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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, 1999
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
28602
(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
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part Ill 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 $2,169.5 million as of
March 21, 2000 (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 21, 2000 there were
50,995,406 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
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PART I
ITEM 1. BUSINESS
On July 28, 1997, CommScope, Inc. became an independent public company
when it was spun off from its parent company, General Instrument
Corporation (subsequently renamed "General Semiconductor, Inc."). Unless
the context otherwise requires, references to "CommScope, Inc.," or "we,"
"us," or "our" are to CommScope, Inc. and its direct and indirect
subsidiaries, including CommScope Inc. of North Carolina, on a consolidated
basis since the spin-off and to the coaxial and other cable business
conducted by General Instrument Corporation prior to the spin-off.
GENERAL
We are a leading worldwide designer, manufacturer and marketer of a
broad line of coaxial cables and other high-performance electronic and
fiber optic cable products for cable television, telephony, Internet access
and wireless communications. We believe that we supplied over 50% of all
coaxial cable purchased in the United States in 1999 for broadband cable
networks using Hybrid Fiber Coaxial (HFC) architecture. We believe we are
also the largest manufacturer and supplier of coaxial cable for HFC cable
networks in Europe. We are also a leading supplier of fiber optic cables
primarily for HFC cable networks and have developed specialized,
proprietary fiberoptic products for telecommunications applications. We
are a leading supplier of coaxial cable for telephone central office
switching and transmission applications, as well as video distribution
applications such as satellite television and security surveillance. In
addition, we have developed an innovative line of coaxial cables for
wireless communication infrastructure applications that have superior
performance characteristics compared to traditional cables. We are a
leading provider of high-performance premise wiring for local area networks
and have developed a new patent-pending foaming process for unshielded
twisted pair cables that significantly reduces cost and improves electrical
performance. We sell our products to approximately 2,300 customers in
more than 76 countries.
For the year ended December 31, 1999 our revenues were $748.9 million
and our net income was $68.1 million. During this period, approximately 74%
of our revenues were for HFC cable networks and other video applications,
14% were for wireless, central office and other telecommunications
applications and 12% were for local area network premise wiring
applications. International sales were 24% of our revenues during this
period.
We believe that we are the world's most technologically advanced,
low-cost provider of coaxial cable With our leading product offerings,
cost-efficient manufacturing and economies of scale, we believe we will
benefit from the convergence of video, voice and high-speed Internet access
and the resulting demand for enhanced HFC broadband networks.
We believe that the following industry trends will drive demand for our
products:
o endorsement of the HFC architecture by major cable, telephone and
technology companies;
o increasing use of the Internet;
o increasing need for additional bandwidth to accommodate new
applications;
o increasing maintenance requirements for HFC cable networks as
operators improve reliability for telephony, data and other
two-way services;
o expansion of telephone central offices to accommodate digital
subscriber line (DSL) growth and growing alternate access
providers of telephony and data services;
o the continuing rapid deployment of wireless communications
systems worldwide; and
o increasing demand for higher speed and bandwidth for local area
networks.
1
BUSINESS STRATEGY
We have adopted a growth strategy to expand and strengthen our current
market position as the leading worldwide supplier of coaxial cable for
broadband communications. The principal elements of our growth strategy
are:
BENEFIT FROM HFC PARADIGM SHIFT. A vast majority of video networks
worldwide, such as cable service provider networks, have adopted the HFC
cable network architecture for video service delivery. Recent events
involving major telecommunications and cable service providers create the
potential to expand the role of HFC cable 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 Tele-Communications,
Inc. (TCI), AT&T Corporation's pending acquisition of MediaOne Group, Inc.,
the strategic relationship between AT&T Corporation and Time Warner, Inc.
to offer cable telephony to residential and small business customers in 33
states and to develop the next-generation broadband services, Microsoft
Corporation's $1 billion investment in Comcast Corporation and investments
in cable television in Europe and the United Kingdom, Paul Allen's
acquisitions of Marcus Cable Company, L.L.C., Charter Communications, Inc.
and other cable companies, and the recent success of high-speed cable data
services such as those offered by Excite@Home Corporation and others. We
believe that the HFC cable network architecture provides the most
cost-effective bandwidth for multi-channel video, voice and data into homes
around the world. This architecture enables both cable and
telecommunications service providers to offer new products and services
such as high-speed Internet access, video on demand, Internet protocol
telephony and high-definition television. As the leading provider of
coaxial cable for HFC cable networks, we believe we are well positioned to
benefit from the build out, upgrade and maintenance of these networks in
both domestic and international markets.
DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. We
maintain an active program to identify new market opportunities and develop
and commercialize products that use our core technology and manufacturing
competencies. We have developed new products and entered new markets,
including coaxial cable for wireless applications, satellite cables, local
area network cables, specialized coaxial based telecommunication cables,
broadcast audio and video cables and coaxial cables in conduit. We have
developed specialized coaxial (Power Feeder(R)) and fiber optic (Fiber
Feeder(TM)) cables for distribution and telephony applications in HFC
cable networks.
We used our expertise in aluminum coaxial cable technology to help
develop Cell Reach(R), a patented copper coaxial cable solution for the
wireless antenna market. We believe Cell Reach(R) is a technologically
superior product with a lower total lifetime cost of ownership than the
current industry standard. Cell Reach(R) has been installed in thousands
of cellular and personal communications services antenna sites with leading
service providers such as Nextel Communications, Inc., Sprint Corporation
and certain Sprint affiliates, certain AT&T Corporation affiliates and
Metricom, Inc.
We developed UltraMedia, a high-end local area network cable product
targeted for high-speed local area network applications. We have also
developed a thin-wall foam design (Isolite(TM)) for twisted pair cables on
which a patent is pending.
CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. We invested more than
$205 million in the development and acquisition of state-of-the-art
manufacturing facilities and new technologies during the past five fiscal
years. These investments help to increase our capacity and operating
efficiencies, improve management control and provide more consistent
product quality. As a result, we believe we are one of the few
manufacturers capable of satisfying volume production, time-to-market, and
technology requirements of customers for coaxial cable in the
communications industry. We believe that our breadth and scale permit us to
cost-effectively invest in improving our operating efficiency through
investments in engineering and cost-management programs. We intend to
capture additional value in the supply chain through vertical integration
projects.
EXPAND OUR GLOBAL PLATFORM. We believe that the worldwide demand for
video and data services, the large number of television households outside
the United States and relatively low penetration rates for cable television
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in most countries provide significant long-term opportunities. We have
become a major supplier of coaxial cable for the cable television and
broadband services industries in international markets, principally Europe,
Latin America and the Pacific Rim. In 1999 we had approximately 309
international customers in more than 76 countries, representing
approximately $177.7 million or 24% of our 1999 revenue. We support our
international sales efforts with sales representatives based in Europe,
Latin America and the Pacific Rim. In addition, we are able to benefit from
our domestic cable customer base because some of those customers are also
equity investors in international cable service providers.
Although there is current uncertainty in international markets, we
believe that we are well positioned to benefit over the long term from
future international growth opportunities. We believe we became the largest
manufacturer and supplier of coaxial cable for HFC cable networks in Europe
with our acquisition in January 1999 of Alcatel Benelux Cable S.A.'s
coaxial cable business in Seneffe, Belgium. This acquisition also gave us
access to established European distribution channels and complementary
coaxial cable technologies.
In addition, we recently purchased an existing 455,000-square-foot
facility in Newton, North Carolina to expand our wireless business, support
growth in other markets and house certain engineering, research and
development functions. We also expanded our Claremont, North Carolina
facility by 137,500 square feet. We expect to equip this expansion by
midyear 2000. We intend to establish or acquire international distribution
and/or manufacturing facilities to further improve our ability to service
international customers as well as reduce shipping and importation costs.
LEVERAGE SUPERIOR CUSTOMER SERVICE. We believe that our coaxial cable
manufacturing capacity is greater than that of any other manufacturer. This
enables us to provide our customers with a unique high-volume service
capability. As a result of our 24-hour, seven days per week continuous
manufacturing operations, we are able to offer faster order turnaround
services. In addition, we believe that our ability to offer rapid delivery
services, materials management and logistics services to customers through
our private truck fleet is an important competitive advantage.
BUSINESS UNITS
We manufacture and sell cable for three broad product categories:
o cable television and other video applications;
o local area network applications; and
o wireless and other telecommunications applications.
DOMESTIC HFC CABLE TV MARKET. We design, manufacture and market
primarily coaxial cable, most of which is used in the cable television
industry. We manufacture two primary types of coaxial cable:
o semi-flexible, which has an aluminum or copper outer tubular
shield or outer conductor; and
o 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 typically used in the trunk and
feeder distribution portion of cable television systems, and flexible
coaxial cables, also known as drop cables, are typically used for
connecting the feeder cable to a residence or business or for some other
communications applications. We also manufacture fiber optic cable for the
cable television industry and others.
Cable television service traditionally has been provided primarily by
cable television system operators that have been awarded franchises from
the municipalities they serve. In response to increasing competitive
pressures and expanding revenue opportunities, cable television system
operators 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. Cable television
system operators have generally adopted, and we believe that for the
foreseeable future will continue to adopt, HFC cable system designs when
seeking to increase system bandwidth. These systems combine the advantages
of fiber optic cable in transmitting clear signals over a long distance
without amplification, and the advantages of high-bandwidth coaxial cable
3
in ease of installation, low cost and compatibility with the receiving
components of the customer's communications devices. We believe that:
o cable television system operators are likely to increase their
use of fiber optic cable for the trunk and feeder portions of
their cable systems;
o 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
o coaxial cable will remain 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. Cable television system
operators have been significant borrowers from the credit and capital
markets. Therefore, 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. The
regional Bell operating companies 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 cable television system
operators and telephone operating companies in the offering of video and
telephone services. We believe that the Telecom Act will encourage
competition among cable television system operators, 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. We have provided coaxial cables to most major U.S. telephone
operating companies. Several of these companies 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 use HFC technologies similar to those
employed by many cable television operators.
INTERNATIONAL MARKETS. Cable system designs using HFC technology are
increasingly being used in international markets with low cable television
penetration. As of December 31, 1999, based upon industry trade
publications and reports from telecommunications industry analysts, we
estimate that approximately 32% of the television households in Europe
subscribe to some form of multichannel television service as compared to a
subscription rate of approximately 75% in the United States. Based upon
such sources, we estimate that subscription rates in the Asia/Pacific Rim
and Latin American/Caribbean markets are even lower at approximately 28%
and 19%, respectively. In terms of television households, it is estimated
that there are approximately 263 million television households in Europe,
approximately 440 million in Asia/Pacific Rim and approximately 96 million
in Latin America and the Caribbean. This compares to approximately 100
million television households in the United States.
As of December 31, 1999 we had sales in more than 76 countries. We
have penetrated the international marketplace through a field sales
organization and through a network of distributors and agents located in
major countries where we do business. In addition to new customers
developed by our network of distributors and sales representatives, many
large U.S. cable television operators, with whom we have had long
established business relationships, are active investors in cable
television systems outside the United States.
VIDEO AND BROADCAST APPLICATIONS (NON-CABLE TELEVISION). Many
specialized markets or applications are served by multiple cable media such
as coaxial, twisted pair, fiber optic or combinations of each. We are 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 cable market, where specialized composite coaxial
and copper cables transmit satellite-delivered video signals and antenna
positioning/control signals, we have developed a leading market position.
4
We market an array of premium metallic and optical cable products directed
at the broadcasting and video production studio market. Because of our
position in other video transport markets and access to distribution
channels within these markets, we view these products as a growth
opportunity, although we cannot assure you that we will be able to
penetrate these markets successfully.
LOCAL AREA NETWORK 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. Local area networks,
typically consisting of at least one dedicated computer (a "server"),
peripheral devices, network software and interconnecting cables, were
developed in response to this demand. We manufacture a variety of twisted
pair, coaxial and fiber optic cables to transmit data for local area
network 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 100 mbps. We focus our
products and marketing on cables with enhanced electrical and physical
performance such as our UltraMedia unshielded twisted pair. We believe that
UltraMedia cable is among the highest performing unshielded twisted pair
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.
WIRELESS COMMUNICATION APPLICATIONS. We believe 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
us. 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, we
developed Cell Reach(R) products, a line of copper shielded semi-flexible
coaxial cables and related connectors and accessories to address this
market. We are expanding manufacturing capacity for this product line and
we are developing additional products and marketing programs for Cell
Reach(R) for both the United States and certain international markets. Cell
Reach(R) has been installed in thousands of cellular and personal
communications services sites with leading service providers such as Nextel
Communications, Inc., Sprint Corporation and certain Sprint affiliates,
certain AT&T Corporation affiliates and Metricom, Inc. 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. We have developed a strategy for addressing additional
cable consuming markets. By combining narrowly focused product and market
management with our cable manufacturing and operational skills, we are
entering new markets for broadcast, home automation, telephone central
office switching and transmission, and other high-performance
communications applications.
MANUFACTURING
We employ advanced cable manufacturing processes, the most important
of which are:
o thermoplastic extrusion for insulating wires and cables;
o high-speed welding and swaging of metallic shields or outer
conductors;
o braiding;
o cabling; and
o automated testing.
Many of these processes, some of which are proprietary and/or trade
secret information, are performed on equipment that has been modified for
our purposes or specifically built to our specifications, often internally
in our own machine shop facilities. We do not fabricate all of the raw
material components used in making most of our cables, such as certain
wires, tapes, tubes and similar materials. We believe, however, that
fabrication, to the extent economically feasible, could be done by us
instead of being outsourced.
5
For example, we acquired the clad wire fabrication equipment and
technology of Texas Instruments Incorporated for manufacturing copper-clad
aluminum wire and copper-clad steel wire that we use as center conductors
for our cable. This acquisition allows us to further vertically integrate
our processes, providing an opportunity to significantly reduce cost. We
are also pursuing fine wire drawing to produce wires to be braided for
flexible coaxial cables. The manufacturing processes of the three principal
types of cable we manufacture are further described below.
COAXIAL CABLES. We employ 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:
o First, a plastic insulation material, called the dielectric, is
melt extruded around a metallic wire or center conductor. Current
state-of-the-art dielectrics consist of foamed plastics to
enhance the electrical properties of the cable. Precise control
of the foaming process is critical to achieve the mechanical and
electrical performance required for broadband services and
cellular communications applications. We believe that plastic
foam extrusion, using proprietary materials, equipment and
control systems, is one of our core competencies.
o 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, we
apply solid aluminum or copper shields 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. We use 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.
o 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.
o 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. We insulate single copper wires using high-speed
thermoplastic extrusion techniques. Two insulated copper singles are then
twinned by twisting them into an electrically balanced pair unit in a
separate process. They are then bunched or cabled by grouping 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 jacketing
process involves extrusion of a plastic jacket over a shielded or
unshielded cable core. The majority of sales of our twisted copper pairs
come from plenum rated unshielded twisted pair cables for local area
network 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. We believe that
the processing of plenum rated materials is one of our core competencies.
In addition, we 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. We believe that this process
enhances our ability to grow and serve customers in all local area network
segments.
6
FIBER OPTIC CABLES. We manufacture fiber optic cables by purchasing
bulk uncabled optical fiber singles and buffering them before cabling them
into unjacketed core units. We then apply protective outer jackets and,
sometimes, shields and jackets in a final process before testing. The
manufacturing and test equipment for fiber optic cables are different from
those used to manufacture coaxial and copper twisted pair cables. Most of
the fiber optic cables we produce are sold to the cable television and
local area network industry. Some of these fiber optic cables are produced
under licenses acquired from other fiber and fiber optic cable
manufacturers.
COMPOSITE CABLES. We also produce 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 for a variety of applications. The most
significant of the composite cables we manufacture are combination coaxial
and copper twisted pairs within a common outer jacket which are being used
by some telephone companies and cable operators to provide both cable
television services and telephone services to the same households over HFC
cable networks. Nearly all of our current markets have applications for
composite cables which we can manufacture.
RESEARCH AND DEVELOPMENT
Our research, development and engineering expenditures for the
creation and application of new and improved products and processes were $8
million, $6 million and $6 million for the years ended December 31, 1999,
1998, and 1997, respectively. We focus our research and development efforts
primarily on those product areas that we believe have the potential for
broad market applications and significant sales within a one-to-three year
period. We anticipate that the level of spending on product development
activities will accelerate in future years. The widespread deployment of
broadband services and HFC cable systems is expected to provide
opportunities for us to enhance our coaxial cable product lines and to
improve our manufacturing processes. Additionally, we expect that our
participation in the local area network, wireless 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
We market our products worldwide through a combination of more than
100 direct sales, territory managers and manufacturers' representative
personnel. We support our sales organization with regional service centers
in: North Carolina; California; Alabama; Seneffe, Belgium; Birmingham,
England; and Melbourne, Australia. In addition, we utilize 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 our sales
organization. We have expanded our global presence through our acquisition
of Europe's largest manufacturer of cable television coaxial cable.
A key aspect of our customer support and distribution chain is the use
of our private truck fleet. We believe that the ability to offer rapid
delivery services, materials management and logistics services to customers
through our private truck fleet is an important competitive advantage.
Our products are sold and used in a wide variety of applications. Our
products primarily are sold directly to cable system operators,
telecommunications companies, original equipment manufacturers and
indirectly through distributors. There has been a trend on the part of
original equipment manufacturer 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. We have concentrated our 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. Our strategy is to provide a broad selection of
products in the areas in which we compete. We have achieved a preferred
supplier designation from many of our cable television, telephone and
original equipment manufacturer customers. We are also in the process of
implementing an integrated information management system.
7
We believe that this new system, when fully implemented, will help us
improve business practices, will allow faster access to information and
ultimately will enable us to better service our customers.
Cable television services in the United States are provided primarily
by cable television system operators. It is estimated that the five largest
cable television system operators account for more than 50% of the cable
television subscribers in the United States. The major cable television
system operators include such companies as AT&T, Time Warner Cable,
MediaOne, Comcast and Cablevision Systems Corporation. Many of the major
cable television system operators are our customers, including those listed
above. During the year ended December 31, 1999, AT&T and its affiliates
accounted for approximately 10% of our net sales. No other customer
accounted for 10% or more of our net sales in 1999. During 1998 and 1997,
sales to no single customer accounted for 10% or more of our net sales.
PATENTS
We pursue an active policy of seeking intellectual property
protection, namely patents, for new products and designs. We hold 47
patents worldwide and have 80 pending applications. We consider our patents
to be valuable assets, but no single patent is material to our operations
as a whole. We intend to rely on our proprietary knowledge, trade secrets
and continuing technological innovation to develop and maintain our
competitive position.
BACKLOG
At December 31, 1999, 1998, and 1997, we had an order backlog of
approximately $104 million, $43 million, and $55 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. In some cases, unfilled orders
may be canceled prior to shipment of goods; but cancellations historically
have not been material. Due to growth in our business, some lead times have
lengthened. However, our current order backlog may not be indicative of
future demand.
COMPETITION
We encounter competition in substantially all areas of our business.
We compete 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 we do, as well as medium to small
companies. We also face competition from certain smaller companies that
have concentrated their efforts in one or more areas of the coaxial cable
market. We believe that we enjoy a strong competitive position in the
coaxial cable market due to our 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.
We also believe that we enjoy a strong competitive position in the
electronic cable market due to our large direct field sales organization
within the local area network segment, the comprehensive nature of our
product line and our long established reputation for quality.
RAW MATERIALS
In the manufacture of coaxial and twisted pair cables, we process
metal tubes, tapes and wires including bimetallic wires (wires made of
aluminum or steel with thin outer skins of copper) that are fabricated from
high-grade aluminum, copper and steel. Most of these fabricated metal
components are purchased under supply arrangements with some portion of the
unit pricing indexed to commodity market prices for these metals. We have
adopted a hedging policy pursuant to which we 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 we use include polyethelenes, polyvinylchlorides,
FEP and other plastic insulating materials, optical fibers, and wood and
cardboard shipping and packaging materials. In 1999, approximately 11% of
our raw material purchases were for bimetallic center conductors for
coaxial cables, nearly all of which were purchased from Copperweld
Corporation under a long-term supply arrangement expiring in March 2000.
Copperweld has agreed to continue to supply us with bimetallic center
conducts after expiration of this agreement, but this continued supply
arrangement is indefinite in duration. If we are unable to continue to
purchase bimetallic center conductors from this supplier, either before or
after expiration of this arrangement, we may be unable to obtain these raw
materials on commercially acceptable terms from another source. There are
few, and limited, alternative sources of supply for these raw materials. In
8
February 1999, we purchased the clad wire fabrication equipment and
technology of Texas Instruments Incorporated for manufacturing copper-clad
aluminum wire and copper-clad steel wire. We anticipate that in midyear
2000 we will begin to produce a significant portion of the bimetallic
center conductors we use. However, the loss of Copperweld as a supplier of
bimetallic center conductors, either during the term of the current supply
contract, or after the expiration of that agreement, and/or our failure to
vertically integrate these products, could have a material adverse effect
on our business and financial condition. In addition, we purchase fine
aluminum wire from a limited number of suppliers. Fine aluminum wire is a
smaller raw material purchase than bimetallic wire. 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 we were unable to vertically integrate the production of these
products. In such event, there could be a materially adverse impact on our
financial results.
Additionally, FEP is the primary raw material used throughout the
industry for producing flame-retarding cables for local area network
applications. There are few worldwide producers of FEP and market supplies
have been periodically limited over the past several years. Availability of
adequate supplies of FEP will be critical to future local area network
cable sales growth.
We have demonstrated an ability to successfully foam FEP. Our ability
to expand foaming of FEP on a larger scale would help moderate the impact
of any limitation of the FEP supply. Alternative sources of supply or
access to alternative materials are generally available for all other major
raw materials we use. Supplies of all other material raw materials we use
are generally adequate and expected to remain so for the foreseeable
future.
ENVIRONMENT
We use some hazardous substances and generate some solid and hazardous
waste in the ordinary course of our business. As a result, we are 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 our business, we have incurred, and will continue to incur, costs
relating to compliance with these environmental laws. Although we believe
that we are in substantial compliance with such environmental requirements,
and we have not in the past been required to incur material costs in
connection with this compliance, there can be no assurance that our cost to
comply with these requirements will not increase in the future. Although we
are 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 materially adverse effect on our operations or financial
condition.
EMPLOYEES
At December 31, 1999, we employed approximately 3,300 people.
Substantially all employees are located in the United States. We also have
employees in foreign countries, including those in our Seneffe, Belgium
operations. We believe that our relations with our employees are
satisfactory.
ITEM 2. PROPERTIES
Our principal administrative, production and research and development
facilities are located in the following locations:
The Hickory, North Carolina facility occupies approximately 40,000
square feet under a lease expiring in December 2001. Our executive offices,
sales office and customer service department are located at this facility.
The Catawba, North Carolina facility occupies approximately 1,000,000
square feet and is owned by us. The Catawba facility manufactures coaxial
cables, is the major distribution facility for our products and houses
certain administrative and engineering activities.
9
The Claremont, North Carolina facility occupies approximately 587,500
square feet and is owned by us. The Claremont facility manufactures
coaxial, copper twisted pair and fiber optic cables and houses certain of
our administrative, sales and engineering activities.
The Newton, North Carolina facility occupies approximately 455,000
square feet of manufacturing, office and warehouse space and is owned by
us. We intend to renovate the facility and establish the new CommScope
Cable Technology Center at this location. Once renovated, we expect the
facility to house some of our engineering, research and development
functions as well as manufacturing of wireless products.
The Scottsboro, Alabama facility occupies approximately 150,000 square
feet and is owned by us. The Scottsboro facility manufactures coaxial
cables.
The Seneffe, Belgium, facility occupies approximately 120,000 square
feet and is owned by us. The Seneffe facility houses certain coaxial cable
manufacturing and sales activities.
The Statesville, North Carolina facility occupies approximately
315,000 square feet and is owned by us. The Statesville facility houses
certain twisted pair cable manufacturing, cable-in-conduit manufacturing,
wire fabrication, recycling activities, research and development, and
engineering activities.
In March 2000, we leased an approximately 225,500-square-foot facility
in Sparks, Nevada primarily for the manufacturing of cable-in-conduit
products and for a regional service and distribution facility.
We do not believe there is any material long-term excess capacity in
our facilities, although utilization is subject to change based on customer
demand. We believe that our facilities and equipment generally are well
maintained, in good operating condition and suitable for our purposes and
adequate for our present operations.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business. We do
not believe that any such claims or lawsuits will have a materially adverse
effect on our financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
three months ended December 31, 1999.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is 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.
Common Stock
Price Range
--------------------------
High Low
----------- -----------
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
1999
First Quarter $ 21 9/16 $ 15 7/8
Second Quarter $ 31 3/16 $ 19 1/4
Third Quarter $ 40 $ 29 1/4
Fourth Quarter $ 46 3/8 $ 31 11/16
As of March 21, 2000 the approximate number of registered stockholders
of record of our common stock was 761.
We have never declared or paid any cash dividends on our common stock.
We do not currently intend to pay cash dividends in the foreseeable future,
but intend to reinvest earnings in our business. Our debt agreements
contain limits on our ability to pay cash dividends on our common stock.
11
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data (In
thousands, except ratios and per share amounts)
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
RESULTS OF OPERATIONS:
Net sales $748,914 $571,733 $599,216 $572,212 $485,160
Gross profit 200,106 134,593 141,000 155,089 129,428
Operating income 117,517 72,843 79,182 100,254 85,263
Net income 68,077 39,231 37,458 57,122 47,331
Pro forma net income (1) -- -- 34,604 51,908 --
NET INCOME PER SHARE
INFORMATION (1):
Weighted average number of
shares outstanding:
Basic 50,669 49,221 49,107 49,105 --
Assuming dilution 52,050 49,521 49,238 49,200 --
Net income per share:
Basic $ 1.34 $ 0.80 $ 0.70 $ 1.06 --
Assuming dilution $ 1.31 $ 0.79 $ 0.70 $ 1.06 --
BALANCE SHEET DATA:
Cash and cash equivalents $ 30,223 $ 4,129 $ 3,330 $ -- $ --
Property, plant and equipment, net 181,488 135,082 133,235 117,022 90,587
Total assets 582,535 465,327 483,539 479,885 412,378
Working capital 146,952 93,982 112,786 107,220 72,908
Long-term debt, including
current maturities (2) 198,402 181,800 265,800 10,800 10,800
Stockholders' equity (2) 281,344 203,972 150,032 393,560 339,177
OTHER INFORMATION:
Earnings before net interest,
taxes, depreciation, and
amortization ("EBITDA") (3) $147,360 $ 99,616 $ 96,606 $121,045 $102,597
Depreciation and amortization 29,295 24,662 21,677 18,952 17,219
Capital expenditures 57,149 22,784 29,871 33,218 27,281
Ratio of earnings to fixed charges 11.62 4.90 5.49 10.13 9.63
- -----------------
(1) Pro forma net income, weighted average number of shares
outstanding and net income per share have not been presented for
1995 since we, through our wholly owned subsidiary CommScope,
Inc. of North Carolina ("CommScope NC"), were formerly a wholly
owned indirect subsidiary of General Instrument Corporation with
no separately issued or outstanding equity securities prior to
the spin-off on July 28, 1997. On the date of the spin-off,
through a series of transactions and stockholder dividends
initiated by General Instrument, CommScope NC became our wholly
owned subsidiary. The unaudited pro forma information for 1996
and 1997 has been prepared utilizing the historical consolidated
statements of income of CommScope NC adjusted to reflect a net
debt level of $275 million at the beginning of each period
presented at an assumed weighted average borrowing rate of 6.35%
plus the amortization of debt issuance costs associated with the
new borrowings and a total of 49.1 million common shares
outstanding and 49.2 million common and potential common shares
outstanding for basic and diluted earnings per share,
respectively. There is no pro forma information for 1998 or 1999
since the spin-off occurred in 1997.
12
(2) Giving effect to transactions related to the spin-off as if they
had occurred on December 31, 1996, on a pro forma basis,
long-term debt would have been $276,800 and stockholders' equity
would have been $128,348 on that date.
(3) EBITDA is presented not as an alternative measure of operating
results or cash flow (as determined in accordance with generally
accepted accounting principles), but rather to provide additional
information related to our ability to service debt. The EBITDA
measure included herein may not be comparable to similarly titled
measures reported by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY BACKGROUND
CommScope, Inc., through its wholly owned subsidiaries, operates
in the cable manufacturing business. We are a leading worldwide designer,
manufacturer and marketer of a broad line of coaxial cables and other
high-performance electronic and fiber optic cable products for cable
television, telephony, Internet access and wireless communications. We
believe we are the world's largest manufacturer of coaxial cable for hybrid
fiber coaxial (HFC) cable television systems. We are also a leading
supplier of coaxial, twisted pair and fiber optic cables for premise wiring
(local area networks), wireless and other communication applications.
CommScope, Inc. was incorporated in Delaware in January 1997. On
July 28, 1997, through a series of transactions and stockholder dividends
initiated by General Instrument Corporation ("General Instrument"): (i)
CommScope, Inc. of North Carolina ("CommScope NC"), formerly a wholly owned
indirect subsidiary of General Instrument, became a wholly owned subsidiary
of CommScope, Inc. and (ii) CommScope, Inc. was spun off to the
stockholders of General Instrument. General Instrument retained no
ownership interest in CommScope, Inc. or CommScope NC. CommScope, Inc.
commenced operations as an independent entity with publicly traded common
stock on July 28, 1997.
Our consolidated financial statements for the period prior to the
spin-off reflect our results of operations and cash flows that were
included in the consolidated financial statements of General Instrument.
These financial results include the revenues and expenses directly
attributable to our operations and an allocation of certain general
corporate and administrative expenses and net interest expense from General
Instrument. We believe the assumptions underlying these financial
statements are reasonable, although these financial statements may not
necessarily reflect the results of operations had we been a separate,
stand-alone entity.
FINANCIAL HIGHLIGHTS
For the three year period 1997-1999, we reported the following results:
Year Ended December 31,
--------------------------------------------------
1999 1998 1997 (A)
----------------- -------------- ---------------
Net income $ 68,077 $ 39,231 $ 34,604
Net income per share - 1.31 0.79 0.70
assuming dilution
(A) Net income and net income per share information for 1997 are
presented on a pro forma basis, giving effect to the spin-off on July 28,
1997.
13
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 our 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 our closed Australian joint venture.
Net income for 1998, excluding these one-time events would have been $35.9
million, or $0.73 per basic and diluted share.
One-time events during 1997 include an after-tax charge of $3.1
million associated with the closing of the Australian joint venture. Net
income for 1997, excluding this one-time event, would have been $37.7
million, or $0.77 per basic and diluted share.
Our consolidated financial statements and related notes, included in
Item 8, should be read as an integral part of the financial highlights and
the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
WITH THE YEAR ENDED DECEMBER 31, 1998
Net Sales
Net sales for the year ended December 31, 1999 increased $177.2
million or 31% to $748.9 million, from 1998. The increase in net sales is
primarily driven by strong broadband cable sales to domestic
telecommunications companies and solid growth in all key product
categories. The following table presents (in millions) our revenues by
product line as well as domestic versus international sales for the years
ended December 31, 1999 and 1998:
1999 Net % of 1999 1998 Net % of 1998
Sales Net Sales Sales Net Sales
----------------------------------------------------
CATV/Video Products $557.4 74.4% $457.2 80.0%
LAN Products 87.3 11.7 74.8 13.1
Wireless & Other Telecom Products 104.2 13.9 39.7 6.9
=====================================================
Total worldwide sales $748.9 100.0% $571.7 100.0%
=====================================================
Domestic sales $571.2 76.3% $431.9 75.6%
International sales 177.7 23.7 139.8 24.4
=====================================================
Total worldwide sales $748.9 100.0% $571.7 100.0%
=====================================================
For the year ended December 31, 1999, international sales increased
27% compared to 1998, due mainly to the acquisition of our new coaxial
cable business in Seneffe, Belgium and improving sales in the Asia/Pacific
Rim region. While year-to-date Latin American sales were level from 1998 to
1999, we are beginning to see encouraging signs of activity in this region,
demonstrated by three recently announced contracts representing more than
$11 million in potential revenues over the next few years.
Net sales to cable television and other video distribution markets
("CATV/Video Products") for the year ended December 31, 1999 increased
$100.2 million or 22% to $557.4 million, from 1998. The increase in sales
of CATV/Video Products resulted primarily from strong sales of broadband
cable to domestic telecommunications companies and cable television system
operators. Domestic CATV/Video sales grew approximately 20% year-over-year.
This performance reflects the ongoing momentum in the upgrade of broadband
networks for multi-channel video, voice and high-speed Internet access.
Net sales for local area network and other data applications ("LAN
Products") for the year ended December 31, 1999 increased $12.5 million or
17% to $87.3 million, from 1998. Demand remains strong for high-performance
products and pricing for selected products appears to have stabilized.
However, during 1999, capacity constraints limited growth in sales of
14
certain LAN Products. During the second half of 1999, we expanded our
production capacity for enhanced bandwidth cables and began a
137,500-square-foot expansion of our Claremont, N.C. facility, in part to
support sales growth in LAN Products. We expect to equip this expansion in
midyear 2000. We are optimistic about growth in sales of our LAN Products,
due primarily to the strength of the underlying market, the ongoing shift
to high-performance products, and the acceptance of our Isolite(TM) foamed
insulation for unshielded twisted pair cables.
Net sales for wireless and other telecommunications products for the
year ended December 31, 1999 were $104.2 million as compared to $39.7
million in 1998. This substantial year-over-year increase reflects strong
growth in both sales of Cell Reach(R) for wireless applications and sales
of other telecommunications products. Sales of Cell Reach products more
than quadrupled year-over-year. We believe that Cell Reach is now
recognized as the new standard of performance and value in the wireless
industry due to its superior performance and compelling value proposition
for the growing wireless industry. With significant capacity scheduled to
come on line in midyear 2000, we believe that Cell Reach will be a
substantial contributor to our long-term growth goals. Other
telecommunications products primarily represent cables designed for
switching and transmission applications for enhanced telecommunications
services. Sales of other telecommunications products more than doubled
year-over-year.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit for the year ended December 31, 1999 was $200.1 million,
compared to $134.6 million for 1998, an increase of 49%. Gross profit
margins improved to 26.7% for the year ended December 31, 1999, compared to
gross profit margins of 23.5% for 1998. The primary drivers of the
improvement in gross profit and gross profit margins are:
o increased sales volumes and favorable product mix;
o improving Cell Reach profitability; and
o aggressive cost reduction efforts, primarily through engineered
manufacturing efficiencies including vertical integration
projects.
These improvements were somewhat offset by lower prices for certain
LAN Products and the acquisition of the Seneffe facility. This facility,
while profitable and improving, currently has lower than our average
margins. The Seneffe facility is expected to play a key role in
strengthening our worldwide delivery capability. We expect to continue
investing in this facility and intend to increase its capacity and
productivity.
In order to mitigate escalating material costs, we recently announced
global price increases of 6-8% for all of our hybrid fiber coaxial (HFC)
related products. We began notifying customers of this price increase in
late December 1999 and began implementing the increase in February 2000.
We anticipate continued improvement in gross profit margins due to
ongoing cost reduction initiatives. However, these improvements may be
moderated by increasing commodity prices.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense for the year
ended December 31, 1999 was $68.9 million, compared to $52.8 million for
1998. As a percentage of net sales, SG&A expense was 9% for the years ended
December 31, 1999 and 1998. The absolute amount of SG&A expense increased
over the prior period as a result of the expansion of sales and marketing
efforts to support developing products and sales growth targets.
Research and Development
Research and development expense as a percentage of net sales remained
steady at 1% for the years ended December 31, 1999 and 1998. We have
15
ongoing programs to develop new products and market opportunities for our
products and core capabilities and new manufacturing technologies to
achieve cost reductions.
Gain on Sale of Assets
In February 1998, we sold certain real and personal property and
inventories of our high temperature aerospace and industrial cable business
to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. We
recognized a pretax gain from the sale of $1.9 million or $0.02 per basic
and diluted share, net of tax effect.
Other Income (Expense), Net
In December 1998, we recorded a pretax benefit of $2.0 million, or
$0.04 per basic and diluted share, net of tax effect, related to the
partial reversal of 1997 after-tax charges associated with our closed
Australian joint venture.
Net Interest Expense
Net interest expense for the year ended December 31, 1999 was $9.6
million, compared to $14.9 million for 1998. The decrease in net interest
costs is primarily due to the lower amount of weighted average outstanding
borrowings under our revolving credit agreement during 1999. In addition,
all outstanding borrowings under our revolving credit agreement were repaid
in December 1999 with proceeds from the issuance of our convertible notes,
which carry a lower effective interest rate. This reduction in interest
expense was partially offset during the year ended December 31, 1999 by
interest expense on new borrowings of 15 million euros (equivalent to $16.4
million at the date of borrowing), which are discussed below under
"Liquidity and Capital Resources."
Income Taxes
Our effective tax rate was 37% for the year ended December 31, 1999
and 35% for 1998. This fluctuation in our effective tax rate is partly due
to the strength in 1999 domestic versus international sales, which diluted
the impact of our foreign sales corporation tax benefit. In addition, the
1998 rate included a benefit of 1% from the reversal of a valuation
allowance established in 1997 for charges associated with the closing of
our Australian joint venture.
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 (in millions) our revenues by product line as well as domestic
versus international sales for the years ended December 31, 1998 and 1997:
1998 Net % of 1998 1997 Net % of 1997
Sales Net Sales Sales Net Sales
-----------------------------------------------------------
CATV/Video Products $457.2 80.0 % $491.5 82.0 %
LAN Products 74.8 13.1 76.6 12.8
Wireless and Other Telecom Products 39.7 6.9 31.1 5.2
----------------------------------------------------------
Total worldwide sales $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
16
==========================================================
Total worldwide sales $571.7 100.0 % $599.2 100.0 %
==========================================================
International sales (of which over 96% are for CATV/Video 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).
Overall sales of CATV/Video Products in 1998 decreased by 7% compared
to 1997. Sales of CATV/Video Products represented 80% of our net sales in
1998, compared to 82% in 1997. Domestically, sales of CATV/Video Products
increased by 8%, driven primarily by increased sales to multiple system
operators using HFC cable networks, who continued their system upgrading
activities.
To complement our offering of CATV/Video Products, we continue to
focus on growth opportunities for LAN Products. As a leader in the concept
of high performance premise wiring cable, sales of LAN Products grew 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 distributors.
Many of our LAN Products utilize the raw material 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, we announced that we had developed a thin-wall foam
FEP process, which was patented in 1999, that is designed to 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.
Overall average selling prices for CATV/Video 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, primarily 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.
Sales of wireless and other telecommunications 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 (which was sold in February 1998).
We have 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. 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.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit for the year ended December 31, 1998 was $134.6 million,
compared to $141.0 million for the comparable prior year period, a decrease
of $6.4 million, or 5%. Gross profit margin was 23.5% in 1998 and 1997. The
decrease in gross profit is primarily 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
17
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 our coaxial cable products;
o engineered manufacturing efficiencies including vertical
integration projects;
o raw material cost improvements (including costs for commodity raw
materials); and
o improving Cell Reach product profitability.
We have focused on developing or acquiring manufacturing capabilities
that allow for the in-house production or modification of materials and
components used in the production of our finished products that are more
efficient than commercially practiced.
Our 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 affected gross profit margin by
approximately 70 basis points. As Cell Reach gained industry recognition
during 1998, product sales increased and the product produced positive
gross profit margin in 1998.
Selling, General and Administrative
SG&A expense for the year ended December 31, 1998 was $52.8 million,
compared to $50.4 million for the comparable prior year period, an increase
of $2.4 million, or 5%. As a percentage of net sales, SG&A expense was 9%
in 1998 and 8% in 1997. The increase in the absolute amount of SG&A expense
was due primarily to expanded sales and marketing efforts for our products.
Research and Development
Research and development expense was 1% of net sales in both 1998 and
1997.
Gain on Sale of Assets
In February 1998, we sold certain real and personal property and
inventories of our high temperature aerospace and industrial cable business
to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. We
recognized a pretax gain from the sale of $1.9 million or $0.02 per basic
and diluted share, net of tax effect.
Other Income (Expense), Net
Other income (expense), net in 1998 includes a $2.0 million pretax
benefit for the partial reversal of 1997 pretax charges related to our
financial investment in an Australian joint venture. Other income
(expense), net in 1997 primarily reflects pretax charges of $3.9 million to
reduce our 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, we recorded pretax
charges of $3.9 million to other income (expense), net to reduce our total
current financial investment in the joint venture to expected net
realizable value. Tax benefits were recorded at our effective tax rate
reduced by a $0.7 million valuation allowance established for expected
nondeductible capital losses resulting from the investment. Net of tax
benefits of $0.8 million, these charges reduced 1997 net income by $3.1
million, or $0.06 per basic and diluted share.
In July 1998, a formal termination and dissolution agreement for the
joint venture was completed. The partial liquidation of the joint venture's
assets in 1998, which was affected by the terms of the formal termination
18
and dissolution agreement between the partners, indicated that the
financial position of the joint venture at final dissolution would be
better than was anticipated at December 31, 1997. Accordingly, $2.0 million
of the 1997 pretax charges related to our financial investment in the joint
venture were reversed into other income (expense), net, representing $0.04
per basic and diluted share after taxes, including reversal of the capital
loss valuation allowance established in 1997. Final dissolution and
liquidation of this joint venture is expected to be completed in accordance
with Australian legal requirements in 2000 and is not expected to have a
material impact on the Company's results of operations.
Net Interest Expense
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 spin-off 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 was primarily attributable to an $84
million reduction in borrowings under our revolving credit facility in 1998
(and a total reduction of $95 million from the date of the spin-off to
December 31, 1998).
Income Taxes
Our effective tax rate in 1998 was 35% (representing a 36% normal
effective tax rate reduced primarily by the effects of the change in a
capital loss valuation allowance of 1%). Our effective tax rate in 1997 was
39% (representing a 38% normal effective tax rate increased by 1% for the
establishment of a capital loss valuation allowance). The capital loss
valuation allowance established in 1997 relates to expected nondeductible
capital losses resulting from our equity investment in the Australian joint
venture. The 200 basis point reduction in the normal effective tax rate for
1998 compared to 1997 was mainly due to increased tax benefits from foreign
sales and the utilization of state investment tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $79.4 million for the year ended
December 31, 1999, compared to $82.9 million for 1998, a decrease of $3.5
million, or 4%. The decrease in cash flow provided by operations in 1999,
compared to 1998, is primarily due to increased accounts receivable
resulting from higher sales volume and moderated somewhat by improved cash
collections. This decrease was also somewhat offset by an increase in
accounts payable and other accrued liabilities.
Working capital was $147.0 million at December 31, 1999, compared to
$94.0 million at December 31, 1998. We believe that working capital levels
are appropriate to support current levels of orders and backlog.
During the year ended December 31, 1999, we invested $57.1 million in
equipment and facilities compared to $22.8 million in 1998. The capital
spending in each period was primarily attributable to vertical integration
projects, capacity expansion, and equipment upgrades to meet increased
current and anticipated future business demands. Based on expectations of
continued growth, we plan to accelerate capital expenditures over the next
few quarters. We expect capital expenditures for equipment and facilities
in 2000 to be approximately $75 million. This level of capital spending
includes anticipated expenditures for potential international expansion
opportunities.
We utilized an additional $17.0 million during the year ended December
31, 1999 to acquire Alcatel's coaxial cable business in Seneffe, Belgium.
During the year ended December 31, 1998, we received initial cash proceeds
of $9.7 million related to the sale of our high temperature aerospace and
industrial cable business.
Our principal sources of liquidity both on a short-term and long-term
basis are cash flows provided by operations and funds available under
19
long-term credit facilities. In December 1999, in order to create a
longer-term capital structure, we issued $172.5 million of 4% convertible
subordinated notes due in 2006. The proceeds from these convertible notes
were used primarily to repay outstanding indebtedness under our revolving
credit agreement. Additionally in 1999, we borrowed 15 million euros
(equivalent to $16.4 million on the date of borrowing) under a new variable
rate term loan agreement to fund the acquisition of our coaxial cable
business in Seneffe, Belgium. Including the convertible notes, we owed
long-term debt of $198.4 million, or 41% of our book capital structure,
defined as long-term debt and total stockholders' equity, as of December
31, 1999, compared to $181.8 million, or 47% of our book capital structure
as of December 31, 1998.
Based upon our analysis of our consolidated financial position and the
expected results of our operations in the future, we believe that we will
have sufficient cash flows from future operations and the financial
flexibility to attract both short-term and long-term capital on acceptable
terms as may be needed to fund operations, capital expenditures and other
growth objectives. There can be no assurance, however, that future
industry-specific developments, general economic trends or other situations
will not adversely affect our operations or ability to meet cash
requirements.
MARKET RISK
We have established a risk management strategy that includes the use
of derivative financial instruments primarily to reduce our exposure to
market risks resulting from adverse fluctuations in commodity prices,
interest rates and foreign currency exchange rates. Derivative financial
instruments utilized by us, which are not entered into for speculative
purposes, include commodity pricing contracts, foreign currency exchange
contracts, and contracts hedging exposure to interest rates. Our policy is
to designate all derivatives as hedges and to account for the derivatives
in the same manner as the item being hedged. We do not utilize derivative
financial instruments for trading purposes, nor do we engage in
speculation.
Materials, in their finished form, account for a large portion of our
cost of sales. These materials are fabricated from commodity products that
are openly traded on exchange markets and are subject to significant
potential changes in market prices. Increases in the prices of certain
commodity products could result in higher overall production costs.
We primarily bill customers in foreign countries in US dollars.
However, a significant decline in the value of currencies used in certain
regions of the world as compared to the US dollar can adversely affect
product sales in those regions because our products may become more
expensive for those customers to pay for in their local currency. The 1999
acquisition of our Belgian subsidiary created a specific market risk that a
decline in the value of the Belgian franc (or the euro) compared to the US
dollar could adversely affect our net investment in that subsidiary. Our
Eurodollar Credit Agreement, which is denominated in euros, serves as a
hedge of our net investment in the Belgian subsidiary.
As of December 31, 1999, the only derivative financial instrument
outstanding was an interest rate swap agreement that serves as a fixed-rate
hedge to the variable-rate borrowings under our Eurodollar Credit
Agreement, as required under the covenants of this term loan. At December
31, 1999, we evaluated our commodity pricing and foreign currency exchange
exposures and concluded that it was not currently beneficial to use
derivative financial instruments to hedge our current positions with
respect to those exposures. The fair values of the interest rate and
commodity price swap contracts outstanding at December 31, 1998 and the
interest rate swap agreement outstanding at December 31, 1999 are not
material to our financial position.
Our nonderivative financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables, and debt instruments.
At December 31, 1999, the book values of each of the financial instruments
recorded on our balance sheet are considered representative of their
20
respective fair values due to their variable interest rates, their short
terms to maturity, or their short length of time outstanding. 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.
The following table summarizes our market risks associated with
long-term debt and foreign currency exposure. The table presents principal
cash outflows and related interest rates by year of maturity.
21
Long-term Debt Maturities by Year
($ in millions)
There- Total Fair
2000 2001 2002 2003 2004 after Value
-----------------------------------------------------------------------------------
Fixed rate ($US) $ -- $ -- $ -- $ -- $ -- 172.5 $172.5 $172.5
Average interest rate 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Variable rate ($US) $ -- $ -- $ -- $ -- $ -- $ 10.8 $ 10.8 $ 10.8
Average interest rate 5.56% 5.56% 5.56% 5.56% 5.56% 5.56%
Variable rate (EUR) $ -- $ 2.3 $ 3.0 $ 3.0 $ 3.0 $ 3.8 $ 15.1 $ 15.1
Average interest rate 4.19% 4.19% 4.19% 4.19% 4.19% 4.19%
EFFECTS OF INFLATION
We continually attempt to minimize any effect of inflation on earnings
by controlling our 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 our results of operations.
The principal raw materials purchased by us (fabricated aluminum,
plastics, bimetals, copper and fiber) are subject to changes in market
price as these materials are linked to the commodity markets. To the extent
that we are unable to pass on cost increases to customers, the cost
increases could have a significant impact on the results of our operations.
OTHER
We are either a plaintiff or a defendant in pending legal matters in
the normal course of business; however, we believe none of these legal
matters will have a materially adverse effect on our financial statements
upon final disposition. In addition, we are subject to various federal,
state, local and foreign laws and regulations governing the use, discharge
and disposal of hazardous materials. Our 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 our financial statements.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and for hedging activities. The new standard requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 133 is effective for us beginning with the year ending
December 31, 2001. We are currently evaluating the effects of SFAS No. 133
on our financial statements and current disclosures.
EUROPEAN MONETARY UNION -- EURO
On January 1, 1999, several member countries of the European Monetary
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 began trading 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. We conduct
business in member countries.
During the transition period, cashless payments (for example, wire
transfers) can be made in the euro, and parties to individual transactions
22
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.
We are addressing the issues involved with the introduction of the
euro. Among the issues facing us are the assessment and conversion of
information technology systems to allow for transactions to take place in
both the legacy currencies and the euro and the eventual elimination of
legacy currencies. In addition, we are reviewing certain existing contracts
for potential modification and assessing our pricing/marketing strategies
in the affected European markets.
Based on current information, we do not expect that the euro
conversion will have a materially adverse effect on our business, results
of operations, cash flows or financial condition.
YEAR 2000
During 1999, we completed our preparations to mitigate the risks posed
by Year 2000 compliance issues. We prepared for the Year 2000 risks through
a corporate wide effort to modify, upgrade and replace various information
technology and non-information technology systems, devices, and
applications. To date, we have not experienced any significant Year 2000
related problems with our information technology or non-information
technology systems, devices or applications. In addition, we have not
experienced any significant Year 2000 related problems with any of our
major customers or suppliers.
The costs of addressing Year 2000 compliance issues were not material
to our results of operations, financial condition or cash flows and were
financed through cash flows from operations.
We believe that we and our major customers and suppliers have become
Year 2000 compliant to ensure minimal business interruption to our
operations. However, we cannot assure you 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 our results of operations, liquidity and financial
condition.
INFORMATION MANAGEMENT SYSTEM
On January 2, 2000, we began the implementation of a new integrated
information management system. Our goal for this new computer-based system
is to help us improve business practices, allow faster access to
information and ultimately enable us to service our customers better in the
future, among other things.
However, during January 2000 we experienced some delays in certain
shipments in connection with the transition to this new information system.
During the first quarter of 2000, we worked diligently to correct these
transition issues and to increase shipping efforts to reduce the
system-related backlogs. While this shipping issue may have a negative
impact on our first quarter 2000 results, we do not believe that these
transition issues will have a material impact on our results of operations,
liquidity or financial condition in 2000. However, we cannot assure you
that we will incur no future issues with this system.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K that 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, including, without limitation, by their use of such terms
and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated,"
"should," "designed to," "foreseeable future," "believe," "believes" and
"scheduled" and similar expressions. These statements are subject to
various risks and uncertainties, many of which are outside our control,
23
such as effective implementation of the new integrated information
management system, developments in technology, pricing and acceptance of
our products, changes in material costs, industry competition, regulatory
changes affecting the cable industry, international economic conditions,
telecommunications industry capital spending, successful expansion and
related operation of the Newton and Claremont facilities, successful
implementation of the bimetals operation and other vertical integration
activities, the ability to achieve reductions in costs and to continue to
integrate acquisitions, foreign currency fluctuations, technological
obsolescence, international economic and political uncertainties 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 our best judgment at the date of this report based on
information currently available. However, we do not intend to update this
information to reflect developments or information obtained after the date
of this report and disclaim 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, 1999, 1998 and 1997 27
Consolidated Balance Sheets as of December 31, 1999 and 1998 28
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997 29
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1999, 1998 and 1997 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 subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America. 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 31, 2000
26
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Net sales (Notes 4, 5 and 16) $ 748,914 $ 571,733 $ 599,216
-------------- -------------- --------------
Operating costs and expenses:
Cost of sales 548,808 437,140 458,216
Selling, general and administrative 68,869 52,817 50,361
Research and development 8,332 5,612 6,234
Amortization of goodwill 5,388 5,194 5,223
Gain on sale of assets (Note 5) -- (1,873) --
-------------- -------------- --------------
Total operating costs and expenses 631,397 498,890 520,034
-------------- -------------- --------------
Operating income 117,517 72,843 79,182
Other income (expense), net (Note 4) 736 2,261 (4,183)
Interest expense (10,230) (15,448) (13,685)
Interest income 604 558 200
-------------- -------------- --------------
Income before income taxes 108,627 60,214 61,514
Provision for income taxes (Note 11) (40,550) (20,983) (24,056)
-------------- -------------- --------------
Net income $ 68,077 $ 39,231 $ 37,458
============== ============== ==============
Net income per share:
Basic $ 1.34 $ 0.80 *
Assuming dilution $ 1.31 $ 0.79 *
Weighted-average shares outstanding:
Basic 50,669 49,221 *
Assuming dilution 52,050 49,521 *
* Historical net income per share data for 1997 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,
-----------------------------
1999 1998
-----------------------------
ASSETS
Cash and cash equivalents $ 30,223 $ 4,129
Accounts receivable, less allowance for doubtful accounts of $4,838 and $4,126,
respectively 127,018 93,627
Inventories (Note 6) 40,208 29,986
Prepaid expenses and other current assets 2,376 3,745
Deferred income taxes (Note 11) 15,354 12,925
-------------- -------------
Total current assets 215,179 144,412
Property, plant and equipment, net (Note 7) 181,488 135,082
Goodwill, net of accumulated amortization of $48,777 and $43,396, respectively
162,075 164,024
Other intangibles, net of accumulated amortization of $32,055 and $29,314,
respectively 16,710 19,451
Other assets (Note 9) 7,083 2,358
-------------- -------------
Total Assets $582,535 $ 465,327
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $29,179 $23,717
Other accrued liabilities (Note 8) 39,048 26,713
-------------- -------------
Total current liabilities 68,227 50,430
Long-term debt (Note 9) 198,402 181,800
Deferred income taxes (Note 11) 20,346 17,543
Other noncurrent liabilities (Note 10) 14,216 11,582
-------------- -------------
Total Liabilities 301,191 261,355
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, 1999 and 1998
Common stock, $.01 par value; Authorized shares: 300,000,000; Issued and
outstanding shares: 50,889,208 at December 31, 1999; 50,254,467 at
December 31, 1998 509 503
Additional paid-in capital 166,875 155,631
Retained earnings 115,915 47,838
Accumulated other comprehensive loss (Note 17) (1,955) --
-------------- -------------
Total Stockholders' Equity 281,344 203,972
-------------- -------------
Total Liabilities and Stockholders' Equity $ 582,535 $465,327
============== ============
See notes to consolidated financial statements.
28
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- --------------- -----------
OPERATING ACTIVITIES:
Net income $68,077 $ 39,231 $ 37,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 29,295 24,662 21,677
Deferred income taxes (98) 1,788 1,374
Gain on sale of assets of the high temperature aerospace
and industrial cable business -- (1,873) --
Changes in assets and liabilities:
Accounts receivable (37,367) 5,114 6,076
Inventories (5,340) 6,318 (1,087)
Prepaid expenses and other current assets 1,356 (1,546) (1,152)
Accounts payable and other accrued liabilities 21,368 7,667 (7,713)
Other noncurrent liabilities 2,633 1,856 161
Other (499) (340) 2,894
--------- --------------- ----------
Net cash provided by operating activities 79,425 82,877 59,688
INVESTING ACTIVITIES:
Additions to property, plant and equipment (57,149) (22,784) (29,871)
Acquisition of business in Seneffe, Belgium (17,023) -- --
Sale of assets of the high temperature aerospace and
industrial cable business -- 9,654 --
Other 314 343 268
--------- --------------- ----------
Net cash used in investing activities (73,858) (12,787) (29,603)
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facility
(171,000) (84,000) 255,000
Proceeds from term loan facility for acquisition of
business in Seneffe, Belgium 16,353 -- --
Proceeds from issuance of convertible notes 172,500 -- --
Debt issuance costs (5,084) -- (705)
Dividend paid to former parent company -- -- (265,212)
Transfers to former parent company, net -- -- (15,838)
Proceeds from exercise of stock options 8,024 1,235 --
Proceeds from issuance of shares in secondary offering -- 13,474 --
--------- --------------- ----------
Net cash provided by (used in) financing activities 20,793 (69,291) (26,755)
Effect of exchange rate changes on cash (266) -- --
Change in cash and cash equivalents 26,094 799 3,330
Cash and cash equivalents, beginning of year 4,129 3,330 --
--------- --------------- ----------
Cash and cash equivalents, end of year $ 30,223 $ 4,129 $ 3,330
========= =============== ==========
See notes to consolidated financial statements.
29
COMMSCOPE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Number of Additional Other Total
Common Shares Paid-In Divisional Retained Comprehensive Stockholders'
Outstanding Common Stock Capital Equity Earnings Loss Equity
------------- ------------ ---------- ---------- -------- ------------- ------------
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 (Note 1) 49,104,874 491 140,870 (141,361) -- -- --
Issuance of shares to outside
directors 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
exercises 95,020 1 1,140 -- -- -- 1,141
Tax benefit from stock option
exercises -- -- 94 -- -- -- 94
Net income (and comprehensive
income) -- -- -- -- 39,231 -- 39,231
----------------------------------------------------------------------------------------------
Balance December 31, 1998 50,254,467 503 155,631 -- 47,838 -- 203,972
Issuance of shares for stock option
exercises 633,741 6 8,024 -- -- -- 8,030
Tax benefit from stock option
exercises -- -- 3,201 -- -- -- 3,201
Issuance of shares to outside 1,000 -- 19 -- -- -- 19
director
Comprehensive income:
Net income -- -- -- -- 68,077 -- 68,077
Other comprehensive loss
(Note 17) -- -- -- -- -- (1,955) (1,955)
----------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- 68,077 (1,955) 66,122
==============================================================================================
Balance December 31, 1999 50,889,208 $ 509 $166,875 $ -- $ 115,915 $ (1,955) $ 281,344
==============================================================================================
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"), through its wholly
owned subsidiaries, operates in the cable manufacturing business. CommScope
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 for cable television, telephony, Internet access and
wireless communications. Management believes CommScope is the world's
largest manufacturer of coaxial cable for hybrid fiber coaxial (HFC) cable
television systems. CommScope is also a leading supplier of coaxial,
twisted pair, and fiber optic cables for premise wiring (local area
networks), wireless and other communication applications.
CommScope, Inc. was incorporated in Delaware in January 1997. On July
28, 1997 (the "Distribution Date"), through a series of transactions and
stockholder dividends (the "Distribution") initiated by General Instrument
Corporation ("General Instrument"): (i) CommScope, Inc. of North Carolina
("CommScope NC"), formerly a wholly owned indirect subsidiary of General
Instrument, became a wholly owned subsidiary of CommScope, Inc. and (ii)
CommScope, Inc. was spun off to the stockholders of General Instrument.
General Instrument retained no ownership interest in CommScope, Inc. or
CommScope NC. CommScope, Inc. commenced operations as an independent entity
with publicly traded common stock on July 28, 1997.
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 the period prior to the
Distribution Date include the revenues and expenses directly attributable
to the Company's operations and an allocation of certain 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 the 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 the period prior to the Distribution was based on the Company's
expected annual effective tax rate, calculated assuming CommScope had filed
tax returns as a separate, free-standing entity. The expense allocations
from General Instrument, for the period prior to the Distribution, were
made consistent with prior periods. Although management believes these
allocations are reasonable, the financial results prior to the Distribution
do not necessarily reflect the results of operations of CommScope had it
operated as a separate, free-standing entity, and may not be indicative of
future operations.
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 the 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
31
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 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 and accelerated methods. 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 30 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,
1999, 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 1997 provision for income taxes has been determined as if
CommScope had filed separate tax returns for the period 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 $1.1 million in 1999, $0.9 million in
1998 and $1.2 million in 1997.
32
DERIVATIVE FINANCIAL INSTRUMENTS
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's policy is
to designate all derivatives as hedges and to account for the derivatives
in the same manner as the item being hedged. CommScope does not utilize
derivative financial instruments for trading purposes, nor does it engage
in speculation.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's
Belgian subsidiary are measured using the local currency as the functional
currency. Revenues and expenses of this subsidiary have been translated
into U.S. dollars at average exchange rates prevailing during the period.
Assets and liabilities of this subsidiary have been translated at the rates
of exchange as of the balance sheet date. Translation gains and losses of
this subsidiary are recorded to other comprehensive income or loss (see
Note 17).
Aggregate foreign currency transaction gains and losses of the Company
and its subsidiaries, such as those resulting from the settlement of
foreign receivables or payables, are included in determining net income and
were not material to the results of the Company's operations during 1999,
1998, or 1997.
The Eurodollar Credit Agreement (see Note 9), which serves as a hedge
of the Company's net investment in its Belgian subsidiary, is translated at
the rate of exchange as of the balance sheet date. The translation gains or
losses on this loan are recorded, net of tax, to other comprehensive income
or loss (see Note 17).
NET INCOME 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 potential common shares outstanding. The
following table reconciles shares outstanding for each computation of net
income per share:
Year Ended December 31,
----------------------------------------------------------
1999 (C) 1998 1997 (A)
--------------------- ------------------ -------------------
Weighted average number of common shares outstanding
50,669 49,221 49,107
Dilutive effect of employee stock options (B) 1,381 300 131
--------------------- ------------------ -------------------
Weighted average number of common and potential common
shares outstanding 52,050 49,521 49,238
===================== ================== ===================
- ------------------------
(A) Weighted average share information for 1997 is presented on a pro forma
basis, and assumes that a total of 49.1 million common shares and 49.2
million common and potential common 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.
(C) On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a conversion
rate of 20.7512 shares per $1,000 principal amount. The effect of the
assumed conversion of these notes was excluded from the computation of
net income per share (assuming dilution) for 1999 because its inclusion
would have been antidilutive. See Note 9 for further discussion of
convertible notes.
33
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
1999 presentation.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as embedded derivatives) and for hedging activities. The new standard
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 was amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date for FASB Statement No. 133, which delays the Company's
effective date until the first quarter of the year ending December 31,
2001. Management is currently evaluating the effects of SFAS No. 133 on the
Company's financial statements and current disclosures.
3. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The Company's earnings were included in General Instrument's results
of operations for the period prior to the Distribution. Additionally, the
capital structure of the Company changed 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.
The unaudited pro forma financial information below presents the
consolidated results of operations of CommScope as if the Distribution had
occurred on January 1, 1997. The unaudited pro forma financial information
does not purport to represent what the Company's operations actually would
have been for 1997 or to project the Company's operating results for any
future period.
The unaudited pro forma information below was prepared by adjusting
the Company's 1997 net income to reflect interest expense based on a net
debt level of $275 million at January 1, 1997. 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 potential common shares
outstanding at the Distribution Date are assumed to be outstanding since
January 1, 1997 (see Note 2 for additional information on weighted average
shares outstanding).
Giving effect to the Distribution as of January 1, 1997, pro forma net
income was $34,604 for the year ended December 31, 1997 ($0.70 per basic
and diluted share). 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.
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 was recorded as other income (expense), net in the consolidated
statements of income using the equity method of accounting. 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,
34
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 income (expense), net 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
basic and diluted share).
In July 1998, a formal termination and dissolution agreement for the
joint venture was completed. The partial liquidation of the joint venture's
assets in 1998, which was affected by the terms of the formal termination
and dissolution agreement between the partners, indicated that the
financial position of the joint venture at final dissolution would be
better than was anticipated at December 31, 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 basic and
diluted share after taxes, including reversal of the capital loss valuation
allowance established in 1997). Final dissolution and liquidation of this
joint venture is expected to be completed in accordance with Australian
legal requirements in 2000 and is not expected to have a material impact on
the Company's results of operations.
Sales of cable products to the joint venture by CommScope totaled $0.9
million in 1998 and $10.3 million in 1997.
5. ACQUISITIONS AND DIVESTITURES
Effective January 1, 1999, in a transaction with Alcatel Cable
Benelux, S.A. ("Alcatel"), 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 Seneffe acquisition has been accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities
have been recorded at their estimated fair value at the date of the
acquisition of approximately $20 million, including $3.5 million of
goodwill, which is being amortized over 30 years. Payment for the acquired
business was not required until March 1999 and was financed primarily by
borrowings under the new Eurodollar Credit Agreement (see Note 9).
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 recognized a pre-tax gain from the sale of $1.9
million as a gain on sale of assets.
Sales from the High Temperature Aerospace and Industrial Cable
Business totaled $2.4 million in 1998 prior to the sale and $16.5 million
in 1997.
6. INVENTORIES
December 31,
---------------------------------------
1999 1998
------------------- --------------------
Raw materials $ 16,597 $ 12,379
Work in process 9,942 5,811
Finished goods 13,669 11,796
------------------- --------------------
$ 40,208 $ 29,986
=================== ====================
The principal raw materials purchased by CommScope (fabricated
aluminum, plastics, bimetals, copper and 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.
35
7. PROPERTY, PLANT AND EQUIPMENT
December 31,
---------------------------------------
1999 1998
------------------- --------------------
Land and land improvements $ 3,577
5,284
Buildings and improvements 52,347 43,639
Machinery and equipment 196,367 158,333
Construction in progress 26,651 10,418
------------------- --------------------
280,649 215,967
Accumulated depreciation (99,161) (80,885)
=================== ====================
$ 181,488 $ 135,082
=================== ====================
Depreciation expense was $20,778, $16,377, and 13,420 for the years
ended December 31, 1999, 1998 and 1997, respectively.
8. OTHER ACCRUED LIABILITIES
December 31,
------------------------------------
1999 1998
------------------- ---------------
Salaries and compensation liabilities $ 19,225 $ 12,379
Postretirement benefit liabilities 9,143 5,063
Product reserves 2,196 1,799
Interest 530 697
Other 7,954 6,775
------------------- ---------------
$ $ 26,713
39,048
=================== ===============
9. LONG-TERM DEBT
December 31,
----------------------------------
1999 1998
------------------ ---------------
Credit Agreement $ -- $ 171,000
Convertible Notes 172,500 --
Eurodollar Credit Agreement 15,102 --
IDA Notes 10,800 10,800
------------------ ---------------
198,402 181,800
Less current portion -- --
================== ===============
$ 198,402 $ 181,800
================== ===============
CREDIT AGREEMENT
On July 23, 1997 the Company entered into an unsecured $350 million
revolving credit agreement with a group of banks (as amended, 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. All outstanding borrowings under the
Credit Agreement were repaid in December 1999 with proceeds from the
issuance of convertible debt (discussed below).
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. The Credit Agreement
expires on December 31, 2002.
36
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.
During 1999, the Company was party to several interest rate swap
agreements to effectively convert an aggregate amount of $150 million of
variable-rate borrowings under the Credit Agreement to a fixed-rate basis.
One agreement for a notional amount of $50 million expired in April 1999.
The other agreements were terminated in December 1999, when the underlying
borrowings were repaid.
The Credit Agreement contains certain financial and operating
covenants, including restrictions on incurring indebtedness and liens,
entering into transactions to acquire or merge with any entity, making
certain other fundamental changes, selling assets, paying dividends, and
maintaining certain levels of consolidated net worth, leverage ratio and
interest coverage ratio. The Company was in compliance with these covenants
at December 31, 1999.
CONVERTIBLE NOTES
On December 15, 1999, the Company issued $172.5 million of 4%
convertible subordinated notes due December 15, 2006. These notes are
convertible at any time into shares of CommScope common stock at a
conversion price of $48.19 per share, which is subject to adjustment, as
provided in the Indenture. The Company may redeem some or all of these
notes at any time on or after December 15, 2002 at redemption prices
specified in the Indenture. In connection with the issuance of the
convertible notes, the Company incurred costs of approximately $5.0
million, which have been capitalized as other assets and are being
amortized over the term of the notes. The net proceeds of $167.5 million
from this convertible debt offering were used primarily to repay
outstanding indebtedness under the Credit Agreement. The remaining proceeds
will be used to finance capital expenditures and for other general
corporate purposes.
EURODOLLAR CREDIT AGREEMENT
In February 1999, the Company entered into a term loan agreement for
15 million euros ($16.4 million at the date of borrowing) that matures on
March 1, 2006 (as amended, the "Eurodollar Credit Agreement"). The proceeds
of the Eurodollar Credit Agreement were used to fund a portion of the
acquisition costs and initial working capital needs of the Company's
manufacturing facility in Seneffe, Belgium. Borrowings under this loan
agreement bear interest at a variable rate equal to the Euro LIBOR Market
Rate plus an applicable margin, payable quarterly. Principal payments on
this loan are due in 20 equal quarterly installments of 750,000 euros
beginning June 1, 2001.
As of December 31, 1999, the Company was party to an interest rate
swap agreement, as required by the terms of the Eurodollar Credit
Agreement, to effectively convert the variable-rate loan to a fixed-rate
basis. The notional amount is equal to the outstanding principal balance of
the Eurodollar Credit Agreement and will decrease in tandem with principal
repayments, which begin June 1, 2001. Under the agreement, interest
settlement payments will be made quarterly based upon the spread between
the Euro LIBOR Market Rate, as adjusted quarterly, and a fixed rate of
4.53%.
37
IDA NOTES
In January 1995, CommScope entered into a $10.8 million unsecured 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.
OTHER MATTERS
Maturities of long-term debt for the next five years are as follows:
none in 2000; $2,265 in 2001; $3,020 in 2002; $3,020 in 2003 and $3,020 in
2004.
The weighted average effective interest rate on outstanding
borrowings, including amortization of associated loan fees, under the above
debt instruments was 4.82% at December 31, 1999 and 6.16% at December 31,
1998.
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 the Company's 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 $6.5 million in 1999, $6.8 million in 1998 and $8.4 million in
1997 to the Profit Sharing and Savings Plan, of which $5.0 million, $5.4
million and $7.0 million each year was discretionary.
The Company also sponsors an unfunded postretirement group medical and
dental plan (the "Postretirement 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 Postretirement 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 Postretirement 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 postretirement benefits during employees' active service
periods.
Additionally, the Company sponsors two defined benefit pension plans
("Defined Benefit Pension Plans"). The first is a nonqualified unfunded
supplemental executive retirement plan that provides certain key executives
with defined pension benefits. This plan is funded entirely by Company
contributions. The second is a nonqualified pension plan which provides
pension benefits for certain international management-level employees. This
plan is funded by Company and employee contributions.
38
Amounts accrued under the Postretirement Health Plan and the Defined
Benefit Pension Plans are included in other noncurrent liabilities. The
following table summarizes information for the Defined Benefit Pension
Plans and the Postretirement Health Plan (in thousands):
Other Postretirement
Pension Benefits Benefits
------------------------ -------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
Change in benefit obligation:
Postretirement benefit obligation, beginning of year
$ 5,413 $ 4,785 $ 8,502 $ 8,581
Benefit obligation at date of transition 915 -- -- --
Service cost -- -- 1,021 726
Interest cost 362 346 682 514
Plan participants' contributions -- -- 15 24
Curtailment due to divestiture (see Note 5) -- -- -- (1,348)
Actuarial (gain) loss (650) 301 2,777 90
Benefits paid (75) (19) (40) (85)
----------- ----------- ----------- ------------
Postretirement benefit obligation, end of year $ 5,965 $ 5,413 $ 12,957 $ 8,502
----------- ----------- ----------- ------------
Change in plan assets:
Fair value of plan assets, beginning of year $ -- $ -- $ -- $ --
Fair value of plan assets at date of transition 418 -- -- --
Employer and plan participant contributions 75 19 40 85
Benefits paid (75) (19) (40) (85)
----------- ----------- ----------- ------------
Fair value of plan assets, end of year $ 418 $ -- $ -- $ --
----------- ----------- ----------- ------------
Funded status (postretirement benefit obligation
in excess of fair value of plan assets) $ 5,547 $ 5,413 $ 12,957 $ 8,502
Unrecognized net actuarial loss (196) (882) (4,793) (2,138)
Unrecognized net transition amount (497) -- -- --
=========== =========== =========== ============
Accrued benefit cost, end of year $ 4,854 $ 4,531 $ 8,164 $ 6,364
=========== =========== =========== ============
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of return on plan assets 5.50% -- -- --
Rate of compensation increase 4.75% 4.75% -- --
Net periodic benefit cost for the Defined Benefit Pension Plans and the
Postretirement Health Plan consists of the following components (in thousands):
Pension Benefits Other Postretirement Benefits
---------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
Service cost $ -- $ -- $ -- $ 1,021 $ 726 $ 701
Interest 362 346 284 682 514 549
Recognized actuarial loss 36 12 -- 121 53 113
---------- ---------- ----------
========== ========== ==========
Net periodic benefit cost $ 398 $ 358 $ 284 $ 1,824 $ 1,293 $ 1,363
========== ========== ========== ========== ========== ==========
For measurement purposes, an 11% annual rate of increase in health
care costs was assumed for 2000 and is assumed to decrease gradually to
5.25% for 2006 and remain at that level thereafter. The increase in the
postretirement benefit obligation in 1999 reflects actuarial losses
primarily related to changes in expected future postretirement health care
claim costs.
39
Assumed health care cost trend rates have a significant effect on the
amounts reported for the Postretirement Health Plan. A one-percentage-point
change in assumed health care cost trend rates would have the following
effects for the year ended December 31, 1999:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost
components of net periodic benefit cost $ 496 $ (368)
Effect on postretirement benefit obligation 3,285 (2,502)
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,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Current:
Federal $ 37,404 $ 17,464 $ 20,200
State 3,244 1,731 2,482
--------------- --------------- ---------------
Current income tax provision 40,648 19,195 22,682
--------------- --------------- ---------------
Deferred:
Federal (90) 1,721 1,176
State (8) 67 198
--------------- --------------- ---------------
Deferred income tax provision (benefit) (98) 1,788 1,374
--------------- --------------- ---------------
Total provision for income taxes $ 40,550 $ 20,983 $ 24,056
=============== =============== ===============
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.9 2.0 2.7
Foreign sales corporation benefit (1.4) (3.8) (2.8)
Permanent items and other 1.8 2.7 3.1
Change in valuation allowance for capital
loss carryforward -- (1.1) 1.1
--------------- --------------- ---------------
Effective income tax rate 37.3% 34.8% 39.1%
=============== =============== ===============
40
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,
---------------------------------------
1999 1998
------------------- --------------------
Deferred tax assets:
Accounts receivable and inventory reserves $ 7,933 $ 6,358
Product reserves 835 683
Employee benefits 4,165 3,421
Postretirement benefits 5,085 4,140
Other 2,421 2,934
------------------- --------------------
Total deferred tax assets 20,439 17,536
Deferred tax liabilities:
Property, plant and equipment (20,743) (16,904)
Intangibles (4,688) (5,250)
------------------- --------------------
Total deferred tax liabilities (25,431) (22,154)
------------------- --------------------
Net deferred tax liability $ (4,992) $ (4,618)
=================== ====================
Deferred taxes as recorded on the balance sheet:
Current deferred tax asset $ 15,354 $ 12,925
Noncurrent deferred tax liability (20,346) (17,543)
------------------- --------------------
Net deferred tax liability $ (4,992) $ (4,618)
=================== ====================
The valuation allowance at December 31, 1997 related to a portion of a
capital loss carryforward 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, 1999 the Company had approximately $4.7 million in
state investment tax credits that can be utilized to reduce state income
tax liabilities for future tax years through 2006.
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 nonemployee directors of the Company. Awards of stock
options made to Company employees and nonemployee 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.
41
The following tables summarize the Company's stock option activity
from the Distribution Date and information about stock options outstanding
at December 31, 1999 (in thousands, except per share information):
Weighted Average
Exercise Price Per
Shares (000s) Share
--------------------- ---------------------
Substitute Options transferred from GI Incentive Plan 2,149 $ 12.70
Granted 1,674 12.31
Cancelled (15) 13.19
--------------------- ---------------------
Stock options outstanding at December 31, 1997 3,808 12.53
Granted 1,178 15.16
Cancelled (359) 12.28
Exercised (95) 12.01
--------------------- ---------------------
Stock options outstanding at December 31, 1998 4,532 13.25
Granted 690 37.08
Cancelled (84) 14.29
Exercised (634) 12.72
===================== =====================
Stock options outstanding at December 31, 1999 4,504 $ 16.96
===================== =====================
Stock options exercisable at December 31, 1999 2,068 $ 12.99
===================== =====================
Shares reserved for future issuance at
December 31, 1999 1,517
=====================
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------
Weighted
Average Weighted Average Weighted Average
Range of Remaining Exercise Price Exercise Price
Exercise Prices Contractual Per Share Per Share
Shares (000s) Life (in Years) Shares (000s)
- ----------------- ----------------------------------------------------- ------------------------------------
$8 to $15 2,685 6.9 $ 12.51 1,756 $ 12.57
15 to 25 1,165 8.8 15.42 312 15.33
25 to 35 27 7.8 28.96 -- --
35 to 46 627 10.0 38.40 -- --
===================================================== ====================================
$8 to $46 4,504 7.8 $ 16.96 2,068 $ 12.99
===================================================== ====================================
42
The Company has elected to account for stock options using the
intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25 and has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires
disclosure of fair value and valuation data for stock options and the pro
forma effects on net income and net income per share. The weighted average
fair value per option has been estimated using the Black-Scholes option
pricing model. Pro forma information presents net income and net income per
share as if compensation expense for grants made after January 1, 1995 had
been recorded using the fair value based method prescribed by SFAS No. 123.
The 1997 pro forma information is presented after giving effect to the pro
forma adjustments for the Distribution (see Note 3). These disclosures are
as follows:
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
------------- ---------------- -----------------
Valuation assumptions:
Expected option term (years) 3.5 4.5 4.5
Expected volatility 50.0% 50.0% 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 option $ 15.87 $ 7.35 $ 6.06
Pro forma:
Net income $ 64,020 $ 37,803 $ 32,546
Net income per share - basic 1.26 0.77 0.66
Net income per share - assuming dilution
1.23 0.76 0.66
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 pursuant to a Permitted
Offer, as defined) has acquired beneficial ownership of 15% or more of the
outstanding Common Stock; or (ii) 10 business days following a person's or
group's commencement of, or announcement of and intention to commence, a
tender or exchange offer, the consummation of which would result in
beneficial ownership of 15% or more of the Common Stock. The rights will
entitle holders (other than an Acquiring Person, as defined) to purchase
Common Stock having a market value (immediately prior to such acquisition)
of twice the exercise price of the right. If the Company is acquired
through a merger or other business combination transaction (other than a
Permitted Offer, as defined), each right will entitle the holder to
purchase $120 worth of the surviving company's common stock for $60. The
Company may redeem the rights for $0.01 each at any time prior to such
acquisitions. The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved
the creation of (out of the authorized but unissued shares of preferred
stock of the Company) Participating Preferred Stock, consisting of 0.4
million shares with a par value of $0.01 per share. The holders of the
Participating Preferred Stock are entitled to receive dividends, if
declared by the Board of Directors, from funds legally available. Each
share of Participating Preferred Stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of Participating
43
Preferred Stock are not redeemable by the Company nor convertible into
Common Stock or any other security of the Company.
14. CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, for purposes other
than trading. Nonderivative financial instruments include letters of credit
and commitments to extend credit, primarily accounts receivable. These
financial instruments involve risk, including the credit risk of
nonperformance by the counterparties to those instruments, and the maximum
potential loss may exceed the amount reserved in the Company's balance
sheet. The Company manages its exposures to credit risk associated with
financial instruments through credit approvals, credit limits and
monitoring procedures. Concentrations of credit risk with respect to trade
accounts receivable 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. At December 31, 1999,
trade receivables from a major customer and its affiliates comprised 10% of
the Company's total trade accounts receivable. However, in management's
opinion, the Company did not have any other significant risk of credit loss
due to the nonperformance of any customer or counterparty related to any
financial instrument. In addition, management believes that the various
counterparties with which the Company enters into derivative agreements
consist of only financially sound institutions and, accordingly, believe
that the credit risk for non-performance of these contracts is low.
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, 1999, 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. 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.
At December 31, 1999, the only derivative financial instrument
outstanding was an interest rate swap agreement, which serves as a
fixed-rate hedge to the variable-rate borrowings under the Eurodollar
Credit Agreement (see Note 9). The fair values of the interest rate and
commodity price swap contracts outstanding at December 31, 1998 and the
interest rate swap agreement outstanding at December 31, 1999 were not
material to the Company's financial position.
15. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment under operating leases expiring at
various dates through the year 2008. Rent expense was $5.4 million in 1999,
$4.2 million in 1998 and $3.0 million in 1997. Future minimum rental
payments required under operating leases with initial terms of one year or
more as of December 31, 1999 are: $3,504 in 2000; $2,967 in 2001; $2,248 in
2002; $2,001 in 2003; $1,784 in 2004 and $7,180 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.
44
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
applications.
Sales of coaxial cable products to a major customer and its affiliates
were approximately 10%, 9% and 7% of net sales in 1999, 1998 and 1997,
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, 1999.
Sales to related parties were less than 2.5% of net sales in 1999,
less than 2% of net sales in 1998 and less than 1% of net sales in 1997.
Trade accounts receivable from related parties were less than 2% of the
Company's total trade accounts receivable balance as of December 31, 1999
and less than 1% as of December 31, 1998. Purchases from related parties
were less than 1% of cost of sales and operating expenses in 1999 and 1998.
Sales to customers located outside of the United States
("international sales") comprised 24% of net sales in 1999 and 1998 and 33%
of net sales in 1997. International sales by geographic region and
worldwide sales by product are as follows (in millions):
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
Latin America $ 43.0 $ 43.0 $ 74.3
Asia / Pacific Rim 47.6 40.1 57.6
Europe 65.4 39.2 48.0
Canada 18.3 14.9 17.5
Other 3.4 2.6 3.0
------------------------------------------------------------
Total international sales $ 177.7 $ 139.8 $ 200.4
============================================================
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
Cable television and other video
applicationproducts $ 557.4 $ 457.2 $ 491.5
Local area network products 87.3 74.8 76.6
Wireless and other telecom products 104.2 39.7 31.1
------------------------------------------------------------
Total worldwide sales by product $ 748.9 $ 571.7 $ 599.2
============================================================
Net property, plant and equipment by geographic area is as follows (in millions):
December 31,
----------------------------------------
1999 1998
----------------------------------------
United States $ 171.9 $ 135.1
Europe 9.6 --
----------------------------------------
Total net property, plant and equipment $ 181.5 $ 135.1
========================================
45
17. OTHER
SUPPLEMENTAL CASH FLOW INFORMATION (IN MILLIONS)
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 (A) (B)
----------------------------------------------------
Cash paid during the year for:
Taxes $ 37.1 $ 18.0 $ 9.0
Interest 10.3 17.1 5.5
Noncash activities:
Tax benefit from exercise of stock 3.2 0.1 --
options
- ------------------
(A) For the period 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.
(B) Interest costs incurred prior to the Distribution, with the exception of
interest on the IDA Notes, were settled with General Instrument through
divisional equity.
OTHER COMPREHENSIVE LOSS
Comprehensive income consists of net income plus other comprehensive
income or loss, defined as all other changes in net assets from nonowner
sources. The Company had no items of other comprehensive income or loss for
the years ended December 31, 1998 or 1997.
Other comprehensive loss for the year ended December 31, 1999 consists of
the following (in thousands):
Foreign currency translation loss - Belgian subsidiary $ 2,734
Foreign currency translation gain -
Eurodollar Credit Agreement (1,251)
Deferred tax liability for foreign currency translation -
Eurodollar Credit Agreement 472
--------
Other comprehensive loss $ 1,955
18. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
Fiscal 1999:
Net sales $148,071 $186,882 $202,315 $211,646
Gross profit 36,835 49,860 54,533 58,878
Operating income 19,530 29,238 34,250 34,499
Net income 10,760 17,092 19,738 20,487
Net income per share, basic 0.21 0.34 0.39 0.40
Net income per share, diluted 0.21 0.33 0.38 0.39
Fiscal 1998:
Net sales $133,602 $141,886 $150,057 $146,188
Gross profit 27,568 32,697 37,281 37,047
Operating income 13,852 17,016 21,519 20,456
Net income 6,332 8,499 11,421 12,979
Net income per share, basic and assuming
dilution (1) 0.13 0.17 0.23 0.26
(1) Net income per share (basic) for the year ended December 31, 1998 is $0.80.
46
COMMSCOPE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
----------------------------
Charged to
Description Balance at Charged to Other Balance at
Beginning of Costs and Accounts Deductions End of
Period Expenses (Describe) (Describe) (1) Period
- --------------------------------------------------------------------------------------------------------------------
Deducted from assets:
Allowance for doubtful accounts
Year ended December 31, 1999 $4,126 $1,602 $ -- $ 890 $4,838
Year ended December 31, 1998 $3,985 $ 995 $ -- $ 854 $4,126
Year ended December 31, 1997 $3,761 $ 525 $ -- $ 301 $3,985
(1) Uncollectible customer accounts written off, net of recoveries of previously written off customer accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
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 our Proxy Statement for the
2000 Annual Meeting of Stockholders ("2000 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, 2000.
Name and Title Age Business Experience
- -------------- --- -------------------
Frank M. Drendel 55 Frank M. Drendel has been our
Chairman and Chief Chairman and Chief Executive
Executive Officer Officer since the spin-off. He
has served as Chairman and
President of CommScope NC,
currently our wholly-owned
subsidiary, from 1986 to the
spin-off and has served as Chief
Executive Officer of CommScope
NC since 1976. Mr. Drendel is a
director of Nextel
Communications, Inc., C-SPAN and
the National Cable Television
Association.
Brian D. Garrett 51 Brian D. Garrett has been our
President and Chief President and Chief Operating
Operating Officer 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 51 Jearld L. Leonhardt has been our
Executive Vice President Executive Vice President and
and Chief Financial Officer Chief Financial Officer since
February 1999. He has served as
our Executive Vice President,
Finance and Administration from
the spin-off until February
1999. He was our Treasurer 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 58 William R. Gooden has been our
Senior Vice President Senior Vice President and
and Controller 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.
48
Name and Title Age Business Experience
- -------------- --- -------------------
Larry W. Nelson 57 Larry W. Nelson has been our
Executive Vice President, Executive Vice President,
Development Executive Vice President,
Development since the spin-off.
He has served as Executive
Development Vice President,
Development of CommScope NC
since 1997. From 1988 to 1997,
he was Executive Vice President
and General Manager of the Cable
TV Division of CommScope NC.
Frank J. Logan 57 Frank J. Logan has been our
Executive Vice President Executive Vice President,
International Executive Vice President,
International since the
spin-off. He has served as
Executive International Vice
President, International of
CommScope NC since 1996. From
1989 to 1996, he was Vice
President, International of
CommScope NC.
Gene W. Swithenbank 60 Gene W. Swithenbank has been our
Executive Vice President, Executive Vice President,
Sales and Marketing Executive Vice President, Sales
and Marketing since the
spin-off. He has served as Sales
and Marketing 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 W. Crenshaw 43 Randall W. Crenshaw has been our
Executive Vice President Executive Vice President,
Producrement/Logistics Procurement/Logistics since the
spin-off. He has served as
Executive Vice President,
Procurement/Logistics of
CommScope NC since 1997. From
1994 to 1997, Mr. Crenshaw was
Vice President Operations for
the Network Cable Division of
CommScope NC. Prior to that
time, Mr. Crenshaw has held
various positions with CommScope
NC since 1985.
Frank B. Wyatt, II 37 Frank B. Wyatt, II has been our
Vice President, General Vice President, General Counsel
Counsel and Secretary and Secretary 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 our 2000 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 our 2000 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 our 2000 Proxy Statement, which sections are
incorporated by reference herein.
49
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 our 2000 Proxy Statement and is incorporated by reference
herein.
50
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, 1999, 1998 and 1997.
Consolidated Balance Sheets as of December 31, 1999 and
1998.
Consolidated Statements of Cash Flows for the Years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1999, 1998 and 1997.
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 December 7, 1999 we filed a current report on Form
8-K announcing our planned convertible subordinated
note offering.
On December 15, 1999 we filed a current report on Form
8-K announcing completion of our convertible
subordinated note offering.
51
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 20, 2000 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 Chief March 20, 2000
- ------------------------- Executive Officer
Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and March 20, 2000
- ------------------------- Chief Financial Officer
Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President and Controller March 20, 2000
- ------------------------- (Principal accounting officer)
William R. Gooden
/s/ Edward D. Breen Director March 20, 2000
- -------------------------
Edward D. Breen
/s/ Duncan M. Faircloth Director March 20, 2000
- -------------------------
Duncan M. Faircloth
/s/ Boyd L. George Director March 20, 2000
- -------------------------
Boyd L. George
/s/ George N. Hutton, Jr. Director March 20, 2000
- -------------------------
George N. Hutton
/s/ James N. Whitson, Jr. Director March 20, 2000
- -------------------------
James N. Whitson
52
INDEX OF EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of CommScope,
Inc. (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)).
3.2 Amended and Restated By-Laws of CommScope, Inc. (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)).
4.1 Rights Agreement, dated June 12, 1997, between CommScope, Inc.
and ChaseMellon Shareholder Services, L.L.C. (Incorporated herein
by reference from the Registration Statement on Form 8-A filed
June 30, 1997 (File No. 1-12929)).
4.1.1 Amendment No. 1 to Rights Agreement, dated as of June 14, 1999,
between CommScope, Inc. and ChaseMellon Shareholder Services.
(Incorporated by reference from the Amendment to Registration
Statement on Form 8-A/A filed June 14, 1999 (File No. 1-12929)).
10.1 Employee Benefits Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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)).
10.2 Debt and Cash Allocation Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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)).
10.3 Insurance Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
(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)).
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel
Systems, Inc., CommScope, Inc. and General Semiconductor, Inc.
(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)).
10.5 Trademark License Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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)).
10.6 Transition Services Agreement, dated as of July 25, 1997, between
NextLevel Systems, Inc. and CommScope, Inc. (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)).
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.
(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)).
E-1
10.7.1 First Amendment to the Credit Agreement, dated as of December 7,
1999 to the Credit Agreement dated as of July 23, 1997, among
CommScope, Inc. of North Carolina, The Chase Manhattan Bank, as
Administrative Agent, and the Banks from time to time parties
thereto, and the financial institutions named therein as
co-agents for the Banks.
10.8+ Amended and Restated CommScope, Inc. 1997 Long-Term Incentive
Plan, as amended through June 9, 1999. (Incorporated herein by
reference from the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999 (File No. 1-12929)).
10.9 Form of Severance Protection Agreement between the Company and
certain executive officers. (Incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12929)).
10.9.1 Form of Amendment to Severance Protection Agreement between the
Company and certain Executive Officers. (Incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1999 (File No. 1-12929)).
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. (Incorporated by
reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12929)).
10.11 Credit Agreement, dated February 26, 1999, between First Union
National Bank and CommScope, Inc. of North Carolina.
(Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No.
1-12929)).
10.11.1 First Amendment to the Credit Agreement, dated as of December 7,
1999 between First Union National Bank and CommScope Inc. of
North Carolina.
10.12+ The CommScope, Inc. Annual Incentive Plan, as amended through
June 9, 1999.
10.13 Indenture dated as of December 15, 1999 between CommScope, Inc.
and First Union National Bank, as Trustee (Incorporated by
reference from the Company's Registration Statement on form S-3
dated January 14, 2000 (File No. 333-94691).
10.14 Registration Rights Agreement, dated December 15, 1999 between
CommScope Inc. and the Initial Purchasers (Incorporated by
reference from the Company's Registration Statement on form S-3
dated January 14, 2000 (File No. 333-94691)
12. Statements re: Computation of Ratios.
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
- ----------------------------------
+ Management Compensation.
E-2