UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4135495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1375 LENOIR-RHYNE BOULEVARD
HICKORY, NORTH CAROLINA
28601
(Address of principal executive offices) (Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant was approximately $939.6 million as of
March 19, 1999 (based on the closing price for the Common Stock on the New
York Stock Exchange on that date). For purposes of this computation, shares
held by affiliates and by directors and officers of the Registrant have
been excluded. Such exclusion of shares held by directors and officers is
not intended, nor shall it be deemed, to be an admission that such persons
are affiliates of the Registrant. As of March 19, 1999 there were
50,509,737 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1999 ANNUAL MEETING
OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references to the "Company" or
"CommScope" include CommScope, Inc. and its direct or indirect subsidiaries
including CommScope, Inc. of North Carolina ("CommScope NC"), the Company's
principal operating subsidiary. Effective on July 28, 1997, the Company was
spun-off (the "Spin-off" or the "Distribution") from its parent company,
General Instrument Corporation (the "Distributing Company"), through a
distribution of the Company's shares to the stockholders of the
Distributing Company. Immediately following the Distribution, the
Distributing Company changed its corporate name to General Semiconductor,
Inc. On February 2, 1998 NextLevel Systems, Inc. (which was also spun-off
from the Distributing Company) changed its name to General Instrument
Corporation.
GENERAL
The Company is a leading worldwide designer, manufacturer and marketer
of a broad line of coaxial cables and other high-performance electronic and
fiber optic cable products primarily for communications applications
including cable television, telephony and Internet access. The Company is
the largest manufacturer and supplier of coaxial cable for hybrid fiber
coaxial ("HFC") cable systems in the United States, with over 50% market
share in 1998 (by sales volume), and is a leading supplier of coaxial cable
for video distribution applications such as satellite television and
security surveillance. The Company is also a leading provider of
high-performance premise wiring for local area networks ("LAN") and the
Company's management believes that it has developed a next generation
wireless antenna cable. The Company sells its products to approximately
2,400 customers in more than 85 countries. The Company is expanding its
global presence through its acquisition of Alcatel's cable television
("CATV") coaxial cable business, which is Europe's largest manufacturer of
CATV coaxial cable.
For the year ended December 31, 1998, approximately 80% of the
Company's revenues were for the cable television and video distribution
markets, 13% were for LAN applications and 7% were for other
high-performance cable markets including cable for wireless applications,
industrial and other wiring applications. The Company's revenues and net
income for the year ended December 31, 1998 were $571.7 million and $39.2
million, respectively. Approximately $139.8 million (24.4%) of the
Company's revenues were from international customers.
The Company's management believes that the Company is the world's most
technologically advanced, low-cost provider of coaxial cable. As a result
of the Company's leading product offerings, cost-efficient manufacturing
processes and economies of scale resulting from its leading market share,
management believes that the Company is well positioned to capitalize on
the opportunity provided by the convergence of video, voice and data and
the resulting demand for bandwidth and high-speed access. The Company's
management also believes that the following industry trends will drive
demand for its products: (i) the endorsement of HFC cable systems by major
cable, telephone and technology companies; (ii) increasing use of the
Internet; (iii) increasing demand for high-speed LAN access; and (iv) the
continuing rapid deployment of wireless communications systems worldwide.
GROWTH STRATEGY
The Company has adopted a growth strategy to expand, strengthen and
leverage its current market position as the leading worldwide supplier of
coaxial cable for broadband communications. The principal elements of the
Company's growth strategy are the following:
o CAPITALIZE ON HFC PARADIGM SHIFT. To date, a vast majority of video
networks worldwide, such as cable service provider networks, have
adopted the HFC network architecture for video service delivery.
Recent events involving major telecommunications and cable service
providers create the potential to expand the role of HFC networks from
a video-centric focus to a key platform for delivery of a variety of
broadband services. These events include AT&T Corporation's
acquisition of TCI, Microsoft Corporation's $1 billion investment in
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Comcast and investments in cable television in Europe and the United
Kingdom, Paul Allen's acquisitions of Marcus Cable and Charter, and
the recent success of high-speed cable data services such as @Home
Corporation and MediaOne. The Company believes that the HFC network
architecture provides the most cost-effective bandwidth into the home,
enabling both cable and telecommunications service providers to offer
new products and services such as high-speed Internet access, video on
demand, IP telephony and HDTV. The Company believes it is well
positioned to benefit from the build out, upgrade and maintenance of
such networks in both domestic and international markets.
o DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. The
Company maintains an active program to identify new market
opportunities and develop and commercialize products that leverage its
core technology and manufacturing competencies. This strategy has led
to the development of new products and entry into new markets such as
satellite cables, LAN cables, specialized coaxial based
telecommunication cables, broadcast audio and video cables and coaxial
cables in conduit. For example, the Company leveraged its coaxial
cable technology to enter the LAN cable market and developed
UltraMedia, a high-end LAN cable product targeted for high-speed LAN
applications. The Company has also recently developed a thin-wall foam
FEP design for twisted pair cables on which a patent is pending. In
addition, the Company leveraged its expertise in aluminum coaxial
cable technology to develop Cell Reach, a superior copper coaxial
cable solution for the wireless antenna market. Cell Reach is a
technologically superior product with a lower total lifetime cost of
ownership than the current industry standard and has been installed to
date in more than 1,200 cellular and PCS sites with leading service
providers such as Nextel Communications, Inc., Sprint Corporation and
Sprint affiliates. The Company's internal product development strategy
is augmented by acquisitions of cable or related component businesses
that enhance the Company's existing product portfolio or that offer
synergistic cable-related growth opportunities.
o CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. The Company has invested
approximately $86 million in state-of-the-art manufacturing facilities
and new technologies during the past three fiscal years. These
investments have increased capacity and operating efficiencies,
improved management control and provided more consistent product
quality. As a result, the Company believes that it has become one of
the few cable manufacturers capable of satisfying volume production,
time-to-market, time-to-volume and technology requirements of
customers in the communications industry. The Company believes that
its breadth and scale permit it to cost-effectively invest in
improving its operating efficiency through investments in engineering
and cost-management programs and to capture value in the supply chain
through vertical integration projects.
o LEVERAGE GLOBAL PLATFORM. In the past few years, the Company has
become a major supplier of coaxial cable to international markets,
principally Europe, Latin America and the Pacific Rim, for the cable
television and broadband services industries. In 1998 the Company had
approximately 350 international customers in more than 85 countries
representing approximately $139.8 million (24.4%) of the Company's
1998 revenue. To support its international sales efforts, the Company
has sales representatives based in Europe, Latin America and the
Pacific Rim. In addition, the Company is able to leverage its domestic
cable customer base with respect to those customers who are also
equity investors in international cable service providers. Although
there is current uncertainty in international markets, the Company
believes that it is well positioned to benefit over the long term from
future international growth opportunities. To further improve its
ability to service international customers as well as reduce shipping
and importation costs, the Company intends to establish or acquire
international distribution and/or manufacturing facilities. For
example, the Company recently acquired Alcatel's CATV coaxial cable
business in Seneffe, Belgium. This acquisition gives CommScope access
to established European distribution channels and complementary
coaxial cable technologies. See "--Business Units--International
Markets."
o PROVIDE SUPERIOR CUSTOMER SERVICE. The Company believes that its
coaxial cable manufacturing capacity is greater than that of any other
manufacturer, which enables the
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Company to provide its customers a unique high-volume service
capability. As a result of its 24-hour, seven days per week continuous
manufacturing operations, the Company is able to offer quick order
turnaround services. In addition, management believes that the ability
to offer rapid delivery services, materials management and logistics
services to customers through its private truck fleet is an important
competitive advantage.
BUSINESS UNITS
The Company manufactures and sells cable for three broad market
segments: CATV and other video applications, LAN applications and other
cable products.
DOMESTIC CABLE TV MARKET. The Company designs, manufactures and
markets primarily coaxial cable, most of which is used in the cable
television industry. The Company manufactures two primary types of coaxial
cable: semi-flexible, which has an aluminum or copper outer tubular shield
or outer conductor; and flexible, which is typically smaller in diameter
than semi-flexible coaxial cable and has a more flexible outer conductor
typically made of metallic tapes and braided fine wires. Semi-flexible
coaxial cables are used in the trunk and feeder distribution portion of
cable television systems, and flexible coaxial cables (also known as drop
cables) are used for connecting the feeder cable to a residence or business
or for some other communications applications. The Company also
manufactures fiber optic cable primarily for the cable television industry.
Cable television service traditionally has been provided primarily by
cable television system operators ("MSOs") that have been awarded
franchises from the municipalities they serve. In response to increasing
competitive pressures, MSOs have been expanding the variety of their
service offerings not only for video, but for Internet access and
telephony, which generally requires increasing amounts of cable and system
bandwidth. MSOs have generally adopted, and the Company's management
believes that for the foreseeable future will continue to adopt, HFC cable
system designs when seeking to increase system bandwidth. Such systems
combine the advantages of fiber optic cable in transmitting clear signals
over a long distance without amplification, and the advantages of coaxial
cable in ease of installation, low cost and compatibility with the
receiving components of the customer's communications devices. The
Company's management believes that: (1) MSOs are likely to increase their
use of fiber optic cable for the trunk and feeder portions of their cable
systems; (2) there will be an ongoing need for high-capacity coaxial cable
for the local distribution and street-to-the-home portions of the cable
system; and (3) coaxial cable remains the most cost effective means for the
transmission of broadband signals to the home or business over shorter
distances in cable networks. For local distribution purposes, coaxial cable
has the necessary signal carrying capacity or bandwidth to handle upstream
and downstream signal transmission.
The construction, expansion and upgrade of cable systems require
significant capital investment by cable operators. MSOs have been
significant borrowers from the credit and capital markets, and,
accordingly, capital spending within the domestic cable television industry
has historically been cyclical, depending to a significant degree on the
availability of credit and capital. The cable television industry has also
been subject to varying degrees of both national and local government
regulation, most recently, the Telecom Act and the 1992 Cable Act, and
their implementing regulations adopted in 1993 and 1994. Regional Bell
Operating Companies ("RBOCs") and other telephone service providers have
generally been subject to regulatory restrictions which prevented them from
offering cable television service within their franchise telephone areas.
However, the Telecom Act removes or phases out many of the regulatory and
sale restrictions affecting MSOs and telephone operating companies in the
offering of video and telephone services. The Company's management believes
that the Telecom Act will encourage competition among MSOs, telephone
operating companies and other communications companies in offering video,
telephone and data services such as Internet access to consumers, and that
providers of such services will upgrade their present communications
delivery systems. The Company has provided coaxial cables to most major
U.S. telephone operating companies, several of which are installing
broadband networks for the delivery of video, telephone and other services
to some portion of their telephone service areas. The broadband networks
proposed by some of the telephone companies utilize HFC technologies
similar to those employed by many cable television operators.
3
INTERNATIONAL MARKETS. Cable system designs utilizing HFC technology
are increasingly being employed in international markets with low cable
television penetration. Based upon industry trade publications and reports
from telecommunications industry analysts, the Company's management
estimates that approximately 36% of the television households in Europe
subscribe to some form of multichannel television service as compared to a
subscription rate of approximately 70% in the United States. Based upon
such sources, the Company's management estimates that subscription rates in
the Asia/Pacific Rim and Latin American/Caribbean markets are even lower at
approximately 17% and 12%, respectively. In terms of television households,
it is estimated that there were approximately 248 million television
households in Europe, approximately 377 million in Asia/Pacific Rim and
approximately 93 million in Latin America and the Caribbean. This compares
to approximately 96 million television households in the United States.
International sales of the Company's coaxial cables have increased
from approximately $66 million in 1992 to approximately $200 million in
1997, before declining to approximately $139.8 million in 1998. In 1998,
the Company had sales in more than 85 countries. Penetration of the
international marketplace has been accomplished through a network of
distributors and agents located in major countries where the Company does
business. The Company also employs 16 international direct territory
managers to supplement and manage its network of distributors and agents.
In addition to new customers developed by the Company's network of
distributors and sales representatives, many large U.S. cable television
operators, with whom the Company has had long established business
relationships, are active investors in cable television systems outside the
United States.
Management remains guarded about the near-term outlook for
international sales. During 1998, international sales decreased by
approximately 30%, or $60.6 million, compared to 1997, due to monetary
crises in key overseas markets, including the Pacific Rim and South
America. Excluding the Seneffe acquisition, which is expected to provide
approximately 5% sales growth in 1999, management expects 1999
international sales to be relatively unchanged compared to 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." However, in the long run, the Company's management believes
that continued growth in international markets, including the developing
markets in Asia, the Middle East and Latin America, and the expected
privatization of the telecommunications structure in many European
countries, represent significant future opportunities. However, the Company
cannot predict with certainty the outlook for international sales in 1999
and beyond due to unpredictable political and economic uncertainties.
The Company recently completed its acquisition of Alcatel's CATV
coaxial cable business in Seneffe, Belgium. This acquisition gives
CommScope access to established European distribution channels and
complementary coaxial cable technologies. CommScope believes that it will
also supply Alcatel with its future worldwide requirements of CATV coaxial
cable for a period of time to be determined. The Company believes that this
acquisition provides access to key strategic markets and creates the
opportunity for growth in sales, cash flow and stockholder value over the
long term. While the Company expects the transaction to be neutral to
slightly negative to 1999 earnings, it expects it to be accretive
thereafter.
VIDEO AND BROADCAST APPLICATIONS (NON-CABLE TELEVISION). Many
specialized markets or applications are served by multiple cable media
(i.e., coaxial, twisted pair (shielded or unshielded), fiber optic or
combinations of each). The Company has become a leading producer of
composite cables made of flexible coaxial and twisted copper pairs for full
service communications providers worldwide. In the satellite direct-to-home
("DTH") cable market, where specialized composite coaxial and copper cables
transmit satellite-delivered video signals and antenna positioning/control
signals, the Company has developed a leading market position. DTH cables
are specified by leading original equipment manufacturers ("OEMs"),
distributors and service providers. The Company markets an array of premium
metallic and optical cable products directed at the broadcasting and video
production studio market. Because of the Company's position in other video
transport markets and access to distribution channels within the market,
these products are viewed by the Company's management as a growth
opportunity, although there can be no assurance that the Company will be
able to penetrate this market successfully.
4
LAN MARKET. The proliferation of personal computers, and more broadly
the practice of distributed computing, has created a need for products
which enable users to share files, applications and peripheral equipment
such as printers and data storage devices. LANs, typically consisting of at
least one dedicated computer (a "server"), peripheral devices, network
software and interconnecting cables, were developed in response to this
demand. The Company manufactures a variety of twisted pair, coaxial and
fiber optic cables to transmit data for LAN applications. The most widely
used cable design for this application consists of four high-performance
twisted pairs that are capable of transmitting data at rates in excess of
155 mbps. The Company focuses its products and marketing on cables with
enhanced electrical and physical performance such as its UltraMedia
unshielded twisted pair ("UTP"). The Company's management believes that
UltraMedia cable is among the highest performing UTP cables in the
industry. Copper and fiber optic composite cables are frequently combined
in a single cable to reduce installation costs and support multimedia
applications.
CELLULAR COMMUNICATION APPLICATIONS. Management of the Company
believes that the rapid deployment of cellular or "wireless" communication
systems throughout the United States and the rest of the world presents a
growth opportunity for the Company. Semi-flexible coaxial cables are used
to connect the antennae located at the top of cellular antenna towers to
the radios and power sources located adjacent to or near the antenna site.
In 1996 and 1997, the Company developed Cell Reach products, a line of
copper shielded semi-flexible coaxial cables and related connectors and
accessories to address this market. The Company has significant
manufacturing capacity in place for this product line and is currently
developing additional products and marketing programs for Cell Reach for
both the U.S. and certain international markets. Management of the Company
began receiving orders and making shipments of Cell Reach in the first
quarter of 1997. Cell Reach has been installed to date in more than 1,200
cellular and PCS sites with leading service providers such as Nextel
Communications, Inc., Sprint Corporation and Sprint affiliates. There are,
however, larger, well established companies with significant financial
resources and brand recognition in the cellular market which have
established marketing channels for coaxial cables and accessories.
OTHER MARKETS. The Company has also developed a strategy for
addressing additional cable consuming markets. By combining narrowly
focused product and market management with its cable manufacturing and
operational skills, the Company is entering new markets for telephone
central office, industrial control and data, and other high-performance
cable applications.
MANUFACTURING
The Company employs advanced cable manufacturing processes, the most
important of which are thermoplastic extrusion for insulating wires and
cables, high-speed welding and swaging of metallic shields or outer
conductors, braiding, cabling and automated testing. Many of these
processes are performed on equipment that has been modified for the
Company's purposes or specifically built to the Company's specifications,
often internally in the Company's own machine shop facilities. The Company
fabricates very few of the raw material components used in making most of
its cables, such as wire, tapes, tubes and similar materials, but the
Company's management believes such fabrication, to the extent economically
feasible, could be done by the Company instead of being outsourced. For
example, the Company recently acquired the clad wire fabrication equipment
and technology of Texas Instruments Incorporated for manufacturing
copper-clad aluminum wire and copper-clad steel wire. This acquisition
allows the Company to further vertically integrate its processes, providing
an opportunity to significantly reduce cost. The Company also intends to
pursue fine wire drawing to produce braid wires for flexible coaxial
cables. The manufacturing processes of the three principal types of cable
manufactured by the Company--coaxial cables, twisted copper pair cables and
fiber optic cables--are further described below.
COAXIAL CABLES. The Company employs a number of advanced plastic and
metal forming processes in the manufacture of coaxial cable. Three
fundamental process sequences are common to almost all coaxial cables.
First, a plastic insulation material, called the dielectric, is melt
extruded around a metallic wire or center conductor. Current,
state-of-the-art dielectrics consist of foamed plastics to enhance the
electrical properties of the cable. Precise control of the foaming process
is critical to achieve the mechanical and
5
electrical performance required for broadband services and cellular
communications applications. The Company's management believes that plastic
foam extrusion, using proprietary materials, equipment and control systems,
is a core competency of the Company.
The second step involves sheathing the dielectric material with a
metallic shield or outer conductor. Three basic shield designs and
processes are used. For semi-flexible coaxial cables, solid aluminum or
copper shields are applied over the dielectric by either pulling the
dielectric insulated wire into a long, hollow metallic tube or welding the
metallic tube directly over the dielectric. Welding allows the use of
thinner metal, resulting in more flexible products. The Company uses a
proprietary welding process that achieves significantly higher process
speeds than those achievable using other cable welding methods. The same
welding process has led to extremely efficient manufacturing processes of
copper shielded products for cellular communications. For both hollow and
welded tubes, the cable is passed through tools that form the metallic
shield tightly around the dielectric.
Flexible coaxial cables, which are usually smaller in diameter than
semi-flexible coaxial cables, generally are made with the third shield
design. Flexible outer shield designs typically involve laminated metallic
foils and braided fine wires which are used to enhance flexibility which is
more desirable for indoor wiring or for connecting subscribers in drop
cable applications.
The third and usually final process sequence is the melt extrusion of
thermoplastic jackets to protect the coaxial cable. A large number of
variations are produced during this sequence including: incorporating an
integral strength member; customer specified extruded stripes and printing
for identification; abrasion and crush resistant jackets; and adding
moisture blocking fillers.
TWISTED COPPER PAIRS. Single copper wires are insulated using
high-speed thermoplastic extrusion techniques. Two insulated copper singles
are then twinned (twisted into an electrically balanced pair unit) in a
separate process and then bunched or cabled (the grouping of two or more
pair units into larger units for further processing) in one or more further
processes depending on the number of pairs desired within the completed
cable. The cabled units are then shielded and jacketed or simply jacketed
without applying a metallic shield in the jacketing process (the extrusion
of a plastic jacket over a shielded or unshielded cable core). The majority
of the sales of the Company's twisted copper pairs are derived from plenum
rated unshielded twisted pair cables for LAN applications. Plenum cables
are cables rated under the National Electrical Code as safe for
installation within the air plenum areas of office buildings due to their
flame retarding and low smoke generating characteristics when heated.
Plenum cables are made from more costly thermoplastic insulating materials,
such as FEP. These materials have significantly higher extrusion
temperature profiles that require more costly extrusion equipment than
non-plenum rated cables. The Company believes that the processing of plenum
rated materials is one of its core competencies. In addition, the Company
recently announced an engineering breakthrough for the extrusion of FEP.
The patent pending thin-wall foam FEP process improves signal velocity and
uses significantly less raw material in a smaller diameter cable in typical
applications. The Company believes that this process enhances its ability
to grow and serve customers in all LAN segments. The Company has
incorporated this new foaming technology in certain products, continues to
ramp up production and expects to reach full production capacity during
1999.
FIBER OPTIC CABLES. To manufacture fiber optic cables, the Company
purchases bulk uncabled optical fiber singles and colors and buffers them
before cabling them into unjacketed core units. Protective outer jackets
and, sometimes, shields and jackets are then applied in a final process
before testing. Manufacturing and test equipment for fiber optic cables are
distinct from that used to manufacture coaxial and copper twisted pair
cables. The majority of fiber optic cables produced by the Company are sold
to the cable television and LAN industry. Some of these fiber optic cables
are produced under licenses acquired from other fiber and fiber optic cable
manufacturers.
COMPOSITE CABLES. Cables that are combinations of some or all of
coaxial cables, copper singles or twisted copper pairs and fiber optic
cables within a single cable are also produced by the Company for a variety
of applications. The most significant of the composite cables manufactured
by the Company are combination coaxial and copper twisted pairs within a
common outer jacket which are being used by some telephone companies and
cable operators to provide both cable television services and telephone
6
services to the same households over HFC networks. Nearly all markets
currently addressed by the Company have applications for composite cables
which the Company is capable of manufacturing.
RESEARCH AND DEVELOPMENT
The Company's research, development and engineering expenditures for
the creation and application of new and improved products and processes
were $6 million, $6 million and $5 million for the years ended December 31,
1998, 1997 and 1996, respectively. The Company focuses its research and
development efforts primarily on those product areas that it believes have
the potential for broad market applications and significant sales within a
one-to-three year period. The Company's management anticipates that the
level of spending on product development activities will accelerate in
future years. The widespread deployment of broadband services and HFC
systems is expected to provide opportunities for the Company to enhance its
coaxial cable product lines and to improve its manufacturing processes.
Additionally, the Company's management expects that its participation in
the LAN, cellular communications and other new markets now identified will
require higher rates of product development spending in relation to sales
generated than has been the case in recent years.
SALES AND DISTRIBUTION
The Company markets its products worldwide through a combination of
more than [100] direct sales, territory managers and manufacturers'
representative personnel. The Company supports its sales organization with
regional service centers in: North Carolina; California; Alabama; Seneffe,
Belgium, Birmingham, England; and Melbourne, Australia. In addition, the
Company utilizes local inventories, sales literature, internal sales
service support, design engineering services and a group of product
engineers who travel with sales personnel and territory managers and assist
in product application issues, and conduct technical seminars at customer
locations to support its sales organization. The Company is expanding its
global presence through its acquisition of Europe's largest manufacturer of
CATV coaxial cable. See "--Business Units--International Markets."
A key aspect of the Company's customer support and distribution chain
is the use of its private truck fleet. Management believes that the ability
to offer rapid delivery services, materials management and logistics
services to customers through its private truck fleet is an important
competitive advantage.
The Company's products are sold and used in a wide variety of
applications. The Company's products primarily are sold both directly to
cable system operators and telecommunications companies, OEMs and through
distributors. There has been a trend on the part of OEM customers to
consolidate their lists of qualified suppliers to companies that have a
global presence, can meet quality and delivery standards, have a broad
product portfolio and design capability, and have competitive prices. The
Company has concentrated its efforts on service and productivity
improvements including advanced computer aided design and manufacturing
systems, statistical process controls and just-in-time inventory programs
to increase product quality and shorten product delivery schedules. The
Company's strategy is to provide a broad selection of products in the areas
in which it competes. The Company has achieved a preferred supplier
designation from many of its cable television, telephone and OEM customers.
Cable television services in the United States are provided primarily
by MSOs. It is estimated that the six largest MSOs account for more than
60% of the cable television subscribers in the United States. The major
MSOs include such companies as TCI (recently purchased by AT&T), Time
Warner Cable, MediaOne of Delaware, Inc., Comcast and Cablevision Systems
Corporation. Many of the major MSOs are customers of the Company, including
those listed above. During 1998 and 1997, sales to no single customer
accounted for 10% or more of the Company's net sales and TCI was the only
customer which accounted for 10% or more of the net sales of the Company
during 1996. Certain RBOCs and other telecommunications companies who have
recently begun providing cable television services have become significant
customers of the Company.
PATENTS
The Company pursues an active policy of seeking intellectual property
protection, namely patents, for new products and designs. The Company holds
44 patents worldwide and has 63 pending applications. Although the Company
considers its patents to be valuable assets, no single patent is
7
considered to be material to its operations as a whole. The Company intends
to rely on its proprietary knowledge and continuing technological
innovation to develop and maintain its competitive position.
BACKLOG
At December 31, 1998, 1997 and 1996, the Company had an order backlog
of approximately $43 million, $55 million and $36 million, respectively.
Orders typically fluctuate from quarter to quarter based on customer demand
and general business conditions. Backlog includes only orders for products
scheduled to be shipped within six months. Unfilled orders may be canceled
prior to shipment of goods; however, such cancellations historically have
not been material. However, significant elements of the Company's business,
such as sales to the cable television industry, distributors, the computer
industry and other commercial customers, generally have short lead times.
Therefore, current order backlog may not be indicative of future demand.
COMPETITION
The Company encounters competition in substantially all areas of its
business. The Company competes primarily on the basis of product
specifications, quality, price, engineering, customer service and delivery
time. Competitors include large, diversified companies, some of which have
substantially greater assets and financial resources than the Company, as
well as medium to small companies. The Company also faces competition from
certain smaller companies that have concentrated their efforts in one or
more areas of the coaxial cable market. The Company's management believes
that it enjoys a strong competitive position in the coaxial cable market
due to its position as a low-cost, high-volume coaxial cable producer and
reputation as a high-quality provider of state-of-the-art cables with a
strong orientation toward customer service. The Company's management also
believes that it enjoys a strong competitive position in electronic cable
market due to the existence of one of the larger direct field sales
organizations within the LAN segment, the comprehensive nature of its
product line and its long established reputation for quality.
RAW MATERIALS
In the manufacture of coaxial and twisted pair cables, the Company
processes metal tubes, tapes and wires including bi-metallic wires (wires
made of aluminum or steel with thin outer skins of copper) that are
fabricated from high-grade aluminum, copper and steel. More of these
fabricated metal components are purchased under supply arrangements with
some portion of the unit pricing indexed to commodity market prices for
these metals. The Company has adopted a hedging policy pursuant to which it
may, from time to time, attempt to match futures contracts or option
contracts for a specific metal with some portion of the anticipated metal
purchases for the same periods. Other major raw materials used by the
Company include polyethelenes, polyvinylchlorides, FEP and other plastic
insulating materials, optical fibers, and wood and cardboard shipping and
packaging materials. In 1998, approximately 13% of the Company's raw
material purchases were for bi-metallic center conductors for coaxial
cables, nearly all of which were purchased from Copperweld Corporation
under a long-term supply arrangement expiring in March 2000. However, the
Company recently acquired the clad wire fabrication equipment and
technology of Texas Instruments Incorporated for manufacturing copper-clad
aluminum wire and copper-clad steel wire. At full capacity, this
acquisition will give the Company the ability to produce a significant
portion of the bi-metal center conductors used by the Company. In addition
to bi-metallic wires, fine aluminum wire, which is a smaller raw material
purchase than bi-metallic wire, is purchased primarily from a single
source. However, the Company also intends to pursue fine wire drawing to
produce braid wires for flexible coaxial cables. Neither of these major raw
materials could be readily replaced in sufficient quantities if all
supplies from the respective primary sources were disrupted for an extended
period and the Company was unable to vertically integrate the production of
these products. There are few worldwide producers of FEP and market
supplies have been periodically limited over the past several years.
Availability of adequate supplies of FEP will be critical to future LAN
cable sales growth. The Company has demonstrated an ability, on a limited
basis, to successfully foam FEP. The Company's ability to successfully foam
FEP on a large scale commercial basis would help moderate the impact of any
limitation of the FEP supply. With respect to all other major raw materials
used by the Company, alternative sources of supply or access to alternative
8
materials are generally available. Supplies of all raw materials used by
the Company are generally adequate and expected to remain so for the
foreseeable future.
ENVIRONMENT
The Company uses some hazardous substances and generates some solid
and hazardous waste in the ordinary course of its business. Consequently,
the Company is subject to various federal, state, local and foreign laws
and regulations governing the use, discharge and disposal of hazardous
materials. Because of the nature of its business, the Company has incurred,
and will continue to incur, costs relating to compliance with such
environmental laws. Although the Company's management believes that it is
in substantial compliance with such environmental requirements, and the
Company has not in the past been required to incur material costs in
connection therewith, there can be no assurance its cost to comply with
such requirements will not increase in the future. Although the Company is
unable to predict what legislation or regulations may be adopted in the
future with respect to environmental protection and waste disposal,
compliance with existing legislation and regulations has not had and is not
expected to have a material adverse effect on the Company's operations and
financial condition.
EMPLOYEES
At December 31, 1998, approximately 2,600 people were employed by the
Company. Substantially all employees are located in the United States. The
Company's management believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's administrative, production and research and development
facilities are located in Hickory, Catawba, Claremont and Statesville,
North Carolina; Scottsboro, Alabama; and Seneffe, Belgium. The Hickory,
North Carolina facility occupies approximately 38,000 square feet pursuant
to a lease expiring in December 1999 and is the location of the Company's
executive offices, sales office and customer service department.
The Catawba, North Carolina facility occupies approximately 1,000,000
square feet and is owned by the Company. The Catawba facility manufactures
coaxial cables, is the major distribution facility for the Company's
products and houses certain administrative and engineering activities.
The Claremont, North Carolina facility occupies approximately 450,000
square feet and is owned by the Company. The Claremont facility
manufactures coaxial, copper twisted pair and fiber optic cables and houses
certain administrative, sales and engineering activities for the Company.
The Scottsboro, Alabama facility occupies 150,000 square feet and is
owned by the Company. The Scottsboro facility manufactures coaxial cables.
The Statesville, North Carolina facility occupies approximately
315,000 square feet and is owned by the Company. The Statesville facility
houses certain LAN cable manufacturing, cable-in-conduit manufacturing,
recycling activities, research and development, and engineering activities.
During 1999, the Company purchased an approximately 120,000 square
foot facility in Seneffe, Belgium, which houses certain coaxial cable
manufacturing activities.
The Company's management does not believe there is any material
long-term excess capacity in its facilities, although utilization is
subject to change based on customer demand. Furthermore, the Company's
management believes that its facilities and equipment generally are well
maintained, in good operating condition and suitable for its purposes and
adequate for its present operations.
In February 1998, the Company sold the Elm City facility, which
occupied approximately 250,000 square feet. See Note 5 of the "Notes to
Consolidated Financial Statements" contained in Item 8.
9
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other
than various claims and lawsuits arising in the normal course of business.
The Company's management does not believe that any such claims or lawsuits
will have a material adverse effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the three months ended December 31, 1998.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Spin-off, the Company's Common Stock has been traded on the
New York Stock Exchange under the symbol CTV. The following table sets
forth the high and low sale prices as reported by the New York Stock
Exchange for the periods indicated. The stock price information shown below
does not include "when-issued" trading prior to the Spin-off.
COMMON
STOCK PRICE
RANGE
-----------------------
HIGH LOW
----------- -----------
1997
Third Quarter (beginning July 28) $19 $ 12 3/4
Fourth Quarter $14 7/16 $ 10 3/8
1998
First Quarter $15 3/16 $ 11 5/8
Second Quarter $17 7/16 $ 13 5/16
Third Quarter $20 11/16 $ 9 3/8
Fourth Quarter $17 1/4 $ 8 3/4
As of March 11, 1999, the approximate number of registered
stockholders of record of the Company's Common Stock was 775.
The Company does not currently intend to pay dividends in the
foreseeable future, but to reinvest earnings in the Company's business. The
Company's ability to pay cash dividends on its Common Stock is limited by
certain covenants contained in a credit agreement to which the Company is a
party. See Note 9 of the consolidated financial statements, included in
Item 8.
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data
(In thousands, except share and per share amounts)
Years ended
December 31 1998 1997 1996 1995 1994
- ----------- ---- ---- ---- ---- ----
RESULTS OF
OPERATIONS:
Net sales $ 571,733 $ 599,216 $ 572,212 $ 485,160 $445,328
Gross profit 134,593 141,000 155,089 129,428 127,862
Operating income 70,970 79,182 100,254 85,263 87,770
Net income 39,231 37,458 57,122 47,331 45,096
NET INCOME PER
SHARE INFORMATION
(1)
Pro forma net
income -- $ 34,604 $ 51,908 -- --
Weighted average
number of shares
outstanding:
Basic 49,221 49,107 49,105 -- --
Assuming dilution 49,521 49,238 49,200 -- --
Net income per
share - pro forma
except for 1998:
Basic $ 0.80 $0.70 $1.06 -- --
11
Assuming dilution $ 0.79 $0.70 $1.06 -- --
OTHER INFORMATION:
Earnings before net
interest, taxes,
depreciation and
amortization
("EBITDA") (2) $ 99,616 $ 96,606 $ 121,045 $ 102,597 $ 104,188
Depreciation and
amortization 24,662 21,677 18,952 17,219 16,422
Capital expenditures 22,784 29,871 33,218 27,281 33,089
BALANCE SHEET DATA:
Total assets $ 465,327 $ 483,539 $ 479,885 $ 412,378 $ 397,843
Working capital 93,982 112,786 107,220 72,908 69,269
Long-term debt,
including current
maturities (3) 181,800 265,800 10,800 10,800 --
Stockholders'
equity (3) 203,972 150,032 393,560 339,177 343,169
(1) Pro forma net income, weighted average number of shares outstanding
and net income per share have not been presented for 1995 and 1994
since the Company, through its wholly owned subsidiary CommScope, Inc.
of North Carolina ("CommScope NC"), was formerly a wholly owned
indirect subsidiary of General Instrument Corporation ("General
Instrument") prior to July 28, 1997 (the "Distribution Date"). On the
Distribution Date, through a series of transactions and stockholder
dividends initiated by General Instrument (the "Distribution"),
CommScope NC became a wholly owned subsidiary of the Company. The
unaudited pro forma information for 1997 and 1996 has been prepared
utilizing the historical consolidated statements of income of
CommScope adjusted to reflect a net debt level of $275 million at the
beginning of each period presented at an assumed weighted average
borrowing rate of 6.35% plus the amortization of debt issuance costs
associated with the new borrowings incurred at the Distribution Date.
A total of 49.1 million common shares outstanding and 49.2 million
common and common equivalent shares outstanding at the Distribution
Date are assumed to be outstanding since January 1, 1996.
(2) EBITDA is presented not as an alternative measure of operating results
or cash flow (as determined in accordance with generally accepted
accounting principles), but rather to provide additional information
related to the Company's ability to service debt. The EBITDA measure
included herein may not be comparable to similarly titled measures
reported by other companies. For purposes of the EBITDA calculation,
amortization of deferred financing fees of $150 for 1998 and $70 for
1997 is excluded from net interest. These amounts are included in
depreciation and amortization.
(3) Giving effect to transactions of the Distribution as if they had
occurred on December 31, 1996, on a pro forma basis long-term debt was
$276,800 and stockholders' equity was $128,348.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY BACKGROUND
CommScope, Inc. ("CommScope" or the "Company") was incorporated in
Delaware in January 1997 and, through its wholly owned subsidiary,
CommScope, Inc. of North Carolina ("CommScope NC"), formerly a wholly owned
indirect subsidiary of General Instrument Corporation ("General
Instrument"), operates in the cable manufacturing business. The Company's
operations are conducted within one business segment that designs,
manufactures and markets coaxial, fiber optic and high performance
electronic cables primarily used in communications, local area network and
industrial applications. CommScope is a leading manufacturer and supplier
of coaxial cable for cable television applications and
12
other communications applications in the United States. CommScope is also a
leading supplier of coaxial cable to international cable television
markets.
On July 28, 1997 (the "Distribution Date"), through a series of
transactions and stockholder dividends initiated by General Instrument (the
"Distribution"), CommScope NC became a wholly owned subsidiary of the
Company. General Instrument retained no ownership interest in CommScope NC
or the Company, which commenced operations as an independent entity with
publicly traded common stock on the Distribution Date.
The Company's consolidated financial statements for periods prior to
the Distribution Date reflect the financial position, results of operations
and cash flows of CommScope NC that were included in the consolidated
financial statements of General Instrument. These financial results include
the assets, liabilities, revenues and expenses directly attributable to the
Company's operations and an allocation of certain assets, liabilities,
general corporate and administrative expenses, and net interest expense
from General Instrument. Management believes the assumptions underlying
these financial statements are reasonable, although these financial
statements may not necessarily reflect the results of operations or
financial position had CommScope been a separate, stand-alone entity.
FINANCIAL HIGHLIGHTS
For the three year period 1996-1998, CommScope reported the following
(in thousands, except per share amounts):
Year Ended December 31,
--------------------------------------
1998 1997 (A) 1996 (A)
---------- ----------- -----------
Net income $ 39,231 $ 34,604 $ 51,908
Net income per share - assuming $ 0.79 $ 0.70 $ 1.06
dilution
Net income, excluding
certain one-time events $ 35,931 $ 37,686 $ 51,908
Net income per share - assuming
dilution, excluding certain
one-time events $ 0.73 $ 0.77 $ 1.06
(A) Net income and net income per share information for 1997 and 1996 are
presented on a pro forma basis, giving effect to the Distribution in
July 1997.
One-time events during 1998 include an after-tax profit of $1.4
million related to the sale of certain real and personal property and
inventories of the High Temperature Aerospace and Industrial Cable Business
and an after-tax benefit of $1.9 million related to the partial reversal of
1997 after-tax charges associated with a closed Australian joint venture.
One-time events during 1997 include an after-tax charge of $3.1 million
associated with the closing of an Australian joint venture.
The Company's consolidated financial statements and related notes,
included elsewhere in the 1998 Annual Report, should be read as an integral
part of the financial highlights and the following financial review.
13
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 WITH
THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales for the year ended December 31, 1998 were $571.7 million
compared to $599.2 million in 1997, a decrease of 5%. The following table
presents the Company's revenues (in millions) by product line and domestic
versus international sales for the years ended December 31, 1998 and 1997,
respectively:
1998 Net % of 1998 1997 Net % of 1997
Sales Net Sales Sales Net Sales
----------------------------------------------
CATV Products $ 457.2 80.0 $ 491.5 82.0
LAN Products 74.8 13.1 76.6 12.8
Other products 39.7 6.9 31.1 5.2
----------------------------------------------
Total $ 571.7 100.0 $ 599.2 100.0
==============================================
Domestic sales $ 431.9 75.6 $ 398.8 66.6
International sales 139.8 24.4 200.4 33.4
----------------------------------------------
Total $ 571.7 100.0 $ 599.2 100.0
==============================================
CommScope is a leading manufacturer and supplier of coaxial cable for
cable television applications and other video telecommunications
applications (including in-home video wiring, broadcast and security) -
collectively referred to as "CATV Products" - in the United States and
internationally. Sales of CATV Products represented 80% of the Company's
net sales in 1998, compared to 82% in 1997.
Overall sales of CATV Products in 1998 decreased by 7% compared to
1997. Domestically, sales of CATV Products increased by 8%, driven
primarily by increased sales to multiple system operators using HFC
networks, who continued their system upgrading activities.
International sales (of which over 96% are for CATV Products)
decreased 30%, or $60.6 million, in 1998 from 1997 international sales of
$200.4 million. Sales to Latin America and the Pacific Rim were affected
due to the economic turmoil experienced in those regions during 1998. Sales
to the Pacific Rim were also negatively affected by decreased sales
activity in Australia ($0.9 million in 1998 compared to $10.3 million in
1997).
Management remains guarded about the near term outlook for
international sales. Excluding the Seneffe acquisition (discussed below),
which is expected to provide approximately 5% sales growth in 1999,
management expects the Company's overall 1999 international sales to be
relatively unchanged compared to 1998. The Company cannot predict with
certainty the outlook for international sales in 1999, however, and the
continued economic turmoil in international markets could result in lower
international sales in 1999 compared to 1998.
The Company expects that international sales in 1999 should be
impacted favorably by the announced acquisition of Alcatel's coaxial cable
business in Seneffe, Belgium (effective January 1, 1999). This acquisition
provides the Company with a European base of operations, access to
established distribution channels and complementary coaxial cable
technologies.
To complement its offering of CATV Products, the Company continues to
focus on growth opportunities for products used in local area network
applications ("LAN Products"). As a leader in the concept of high
performance premise wiring cable, sales of LAN Products have grown from
approximately $25 million in 1993 to $76.6 million in 1997, before
decreasing 2% in 1998 to $74.8 million. Although the sales of "enhanced"
cable continued to be strong, many of the distributors of "generic" cable
had unanticipated high inventory levels late in 1998 resulting in reduced
sales to those
14
distributors. The Company anticipates that the lower sales levels of the
fourth quarter 1998 are temporary and expects increased sales of LAN
Products in 1999.
Many of the Company's LAN Products utilize the raw material
fluorinated-ethylene-propylene ("FEP") to produce flame-retarding cables.
There are few worldwide producers of FEP and market supplies of this
product have been periodically limited over the past several years. In
1998, the Company announced that it had developed a patent pending
thin-wall foam FEP process that will use approximately 30% less FEP in
typical product designs and improve signal velocity. Customer response to
initial use of the new products has been positive, and the Company expects
to increase production of the new product designs during 1999.
Overall average selling prices for CATV Products for the full fiscal
year 1998 decreased slightly from 1997, but were generally more stable than
in recent years. Overall average selling prices for LAN Products were
stable for 1998 as compared to 1997 due to a stronger mix of enhanced
cables, which provide higher unit prices than standard grade cables.
However, overall average selling prices for LAN Products were lower during
the second half of 1998.
The Company has recently expanded into additional markets through the
internal development of new products such as Cell Reach, which is a coaxial
cable product designed to be installed on antenna towers for cellular
telephone, personal communication services (PCS), paging and other wireless
or cellular communications applications. Initial marketing of Cell Reach
cables and accessories as the lowest loss, lowest life-cycle cost solution
for wireless applications to cellular network operators in the United
States and certain international markets began in 1997. Sales of Cell Reach
products represented approximately 2% of total net sales in 1998. Recent
contracts with Airgate Wireless and Sprint PCS, announced late in 1998,
confirm that the Cell Reach product is gaining industry recognition in the
wireless and cellular market.
Sales of other products increased by $8.6 million in 1998 compared to
1997. Included in these amounts are sales of wiring products used in
telecommunication applications, Cell Reach product sales, and sales from
the High Temperature Aerospace and Industrial Cable Business (that was sold
in February 1998).
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit decreased $6.4 million, or 5%, to $134.6 million in 1998
compared to 1997 gross profit of $141.0 million. Gross profit margin was
23.5% in 1998 and 1997. The decrease in gross profit is due to the lower
sales volume in 1998 as compared to 1997.
Gross profit margin, while stable on a year-to-year basis, improved
significantly throughout 1998. Gross profit margins were 20.6% for the
first quarter of 1998, 23.0% for the second quarter of 1998, 24.8% for the
third quarter of 1998 and 25.3% for the fourth quarter of 1998. The gross
profit margin improvement of almost 500 basis points during the last three
calendar quarters of 1998 is due primarily to the following factors:
o A stabilization of market prices for the Company's coaxial cable
products
o Engineered manufacturing efficiencies including "value capture"
vertical integration
o Raw material cost improvements (including costs for commodity raw
materials)
o Improving Cell Reach product profitability
The Company has focused intensely on developing or acquiring
manufacturing capabilities that allow for the in-house production or
modification of materials and components used in the production of its
finished products that are more efficient than commercially practiced. As
the Company continues to capitalize on its competitive cost advantages by
expanding the reach of its vertical integration projects, the overall cost
of production is expected to improve. The Company currently has two key
projects planned that should maintain its cost reduction momentum during
1999.
The Company's Cell Reach product generated negative gross profit
margin during initial marketing and test installations in 1997. For 1997,
Cell Reach manufacturing start-up costs negatively impacted gross profit
margin by approximately 70 basis points. As Cell Reach has gained industry
recognition
15
during 1998, product sales have increased and the product has produced
positive gross profit margin in 1998.
The Company anticipates continued improvements in gross profit margins
in 1999 due to the pricing and cost initiatives in place. However, these
improvements may be moderated by the implementation of a new factory
information management system and the impact of the acquisition and
transition of the coaxial cable business operations in Seneffe, Belgium.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expense increased $2.4
million, or 5%, to $52.8 million in 1998 compared to $50.4 million in 1997.
The increase in SG&A expense is due primarily to expanded sales and
marketing efforts for the Company's products. As a percentage of net sales,
SG&A expense was 9.2% in 1998 and 8.4% in 1997.
With the additional costs of the Seneffe operations, the planned
expansion of sales and marketing efforts, and the planned implementation of
a new information management system planned during 1999, SG&A expense for
1999 is expected to increase from 1998 levels.
Research and development expense was 1% of net sales in both 1998 and
1997.
OTHER INCOME (EXPENSE), NET
Other income, net was $4.1 million in 1998 and other expense, net was
$4.2 million in 1997. Other income, net includes a $2.0 million benefit for
the partial reversal of 1997 pretax charges related to the Company's
financial investment in an Australian joint venture and a one-time gain
from the sale of its High Temperature Aerospace and Industrial Cable
Business of $1.9 million. Other expense, net in 1997 primarily reflects
pretax charges of $3.9 million to reduce the Company's total current
financial investment in an Australian joint venture to expected net
realizable value.
Due to certain governmental regulation changes and other events
affecting the market for cable products in Australia during 1997,
manufacturing operations of the joint venture were suspended in August 1997
and formally discontinued by decision of the joint venture's directors in
December 1997. During the fourth quarter of 1997, CommScope recorded pretax
charges of $3.9 million to other expense to reduce its total current
financial investment in the joint venture to expected net realizable value.
Tax benefits were recorded at the Company's effective tax rate reduced by a
$0.7 million valuation allowance established for expected non-deductible
capital losses resulting from the investment. Net of tax benefits of $0.8
million, these charges reduced 1997 net income by $3.1 million ($0.06 per
share).
In July 1998, a formal termination and dissolution agreement for the
joint venture was completed. The liquidation of the joint venture's assets
in 1998, which was impacted by the terms of the formal termination and
dissolution agreement between the partners, resulted in improved
expectations for the financial position of the joint venture at final
dissolution than was anticipated at December 1997. Accordingly, $2.0
million of the 1997 pretax charges related to the Company's financial
investment in the joint venture were reversed into other income ($0.04 per
share after taxes, including reversal of the capital loss valuation
allowance established in 1997).
NET INTEREST EXPENSE AND INCOME TAXES
Net interest expense was $14.9 million in 1998 compared to $13.5
million in 1997. On a pro forma basis (giving effect to the Distribution as
if it had occurred on January 1, 1997), net interest expense was $18.1
million in 1997. The reduction in net interest expense in 1998 compared to
pro forma net interest expense in 1997 is attributable to an $84 million
reduction in borrowings under the Company's revolving credit facility in
1998 (and a total reduction of $95 million from the Distribution Date to
December 31, 1998).
The Company's effective tax rate in 1998 was 34.8% (representing a 36%
normal effective tax rate reduced primarily by the effects of the change in
a capital loss valuation allowance of 1.1%). The Company's effective tax
rate in 1997 was 39.1% (representing a 38% normal effective tax rate
increased by 1.1% for the establishment of a capital loss valuation
allowance). The capital loss valuation allowance established in 1997
relates to expected non-deductible capital losses resulting from the
16
Company's equity investment in an Australian joint venture. The 200 basis
point reduction in the normal effective tax rate for 1998 compared to 1997
is due to increased tax benefits from foreign sales and the utilization of
state investment tax credits.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
WITH THE YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for the year ended December 31, 1997 were $599.2 million
compared to $572.2 million in 1996, an increase of 5%. The following table
presents the Company's revenues (in millions) by product line and domestic
versus international sales for the years ended December 31, 1997 and 1996,
respectively:
1997 Net % of 1997 1996 Net % of 1996
Sales Net Sales Sales Net Sales
----------------------------------------------
CATV Products $ 491.5 82.0 $ 489.4 85.5
LAN Products 76.6 12.8 66.5 11.6
Other products 31.1 5.2 16.3 2.9
----------------------------------------------
Total $ 599.2 100.0 $ 572.2 100.0
==============================================
Domestic sales $ 398.8 66.6 $ 371.3 64.9
International sales 200.4 33.4 200.9 35.1
----------------------------------------------
Total $ 599.2 100.0 $ 572.2 100.0
==============================================
Sales of CATV Products in 1997 were essentially equal to 1996 levels.
Domestically, sales of CATV Products were primarily to multiple system
operators using HFC networks, who continued their upgrading activities.
Excluding sales to our largest domestic customer, sales to domestic
multiple system operators increased by approximately 10% in 1997 as
compared to 1996. These domestic sales increases were mostly offset by
lower sales volume to the Company's largest customer in 1997.
International sales of CATV Products, which represent most of the
Company's international sales activity, were also equal to 1996
international sales levels. Excluding sales to Asia and the Pacific Rim
market, international sales increased approximately 11% in 1997 compared to
1996. However, sales to the Pacific Rim region decreased by $15 million
primarily as a result of economic conditions in the region and changes in
the Australian market due to certain governmental regulation changes and
other events affecting the market for cable products in that country. CATV
Product sales to Australia were $10.3 million in 1997, a decrease of $14.4
million from 1996 sales of $24.7 million.
Sales of LAN Products increased 15% in 1997 compared to 1996,
primarily due to higher sales volume for premise wiring of local area
networks. The higher sales volumes of LAN Products has been achieved
through the expansion of manufacturing capacity and facilities dedicated to
these products, the introduction of cable products with enhanced electrical
and physical performance and the acquisition of LAN product lines from
Teledyne Industries, Inc. in May 1996.
Average selling prices for both CATV Products and LAN Products were
lower in 1997 compared to 1996, primarily attributable to competitive price
reductions in the market for these products, and offset favorable unit
sales volume growth for most products.
Sales of other products, which increased $14.8 million in 1997
compared to 1996, primarily represent sales from the High Temperature
Aerospace and Industrial Cable Business, acquired along with certain other
assets primarily used in the production of certain LAN Products, from
Teledyne Industries, Inc. in May 1996. Sales from the High Temperature
Aerospace and Industrial Cable Business (which was sold in February 1998)
were $16.5 million in 1997 and $7.3 million in 1996 subsequent to the
acquisition, representing $9.2 million of the increase in sales of other
products for 1997. Other sales, primarily of wiring products used in
telecommunication applications, were $14.6 million in 1997 compared to $9.0
17
million in 1996. Sales of Cell Reach products, included in other sales,
were less than 1% of net sales in both 1997 and 1996.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit decreased $14.1 million, or 9%, to $141.0 million in 1997
compared to 1996 gross profit of $155.1 million. Gross profit margin was
23.5% in 1997 and 27.1% in 1996. The decrease in gross profit and gross
profit margin were due to market price competition, higher raw material
costs, low gross profit margin in the High Temperature Aerospace and
Industrial Cable Business, and negative gross profits generated during the
introduction phase of the Cell Reach product.
During 1997, particularly in the third and fourth quarters, the
Company made significant progress in the introduction of the Cell Reach
product. More than 500 cellular and PCS sites were successfully installed
and began operation of Cell Reach products, including customers such as
NEXTEL, BellSouth, Sprint and Air Touch. For 1997, Cell Reach manufacturing
start-up costs negatively impacted gross profit margin by approximately 70
basis points.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expense increased $6.1
million, or 14%, to $50.4 million in 1997 compared to $44.3 million in
1996. The increase in SG&A expense is due primarily to expanded sales and
marketing efforts for the Company's products, particularly for growth
opportunities in international cable and network markets, and the
development of a sales force to support the sale of Cell Reach products.
General and administrative expenditures related to the Distribution also
contributed slightly to the overall increase in SG&A expense. As a
percentage of net sales, SG&A expense was 8.4% in 1997 and 7.7% in 1996.
Research and development expense was 1% of net sales in both 1997 and
1996.
OTHER INCOME (EXPENSE), NET
Other expense, net was $4.2 million in 1997 and other income, net was
$1.8 million in 1996. Other expense, net in 1997 primarily reflects pretax
charges of $3.9 million to reduce its total current financial investment in
an Australian joint venture to expected net realizable value. Other income,
net in 1996 primarily reflects the Company's share of income generated by
its 49% investment in the Australian joint venture (acquired in August
1995).
NET INTEREST EXPENSE AND INCOME TAXES
Net interest expense, as recorded in the consolidated statements of
income, was $13.5 million in 1997 compared to $10.0 million in 1996.
On a pro forma basis (giving effect to the Distribution as if it had
occurred on January 1, 1996), net interest expense was $18.1 million in
1997 compared to $18.4 million in 1996. Pro forma interest expense was
computed using an assumed weighted-average borrowing rate of 6.35% plus the
amortization of debt issuance costs associated with borrowings initially
outstanding under the Company's credit facilities at the Distribution Date.
The reduction in pro forma net interest expense in 1997 compared to 1996 is
attributable to an $11.0 million reduction in borrowings under the
Company's revolving credit facility from the Distribution Date to December
31, 1997.
The provision for income taxes has been determined as if the Company
had filed separate tax returns under its existing structure for the periods
presented prior to the Distribution. The Company's effective tax rate was
39.1% in 1997 (representing a 38% normal effective tax rate increased by
1.1% for the establishment of a valuation allowance related to expected
non-deductible capital losses resulting from the Company's equity
investment in an Australian joint venture) and 38% in 1996.
CASH FLOWS
Cash provided by operating activities was $82.9 million in 1998, $59.7
million in 1997 and $52.0 million in 1996. Cash provided by operating
activities primarily represents net income plus non-cash
18
charges for depreciation, amortization and changes in deferred income
taxes, adjusted for the change in working capital.
Cash used in investing activities was $12.8 million in 1998, $29.6
million in 1997 and $51.0 million in 1996. The Company invested $22.8
million in 1998, $29.9 million in 1997 and $33.2 million in 1996 to acquire
equipment and facilities in support of capacity expansion across the
business units to meet increased current and anticipated future demands for
CommScope products. Cash proceeds from the sale of assets of the High
Temperature Aerospace and Industrial Cable Business in 1998 totaled $9.7
million. In 1996 the Company utilized $17.8 million to acquire the High
Temperature Aerospace and Industrial Cable Business, along with certain
other assets primarily used in the production of certain LAN Products, from
Teledyne Industries, Inc. Planned capital expenditures for equipment and
facilities during 1999 are $37 million, and will be impacted by the pace of
spending for vertical integration activities.
Cash used in financing activities was $69.3 million in 1998, $26.8
million in 1997 and $1.0 million in 1996. During 1998, the Company made net
repayments of $84.0 million of amounts borrowed under its revolving credit
facility. The Company received cash proceeds of $13.5 million from the
issuance of stock in a secondary public offering (completed primarily for
the sale of existing shares of stock held by partnerships associated with
Forstmann Little & Co.) and cash proceeds from the exercise of stock
options during 1998 of $1.2 million.
On July 23, 1997 the Company entered into an unsecured $350 million
revolving credit agreement with a group of banks (the "Credit Agreement").
On the Distribution Date, the Company initially borrowed $266 million under
the Credit Agreement. The initial borrowings were utilized to make a
dividend payment to General Instrument of $265.2 million in accordance with
the terms of the Distribution and to fund debt issuance costs of the Credit
Agreement exceeding $0.7 million. From the Distribution Date to December
31, 1997, net repayments of initial borrowings under the Credit Agreement
totaled $11.0 million.
Prior to the Distribution, the Company participated in the General
Instrument cash management program. To the extent the Company generated
positive cash, such amounts were remitted to General Instrument. To the
extent the Company experienced temporary cash needs for working capital
purposes or capital expenditures, such funds historically were provided by
General Instrument. Net transfers to General Instrument were $15.8 million
in 1997 and $1.0 million in 1996. The Company established an independent
cash management program on the Distribution Date to support future business
levels and growth objectives.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital was $94.0 million at December 31, 1998 compared to
$112.8 million and $107.2 million at December 31, 1997 and 1996,
respectively. The 1998 decrease in working capital of $18.8 million is
primarily the result of a $12.2 million reduction in inventory levels. The
1997 increase in working capital of $5.6 million is primarily the result of
$3.3 million in cash and cash equivalents retained by the Company under its
independent cash management program at December 31, 1997. Based on current
levels of orders and backlog, management of the Company believes that
working capital levels are appropriate to support future operations. There
can be no assurance, however, that future industry-specific developments or
general economic trends will not alter the Company's working capital
requirements.
Currently, the Company's primary source of funds for general working
capital needs, financing capital expenditures and other general corporate
purposes is the $350 million Credit Agreement, of which $171 million in
borrowings are outstanding at December 31, 1998. Interest on outstanding
borrowings under the Credit Agreement is generally payable quarterly in
arrears, and all amounts borrowed are due on December 31, 2002. The Credit
Agreement contains certain financial and operating covenants, which are
described more fully in Note 9 of the consolidated financial statements.
The Company was in compliance with these loan covenants at December 31,
1998. The weighted-average variable interest rate on outstanding borrowings
and associated credit fees under long-term debt facilities at December 31,
1998 was 6.16%.
19
The Company utilizes the Credit Agreement for, among other things,
general working capital needs, financing capital expenditures and other
general corporate purposes. Management believes that the Company will have
sufficient access to the capital markets to obtain financial resources of a
short- and long-term nature on acceptable terms as may be needed to fund
operations, capital expenditures and other growth objectives to the extent
not provided by cash flows from operations.
The ratio of total debt to total capital (debt plus equity) was 47% at
December 31, 1998 compared to 64% at December 31, 1997. The decrease in the
ratio was primarily due to net repayments of borrowings under the Company's
Credit Agreement of $84 million, net income for 1998, and $13.5 million in
proceeds from the issuance of stock in the secondary offering.
RISK MANAGEMENT
In the normal course of business, CommScope is exposed to the risk of
loss from non-performance by its customers under outstanding extensions of
credit (accounts receivable). The Company controls exposures to credit risk
associated with these financial instruments through credit approvals,
credit limits and monitoring procedures. At December 31, 1998, in
management's opinion, CommScope did not have any significant exposure to
any individual customer or counter-party, nor did CommScope have any
significant concentration of credit risk related to any financial
instrument.
CommScope is exposed to market risk from changes in commodity raw
material prices, changes in foreign currency exchange rates and increases
in interest rates, which could impact its results of operations and
financial condition. CommScope manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments.
Derivative financial instruments are not used for speculative or trading
purposes.
Many of the raw materials utilized in the Company's manufacturing
operations are commodity products that are openly traded on exchange
markets, and are subject to significant changes in market prices. Changes
in the prices of commodity raw materials used by the Company could result
in higher overall production costs, thereby negatively impacting the
Company's gross profit margin. As of December 31, 1998, the Company had
entered into a commodity price swap agreement to effectively lock in a
fixed price for a portion of its third quarter 1999 aluminum purchases. The
total value of aluminum covered by the commodity price swap agreement in
place at December 31, 1998 equates to less than 1% of the Company's average
quarterly cost of sales. As of December 31, 1997 the Company had not
entered into any derivative financial instruments to hedge its exposures to
changes in the market prices of commodity products.
The Company primarily bills customers in foreign countries in U.S.
dollars. However, a significant decline in the value of currencies used in
certain regions of the world as compared to the U.S. dollar can adversely
affect product sales in those regions because CommScope products may become
more expensive for those customers to pay for in their local currency. The
Company had not entered into any derivative financial instruments related
to foreign currency exchange rates at December 31, 1998 or 1997.
The Company's primary source of funds currently (other than cash flows
from operations) is borrowings available under the $350 million Credit
Agreement. Amounts borrowed under the Credit Agreement incur interest at
variable rates that are based on an underlying market rate such as LIBOR or
the prime rate. The interest term for individual borrowings under the
Credit Agreement cannot exceed six months, at which time the underlying
market rate of the individually outstanding borrowings is reset to the
current market rates. As of December 31, 1998, the Company had entered into
interest rate swap agreements to effectively convert an aggregate amount of
$100 million of variable-rate borrowings to a fixed-rate basis. Contracts
for notional amounts of $50 million each expire in April 1999 and October
2001, respectively. Under the agreements, interest settlement payments will
be made quarterly based upon the spread between the three month LIBOR, as
adjusted quarterly, and fixed rates of 5.79% and 4.81%, respectively. Net
payments or receipts resulting from the interest rate swap agreements are
recorded as adjustments to interest expense in each quarter. The Company
had similar interest rate swap agreements outstanding at December 31, 1997.
20
The fair value of the Company's commodity price and interest rate swap
agreements was not material to the Company's financial position at December
31, 1998 or 1997.
EFFECTS OF INFLATION
The Company continually attempts to minimize any effect of inflation
on earnings by controlling its operating costs and selling prices. During
the past few years, the rate of inflation has been low and has not had a
material impact on the Company's results of operations.
The principal raw materials purchased by CommScope (fabricated
aluminum, plastics, bi-metals, copper and optical fiber) are subject to
changes in market price as these materials are linked to the commodity
markets. To the extent that CommScope is unable to pass on cost increases
to customers, the cost increases could have a significant impact on the
results of operations of CommScope.
OTHER
CommScope is either a plaintiff or a defendant in pending legal
matters in the normal course of business; however, management believes none
of these legal matters will have a materially adverse effect on the
Company's financial statements upon final disposition. In addition,
CommScope is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous
materials. The Company's manufacturing facilities are believed to be in
substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
materially adverse effect on the Company's financial statements.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income", on January 1, 1998.
Comprehensive income is defined as "all changes in stockholders' equity
exclusive of transactions with owners". Examples of items to be reported as
"other comprehensive income" include unrealized gains or losses on
available-for-sale securities, translation adjustments on investments in
consolidated foreign subsidiaries and certain changes in minimum pension
liabilities. There were no transactions representing other comprehensive
income during the years ended December 31, 1998, 1997 or 1996.
Comprehensive income will also include gains and losses on certain
derivative transactions that qualify as hedges, as computed under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 was issued in June 1998 and will be adopted by the Company on
January 1, 2000. SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes special accounting
standards for derivatives that qualify as fair value hedges, cash flow
hedges and hedges of foreign currency exposures of net investments in
foreign operations. Management is evaluating the impact of the adoption of
SFAS No. 133 on the Company's financial position and operations.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies, and adopted the Euro as their new common legal currency. As of
that date, the Euro trades on currency exchanges. The legacy currencies of
the participating countries will remain legal tender for a transition
period between January 1, 1999 and January 1, 2002. The Company conducts
business in member countries.
During the transition period, cash-less payments (for example, wire
transfers) can be made in the Euro, and parties to individual transactions
can elect to pay for goods and services using either the Euro or the legacy
currency. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and eventually withdraw all
legacy currencies so that they will no longer be available.
The Company is addressing the issues involved with the introduction of
the Euro. Among the issues facing the Company are the assessment and
conversion of information technology ("IT") systems to allow for
transactions to take place in both the legacy currencies and the Euro and
the eventual
21
elimination of the legacy currencies. In addition, the Company is reviewing
certain existing contracts for potential modification and assessing its
pricing/marketing strategies in the affected European markets.
Based on current information, CommScope does not expect that the Euro
conversion will have a material adverse effect on its business, results of
operations, cash flows or financial condition.
YEAR 2000
CommScope is currently addressing an issue common to most companies -
ensuring that its existing IT systems and applications and other non-IT
control devices are suitable for continued use into and beyond the Year
2000. Many IT systems and applications and non-IT control devices utilized
by the Company use only two digits to identify a year in the date field -
and accordingly may recognize a date using "00" as the Year 1900 or some
other date rather than the Year 2000. Failure to make appropriate
modifications or upgrades to critical IT systems and applications and
non-IT control devices could result in a system failure or miscalculations
causing significant disruptions to operations. Third parties with whom the
Company interacts also employ various computer systems with similar Year
2000 compliance issues. Failure by third parties to adequately address
their own Year 2000 compliance issues exposes the Company to business risks
such as a reduced demand for the Company's products or the lack of
availability of critical raw materials or services required for
manufacturing the Company's products. The Company's products themselves -
high performance, high bandwidth cables for the telecommunications industry
- - are not affected by the Year 2000 problem. The Year 2000 compliance
discussion below is based on information currently available to the
Company. Readers are cautioned that forward-looking statements contained in
the Year 2000 section should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements".
To address the Year 2000 compliance issue, the Company has appointed a
corporate-wide Year 2000 compliance project team which is responsible for
coordinating the identification, evaluation, and implementation of changes
to IT systems and applications and non-IT control devices necessary to
achieve a Year 2000 date conversion. The Year 2000 compliance project team
is also investigating significant third parties to determine the
effectiveness of their efforts toward achieving Year 2000 compliance.
The Year 2000 compliance project team has designed a systematic
methodology of addressing the Year 2000 compliance issue, which includes:
(1) identification and evaluation of IT systems and applications and non-IT
control devices with Year 2000 compliance issues; (2) implementation of
changes to IT systems and applications and non-IT control devices to
achieve Year 2000 compliance; (3) testing of the corrective actions taken
to ensure Year 2000 compliance for the identified systems; and (4)
development of contingency plans in the event of the failure of third
parties to become Year 2000 compliant.
A database of internal IT systems and applications and non-IT control
devices which rely on date-sensitive computer logic has been developed to
provide a starting framework from which to address the significant issues
related to Year 2000 compliance. Each of these systems, applications and
devices is being classified as a priority A, B, or C issue. Both A and B
priority items are deemed as critical systems which must be modified or
upgraded into Year 2000 compliance. Priority C items are non-critical IT
and non-IT systems which will be upgraded into Year 2000 compliance upon
completion of the modification of A and B priority items.
The Year 2000 compliance project team has also accumulated a database
of significant third parties. Each of these third parties is being
contacted and asked to provide responses which will allow the Company to
assess their ability to achieve Year 2000 compliance. The Company will also
evaluate third-party compliance through internal testing, where feasible,
to verify that the modifications are effective. Almost all of the Company's
suppliers are still engaged in executing their Year 2000 compliance
efforts. As a result, the Company at this time cannot fully evaluate the
Year 2000 risks to its supply of goods and services. The Company maintains
a list of alternative suppliers as part of its contingency plan in the
event current suppliers do not timely complete their compliance efforts.
However, because there are limited sources of certain materials used in
manufacturing the Company's products, the Company may not be able to
develop an alternative source of supply if the operations of its current
suppliers are interrupted as a result of Year 2000 non-compliance.
CommScope will continue to
22
monitor the Year 2000 status of its suppliers to minimize this risk and
will develop or modify, as appropriate, contingency plans as the risks
become more clear.
Modifications to most written programs for IT systems and applications
(which initially were developed in-house) have been in progress by Company
personnel since early 1997. In addition, certain non-compliant systems and
applications have been or are being replaced with Year 2000 compliant
systems and products. Substantially all IT systems and applications
acquired from external sources are being upgraded to Year 2000 compliant
versions (if they are not already) through system upgrades or through the
purchase of new systems. The Company believes that it has achieved 77% Year
2000 compliance for critical internal IT systems and applications at
December 31, 1998, with 100% Year 2000 compliance expected by the third
quarter of 1999. Virtually all the critical non-IT systems (including a
variety of equipment control devices) are currently being identified,
evaluated and modified, as appropriate, for Year 2000 compliance through
upgrades to Year 2000 compliant devices.
The Company plans to test the effectiveness of corrective actions
taken to achieve Year 2000 compliance during 1999, but to date it has not
performed compliance testing on systems or applications for which Year 2000
modifications have been made. As compliance testing is completed and a full
assessment of the risks from potential Year 2000 systems failures can be
made, the Company plans to develop Year 2000 contingency plans for such
risks. These contingency plans will factor in business and operating
decisions related to the potential failure of significant third parties to
become Year 2000 compliant.
The Company currently does not believe that the costs of addressing
Year 2000 compliance issues will be material to the Company's results of
operations, financial condition or cash flows. The Company estimates that,
through December 31, 1998, it has spent $350,000 to address Year 2000
compliance issues for IT systems and applications and $100,000 for non-IT
devices. Future expenditures to address Year 2000 compliance issues are
currently estimated at $400,000 for IT systems and applications and
$500,000 for non-IT devices. The Company expects to finance expenditures
for Year 2000 compliance modifications through cash flows from future
operations.
Due to the Company's dependence upon, and its current uncertainty
with, the Year 2000 compliance of certain third-party suppliers and
vendors, the Company is unable to determine at this time its most
reasonably likely worst case scenario. The Company expects its Year 2000
compliance efforts to reduce significantly the Company's current level of
uncertainty regarding the impact of these Year 2000 issues.
The Company believes that the corrective actions implemented under the
direction of the Year 2000 compliance project team will be completed on a
timely basis in a cost-effective manner to ensure that the Company's
internal systems will be operational and suitable for continued use in the
Year 2000 and beyond. In addition, the Company believes that significant
third parties will become Year 2000 compliant or that adequate contingency
plans will be developed and implemented to ensure minimal business
interruption to the Company's operations. However, there can be no
guarantee that problems associated with system failure or deficient system
operation due to Year 2000 compliance issues will not result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
SUBSEQUENT EVENTS
Effective January 1, 1999, the Company acquired certain assets and
assumed certain liabilities of Alcatel's coaxial cable business in Seneffe,
Belgium. The acquisition provides the Company with a European base of
operations, access to established distribution channels and complementary
coaxial cable technologies. The operation in Seneffe is the largest CATV
coaxial cable manufacturer in Europe with annual sales by Alcatel of
approximately $35 million in 1998.
The acquisition will be accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities
will be recorded at their estimated fair value at the date of the
acquisition of approximately $20 million. Payment for the acquired business
will be financed primarily by borrowings under a new credit agreement for
15 million Euros (approximately $17 million) entered into by the Company in
the first quarter of 1999.
23
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K which are other than historical
facts are intended to be "forward-looking statements" within the meaning of
the Securities Exchange Act of 1934, the Private Securities Litigation
Reform Act of 1995 and other related laws. These forward-looking statements
are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "think", "project", "projects", "projected", "projections",
"plans", "anticipates", "anticipated", "should", "designed to",
"foreseeable future", "believe", "believes" and "scheduled" and similar
expressions. These statements are subject to various risks and
uncertainties, many of which are outside the control of the Company, such
as the level of market demand for the Company's products, competitive
pressures, the ability to achieve reductions in costs and to continue to
integrate acquisitions, price fluctuations of materials and the potential
unavailability thereof, foreign currency fluctuations, technological
obsolescence, and other specific factors discussed in Exhibit 99 to this
Form 10-K, which is incorporated by reference herein. The information
contained in this Form 10-K represents the Company's best judgment at the
date of this report based on information currently available. However, the
Company does not intend to update this information to reflect developments
or information obtained after the date of this report and disclaims any
legal obligation to do so.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE #
------------------------------------------------------------------------
Independent Auditors' Report. 26
Consolidated Statements of Income for the Years ended
December 31, 1998, 1997 and 1996. 27
Consolidated Balance Sheets at December 31, 1998 and
1997. 28
Consolidated Statements of Cash Flows for the Years
ended December 31, 1998, 1997 and 1996. 29
Consolidated Statements of Stockholders' Equity for
the Years ended December 31, 1998, 1997 and 1996. 30
Notes to Consolidated Financial Statements. 31-45
Schedule II - Valuation and Qualifying Accounts. 46
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of CommScope, Inc.
Hickory, North Carolina
We have audited the accompanying consolidated balance sheets of CommScope,
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CommScope, Inc. and
subsidiary at December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 29, 1999
26
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- ------------
Net Sales (Notes 4, 5 and 16) % 571,733 $ 599,216 572,212
------------- ------------- ------------
Operating costs and expenses:
Cost of sales 437,140 458,216 417,123
Selling, general and 52,817 50,361 44,342
administrative
Research and development 5,612 6,234 5,348
Amortization of goodwill 5,194 5,223 5,145
------------- ------------- ------------
Total operating costs and expenses 500,763 520,034 471,958
------------- ------------- ------------
Operating Income 70,970 79,182 100,254
Other income (expense), net (Note 4) (4,134) (4,183) 1,839
Interest expense (15,448) (13,685) (10,091)
Interest income 558 200 101
------------- ------------- ------------
Income Before Income Taxes 60,214 61,514 92,103
Provision for income taxes (Note 11) (20,983) (24,056) (34,981)
------------- ------------- ------------
Net Income $ 39,231 37,458 57,122
============= ============= ============
Net income per share:
Basic $ 0.80
Assuming dilution $ 0.79
Weighted-average shares outstanding:
Basic 49,221
Assuming dilution 49,521
Historical net income per share data for 1997 and 1996 is not considered
relevant for the reasons provided in Notes 2 and 3. Pro forma net income
per share data is presented in Note 3.
See notes to consolidated financial statements.
27
COMMSCOPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As of December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $4,129 $ 3,330
Accounts receivable, less allowance for doubtful
accounts of $4,126 and $3,985, respectively 93,627 95,741
Inventories (Note 6) 29,986 42,223
Prepaid expenses and other current assets 3,745 2,439
Deferred income taxes (Note 11) 12,925 12,102
------------ ------------
Total current assets 144,412 155,835
Property, plant and equipment, net (Note 7) 135,082 133,235
Goodwill, net of accumulated amortization of
$43,396 and $38,263, respectively 164,024 170,345
Other intangibles, net of accumulated amortization of
$29,314 and $26,573, respectively 19,451 22,192
Investments and other assets (Note 4) 2,358 1,932
------------ ------------
Total Assets $ 465,327 $ 483,539
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 23,717 $18,533
Other accrued liabilities (Note 8) 26,713 24,516
------------ ------------
Total current liabilities 50,430 43,049
Long-term debt (Note 9) 181,800 265,800
Deferred income taxes (Note 11) 17,543 14,932
Other long-term liabilities (Note 10) 11,582 9,726
------------ ------------
Total 261,355 333,507
Liabilities
Commitments and contingencies (Note 15)
Stockholders' Equity (Notes 1, 9,12 and 13):
Preferred stock, $.01 par value; Authorized shares:
20,000,000;
Issued and outstanding shares:
None at December 31, 1998 and 1997 -- --
Common Stock, $.01 par value; Authorized shares:
300,000,000;
Issued and outstanding shares: 50,254,467 at
December 31, 1998;
49,108,874 at December 31, 1997 503 491
Additional paid-in capital 155,631 140,934
Retained earnings 47,838 8,607
------------ ------------
Total Stockholders' Equity 203,972 150,032
------------ ------------
Total Liabilities and Stockholders' Equity $ 465,327 $ 483,539
============ ============
See notes to consolidated financial statements.
28
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------ ----------------- ---------------
OPERATING ACTIVITIES:
Net income $ 39,231 $ 37,458 $57,122
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and 24,662 21,677 18,952
amortization
Gain on sale of assets of
the high temperature
aerospace and industrial (1,873) -- --
cable business
Changes in assets and
liabilities:
Accounts receivable 5,114 6,076 (19,775)
Inventories 6,318 (1,087) (12,059)
Prepaid expenses and
other current assets (1,546) (1,125) (705)
Deferred income taxes 1,788 1,374 1,030
Accounts payable and
other accrued liabilities 7,667 (7,713) 6,686
Other long-term 1,856 161 2,139
liabilities
Other (340) 2,894 (1,426)
-------------- --------------- ---------------
Net cash provided by operating 82,877 59,688 51,964
activities -------------- --------------- ---------------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment (22,784) (29,871) (33,218)
Acquisition of Teledyne
Industries, Inc. assets, net -- -- (17,849)
Sale of assets of the high
temperature aerospace and
industrial cable business 9,654 -- --
Other 343 268 65
Net cash used in investing (12,787) (29,603) (51,002)
activities -------------- --------------- ---------------
FINANCING ACTIVITIES:
Net borrowings (repayments)
under revolving credit (84,000) 255,000 --
facility
Debt issuance costs -- (705) --
Dividend paid to former
parent company -- (265,212) --
Proceeds from exercise of
stock options 1,235 -- --
Proceeds from issuance of
shares in secondary offering 13,474 -- --
Transfers to former parent
company, net -- (15,838) (962)
Net cash used in financing (69,291) (26,755) (962)
activities -------------- --------------- ---------------
Increase in cash and cash 799 3,330 --
equivalents
Cash and cash equivalents,
beginning of year 3,330 -- --
-------------- --------------- ---------------
Cash and cash equivalents, end $ 4,129 $ 3,330 $ --
of year ============== =============== ===============
See notes to consolidated financial statements.
29
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Number of
Common Additional Total
Shares Common Paid-In Divisional Retained Stockholders'
Outstanding Stock Capital Equity Earnings Equity
-------------------------------------------------------------------------
Balance December 31, -- $ -- $ -- $339,177 $ -- $ 339,177
1995
Transfers to former
parent company, net -- -- -- (962) -- (962)
Other transactions
with former parent -- -- -- (1,777) -- (1,777)
company
Net income (and
comprehensive income) -- -- -- 57,122 -- 57,122
-------------------------------------------------------------------
Balance December 31, 1996 -- -- -- 393,560 -- 393,560
Transfers to former
parent company, net -- -- -- (15,838) -- (15,838)
Dividend paid to
former parent company -- -- -- (265,212) -- (265,212)
Net income (and
comprehensive
income) from January
1, 1997 to July 27, 1997 -- -- -- 28,851 -- 28,851
Issuance of shares in
the Distribution 49,104,874 491 140,870 (141,361) -- --
(Note 1)
Issuance of 4,000 shares 4,000 -- 64 -- -- 64
Net income (and
comprehensive
income) from July
28, 1997 to December
31, 1997 -- -- -- -- 8,607 8,607
-------------------------------------------------------------------
Balance December 31,
1997 49,108,874 491 140,934 -- 8,607 150,032
Issuance of shares in
secondary offering 1,050,573 11 13,463 -- -- 13,474
Issuance of shares
for stock option 95,020 1 1,234 -- -- 1,234
exercises
Net income (and
comprehensive income) -- -- -- -- 39,231 39,231
-------------------------------------------------------------------
Balance December 31, 50,254,467 $ 503 $155,631 -- 47,838 $ 203,972
1998
===================================================================
Comprehensive income is equal to net income during all periods presented.
During all periods presented, the Company has no individual items comprising
other comprehensive income.
See notes to consolidated financial statements.
30
COMMSCOPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
CommScope, Inc. ("CommScope" or the "Company") was incorporated in Delaware
in January 1997 and, through its wholly owned subsidiary, CommScope, Inc.
of North Carolina ("CommScope NC"), formerly a wholly owned indirect
subsidiary of General Instrument Corporation ("General Instrument"),
operates in the cable manufacturing business. The Company's operations are
conducted within one business segment that designs, manufactures and
markets coaxial, fiber optic and high performance electronic cables
primarily used in communications, local area network and industrial
applications. CommScope is a leading manufacturer and supplier of coaxial
cable for cable television applications and other communications
applications in the United States. CommScope is also a leading supplier of
coaxial cable to international cable television markets.
On July 28, 1997 (the "Distribution Date"), through a series of
transactions and stockholder dividends initiated by General Instrument (the
"Distribution"), CommScope NC became a wholly owned subsidiary of the
Company. General Instrument retained no ownership interest in CommScope NC
or the Company, which commenced operations as an independent entity with
publicly traded common stock on the Distribution Date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include CommScope and
its wholly owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation.
BASIS OF PRESENTATION
The accompanying financial statements for periods prior to the Distribution
Date include the assets, liabilities, revenues and expenses directly
attributable to the Company's operations and an allocation of certain
assets, liabilities, general corporate and administrative expenses, and net
interest expense from General Instrument. General corporate and
administrative expenses were allocated to the Company on a consistent basis
using management's estimate of services provided to CommScope by General
Instrument. Consolidated net interest expense of General Instrument for
each period prior to the Distribution was allocated to CommScope based upon
the Company's net assets as a percentage of the total net assets of General
Instrument. The provision for income taxes for all periods prior to the
Distribution is based on the Company's expected annual effective tax rate,
calculated assuming CommScope had filed tax returns as a separate,
free-standing entity. The allocations of expenses from General Instrument
were made consistently in each period. Although management believes these
allocations are reasonable, the financial results prior to the Distribution
do not necessarily reflect the financial position and results of operations
of CommScope had it operated as a separate, free-standing entity during
these periods, and may not be indicative of future operations or financial
position.
The financial results of the Company and transfers of capital to/from
General Instrument by the Company prior to the Distribution were included
in the consolidated results of operations and financial position of General
Instrument. Accordingly, all transactions affecting stockholders' equity
prior to the Distribution Date are presented as divisional equity in the
consolidated statements of stockholders' equity. Transfers of capital
to/from General Instrument by the Company reflect the net cash generated or
used by the Company during each period prior to the Distribution as a
participant in the General Instrument cash management program. After the
dividend payment was made to General Instrument in accordance with the
terms of the Distribution, the remaining divisional equity was contributed
to the Company by General Instrument and is reflected as common stock and
additional paid-in capital. Net income of the Company after the
Distribution is reflected as a component of retained earnings. At the
Distribution Date, CommScope implemented an independent cash management
program and assumed
31
responsibility for the general corporate and administrative expenses,
financing costs and income taxes associated with operating a separate,
free-standing public company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent amounts on deposit in banks and cash
invested temporarily in various instruments with a maturity of three months
or less at the time of purchase.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out ("FIFO") basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Provisions for
depreciation are based on estimated useful lives of the assets using the
straight-line method. Average useful lives are 10 to 35 years for buildings
and improvements and three to 10 years for machinery and equipment.
Expenditures for repairs and maintenance are charged to expense as
incurred.
GOODWILL, OTHER INTANGIBLES AND OTHER LONG LIVED ASSETS
Goodwill is being amortized on a straight-line basis over 35 to 40 years.
Other intangibles consist primarily of patents and customer lists, which
are being amortized on a straight-line basis over approximately 17 years.
Management continually reassesses the appropriateness of both the carrying
value and remaining life of long lived assets by assessing recoverability
based on forecasted operating cash flows, on an undiscounted basis, and
other factors. Management believes that, as of December 31, 1998, the
carrying value and remaining life of recorded goodwill, other intangibles
and other long lived assets is appropriate.
INCOME TAXES
The Company's operating results were part of General Instrument's
consolidated federal and certain state income tax returns prior to the
Distribution, including 1997 income tax returns for the period up to the
Distribution Date. For periods prior to the Distribution, currently payable
or refundable federal income taxes (plus certain state income taxes) and
changes in deferred tax assets and liabilities were settled with General
Instrument through divisional equity.
The provision for income taxes has been determined as if CommScope had
filed separate tax returns for the periods presented prior to the
Distribution. Future tax rates could vary from the historical effective tax
rates depending upon the Company's future legal structure and tax
elections.
Under a tax-sharing agreement entered into with General Instrument and
other previously related parties in connection with the Distribution,
adjustments to taxes paid by General Instrument in the pre-Distribution
period that are clearly attributable to the business of CommScope will be
the responsibility of the Company.
Deferred income taxes reflect the future tax consequences of differences
between the financial reporting and tax bases of assets and liabilities.
Investment tax credits are recorded using the flow-through method.
REVENUE RECOGNITION
Revenue from sales of the Company's products is recorded at the time the
goods are shipped and title passes.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are incurred.
Advertising expense was $0.9 million in 1998, $1.2 million in 1997 and $0.8
million in 1996.
32
NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Net income per
share (basic) is computed by dividing net income by the weighted-average
number of common shares outstanding. Net income per share (assuming
dilution) is computed by dividing net income by the weighted-average number
of common and common equivalent shares outstanding. The following table
reconciles shares outstanding for each computation of net income per share
under SFAS No. 128:
Year Ended December 31,
--------------------------------
1998 1997 (A) 1996 (A)
--------- --------- -----------
Weighted-average number of common
shares outstanding 49,221 49,107 49,105
Dilution effect of employee stock 300 131 95
options (B) --------- --------- ---------
Weighted-average number of common
and
common equivalent shares 49,521 49,238 49,200
outstanding ========= ========= =========
(A) Weighted-average shares outstanding information for 1997 and 1996 is
presented on a pro forma basis, and assumes that a total of 49.1
million common shares and 49.2 million common and common equivalent
shares were outstanding from January 1, 1996 to the Distribution Date.
Additionally, the weighted-average share information for 1997 reflects
the impact of changes in common shares outstanding and stock option
dilution subsequent to the Distribution Date. Pro forma net income per
share information is presented in Note 3.
(B) For additional information regarding employee stock options, see Note
12.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates are
based on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual results.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", on
January 1, 1998. Comprehensive income is defined as "all changes in
stockholders' equity exclusive of transactions with owners". Examples of
items to be reported as "other comprehensive income" include unrealized
gains or losses on available-for-sale securities, translation adjustments
on investments in consolidated foreign subsidiaries and certain changes in
minimum pension liabilities. There were no transactions representing other
comprehensive income during the years ended December 31, 1998, 1997 or
1996.
Comprehensive income will also include gains and losses on certain
derivative transactions that qualify as hedges, as computed under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 was issued in June 1998 and will be adopted by the Company on
January 1, 2000. SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes special accounting
standards for derivatives that qualify as fair value hedges, cash flow
hedges and hedges of foreign currency exposures of net investments in
foreign operations. Management is evaluating the impact of the adoption of
SFAS No. 133 on the Company's financial position and operations.
3. PRO FORMA FINANCIAL INFORMATION
The Company's earnings were included in General Instrument's results of
operations for all periods presented prior to the Distribution.
Additionally, the capital structure of the Company changed
33
significantly as a result of initial borrowings under the Company's credit
facility on the Distribution Date, which were utilized primarily to make a
dividend payment to General Instrument in accordance with the terms of the
Distribution (see Note 9). Accordingly, no historical net income per share
data has been presented for 1997 and 1996.
The unaudited pro forma financial information below presents the
consolidated statements of income of CommScope as if the Distribution had
occurred on January 1, 1996. The unaudited pro forma financial information
does not purport to represent what the Company's operations actually would
have been for the years presented or to project the Company's operating
results for any future period.
The unaudited pro forma information below was prepared by adjusting the
historical consolidated statements of income of the Company to reflect
interest expense based on a net debt level of $275 million at the beginning
of each period presented. Pro forma interest expense was computed using an
assumed weighted-average borrowing rate of 6.35% plus the amortization of
debt issuance costs associated with borrowings initially outstanding under
the Company's credit facilities at the Distribution Date. Weighted-average
common and common equivalent shares outstanding at the Distribution Date
are assumed to be outstanding since January 1, 1996 (see Note 2 for
additional information on weighted-average shares outstanding).
Giving effect to the Distribution as of January 1, 1996, pro forma net
income was $34,604 for the year ended December 31, 1997 ($0.70 per share -
basic and assuming dilution) and $51,908 for the year ended December 31,
1996 ($1.06 per share - basic and assuming dilution). Pro forma net income
for 1997 was calculated based on net interest expense of $18.1 million and
income tax expense of $22.3 million. Pro forma net income for 1996 was
calculated based on net interest expense of $18.4 million and income tax
expense of $31.8 million.
4. JOINT VENTURE
In August 1995, CommScope entered into a joint venture agreement with
Pacific Dunlop Ltd. to produce cable in Australia, acquiring a 49%
ownership interest. The Company's share of income and losses from the joint
venture is recorded as other income (expense) in the consolidated
statements of income using the equity method of accounting. The Company's
share of income from the joint venture was $1.3 million in 1996. The
Company's share of losses from the joint venture in 1997 was $6.1 million,
including the significant fourth quarter 1997 charges discussed below.
Due to certain governmental regulation changes and other events affecting
the market for cable products in Australia during 1997, manufacturing
operations of the joint venture were suspended in August 1997 and formally
discontinued by decision of the joint venture's directors in December 1997.
During the fourth quarter of 1997, CommScope recorded pretax charges of
$3.9 million to other expense to reduce its total current financial
investment in the joint venture to expected net realizable value. Tax
benefits were recorded at the Company's effective tax rate reduced by a
$0.7 million valuation allowance established for expected non-deductible
capital losses resulting from the investment (see Note 11 for additional
information on income taxes). Net of tax benefits of $0.8 million, these
charges reduced 1997 net income by $3.1 million ($0.06 per share).
In July 1998, a formal termination and dissolution agreement for the joint
venture was completed. The liquidation of the joint venture's assets in
1998, which was impacted by the terms of the formal termination and
dissolution agreement between the partners, resulted in improved
expectations for the financial position of the joint venture at final
dissolution than was anticipated at December 1997. Accordingly, $2.0
million of the 1997 pretax charges related to the Company's financial
investment in the joint venture were reversed into other income ($0.04 per
share after taxes, including reversal of the capital loss valuation
allowance established in 1997).
Sales of cable products to the joint venture by CommScope totaled $0.9
million in 1998, $10.3 million in 1997 and $24.7 million in 1996.
34
5. ACQUISITIONS AND DIVESTITURES
In May 1996, CommScope acquired certain assets and assumed certain
liabilities of a specialty high performance wire and cable manufacturing
operation from Teledyne Industries, Inc. ("Teledyne") for a net purchase
price of $17.8 million. The acquired operation specializes in high
temperature aerospace and industrial cables (the "High Temperature
Aerospace and Industrial Cable Business") and local area network cables.
The acquisition was accounted for as a purchase business combination and,
accordingly, the acquired assets and assumed liabilities were recorded at
their estimated fair value at the date of the acquisition.
In February 1998, the Company sold certain real and personal property and
inventories of the High Temperature Aerospace and Industrial Cable Business
to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. The
Company retained the LAN manufacturing equipment previously purchased from
Teledyne. The Company recognized a pre-tax gain from the sale of $1,873 in
other income.
Sales from the High Temperature Aerospace and Industrial Cable Business
totaled $2.4 million in 1998 prior to the sale, $16.5 million in 1997 and
$7.3 million in 1996 subsequent to the acquisition from Teledyne.
6. INVENTORIES
December 31,
---------------------------
1998 1997
-------------- -------------
Raw materials $ 12,379 $ 16,376
Work in process 5,811 8,860
Finished goods 11,796 16,987
-------------- -------------
$ 29,986 $ 42,223
============== =============
The principal raw materials purchased by CommScope (fabricated aluminum,
plastics, bi-metals, copper and optical fiber) are subject to changes in
market price as these materials are linked to the commodity markets. To the
extent that CommScope is unable to pass on cost increases to customers, the
cost increases could have a significant impact on the results of operations
of CommScope.
7. PROPERTY, PLANT AND EQUIPMENT
December 31,
---------------------------
1998 1997
-------------- --------------
Land and land improvements $ 3,577 $ 3,218
Buildings and improvements 43,639 47,202
Machinery and equipment 158,333 142,618
Construction in progress 10,418 7,375
-------------- --------------
215,967 200,413
Accumulated depreciation (80,885) (67,178)
============== ==============
$ 135,082 $ 133,235
============== ==============
35
8. OTHER ACCRUED LIABILITIES
---------------------------
December 31,
---------------------------
1998 1997
-------------- -------------
Salaries and compensation
liabilities $ 12,379 $ 8,904
Post-retirement benefit liabilities 5,063 5,611
Product reserves 1,799 1,791
Interest 697 2,540
Other 6,775 5,670
-------------- -------------
$ 26,713 $ 24,516
============== =============
9. LONG-TERM DEBT
December 31,
---------------------------
1998 1997
-------------- -------------
Credit Agreement (as defined below) $ 171,000 $255,000
IDA Notes (as defined below) 10,800 10,800
--------------
181,800 265,800
- -------------------------------------
Less current portion -- --
- -------------------------------------
============== =============
$ 181,800 $265,800
============== =============
On July 23, 1997 the Company entered into an unsecured $350 million
revolving credit agreement with a group of banks (the "Credit Agreement").
On the Distribution Date, the Company initially borrowed $266 million under
the Credit Agreement. The initial borrowings were utilized to make a
dividend payment to General Instrument in accordance with the terms of the
Distribution and to fund debt issuance costs of the Credit Agreement. The
Company utilizes the Credit Agreement for, among other things, general
working capital needs, financing capital expenditures and other general
corporate purposes.
The Credit Agreement provides a total of $350 million in available
revolving credit commitments through (i) loans available at various
interest rates and interest maturity periods (collectively, the "Revolving
Credit Loans"); and (ii) the issuance of standby or commercial letters of
credit ("Letters of Credit") of up to $50 million, of which $0.6 million
was outstanding at December 31, 1998. All amounts borrowed under the Credit
Agreement are due on December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are
available by choosing from one of the following types of loans, which
primarily are differentiated by the interest rates available: (i) an ABR
Loan (as defined in the Credit Agreement), with interest based on the
highest of the prime rate of The Chase Manhattan Bank, the Base CD Rate (as
defined in the Credit Agreement) plus 1%, or the Federal Funds Effective
Rate (as defined in the Credit Agreement) plus 0.5%; (ii) a Eurodollar Loan
(as defined in the Credit Agreement), with interest based on the Eurodollar
Rate (LIBOR) plus a margin that will vary based on the Company's
performance with respect to certain calculated financial ratios as defined
in the Credit Agreement; (iii) an Absolute Rate Bid Loan (as defined in the
Credit Agreement), with interest determined through competitive bid
procedures among qualified lenders under the Credit Agreement; and (iv) a
Swing Line Loan (as defined in the Credit Agreement) for up to an aggregate
amount of $30 million, with interest based on a money market rate, the ABR
Loan rate, or a combination thereof.
Interest on the Revolving Credit Loans generally is payable quarterly in
arrears or, for a Eurodollar Loan, at the end of an interest period date
that is specified at the time funds are advanced to the Company, not to
exceed three months. A facility fee based on the total commitment under the
Credit Agreement and a fee for outstanding letters of credit are payable
quarterly.
The Credit Agreement contains certain financial and operating covenants,
including restrictions on incurring indebtedness and liens, entering into
transactions to acquire or merge with any entity, making
36
certain other fundamental changes, selling assets, paying dividends, and
maintaining certain minimum levels of consolidated net worth, leverage
ratio and interest coverage ratio. The Company was in compliance with these
covenants at December 31, 1998.
In January 1995, CommScope entered into a $10.8 million loan agreement in
connection with the issuance of notes by the Alabama State Industrial
Development Authority (the "IDA Notes"). Borrowings under the IDA Notes
bear interest at variable rates based upon current market conditions for
short-term financing. All outstanding borrowings under the IDA Notes are
due on January 1, 2015.
In addition to the above borrowings, the Company also had an outstanding
letter of credit at December 31, 1998 of $20.3 million related to the
acquisition of a coaxial cable business in Seneffe, Belgium (see Note 18).
At December 31, 1998 the weighted-average effective interest rate on
outstanding borrowings and associated credit fees under the Credit
Agreement and the IDA Notes was 6.16%.
As of December 31, 1998, the Company had entered into interest rate swap
agreements to effectively convert an aggregate amount of $100 million of
variable-rate borrowings to a fixed-rate basis. Contracts for notional
amounts of $50 million each expire in April 1999 and October 2001,
respectively. Under the agreements, interest settlement payments will be
made quarterly based upon the spread between the three month LIBOR, as
adjusted quarterly, and fixed rates of 5.79% and 4.81%, respectively. Net
payments or receipts resulting from the swap agreements are recorded as
adjustments to interest expense in each quarter.
Interest paid by the Company totaled $17.1 million in 1998, $5.5 million in
1997 and $0.6 million in 1996. Interest costs incurred prior to the
Distribution, with the exception of interest on the IDA Notes, were settled
with General Instrument through divisional equity.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors the CommScope, Inc. of North Carolina Employees Profit
Sharing and Savings Plan (the "Profit Sharing and Savings Plan"). The
majority of contributions to the Profit Sharing and Savings Plan are made
at the discretion of the Company's Board of Directors. In addition,
eligible employees may elect to contribute up to 10% of their salaries.
CommScope contributes an amount equal to 50% of the first 4% of the
employee's salary that the employee contributes. CommScope contributed $6.8
million in 1998, $8.4 million in 1997 and $6.5 million in 1996 to the
Profit Sharing and Savings Plan, of which $5.4 million, $7.0 million and
$5.5 million each year was discretionary.
The Company also sponsors an unfunded post-retirement group medical and
dental plan (the "Post-Retirement Health Plan") that provides benefits to
full-time employees who retire from the Company at age 65 or greater with a
minimum of 10 years of active service. The Post-Retirement Health Plan is
contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance, with
Medicare as the primary provider of health-care benefits for eligible
retirees. The accounting for the Post-Retirement Health Plan anticipates
future cost-sharing changes to the written plan that are consistent with
the Company's expressed intent to maintain a consistent level of cost
sharing with retirees. The Company recognizes the cost of providing and
maintaining post-retirement benefits during employees' active service
periods.
Additionally, the Company sponsors a non-qualified unfunded supplemental
executive retirement plan ("SERP") that provides certain executives with
defined pension benefits.
Amounts accrued under the Post-Retirement Health Plan and SERP
(collectively, the "Defined Benefit Plans") are included in other long-term
liabilities. The following table summarizes combined information for the
Defined Benefit Plans:
December 31,
--------------------------
1998 1997
----------- --------------
Change in benefit obligation:
Post-retirement benefit obligation,
beginning of year $ 13,366 $ 7,708
Service cost 726 701
Interest cost 860 833
37
Plan participants' contributions 24 15
Curtailment due to divestiture (see (1,348) --
Note 5)
Actuarial loss 391 4,158
Benefits paid (104) (49)
----------- ------------
Post-retirement benefit obligation, end 13,915 13,366
of year
----------- ------------
Change in plan assets:
Fair value of plan assets, beginning of -- --
year
Employer and plan participant 104 49
contributions
Benefits paid (104) (49)
----------- ------------
Fair value of plan assets, end of year -- --
----------- ------------
Funded status (post-retirement benefit
obligation in excess of fair value of 13,915 13,366
plan assets)
Unrecognized net actuarial loss (3,020) (4,042)
=========== ============
Accrued benefit cost, end of year $ 10,895 $ 9,324
=========== ============
Discount rate 6.75% 7.25%
Rate of compensation increase 4.75% 4.75%
Components of net periodic benefit cost for the Defined Benefit Plans
consist of the following components:
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
Service cost $ 726 $ 701 $ 412
Interest 860 833 506
Recognized actuarial loss 65 113 --
------------ ------------ ------------
Net periodic benefit cost $ 1,651 $ 1,647 $ 918
============ ============ ============
For measurement purposes, a 9% annual rate of increase in health care costs
was assumed for 1999 and is assumed to decrease gradually to 4% for 2007
and remain at that level thereafter. The increase in the post-retirement
benefit obligation in 1997 reflects actuarial losses primarily related to
changes in expected future post-retirement health care claim costs.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the Post-Retirement Health Plan. A
one-percentage-point change in assumed health care cost trend rates would
have the following effects:
One One
Percentage- Percentage-
Point Point
Increase Decrease
------------------------------
Effect on total of service and interest
cost components of net periodic benefit
cost $ 383 (281)
Effect on post-retirement benefit 2,382 (1,787)
obligation
38
11. INCOME TAXES
The components of the provision for income taxes and the reconciliation of
the statutory U.S. federal income tax rate to the Company's effective rate
are as follows:
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ---------- -----------
Current:
Federal $ $ $
17,464 20,200 29,928
State 1,731 2,482 4,023
----------- -------- ---------
Current income tax provision 19,195 22,682 33,951
----------- -------- ---------
Deferred:
Federal 1,721 1,176 1,044
State 67 198 (14)
----------- -------- ---------
Deferred income tax 1,788 1,374 1,030
provision
----------- -------- ---------
Total provision for income
taxes $ 20,983 $ 24,056 34,981
=========== ======== =========
Statutory U.S. federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of 2.0 2.7 2.8
federal benefit
Foreign sales corporation (3.8) (2.8) (2.2)
benefit
Permanent items and other 2.7 3.1 2.4
Change in valuation allowance
for capital
loss carry-forward (1.1) 1.1 --
----------- -------- ---------
Effective income tax rate 34.8% 39.1% 38.0%
=========== ======== =========
The components of deferred income tax assets and liabilities and the
classification of deferred tax balances on the balance sheet are as
follows:
December 31,
---------------------------
1998 1997
-------------- -------------
Deferred tax assets:
Accounts receivable and inventory $ 6,358 $ 6,347
reserves
Product reserves 683 681
Employee benefits 3,421 3,208
Capital loss carry-forward -- 1,764
Post-retirement benefits 4,140 3,543
Other 2,934 1,868
-------------- -------------
17,536 17,411
Valuation allowance -- (678)
-------------- -------------
Total deferred tax assets 17,536 16,733
Deferred tax liabilities:
Property, plant and equipment and (22,154) (19,563)
intangibles
-------------- -------------
Net deferred tax liability $ (4,618) $ (2,830)
============== =============
Deferred taxes as recorded on the
balance sheet:
Current deferred tax asset $ 12,925 $ 12,102
39
Non-current deferred tax liability (17,543) (14,932)
-------------- -------------
Net deferred tax liability $ (4,618) $ (2,830)
============== =============
The valuation allowance at December 31, 1997 relates to a portion of a
capital loss carry-forward resulting from the Company's equity investment
in an Australian joint venture. The capital losses incurred from the equity
investment were lower than anticipated at December 1997 and, accordingly,
the valuation allowance was reversed in 1998.
At December 31, 1998 the Company had approximately $2.9 million in state
investment tax credits which can be utilized to reduce state income tax
liabilities for future tax years through 2005.
For periods prior to the Distribution, currently payable or refundable
federal income taxes (plus certain state income taxes) and changes in
deferred tax assets and liabilities were settled with General Instrument
through divisional equity. Prior to the Distribution, General Instrument
settled certain tax matters relating to periods prior to the acquisition of
General Instrument by affiliates of Forstmann Little & Co. The settlement
of these tax matters decreased the amount payable through divisional equity
by the Company to General Instrument and resulted in a credit of $1.8
million to goodwill in 1996. Income tax payments made by the Company in
1998 and for the tax period from the Distribution Date to December 31, 1997
were $18.0 million and $9.0 million, respectively.
12. STOCK COMPENSATION PLANS
Prior to the Distribution, the Company participated in the General
Instrument Corporation 1993 Long Term Incentive Plan (the "GI Incentive
Plan"). During 1997, the Company adopted the Amended and Restated
CommScope, Inc. 1997 Long Term Incentive Plan (the "CommScope Incentive
Plan"), which is substantially identical in design to the GI Incentive
Plan. The Company's stockholders formally approved the CommScope Incentive
Plan in 1998.
The CommScope Incentive Plan provides for the granting of stock options,
restricted stock grants, performance share units and phantom shares to
employees of the Company and its subsidiaries and the granting of stock
options to non-employee directors of the Company. Awards of stock options
made to Company employees and non-employee directors of General Instrument
prior to the Distribution under the GI Incentive Plan were transferred to
the CommScope Incentive Plan at the Distribution Date (the "Substitute
Options"). A total of 2.1 million shares of Substitute Options were
transferred at the Distribution Date, and 4.6 million additional shares are
authorized for issuance under the CommScope Incentive Plan. Stock options
expire 10 years from the date they are granted. Options vest over service
periods that range from two to five years. Upon initial election to the
Company's board of directors, a non-employee director is granted 1,000
shares of stock which are fully vested and transferable upon issuance.
The following tables summarize the Company's stock option activity from the
Distribution Date and information about stock options outstanding at
December 31, 1998 (in thousands, except per share information):
Weighted
Average
Shares Exercise
(000's) Price Per
Share
--------------- ---------------
Substitute Options transferred from GI 2,149 $ 12.70
Incentive Plan
Granted 1,674 12.31
Cancelled (15) 13.19
--------------- ---------------
Stock options outstanding at December 3,808 12.53
31, 1997
Granted 1,178 15.16
Cancelled (359) 12.28
40
Exercised (95) 12.01
=============== ===============
Stock options outstanding at December 4,532 $ 13.25
31, 1998
=============== ===============
Stock options exercisable at December 1,690 $ 12.70
31, 1998
=============== ===============
Shares reserved for future issuance at
at December 31, 1998 2,122
===============
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted-
Average Weighted- Weighted-Average
Remaining Average Exercise
Range of Contractual Exercise Price Per
Exercise Shares Life (in Price Per Shares Exercise Price
Prices (000's) Years) Share (000's) Per Share
- ------------ --------------------------------------- ---------------------------
$8 to $10 176 4.1 $ 8.75 176 $ 8.75
10 to 15 3,182 8.0 12.74 1,480 13.10
15 to 18 1,174 9.8 15.29 34 15.95
======================================== ================================
$8 to $18 4,532 8.3 $ 13.25 1,690 $12.70
======================================== ================================
41
Disclosures required by SFAS No. 123 are as follows:
Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- ---------- ------------
Valuation assumptions:
Expected option term (years) 4.5 4.5 4.5
Expected volatility 50.0% 47.4% 47.4%
Expected dividend yield 0.0% 0.0% 0.0%
Risk free interest rate 6.0% 6.0% 6.0%
Weighted average fair value per $ 7.35 $ 6.06 $ 5.99
option (A)
Pro forma effects of SFAS No.
123 (B):
Net income $ 37,803 $ 32,546 $ 51,520
Net income per share - basic 0.77 0.66 1.05
Net income per share - 0.76 0.66 1.05
assuming dilution
(A) Estimated using Black-Scholes option pricing model.
(B) The Company has elected to account for stock options under Accounting
Principles Board Opinion No. 25 and has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
Pro forma information presents net income and net income per share if
compensation expense for grants made after January 1, 1995 had been
recorded under SFAS No. 123. The 1997 and 1996 pro forma information
is presented after giving effect to the pro forma adjustments for the
Distribution - see Note 3.
13. STOCKHOLDER RIGHTS PLAN
On June 10, 1997, the Board of Directors adopted a stockholder rights plan
designed to protect stockholders from various abusive takeover tactics,
including attempts to acquire control of the Company at an inadequate
price. Under the rights plan, each stockholder received a dividend of one
right for each outstanding share of Common Stock, which was distributed on
July 29, 1997. The rights are attached to, and presently only trade with,
the Common Stock and currently are not exercisable. Except as specified
below, upon becoming exercisable, all rights holders will be entitled to
purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock ("Participating Preferred Stock") at a price
of $60.
The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement
that a person or group (other than the FLC Entities or pursuant to a
Permitted Offer, each as defined) has acquired beneficial ownership of 15%
or more of the outstanding Common Stock; or (ii) 10 business days following
a person's or group's commencement of, or announcement of and intention to
commence, a tender or exchange offer, the consummation of which would
result in beneficial ownership of 15% or more of the Common Stock. The
rights will entitle holders (other than an Acquiring Person, as defined) to
purchase Common Stock having a market value (immediately prior to such
acquisition) of twice the exercise price of the right. If the Company is
acquired through a merger or other business combination transaction (other
than a Permitted Offer, as defined), each right will entitle the holder to
purchase $120 worth of the surviving company's common stock for $60. The
Company may redeem the rights for $0.01 each at any time prior to such
acquisitions. The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved the
creation of (out of the authorized but unissued shares of preferred stock
of the Company) Participating Preferred Stock, consisting of 0.4 million
shares with a par value of $0.01 per share. The holders of the
Participating Preferred Stock are entitled to receive dividends, if
declared by the Board of Directors, from funds legally available. Each
share of Participating Preferred Stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of Participating
Preferred Stock are not redeemable by the Company nor convertible into
Common Stock or any other security of the Company.
42
14. CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and markets into which the Company's
products are sold, as well as their dispersion across many different
geographic areas. Accordingly, the Company does not consider itself to have
any significant concentrations of credit risk at December 31, 1998 and
1997. The Company's financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables, debt instruments and
interest rate and commodity price swap contracts. At December 31, 1998 and
1997, the book values of each of the financial instruments recorded on the
Company's balance sheet are considered representative of their respective
fair values due to their variable interest rates and / or short terms to
maturity. The fair values of the interest rate and commodity price swap
contracts outstanding at each balance sheet date, which are not recorded on
the Company's balance sheet, are not material to the Company's financial
position. Fair value of the Company's debt is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing
rates for similar types of arrangements.
CommScope has established a risk management strategy that includes the use
of derivative financial instruments primarily to reduce its exposure to
market risks resulting from adverse fluctuations in commodity prices,
interest rates and foreign currency exchange rates. CommScope does not
utilize derivative financial instruments for trading purposes, nor does it
engage in speculation. The Company believes that the various
counter-parties with which the Company enters into derivative agreements
consist of only financially sound institutions and, accordingly, believes
that the credit risk for non-performance of these contracts is remote.
As of December 31, 1998 the Company had entered into a commodity price swap
agreement to effectively lock in a fixed price for a portion of its third
quarter 1999 aluminum purchases. The total value of aluminum covered by the
commodity price swap agreement equates to less than 1% of the Company's
average quarterly cost of sales. Also as of December 31, 1998, the Company
had two outstanding interest rate swap agreements with financial
institutions to effectively convert an aggregate amount of $100 million of
variable-rate borrowings to a fixed-rate basis (discussed more completely
in Note 9). The Company had not entered into any derivative financial
instruments related to foreign currency exchange rates at December 31,
1998.
15. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment under operating leases expiring at
various dates through the year 2008. Rent expense was $4.2 million in 1998,
$3.0 million in 1997 and $3.9 million in 1996. Future minimum rental
payments required under operating leases with initial terms of one year or
more as of December 31, 1998 are: $2,674 in 1999; $2,053 in 2000; $1,674 in
2001; $1,272 in 2002; $1,044 in 2003; and $3,672 thereafter.
CommScope is either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, management believes none of these
legal matters will have a materially adverse effect on the Company's
financial statements upon final disposition. In addition, CommScope is
subject to various federal, state, local and foreign laws and regulations
governing the use, discharge and disposal of hazardous materials. The
Company's manufacturing facilities are believed to be in substantial
compliance with current laws and regulations. Compliance with current laws
and regulations has not had, and is not expected to have, a materially
adverse effect on the Company's financial statements.
16. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND
GEOGRAPHICAL INFORMATION
The Company's operations are conducted within one business segment that
designs, manufactures and markets coaxial, fiber optic and high performance
electronic cables primarily used in communications, local area network and
industrial applications.
43
Sales of coaxial cable products to a major customer were approximately 9%,
7% and 11% of net sales in 1998, 1997 and 1996, respectively. No other
customer accounts for 10% or more of net sales during any of the three
fiscal years in the period ended December 31, 1998.
Sales to related parties were less than 2% of net sales in 1998 and less
than 1% of net sales in 1997. Purchases from related parties were less than
1% of cost of sales and operating expenses in 1998.
Export sales from the United States comprised 24%, 33% and 35% of net sales
in 1998, 1997 and 1996, respectively. Export sales by geographic region and
sales by product are as follows (in millions):
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------------------------------------
Latin America $ 43.0 $ 74.3 $ 62.9
Asia / Pacific Rim 40.1 57.6 72.6
Europe 39.2 48.0 45.0
Canada 14.9 17.5 17.7
Other 2.6 3.0 2.7
----------------------------------------
Total export sales $ 139.8 $ 200.4 $ 200.9
========================================
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------------------------------------
Cable television and other video
application
products $ 457.2 $ 491.5 $ 489.4
Local area network products 74.8 76.6 66.5
Other products 39.7 31.1 16.3
----------------------------------------
Total sales by product $ 571.7 $ 599.2 $ 572.2
========================================
17. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------
Fiscal 1998:
Net sales $133,602 $141,886 $150,057 $146,188
Gross profit 27,568 32,697 37,281 37,047
Operating income 11,979 17,016 21,519 20,456
Net income 6,332 8,499 11,421 12,979
Net income per share, basic and
assuming 0.13 0.17 0.23 0.26
dilution (1)
Fiscal 1997:
Net sales $147,874 $159,291 $147,269 $144,782
Gross profit 39,240 39,371 31,941 30,448
Operating income 25,353 23,138 16,261 14,430
Net income 14,155 12,950 7,424 2,929
Pro forma net income (2) 12,997 11,664 7,014 n/a
Pro forma net income per share,
basic and assuming dilution (2) 0.26 0.24 0.14 n/a
(1) Net income per share (basic) for the year ended December 31, 1998 is
$0.80.
44
(2) Historical net income per share data is not applicable through
September 30, 1997, as the Company's earnings were part of the results
of General Instrument - see Notes 1 and 2. Pro forma net income and
net income per share has been prepared in a manner consistent with the
presentation of pro forma financial information in Note 3. Historical
net income and net income per share (basic and assuming dilution) for
the fourth quarter of 1997 is $2,929 and $0.06, respectively.
18. SUBSEQUENT EVENT
Effective January 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Seneffe,
Belgium. The acquisition provides the Company with a European base of
operations, access to established distribution channels and complementary
coaxial cable technologies. The operation in Seneffe is the largest CATV
coaxial cable manufacturer in Europe with annual sales by Alcatel of
approximately $35 million in 1998.
The acquisition will be accounted for as a purchase business combination
and, accordingly, the acquired assets and assumed liabilities will be
recorded at their estimated fair value at the date of the acquisition of
approximately $20 million. Payment for the acquired business will be
financed primarily by borrowings under a new credit agreement for 15
million Euros (approximately $17 million) entered into by the Company in
the first quarter of 1999.
45
CommScope, Inc.
Schedule II - Valuation and Qualifying Accounts
Additions
----------------------
Charged to
Other
Balance at Charged to Accounts Deductions Balance at
Description Beginning Costs and (Describe) (Describe) End of
of Period Expenses (1) (2) Period
- -------------------------------- ----------- ----------- ----------- ---------- ------------
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 1998 $3,985 $ 995 $ -- $ 854 $ 4,126
Year ended December 31, 1997 $3,761 $ 525 $ -- $ 301 $ 3,985
Year ended December 31, 1996 $3,114 $ 750 $ 150 $ 253 $ 3,761
(1) Valuation accounts of acquired company. Reserves are deducted from
assets to which they apply.
(2) Uncollectable customer accounts written off, net of recoveries of
previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections
captioned "Management of the Company--Board of Directors of the Company",
"Management of the Company--Committees of the Board of Directors--Board
Meetings", and "Management of the Company--Section 16(a) Beneficial
Ownership Reporting Compliance" included in the Proxy Statement for the
Company's 1999 Annual Meeting of Stockholders ("1999 Proxy Statement"),
which sections are incorporated herein by reference.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company as of March 1, 1999.
Name and Title Age Business Experience
- -------------- --- -------------------
Frank M. Drendel 54 Frank M. Drendel has been Chairman and
Chairman and Chief Chief Executive Officer of the Company
Executive Officer since the Spin-off. He has served as
Chairman and President of CommScope NC,
currently a wholly-owned subsidiary of the
Company, from 1986 to the Spin-off and has
served as Chief Executive Officer of
CommScope NC since 1976. Mr. Drendel is a
director of General Instrument Corporation,
Nextel Communications, Inc., C-SPAN and the
National Cable Television Association.
Brian D. Garrett 50 Brian D. Garrett has been President and
President and Chief Chief Operating Officer of the Company
Operating Officer since 1997. He has served as Executive Vice
President, Operations of CommScope NC since
1997. From 1996 to 1997, he was Executive
Vice President and General Manager of the
Network Cable Division of CommScope NC and
Vice President and General Manager of the
Network Cable Division from 1986 to 1996.
Jearld L. Leonhardt 50 Jearld L. Leonhardt has been Executive Vice
Executive Vice President President and Chief Financial Officer since
and Chief Financial February 1999. He has served as Executive
Officer Vice President, Finance and Administration
of the Company from the Spin-off until
February 1999. He was Treasurer of the
Company from the Spin-off until 1997. He has
served as Executive Vice President and Chief
Financial Officer of CommScope NC since
February 1999. He has served as Executive
Vice President, Finance and Administration
of CommScope NC from 1983 until February
1999 and Treasurer of CommScope NC from 1983
until 1997.
William R. Gooden 57 William R. Gooden has been Senior Vice
Senior Vice President President and Controller of the Company
and Controller since the Spin-off. He has served as
Senior Vice President and Controller of
CommScope NC since 1996 and was Vice
President and Controller from 1991 to 1996.
Larry W. Nelson 56 Larry W. Nelson has been Executive Vice
Executive Vice President, Development of the Company since
President, the Spin-off. He has served as Executive
Development Vice President, Development of
47
CommScope NC since 1997. From 1988 to 1997,
he was Executive Vice President and General
Manager of the Cable TV Division of CommScope
NC.
Frank J. Logan 56 Frank J. Logan has been Executive Vice
Executive Vice President, International of the Company
President, since the Spin-off. He has served as
International Executive Vice President, International of
CommScope NC since 1996. From 1989 to
1996, he was Vice President, International
of CommScope NC.
Gene W. Swithenbank 59 Gene W. Swithenbank has been Executive Vice
Executive Vice President, Sales and Marketing of the
President, Company since the Spin-off. He has served
Sales and Marketing as Executive Vice President, Sales and
Marketing for CommScope NC since 1997 and
Executive Vice President, CATV Sales and
Marketing since 1996. From 1992 to 1996,
Mr. Swithenbank was Senior Vice President
CATV Sales of CommScope NC.
Randall Crenshaw 42 Randall Crenshaw has been Executive Vice
Executive Vice President, Procurement/Logistics of the
President, Company since the Spin-off. He has served
Procurement/Logistics as Executive Vice President,
Procurement/Logistics of CommScope NC since
1997. From 1994 to 1997, Mr. Crenshaw was
Vice President Operations for the Network
Cable Division of CommScope NC. Prior to
that time, Mr. Crenshaw has held various
positions with CommScope NC since 1985.
Frank B. Wyatt, II 36 Frank B. Wyatt, II has been Vice President,
Vice President, General General Counsel and Secretary of the
Counsel and Secretary Company since the Spin-off. He has served
as Vice President of CommScope NC since
1997 and General Counsel and Secretary of
CommScope NC since 1996. From 1987 to
1996, he was an attorney with the law firm
of Bell, Seltzer, Park & Gibson, P.A. (now
Alston & Bird LLP).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the section
captioned "Management of the Company" in the Company's 1999 Proxy Statement
and is incorporated by reference herein. The sections captioned "Management
of the Company--Compensation Committee Report on Compensation of Executive
Officers" and "Performance Graph" in the Company's 1999 Proxy Statement are
not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in the sections
captioned "Beneficial Ownership of Common Stock" and "Management of the
Company--Stock Options" in the Company's 1999 Proxy Statement, which
sections are incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section
captioned "Management of the Company--Certain Relationships and Related
Transactions" in the Company's 1999 Proxy Statement and is incorporated by
reference herein.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements.
The following consolidated financial statements of
CommScope, Inc. are included under Part II, Item 8:
Independent Auditors' Report.
Consolidated Statements of Income for the Years ended
December 31, 1998, 1997 and 1996.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts. Included
under Part II, Item 8.
Certain schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
On November 30, 1998, the Company filed a current report on
Form 8-K announcing the Company's agreement to acquire Texas
Instruments' wire clad fabrication equipment and technology.
49
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CommScope, Inc.
Date: March 25, 1999 By: /s/ Frank M. Drendel
------------------------------------
Frank M. Drendel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frank M. Drendel Chairman of the Board and March 25, 1999
- ----------------------------- Chief Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and March 25, 1999
- ----------------------------- Chief Financial Officer
Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President and March 25, 1999
- ----------------------------- Controller (Principal
William R. Gooden accounting officer)
/s/ Edward D. Breen Director March 25, 1999
- -----------------------------
Edward D. Breen
/s/ Duncan M. Faircloth Director March 25, 1999
- -----------------------------
Duncan M. Faircloth
/s/ Boyd L. George Director March 25, 1999
- -----------------------------
Boyd L. George
/s/ George N. Hutton Director March 25, 1999
- -----------------------------
George N. Hutton
/s/ James N. Whitson Director March 25, 1999
- -----------------------------
James N. Whitson
50
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1* Amended and Restated Certificate of Incorporation of CommScope,
Inc.
3.2* Amended and Restated By-Laws of CommScope, Inc.
4.1** Rights Agreement, dated June 12, 1997, between CommScope, Inc. and
ChaseMellon Shareholder Services, L.L.C.
10.1* Employee Benefits Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.2* Debt and Cash Allocation Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.3* Insurance Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
10.4* Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
10.5* Trademark License Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor,
Inc.
10.6* Transition Services Agreement, dated as of July 25, 1997, between
NextLevel Systems, Inc. and CommScope, Inc.
10.7* Credit Agreement, dated as of July 23, 1997, among CommScope,
Inc. of North Carolina, Certain Banks, The Chase Manhattan Bank,
as Administrative Agent and The Chase Manhattan Bank, Bank of
America National Trust and Savings Association, BankBoston, N.A.,
Bank of Tokyo-Mitsubishi Trust Company, CIBC, Inc., Credit
Lyonnais Atlanta Agency, First Union National Bank, The Fuji
Bank, Limited, Atlanta Agency, NationsBank, N.A., Toronto
Dominion (New York), Inc. and Wachovia Bank, N.A. as Co-Agents.
10.8*****+ Amended and Restated CommScope, Inc. 1997 Long-Term Incentive
Plan.
10.9***+ Form of Severance Protection Agreement between the Company and
certain executive officers.
10.10****+ Employment Agreement between Frank Drendel, General Instrument
Corporation and CommScope, Inc. of North Carolina, the Letter
Agreement related thereto dated May 20, 1993 and Amendment to
Employment Agreement dated July 25, 1997.
10.11 Credit Agreement dated February 26, 1999, between First Union
National Bank and CommScope, Inc. of North Carolina.
10.12*****+The CommScope, Inc. Annual Incentive Plan.
21. Subsidiaries of the Registrant.
23. Consent of Deloitte & Touche LLP.
27. Financial Data Schedule (filing only for the Electronic Data
Gathering, Analysis and Retrieval system of the U.S. Securities
and Exchange Commission).
99. Forward-Looking Information
- ------------------------
* Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1997 (File No. 1-12929).
1
** Incorporated herein by reference from the Registration Statement on Form
8-A filed June 30, 1997 (File No. 1-12929).
*** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (File No. 1-12929).
**** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-12929).
***** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998 (File No. 1-12929).
+ Management Compensation.
2