
successful deployment and market growth of telephony networks. The Company
does not expect NLC to generate significant revenues until 1998 and there can
be no assurance that delays will not occur in the deployment of NLC's
products or that the products will be commercially successful.
The Company commenced initial commercial deployment of its
SURFboard(Trademark) modem for cable networks during the third quarter of 1996.
SURFboard(Trademark) enables network operators to link subscribers to
interactive video and data services at speeds up to 1,000 times faster than
conventional telephone modems. SURFboard(Trademark) modems have been selected
in the U.S. and internationally by several cable operators, including
Continental Cable, Adelphia Cable, Television International in Mexico and Red
Argentina, Argentina's largest cable television operator. There can be no
assurance that the SURFboard(Trademark) product line will be commercially
successful.
With these new technologies and applications under development, the
Company believes it is well positioned to take advantage of the opportunities
presented in the new competitive environment. There can be no assurance,
however, that these technologies and applications will be successfully
developed, or, if they are successfully developed, that they will be implemented
by the Company's customers or that the Company will otherwise be able to
successfully exploit these
8
<PAGE>
technologies and applications.
FOREIGN EXCHANGE
A significant portion of the Company's products are manufactured or assembled in
countries outside the United States. In addition, as mentioned above, the
Company's sales of its equipment into international markets have increased.
These foreign operations are subject to risk with respect to currency exchange
rate fluctuations. The Company monitors its underlying exchange rate exposures
on an ongoing basis and continues to implement selective hedging strategies to
reduce the market risks from changes in exchange rates. (See Notes 13 and 14 to
the consolidated financial statements.)
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on earnings
by controlling its operating costs and selling prices. During the past few
years, the rate of inflation has been low and has not had a material impact on
the Company's results of operations.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this Annual
Report contain forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, uncertainties relating to economic conditions, uncertainties relating to
government and regulatory policies, uncertainties relating to customer plans and
commitments, the Company's dependence on the cable television industry and cable
television spending, signal security, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations. The words "believe," "expect," "anticipate," "project" and
similar expressions identify forward-looking statements. 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.
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the consolidated balance sheets of General Instrument
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 General Instrument Corporation
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for postemployment
benefits to conform with Statement of Financial Accounting Standards No. 112.
/S/ DELOITTE & TOUCHE LLP
- - ----------------------------
DELOITTE & TOUCHE LLP
CHICAGO, ILLINOIS
FEBRUARY 3, 1997
(FEBRUARY 28, 1997 AS TO NOTE 16)
10
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
NET SALES............................................................... $ 2,689,688 $ 2,432,024 $ 2,036,323
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales......................................................... 1,997,625 1,690,639 1,403,585
Selling, general and administrative................................... 265,717 224,269 179,631
Research and development.............................................. 209,257 147,253 111,462
Purchased in-process technology....................................... -- 139,860 --
NLC litigation costs.................................................. 141,000 -- --
Amortization of excess of cost over fair value of net assets
acquired............................................................ 24,577 24,702 25,574
------------ ------------ ------------
Total operating costs and expenses.................................. 2,638,176 2,226,723 1,720,252
------------ ------------ ------------
OPERATING INCOME........................................................ 51,512 205,301 316,071
Other income (expense)--net............................................. 361 (1,894) (5,154)
Interest expense--net................................................... (46,356) (41,059) (52,751)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE............................................................. 5,517 162,348 258,166
Provision for income taxes.............................................. (7,381) (38,566) (9,714)
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE............................................................. (1,864) 123,782 248,452
Cumulative effect of change in accounting principle..................... -- -- (1,917)
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ (1,864) $ 123,782 $ 246,535
------------ ------------ ------------
------------ ------------ ------------
Weighted Average Shares Outstanding..................................... 132,390 124,374 123,393
EARNINGS (LOSS) PER SHARE:
Primary:
Income (loss) before cumulative effect of change in accounting
principle......................................................... $ (.01) $ 1.00 $ 2.01
Cumulative effect of change in accounting principle................. -- -- (.01)
------------ ------------ ------------
Net income (loss)................................................... $ (.01) $ 1.00 $ 2.00
------------ ------------ ------------
------------ ------------ ------------
Fully Diluted:
Income (loss) before cumulative effect of change in accounting
principle......................................................... $ (.01) $ .96 $ 1.89
Cumulative effect of change in accounting principle................. -- -- (.01)
------------ ------------ ------------
Net income (loss)................................................... $ (.01) $ .96 $ 1.88
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 20,252 $ 36,382
Short-term investments............................................................... 49,946 --
Accounts receivable, less allowance for doubtful accounts of $17,536 and $14,321,
respectively....................................................................... 544,430 367,672
Inventories.......................................................................... 336,516 281,398
Prepaid expenses and other current assets............................................ 24,619 26,992
Deferred income taxes................................................................ 107,322 111,750
------------ ------------
Total current assets............................................................... 1,083,085 824,194
Property, plant and equipment--net................................................... 571,051 437,194
Intangibles, less accumulated amortization of $110,298 and $94,654, respectively..... 131,051 146,646
Excess of cost over fair value of net assets acquired, less accumulated amortization
of $160,231 and $135,654, respectively............................................. 827,373 842,954
Investments and other assets......................................................... 28,999 27,576
Deferred income taxes, net of valuation allowance.................................... 58,891 8,885
Deferred financing costs, less accumulated amortization of $28,070 and $28,045,
respectively....................................................................... 6,401 13,309
------------ ------------
TOTAL ASSETS......................................................................... $2,706,851 $2,300,758
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................................... $ 272,041 $ 215,761
Accrued interest payable............................................................. 7,772 3,571
Income taxes payable................................................................. 20,703 33,904
Other accrued liabilities............................................................ 229,894 204,874
Current portion of long-term debt.................................................... 4,310 4,310
------------ ------------
Total current liabilities.......................................................... 534,720 462,420
Deferred income taxes................................................................ 21,457 22,221
Long-term debt....................................................................... 698,825 738,569
NLC litigation liability............................................................. 139,100 --
Other non-current liabilities........................................................ 139,596 162,205
------------ ------------
Total liabilities.................................................................. 1,533,698 1,385,415
------------ ------------
Commitments and contingencies (See Note 9)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized; no shares issued...... -- --
Common Stock, $.01 par value; 400,000,000 shares authorized; 137,144,412 and
126,034,911 shares issued, respectively............................................ 1,371 1,260
Additional paid-in capital........................................................... 925,166 666,190
Retained earnings.................................................................... 254,552 256,416
------------ ------------
1,181,089 923,866
Less-- Treasury Stock, at cost, 231,527 and 229,011 shares of Common Stock,
respectively................................................................... (7,271) (7,246)
--Unearned compensation........................................................... (665) (1,277)
------------ ------------
Total stockholders' equity......................................................... 1,173,153 915,343
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $2,706,851 $2,300,758
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS COMMON
-------------------- PAID-IN (ACCUMULATED STOCK IN UNEARNED
SHARES AMOUNT CAPITAL DEFICIT) TREASURY COMPENSATION
--------- --------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994......................... 60,131 $ 601 $ 502,423 $ (113,901) $ (18) $ --
Two-for-one stock split.......................... 60,131 601 (601) -- -- --
Exercise of stock options........................ 1,954 20 9,076 -- -- --
Treasury Stock transactions...................... -- -- 15 -- 1 --
Issuance of restricted stock..................... 15 -- 480 -- -- (389)
Tax benefit from reduction in a valuation
allowance for domestic deferred tax assets..... -- -- 32,335 -- -- --
Net income....................................... -- -- -- 246,535 -- --
--------- --------- ---------- ------------ --------- -------------
BALANCE, DECEMBER 31, 1994....................... 122,231 1,222 543,728 132,634 (17) (389)
Exercise of stock options and related tax
benefit........................................ 1,103 11 25,897 -- -- --
Stock issued for business acquisition............ 2,465 25 92,052 -- (7,229) (1,394)
Costs associated with the sale/issuance of Common
Stock.......................................... -- -- (1,100) -- -- --
Amortization of unearned compensation............ -- -- -- -- -- 506
Conversion of Convertible Junior Subordinated
Notes--net..................................... 236 2 5,613 -- -- --
Net income....................................... -- -- -- 123,782 -- --
--------- --------- ---------- ------------ --------- -------------
BALANCE, DECEMBER 31, 1995....................... 126,035 1,260 666,190 256,416 (7,246) (1,277)
Exercise of stock options and related tax
benefit........................................ 162 2 3,473 -- -- --
Amortization of unearned compensation............ -- -- -- -- -- 612
Conversion of Convertible Junior Subordinated
Notes--net..................................... 10,947 109 255,503 -- -- --
Treasury Stock transactions...................... -- -- -- -- (25) --
Net loss......................................... -- -- -- (1,864) -- --
--------- --------- ---------- ------------ --------- -------------
BALANCE, DECEMBER 31, 1996....................... 137,144 $ 1,371 $ 925,166 $ 254,552 $ (7,271) $ (665)
--------- --------- ---------- ------------ --------- -------------
--------- --------- ---------- ------------ --------- -------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss).......................................................... $ (1,864) $ 123,782 $ 246,535
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 129,136 110,140 97,350
NLC litigation costs-net................................................. 91,650 -- --
Purchased in-process technology-net...................................... -- 90,000 --
Loss from asset write-downs and divested businesses...................... 11,974 -- 3,153
Changes in assets and liabilities:
Accounts receivable.................................................... (171,135) (54,918) (95,035)
Inventories............................................................ (62,537) (67,218) (105,229)
Prepaid expenses and other current assets.............................. (2,228) (5,308) (4,446)
Deferred income taxes.................................................. 6,133 13,531 (50,435)
Accounts payable, income taxes payable and other accrued liabilities... 59,893 55,409 60,513
Other non-current liabilities.......................................... (23,439) (28,406) 4,605
Other.................................................................... 6,132 (5,185) 5,126
----------- ----------- -----------
Net cash provided by operating activities.................................. 43,715 231,827 162,137
----------- ----------- -----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment............................... (227,902) (159,441) (135,740)
Acquisitions, net of cash acquired....................................... (29,520) (2,775) --
Proceeds from sales of assets............................................ 4,368 2,339 8,210
Purchase of short-term investments....................................... (24,974) -- --
Investments in other assets.............................................. (3,700) (8,796) --
----------- ----------- -----------
Net cash used in investing activities...................................... (281,728) (168,673) (127,530)
----------- ----------- -----------
FINANCING ACTIVITIES:
Costs associated with the issuance of debt and Common Stock.............. (1,053) (1,051) (804)
Proceeds from the issuance of Flexible Term Notes........................ -- 10,800 --
Net proceeds from (repayments of) revolving credit facilities............ 231,000 (57,000) (26,645)
Redemption of Convertible Junior Subordinated Notes...................... (6,440) -- --
Repayment of debt........................................................ (4,310) (2,155) (16,710)
Proceeds from stock options.............................................. 2,686 17,506 9,096
----------- ----------- -----------
Net cash provided by (used in) financing activities........................ 221,883 (31,900) (35,063)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........................... (16,130) 31,254 (456)
Cash and cash equivalents, beginning of year............................... 36,382 5,128 5,584
----------- ----------- -----------
Cash and cash equivalents, end of year..................................... $ 20,252 $ 36,382 $ 5,128
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid........................................................ $ 56,381 $ 36,973 $ 70,815
Interest paid............................................................ $ 41,766 $ 47,801 $ 45,594
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of General Instrument Corporation (the "Company"
or "GI") and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES The preparation of the accompanying consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION The Company recognizes revenue when products are
shipped and services are performed.
PRODUCT WARRANTY The Company warrants its products against defects and
accrues estimated warranty expense at the time of sale. Actual warranty costs
incurred are charged against the accrual when paid.
CASH EQUIVALENTS The Company considers all highly liquid debt instruments
with a maturity of three months or less at the date of purchase to be cash
equivalents.
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 5 to 35 years
for buildings and improvements; economic useful life or lease term, whichever is
shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment.
DEFERRED FINANCING COSTS Financing costs are capitalized and amortized
using the interest method over the term of the related financing.
INTANGIBLE ASSETS Intangible assets consist primarily of patents which are
being amortized on a straight-line basis over 5 to 17 years.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 35 to 40 years. Management continually reassesses the appropriateness
of both the carrying value and remaining life of the excess of cost over fair
value of net assets acquired by assessing recoverability based on forecasted
operating cash flows, on an undiscounted basis, and other factors. Management
believes that, as of December 31, 1996, the carrying value and remaining life of
the excess of cost over fair value of net assets acquired are appropriate.
LONG-LIVED ASSETS The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121
prescribes the accounting treatment for long-lived assets, identifiable
intangibles and goodwill related to those assets when there are indications that
the carrying values of those assets may not be recoverable. Whenever events
indicate that the carrying values of such assets may not be recoverable, the
Company evaluates the carrying values of such assets using future undiscounted
cash flows. The adoption of SFAS No. 121 did not have a material impact on the
Company's financial position or operations.
15
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION The Company has determined the U.S. dollar to
be the functional currency of all foreign subsidiaries. Accordingly, gains and
losses recognized as a result of translating foreign subsidiaries' monetary
assets and liabilities from local foreign currencies to U.S. dollars are
reflected in the accompanying consolidated statements of operations. To hedge
certain foreign currency exposures on monetary assets and liabilities, the
Company enters into foreign currency forward exchange contracts on a
month-to-month basis.
BENEFIT PLANS Substantially all employees, including certain employees of
divested businesses, are covered by pension plans. The benefits under the plans
are based on years of service and compensation
levels. Contributions to pension funds are made when actuarial computations
prescribe such funding.
INCOME TAXES Deferred income taxes reflect the future tax consequences of
differences between the financial reporting and tax bases of assets and
liabilities. Deferred income taxes have been provided for the income tax
liability which would be incurred on the repatriation of undistributed earnings
of the Company's foreign subsidiaries, except for locations where the Company
has designated earnings to be permanently reinvested.
EARNINGS (LOSS) PER SHARE Primary earnings (loss) per share is computed
based on the weighted average number of common and common equivalent shares
outstanding during the applicable periods. Fully diluted earnings (loss) per
share computations for all periods are based on net income (loss) adjusted for
interest and amortization of debt issuance costs related to convertible debt and
the weighted average number of common shares outstanding adjusted for the
dilutive effect of stock options and convertible securities. The computations of
primary and fully diluted earnings (loss) per share assume the exercise of stock
options using the treasury stock method, and to the extent that stock options
are anti-dilutive, they are excluded from the computation. For 1996, the
computation of fully diluted earnings (loss) per share is anti-dilutive;
therefore, the amounts reported for primary and fully diluted earnings (loss)
per share are the same.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to
conform to the current year presentation.
2 RESTRUCTURING OF GENERAL INSTRUMENT CORPORATION
On January 7, 1997, the Company announced its intention to separate the
Company into three publicly-traded companies to focus on global growth
opportunities. The restructuring, expected to be completed in the third quarter
of 1997 through a tax-free distribution to stockholders, will create three
independent companies: NextLevel Systems, Inc., a leading worldwide supplier of
systems and components for high-performance networks, delivering video, voice
and Internet/data services to the cable, telephony and satellite markets;
CommScope, Inc., the world's largest manufacturer of coaxial cable for cable
television applications and a leading supplier of high-performance electronic
cables; and General Semiconductor, Inc. (which will change its name from General
Instrument Corporation), a world leader in the manufacture of low-to-medium
power rectifiers and transient voltage suppressors. The restructuring is subject
to the approval of the holders of a majority of the outstanding shares of the
Company, the receipt of a ruling from the Internal Revenue Service that the
transactions related to the separation of NextLevel Systems, Inc., CommScope,
Inc. and General Semiconductor, Inc. are not taxable to the Company or its
stockholders, and the absence of events or developments that would have a
material adverse impact on the Company or its stockholders. In connection with
the restructuring, NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. will enter into various agreements that will generally
provide for the
16
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
2 RESTRUCTURING OF GENERAL INSTRUMENT CORPORATION (CONTINUED)
separation and distribution of the operating assets and liabilities and pension
plan assets and liabilities of the Company, as well as tax sharing, transition
services and other matters.
In connection with the restructuring, the Company recorded a charge of $12
million to selling, general and administrative expense in the fourth quarter of
1996, which included $8 million for the write-down of various assets to their
estimated net realizable values and $4 million for transaction costs incurred
related to the restructuring. During 1997, the Company expects to incur $50 to
$70 million of charges for costs related to dividing the Company's Taiwan
operations between NextLevel Systems, Inc. and General Semiconductor, Inc. and
additional transaction costs related to the restructuring.
3 ACQUISITIONS
In May 1996, CommScope, Inc. of North Carolina, an indirect wholly-owned
subsidiary of the Company, acquired certain assets of Teledyne, Inc.'s
Thermatics unit, a high performance wire and cable manufacturer specializing in
high temperature cables, for a net purchase price of $18 million. In June 1996,
the Company acquired the assets of the Magnitude-Registered Trademark-MPEG-2/DVB
product family of Compression Labs Inc. for a net purchase price of $13 million.
The Magnitude line consists of modular video and audio encoders and decoders for
the delivery of entertainment and information services over cable, satellite and
telephone networks. Both acquisitions were accounted for as purchases and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition.
In September 1995, the Company acquired all the outstanding shares of Next
Level Communications ("NLC") not previously owned by the Company, including
shares issued upon conversion of all of NLC's outstanding options and warrants.
The total purchase price of $91 million consisted of 2.2 million common shares
of the Company valued at $75 million, Company stock options valued at $10
million and cash of $6 million. NLC is involved with the development of a next
generation broadband access system, NLevel(3), utilizing switched-digital access
technology. NLevel(3) is designed to provide delivery of video, voice and
Internet/data services over both copper-twisted-pair and fiber-to-the-curb
networks. The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair value at
the date of acquisition. The purchase price of $91 million, plus the $2 million
of costs directly attributable to the completion of the acquisition, have been
allocated to the assets and liabilities acquired. Approximately $90 million of
the total purchase price represented the value, net of deferred income taxes, of
NLC's in-process technology. Since technological feasibility had not yet been
achieved and there was no alternative future use for the technology being
developed, the amounts allocated to the in-process technology were expensed
concurrent with the purchase. The net-of-tax charge of $90 million included $140
million associated with this technology charged to operating income, offset by a
non-cash tax benefit of $50 million.
4 INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Raw materials.......................................... $ 134,807 $ 142,573
Work in process........................................ 38,135 38,565
Finished goods......................................... 163,574 100,260
----------------- -----------------
$ 336,516 $ 281,398
----------------- -----------------
----------------- -----------------
</TABLE>
17
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
5 PROPERTY, PLANT AND EQUIPMENT-NET
Property, plant and equipment-net consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Land and land improvements............................. $ 96,563 $ 96,152
Buildings, improvements and leasehold improvements..... 121,446 78,734
Machinery and equipment................................ 747,189 575,266
----------------- -----------------
965,198 750,152
Less accumulated depreciation.......................... (394,147) (312,958)
----------------- -----------------
$ 571,051 $ 437,194
----------------- -----------------
----------------- -----------------
</TABLE>
6 OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Salaries and compensation liabilities.................. $ 53,252 $ 48,345
Payroll, state and local taxes......................... 15,017 12,040
Product and warranty liabilities....................... 83,207 68,628
Other.................................................. 78,418 75,861
----------------- -----------------
$ 229,894 $ 204,874
----------------- -----------------
----------------- -----------------
</TABLE>
7 INCOME TAXES
The domestic and foreign components of income (loss) before income taxes and
cumulative effect of a change in accounting principle are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Domestic...................................................................... $ (39,649) $ 78,390 $ 194,112
Foreign....................................................................... 45,166 83,958 64,054
---------- ---------- ----------
Total......................................................................... $ 5,517 $ 162,348 $ 258,166
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
18
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
7 INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- -----------
Current:
Federal.................................................................... $ 25,278 $ 35,707 $ 26,153
Foreign.................................................................... 9,413 20,586 19,680
State...................................................................... 10,822 14,367 7,614
---------- ---------- -----------
45,513 70,660 53,447
---------- ---------- -----------
Deferred:
Federal.................................................................... (42,119) (30,864) 55,534
Foreign.................................................................... 4,398 (901) 3,543
State...................................................................... 39 1,328 3,941
---------- ---------- -----------
(37,682) (30,437) 63,018
---------- ---------- -----------
Net change in valuation allowance.......................................... (450) (1,657) (106,751)
---------- ---------- -----------
Provision for income taxes................................................. $ 7,381 $ 38,566 $ 9,714
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The following table presents the principal reasons for the difference
between the actual income tax provision and the tax provision computed by
applying the U.S. federal statutory income tax rate to income before income
taxes and cumulative effect of a change in accounting principle:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- ---------- ----------
Federal income tax provision at 35%............................................. $ 1,931 $ 56,822 $ 90,358
Valuation allowance benefit..................................................... (450) (1,657) (106,751)
State income taxes-net.......................................................... 7,060 10,202 7,511
Foreign operations.............................................................. (5,409) (21,227) 7,586
Non-deductible purchase accounting item......................................... 8,451 8,696 8,951
Settlement of tax audits........................................................ -- (12,000) --
Other-net....................................................................... (4,202) (2,270) 2,059
--------- ---------- ----------
Provision for income taxes...................................................... $ 7,381 $ 38,566 $ 9,714
--------- ---------- ----------
--------- ---------- ----------
Effective income tax rate....................................................... 133.8% 23.8% 3.8%
</TABLE>
Income taxes related to foreign operations in 1996 and 1995 reflect the
Company's ability to recognize the benefit of foreign tax credits. The amounts
included in "Other-net" in 1996 and 1995 primarily relate to the benefit
associated with the Company's Foreign Sales Corporation, partially offset by
other permanent items. The amount included in "Other-net" in 1994 primarily
reflects miscellaneous non-deductible items.
19
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
7 INCOME TAXES (CONTINUED)
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET LIABILITY NET ASSET LIABILITY NET
---------- --------- ---------- ---------- --------- ----------
Current Deferred Income Taxes:
Domestic net operating loss carryforwards......... $ -- $ -- $ -- $ 11,382 $ -- $ 11,382
Accounts receivable and inventory reserves........ 37,294 -- 37,294 43,054 -- 43,054
Product and warranty liabilities.................. 25,555 -- 25,555 15,376 -- 15,376
Employee benefits................................. 15,008 -- 15,008 13,870 -- 13,870
Other current..................................... 29,465 -- 29,465 28,068 -- 28,068
---------- --------- ---------- ---------- --------- ----------
$ 107,322 $ -- $ 107,322 $ 111,750 $ -- $ 111,750
---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- ---------- --------- ----------
Non-Current Deferred Income Taxes:
Domestic capital loss carryforwards............... $ 17,518 $ -- $ 17,518 $ 25,336 $ -- $ 25,336
Tax credit carryforwards.......................... 13,944 -- 13,944 7,091 -- 7,091
Fixed and intangible assets....................... (48,621) 1,218 (49,839) (3,296) 50,348 (53,644)
Environmental liabilities......................... 14,755 -- 14,755 1,503 (12,302) 13,805
Litigation liabilities............................ 48,955 -- 48,955 50 (412) 462
Employee benefits................................. 21,532 -- 21,532 2,193 (18,448) 20,641
Product and warranty liabilities.................. -- -- -- 5,629 -- 5,629
Other non-current................................. 10,585 20,239 (9,654) (1,576) 3,035 (4,611)
---------- --------- ---------- ---------- --------- ----------
78,668 21,457 57,211 36,930 22,221 14,709
Valuation allowance............................... (19,777) -- (19,777) (28,045) -- (28,045)
---------- --------- ---------- ---------- --------- ----------
$ 58,891 $ 21,457 $ 37,434 $ 8,885 $ 22,221 $ (13,336)
---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- ---------- --------- ----------
</TABLE>
Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $9 and $30 million in 1996 and 1995, respectively, as
those earnings are considered to be permanently reinvested. Determining the tax
liability that would arise if these earnings were remitted is not practicable.
As a result of adopting SFAS No. 109, "Accounting for Income Taxes,"
effective January 1, 1993, the Company recorded a valuation allowance to fully
reserve its domestic deferred tax assets. The valuation allowance was reduced
during 1994 to the extent that the Company generated domestic taxable income,
resulting in an income tax benefit of $77 million. In addition, based on
operating trends, positive industry and technological developments and
management's assessment of expected domestic taxable income included in the
Company's planning process, the Company recorded a further reduction to the
valuation allowance, as of December 31, 1994, resulting in an income tax benefit
of $30 million.
The valuation allowance which exists at December 31, 1996 relates
principally to domestic capital loss carryforwards, which expire in 2002. The
valuation allowance will be reduced when and if the Company generates domestic
capital gains.
During 1996 and 1995, the Company settled certain tax matters which resulted
in a $12 million credit to income taxes in 1995 and $8 and $36 million of
credits to goodwill in 1996 and 1995, respectively, since such matters related
to the period prior to August 1990, when affiliates of Forstmann Little & Co., a
private investment firm, acquired the Company.
20
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
8 LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Senior bank indebtedness:
Revolving credit facilities.......................... $ 414,000 $ 183,000
Taiwan loan.......................................... 50,384 54,694
Flexible Term Notes.................................. 10,800 10,800
Convertible Junior Subordinated Notes.................. 227,951 494,385
-------- --------
703,135 742,879
Less current maturities................................ 4,310 4,310
-------- --------
Long-term debt......................................... $ 698,825 $ 738,569
-------- --------
-------- --------
</TABLE>
In August 1996, the Company amended and restated its senior bank credit
agreement (as further amended and restated, the "Credit Agreement") to lower its
interest costs and commitment fees, increase available credit commitments and
obtain greater operating flexibility with less restrictive financial and
operating covenants. The Credit Agreement, which matures on December 31, 2001,
provides for a $650 million unsecured revolving credit facility. Amounts
outstanding as of December 31, 1996 under this facility are classified as
long-term based on the Company's intent and ability to maintain these loans on a
long-term basis. The Credit Agreement requires the Company to pay a facility fee
of .125% per annum on the total commitment. The Credit Agreement permits the
Company to choose between three interest rate options: the Adjusted Base Rate,
which is based on the prime rate of The Chase Manhattan Bank, a Eurodollar rate
(LIBOR) plus .225% and a competitive bid loan rate. The interest rates and
facility fees are subject to change based on the Company's credit ratings as
issued by nationally recognized statistical rating companies specified in the
Credit Agreement. The Credit Agreement contains financial and operating
covenants, including limitations on contingent obligations and liens, and
requires the maintenance of certain financial ratios. In addition, under the
Credit Agreement, certain changes in control of the Company would cause an event
of default, and the banks could declare all outstanding borrowings under the
Credit Agreement immediately due and payable. None of the restrictions contained
in the Credit Agreement are expected to have a significant effect on the ability
of the Company to operate. As of December 31, 1996 and 1995, the Company was in
compliance with all financial and operating covenants under existing credit
agreements and other arrangements with debt holders. At December 31, 1996 and
1995, the Company had borrowings of $414 and $183 million, respectively, under
its revolving credit facilities and available credit of $233 and $264 million,
respectively.
The Company has a $60 million loan agreement with a consortium of banks in
Taiwan (the "Taiwan Loan Agreement"). Borrowings under the Taiwan Loan Agreement
are secured by a mortgage on land and buildings in Taiwan, and the interest rate
under the Taiwan Loan Agreement is equal to the Singapore Interbank Offered Rate
(SIBOR) plus 3/4%. At December 31, 1996, the variable rate was 6.75%. The
borrowings mature on June 30, 2000 and require nine semi-annual installments of
$2.2 million payable on June 30 and December 31, which began on December 31,
1995, with the remaining balance to be paid at maturity.
In January 1995, CommScope, Inc. of North Carolina, an indirect wholly-owned
subsidiary of the Company, entered into an $11 million loan agreement in
connection with the issuance of notes by the Alabama State Industrial
Development Authority (the "Flexible Term Notes"). Borrowings under the loan
agreement bear interest at variable rates based upon current market conditions
for short-term financing. At December 31, 1996, the variable rate was 6.28%. The
loan agreement will mature on January 1, 2015,
21
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
8 LONG-TERM DEBT (CONTINUED)
and any remaining amounts outstanding under the Flexible Term Notes will be due
and payable on that date.
The Company consummated a public offering of an aggregate principal amount
of $500 million of 5% Convertible Junior Subordinated Notes (the "Notes") in
1993. The Notes mature on June 15, 2000 and have semi-annual interest payments
on each June 15 and December 15. The Notes have been redeemable since June 18,
1996 in whole or in part at the Company's option at amounts decreasing from
102.857% of principal plus accrued interest at June 18, 1996 to 100% of
principal at June 15, 2000. Holders of the Notes have a repurchase right,
pursuant to which, in the event certain changes of control of the Company occur,
each holder will have the right, at the holder's option, to require the Company
to repurchase all or any part of the holder's Notes at 100% of principal plus
accrued interest to the repurchase date. The Notes are convertible into Common
Stock at a conversion price of $23.75 per share. In May 1996, the Company issued
a notice to redeem $250 million in principal amount of the Notes. Of the Notes
called, $244 million in principal amount were converted into the Company's
Common Stock prior to the redemption date, with the remaining $6 million
redeemed for cash. Additionally, $16 and $6 million in principal amount of Notes
that were not called for redemption were also converted into the Company's
Common Stock during 1996 and 1995, respectively. These conversions resulted in
the issuance of 11.2 million shares of Common Stock, and approximately 9.6
million shares of Common Stock are reserved for issuance upon conversion of the
remaining outstanding Notes. In connection with the Common Stock conversions,
$4.4 million was charged to additional paid-in capital, net of the related tax
benefit, for unamortized deferred financing costs and accrued but unpaid
interest related to the converted Notes. The estimated fair value of the Notes,
which are publicly traded, as of December 31, 1996 and 1995 was $244 and $544
million, respectively, based on quoted market prices.
The weighted average interest rate on the Company's long-term debt at
December 31, 1996 and 1995 was 5.66% and 5.60%, respectively.
9 COMMITMENTS AND CONTINGENCIES
The Company leases office space, manufacturing and warehouse facilities and
transportation and other equipment under operating leases which expire at
various dates through the year 2009. Rent expense was $23, $17 and $14 million
in 1996, 1995 and 1994, respectively. In August 1996, the Company entered into a
seven-year operating lease agreement for two administrative facilities. The
total cost of the facilities covered by this lease agreement is limited to $115
million. The lease provides for a substantial residual value guarantee
(approximately 83% of the total cost) by the Company which is due upon
termination of the lease and includes purchase and renewal options. Upon
termination of the lease, the Company can either exercise its purchase option,
or the facilities can be sold to a third party. The Company expects the fair
market value of the leased facilities to substantially reduce or eliminate the
Company's payment under the residual value guarantee. The table of future
minimum operating lease payments below excludes any payment related to this
guarantee.
22
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
9 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments required under operating leases as of December
31, 1996 were as follows:
<TABLE>
<S> <C>
1997............................................................... $ 11,558
1998............................................................... 13,976
1999............................................................... 12,241
2000............................................................... 10,793
2001............................................................... 9,622
Thereafter......................................................... 24,706
</TABLE>
The Company has approximately $60 million in letters of credit outstanding
at December 31, 1996.
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 is also involved in
remediation programs, principally with respect to former manufacturing sites,
which are proceeding in conjunction with federal and state regulatory oversight.
In addition, the Company is currently named as a potentially responsible party
with respect to the disposal of wastes at nine hazardous waste sites located in
six states and Puerto Rico.
The Company engages independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named as a
potentially responsible party. Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. Although the Company estimates, based on assessments
and evaluations made by management, that its exposure with respect to these
environmental matters could be as high as $58 million, the Company believes that
the reserve for environmental matters of $38 million at December 31, 1996 ($35
million at December 31, 1995) is reasonable and adequate. However, there can be
no assurance that the ultimate resolution of these matters will approximate the
amount reserved.
Based on the factors discussed above, capital expenditures and expenses for
the Company's remediation programs, and the proportionate share of the cost of
the necessary investigation and eventual remedial work that may be needed to be
performed at the sites for which the Company has been named as a potentially
responsible party, are not expected to have a material adverse effect on the
Company's financial statements. The Company's present and past facilities have
been in operation for many years, and over that time in the course of those
operations, the Company's 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.
In April 1995, prior to the Company's acquisition of NLC in September 1995,
DSC Communications Corporation and DSC Technologies Corporation (collectively,
"DSC") brought suit against NLC and the founders of NLC. On March 28, 1996, a
jury verdict was reached in the case which stated that the founders of NLC
breached certain employee agreements with DSC, failed to disclose and diverted a
corporate opportunity of DSC, misappropriated DSC trade secrets and conspired to
take certain of the foregoing
23
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
9 COMMITMENTS AND CONTINGENCIES (CONTINUED)
actions, and that NLC used or benefited from the diversion of corporate
opportunity and misappropriation of trade secrets. In June 1996, a final
judgment against NLC and the individual defendants was entered in favor of DSC,
in a total amount of $137 million. However, the court denied DSC's request for
entry of permanent injunctive relief. In June 1996, a pre-tax charge to earnings
of $141 million was recorded, reflecting the judgment and costs of litigation.
Since the Company has the ability and intent to pay this judgment utilizing
borrowings under its Credit Agreement, the liability has been classified as long
term. Both sides appealed to the U.S. Court of Appeals for the Fifth Circuit,
and a decision was rendered in February 1997 (See Note 16).
During October 1995, the Company and certain of its officers and directors
were named as defendants in purported class action complaints in which the
plaintiffs alleged that during various periods, generally extending from March
21, 1995 through October 18, 1995, the Company and certain officers and
directors violated certain federal securities laws by making false and
misleading statements about the Company's financial prospects, and as a result,
the plaintiffs allege that the market value of the Company Stock declined,
thereby causing unspecified monetary damages to the plaintiffs. The Company
intends to vigorously defend these allegations.
In February 1996, the Company and NLC were named as defendants in a
complaint in which the plaintiffs, who are some of the former holders of
preferred stock of NLC, allege, among other things, that the defendants violated
federal securities laws by making misrepresentations and omissions and breached
fiduciary duties to NLC in connection with the acquisition by the Company of NLC
in September 1995. Plaintiffs seek, among other things, unspecified compensatory
and punitive damages and attorneys' fees and costs. The Company intends to
vigorously defend these allegations.
While the ultimate outcome of the matters described above cannot be
determined, management does not believe that the final disposition of these
matters beyond the amounts previously provided for in the financial statements
will have a material adverse effect on the Company's financial statements.
24
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
10 EMPLOYEE BENEFITS
Net pension cost consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
---------------------- --------------------- ---------------------
<CAPTION>
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
----------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................................ $ 2,464 $ 4,577 $ 1,999 $ 3,543 $ 2,113 $ 3,149
Interest................................................ 7,137 5,266 6,832 4,967 6,580 4,851
Loss (return) on plan assets............................ (7,441) (2,105) (22,872) (1,885) 5,974 (2,092)
Net amortization and deferral........................... 1,056 1,237 16,659 203 (12,097) (99)
----------- --------- ---------- --------- ---------- ---------
Net pension cost........................................ $ 3,216 $ 8,975 $ 2,618 $ 6,828 $ 2,570 $ 5,809
----------- --------- ---------- --------- ---------- ---------
----------- --------- ---------- --------- ---------- ---------
</TABLE>
The funded status of the pension plans and the related amounts as recorded
in the accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
DOMESTIC FOREIGN DOMESTIC FOREIGN
---------- ---------- ---------- ----------
Actuarial present value of:
Vested benefits................................................. $ 87,354 $ 14,607 $ 87,503 $ 11,657
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated benefits............................................ $ 90,148 $ 44,634 $ 90,157 $ 39,305
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Projected benefit obligation.................................... $ 101,435 $ 89,471 $ 99,693 $ 82,768
Market value of plan assets....................................... 89,703 33,166 83,443 30,759
---------- ---------- ---------- ----------
Funded status..................................................... (11,732) (56,305) (16,250) (52,009)
Unrecognized loss (gain).......................................... (1,106) 32,634 2,947 32,069
---------- ---------- ---------- ----------
Accrued pension obligation........................................ $ (12,838) $ (23,671) $ (13,303) $ (19,940)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Actuarial assumptions:
Discount rate................................................... 7.75% 6.75% 7.25% 6.5%
Investment return............................................... 9% 8% 9% 8%
Compensation increases.......................................... 4.75% 6% 4.25% 6%
</TABLE>
The impact of the changes in the actuarial assumptions, as of December 31,
1996, have been reflected in the funded status of the domestic and foreign
pension plans, and the Company believes that such changes will not have a
material effect on net pension cost in 1997.
The domestic pension plans consist principally of a qualified retirement
plan which has satisfied the full funding limitation requirements under the
Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions of $4
million were made in 1996, and no contributions were made to the plan during
1995. It is anticipated that no pension contributions will be required under
ERISA during 1997. In 1994, the Company established unfunded supplemental
retirement plans for certain members of management. Net pension cost and accrued
pension obligations for these plans are included in the amounts above. The
foreign pension plans consist principally of a Taiwan pension plan, which is
funded under Taiwan's statutory requirements. Pension contributions for the
Taiwan pension plan were $5, $6 and $4 million in 1996, 1995 and 1994,
respectively, and are expected to approximate $5 million in 1997. Domestic plans
assets consist of fixed income and equity securities. Foreign plans assets
principally consist of fixed income securities.
25
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
10 EMPLOYEE BENEFITS (CONTINUED)
CommScope, Inc. of North Carolina, an indirect wholly owned subsidiary of
the Company, maintains an Employees Profit Sharing and Savings Plan (the "Profit
Sharing and Savings Plan"). The majority of contributions to the Profit Sharing
and Savings Plan are made at the discretion of CommScope, Inc. of North
Carolina's Board of Directors. In addition, eligible employees may elect to
contribute up to 10% of their salaries. The subsidiary contributes an amount
equal to 50% of the first 4% of the employee's salary that the employee
contributes. During the years ended December 31, 1996, 1995 and 1994, the
subsidiary contributed $7, $7 and $6 million, respectively, to the Profit
Sharing and Savings Plan, of which $6, $6 and $5 million, respectively, was
discretionary.
The Company maintains a voluntary savings plan covering all domestic
non-union employees. Eligible employees not covered by the Profit Sharing and
Savings Plan (as described in the preceding paragraph) may elect to contribute
up to 10% of their salaries. The Company contributes an amount equal to 50% of
the first 6% of the employee's salary that the employee contributes.
Contributions were $3, $3 and $2 million for the years ended December 31, 1996,
1995 and 1994, respectively.
11 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
POSTRETIREMENT. The Company maintains an unfunded contributory group
medical plan (the "Plan") for all full-time U.S. employees not covered by a
collective bargaining agreement and who meet defined age and service
requirements. The Company recognizes the cost of providing and maintaining
postretirement benefits during employees' active service periods. The Plan is
the primary provider of benefits for retirees up to age 65. After age 65,
Medicare becomes the primary provider. Net postretirement benefit cost consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost......................................................................... $ 997 $ 669 $ 663
Interest............................................................................. 1,510 1,522 1,424
Net amortization and deferral........................................................ (515) (599) (515)
--------- --------- ---------
Net postretirement benefit cost...................................................... $ 1,992 $ 1,592 $ 1,572
--------- --------- ---------
--------- --------- ---------
</TABLE>
The status of the Plan and the related amounts as recorded in the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees................................................................. $ 12,691 $ 13,721
Active participants...................................................... 8,970 8,724
------- -------
Total APBO................................................................. 21,661 22,445
Unrecognized prior service cost............................................ 7,532 8,047
Unrecognized gain (loss)................................................... 1,959 (97)
------- -------
Accrued postretirement benefit obligation.................................. $ 31,152 $ 30,395
------- -------
------- -------
Discount rate used in determining APBO..................................... 7.75% 7.25%
</TABLE>
The assumed rate of future increases in health care cost during 1996 and
1995 was 14% and 15%, respectively, for pre-age 65 retirees, and 11% and 12%,
respectively, for post-age 65 retirees, and is
26
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
11 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
expected to decline to 6% by the year 2006. Under the Plan, the actuarially
determined effect of a one percentage point increase in the assumed health care
cost trend rate on annual net postretirement benefit cost and the APBO would be
$.6 and $4 million, respectively.
POSTEMPLOYMENT. Effective January 1, 1994, the Company adopted SFAS No.
112, "Employers' Accounting for Postemployment Benefits." Under SFAS No. 112,
the Company is required to accrue the cost of providing benefits to employees
after employment but before retirement. The postemployment benefit obligation
relates principally to medical costs for former employees on long-term
disability. Upon adoption of SFAS No. 112, the Company recorded a cumulative
effect charge to income of $2 million to recognize the accumulated
postemployment benefit obligation as of January 1, 1994.
12 STOCKHOLDERS' EQUITY
COMMON SHARES. In April 1995, the stockholders approved an amendment to the
Company's Certificate of Incorporation which increased the number of authorized
shares of Common Stock from 175 to 400 million.
STOCK OPTION AGREEMENTS. In May 1993, the stockholders of the Company
approved the General Instrument Corporation 1993 Long-Term Incentive Plan ("1993
Plan") which provides for the granting of stock options, stock appreciation
rights, restricted stock, performance units, performance shares and phantom
stock to employees of the Company and its subsidiaries and the granting of stock
options to directors of the Company. In March 1996, the stockholders approved an
increase of 6 million shares of Common Stock that may be awarded under the 1993
Plan.
The following table summarizes stock option activity relating to the
Company's stock option plans.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at January 1, 1994...................................................... 5,059 $ 12.72
Grants.............................................................................. 4,470 27.41
Exercised........................................................................... (1,954) 4.64
Canceled............................................................................ (2,638) 28.60
-----------
Outstanding at December 31, 1994.................................................... 4,937 20.74
Grants.............................................................................. 8,933 27.24
Exercised........................................................................... (1,103) 15.88
Canceled............................................................................ (3,116) 29.44
-----------
Outstanding at December 31, 1995.................................................... 9,651 24.50
Grants.............................................................................. 1,792 26.21
Exercised........................................................................... (162) 16.52
Canceled............................................................................ (679) 26.37
-----------
Outstanding at December 31, 1996.................................................... 10,602 $ 24.79
-----------
-----------
</TABLE>
27
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
12 STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable under the Company's stock option plans.
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
EXERCISE PRICES 31, 1996 TERM (YEARS) PRICE 31, 1996 PRICE
- - ------------------------------------------ ----------------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$1.51--$2.75.............................. 106 6.4 $ 2.23 106 $ 2.23
15.88--24.75.............................. 4,189 8.2 20.40 943 19.81
25.19--29.88.............................. 5,188 8.3 26.93 2,108 26.52
30.06--39.50.............................. 1,119 8.7 33.43 184 36.37
</TABLE>
At December 31, 1996 and 1995, 5.2 and .3 million shares, respectively, were
reserved for future awards under the Company's stock award plans.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Since the exercise price of all stock options granted under the 1993
Plan in 1996, 1995 and 1994 was equal to the closing price of the Common Stock
on the New York Stock Exchange on the date of grant, no compensation expense has
been recognized by the Company for its stock-based compensation plans during
these years other than for restricted stock agreements. Compensation expense
would have been $22 and $7 million in 1996 and 1995, respectively, had
compensation cost for stock options awarded in 1996 and 1995 under the Company's
stock option agreements been determined based upon the fair value at the grant
date consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," and the Company's pro forma net income/loss and
fully diluted earnings/loss per share would have been a net loss of $15 million
and $0.12 loss per share for 1996 and earnings of $119 million and $0.93
earnings per share for 1995. The weighted-average per share fair value of the
options granted during 1996 and 1995 was estimated as $10.80 and $10.00,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expected life (years)........................................................... 4.0 4.0
Risk-free interest rate......................................................... 6.18% 6.21%
Expected volatility............................................................. 43% 38%
Expected dividend yield......................................................... 0% 0%
</TABLE>
The pro forma effect on net income/loss and earnings/loss per share for 1996
and 1995 may not be representative of the pro forma effect in future years
because it includes compensation cost on a straight-line basis over the vesting
periods of the grants and does not take into consideration the pro forma
compensation costs for grants made prior to 1995.
In connection with the acquisition of NLC, the Company entered into
restricted stock agreements with NLC stockholders who, prior to the merger, held
NLC common stock that was subject to repurchase rights. The repurchase rights
generally permit the Company to repurchase shares of common stock upon certain
terminations of employment. At the acquisition date, unearned compensation,
based on the unamortized excess of the market value of the shares awarded over
the price paid by the recipient at the date of grant, was charged to
stockholders' equity and is being amortized to expense over the vesting period,
which expires in July 1999.
28
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
12 STOCKHOLDERS' EQUITY (CONTINUED)
STOCKHOLDER RIGHTS PLAN. On January 6, 1997, the Board of Directors adopted
a stockholder rights plan designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder, subsequent to the
distribution date of January 24, 1997, receives a dividend of one right for each
outstanding share of Common Stock. The rights are attached to, and presently
only trade with, the Common Stock and currently are not exercisable. Except as
specified below, upon becoming exercisable, all rights holders will be entitled
to purchase from the Company one one-thousandth of a share of Series A
Participating Preferred Stock at a price of $100.
The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement that
a person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock, or (ii) 10 business days following a person's or
group's commencement of, or announcement of, an 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 to
purchase Common Stock having a market value (immediately prior to such
acquisition) of twice the exercise price of the right. The Company may redeem
the rights for $0.01 each at any time prior to such acquisition. The rights will
expire on January 6, 2007, unless earlier redeemed.
In connection with the rights plan, the Board of Directors approved the
creation of, out of the authorized but unissued shares of Common Stock of the
Company, a Series A Junior Participating Preferred Stock ("Participating
Preferred Stock"), consisting of .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.
13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Derivative financial instruments are primarily used by the Company to reduce
market risk arising from changes in foreign exchange and interest rates. The
Company does not use derivative financial instruments for trading purposes, nor
does it engage in currency or interest rate speculation. Derivatives used by the
Company consist of foreign exchange, interest rate and other instruments. The
Company believes that the various counterparties with which the Company enters
into these agreements consist of only financially sound institutions and,
accordingly, believes that the credit risk for non-performance of these
contracts is remote. The Company monitors its underlying market risk exposures
on an ongoing basis and believes that it can modify or adapt its hedging
strategies as needed.
FOREIGN EXCHANGE INSTRUMENTS. The Company enters into forward exchange
contracts on a month-to-month basis to hedge foreign currency exposure with
regard to certain monetary assets and liabilities denominated in currencies
other than the U.S. dollar. These contracts generally do not subject the
Company's results of operations to risk of exchange rate movements because gains
and losses on these contracts generally offset, in the same period, gains and
losses on the monetary assets and liabilities being hedged.
On a selective basis, the Company enters into forward exchange and purchased
option contracts to hedge the currency exposure of contractual and other firm
commitments denominated in foreign currencies. The Company may also enter into
forward exchange and purchased option contracts designed to
29
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
hedge the currency exposure of anticipated, but not yet committed, transactions
expected to be denominated in foreign currencies. The purpose of these
activities is to protect the Company from the risk that the eventual net cash
flows in U.S. dollars from foreign receivables and payables will be adversely
affected by changes in exchange rates. Gains and losses on hedges related to
contractual and other firm commitments are deferred and recognized in the
Company's results of operations in the same period as the gain or loss from the
underlying transactions. Gains and losses on forward exchange contracts used to
hedge anticipated, but not yet committed, transactions are recognized in the
Company's results of operations as changes in exchange rates for the applicable
foreign currencies occur. Historically, foreign exchange contracts with respect
to contractual and other firm commitments and anticipated, but not yet
committed, transactions have been short-term in nature. In addition, purchased
options have had no intrinsic value at the time of purchase.
The Company generally settles forward exchange contracts at maturity at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of contract premium or discount.
The amortization of these premiums or discounts during each of the three years
in the period ended December 31, 1996 was not significant. During 1995, in
response to first half of the year appreciation in the New Taiwan dollar, the
Company increased the volume of forward exchange contracts utilized to hedge its
cash flows in Taiwan. As of December 31, 1996 and 1995, the Company had
outstanding forward exchange contracts in the amounts of $12 and $162 million,
respectively, comprised of foreign currencies which were to be purchased
(principally the Irish punt in 1996 and the New Taiwan dollar in 1995) and $43
and $46 million, respectively, comprised of foreign currencies which were to be
sold (principally the Japanese yen, Canadian dollar and German mark). All
outstanding forward exchange contracts at December 31, 1996 and 1995 mature
within six months, and the fair values of such contracts approximated their
carrying values. Accordingly, deferred gains or losses on such contracts at
December 31, 1996 and 1995 were not significant. Foreign currency transaction
losses included in net income were $3 and $10 million in 1996 and 1995,
respectively. Gains and losses in 1994 were not significant. As of December 31,
1996 and 1995, the Company had no purchased option contracts outstanding.
INTEREST RATE AND OTHER DERIVATIVE INSTRUMENTS. On a selective basis, the
Company from time to time enters into interest rate cap or swap agreements to
reduce the potential negative impact of increases in interest rates on its
outstanding variable-rate debt under the Credit Agreement. The Company
recognizes in its results of operations over the life of the contract, as
interest expense, the amortization of contract premiums incurred from buying
interest rate caps. Net payments or receipts resulting from these agreements are
recorded as adjustments to interest expense. The effect of interest rate
instruments on the Company's results of operations in each of the three years in
the period ended December 31, 1996 was not significant.
In the fourth quarter of 1994, the Company entered into two interest rate
cap agreements to hedge an aggregate amount of $150 million of outstanding
variable-rate borrowings under the Credit Agreement. Each contract had a
notional amount of $75 million and a one-year term, covering the period from
January 3, 1995 through January 3, 1996. At December 31, 1995, the fair value of
interest rate agreements was not material.
As of December 31, 1996, the Company also had four option contracts
outstanding, providing for the purchase and sale of certain investments. The net
premiums totaled $50 million, of which $25 million was paid on the transaction
settlement date subsequent to December 31, 1996. At December 31, 1996, the $50
million net premiums have been reported as short-term investments, and the $25
million which settled subsequent to December 31, 1996 is included in accounts
payable. The option contracts expire in
30
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
13 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
February 1997 and are accounted for at fair value with unrealized gains and
losses recognized in earnings. As of December 31, 1996, the net unrealized gains
and losses on these open contracts, for which the right of offset exists, were
not material.
OTHER FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents approximates fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount of the Company's
senior bank indebtedness approximates fair value because the underlying
instruments have variable interest rates that adjust to market on a short-term
basis.
14 SEGMENT INFORMATION
The Company's major business segments are Broadband Communications and Power
Semiconductor. Broadband Communications offers a variety of products and
services for the cable and satellite television industries, including digital
and analog set-top systems, transmission systems, digital and analog satellite
systems, including digital compression and transmission systems, and coaxial and
fiber optic cable. Broadband Communications is also in the business of
developing high-speed data networks and telephony network solutions. Products
offered by Power Semiconductor include discrete power rectifying and transient
voltage suppression components used in telecommunications, automotive and
consumer electronic products. A significant portion of the Company's products
are manufactured or assembled in Mexico, Taiwan and Ireland. At December 31,
1996, the net assets of these production operations were $20, $90 and $47
million, respectively.
Operating profit represents net revenue less operating expenses, which
excludes interest, unallocated corporate expenses and income taxes. Identifiable
assets are those used in the operations of each segment or geographic area.
<TABLE>
<CAPTION>
UNITED
OPERATIONS BY GEOGRAPHIC AREA: STATES(A) EUROPE FAR EAST OTHER ELIMINATIONS CONSOLIDATED(B)
--------- --------- ----------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Net sales (c).............................. $2,385,032 $ 225,740 $ 30,068 $ 48,848 $ -- $2,689,688
Intercompany transfers (d)................. 230,978 41,369 288,552 22,489 (583,388) --
--------- --------- ----------- --------- ------------ --------------
Net revenues............................. 2,616,010 267,109 318,620 71,337 (583,388) 2,689,688
Operating profit........................... 70,573(e) 5,738 5,557 2,160 -- 84,028(e)
Identifiable assets........................ 2,179,208 126,224 231,582 36,017 -- 2,573,031
Year ended December 31, 1995:
Net sales (c).............................. 2,153,144 210,436 38,505 29,939 -- 2,432,024
Intercompany transfers (d)................. 202,091 47,801 250,190 16,828 (516,910) --
--------- --------- ----------- --------- ------------ --------------
Net revenues............................. 2,355,235 258,237 288,695 46,767 (516,910) 2,432,024
Operating profit........................... 180,275(f) 38,814 7,862 4,554 -- 231,505(f)
Identifiable assets........................ 1,888,401 89,773 194,018 28,760 -- 2,200,952
Year ended December 31, 1994:
Net sales (c).............................. 1,822,383 151,644 32,803 29,493 -- 2,036,323
Intercompany transfers (d)................. 140,691 32,772 221,930 23,264 (418,657) --
--------- --------- ----------- --------- ------------ --------------
Net revenues............................. 1,963,074 184,416 254,733 52,757 (418,657) 2,036,323
Operating profit........................... 299,944 16,854 20,186 4,336 -- 341,320
Identifiable assets........................ 1,753,161 80,061 169,331 16,836 -- 2,019,389
</TABLE>
- - ------------------------
(a) Net sales by geographic segment reflect the originating source of the
unaffiliated sale. Included in the U.S. net sales amount are export sales of
$625, $513 and $413 million in 1996, 1995 and 1994, respectively.
(b) Excludes corporate expenses and assets which are shown separately in the
"Operations by Segment" table.
31
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
14 SEGMENT INFORMATION (CONTINUED)
(c) A limited number of cable and satellite television operators provide
services to a large percentage of television households in the U.S. The loss
of some of these operators as customers could have a material adverse effect
on the Company's sales. One customer, including affiliates, accounted for
17%, 20% and 15% of the Company's consolidated net sales in 1996, 1995 and
1994, respectively. Sales to this customer are made primarily from the
Broadband Communications segment.
(d) Intercompany transfers reflect the originating geographic source of the
transfer and principally reflect product assembly which is accounted for at
cost plus a nominal profit.
(e) Includes charges of $237 million reflecting restructuring charges related to
the Company's plan to separate into three independent companies, NLC
litigation costs and other charges primarily related to the transition to
the Company's next-generation digital products and the write-down of certain
assets to their estimated net realizable values (See Notes 2, 9 and 15).
(f) Includes a charge of $140 million for purchased in-process technology in
connection with the Company's acquisition of NLC.
<TABLE>
<CAPTION>
BROADBAND POWER
COMMUNICATIONS SEMICONDUCTOR CORPORATE CONSOLIDATED
--------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
OPERATIONS BY SEGMENT:
Year ended December 31, 1996:
Net sales.................................. $ 2,327,797 $ 361,891 $ -- $2,689,688
Operating profit (loss).................... (608)(a) 84,636(a) -- 84,028
Corporate expenses......................... -- -- (32,516)(a) (32,516)
Identifiable assets........................ 2,094,053 478,978 -- 2,573,031
Corporate assets........................... -- -- 133,820 133,820
Capital expenditures....................... 165,526 60,335 2,041 227,902
Depreciation and amortization expense...... 103,433 22,015 3,688 129,136
Year ended December 31, 1995:
Net sales.................................. 2,017,755 414,269 -- 2,432,024
Operating profit........................... 131,810(b) 99,695 -- 231,505
Corporate expenses......................... -- -- (26,204) (26,204)
Identifiable assets........................ 1,751,518 449,434 -- 2,200,952
Corporate assets........................... -- -- 99,806 99,806
Capital expenditures....................... 124,261 34,990 190 159,441
Depreciation and amortization expense...... 85,195 19,483 5,462 110,140
Year ended December 31, 1994:
Net sales.................................. 1,720,634 315,689 -- 2,036,323
Operating profit........................... 281,985 59,335 -- 341,320
Corporate expenses......................... -- -- (25,249) (25,249)
Identifiable assets........................ 1,590,876 428,513 -- 2,019,389
Corporate assets........................... -- -- 89,562 89,562
Capital expenditures....................... 112,080 23,406 254 135,740
Depreciation and amortization expense...... 71,618 19,627 6,105 97,350
</TABLE>
- - ------------------------
(a) Operating profit (loss) for Broadband Communications and Power Semiconductor
and corporate expenses for Corporate include charges of $226, $2 and $9
million, respectively, reflecting restructuring charges related to the
Company's plan to separate into three independent companies, NLC litigation
costs and other charges primarily related to the transition to the Company's
next-generation
32
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
14 SEGMENT INFORMATION (CONTINUED)
digital products and the write-down of certain assets to their estimated net
realizable values (See Notes 2, 9 and 15).
(b) Includes a charge of $140 million for purchased in-process technology in
connection with the Company's acquisition of NLC.
33
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
15 QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
1996 1995 1996(A) 1995 1996 1995(B) 1996(C) 1995
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $ 615,762 $ 608,716 $ 675,189 $ 611,639 $ 662,122 $ 563,251 $ 736,615 $ 648,418
Gross profit...................... 174,024 190,832 185,253 195,370 192,089 179,443 140,697 175,740
Net income (loss)................. $ 31,164 $ 57,055 $ (58,086) $ 54,051 $ 42,122 $ (40,892) $ (17,064) $ 53,568
Earnings (loss) per share:
Primary......................... $ .25 $ .46 $ (.45) $ .44 $ .31 $ (.33) $ (.12) $ .43
Fully diluted(d)................ .24 .42 (.45) .40 .30 (.33) (.12) .39
Common Stock
Prices:(e)
High.......................... $ 28 3/8 $ 36 1/4 $ 34 3/8 $ 39 1/4 $ 29 3/8 $ 41 5/8 $ 27 1/8 $ 29 3/4
Low........................... 21 25 5/8 26 1/4 30 1/2 21 1/2 30 1/4 18 1/8 18 1/4
</TABLE>
- - ------------------------
(a) Includes a charge of $141 million ($92 million net-of-tax) reflecting NLC
litigation costs.
(b) Includes a charge of $140 million ($90 million net-of-tax) for purchased
in-process technology in connection with the acquisition of NLC.
(c) Includes a pre-tax charge of $12 million ($7 million net-of-tax) for costs
related to the Company's plan to separate into three independent companies,
a pre-tax charge of $57 million ($35 million net-of-tax) related to the
Company's transition to next-generation digital products and other pre-tax
charges of $27 million ($17 million net-of-tax). Of these charges, $73
million ($45 million net-of-tax) were recorded as cost of goods sold and
related to the write-down of inventories to their estimated net realizable
values and the accrual of upgrade and product warranty liabilities related
to the transition to the Company's next-generation digital products. The
remaining $23 million ($14 million net-of-tax) of charges were recorded as
SG&A expense and related to the Company's plan to separate into three
independent companies, the write-down of fixed assets to their estimated net
realizable values and accruals for environmental and litigation matters.
(d) The sum of the four quarters does not equal the full-year fully-diluted
calculation because the Company recorded losses in certain quarters of 1996
and 1995, the impact of which had an anti-dilutive effect on the Company's
fully-diluted calculation during these periods.
(e) The New York Stock Exchange is the principal market on which these
securities are traded. The Company did not pay dividends on its Common Stock
during 1996 or 1995.
16 SUBSEQUENT EVENT
As discussed in Note 9, in 1995 DSC brought suit against NLC and the
founders of NLC. On February 28, 1997, the U.S. Court of Appeals for the Fifth
Circuit confirmed the trial court's denial of DSC's request for injunctive
relief, reversed the district court judgment for diversion of a corporate
opportunity and remanded the case to the trial court for the entry of judgment
on the misappropriation of trade secrets claim, which the Company expects to
result in a damage award of $138 million plus accrued interest.
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21
GENERAL INSTRUMENT CORPORATION
Company Name Place of Incorporation
- - ------------- ----------------------
<S> <C>
GENERAL INSTRUMENT CORPORATION .......................................................... Delaware
(Formerly FLGI Holding Corp.)
GENERAL INSTRUMENT CORPORATION OF DELAWARE .......................................... Delaware
(Formerly GI Corporation and General Instrument Corporation)
Access Control Center, Inc. (Formerly DBS Authorization Center, Inc.) ............... Delaware
Amplevalue Ltd. ..................................................................... U.K.
ATC Corp. (Formerly American Totalisator Company, Inc.) ............................. Delaware
Cable Transport, Inc. ............................................................... North Carolina
Century Components, Inc. ............................................................ Delaware
Charger Industries .................................................................. California
CommScope, Inc. ..................................................................... Delaware
CommScope India, Inc. ............................................................... Delaware
CommScope Inc. of North Carolina (Formerly CommScope, Inc.) ......................... North Carolina
DBS Services, Inc. .................................................................. California
Ensambladora de Matamoros, S.A. de C.V. ............................................. Mexico
General Instrument of Arizona, Inc. ................................................. Delaware
General Instrument Australia Pty Ltd. ............................................... Australia
General Instrument Belgium B.V.B.A. ................................................. Belgium
General Instrument do Brasil Comunicacoes Ltda. ..................................... Brazil
General Instrument of Canada, Inc. .................................................. Canada
General Instrument Chile Limitada (LLC) ............................................. Chile
General Instrument China Holdings, Inc. ............................................. Delaware
General Instrument Deutschland GmbH ................................................. Germany
General Instrument Europe Limited ................................................... Ireland
General Instrument Europe N.V. ...................................................... Belgium
General Instrument Foreign Sales Corp. .............................................. Barbados
General Instrument France S.A. ...................................................... France
General Instrument High Definition Television Corporation ........................... Delaware
General Instrument India Holdings, Inc. ............................................. Delaware
General Instrument International Corp. .............................................. New York
General Instrument Ireland (formerly General Semiconductor Ireland) ................ Ireland
General Instrument Italia S.r.L ..................................................... Italy
General Instrument Japan, Ltd. ...................................................... Japan
General Instrument Mauritius, Inc. .................................................. Delaware
General Instrument de Mexico, S.A. de C.V. .......................................... Mexico
General Instrument Microelectronics Ltd. ............................................ U.K.
General Instrument (Music Services) Ltd. ............................................ U.K.
General Instrument PSD (China) Co., Ltd. ............................................ Rep. of China
General Instrument PSD (China) Holdings, Inc. ....................................... Delaware
General Instrument (Puerto Rico), Inc. .............................................. Delaware
General Instrument Remittance Products, Inc. ........................................ Florida
General Instrument Semiconductor Industries, Inc. ................................... Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENERAL INSTRUMENT CORPORATION
Company Name Place of Incorporation
- - ------------- ----------------------
<S> <C>
General Instrument Services, Inc. ................................................... Delaware
General Instrument Services Ltd. .................................................... U.K.
General Instrument (Singapore) Pte. Ltd. ............................................ Singapore
General Instrument of Taiwan, Ltd. .................................................. Rep. of China
General Instrument (UK) Ltd. ........................................................ U.K.
GI Communications Purchasing Corp. .................................................. Delaware
GI Mauritius Holdings, Ltd. ......................................................... Mauritius
GSI - General Instrument Semiconductor Industries, Inc. ............................. Delaware
Jerrold DC Radio, Inc. .............................................................. Delaware
Magnitude Compression Systems, Inc. ................................................. California
NextLevel Holdings (Taiwan), Inc. ................................................... Delaware
NextLevel Systems of Delaware, Inc. (formerly Cable/Home Communication Corp.) ....... Delaware
NextLevel Systems Hong Kong Limited ................................................. Hong Kong
NextLevel Systems, Inc. ............................................................. Delaware
NextLevel Systems (Taiwan), Ltd. .................................................... Taiwan
Sharpstep Ltd. ...................................................................... U.K.
The General Instrument Foundation ................................................... Illinois
NEXT LEVEL COMMUNICATIONS ............................................................... California
</TABLE>
<PAGE>
GENERAL INSTRUMENT CORPORATION
JOINT VENTURES
Japan VideoCipher Corporation
Vision Cables Pty. Ltd. (CommScope Australian joint venture)
HCL General Instrument Private Limited
PARTNERSHIPS
Digital Cable Radio Associates
<PAGE>
Exhibit 23
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement Nos.
33-60498, 33-61820, 33-50911, 33-52189, 33-54923, 33-55595, 33-57737 and
333-22861 of General Instrument Corporation on Forms S-8 of our report on the
financial statement schedules of General Instrument Corporation and
subsidiaries listed in Item 14(a)2 dated February 3, 1997 appearing in, and
our report on the consolidated financial statements of General Instrument
Corporation and subsidiaries dated February 3, 1997 (February 28, 1997 as
to Note 16) incorporated by reference in, this Annual Report on Form 10-K of
General Instrument Corporation for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
- - --------------------------
Deloitte & Touche LLP
Chicago, Illinois
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GENERAL
INSTRUMENT CORPORATION FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,252
<SECURITIES> 49,946
<RECEIVABLES> 544,430
<ALLOWANCES> 17,536
<INVENTORY> 336,516
<CURRENT-ASSETS> 1,083,085
<PP&E> 571,051
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,706,851
<CURRENT-LIABILITIES> 534,720
<BONDS> 698,825
<COMMON> 1,371
0
0
<OTHER-SE> 1,171,782
<TOTAL-LIABILITY-AND-EQUITY> 2,706,851
<SALES> 2,689,688
<TOTAL-REVENUES> 2,689,688
<CGS> 1,997,625
<TOTAL-COSTS> 1,997,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,356
<INCOME-PRETAX> 5,517
<INCOME-TAX> (7,381)
<INCOME-CONTINUING> (1,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,864)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
