<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999.
REGISTRATION NO. 333-85999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEXT LEVEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3674 94-3342408
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(707) 584-6820
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES T. WANDREY
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
NEXT LEVEL COMMUNICATIONS, INC.
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(707) 584-6820
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C> <C>
JAY K. HACHIGIAN, ESQ. RAYMOND W. WAGNER, ESQ. VINCENT J. PISANO, ESQ.
GUNDERSON DETTMER STOUGH SIMPSON THACHER & BARTLETT SKADDEN, ARPS, SLATE,
VILLENEUVE FRANKLIN & HACHIGIAN, 425 LEXINGTON AVENUE MEAGHER & FLOM LLP
LLP NEW YORK, NEW YORK 10017 919 THIRD AVENUE
155 CONSTITUTION DRIVE (212) 455-2000 NEW YORK, NEW YORK 10022
MENLO PARK, CALIFORNIA 94025 (212) 735-3000
(650) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION DATED OCTOBER 29, 1999
8,500,000 Shares
[Next Level Communications Logo]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $10.00 and $12.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "NXTV."
General Instrument Corporation will own 83.2% of our outstanding common
stock after this offering.
The underwriters have an option to purchase a maximum of 1,275,000
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
6.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEXT LEVEL
------------ ----------------- ---------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Merrill Lynch & Co. and Credit Suisse First Boston are acting as joint
book-running managers. Delivery of the shares of common stock will be made on or
about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
WARBURG DILLON READ LLC
VOLPE BROWN WHELAN & COMPANY
The date of the prospectus is , 1999.
<PAGE> 3
EDGAR DESCRIPTION OF ARTWORK: INSIDE COVER GRAPHICS OF PROSPECTUS.
The heading for the page reads "Our Products at Work, Delivering Voice,
Data and Video over Copper Telephone Wires."
This diagram depicts the process by which Next Level facilitates the
delivery, by telephone companies, of voice from the public telephone network,
data from high-speed data and internet service providers and video from
entertainment video service providers to a customer's home or business through
our products located at the telephone company central office, field and
subscribers' home or business.
The graphics include photographs of our products.
<PAGE> 4
---------------
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 6
FORWARD-LOOKING STATEMENTS.......... 18
USE OF PROCEEDS..................... 19
DIVIDEND POLICY..................... 19
OUR RECAPITALIZATION................ 20
CAPITALIZATION...................... 21
DILUTION............................ 22
SELECTED FINANCIAL DATA............. 23
PRO FORMA SELECTED FINANCIAL DATA... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 26
BUSINESS............................ 36
</TABLE>
<TABLE>
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PAGE
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MANAGEMENT.......................... 51
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................... 62
PRINCIPAL STOCKHOLDERS.............. 67
DESCRIPTION OF CAPITAL STOCK........ 69
UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS......... 75
SHARES ELIGIBLE FOR FUTURE SALE..... 78
UNDERWRITING........................ 80
NOTICE TO CANADIAN RESIDENTS........ 84
LEGAL MATTERS....................... 85
EXPERTS............................. 85
WHERE YOU CAN FIND ADDITIONAL
INFORMATION....................... 86
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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<PAGE> 5
PROSPECTUS SUMMARY
You should read this prospectus summary together with the more detailed
information contained in this prospectus, including the risk factors and
financial statements and the notes to the financial statements.
NEXT LEVEL COMMUNICATIONS, INC.
We design and market high-speed, high-volume, also known as broadband,
communications equipment that enables telephone companies and other
communications service providers to cost-effectively deliver a full suite of
voice, data and video services over the existing copper telephone wire
infrastructure. Service providers deploying our equipment can either offer
voice, data and video services in a single product offering or offer each
service separately depending on subscriber demand and the service providers'
objectives. We believe that by installing our equipment, telephone companies and
other communications service providers will be able to capitalize on, and
compete effectively in, the market for integrated voice, data and video
services.
Telephone companies face increasing competition from cable companies that
have recently announced plans to offer traditional voice services, as well as
high-speed data and video services. Telephone companies, however, have been
constrained in their response to this increased competition because the copper
wire infrastructure used by most telephone companies has not been capable of
delivering high-speed data and video services. Telephone companies seeking to
provide broadband services have generally needed to adopt a complex and costly
strategy of installing independent equipment from multiple vendors.
We believe that our equipment enables telephone companies to effectively
compete with cable companies in the growing data and video markets. Our
equipment is engineered to provide flexibility to enable telephone companies to
cost-effectively deploy multiple services to large numbers of subscribers. Our
products include equipment located at a telephone company's central office, in
the field and at a subscriber's home or business. Telephone companies using our
equipment can generate incremental revenues from their existing subscribers and
respond to competing service offerings. Additionally, our products are
engineered to provide enhanced security for applications such as electronic
commerce.
Our objective is to be the leading supplier of communications equipment
used by telephone companies to deliver voice, data and video services to their
residential and business customers. To accomplish this objective, we intend to:
- capitalize on our existing relationships with key regional Bell operating
companies to increase our sales as they deploy voice, data and video
services more broadly;
- expand our sales into new markets by targeting other communications
providers that use a copper telephone wire infrastructure, including
local, independent and international telephone companies;
- maintain and extend our technology leadership to offer new products and
features that will provide competitive advantages for all of these
communications service providers; and
- continue to outsource manufacturing of our products to maintain
flexibility and reduce costs.
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<PAGE> 6
We commenced operations in July 1994 and recorded our first sale in
September 1997. From inception through September 30, 1999, approximately 82% of
our total revenues were from sales to U S WEST and Bell Atlantic. In 1999, we
also began to sell our equipment to the local, independent and international
telecommunications markets.
Our principal executive offices are located at 6085 State Farm Drive,
Rohnert Park, California 94928 and our telephone number is (707) 584-6820. Our
world wide web address is www.nlc.com. The information on this web site does not
constitute part of this prospectus.
2
<PAGE> 7
THE OFFERING
Common stock offered................ 8,500,000 shares
Common stock to be outstanding after
this offering....................... 85,543,056 shares. This does not
include 12,319,748 shares that are
reserved for issuance pursuant to
employee stock options that we
anticipate will be outstanding when
this offering is completed and
8,480,102 shares that are reserved for
issuance pursuant to outstanding
warrants held by affiliates of Spencer
Trask Investors LLC.
Use of proceeds..................... For general corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol............................ NXTV
Unless otherwise indicated, the information in this prospectus (excluding
the historical financial statements):
- assumes that we have completed our recapitalization as described in this
prospectus under the heading "Our Recapitalization;" and
- assumes no exercise of the underwriters' over-allotment option.
In addition, the number of shares of common stock to be received by General
Instrument in our recapitalization is partially dependent upon an assumed
initial offering price of the common stock of $11.00 per share. A change in the
number of shares of common stock to be received by General Instrument in our
recapitalization will result in the same change in the total number of shares of
common stock outstanding after this offering.
------------------
NLevel(3) is our trademark. This prospectus also contains product names,
trade names and trademarks of ours as well as those of other organizations. All
other brand names and trademarks appearing in this prospectus are the property
of their respective holders.
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<PAGE> 8
SUMMARY FINANCIAL DATA
The following table presents summary historical, pro forma and pro forma,
as adjusted financial data. The information set forth below should be read in
conjunction with the "Pro Forma Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes included in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the nine months ended September 30, 1999 and the balance sheet data as
of September 30, 1999 are derived from audited financial statements included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1998 are derived from the unaudited financial statements included
in this prospectus and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements.
The unaudited pro forma statement of operations data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
our recapitalization as if it occurred on January 1, 1998. The pro forma
statement of operations data do not give effect to the non-cash compensation
expense associated with employee stock options to be recorded upon completion of
this offering. The compensation expense, based upon an assumed initial offering
price of $11.00 per share and assuming no forfeitures, will be approximately
$51.4 million, approximately $49.3 million of which will be expensed in the
period in which this offering is completed. This compensation expense excludes
any non-cash compensation expense which may result from the tandem stock option
grant made in January 1997 to some of our employees. The tandem stock option
grant permits these employees to exercise options for either shares of our or
General Instrument's common stock. This non-cash compensation expense would be
an additional $16.6 million, based on an assumed initial offering price of
$11.00 per share, assuming it becomes more likely that all tandem stock option
holders will elect to exercise Next Level options.
The unaudited pro forma balance sheet data give effect to our
recapitalization as if it occurred on September 30, 1999. The unaudited pro
forma, as adjusted balance sheet data further give effect to our receipt of the
estimated net proceeds from the sale of 8,500,000 shares of common stock in this
offering at an assumed initial public offering price of $11.00 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, as if this offering had been completed on September 30, 1999.
The pro forma and pro forma, as adjusted financial data do not necessarily
represent what the operating results or financial position would have been or
project the operating results or financial position for any future period or
date.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1998 1998 1999 1999
--------- -------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ -- $ 8,311 $ 43,830 $ 43,830 $ 21,208 $ 32,430 $ 32,430
Gross profit (loss)..................... -- (2,949) 397 397 (568) 2,461 2,461
Operating expenses:
Research and development.............. 17,102 37,064 47,086 47,086 32,493 35,861 35,861
Selling, general and administrative... 15,850 26,414 26,248 26,248 19,906 22,220 22,220
Litigation............................ 141,000 -- 5,000 5,000 5,000 -- --
Operating loss.......................... (173,952) (66,427) (77,937) (77,937) (57,967) (55,620) (55,620)
Other income (expense), net............. 48 (2) 2,241 2,241 2,103 853 853
Interest expense........................ -- -- (6,035) (95) (4,418) (5,181) (171)
--------- -------- -------- -------- -------- -------- --------
Net loss................................ $(173,904) $(66,429) $(81,731) $(75,791) $(60,282) $(59,948) $(54,938)
========= ======== ======== ======== ======== ======== ========
Pro forma basic and diluted net loss
per share............................. $ (0.98) $ (0.71)
======== ========
Shares used in pro forma basic and
diluted net loss per share............ 77,043 77,043
======== ========
</TABLE>
4
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 12,499 $ 12,499 $ 96,654
Working capital............................................. 17,359 17,359 101,514
Total assets................................................ 87,234 87,234 171,389
Long-term obligations, net of current portion............... 86,396 446 446
Total partners' deficit/stockholders' equity................ (40,717) 45,233 129,388
</TABLE>
See notes 3 and 9 of notes to the financial statements of Next Level
Communications L.P. for an explanation of the determination of the number of
shares used in computing pro forma per share data and for a description of the
tandem stock option grant.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. You should also refer to the other information set forth in
this prospectus, including our financial statements and the related notes.
RISKS RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS
WE HAVE INCURRED NET LOSSES AND NEGATIVE CASH FLOW FOR OUR ENTIRE HISTORY, WE
EXPECT TO INCUR FUTURE LOSSES AND NEGATIVE CASH FLOW AND WE MAY NEVER ACHIEVE
PROFITABILITY
We incurred net losses of $59.9 million for the nine months ended September
30, 1999, $81.7 million for the year ended December 31, 1998, $66.4 million for
the year ended December 31, 1997 and $173.9 million for the year ended December
31, 1996. Our ability to achieve profitability on a continuing basis will depend
on the successful design, development, testing, introduction, marketing and
broad commercial distribution of our broadband equipment products.
We expect to continue to incur significant product development, sales and
marketing, and administrative expenses. In addition, we depend in part on cost
reductions to improve gross profit margins because the fixed-price nature of
most of our long-term customer agreements prevents us from increasing prices. As
a result, we will need to generate significant revenues and improve gross profit
margins to achieve and maintain profitability. We may not be successful in
reducing our costs or in selling our products in sufficient volumes to realize
cost benefits from our manufacturers. We cannot be certain that we can achieve
sufficient revenues or gross profit margin improvements to achieve
profitability.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS
We recorded our first sale in September 1997. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. You should consider our prospects in light of the heightened risks
and unexpected expenses and difficulties frequently encountered by companies in
an early stage of development. These risks, expenses and difficulties, which are
described below, apply particularly to us because the market for equipment for
delivering voice, data and video services is new and rapidly evolving. Due to
our limited operating history, it will be difficult for you to evaluate whether
we will successfully address these risks.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE AND THESE
FLUCTUATIONS MAY MAKE OUR STOCK PRICE VOLATILE
Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly in the future. As a result, we believe
that quarter-to-quarter comparisons of our operating results may not be
meaningful. Fluctuations in our quarterly revenues or operating results may
cause volatility in the price of our stock. It is likely that in some future
quarter our operating results may be below the expectations of public
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<PAGE> 11
market analysts and investors, which may cause the price of our stock to fall.
Factors likely to cause variations in our quarterly revenues and operating
results include:
- delays or cancellations of any orders by U S WEST, which accounted for
approximately 61% of our revenues for the nine months ended September 30,
1999, or by any other customer accounting for a significant portion of
our revenues;
- variations in the timing, mix and size of orders and shipments of our
products throughout the quarter or year;
- new product introductions by us or by our competitors;
- the timing of upgrades of telephone companies' infrastructure;
- variations in capital spending budgets of telephone companies; and
- increased expenses, whether related to sales and marketing, product
development or administration.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activity. Because most of our operating expenses are fixed in the short term, we
may not be able to quickly reduce spending if our revenues are lower than we had
projected and our results of operations could be harmed.
BECAUSE OUR SALES CYCLE IS LENGTHY AND VARIABLE, THE TIMING OF OUR REVENUE IS
DIFFICULT TO PREDICT AND WE MAY INCUR SALES AND MARKETING EXPENSES WITH NO
GUARANTEE OF A FUTURE SALE
Customers view the purchase of our products as a significant and strategic
decision. As a result, customers typically undertake significant evaluation,
testing and trial of our products before deployment. This evaluation process
frequently results in a lengthy sales cycle, typically ranging from six months
to more than a year. Before a customer places an order, we may incur substantial
sales and marketing expenses and expend significant management efforts. In
addition, product purchases are frequently subject to unexpected administrative,
processing and other delays on the part of our customers. This is particularly
true for customers for whom our products represent a very small percentage of
their overall purchasing activities. As a result, sales forecasted from a
specific customer for a particular quarter may not be realized in that quarter
and this could result in lower than expected revenues.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FINANCING TO FUND OUR BUSINESS AND, AS A
RESULT, WE MAY NOT BE ABLE TO GROW AND COMPETE EFFECTIVELY
In the past, we have relied on General Instrument to provide capital, but
it will not provide us additional funds after this offering. We may need to
raise additional funds if our estimates of revenues or capital requirements
change or prove inaccurate. If we cannot raise these funds, we may not be able
to grow our business. We may need additional capital if we need to respond to
unforeseen technological or marketing hurdles or if we desire to take advantage
of unanticipated opportunities. In addition, we expect to review potential
acquisitions that would complement our existing product offerings or enhance our
technical capabilities that could require potentially significant amounts of
capital. Funds may not be available at the time or times needed on terms
acceptable to us, if at all. If
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adequate funds are not available, or are not available on acceptable terms, we
may not be able to take advantage of market opportunities, to develop new
products or to otherwise respond to competitive pressures effectively.
RISKS RELATED TO OUR CUSTOMERS
OUR CUSTOMER BASE OF TELEPHONE COMPANIES IS EXTREMELY CONCENTRATED AND THE LOSS
OF OR REDUCTION IN BUSINESS FROM EVEN ONE OF OUR CUSTOMERS COULD CAUSE OUR SALES
TO FALL SIGNIFICANTLY
A small number of customers have accounted for a large part of our revenues
to date. We expect this concentration to continue in the future. If we lose one
of our significant customers, our revenues could be significantly affected. U S
WEST accounted for 68% of total revenues for the year ended December 31, 1998
and 61% of total revenues for the nine months ended September 30, 1999. Bell
Atlantic accounted for 20% of total revenues for the year ended December 31,
1998 and 14% of total revenues for the nine months ended September 30, 1999. Our
agreements with our customers are cancelable by these customers on short notice,
without penalty, do not obligate the customers to purchase any products and are
not exclusive. Accordingly, we may lose revenue from our significant customers
at any time.
A SIGNIFICANT MARKET FOR OUR PRODUCTS MAY NOT DEVELOP IF TELEPHONE COMPANIES DO
NOT SUCCESSFULLY DEPLOY BROADBAND SERVICES SUCH AS HIGH-SPEED DATA AND VIDEO
Telephone companies have just recently begun offering high-speed data
services, and most telephone companies have not offered video services at all.
Unless telephone companies make the strategic decision to enter the market for
providing broadband services, a significant market for our products may not
develop. Sales of our products depend on the increased use and widespread
adoption of broadband services and the ability of our customers to market and
sell broadband services, including video services, to their customers. Certain
critical issues concerning use of broadband services are unresolved and will
likely affect their use. These issues include security, reliability, speed and
volume, cost, government regulation and the ability to operate with existing and
new equipment.
Even if telephone companies decide to deploy broadband services, this
deployment may not be successful. Our customers have delayed deployments in the
past and may delay deployments in the future. Factors that could cause telephone
companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which our products are designed include the
following:
- industry consolidation;
- regulatory uncertainties and delays affecting telephone companies;
- varying quality of telephone companies' network infrastructure and cost
of infrastructure upgrades and maintenance;
- inexperience of telephone companies in obtaining access to video
programming content from third party providers;
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<PAGE> 13
- inexperience of telephone companies in providing broadband services and
the lack of sufficient technical expertise and personnel to install
products and implement services effectively;
- uncertain subscriber demand for broadband services; and
- inability of telephone companies to predict return on their investment in
broadband capable infrastructure and equipment.
Unless our products are successfully deployed and marketed by telephone
companies, we will not be able to achieve our business objectives and increase
our revenues.
CONSOLIDATION AMONG TELEPHONE COMPANIES MAY REDUCE OUR SALES
Consolidation in the telecommunications industry may cause delays in the
purchase of our products and cause a reexamination of strategic and purchasing
decisions by our customers. In addition, we may lose relationships with key
personnel within a customer's organization due to budget cuts, layoffs, or other
disruptions following a consolidation. For example, US WEST, which has announced
a pending merger with Qwest, and Bell Atlantic, which has announced a pending
merger with GTE, are our two largest customers. Any of these factors relating to
consolidation could impair our ability to generate revenues.
GOVERNMENT REGULATION OF OUR CUSTOMERS AND RELATED UNCERTAINTY COULD CAUSE OUR
CUSTOMERS TO DELAY THE PURCHASE OF OUR PRODUCTS
The FCC is in the process of developing new rules that could force
telephone companies, such as the regional Bell operating companies, to offer
their competitors cost-based access to some elements of their networks,
including facilities and equipment used to provide high-speed data and video
services. These telephone companies may not wish to make expenditures for
infrastructure and equipment required to provide broadband services if they will
be forced to allow competitors access to this infrastructure and equipment.
Although the FCC recently announced that, except in limited circumstances, it
will not require incumbent carriers to offer their competitors access to the
facilities and equipment used to provide high-speed data services, the full text
of the FCC's decision and the new rule have not yet been released. Thus, some
uncertainty still remains as to what the exact rule will be and how it will
apply in any given circumstance. Accordingly, the uncertainties caused by these
regulatory proceedings may cause these telephone companies to delay purchasing
decisions at least until the proceedings and any related judicial appeals are
completed. The outcomes of these regulatory proceedings, as well as other FCC
regulation, may cause these telephone companies not to deploy services for which
our products are designed or to further delay deployment. Additionally,
telephone companies' deployment of broadband services may be slowed down or
stopped because of the need for telephone companies to obtain permits from city,
state or federal authorities to implement infrastructure for products such as
ours. Any delay in deployment of products by our customers could harm our sales.
For a more detailed description of these and other regulatory matters that may
affect our business, see "Business -- Regulation of Customers."
OUR CUSTOMERS AND POTENTIAL CUSTOMERS WILL NOT PURCHASE OUR PRODUCTS IF THEY DO
NOT HAVE THE INFRASTRUCTURE NECESSARY TO USE OUR PRODUCTS
The copper wire infrastructures over which telephone companies may deliver
voice, data and video services using our products vary in quality and
reliability. As a result, some
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of these telephone companies may not be able to deliver a full set of voice,
data and video services to their customers, despite their intention to do so,
and this could harm our sales. Even after installation of our products, we
remain highly dependent on telephone companies to continue to maintain their
infrastructure so that our products will operate at a consistently high
performance level. Infrastructure upgrades and maintenance may be costly, and
telephone companies may not have the necessary financial resources. This may be
particularly true for our smaller customers and potential customers such as
independent telephone companies and domestic local telephone companies. If our
current and potential customers' infrastructure is inadequate, we may not be
able to generate anticipated revenues from them.
RISKS RELATED TO OUR INDUSTRY
IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PRODUCTS
ACHIEVE WIDESPREAD ACCEPTANCE, THE DEMAND FOR OUR PRODUCTS MAY NOT DEVELOP
Technologies that compete with our system include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If these alternative
technologies are chosen by our existing and potential customers, our business,
financial condition and results of operations could be harmed. In particular,
cable operators are currently deploying products that will be capable of
delivering voice, high-speed data and video services over cable, including
products from General Instrument, our principal stockholder. Our technology may
not be able to compete effectively against these technologies on price,
performance or reliability.
Our customers or potential customers that also offer cable-based services
may choose to purchase cable-based technologies. Cable service providers that
offer not only data and video but also telephony over cable systems will give
subscribers the alternative of purchasing all communications services from a
single communications service provider, allowing the potential for more
favorable pricing and a single point of contact for bill payment and customer
service. If these services are implemented successfully over cable connections,
they will compete directly with the services offered by telephone companies
using our products. In addition, several telephone companies have commenced the
marketing of video services over direct broadcast satellite while continuing to
provide voice and data services over their existing copper wire infrastructure.
If any of these services are accepted by consumers, the demand for our products
may not develop and our ability to generate revenue will be harmed.
WE FACE INTENSE COMPETITION IN PROVIDING EQUIPMENT FOR TELECOMMUNICATIONS
NETWORKS FROM LARGER AND MORE WELL-ESTABLISHED COMPANIES AND WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY WITH THESE COMPANIES
Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than we do. These competitors
may undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products than
we are able to, which could result in the loss of current and potential
customers.
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<PAGE> 15
Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC (recently acquired by GEC Marconi),
Scientific Atlanta, Siemens and our largest stockholder, General Instrument
(which has announced a pending merger with Motorola), as well as emerging
companies that are developing new technologies. Some of these competitors have
existing relationships with our current and prospective customers. In addition,
we anticipate that other large companies, such as Matsushita Electric Industrial
(which markets products under the Panasonic brand name), Microsoft, Network
Computer, Philips, Sony, STMicroelectronics and Toshiba America, will likely
introduce products that compete with our Residential Gateway product in the
future. Our customer base may be attracted by the name and resources of these
large, well-known companies and may prefer to purchase products from them
instead of us.
CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND NEGATIVELY
AFFECT OUR SALES
Consolidation in the telecommunications equipment industry may strengthen
our competitors' position in our market, cause us to lose customers and hurt our
sales. For example, Alcatel acquired DSC Communications, Lucent recently
acquired Ascend Communications and GEC Marconi recently acquired RELTEC.
Acquisitions such as these may strengthen our competitors' financial, technical
and marketing resources and provide access to regional Bell operating companies
and other potential customers. Consolidation may also allow some of our
competitors to penetrate new markets that we have targeted, such as domestic
local, independent and international telephone companies. This consolidation may
affect our ability to increase revenues.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE
Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:
- the increasing use of the Internet;
- the growth in remote access by telecommuters;
- the increasingly diverse distribution sources for high quality digital
video; and
- other industry and technological trends.
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost-effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall and we could lose revenues.
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<PAGE> 16
RISKS ASSOCIATED WITH OTHER ASPECTS OF OUR BUSINESS
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THE LOSS OF THEIR SERVICES COULD DISRUPT OUR OPERATIONS AND OUR CUSTOMER
RELATIONSHIPS
None of our executive officers or key employees are bound by an employment
agreement. Many of these employees have a significant amount of options to
purchase our common stock. Many of these options are currently vested and are
exercisable upon consummation of this offering and some of our key employees may
leave us once they have exercised their options. In addition, our engineering
and product development teams are critical in developing our products and have
developed important relationships with our regional Bell operating company
customers and their technical staffs. The loss of any of these key personnel
could harm our operations and customer relationships.
COMPETITION FOR QUALIFIED PERSONNEL IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY
IS INTENSE, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE
PERSONNEL, OUR ABILITY TO GROW OUR BUSINESS MAY BE HARMED
Competition for qualified personnel in the telecommunications equipment
industry, specifically in the Rohnert Park, California area, is intense, and we
may not be successful in attracting and retaining such personnel. Failure to
attract qualified personnel could harm the growth of our business.
We are actively searching for research and development engineers and sales
and marketing personnel who are in short supply. Competitors and others have in
the past and may in the future attempt to recruit our employees. In addition,
companies in the telecommunications industry whose employees accept positions
with competitors frequently claim that the competitors have engaged in unfair
hiring practices. We may receive such notices in the future as we seek to hire
qualified personnel and such notices may result in material litigation and
related disruption to our operations.
OUR OPERATIONS AND CUSTOMER RELATIONSHIPS MAY BECOME STRAINED DUE TO RAPID
EXPANSION
We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities both inside and outside the United States. This rapid
growth places a significant demand on management and operational resources. Our
management, personnel, systems, procedures, controls and customer service may be
inadequate to support our future operations. To manage expansion effectively, we
must implement and improve our operational systems, procedures, controls and
customer service on a timely basis. We expect significant strain on our order
and fulfillment process and our quality control systems if significant expansion
of business activity occurs. If we are unable to properly manage this growth,
our operating results, reputation and customer relationships could be harmed. As
a result, our stock price could fall.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY AFFECT OUR ABILITY
TO COMPETE AND WE COULD LOSE CUSTOMERS
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual provisions to
protect our intellectual property. There is no guarantee that these safeguards
will protect our
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<PAGE> 17
intellectual property and other valuable confidential information. If our
methods of protecting our intellectual property in the United States or abroad
are not adequate, our competitors may copy our technology or independently
develop similar technologies and we could lose customers. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully as do
the laws of the United States. If we fail to adequately protect our intellectual
property, it would be easier for our competitors to sell competing products
which could harm our business.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS, LICENSE ADDITIONAL TECHNOLOGY OR PAY MONETARY DAMAGES
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in our market
grows and the functionality of products overlaps, and our products may currently
infringe on one or more United States or international patents. The results of
any litigation are inherently uncertain. In the event of an adverse result in
any litigation with third parties that could arise in the future, we could be
required:
- to pay substantial damages, including paying treble damages if we are
held to have willfully infringed;
- to halt the manufacture, use and sale of infringing products;
- to expend significant resources to develop non-infringing technology;
and/or
- to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail. In
addition, we indemnify our customers for patent infringement claims and we may
be required to obtain licenses on their behalf which could subject us to
significant additional costs.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND ANY DISRUPTION IN THEIR MANUFACTURE
OF OUR PRODUCTS WOULD HARM OUR OPERATING RESULTS
We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We rely primarily on two large contract
manufacturers: SCI Systems and CMC Industries. The efficient operation of our
business will depend, in large part, on our ability to have these and other
companies manufacture our products timely, cost-effectively and in sufficient
volumes while maintaining consistent quality. As our business grows, these
manufacturers may not have the capacity to keep up with the increased demand.
Any manufacturing disruption could impair our ability to fulfill orders and
could cause us to lose customers.
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WE HAVE NO LONG-TERM CONTRACTS WITH OUR MANUFACTURERS AND WE MAY NOT BE ABLE TO
DELIVER OUR PRODUCTS ON TIME IF ANY OF THESE MANUFACTURERS STOP MAKING OUR
PRODUCTS
We have no long-term contracts or arrangements with any of our contract
manufacturers that guarantee product availability, the continuation of
particular payment terms or the extension of credit limits. If our manufacturers
are unable or unwilling to continue manufacturing our products in required
volumes, we will have to identify acceptable alternative manufacturers, which
could take in excess of three months. For example, Flextronics International,
previously designated to be the sole manufacturer of our ETHERset product,
discontinued its relationship with us due to lack of order volume. It is
possible that a source may not be available to us when needed or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis. If we cannot find alternative sources for the manufacture of our
products, we will not be able to meet existing demand. As a result, we may lose
existing customers and our ability to gain new customers may be significantly
constrained.
OUR INABILITY TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE OF OUR
DEPENDENCE ON COMPONENTS FROM KEY SOLE SUPPLIERS COULD RESULT IN DELAYS IN THE
DELIVERY OF OUR PRODUCTS AND COULD HARM OUR REVENUES
Some parts, components and equipment used in our products are obtained from
sole sources of supply. If we or our sole source suppliers fail to obtain
components in sufficient quantities when required, delivery of our products
could be delayed resulting in decreased revenues. Additional sole-sourced
components may be incorporated into our equipment in the future. We do not have
any long term supply contracts to ensure sources of supply. In addition, our
suppliers may enter into exclusive arrangements with our competitors, stop
selling their products or components to us at commercially reasonable prices or
refuse to sell their products or components to us at any price, which could harm
our operating results.
THE OCCURRENCE OF ANY DEFECTS, ERRORS, OR FAILURES IN OUR PRODUCTS COULD RESULT
IN DELAYS IN INSTALLATION, PRODUCT RETURNS AND OTHER LOSSES TO US OR TO OUR
CUSTOMERS OR END-USERS
Our products are complex and may contain undetected defects, errors or
failures. These problems have occurred in our products in the past and
additional errors may occur in our products in the future and could result in
the loss of or delay in market acceptance of our products. In addition, we have
limited experience with commercial deployment and we expect additional defects,
errors and failures as our business expands from trials to commercial deployment
at certain customers. We will have limited experience with the problems that
could arise with any new products that we introduce. Further, our customer
agreements generally include a longer warranty for defects than our
manufacturing agreements. These defects could result in a loss of sales and
additional costs as well as damage to our reputation and the loss of our
customers.
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WE DO NOT HAVE SIGNIFICANT EXPERIENCE IN INTERNATIONAL MARKETS AND MAY HAVE
UNEXPECTED COSTS AND DIFFICULTIES IN DEVELOPING INTERNATIONAL REVENUES
We plan to extend the marketing and sales of our products internationally.
International operations are generally subject to inherent risks and challenges
that could harm our operating results, including:
- unexpected changes in telecommunications regulatory requirements;
- limited number of telephone companies operating internationally;
- expenses associated with developing and customizing our products for
foreign countries;
- tariffs, quotas and other import restrictions on telecommunications
equipment;
- longer sales cycles for our products; and
- compliance with international standards that differ from domestic
standards.
To the extent that we generate international sales in the future, any
negative effects on our international business could harm our business,
operating results and financial condition as a whole. In particular, fluctuating
exchange rates may contribute to fluctuations in our results of operations.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD HARM OUR PRODUCTS OR OUR
REPUTATION OR CAUSE OUR CUSTOMERS TO DECREASE SPENDING ON OUR PRODUCTS
Computer systems, software packages and microprocessor-dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives. If
systems material to our business are not year 2000 compliant or if third parties
fail to make their systems year 2000 compliant in a timely manner, the year 2000
issue could affect our operations. The potential areas of exposure include
systems and equipment operated by third parties with which we transact business
and computers, software, telephone systems and other equipment used internally.
Our year 2000 compliance program may not fully address all potential year 2000
problems. Additionally, our customers' purchasing and deployment plans could be
affected by year 2000 issues. Some customers may wait to purchase or deploy our
products, if at all, which may reduce our future revenues. For a discussion of
our year 2000 preparedness program, see "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
RISKS RELATED TO THIS OFFERING
GENERAL INSTRUMENT WILL EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS AND
AFFAIRS AND OUR STOCKHOLDER VOTES AND, FOR ITS OWN REASONS, COULD PREVENT
TRANSACTIONS WHICH OUR OTHER STOCKHOLDERS MAY VIEW AS FAVORABLE
Upon completion of this offering, General Instrument will beneficially own
approximately 83.2% of the outstanding shares of our common stock. Although
General Instrument will enter into a voting trust agreement to limit its voting
power to 49% of the voting power of all outstanding common stock and to limit
the number of its designees to the board of directors to one less than a
majority, General Instrument will be able to exercise significant
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<PAGE> 20
influence over all matters relating to our business and affairs, including
approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us and could prevent you from receiving a
premium for your shares. In addition, General Instrument intends to terminate
the voting trust agreement immediately upon the completion of its pending merger
with Motorola.
AFTER THE COMPLETION OF GENERAL INSTRUMENT'S PENDING MERGER WITH MOTOROLA,
MOTOROLA WOULD THEN CONTROL US AND COULD PREVENT CHANGES THAT MAY BE FAVORABLE
TO US AND TO OUR OTHER STOCKHOLDERS AND IMPLEMENT CHANGES THAT MAY BE ADVERSE TO
US AND TO OUR OTHER STOCKHOLDERS, AND THIS COULD CAUSE OUR STOCK PRICE TO FALL
On September 14, 1999, General Instrument entered into an agreement and
plan of merger with Motorola, Inc. Immediately upon the completion of this
pending merger, General Instrument intends to terminate the voting trust
agreement and appoint additional individuals to our board of directors
sufficient to exercise control. Accordingly, upon completion of this pending
merger, Motorola will be able to exercise voting power over a majority of our
shares and will have the ability to control our board of directors and all
matters relating to our business and affairs. We do not know whether Motorola's
plans for our business and affairs will be different than our existing plans and
whether any changes that may be implemented under Motorola's control will be
beneficial or detrimental to our other stockholders.
OUR PRINCIPAL STOCKHOLDER MAY HAVE INTERESTS WHICH CONFLICT WITH THE BEST
INTERESTS OF US AND OUR OTHER STOCKHOLDERS AND MAY CAUSE US TO FORGO
OPPORTUNITIES OR TAKE ACTIONS WHICH DISPROPORTIONATELY BENEFIT OUR PRINCIPAL
STOCKHOLDER
It is possible that General Instrument or Motorola could be in a position
involving a conflict of interest with us. In addition, individuals who are
officers or directors of both us and our principal stockholder may have
fiduciary duties to both companies. For example, a conflict may arise if our
principal stockholder were to engage in activities or pursue corporate
opportunities that may overlap with our business. These conflicts could harm our
business and, as a result, could cause our stock price to fall. Our certificate
of incorporation contains provisions intended to protect our principal
stockholder and these individuals in these situations. These provisions would
limit your legal remedies. For a description of these provisions, see
"Description of Capital Stock -- Other Certificate of Incorporation and By-law
Provisions -- Corporate Opportunities."
By becoming a stockholder of Next Level, investors will be considered to
have consented to the provisions of our certificate of incorporation, except to
the extent any of the provisions are inconsistent with Delaware law.
OVER 77 MILLION, OR APPROXIMATELY 90% OF OUR TOTAL OUTSTANDING SHARES, ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY
After this offering, we will have outstanding 85,543,056 shares of common
stock. After this offering, General Instrument will own approximately 83.2% of
our outstanding common stock and Spencer Trask will own approximately 6.9% of
our outstanding common stock and its affiliates will hold warrants to purchase
an additional 9.9% of our outstanding common stock. If General Instrument,
Spencer Trask or any of our other stockholders sell substantial amounts of
common stock, including shares issued upon exercise of outstanding options and
warrants, in the public market following this offering, the market price of the
common stock could fall. In addition, any distribution of shares of
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<PAGE> 21
our common stock by General Instrument to its stockholders could also have an
adverse effect on the market price.
All shares sold in this offering may be resold in the public market
immediately. All of the remaining shares will be owned by General Instrument and
Spencer Trask and its affiliates. Under federal securities laws, these shares,
unless registered under the Securities Act, generally may be resold in the
public market only following a one-year holding period that will begin to run
upon the completion of our recapitalization and subject to volume and manner of
sale limitations. General Instrument and Spencer Trask and its affiliates will
be entitled to registration rights pursuant to which they may require that we
register their shares under the Securities Act. In addition, each of General
Instrument and Spencer Trask and its affiliates has entered into a lockup
agreement with the underwriters pursuant to which they have agreed generally not
to transfer or dispose of shares of common stock or securities convertible into
common stock for a period of 180 days after the date of this prospectus.
However, these lockups may be waived by Credit Suisse First Boston Corporation.
In addition, upon the completion of this offering, we anticipate that there
will be outstanding options to purchase 12,319,748 shares of our common stock.
The holders of options to purchase 3,309,213 shares of our common stock have
entered into 365-day lockup agreements with the underwriters, and the holders of
the remaining options have entered into 180-day lockup agreements. Following
completion of this offering, we intend to file with the SEC a registration
statement covering the shares issuable upon the exercise of our outstanding
employee options. Accordingly, subject to vesting provisions and, in the case of
our affiliates, volume and manner of sale restrictions, the shares of common
stock issuable upon the exercise of our outstanding employee options will be
eligible for sale into the public market at various times after the expiration
of the applicable lockup period. The lockups may be waived by Credit Suisse
First Boston Corporation. For a more detailed description, see "Shares Eligible
for Future Sale."
ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE
Several provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three year
terms;
- prohibiting cumulative voting in the election of directors;
- restricting business combinations with interested stockholders;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent;
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings; and
- requiring super-majority voting to effect amendments to our certificate
of incorporation and bylaws.
Some of these provisions will not currently apply to General Instrument and its
affiliates. For a more detailed description of these provisions, see
"Description of Capital Stock."
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative of such terms or other comparable terminology. These statements involve
known and unknown risks, uncertainties, and other factors that may cause our or
our industry's actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. These factors include, among other things, those listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
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USE OF PROCEEDS
We estimate that through this offering we will receive net proceeds of
$84.2 million ($97.2 million if the underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $11.00 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. The primary purposes of this offering are to
increase our equity capital, to create a public market for our common stock and
to facilitate future access to public markets. As of the date of this
prospectus, we have no specific plans to use the net proceeds from this offering
other than as set forth below.
We expect to use the net proceeds of this offering for general corporate
purposes, including working capital and using a currently estimated $55 million
to fund our continued research and development efforts. From time to time we
will evaluate our opportunities to acquire businesses, products and technologies
that complement our business. We may use a portion of the net proceeds from this
offering for these acquisitions. Currently, however, we do not have any
understandings, commitments or agreements with respect to these acquisitions.
Pending our use of the proceeds, we will most likely invest the net proceeds in
short-term, interest-bearing, investment-grade obligations.
DIVIDEND POLICY
We do not expect to pay dividends on our common stock in the foreseeable
future. We anticipate that all future earnings, if any, generated from
operations will be retained to develop and expand our business. Any future
determination with respect to the payment of dividends will be at the discretion
of the board of directors and will depend upon, among other things, our
operating results, financial condition and capital requirements, the terms of
then-existing indebtedness, general business conditions and such other factors
as our board of directors deems relevant.
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OUR RECAPITALIZATION
Immediately prior to the completion of this offering, the following
interdependent recapitalization transactions will occur:
- the Next Level Communications L.P. $75.0 million note and accrued
interest thereon payable to General Instrument will be contributed by
General Instrument to Next Level Communications, Inc., a newly formed
Delaware corporation and the issuer of the common stock being offered in
this offering, in exchange for a number of shares of common stock equal
to the aggregate amount owed under the note divided by the initial
offering price (which would be 7,813,636 shares based upon $86.0 million
owed as of September 30, 1999 and an assumed initial offering price of
$11.00 per share); and
- Next Level Communications L.P. and Next Level Communications, a wholly
owned subsidiary of General Instrument and the limited partner of Next
Level Communications L.P., each will be merged into Next Level
Communications, Inc. As part of these mergers:
- Spencer Trask, the general partner of the partnership, will receive
5,863,329 shares of common stock for its 9.6% general partnership
interest;
- General Instrument will receive a number of shares of common stock,
for Next Level Communications' 90.4% limited partnership and other
interests under the partnership agreement, equal to 55,366,091 plus a
number equal to $88.0 million divided by the initial offering price
(which would be 8,000,000 shares based upon an assumed initial
offering price of $11.00 per share)(the $88 million is the value
receivable by us from affiliates of Spencer Trask with respect to
their warrants as described below);
- options granted to employees of the partnership to purchase shares of
Next Level Communications will become options to purchase a total of
6,964,904 shares of common stock on a one for one basis; and
- the option currently held by affiliates of Spencer Trask to purchase
shares of the partnership's successor under the partnership agreement
will become warrants to purchase from us 8,480,102 shares of common
stock at an exercise price of $10.38 per share.
As a result of these transactions and upon completion of this offering,
General Instrument will own 71,179,727 shares of common stock, constituting
66.9% of our outstanding common stock on a fully diluted basis. Spencer Trask
and its affiliates will own, including shares issuable upon exercise of
outstanding warrants, 14,343,431 shares of common stock in the aggregate,
constituting 13.5% of our outstanding common stock on a fully diluted basis. All
of the shares of common stock to be received by General Instrument pursuant to
our recapitalization will be held in a voting trust which will limit General
Instrument's voting power to 49% of our total voting power or a lower percentage
as General Instrument may later elect. Immediately upon the completion of its
pending merger with Motorola, General Instrument intends to terminate the voting
trust. For additional information about the voting trust, see "Certain
Relationships and Related Transactions -- Voting Trust Agreement."
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CAPITALIZATION
The following table sets forth as of September 30, 1999:
- the actual capitalization of Next Level Communications L.P.;
- our pro forma capitalization assuming the completion of our
recapitalization on September 30, 1999; and
- our pro forma capitalization as adjusted to reflect the receipt of the
estimated net proceeds from the sale of 8,500,000 shares of common stock
in this offering at an assumed offering price of $11.00 per share, after
deducting the estimated underwriting discounts and commissions and the
estimated offering expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion............ $ 86,396 $ 446 $ 446
Partners' deficit/stockholders' equity:
Common stock, $.01 par value per share; 200,000,000
shares authorized, pro forma and pro forma, as
adjusted and 77,043,056 shares issued and
outstanding, pro forma and 85,543,056 shares issued
and outstanding pro forma, as adjusted(1)........... -- 770 855
Additional paid-in capital(2).......................... -- 44,463 177,786
Partners' deficit...................................... (40,717) -- --
Accumulated deficit(2)................................. -- -- (49,253)
-------- ------- --------
Total partners' deficit/stockholders' equity... (40,717) 45,233 129,388
-------- ------- --------
Total capitalization........................... $ 45,679 $45,679 $129,834
======== ======= ========
</TABLE>
- -------------------------
(1) The information in the table above excludes:
- options outstanding to purchase a total of 6,964,904 shares of common
stock at a weighted average exercise price of $1.24 per share under our
Amended and Restated 1997 Long-Term Incentive Plan,
- options to purchase 5,354,844 shares of common stock at an exercise price
of $11.00 per share that we anticipate will be outstanding under our 1999
Stock Plan upon completion of this offering, and
- warrants held by affiliates of Spencer Trask to purchase 8,480,102 shares
of common stock at an exercise price of $10.38 per share.
(2) The pro forma, as adjusted amount reflects the non-cash compensation expense
associated with employee stock options to be recorded upon completion of
this offering. The non-cash compensation expense related to these options,
assuming no forfeitures, will be approximately $51.4 million, approximately
$49.3 million of which will be expensed in the period in which this offering
is completed. These charges are based upon an assumed initial offering price
of $11.00 per share. These charges exclude any non-cash compensation expense
which may result from the tandem stock option grant made in January 1997 to
some of our employees. The tandem stock option grant permits these employees
to exercise options for shares of either our or General Instrument's common
stock. This non-cash compensation expense would be an additional $16.6
million, based on an assumed initial offering price of $11.00 per share,
assuming it becomes more likely that all tandem stock option holders will
elect to exercise Next Level options. See note 9 of notes to the financial
statements of Next Level Communications L.P. for a description of the tandem
stock option grant.
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DILUTION
The pro forma net tangible book value of our common stock as of September
30, 1999, assuming the completion of our recapitalization on that date, was
$39.9 million, or $0.52 per share. Pro forma net tangible book value per share
represents the amount of our pro forma stockholders' equity, less pro forma
intangible assets, divided by the number of shares of common stock outstanding
after giving pro forma effect to the recapitalization on September 30, 1999.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to the sale of 8,500,000 shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share and the receipt of the
estimated net proceeds from this sale, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, the pro
forma net tangible book value as of September 30, 1999 would have been $124.0
million, or $1.45 per share. This represents an immediate increase in net
tangible book value of $0.93 per share to existing stockholders and an immediate
dilution in net tangible book value of $9.55 per share to purchasers of common
stock in this offering. Investors participating in this offering will incur
immediate, substantial dilution. This is illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of September
30, 1999 prior to this offering............................. $ 0.52
Increase per share attributable to new investors.......... 0.93
------
Pro forma net tangible book value per share, as adjusted for
this offering............................................. 1.45
------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 9.55
======
</TABLE>
The following table sets forth as of September 30, 1999, the difference
between the existing stockholders and the purchasers of shares in this offering
with respect to the number of shares purchased from us, the total consideration
paid and the weighted average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 77,043,056 90.1% $520,630,000 84.8% $ 6.76
New stockholders............... 8,500,000 9.9 93,500,000 15.2 11.00
----------- ----- ------------ -----
Total................ 85,543,056 100.0% $614,130,000 100.0%
=========== ===== ============ =====
</TABLE>
In addition, the information in the table above excludes:
- options outstanding to purchase a total of 6,964,904 shares of common
stock at a weighted average exercise price of $1.24 per share under our
Amended and Restated 1997 Long-Term Incentive Plan,
- options to purchase 5,354,844 shares of common stock at an exercise price
of $11.00 per share that we anticipate will be outstanding under our 1999
Stock Plan upon completion of this offering, and
- warrants held by affiliates of Spencer Trask to purchase 8,480,102 shares
of common stock at an exercise price of $10.38 per share.
To the extent outstanding options or the warrant are exercised, there will
be further dilution to new investors. For a more complete description, see
"Certain Relationships and Related Transactions" and notes 3 and 9 of notes to
the financial statements of Next Level Communications L.P.
22
<PAGE> 27
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes included in this
prospectus. The statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1999, and the
balance sheet data as of December 31, 1997 and 1998 and as of September 30,
1999, are derived from financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, and are included in this prospectus. The
statement of operations data for the nine months ended September 30, 1998 are
derived from unaudited financial statements included in this prospectus and
include all adjustments (consisting of normal recurring items) that management
considers necessary for a fair presentation of the financial statements. The
statement of operations data for the periods from our inception on June 22, 1994
to December 31, 1994, from January 1, 1995 to August 31, 1995 and from September
1, 1995 to December 31, 1995 and the balance sheet data as of December 31, 1994,
1995 and 1996 are derived from unaudited financial statements not included in
this prospectus.
The statement of operations data and balance sheet data for the periods
subsequent to August 31, 1995 reflect adjustments resulting from the application
of the purchase method of accounting in connection with our acquisition by
General Instrument in 1995. The financial information prior to August 31, 1995
is that of a predecessor company prior to its acquisition by General Instrument
and may not be comparable to the financial information for periods which began
subsequent to August 31, 1995. The results for the nine months ended September
30, 1999 are not necessarily indicative of the operating results to be expected
in the future.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 22, 1994 JANUARY 1, SEPTEMBER 1,
(INCEPTION) 1995 1995 TO YEAR ENDED DECEMBER 31,
TO DECEMBER 31, TO AUGUST 31, DECEMBER 31, -------------------------------
1994 1995 1995 1996 1997 1998
--------------- ------------- ------------- --------- -------- --------
(PREDECESSOR) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Equipment................. $ -- $ -- $ -- $ -- $ 6,045 $ 39,243
Software.................. -- -- -- -- 2,266 4,587
----- ------- --------- --------- -------- --------
Total revenues.............. -- -- -- -- 8,311 43,830
----- ------- --------- --------- -------- --------
Cost of revenues:
Equipment................. -- -- -- -- 10,954 43,172
Software.................. -- -- -- -- 306 261
----- ------- --------- --------- -------- --------
Total cost of revenues...... -- -- -- -- 11,260 43,433
----- ------- --------- --------- -------- --------
Gross profit (loss)......... -- -- -- -- (2,949) 397
----- ------- --------- --------- -------- --------
Operating expenses:
Research and
development............. 505 4,937 142,249 17,102 37,064 47,086
Selling, general and
administrative.......... 126 1,646 1,016 15,850 26,414 26,248
Litigation................ -- -- -- 141,000 -- 5,000
----- ------- --------- --------- -------- --------
Total operating expenses.... 631 6,583 143,265 173,952 63,478 78,334
----- ------- --------- --------- -------- --------
Operating loss.............. (631) (6,583) (143,265) (173,952) (66,427) (77,937)
----- ------- --------- --------- -------- --------
Other income (expense),
net....................... -- -- -- 48 (2) 2,241
Interest expense............ -- -- -- -- -- (6,035)
----- ------- --------- --------- -------- --------
Net loss.................... $(631) $(6,583) $(143,265) $(173,904) $(66,429) $(81,731)
===== ======= ========= ========= ======== ========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Equipment................. $ 17,732 $ 29,848
Software.................. 3,476 2,582
--------- --------
Total revenues.............. 21,208 32,430
--------- --------
Cost of revenues:
Equipment................. 21,555 29,741
Software.................. 221 228
--------- --------
Total cost of revenues...... 21,776 29,969
--------- --------
Gross profit (loss)......... (568) 2,461
--------- --------
Operating expenses:
Research and
development............. 32,493 35,861
Selling, general and
administrative.......... 19,906 22,220
Litigation................ 5,000 --
--------- --------
Total operating expenses.... 57,399 58,081
--------- --------
Operating loss.............. (57,967) (55,620)
--------- --------
Other income (expense),
net....................... 2,103 853
Interest expense............ (4,418) (5,181)
--------- --------
Net loss.................... $ (60,282) $(59,948)
========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, -----------------------------------------------
1994 1995 1996 1997 1998
--------------- ------------- --------- -------- --------
(PREDECESSOR) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 362 $ 599 $ -- $ 377 $ 28,983
Working capital (deficit)... 4,175 (1,897) (143,001) (29,571) 38,564
Total assets................ 4,410 3,824 17,393 52,689 97,771
Long term obligations, net
of current portion........ -- -- -- -- 81,275
Total partners'
deficit/stockholder's
equity (deficit).......... 4,410 (2,566) (172,029) (3,702) (14,769)
<CAPTION>
SEPTEMBER 30,
1999
-------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 12,499
Working capital (deficit)... 17,359
Total assets................ 87,234
Long term obligations, net
of current portion........ 86,396
Total partners'
deficit/stockholder's
equity (deficit).......... (40,717)
</TABLE>
23
<PAGE> 28
PRO FORMA SELECTED FINANCIAL DATA
The following unaudited pro forma statement of operations data for the year
ended December 31, 1998 and the nine months ended September 30, 1999, were
prepared to give effect to our recapitalization as if it occurred on January 1,
1998. The unaudited pro forma balance sheet data give effect to our
recapitalization as if it occurred on September 30, 1999. The unaudited pro
forma, as adjusted balance sheet data further give effect to our receipt of the
estimated net proceeds from the sale of 8,500,000 shares of common stock in this
offering at an assumed initial public offering price of $11.00 per share after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us as if this offering had been completed on September 30, 1999. The
following pro forma and pro forma, as adjusted information does not purport to
represent what the operating results or financial position would have been or to
project the operating results or financial position for any future period or
date. The pro forma statement of operations data does not give effect to the
non-cash compensation expense associated with employee stock options to be
recorded upon completion of this offering. The non-cash compensation expense
related to these option grants, assuming no forfeitures, will be approximately
$51.4 million, approximately $49.3 million of which will be expensed in the
period in which this offering is completed. These charges are based upon an
assumed initial offering price of $11.00 per share. These charges exclude any
non-cash compensation expense which may result from the tandem stock option
grant made in January 1997 to some of our employees. This non-cash compensation
expense would be an additional $16.6 million, based on an assumed initial public
offering price of $11.00 per share, assuming it becomes more likely that all
tandem stock option holders will elect to exercise Next Level options. The pro
forma selected financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included in this
prospectus.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................................... $ 43,830 $ 32,430
Total cost of revenues.................................. 43,433 29,969
-------- --------
Gross profit.......................................... 397 2,461
Operating expenses:
Research and development.............................. 47,086 35,861
Selling, general and administrative................... 26,248 22,220
Litigation............................................ 5,000 --
-------- --------
Total operating expenses................................ 78,334 58,081
-------- --------
Operating loss.......................................... (77,937) (55,620)
Other income, net....................................... 2,241 853
Interest expense........................................ (95) (171)
-------- --------
Net loss................................................ $(75,791) $(54,938)
======== ========
Pro forma basic and diluted net loss per share.......... $ (0.98) $ (0.71)
======== ========
Shares used in pro forma basic and diluted net loss per
share................................................. 77,043 77,043
======== ========
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $12,499 $ 96,654
Working capital............................................. 17,359 101,514
Total assets................................................ 87,234 171,389
Long-term obligations, net of current portion............... 446 446
Total stockholders' equity.................................. 45,233 129,388
</TABLE>
See notes 3 and 9 of notes to the financial statements of Next Level
Communications L.P. for an explanation of the determination of the number of
shares used in computing pro forma per share data and for a description of the
tandem stock option grant.
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with selected
financial data, financial statements and the respective notes thereto included
elsewhere in this prospectus.
OVERVIEW
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper wire telephone infrastructure. We commenced operations in July
1994 and recorded our first sale in September 1997. To date, we have sold our
products primarily to regional Bell operating companies through our direct sales
force. Since January 1998, we have operated through Next Level Communications
L.P., which was formed as the result of the transfer of all of the net assets,
management and workforce of a wholly owned subsidiary of General Instrument.
Immediately prior to the completion of this offering, the business and assets of
this partnership will be merged into Next Level Communications, Inc. as part of
our recapitalization.
From inception through September 1997, our operating activities related
primarily to establishing a research and development organization, testing
prototype designs, designing circuits, commencing the staffing of marketing,
sales and field service and technical support organizations and establishing
manufacturing relationships. Since then, we have expanded our sales and
marketing and customer support activities. These activities include commencing
trials with our customers, expanding our customer base, developing customer
relationships, marketing our brand, hiring field service and customer support
personnel, developing new products and technologies and enhancing existing
products.
Our revenue is primarily generated from sales of our equipment. A small
number of customers have accounted for a large part of our revenues to date, and
we expect this concentration to continue in the future. U S WEST accounted for
68% of total revenues for the year ended December 31, 1998 and 61% of total
revenues for the nine months ended September 30, 1999. Bell Atlantic accounted
for 20% of total revenues for the year ended December 31, 1998 and 14% of total
revenues for the nine months ended September 30, 1999. Our agreements with our
largest customers are cancelable by these customers on short notice and without
penalty, and do not obligate the customers to purchase any products. In
addition, our significant customer agreements generally contain fixed-price
provisions. As a result, our ability to generate a profit on these contracts
depends upon our ability to produce and market our products at costs lower than
these fixed prices.
The timing of our revenue is difficult to predict because of the length and
variability of the sales cycle for our products. Customers view the purchase of
our products as a significant and strategic decision. As a result, customers
typically undertake significant evaluation, testing and trial of our products
before deploying them. This evaluation process frequently results in a lengthy
sales cycle, typically ranging from six months to more than a year. While our
customers are evaluating our products and before they place an order, if at all,
we may incur substantial sales and marketing expenses and expend significant
management efforts.
26
<PAGE> 31
Revenues. Our revenues consist primarily of sales of equipment and sales of
data communications software. We recognize equipment revenue upon shipment of
our products. Software revenue consists of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
Software license revenue is recognized when a noncancelable license agreement
has been signed, delivery has occurred, the fees are fixed and determinable and
collection is probable. The portion of revenues from new software license
agreements which relate to our obligation to provide customer support are
deferred and recognized ratably over the maintenance period.
Cost of revenues. Cost of equipment revenue includes direct material and
labor, depreciation and amortization expense on property and equipment, warranty
expenses, license fees and manufacturing and service overhead. Cost of software
revenue primarily includes the cost of the media the software is shipped on
(usually CDs) and documentation costs.
Research and development. Research and development expense consists
principally of salaries and related personnel expenses, consultant fees,
prototype component expenses and development contracts related to the design,
development, testing and enhancement of our products. All research and
development costs are expensed as incurred.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of salaries and related expenses for personnel
engaged in direct marketing and field service support functions, executive,
accounting and administrative personnel, recruiting expenses, professional fees
and other general corporate expenses.
Stock compensation expense. Substantially all of our employees have been
granted contingently exercisable stock options that will become options to
purchase our common stock upon our recapitalization. These options are
exercisable only in the event of our initial public offering or in a change of
control event such as a merger or acquisition. As a result, non-cash
compensation expense will be recognized upon the completion of this offering
based on the difference between the exercise price of these options and the
initial public offering price of our common stock. The non-cash compensation
expense related to these option grants, assuming no forfeitures, will be
approximately $51.4 million, approximately $49.3 million of which will be
expensed in the period in which this offering is completed. These charges are
based upon an assumed initial offering price of $11.00 per share. These charges
exclude any non-cash compensation expense which may result from the tandem stock
option grant made in January 1997 to some of our employees. The tandem stock
option grant permits these employees to exercise options for shares of either
our or General Instrument's common stock. This non-cash compensation expense
would be an additional $16.6 million based on an assumed initial offering price
of $11.00 per share, assuming it becomes more likely that all tandem stock
option holders will elect to exercise our options.
Litigation. The litigation expense incurred in 1996 was attributable to a
judgment in connection with litigation involving DSC Communications and was paid
in 1997. The litigation expense incurred in 1998 was attributable to the cost of
the settlement of the litigation with BroadBand Technologies. For a more
detailed description of these litigation matters, see "Business -- Litigation."
Acquisition. In September 1997, General Instrument acquired all of the
outstanding capital stock of Telenetworks for $7.0 million in cash, and
subsequently contributed the business to the Next Level partnership.
Approximately $6.9 million of the purchase price
27
<PAGE> 32
was allocated to goodwill. As a result, we amortized approximately $1.0 million
of goodwill during 1998 and will continue to amortize the goodwill at a rate of
approximately $1.0 million per year for each of the next six years. In
conjunction with the granting of restricted common stock of General Instrument
to Telenetworks employees, which restrictions lapsed over a nine month period
that ended May 31, 1998, we recorded compensation expense of $3.9 million in
1998 and $3.1 million in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
our seven most recent quarters ended September 30, 1999. This unaudited
information has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting of normal recurring items)
that management considers necessary for a fair presentation of the financial
information for the periods presented. This information should be read in
conjunction with the audited and unaudited financial statements and related
notes included in this prospectus. The operating results for any quarter are not
necessarily indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
------------- ------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment............ $ 1,682 $ 2,372 $ 13,678 $ 21,511 $ 7,947 $ 8,482 $ 13,419
Software........... 1,057 1,496 923 1,111 830 931 821
-------- -------- -------- -------- -------- -------- --------
Total revenues....... 2,739 3,868 14,601 22,622 8,777 9,413 14,240
Cost of revenues:
Equipment.......... 2,395 4,107 15,053 21,617 8,331 8,651 12,759
Software........... 122 54 45 40 74 84 70
-------- -------- -------- -------- -------- -------- --------
Total cost of
revenues........... 2,517 4,161 15,098 21,657 8,405 8,735 12,829
-------- -------- -------- -------- -------- -------- --------
Gross profit
(loss)............. 222 (293) (497) 965 372 678 1,411
Operating expenses:
Research and
development...... 10,033 10,385 12,075 14,593 11,253 11,798 12,810
Selling, general
and
administrative... 7,021 8,379 4,506 6,342 6,791 7,593 7,836
Litigation......... 5,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses........... 22,054 18,764 16,581 20,935 18,044 19,391 20,646
-------- -------- -------- -------- -------- -------- --------
Operating loss....... (21,832) (19,057) (17,078) (19,970) (17,672) (18,713) (19,235)
Other income, net.... 867 710 526 138 108 464 281
Interest expense..... (1,300) (1,509) (1,609) (1,617) (1,693) (1,691) (1,797)
-------- -------- -------- -------- -------- -------- --------
Net loss............. $(22,265) $(19,856) $(18,161) $(21,449) $(19,257) $(19,940) $(20,751)
======== ======== ======== ======== ======== ======== ========
</TABLE>
The significant increase in equipment revenue from the second quarter of
1998 through the fourth quarter of 1998 was primarily attributable to the
purchases of our products by U S WEST in connection with its introduction of
video service in Phoenix, Arizona. U S WEST, however, did not deploy its video
service as rapidly as it had planned. As a result, in the first three quarters
of 1999, U S WEST slowed its purchases of our products for video applications
while it used its existing inventory, which accounted for the significant
decrease in our equipment revenue. The reduction in sales of our products for
video applications in the second and third quarters of 1999 was partially offset
by an increase in the sale of our products for voice applications to U S WEST
and new customers.
28
<PAGE> 33
The gross margins on our equipment revenue have been negative in six of our
last seven quarters primarily due to our relatively high fixed costs associated
with the manufacturing and testing of our products. At relatively low historical
volumes, we have not been able to cover our fixed costs and, as a result, our
unit costs are high. We expect to achieve margin improvements in future
quarters, based on higher sales volumes, cost reductions and increased demand
for higher margin products.
The increase in research and development expense in the fourth quarter of
1998 reflects the higher level of spending in the second half of 1998 due to
increased product development costs in connection with increased demand for our
products. In addition, there were higher engineering costs incurred in
connection with the U S WEST deployment. We view research and development as
critical to attaining our goals and thus we expect research and development
expense to increase as we continue to enhance existing products and begin new
product initiatives.
Selling, general and administrative expense in the first two quarters of
1998 included the amortization of the compensation expense incurred in
connection with the acquisition of Telenetworks and legal fees incurred in
connection with the settlement of the BroadBand Technologies litigation.
Beginning in the fourth quarter of 1998, we expanded our customer focus to local
and independent telephone companies and thus we have been adding personnel in
our sales and marketing group. As a result, selling, general and administrative
expense has continued to increase and we expect this trend to continue.
The litigation expense incurred in the first quarter of 1998 reflects the
cost of the settlement of the litigation with BroadBand Technologies.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues increased to $32.4 million for the nine months
ended September 30, 1999 from $21.2 million for the nine months ended September
30, 1998. This increase was primarily due to an increase in equipment sales.
Equipment revenue increased to $29.8 million for the nine months ended
September 30, 1999, from $17.7 million for the nine months ended September 30,
1998. Sales to two regional Bell operating companies, U S WEST and Bell
Atlantic, comprise substantially all of the equipment revenue to date. U S WEST
accounted for $19.9 million and Bell Atlantic accounted for $4.7 million of
equipment revenue for the nine months ended September 30, 1999. Sales of
equipment to the local and independent telephone markets were $4.8 million for
the nine months ended September 30, 1999, with most of those sales occurring in
the third quarter. The growth in equipment revenue in future periods will depend
upon whether and how quickly our existing customers roll out broadband services
in their coverage areas and whether and how quickly we obtain new customers.
Data communications software revenue decreased to $2.6 million for the nine
months ended September 30, 1999 from $3.5 million for the nine months ended
September 30, 1998 due primarily to a shift in demand from 1999 into 1998. We
expect demand for our software to remain relatively flat in the near term
because the market for these products is mature, and we are not making any
significant investment in new products for that market. As a result, we expect
our level of software revenue to remain relatively stable.
Cost of Revenues. Total cost of revenues increased to $30.0 million for the
nine months ended September 30, 1999 from $21.8 million for the nine months
ended September 30, 1998. The increase in the cost of revenues was attributable
to an increase in
29
<PAGE> 34
equipment volume and consisted primarily of materials and costs associated with
increasing production at our contract manufacturers.
For the nine months ended September 30, 1999, our gross profit (loss) on
equipment was $0.1 million and for the nine months ended September 30, 1998, our
gross profit (loss) on equipment was $(3.8 million). The improvement in gross
profit (loss) was primarily the result of higher unit volumes, leading to
greater efficiencies, including lower fixed costs per unit. We plan to achieve
gross margin improvements as we increase sales of our higher margin products,
increase volume, and continue implementing cost reductions. Our software gross
margins in each period were comparable.
Research and development. Research and development expenses increased to
$35.9 million for the nine months ended September 30, 1999 from $32.5 million
for the nine months ended September, 1998. The increase was primarily due to an
increase in research and development personnel. We believe that continued
investment in research and development is critical to attaining our strategic
product development and cost reduction objectives and, as a result, expect these
expenses to increase in absolute dollars.
Selling, general and administrative. Selling, general and administrative
expenses increased to $22.2 million for the nine months ended September 30, 1999
from $19.9 million for the nine months ended September 30, 1998. Approximately
$3.9 million of compensation expense relating to the Telenetworks acquisition is
included in the amount for 1998. There was no Telenetworks compensation expense
during the nine months ended September 30, 1999. This decrease in compensation
expense was offset by a substantial increase in selling, general and
administrative expenses in the 1999 period due to the increase in scale of our
operations including additional personnel in the sales and marketing
organizations, promotional expenses and other administrative expenses. We expect
selling, general and administrative expenses to increase as we continue to add
personnel and incur additional costs as we increase the scale of our operations.
Litigation. Litigation expenses of $5.0 million for the nine months ended
September 30, 1998 related to the settlement cost of litigation with BroadBand
Technologies. For a detailed discussion of this litigation matter, see
"Business -- Litigation."
Other income (expense), net. Other income (expense) consists primarily of
interest income. The decrease in interest income to $0.9 million for the nine
months ended September 30, 1999 from $2.1 million for the nine months ended
September 30, 1998 was due to a reduced level of cash and cash equivalents
during the 1999 period.
Interest expense. Interest expense increased to $5.2 million for the nine
months ended September 30, 1999, from $4.4 million for the nine months ended
September 30, 1998. The interest expense in these periods is primarily
attributable to interest on a $75.0 million note and accrued interest thereon
payable to General Instrument that General Instrument will contribute to us in
exchange for shares of our common stock immediately prior to completion of this
offering as part of our recapitalization.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenues. Total revenues increased to $43.8 million in 1998 from $8.3
million in 1997. We recorded our first sale in September 1997 and, therefore,
the operating results for 1997 reflect only four months of revenues. We did not
ship product in 1996 and, accordingly, did not recognize any revenues in 1996.
30
<PAGE> 35
Total revenues for the year ended December 31, 1998 included $39.2 million
of equipment sales, compared to $6.0 million of equipment sales for the year
ended December 31, 1997. U S WEST accounted for $29.9 million and Bell Atlantic
accounted for $8.6 million of equipment revenue for the year ended December 31,
1998. U S WEST accounted for $1.4 million and NYNEX (now part of Bell Atlantic)
accounted for $4.6 million of equipment revenue for the year ended December 31,
1997. We expect to continue to derive substantially all of our revenues from
sales of equipment to the regional Bell operating companies and local and
independent telephone companies for the foreseeable future.
In 1998 and 1997, software revenue consisted of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
For the year ended December 31, 1998, software revenue was $4.6 million and for
the year ended December 31, 1997, software revenue was $2.3 million. Software
revenue for 1997 was comprised of four months of revenue from Telenetworks.
Cost of Revenues. Total cost of revenues increased to $43.4 million for the
year ended December 31, 1998 from $11.3 million for the year ended December 31,
1997 and related substantially to cost of equipment. The increase in cost of
revenues in 1998 and 1997 was primarily the result of materials cost and costs
associated with increasing production at our contract manufacturers as a result
of increased equipment sales volume.
Research and development. Research and development expenses increased to
$47.1 million for the year ended December 31, 1998, from $37.1 million for the
year ended December 31, 1997 and $17.1 million for the year ended December 31,
1996. The increase in 1998 was primarily the result of increased personnel,
increased component purchases and spending on third-party testing, development
of the Residential Gateway product, and the completion of our products for voice
applications. The increase in 1997 was primarily due to increased personnel in
research and development, the corresponding procurement of components and test
fixtures, increased system testing and the commencement of development of video
products.
Selling, general and administrative. Selling, general and administrative
expenses were $26.2 million for the year ended December 31, 1998, compared to
$26.4 million for the year ended December 31, 1997 and $15.9 million for the
year ended December 31, 1996. The decrease in 1998 reflects the reduction in
legal expenses associated with the DSC Communications litigation that was
partially offset by costs associated with the increased selling efforts
resulting from the commencement of the commercial sales of our products in
September 1997, as well as expansion into new markets. These costs include
recruiting, travel, tradeshows, print advertising, public relations and other
promotional expenses. The increase in 1997 was primarily due to higher costs
associated with increased personnel in the sales and marketing organizations as
well as higher legal expenses due to the litigation with DSC Communications.
Litigation. Litigation expense of $5.0 million for the year ended December
31, 1998 related to the settlement cost of litigation with BroadBand
Technologies. In 1996, a final judgment was entered in favor of DSC
Communications and DSC Technologies, and an expense for the expected final award
of $141.0 million was recorded in 1996. The $141.0 million judgment was paid in
1997. For a detailed discussion of these litigation matters, see
"Business -- Litigation."
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Other income, net. Other income of $2.2 million for the year ended December
31, 1998 was due to interest income on cash and cash equivalents. Other income,
net was not significant in 1997 or 1996.
Interest expense. Interest expense was $6.0 million in 1998 due almost
entirely to interest on the $75.0 million note and accrued interest thereon
payable to General Instrument. There was no interest expense in 1997 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash contributions and
borrowings from General Instrument. General Instrument will not provide us
additional funds after this offering.
Net cash used in operating activities was $44.4 million for the nine months
ended September 30, 1999 and $63.0 million for the nine months ended September
30, 1998. In each case, the use of cash in operating activities was primarily
due to our net losses, partially offset by an increase of $12.7 million in
deferred revenues in the 1999 period. Net cash used in operating activities of
$66.6 million in 1998 was primarily due to a net loss of $81.7 million,
partially offset by non-cash depreciation charges. Net cash used in operating
activities of $208.5 million in 1997 was due to a net loss of $66.4 million,
payments of litigation expenses of $141.0 million and an increase in
inventories. Net cash used in operating activities of $33.0 million in 1996 was
primarily due to a net loss of $173.9 million offset by $141.0 million of
accrued litigation expenses.
Net cash used in investing activities of $6.1 million for the nine months
ended September 30, 1999, $6.9 million for the nine months ended September 30,
1998, $9.3 million for the year ended December 31, 1998, $9.8 million for the
year ended December 31, 1997 and $9.3 million for the year ended December 31,
1996 was primarily attributable to capital expenditures to support our
engineering and testing activities. As we increase the scope of our operations,
we expect that our capital expenditures will increase.
Net cash provided by financing activities of $34.0 million in the nine
months ended September 30, 1999 and $89.0 million in the nine months ended
September 30, 1998 consisted of capital contributions from the partners and a
$75.0 million loan from General Instrument in the 1998 period. Net cash provided
by financing activities of $104.6 million for the year ended December 31, 1998
consisted of a $75.0 million loan from General Instrument, a $19.6 million
capital contribution from General Instrument and a $10.0 million capital
contribution from the general partner. Net cash provided by financing activities
of $218.7 million for the year ended December 31, 1997 consisted of
contributions from General Instrument. Net cash provided by financing activities
of $41.7 million for the year ended December 31, 1996 was due to borrowings from
General Instrument.
At September 30, 1999, we had $12.5 million of cash and cash equivalents
and $17.4 million of working capital. However, we anticipate that we will
increase our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. We may establish
sales offices and lease additional space, which will require us to commit to
additional lease obligations, purchase equipment and install leasehold
improvements.
We have commitments with suppliers to purchase a total of approximately
$24.0 million of components through 2002.
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In January 1998, we borrowed $75.0 million from General Instrument pursuant
to an 8% note due in 2005. Deferred interest payments bear interest at 10%. At
September 30, 1999, we owed General Instrument $86.0 million under the note,
including accrued interest of $11.0 million. This note, including accrued
interest thereon, will be contributed to us by General Instrument in exchange
for approximately 7,813,636 shares of common stock immediately prior to the
completion of this offering as part of our recapitalization. This number of
shares is based upon the amount owed as of September 30, 1999 and an assumed
initial offering price of $11.00 per share. As a result of the recapitalization,
we do not expect to currently have material debt service requirements.
We expect to experience significant growth in our operating expenses for
the foreseeable future. As a result, we anticipate that operating expenses, as
well as planned capital expenditures, will constitute a material use of our cash
resources. In addition, we may use cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. Our long
term operating and capital lease obligations are generally less than $3.0
million per year and are described in notes 11 and 12 to the financial
statements of Next Level Communications L.P. Other than capital lease
commitments, we have no material commitments for capital expenditures. As we
increase the scope of our operations, we expect that our capital expenditures
will increase. We believe that our cash on hand and the net proceeds from the
sale of the common stock in this offering will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
However, it may still be necessary to obtain additional equity or debt financing
either during or after the next 12 months if we are not able to generate
sufficient cash from operating activities to meet our capital expenditure and
working capital needs. In the event additional financing is required, we may not
be able to raise it on acceptable terms, or at all.
YEAR 2000
The year 2000 issue has arisen as a result of computer programs being
written using two digits rather that four to define the applicable year. Some
information technology systems and their associated software, and other
equipment that uses programmable logic chips to control aspects of their
operation, commonly referred to as embedded chip equipment, may recognize "00"
as a year other than the year 2000. Some information technology systems and
embedded chip equipment used by us and by third parties who do business with us
contain two-digit programming to define a year. The year 2000 issue could
result, for us and for others, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. We
believe our products are year 2000 compliant.
Readiness for Year 2000
We are addressing year 2000 issues relating to:
- embedded chip equipment sold by us;
- information technology systems and embedded chip equipment used by us;
- third parties who do business with us that may not be prepared for the
year 2000; and
- contingency planning.
We use a variety of information technology systems, internally developed
and third-party provided software and embedded chip equipment in our products.
For these
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information technology systems, software and embedded chip equipment, we have
divided our year 2000 efforts into four phases:
(1) identification and inventorying of information technology systems and
embedded chip equipment with potential year 2000 problems;
(2) evaluation of scope of year 2000 issues for, and assigning priorities
to, each item based on its importance to our operations;
(3) remediation of year 2000 issues in accordance with assigned priorities,
by correction, upgrade, replacement or retirement; and
(4) testing for and validation of year 2000 compliance on an application
and enterprise wide basis.
We have categorized as "mission critical" those information technology
systems and embedded chip equipment whose failure would cause cessation of
operations or significant detrimental financial impact on us. Phase (1) and (2)
are complete across all "mission critical" business functions and locations. All
mission critical information technology systems and embedded chip equipment are
currently in phase (3) or (4) and we expect these phases to be completed by
November 1999. We will conduct a comprehensive program of integration testing of
internal systems to ensure that all systems still work together properly and
without year 2000 problems.
Our operations are also dependent on the year 2000 readiness of third
parties, including our contract manufacturers, that we do business with. In
particular, we are in the process of configuring our information technology
systems to interact with commercial electronic transaction processing systems of
our customers. In addition, we are dependent on third-party suppliers of
infrastructure elements such as telecommunications services, electric power,
water and banking facilities.
We have identified and initiated formal communications with key third
parties, including our contract manufacturers, to determine the extent to which
we will be vulnerable to such parties' failure to resolve their own year 2000
issues. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from these vendors that their
systems are year 2000 compliant. As a follow-up, we plan to determine whether
our customers and suppliers are taking appropriate steps to achieve year 2000
readiness and ensure continued functioning in accordance with our business
needs. We are assessing our risks with respect to failure by third parities to
be year 2000 compliant and intend to seek to mitigate those risks. We are also
developing contingency plans, discussed below, to address issues related to
third parties we determine are not making sufficient progress toward becoming
year 2000 compliant.
Costs
Due to the lack of older systems subject to remediation, we expect that our
overall cost of achieving year 2000 compliance will not be material. The total
cost through September 30, 1999 of our year 2000 activities was approximately
$100,000 and the cost of our remaining year 2000 activities is estimated to be
approximately $64,000. Our estimate of the cost of achieving year 2000
compliance and the date by which year 2000 compliance will be achieved are based
on our best estimates, which were derived using numerous assumptions about
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no assurance
that
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these estimates will be achieved and actual results could differ materially from
these estimates. Specific facts that might cause such material differences
include the availability and cost of personnel trained in year 2000 remediation
work, the ability to locate and correct all relevant computer codes, the success
achieved by our customers and suppliers in reaching year 2000 readiness, the
timely availability of necessary replacement items and similar uncertainties.
Some commentators have predicted significant litigation regarding year 2000
compliance issues, and we are aware of these lawsuits against other vendors.
Because of the unprecedented nature of this litigation, it is uncertain whether
or to what extent we may be affected by it. If we are subject to claims by our
customers asserting liability, including liability for breach of warranties
related to the failure of our products to function properly, the cost of this
litigation and any settlement or judgment costs could be material.
Contingency Plans
We presently believe that the most likely worst-case year 2000 scenarios
would relate to the possible failure in one or more geographic regions of
third-party systems over which we have no control and for which we have no ready
substitute, such as, but not limited to, power and telecommunications services.
We have in place a business resumption plan that addresses recovery from various
kinds of disasters, including recovery from significant interruptions to data
flows and distribution capabilities. We are using that plan as a starting point
for developing specific year 2000 contingency plans, which will emphasize
locating alternate sources of supply, methods of distribution and ways of
processing information.
We anticipate this contingency planning will prepare our business for
disruptions but will not protect us fully from commercial impact. We are
currently initiating the following efforts:
- Prioritizing all hardware, software and services across the enterprise.
- Developing contingency plans for top priority items.
There can be no assurance that we will be able to complete our contingency
planning before January 1, 2000.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Statement of Financial Accounting Standards No. 133, as
amended by Statement of Financial Accounting Standards No. 137, will be
effective for our fiscal year ending December 31, 2001. Management is currently
evaluating what impact, if any, Statement of Financial Accounting Standards No.
133 may have on our financial statements.
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BUSINESS
OVERVIEW
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Service providers who deploy our
equipment can either offer voice, data and video services in a single product
offering or offer each service separately depending on subscriber demand and the
service provider's objectives. We believe that by installing our equipment,
telephone companies and other emerging communications service providers will be
able to capitalize on, and compete effectively in, the emerging market for
integrated voice, data and video services. Our products consist of equipment
located at the telephone company's central office, in the field and at the
subscriber's home or business.
We commenced operations in July 1994 and recorded our first sale in
September 1997. From inception through September 30, 1999, approximately 82% of
our revenues were from sales to U S WEST and Bell Atlantic. We incurred a net
loss of $59.9 million for the nine months ended September 30, 1999 and $81.7
million for the year ended December 31, 1998.
INDUSTRY BACKGROUND
Increasing Demand for Voice, Data and Video Services
In recent years, the volume of voice, data and video traffic across
communications networks has grown dramatically due to:
- the increasing use of the Internet as an essential communications and
transaction medium;
- the growth in remote access by telecommuters; and
- the increasingly diverse distribution sources for high quality digital
video.
According to International Data Corporation, the number of Internet users
worldwide reached approximately 142 million in 1998 and is forecasted to grow to
approximately 502 million by the end of 2003, while the number of homes
worldwide with remote access connections is expected to increase from 81 million
in 1999 to 157 million in 2003. In addition, in a June 1999 report, Paul Kagan
Associates estimates that the number of U.S. cable television subscribers is
expected to increase from 67 million in 1999 to 71 million in 2003, while the
number of digital set-top box units is expected to increase from 5 million in
1999 to 29 million in 2003. The growth in traffic and increasing demand for
high-speed data and video services has forced communications companies to find
ways to deliver these services more cost effectively.
Increased Competition for Communications Services
The increasing demand for voice, data and video services combined with
deregulation of the communications industry has created new opportunities and
challenges for communications service providers. As service providers seek to
capitalize on these opportunities to deliver a broader set of services, local
connections to residential and business subscribers have become an increasingly
valuable asset. The two most prevalent
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types of local connections in North America are copper wire and cable. Service
providers that use copper wire are facing increasing competitive pressures from
providers using cable. Recently, certain service providers have announced plans
to provide voice, data and video services over cable. For example, AT&T recently
acquired TCI and entered into an agreement to acquire Media One. AT&T then
announced plans to accelerate the upgrade of TCI's cable systems to offer
packaged services. AT&T plans to provide not only data and video but also voice
over its own cable systems and over other cable systems through partnerships
with other cable service providers. These packaged services will give
residential and business subscribers the ability to purchase all communications
services from a single provider. This could provide more favorable pricing and a
single point of contact for bill payment and customer service. If these cable
providers can successfully package and market these services, they will compete
directly with the services offered by telephone companies.
Although telephone companies have the opportunity to sell packaged
broadband services to their large number of voice customers, they have been
constrained by limitations in their existing networks. In particular, the
connection between the subscriber and the telephone company's central office,
referred to as the "last mile," is the slowest portion of the communications
infrastructure and often acts as a bottleneck in the delivery of high-speed data
and video traffic. As overall demand for services continues to rise, these
limitations are becoming increasingly apparent and are resulting in lost revenue
for service providers and inadequate network service for their customers.
Evolution of the "Last Mile"
Historically, the telephone company infrastructure consisted primarily of
twisted pairs of copper wires that spanned the distance from their customers'
homes or businesses to a central office where they connected to a voice switch.
This infrastructure was originally designed to transmit analog voice traffic.
Over the last several years, telephone companies have installed equipment in
some locations between the telephone company's central office and clusters of
end-users in an effort to make their networks more cost efficient. This
equipment has enabled telephone companies to convert their analog traffic into
more efficient digital data streams and extend higher capacity fiber optic cable
further into their networks. Although these systems have often resulted in more
cost efficient voice communications, they are generally not designed to deliver
data and video services to individuals and businesses.
To take advantage of their existing copper wire infrastructure and respond
to the increased demand for data services, some telephone companies have
recently begun to create data networks separate from their voice networks by
connecting additional equipment to their central office equipment. To date, most
of this equipment has been deployed to provide Internet access to individuals
and businesses. Although this equipment typically provides higher speed than the
earlier systems, it is generally not designed to provide high quality video
services. Thus, telephone companies seeking to offer a variety of services to
their customers often must do so from multiple and distinct networks. This is
because each individual system is typically unable to offer voice, data and
video services in a single package.
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Traditional telephone companies are seeking solutions that enable them to
continue to compete in their existing market for voice services as well as in
the emerging data and video markets because of:
- the increasing demand for high-speed data and video services;
- the greater competition among service providers; and
- the limitations of existing copper wire networks.
To match their capital expenditures to subscriber demand for services, many
telephone companies are seeking flexible solutions with which they can add new
services over time. Despite the desire by many telephone companies to simplify
and reduce costs, companies seeking to deploy multiple services have generally
needed to deploy separate networks from multiple vendors. This strategy is
costly and increases the complexity of installation, operation and maintenance.
OUR SOLUTION
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Our equipment is designed to
provide the following key competitive advantages and benefits:
Flexible, Integrated Products. Our products are designed with the
flexibility to allow our customers to deliver voice, data and video services in
a single packaged offering or to offer them individually. This flexibility
allows telephone companies to immediately serve the varying needs of their
diverse end-user base, including residential, corporate and telecommuter
customers. As a result, telephone companies can generate significant incremental
revenue from their existing networks by using our system. By offering the
flexibility inherent in an integrated system, our products enable telephone
companies to effectively time their network equipment expenditures and rapidly
introduce new services as demand warrants.
Cost Effective Product Deployment. Our product design reduces the cost and
complexity often associated with deploying multiple services to end-users.
Because telephone companies often use separate equipment for each communications
service, they require multiple equipment purchases, installations, training
procedures, maintenance procedures and network management packages. In contrast,
our products deliver all services from a single system. By integrating many
traditionally separate functions, our products allow telephone companies to
incrementally add services by simply installing new modules into our existing
equipment, rather than purchasing entirely new infrastructure equipment.
Additionally, our products installed in the house or office deliver video and
data services from a single networked set-top box, thus eliminating the need for
set-top boxes or modems for different services or separately located TVs and
PCs. We believe our products provide cost savings, reduce trouble calls and ease
installation compared to other equipment that often consists of separate
systems, each of which corresponds to one service and which may not operate
effectively together.
Complete Solution For Delivery of Voice, Data and Video. By supplying
equipment for the telephone company central office, the field and the
subscriber's home or office, we offer a single integrated system for the
delivery of voice, data and video services. With our
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products, telephone companies initially deploying voice service can subsequently
activate data and/or video service with a simple addition and installation of
equipment at the subscriber's home or office. We believe the flexibility found
in our products cannot currently be accomplished by attempting to integrate
multiple systems from multiple vendors.
Reliable and Compatible Technology. Because our products provide multiple
services, including voice, they are engineered to comply with rigorous industry
standards for reliability and safety. Our products are also designed to operate
with existing telephone company switches and billing systems, thereby minimizing
the cost of using our products.
Security. We believe that our products produce greater security compared to
cable systems that are based on shared network design in which data is broadcast
to all users simultaneously. Security has always been important to individuals
and businesses in voice transmission and is becoming increasingly important as
e-commerce applications and video-on-demand services become more prevalent.
OUR STRATEGY
Our objective is to be the leading supplier of products that enable
telephone companies and other emerging communication service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Key elements of this strategy
include the following:
Increase Penetration of Existing Customer Base. As the needs of our
customers evolve, we intend to:
- use our success achieved with key customers to increase sales;
- extend our product offerings; and
- maintain a high level of customer support.
To date, telephone companies have deployed our products to offer a subset
of services in a limited number of locations. We believe there is a significant
opportunity to increase our sales as customers expand to more locations within
their regions and/or as they offer more services at each location. In addition,
we believe our existing agreements with some of our customers provide us with a
competitive advantage as a preferred vendor if and when these customers develop
their next generation of broadband networks. We intend to leverage this
advantage to be the supplier of complete communications solutions to our
customers. For example, we recently expanded our relationship with U S WEST. In
the past, our relationship with U S WEST was confined to providing equipment to
offer voice, data and video services solely in the Phoenix, Arizona service
area. We recently entered into a new agreement with U S WEST to provide our
products for voice applications in six of the 14 states in U S WEST's territory.
Expand Customer Base to Other Communications Providers. We believe our
products' price and performance advantages offer communications service
providers using copper telephone wires a cost-effective solution to upgrade
their networks to offer voice, data and video services. Consequently, we have
recently aggressively expanded our product marketing beyond regional Bell
operating companies to other communications providers using copper wire
infrastructure, including local and independent telephone companies. These
companies have often been quick to embrace and adopt new technologies. Although
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many international telephone markets are still in the early stages of deploying
high-speed data and video services, we intend to market our products to targeted
international telephone companies. Accordingly, we are expanding our sales force
to capitalize on these new opportunities.
Provide Competitive Advantages to our Customers. Our system offers
flexibility to allow delivery of voice, data, and video traffic either in a
packaged or separate product offerings in any combination chosen by a service
provider. By supporting incremental deployment of services, rather than upfront
network buildouts, we believe our system provides telephone companies a more
effective means of managing system development and expansion by enabling these
companies to better match their capital expenditures to subscriber demand for
services. Additionally, our products offer a complete solution including our
set-top box, the Residential Gateway, at the subscriber's home or business. Our
set top box provides telephone companies and their customers with an integrated
solution that is more cost effective than deploying the separate modems or
set-tops often otherwise necessary to provide multiple services. As demand for
high-speed data and video services increases, we intend to continue focusing on
providing our customers products which allow them to cost-effectively deliver
multiple services.
Maintain and Extend Technology Leadership. We believe that we are currently
a technology leader in engineering integrated voice, data and video solutions.
We intend to maintain and extend our technology leadership through continued
research and development of integrated systems for voice, data and video
transmission over a variety of fiber, copper, satellite and various mixes of
these and other networks. Accordingly, we plan several new products and
enhancements, including integration of our customer premises equipment with
Direct Broadcast Satellite and other types of networks to deliver increased cost
savings, additional functionality and more flexible delivery capability to the
telephone companies and their customers.
Outsource Manufacturing. Our manufacturing strategy focuses on the use of
one or more contract manufacturers for the assembling, testing, packaging,
warehousing and shipping of products. Currently, we use two large contract
manufacturers: SCI Systems and CMC Industries. Using contract manufacturers
allows us to:
- achieve economies of scale in purchasing;
- respond rapidly to large customer orders;
- reduce costly investment in manufacturing capital; and
- reduce inventory warehousing.
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PRODUCTS
Our products include equipment located at a telephone company's central
office, in the field and at a subscriber's home or business. Key elements of our
solution, which are described below, are the Broadband Digital Terminal,
Universal Service Access Multiplexer, Broadband Network Unit, Residential
Gateway, ETHERset, N(3) NIC, N(3) View-1 Element Management System and N(3)
View-2 Service Manager. An application of our products is demonstrated in the
following diagram:
[This disgram depicts an application of our products from a WAN, to a telephone
company central office, to the field and to a customer's home or business.]
<TABLE>
<S> <C>
BNU............................... Broadband Network Unit
ETHERset.......................... High speed data product
RES. GTWY......................... Residential Gateway
USAM.............................. Universal Service Access Multiplexer
WAN............................... Wide Area Network
</TABLE>
Broadband Digital Terminal. The Broadband Digital Terminal is the central
element of our product suite, providing centralized access to both broadband and
narrowband networks and related voice, data and video services. The Broadband
Digital Terminal is typically located in a telephone company's central office,
or at a remote cabinet, building basement or hut where it connects with central
office equipment including voice and data switches and billing systems. On the
subscriber side, the Broadband Digital Terminal provides high-speed connections
to remote Universal Service Access Multiplexers or Broadband Network Units that
can support up to a maximum of 2,048 data or video subscribers, up to a maximum
of 6,144 telephone subscribers or combinations thereof. The Broadband Digital
Terminal has the capacity for broadband applications such as video-on-demand and
high definition television. Also, because the Broadband Digital Terminal
supports different remote terminals, changes to network layouts or transmission
media (copper or fiber) do not require different Broadband Digital Terminals.
Universal Service Access Multiplexer. The Universal Service Access
Multiplexer is designed to use existing copper wire to connect to a customer's
home or office and can be connected with fiber optic cable to the Broadband
Digital Terminal. Each Universal
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Service Access Multiplexer can support up to 32 video and/or data subscribers or
up to 96 voice subscribers. By using modular components, a single Universal
Service Access Multiplexer enables multiple voice, data and video services. The
Universal Service Access Multiplexer can be deployed in the telephone company's
central office or remotely. Because the Universal Service Access Multiplexer is
flexible in terms of where it can be located in the network, as well as the
services it can support, its use can reduce both the costs and the complexity of
deploying new high-speed data and video services.
Broadband Network Unit. The Broadband Network Unit is used with
installations where fiber optic cable is deployed up to a location relatively
close to the customer's home or office. The Broadband Network Unit supports
voice, data and video services, and can be mounted on a telephone pole, a
pedestal or a wall. The Broadband Network Unit provides voice, high-speed data
and video service for clusters of up to 24 video and/or data and up to 36 voice
subscribers. Our Broadband Network Unit is particularly suited to situations
where a new network is being built, or where existing copper wire is being
upgraded by the installation of fiber optic cable as the transmission medium for
residences or larger apartment buildings or offices. The advanced design and
environmentally secure housing of the Broadband Network Unit results in low
in-field trouble calls.
Residential Gateway. Our Residential Gateway product is a single set-top
box that delivers integrated data and video services. One Residential Gateway
enables multiple televisions and personal computers to be served from the same
access line into the customer's home or office. Traditionally, the high cost of
customer home or office equipment for broadband services has been a limiting
factor in the deployment of broadband services to multiple televisions or
personal computers. Historically, a customer would have to obtain multiple
modems or set-top boxes to support services to multiple televisions or personal
computers. In contrast, our Residential Gateway simultaneously provides three
independent high quality video streams that can be distributed throughout a home
or office using standard coaxial cable. The primary video stream is also
available in common video and stereo surround sound formats. The Residential
Gateway also supports enhanced telephone services, such as an indicator on the
television that a message is waiting on the customer's answering machine or
service as well as on-screen caller ID. The data port in our Residential Gateway
supports high-speed connectivity to the Internet or remote work-at-home access.
ETHERset. Our ETHERset is a data-only, desktop device that provides a
powerful, low-cost solution for delivering high-speed Internet or data services
to subscribers in residences, small businesses, branch offices and the like.
Individual or multiple personal computers can be connected to a single ETHERset.
N(3) NIC. The N(3) NIC is a card, designed to fit into a personal computer,
that provides the same functionality as our ETHERset.
Element Management Systems. Our products can be managed remotely by our
N(3) View-1 Element Management System and our N(3) View-2 Service Manager. The
View-1 Element Management System enables service providers to manage our
equipment and their other systems and products. The View-2 Service Manager
enables service providers to manage delivery of voice, data and video services
to their customers.
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CUSTOMERS
We market and sell our products through our direct sales force to service
providers that seek to deliver the next generation of broadband services. From
inception through September 30, 1999, approximately 82% of our sales were to U S
WEST and Bell Atlantic. We recently initiated customer relationships in the
local, independent and international telephone company markets. As of September
30, 1999, we had 12 customers who have purchased at least $100,000 of our
products. The following describes our relationship with some of these customers.
U S WEST: In August 1997, we entered into an agreement with U S WEST
through which U S WEST may purchase, without obligation to do so, up to 450,000
Residential Gateways and associated central office and field equipment, in eight
of the 14 states in which U S WEST currently operates over a five year period.
We recorded our first sale to U S WEST in September 1997 for deployment of video
and data service to U S WEST's customers in Phoenix, Arizona. In October 1998, U
S WEST selected our product to provide voice applications in six of the 14
states that U S WEST serves. Sales to U S WEST represented 68% of our revenues
in fiscal 1998 and 61% in the nine months ended September 30, 1999.
Bell Atlantic: In October 1996, we entered into an agreement with NYNEX
(now part of Bell Atlantic) through which Bell Atlantic may purchase, without
obligation to do so, equipment for up to 5,000,000 lines, consisting of
Broadband Network Units and associated equipment, throughout its service area
over a fifteen-year period. The primary application for these products is
rehabilitation of Bell Atlantic's existing network equipment from copper to
fiber. We recorded our first sale to Bell Atlantic in September 1997 for
deployment in the Boston area. Bell Atlantic is currently using our system to
serve customers in the New York City and Boston areas. Sales to Bell Atlantic
represented 20% of our revenues in fiscal 1998 and 14% in the nine months ended
September 30, 1999.
GTE: In April 1998, we entered into an agreement with GTE through which GTE
may purchase, without obligation to do so, our Residential Gateways and
associated central office and field equipment. Through a development agreement,
GTE has commenced a trial deployment of our products for video applications to
customers in the Clearwater, Florida area.
Hutchinson Telephone: In February 1999, we received our first order from an
independent telephone company, Hutchinson Telephone, for deployment of our
equipment. Hutchinson has announced that it intends to deploy our Universal
Services Access Multiplexers and Broadband Digital Terminals for voice,
high-speed data and other services.
Paul Bunyan Rural Telephone: In April 1999, Paul Bunyan Rural Telephone, an
independent telephone company based in Bemidji, Minnesota, began deploying our
equipment for voice applications in its service area.
Chibardun Telephone: In April 1999, Chibardun Telephone, an independent
telephone company based in Dallas, Wisconsin, began deploying our equipment for
voice and data applications in its service area.
Northstar Telephone: In June 1999, Northstar Telephone, a local telephone
company based in Big Lake, Minnesota, began deploying our equipment for voice,
data and video applications in its service area.
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TECHNOLOGY
We believe the following key technologies have been instrumental in our
ability to provide what we believe is the world's only integrated, complete
solution for the delivery of integrated voice, data and video services over the
existing telephone copper wires.
Advanced Application Specific Circuits Architecture. Applications Specific
Circuits are custom-designed silicon circuits that are optimized for a specific
task or set of tasks. These circuits are critical because they are
performance-optimized to minimize gate counts, packaging size, power dissipation
and cost. In addition, one of these circuits may be the only way to provide a
new or novel function that is not available in an off-the-shelf circuit. Our
engineers have substantial experience in the design of these circuits and have
developed a portfolio of over 15 of these circuits, which enables flexible
delivery of voice, data and video from a single system. We will continue to
pursue additional service and system level Application Specific Circuits as a
mechanism for protecting our intellectual property and to achieve ongoing cost
reductions.
System Design and Integration Expertise. We employ a team of experienced
system design and integration engineers in our research and development group.
These individuals provide research, design and development resources and ensure
that our products are able to be integrated by our customers. System integration
by our customers is required on our-specific access products, equipment at the
customers home or business, and management systems, as well as the integration
of our products into our customers' networks. System integration expertise is
critical to the successful deployment of new advanced full service
telecommunications systems and services by our customers.
Wavelength Division Multiplexing Technology. Our system uses a technology
known as wavelength division multiplexing. This technology allows multiple
optical signals to be carried on the same optical fiber. In particular, this
technology is used to communicate two-way voice, data and video over a single
optical fiber. This enables our customers to save fiber costs and increase
bandwidth.
Software and Protocol Stacks. Most of the system software in our products
has been developed internally using modern design principles and processes.
Where appropriate, various third-party software packages have been integrated
into the access system. Some examples include the real time operating system,
various protocol stack software packages.
Standards-based Architecture. We support multiple industry standards to
minimize interoperability issues and leverage industry hardware and software
capabilities, and improve time to market. On the customer side of the network,
we are working with industry standards for asynchronous digital subscriber line
and very high speed digital subscriber line standards to support various
equipment at the customer's home or business.
RESEARCH AND DEVELOPMENT
As of September 30, 1999, we had 215 full time employees and 15 full time
contractors engaged in research and development. We believe that our future
success depends on our ability:
- to adapt to the rapidly changing telecommunications environment;
- to maintain our expertise in core technologies; and
- to continue meeting and anticipating the evolving needs of telephone
companies.
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We continually review and evaluate technological changes affecting the
telecommunications market and invest substantially in applications-based
research and development. We are committed to an ongoing program of new product
development that combines internal development efforts with strategic
relationships and licensing or marketing arrangements relating to new products
and technologies from outside sources.
We have focused our research and development expenditures for the past
several years on creating a complete solution for the delivery of voice, data
and video services using the existing infrastructure of telephone companies. We
have also concentrated on developing the associated customer premises equipment,
including our Residential Gateway, and on developing our N(3) View-1 Element
Management Systems. For the years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1999, research and development expenses were
$17.1 million, $37.1 million, $47.1 million and $35.9 million. We believe that
our extensive experience in designing and implementing high-quality network
components has enabled us to develop integrated systems solutions. We seek to
constantly improve our existing products, including developing additional home
and office products and higher speed interfaces for our products.
SALES AND MARKETING
We primarily market and sell our products through a direct sales force
located in North America that consisted of 34 people as of September 30, 1999.
To date, sales activities have been focused primarily on the regional Bell
operating companies and GTE. More recently, we have focused on emerging
opportunities within the local, independent and international telephone markets.
We are currently expanding our sales organization to focus on these emerging
customer opportunities. As of September 30, 1999, 12 sales people were focused
solely on sales to local telephone companies. Because of the potential
importance of our products to our customers' networks, we focus our selling
efforts at many levels within each customer's organization.
We have a variety of marketing programs and initiatives to support the sale
and distribution of our products. As of September 30, 1999, we had 18 full time
employees engaged in marketing activities focusing on reaching technical experts
within telephone companies and creating product awareness and credibility for
our systems among telephone companies. A key factor to building brand awareness
for our products is promoting the success of our customers deploying our
products. We seek to educate telephone companies regarding the benefits of
deploying broadband-ready equipment across a diverse subscriber base. We also
build our brand name through continued publicity and referral efforts in both
media and industry-centered activities, including editorial presence in various
trade magazines, press releases, public speaking opportunities, national and
regional trade show participation, advertising, Internet-based communication and
promotion, media sponsorships and participation in industry standards
activities.
MANUFACTURING
We seek to deliver our products on time and defect-free by capitalizing on
the experience and expertise of strategic contract manufacturers. Based on their
quality assurance and strengths in the volume manufacture of our products, we
have established our primary contract manufacturing relationships with SCI
Systems and CMC Industries. SCI Systems is responsible for manufacturing a
majority of our circuit board plug-in assemblies. CMC Industries, which was
recently acquired by ACT Manufacturing, is
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responsible for manufacturing our Residential Gateway product. Using contract
manufacturers allows us to reduce the costly investment in manufacturing
capital, achieve economies of scale in purchasing selected components and reduce
inventory warehousing.
We maintain only a limited in-house manufacturing capability for final
assembly, testing and integration of our products. Our internal manufacturing
expertise is focused on product design for testability, design for
manufacturability and the transfer of products from development to
manufacturing. Each contract manufacturer typically assembles an account team of
personnel representing all the essential functions to deliver products from
prototype through volume production. This team works with our design, test, and
manufacturing engineers, and our quality, materials, logistics and program
management teams. All of our major contract manufacturers are certified under
international quality standards. Although our contract manufacturers manage
material procurement for the majority of the components that are incorporated in
our products, we continue to manage the evaluation and selection of certain key
components.
Our engineering team designs circuits and tests these designs using
computer simulations. When the fundamental design is stable, our outsourced
manufacturers make the circuits for testing. Upon completion of these tests,
vendors such as Oki Semiconductor, Broadcom, STMicroelectronics, VLSI (Philips)
and Motorola manufacture the circuit in volume. Warranty and repair support is
performed off-site by our contract manufacturers and by us at our Rohnert Park,
California facility.
CUSTOMER SERVICE AND SUPPORT
We believe that successful long-term relations with our customers require a
service organization committed to customer satisfaction. As of September 30,
1999, we had 16 technical support employees at our headquarters or in the field.
We also offer a five-day training course for all new customers prior to
receiving and installing a system. To date, revenues from customer service and
support have been immaterial.
We provide direct support by telephone or at a customer's office or other
location at any time. To monitor service activities, we maintain a customer call
tracking system. We also maintain a dial-up analog modem connection or an
Internet-based management interface to our equipment to assist with diagnostics.
COMPETITION
The market for providing equipment for local telecommunications networks is
extremely competitive. The principal competitive factors in this market include,
or are likely to include:
- product performance and price;
- features and reliability;
- technical support and service;
- relationships with phone companies and systems integrators;
- compliance with industry standards;
- compatibility with the products of other suppliers;
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- sales and distribution capabilities;
- strength of brand name;
- long-term cost of ownership to communications providers; and
- general industry and economic conditions.
Many of our current and potential competitors have longer operating histories
and greater name recognition and resources than we do. These competitors may
undertake more extensive marketing campaigns than we do. In addition, these
competitors may adopt more aggressive pricing policies than we do. Also, these
competitors may devote substantially more resources to developing new products
than we do. Many of our competitors have recently been acquired and now have
even greater resources to compete with us.
Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC Corporation (recently acquired by
GEC Marconi), Scientific Atlanta, Siemens and our largest stockholder, General
Instrument. Some of these competitors have existing relationships with our
current and prospective customers which could give them a competitive advantage
over us as a preferred provider. In addition, we anticipate that other large
companies, such as Matsushita Electric Industrial (which markets products under
the Panasonic brand name), Microsoft, Network Computer, Philips, Sony Corp.,
STMicroelectronics and Toshiba America, will likely introduce products that
compete with our Residential Gateway product in the future.
In addition, we are likely to face increasing competition from alternative
technologies. In particular, cable operators are currently deploying products
that deliver voice, high-speed data and video services over cable. Cable service
providers that offer these packaged services will give subscribers the
alternative of purchasing all communications services from a single service
provider. If these services are implemented successfully, they will compete
directly with the services offered by telephone companies using our products.
Consolidation in the telecommunications equipment industry may strengthen
our competitors' position in our market. Consolidation of our competitors has
occurred and we expect it to continue to occur in the foreseeable future. For
example, Alcatel acquired DSC Communications, Lucent recently acquired Ascend
Communications and GEC Marconi has recently acquired RELTEC Corporation.
Acquisitions such as these further strengthen our competitors' financial,
technical and marketing resources and provide access to regional Bell operating
company customers. As a result, these competitors are able to devote greater
resources to the development, promotion, sale and support of their products.
This consolidation may allow some of our competitors to penetrate new markets
that we have targeted, such as the domestic local, independent and international
telephone markets. If our competitors are successful in these markets, our
business, operating results and financial condition will be harmed.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets, confidentiality provisions and other contractual provisions to
protect our intellectual property. These measures afford only limited
protection. As of September 30, 1999, we had 11 issued U.S. patents and 23
pending U.S. patent applications and 96 pending international patent
applications.
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REGULATION OF CUSTOMERS
Although our products are not now directly subject to significant
regulation by the FCC or any other federal or state communications regulatory
agency, our customers and their networks, into which our products are
incorporated, are subject to government regulation. Accordingly, the effects of
regulation on our customers may, in turn, harm our business, operating results
and financial condition. FCC regulatory policies affecting either the
willingness or the ability of cable operators or telephone companies to offer
certain services, or the terms on which these companies offer the services and
conduct their businesses, may impede sales of our products.
Several FCC regulatory policies may affect the degree to which or way in
which incumbent local exchange carriers, which we refer to as incumbent
carriers, principally the regional Bell operating companies, can or choose to
make integrated voice, data and video offerings available. For example, the
Telecommunications Act of 1996 requires incumbent carriers to offer their
competitors cost-based access to certain parts of their networks to enable these
competitors to provide telecommunications services. In response to a decision by
the Supreme Court overturning the FCC's rule identifying the specific network
elements that incumbent carriers must offer to their competitors, the FCC
recently announced that, except in limited circumstances, it will not require
incumbent carriers to offer their competitors access to the facilities and
equipment used to provide high-speed data services. The full text of the FCC's
decision has not yet been released, and thus we cannot analyze completely how
this decision effects us. Also, judicial appeals of this recent FCC decision may
follow. The 1996 Telecommunications Act also requires incumbent carriers to
offer for resale, at wholesale rates, any telecommunications services that
incumbent carriers offer to customers. The FCC has determined that high-speed
data services are "telecommunications services," and thus incumbent carriers
must offer high-speed data services for resale by competitors.
The uncertainties caused by pending regulatory proceedings or appeals could
cause potential customers to delay purchasing decisions. In addition, the
outcomes of the various regulatory proceedings may cause potential customers to
not deploy all of the services for which our products are designed or to delay
the widespread introduction of one or more of these services. Certain members of
Congress have also expressed an interest in reducing the regulation of incumbent
carriers' provision of video and high-speed data services, but again there is no
way to predict whether this legislation will be adopted.
The FCC also has proposed allowing incumbent carriers to offer high-speed
data and video services through a structurally separate subsidiary that is not
subject to the unbundling and resale requirements. Our equipment is designed to
allow carriers to provide video, high-speed data, and digital voice on an
integrated basis. If incumbent carriers choose to offer video or data services
through a separate affiliate, incumbent carriers may prefer vendors whose
equipment does not provide for integration of service offerings. A separate
affiliate may choose to purchase less sophisticated equipment because it might
not be able to utilize fully our equipment's integrated features. The FCC's
announcement that, except in limited circumstances, it will not require
incumbent carriers to unbundle equipment used for high-speed data services
likely means that the FCC is abandoning this separate affiliate proposal. We
will not know for certain until the full text of the FCC's decision is released.
In a separate proceeding, the FCC recently released an order requiring two large
incumbent carriers, SBC and Ameritech, to provide high-speed data services
through a separate subsidiary as a condition to the FCC's approval of their
merger. Under
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the terms of the order, this condition terminates when the two incumbent
carriers satisfy certain requirements, but no sooner than 42 months after the
merger's closing.
The FCC's rules prohibit incumbent carriers from providing voice or data
services along with customer premises equipment, such as our Residential
Gateway, as a package offering at a single price. The FCC also currently
prohibits certain carriers, including incumbent carriers, from offering enhanced
services. This would include, for example, Internet access services bundled with
local exchange voice services. These bundling restrictions may limit the ability
of incumbent carriers using our equipment to attract customers. The FCC is
considering amending or repealing these bundling restrictions, but there can be
no assurance that rule changes will take place.
Distribution of our Residential Gateway could be adversely affected by the
FCC's "navigation devices" rules. Those rules require video program
distributors, including those who use our system to deliver video, to allow
set-top boxes and other navigation devices owned by customers or manufactured by
third parties to be connected to the video program distributor's system. The
rules require video program distributors to disclose technical details of their
interfaces so as to permit third-parties to manufacture the navigation devices
and retail customers to connect them. We believe these rules are not readily
applicable to our system because our Residential Gateway is in many ways
different from a cable set-top box, and currently there is little likelihood of
an independent market for our Residential Gateway separate from our entire
system. However, if these rules could be applied to our Residential Gateway or
other parts of our system, our customers might be required to disclose
proprietary technical information including patented data about our technology,
to allow competing vendors to access the system.
LITIGATION
In April 1995, DSC Communications and DSC Technologies filed an action
against us and our founders, who are former DSC employees, in the United States
District Court for the Eastern District of Texas alleging breach of contract,
usurpation of corporation opportunity and misappropriation of trade secrets. The
complaint alleged that certain telecommunications technology known as switched
digital video was misappropriated by the defendants. Following a March 1996
trial on the merits, the jury found against the defendants on all three theories
and the court awarded DSC $136.7 million in damages based on future lost
profits. Following several post-trial proceedings and an appeal of a federal
district court's denial of injunctive relief, on February 28, 1997, the United
States Court of Appeals for the Fifth Circuit ruled that DSC was not entitled to
permanent injunctive relief, since the lost profits damage award was based on
the assumption that we developed a competing switched digital video system.
Subsequently, we satisfied the judgment of the Texas litigation, including
interest, by paying DSC $141.0 million in November 1997.
In March 1998, DSC filed an action against Next Level Communications L.P.,
Spencer Trask Investors LLC, General Instrument and Spencer Trask & Co., Inc.,
the parent of the general partner, in the Superior Court of the State of
Delaware in and for New Castle County. In that action, DSC alleged that in
connection with the formation of Next Level Communications L.P. and the transfer
to it of the switched digital video technology, Next Level Communications L.P.
and Spencer Trask Investors LLC misappropriated DSC's trade secrets; that
General Instrument improperly disclosed trade secrets when it conveyed this
technology to the partnership; and that Spencer Trask & Co. conspired to
misappropriate
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DSC's trade secrets. The trade secrets at issue were the same switched digital
video technology trade secrets at issue in the Texas litigation. DSC sought
actual damages for the defendants' purported unjust enrichment, disgorgement of
consideration, exemplary damages and attorney's fees, all in unspecified
amounts. In April 1998, the defendants filed an action in the United States
District Court for the Eastern District of Texas, requesting that the federal
court preliminarily and permanently enjoin DSC from prosecuting the Delaware
action because by pursuing the action, DSC effectively was trying to circumvent
and relitigate the Texas action, in which we had paid $141.0 million. In May
1998, the Texas court granted a preliminary injunction preventing DSC from
proceeding with the Delaware action. That injunction order was appealed to the
United States Court of Appeals for the Fifth Circuit. In June 1999, the Fifth
Circuit affirmed the grant of the preliminary injunction. On July 15, 1999, the
Texas federal court granted the Delaware defendants' motion for summary judgment
and issued its final judgment, permanently enjoining DSC from prosecuting and
continuing the Delaware action.
In May 1998, actions by BroadBand Technologies, Inc. against General
Instrument and by Next Level Communications against BroadBand Technologies,
pending in the United States District Court for the Eastern District of North
Carolina, were dismissed with prejudice. The action brought by BroadBand related
to fiber optic communications systems for delivering television signals and a
patent held by BroadBand. The action brought by Next Level Communications
involved contentions that BroadBand infringed two patents held by Next Level
Communications relating to video compression and signal processing and that
BroadBand had violated antitrust laws. These dismissals were entered pursuant to
a settlement agreement under which, among other things, Next Level
Communications L.P. paid BroadBand Technologies $5.0 million, which was expensed
in 1998, and BroadBand Technologies and Next Level Communications L.P. have
entered into a perpetual cross-license of patents applied for or issued
currently or through May 2003.
EMPLOYEES
As of September 30, 1999, we had a total of 359 full-time employees and 27
full-time contractors. Of the total number of employees, 215 were in research
and development, 18 in marketing, 25 in operations, 50 in sales and sales
support and 51 in administration. Of the total number of contractors, 15 were in
research and development, one in marketing, one in operations, seven in
administration and three in sales and sales support. Our employees are not
represented by any collective bargaining agreement with respect to their
employment, and we have never experienced an organized work stoppage. Our future
success is heavily dependent upon our ability to hire and retain qualified
technical, marketing and management personnel. The competition for personnel is
intense, particularly for engineering personnel.
FACILITIES
We lease approximately 205,000 square feet of administrative, research and
development, engineering and prototype/test facilities in Rohnert Park,
California. We also lease two sales offices, in Braintree, Massachusetts and
Denver, Colorado. In addition, we lease an office for our technology department
in Parsippany, New Jersey. We believe our current facilities will be sufficient
to handle our operations for at least the next 18 months.
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MANAGEMENT
OFFICERS AND DIRECTORS
Our officers and directors, and their ages as of September 30, 1999, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Peter W. Keeler................ 44 Chairman of the Board, Chief Executive Officer
and President
Thomas R. Eames................ 46 Chief Technical Officer
Charles H. Seebock............. 52 Senior Vice President and Chief Operating
Officer
James T. Wandrey............... 44 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
A. Pat Pachynski............... 60 Senior Vice President, Marketing
Frank P. Tuhy.................. 55 Senior Vice President, Technology
T. Murat Uraz.................. 44 Senior Vice President and Chief Engineering
Officer
Hans L. Van Welzen............. 56 Senior Vice President, Sales
William A. Weeks............... 36 Senior Vice President and Chief Strategic
Officer
Richard C. Smith............... 55 Director
</TABLE>
We currently anticipate that the following persons will be elected as
additional directors prior to the effectiveness of this offering:
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C> <C>
Lynn Forester.................. 45
Paul S. Latchford.............. 45
John McCartney................. 47
</TABLE>
Peter Keeler co-founded Next Level and has served as our Chief Executive
Officer from July 1994 to the present and served as our co-President from July
1994 to June 1999. Mr. Keeler was appointed as Chairman of the Board and one of
our directors in August 1999. From 1988 until May 1994, Mr. Keeler served as
Vice President of Business Development for Optilink/DSC, a telecommunications
equipment company. Prior to that, Mr. Keeler held various marketing and
international business positions for the 3M Company. Mr. Keeler holds a BS
degree in Electrical Engineering from Wentworth College of Technology and an MBA
from Northeastern University.
Thomas Eames co-founded Next Level and has served as our Chief Technical
Officer since June 1999 while also serving as our co-President from July 1994 to
June 1999. Prior to that, Mr. Eames was a founder of Optilink Corporation, which
was later acquired by DSC Corporation where he served as Senior Director in
Engineering from 1987 to May 1994. Prior to that Mr. Eames was employed by
Harris Corporation in a variety of technical positions. Mr. Eames holds a BS
degree in Computer Science from Sonoma State University.
Charles Seebock has served as our Senior Vice President and Chief Operating
Officer since June 1999. From June 1998 to June 1999, Mr. Seebock served as our
Vice President and Chief Operating Officer. From January 1996 to June 1998, Mr.
Seebock served as our
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Vice President, Administration and Chief Financial Officer. From January 1989 to
November 1995, Mr. Seebock was the Vice President Finance/MIS of the airbag
business of Morton International. Mr. Seebock holds a BS degree in Business
Management and Accounting from Elmhurst College.
James Wandrey has served as our Senior Vice President, Chief Financial
Officer and Treasurer since June 1999 and as our Secretary since October 1999.
From March 1999 to June 1999, Mr. Wandrey served as our Vice President, Chief
Financial Officer and Treasurer. Mr. Wandrey was Vice President and Corporate
Controller of Avid Technology from April 1997 to December 1998. From January
1995 to April 1997, Mr. Wandrey served as Senior Director and Corporate
Controller of Alcatel Network Systems. Prior to that, Mr. Wandrey spent 11 years
with the Hewlett Packard Company. Mr. Wandrey holds a BS degree in Accounting
from Boston College and an MBA from the University of Chicago.
Pat Pachynski has served as our Senior Vice President of Marketing since
June 1999. From August 1997 to June 1999, Mr. Pachynski served as our Vice
President of Marketing. From May 1997 to August 1997, Mr. Pachynski was our
Senior Programs Manager. Prior to that, Mr. Pachynski was a consultant to the
telecommunications industry from September 1995 to April 1997. From 1989 to
1994, Mr. Pachynski was Vice President of Marketing for Raynet Corporation.
Prior to that Mr. Pachynski held a variety of technical and management positions
with GTE Lenkurt and Rockwell International. Mr. Pachynski holds a BS degree in
Electrical Engineering from Stanford University and a General Management
Certificate from Santa Clara University.
Frank Tuhy has served as our Senior Vice President of Technology since June
1999. From December 1996 to June 1999, Mr. Tuhy served as our Vice President of
Technology-East. From January 1984 to November 1996, Mr. Tuhy was Director of
Access Systems Analysis and Criteria at Bell Communications Research (Bellcore).
Mr. Tuhy holds a BS degree in Electrical Engineering from Rutgers University and
an MS degree in Electrical Engineering from Massachusetts Institute of
Technology.
Murat Uraz has served as our Senior Vice President and Chief Engineering
Officer since June 1999. From January 1995 to June 1999, Mr. Uraz held many
positions in our Engineering Department, including Vice President of
Engineering. Prior to that, from 1993 to January 1995, Mr. Uraz was a Broadband
Engineering Project Manager at Raynet Corporation. Mr. Uraz holds a BS degree in
Electrical Engineering from Technical Institute of Istanbul, Turkey and an MS
degree in Electrical Engineering from Polytechnic Institute of New York.
Hans Van Welzen has served as our Senior Vice President of Sales since
April 1999. Mr. Van Welzen was Senior Vice President of Sales for Siemens
Information and Communications Networks from October 1998 to March 1999. From
December 1993 to September 1998, Mr. Van Welzen was Vice President of Northeast
sales for Siemens Telecom Networks. From 1989 to 1992, Mr. Van Welzen was Vice
President of Operations for Siemens. Prior to that, Mr. Van Welzen spent 22
years with Nortel where he held a wide variety of Sales, Engineering, Operations
and Marketing positions. Mr. Van Welzen holds a BA in Science from the
University of Waterloo in Canada.
William Weeks has served as our Senior Vice President and Chief Strategic
Officer since June 1999. From April 1996 to June 1999, Mr. Weeks served as our
Vice President, Technology-West. From February 1995 to April 1996, Mr. Weeks
served as our Senior Director of Technology. Mr. Weeks was Director of Broadband
Access Technology at U S
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WEST Advanced Technologies from 1992 to February 1995. Prior to that, Mr. Weeks
held various positions with Ameritech Corp, AT&T Bell Laboratories and United
Telecommunications. Mr. Weeks holds a BS degree in Electrical Engineering
Technology from the Missouri Institute of Technology, an MS in
Telecommunications Engineering from the University of Missouri and an MS degree
in Computer Science from North Central College.
Richard Smith has been one of our directors since August 1999 and was a
director of the limited partner of Next Level Communications L.P. since November
1996. Since April 1998, Mr. Smith has been Executive Vice President of General
Instrument. Mr. Smith was Vice President, Business Development of General
Instrument from July 1997 to April 1998. In addition, Mr. Smith was the
Treasurer of General Instrument and its predecessors from September 1991 until
May 1999. Mr. Smith held various positions with General Instrument and its
predecessors since April 1983. Mr. Smith holds a BS in Finance from Boston
College and a JD from Georgetown University Law Center.
Lynn Forester is currently anticipated to become one of our directors prior
to the effectiveness of this offering. Since February 1995, Ms. Forester has
been a director of General Instrument and its predecessors. Ms. Forester has
been President and Chief Executive Officer of FirstMark Holdings, Inc. since
1984 and since June 1998 has served as Co-Chief Executive Officer of FirstMark
Communications International, LLC, a telecommunications company. From 1989 to
December 1994, Ms. Forester was Chairman and Chief Executive Officer of TPI
Communications International, Inc., a radio common carrier and paging company.
Ms. Forester is Vice Chairman of the Corporate Commission on Educational
Technology. Ms. Forester holds a BA in government from Pomona College and a JD
from Columbia Law School.
Paul Latchford is currently anticipated to become one of our directors
prior to the effectiveness of this offering and has served as the President of
the Spencer Trask Media and Communications Group since June 1999. From February
1997 to June 1999, Mr. Latchford has served as Principal Vice President of
Global Business Development for Bechtel Group, Inc. Prior to that, Mr. Latchford
was Vice President of Business Development and Operations for Bell Atlantic
International for the Asia Pacific Region from February 1995 to February 1997
and Executive Director of Business Development from March 1994 to February 1995.
Mr. Latchford holds a BA in public administration and government from Georgetown
University.
John McCartney is currently anticipated to become one of our directors
prior to the effectiveness of this offering. Since October 1998, Mr. McCartney
has served as vice chairman of Datatec, Ltd. From June 1997 to March 1998, Mr.
McCartney was president of the client access business unit of 3Com Corporation,
which merged with U.S. Robotics Corporation in 1997. Mr. McCartney served on the
board of directors of U.S. Robotics Corporation from 1985 through 1997. Mr.
McCartney also served in various executive capacities at U.S. Robotics
Corporation, including as president and chief operating officer. Mr. McCartney
serves on the board of directors of Datatec, A.M. Castle Corp., Quotesmith.com
and Altec Lansing Technologies. Mr. McCartney holds a BA in philosophy from
Davidson College and an MBA from the Wharton School, University of Pennsylvania.
BOARD OF DIRECTORS
We currently have authorized five directors. In accordance with the terms
of our certificate of incorporation, the board of directors will be divided into
three classes, whose
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terms will expire at different times. The Class I director, initially
anticipated to be Mr. McCartney, will stand for re-election at the first annual
meeting of stockholders following this offering. The Class II directors,
initially anticipated to be Ms. Forester and Mr. Latchford, will stand for
re-election at the second annual meeting of stockholders following this
offering, and the Class III directors, initially anticipated to be Messrs.
Keeler and Smith, will stand for re-election at the third annual meeting of
stockholders following this offering. Immediately upon the completion of General
Instrument's pending merger with Motorola, we have agreed to cause the
appointment of additional individuals nominated by General Instrument to our
board of directors. As a result, Motorola would control our board of directors.
BOARD COMMITTEES
We currently anticipate that prior to the effectiveness of the offering,
our board of directors will have a compensation committee and an audit
committee. We anticipate that the compensation committee will consist of Ms.
Forester, Mr. McCartney and Mr. Smith. The compensation committee makes
recommendations regarding our stock option plans and all matters concerning
executive compensation, except that a subcommittee anticipated to consist of Ms.
Forester and Mr. McCartney will make recommendations as to matters subject to
Section 162(m) of the Internal Revenue Code. We anticipate that the audit
committee will consist of Messrs. Latchford and McCartney. The audit committee
approves our independent auditors, reviews the results and scope of annual
audits and other accounting related services, and evaluates our internal
controls.
DIRECTOR COMPENSATION
We pay our non-employee directors who are not employees of General
Instrument or its affiliates a retainer of $20,000 per year. In addition, we pay
them fees of $1,500 for each meeting of the board of directors or a board
committee that they attend. Non-employee directors also receive stock option
grants, as described under "Employee Stock Plans -- 1999 Equity Incentive Plan."
We anticipate that each of Ms. Forester, Mr. Latchford and Mr. McCartney will be
granted an option to purchase 20,000 shares prior to the closing of this
offering under our 1999 Stock Plan.
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EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth compensation
information for fiscal year 1998 paid by Next Level for services by our Chief
Executive Officer and our four other highest-paid executive officers whose total
salary and bonus for fiscal year 1998 exceeded $100,000 and whom we collectively
refer to as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------- ALL OTHER
------------------- SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (1)
- --------------------------- -------- -------- --------------------- ---------------
<S> <C> <C> <C> <C>
Peter W. Keeler........... $250,000 $125,000 -- $5,000
Chairman of the Board,
Chief Executive Officer
and
President
Thomas R. Eames........... 250,000 125,000 -- 5,000
Chief Technical Officer
T. Murat Uraz............. 148,993 79,698 33,334 4,368
Senior Vice President,
Chief Engineering Officer
Charles H. Seebock........ 166,910 50,074 8,334 5,000
Senior Vice President,
Chief Operating Officer
William A. Weeks.......... 146,300 43,890 8,334 4,268
Senior Vice President,
Chief Strategic Officer
</TABLE>
- -------------------------
(1) Represents our matching 401(k) contribution.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the named executive officers in fiscal year 1998. No stock
appreciation rights were granted to these individuals during that year.
Each of the option grants shown in the table was made under the Amended and
Restated 1997 Long-Term Incentive Plan. One-third of these options vests on each
of the first three anniversaries of the date of grant. The options vest in full
if we are subject to a change in control. Absent a change in control, none of
our options is exercisable before the completion of this offering. Once this
offering has been completed, our options will be exercisable in accordance with
their respective vesting schedules. These options may
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<PAGE> 60
terminate before their expiration dates if the optionee's status as an employee
is terminated or upon the optionee's death or disability.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------- ANNUAL RATES
NUMBER OF OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED 1998 (PER SHARE) DATE 5% 10%
---- ---------- --------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler...... -- -- -- -- -- --
Thomas R. Eames...... -- -- -- -- -- --
T. Murat Uraz........ 33,334 18.6% $6.18 9/1/08 $391,341 $745,015
Charles H. Seebock... 8,334 4.7% 6.18 9/1/08 97,841 186,265
William A. Weeks..... 8,334 4.7% 6.18 9/1/08 97,841 186,265
</TABLE>
In fiscal year 1998, we granted options to employees to purchase an
aggregate of 179,080 shares. The exercise price was equal to the fair market
value of our common stock as valued by the board of directors of the limited
partner of Next Level Communications L.P. on the date of grant. In determining
the fair market value of our common stock, the board of directors considered
factors such as our financial condition and business prospects, our operating
results, the absence of a market for our common stock and the risks normally
associated with high-technology companies. The exercise price may be paid in
cash, check, shares of our common stock, through a cashless exercise procedure
involving same-day sale of the purchased shares or any combination of these
methods.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by assuming
that the estimated value on the date of this offering (based on an assumed
initial public offering price of $11.00 per share) appreciates at the indicated
rate for the entire term of the option and that the option is exercised at the
exercise price and the shares sold on the last day of its term at the
appreciated price.
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<PAGE> 61
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options during fiscal year
1998 and the year-end number and value of unexercised options with respect to
each of the named executive officers. No stock appreciation rights were
exercised by the named executive officers in fiscal year 1998 or were
outstanding at the end of that year.
Some of our options were granted in tandem with options to purchase shares
of the common stock of General Instrument. If all or a portion of one of our
options are exercised, all or a portion of the General Instrument options are
canceled, and if all or a portion of the General Instrument options are
exercised, all or a portion of our options are canceled. The number of
unexercised options set forth in the table does not include options to purchase
shares of General Instrument common stock.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler...... -- -- -- 1,750,000 -- $15,435,000
Thomas R. Eames...... -- -- -- 1,559,214 -- 13,752,267
T. Murat Uraz........ -- -- -- 176,667 -- 1,341,508
Charles H. Seebock... -- -- -- 116,667 -- 955,258
William A. Weeks..... -- -- -- 105,000 -- 855,505
</TABLE>
The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value for our
common stock of $9.66 per share as of December 31, 1998. The fair market value
of our common stock was determined by the board of directors of the limited
partner of Next Level Communications L.P. based on a number of factors, such as
our financial condition and business prospects, our operating results, the
absence of a market for our common stock and the risks normally associated with
high-technology companies. The initial public offering price is higher than the
estimated fair market value at fiscal year-end, and the value of unexercised
options would be higher than the numbers shown in the table if the value were
calculated by subtracting the exercise price from the initial public offering
price.
EMPLOYEE STOCK PLANS
1999 STOCK PLAN
Our board of directors adopted our 1999 Stock Plan effective October 1,
1999. Our stockholder also approved this plan. We have reserved 6,000,000 shares
of our common stock for grants under the 1999 Stock Plan. If options or shares
awarded under the 1999 Stock Plan are forfeited, then those options or shares
will become available for new awards. Before this offering is completed, we
expect to grant options covering 5,354,844 shares of our common stock under the
1999 Stock Plan. These options will have an exercise price equal to $11.00 per
share, and they will become exercisable with respect to 25% of the shares after
12 months of service and the remaining 75% of the shares in equal monthly
installments over the next 36 months of service. We will make no awards under
the 1999 Stock Plan after this offering.
Our board of directors administers the 1999 Stock Plan. The board has
complete discretion to make all decisions relating to the interpretation and
operation of our 1999
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<PAGE> 62
Stock Plan. Participants in the plan may include employees, consultants and
members of the board of directors who are not employees. The board may grant
options to purchase shares of our common stock, or it may grant restricted
shares of our common stock. Options may be incentive stock options, which may
qualify for favorable tax treatment and which have a minimum exercise price
equal to 100% of the fair market value of the underlying stock on the date of
grant. Options may also be nonstatutory stock options, which cannot qualify for
favorable tax treatment and which have a minimum exercise price equal to 85% of
the fair market value of the underlying stock on the date of grant. Options
expire not later than 10 years after the date of grant, and they expire earlier
if the optionee's service ends earlier.
Our board of directors may amend or terminate the 1999 Stock Plan at any
time. If our board amends the plan, stockholder approval must be obtained only
to the extent required by applicable law.
1999 EQUITY INCENTIVE PLAN
Our board of directors adopted our 1999 Equity Incentive Plan on October
10, 1999. Our stockholder also approved this plan. We have reserved 4,000,000
shares of our common stock for issuance under the 1999 Equity Incentive Plan. In
addition, any shares reserved under the 1999 Stock Plan for options not granted
at the time of this offering will become available for grants under the 1999
Equity Incentive Plan. In general, if options or shares awarded under the 1999
Stock Plan or the 1999 Equity Incentive Plan are forfeited, then those options
or shares will again become available for awards under the 1999 Equity Incentive
Plan. We have not yet granted any options under the 1999 Equity Incentive Plan,
and none will be granted until after this offering.
The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has the complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Equity
Incentive Plan. The committee has the discretion to determine who will receive
an award, what type of award it will be, how many shares will be covered by the
award, what the vesting requirements will be, if any, and what the other
features and conditions of each award will be. The compensation committee may
also reprice outstanding options and modify outstanding awards in other ways.
The following groups of individuals are eligible to participate in the 1999
Equity Incentive Plan:
- employees;
- members of our board of directors, other than board members who are our
employees or board members who are employees of General Instrument or its
affiliates; and
- consultants.
The 1999 Equity Incentive Plan provides for the following types of awards:
- options to purchase shares of our common stock;
- stock appreciation rights;
- restricted shares of our common stock; and
- stock units (sometimes called phantom shares).
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<PAGE> 63
Options may be incentive stock options or nonstatutory stock options. An
optionee who exercises an incentive stock option may qualify for favorable tax
treatment under Section 422 of the Internal Revenue Code of 1986. On the other
hand, nonstatutory stock options do not qualify for this favorable tax
treatment. The exercise price for all options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of our common
stock on the option grant date. Optionees may pay the exercise price by using:
- cash;
- shares of common stock that the optionee already owns;
- an immediate sale of the option shares through a broker designated by us;
or
- a loan from a broker designated by us, secured by the option shares.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options will vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier.
The 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 2,000,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 3,000,000 shares in the first year of
employment.
Restricted shares may be awarded under the 1999 Equity Incentive Plan in
return for:
- cash;
- a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- services already provided to us; and
- in the case of treasury shares only, services to be provided to us in the
future.
Restricted shares and stock units vest at the time or times determined by
the compensation committee.
Our compensation committee may determine that an option or other award
under the 1999 Equity Incentive Plan will become fully or partially vested if we
are subject to a change in control or if a participant's employment is
terminated after a change in control. A change in control includes the
following, except that in no case does a change in control include the sale of
our stock by General Instrument or General Instrument's pending merger with
Motorola or any other change in control of General Instrument:
- a merger after which our own stockholders own 50% or less of the
surviving corporation or our parent company;
- a sale of all or substantially all of our assets;
- a proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- an acquisition of 50% or more of our outstanding stock by any person or
group, other than General Instrument or a person related to us, such as a
holding company owned by our stockholders.
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<PAGE> 64
The non-employee members of our board of directors, with the exception of
non-employee directors who are employees of General Instrument or its
affiliates, will be eligible for automatic option grants under the 1999 Equity
Incentive Plan. Each non-employee director who first joins our board after the
completion of this offering will receive an initial option for 20,000 shares of
our common stock. That grant will occur when the director takes office. The
initial option will vest over the four-year period following the date of grant.
At the time of each of our annual stockholders' meetings, beginning in
2000, each non-employee director, with the exception of non-employee directors
who are employees of General Instrument or its affiliates, who will continue to
be a director after that meeting will automatically be granted an annual option
for 5,000 shares of our common stock. However, a new non-employee director who
is receiving the 20,000-share initial option will not receive the 5,000-share
annual option in the same year. The annual options will vest one year after the
date of grant. If a change in control occurs, or if a non-employee director
leaves our board because of retirement after age 65, total disability or death,
then the non-employee director's options granted under the 1999 Equity Incentive
Plan will become fully vested.
The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. A director
may pay the exercise price by using cash, shares of common stock that the
director already owns, or an immediate sale of the option shares through a
broker designated by us. The non-employee directors' options have a 10-year
term, except that they expire one year after a director leaves the board (if
earlier).
Our board may amend or terminate the 1999 Equity Incentive Plan at any
time. If our board amends the plan, it does not need to ask for stockholder
approval of the amendment unless applicable law requires it. The 1999 Equity
Incentive Plan will continue in effect indefinitely, unless the board decides to
terminate the plan earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
October 10, 1999. Our stockholder also approved this plan. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. We have reserved 1,000,000 shares of our common stock for issuance
under the plan. On November 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically be increased by 1,000,000
shares, 1% of the shares then outstanding or the number determined by our board
of directors, whichever is lowest. The plan will be administered by the
compensation committee of our board of directors.
All of our employees are eligible to participate. Eligible employees may
begin participating in the 1999 Employee Stock Purchase Plan at the start of any
offering period. Each offering period lasts 24 months. Overlapping offering
periods start on May 1 and November 1 of each year. However, the first offering
period will start on the effective date of this offering and end on October 31,
2001.
Our 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 20% of the employee's cash compensation. Purchases of
our common stock will occur on April 30 and October 31 of each year. Each
participant may purchase up to
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<PAGE> 65
1,500 shares on any purchase date. But the value of the shares purchased in any
calendar year (measured as of the beginning of the offering period) may not
exceed $25,000.
The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
- the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- the fair market value per share of common stock on the purchase date;
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- the price per share to the public in this offering; or
- the fair market value per share of common stock on the purchase date.
Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us. If a change in control occurs, our 1999 Employee Stock
Purchase Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees, unless the plan is assumed by
the surviving corporation or its parent. Our board of directors may amend or
terminate the 1999 Employee Stock Purchase Plan at any time. If our board
increases the number of shares of common stock reserved for issuance under the
plan (except for the automatic increases described above), it must seek the
approval of our stockholders.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Currently, Next Level Communications, a subsidiary of General Instrument,
is the limited partner and Spencer Trask is the general partner of Next Level
Communications L.P., with the General Instrument subsidiary holding a 90.4%
limited partnership interest and Spencer Trask holding a 9.6% general
partnership interest. General Instrument also holds a $75.0 million principal
amount promissory note of Next Level Communications L.P., which, together with
accrued interest thereon, is convertible into shares of common stock of the
successor corporation to the partnership. Affiliates of Spencer Trask also have
an option to acquire additional shares of that successor corporation.
Immediately prior to the completion of this offering, General Instrument
will contribute the $75 million note and accrued interest thereon to us, and
Next Level Communications L.P. and the General Instrument subsidiary will be
merged into us. As a result, General Instrument will receive an estimated
71,179,727 shares of common stock and Spencer Trask will receive 5,863,329
shares of common stock. After giving effect to this offering, these shares will
represent approximately 90.1% of the outstanding common stock. Also pursuant to
this merger, the option held by Spencer Trask affiliates will become warrants to
acquire from us 8,480,102 shares of common stock at an exercise price of $10.38
per share. The warrants become exercisable upon completion of this offering and
expire on January 13, 2003. In lieu of paying the exercise price in cash, the
holders may elect to receive, upon the exercise of a warrant, the number of
shares subject to the warrant multiplied by a fraction, the numerator of which
is the market price per share less the exercise price and the denominator of
which is the market price per share.
Prior to this offering, General Instrument will enter into a voting trust
agreement, which is described below, to limit its voting power to 49% of the
voting power of all outstanding common stock and to limit the number of its
designees to the board of directors to one less than a majority. Notwithstanding
the voting trust agreement, as a result of its 49% voting power and board
representation, General Instrument will be able to exercise significant
influence over the business and affairs of Next Level, including dividend
policy, borrowings and access to capital, acquisition or disposition of assets,
mergers and other business combinations and change of control transactions.
On September 14, 1999, General Instrument entered into an agreement and
plan of merger with Motorola. Immediately upon the completion of this pending
merger, General Instrument intends to terminate the voting trust agreement and
appoint a number of additional individuals to our board of directors sufficient
to exercise control of us. Accordingly, upon the completion of this pending
merger, Motorola will be able to exercise a majority of our total voting power
and will have the ability to control our board of directors and all matters
relating to our business and affairs. We do not know whether Motorola's plans
for our business and affairs will be different than our existing plans and
whether any changes that may be implemented under Motorola's control will be
beneficial or detrimental to our other stockholders.
General Instrument and Spencer Trask have advised us that they currently
intend to hold all of their shares. However, they are not subject to any
contractual obligation to retain any of their shares, except that they have
agreed not to sell or otherwise dispose of any shares for 180 days after the
date of this prospectus without the prior written consent of Credit Suisse First
Boston Corporation. As a result, we cannot assure you as to how long General
Instrument or Spencer Trask will maintain their beneficial ownership of common
stock after this offering.
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It is possible that General Instrument or Motorola could be in a position
involving a conflict of interest with us. In addition, individuals who are
officers or directors of both our principal stockholder and us may have
fiduciary duties to both our principal stockholder and us. For example, a
conflict may arise if our principal stockholder were to engage in activities or
pursue corporate opportunities that may overlap with our business. Our
certificate of incorporation contains provisions intended to protect our
principal stockholder and these individuals in these situations. See
"Description of Capital Stock -- Other Certificate of Incorporation and By-law
Provisions -- Corporate Opportunities."
General Instrument leases one of the buildings at our Rohnert Park offices
from a Delaware realty trust set up specifically to permit the purchase and
lease of the facility. To purchase the land and construct the facility, this
trust obtained loans from several lenders which are guaranteed by General
Instrument. We intend to sublease the facility from General Instrument
immediately prior to the completion of this offering and will remain a
sublessee. General Instrument will remain lessee of the facility and guarantor
of the loans. We have the right to purchase the property by refinancing the
outstanding indebtedness. If we do so, General Instrument would be released from
the obligations under the loans. Under the terms of our proposed sublease with
General Instrument, until December 31, 1999, we will pay directly to the trust
all monthly payments owed by General Instrument on the facility. If we have not
refinanced the loans by that date, we will pay to General Instrument a fair
market rent of not less than the amount payable by General Instrument under its
lease. In addition, we also have the option to purchase the building from
General Instrument following December 31, 1999 at fair market value.
As a condition of our contract with Bell Atlantic, we are required to
maintain up to a $75 million performance bond or irrevocable letter of credit.
This obligation, currently $25 million, is guaranteed by General Instrument. We
are negotiating to replace this guarantee with a facility of our own.
Set forth below are descriptions of agreements which will be entered into
between us and our principal stockholders in connection with this offering.
CORPORATE AND INTERCOMPANY AGREEMENT
Before this offering is completed, we will enter into a corporate and
intercompany agreement with General Instrument under which we will grant to
General Instrument and its affiliates a continuing option to purchase additional
shares of common stock or shares of non-voting capital stock. If we issue any
additional equity securities after this offering, General Instrument and its
affiliates may exercise this option to purchase:
- shares of common stock to the extent necessary for them to maintain their
then-existing percentage of the total voting power; and
- shares of nonvoting capital stock to the extent necessary to own 80% of
any class of non-voting capital stock which may be outstanding.
The purchase price of the shares of common stock will be the market price of the
common stock. The purchase price of non-voting capital stock will be the price
at which third parties may purchase this stock. The stock option expires if
General Instrument and its affiliates beneficially own less than 30% of the
outstanding common stock.
Under this agreement, we have agreed to obtain a release of General
Instrument from its Bell Atlantic guaranty as promptly as practicable and in any
event not later than December 31, 1999.
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This agreement will also provide that, for as long as General Instrument
and its affiliates beneficially own a majority of the outstanding common stock,
we may not take any action which may be reasonably anticipated to result in a
violation by them of:
- any law or regulation, including the Internal Revenue Code or the
Employee Retirement Income Security Act;
- their certificates of incorporation or by-laws;
- any credit agreement or other material instrument binding upon them or
any of their assets; or
- any judgment, order or decree of any governmental authority having
jurisdiction over them or any of their assets.
This agreement will also provide that the parties will provide reasonable
cooperation with respect to their tax filings and any tax audits. Under this
agreement, we will also indemnify General Instrument and its affiliates against
any lawsuits or other claims arising out of any of our or our predecessors'
activities or omissions before and after this offering.
This agreement will also provide that, immediately upon the termination of
the voting trust agreement, we and our board of directors will take all actions
necessary to appoint on the date of termination any number of additional
directors nominated by General Instrument.
This agreement will also provide that we will enter into a similar
agreement for the benefit of any Majority Transferee, as defined under
"Description of Capital Stock."
CROSS LICENSE AGREEMENT
Before this offering is completed, we will enter into a cross license
agreement with General Instrument. Under this agreement, General Instrument will
grant to us a nonexclusive, perpetual, royalty free, worldwide license under all
patent applications and patents owned by General Instrument and filed prior to
this offering and any future patents issued from these General Instrument
patents and patent applications, to make our NLevel(3) product or related
switched digital video network equipment and software. This grant will not
include patent claims covering the implementations, methods or devices primarily
used or to be used by General Instrument. Also under this agreement, we will
grant to General Instrument and its affiliates, including Motorola upon
completion of General Instrument's pending merger with Motorola, a nonexclusive,
perpetual, royalty free, worldwide license under all patent applications and
patents owned by us and filed prior to this offering and any future patents
issued from these patents and patent applications to make digital cable
subscriber terminals, satellite and wireless subscriber terminals, cable modems,
HFC telephony and related headend, uplink, transmission or other network
equipment and software. This grant will not include patent claims covering the
implementations, methods or devices primarily used or to be used by us. We and
General Instrument will each also license to the other the right to use
confidential, technical and other information in each other's possession as of
the completion of this offering. These licenses do not include the right to
sublicense to any third parties. This agreement will permit General Instrument
and us to transfer their or our licenses pursuant to a sale of their or our
respective entire business, a sale of an entire business unit that benefits from
the license or to any of General Instrument's or our respective affiliates.
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REGISTRATION RIGHTS AGREEMENT
Before this offering is completed, we will enter into a registration rights
agreement with General Instrument and Spencer Trask. Under this agreement, we
will grant to these stockholders and their affiliates the right to request that
we use our best efforts to register their shares of common stock under federal
and state securities laws so that they may sell or dispose of their shares in
accordance with these laws. So long as General Instrument and its affiliates own
30% of our outstanding common stock, they will not be limited in the number of
times they may make that request. After their ownership declines below that
level, they will be able to cause us to effect up to four registrations of their
shares. Spencer Trask and its affiliates will be able to cause us to effect up
to three registrations of their shares. Under customary "piggy-back"
registration rights, General Instrument, Spencer Trask and their affiliates will
also be entitled to include their shares in all registrations of common stock we
make, either for a sale by us or any of our stockholders, subject to customary
exceptions. We will pay for all out-of-pocket expenses relating to these
registrations and indemnify General Instrument, Spencer Trask and their
affiliates against liabilities under securities laws. General Instrument,
Spencer Trask and their affiliates may generally assign these registration
rights to transferees of their shares. This agreement will also provide that we
will enter into a similar agreement for the benefit of any Majority Transferee.
VOTING TRUST AGREEMENT
Before this offering is completed, we and General Instrument will enter
into a voting trust agreement, which General Instrument intends to terminate
immediately upon the completion of its pending merger with Motorola. Chase
Mellon Shareholder Services LLC will also be a party to this agreement in its
capacity as voting trustee. All of the shares of common stock to be received by
General Instrument pursuant to the recapitalization will be held in the voting
trust created by this agreement. General Instrument may, but is not obligated
to, deposit in the voting trust additional shares from time to time. Through
this agreement, General Instrument intends to limit the voting power of the
shares held in the voting trust to 49% of the total voting power represented by
all outstanding shares of our common stock or a lower percentage as General
Instrument may elect from time to time by giving notice to the voting trustee
and us. We refer to this percentage as the "threshold percentage."
With respect to the voting trust shares representing up to the threshold
percentage of the total voting power of all outstanding shares of common stock,
the voting trustee will:
- vote or consent in writing in favor of any individuals designated by
General Instrument for election as director so long as the number of
individuals designated by General Instrument and elected to our board of
directors would not exceed one less than a majority;
- vote "for" or "against" or abstain from voting on any other matter
validly presented at a stockholder meeting or consent in writing as
directed by General Instrument; and
- cause to be present at any stockholder meeting for purposes of
determining a quorum a number of those voting trust shares as directed by
General Instrument, which will not be less than the number of shares
directed by General Instrument to be voted at that meeting.
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With respect to all other voting trust shares, the voting trustee will:
- vote or consent in writing in favor of any individual for election as
director in the same proportion as all shares of common stock other than
the voting trust shares are voted or consented to in writing in favor of
that individual;
- vote "for" or "against" or abstain from voting on any other matter
validly presented at a stockholder meeting or consent in writing in the
same proportion as all shares of common stock other than the voting trust
shares are voted "for" or "against" or abstain from voting or consented
to in writing on that matter; and
- cause to be present at any stockholder meeting for purposes of
determining a quorum a number of those voting trust shares which is in
proportion to the number of shares of common stock other than voting
trust shares which are present at that meeting in relation to the number
of outstanding shares of common stock other than the voting trust shares.
Except as described above, the voting trustee will not exercise any right
or power with respect to the voting trust shares but will instead act solely as
directed by General Instrument. For example, General Instrument may:
- direct the voting trustee to tender voting trust shares in connection
with any tender, exchange or other offer and to distribute the
consideration received for those shares free of the voting trust;
- sell, assign or otherwise transfer voting trust shares to any person and
cause certificates for those shares to be delivered, free of the voting
trust except in the case of a transfer to its subsidiary, to it or to its
order for that purpose;
- distribute voting trust shares to its stockholders in a tax-free spin-off
or otherwise and cause certificates for those shares to be delivered free
of the voting trust to it for that purpose; or
- dissent from any corporate action or perfect any dissenters' rights.
The voting trustee will deliver to General Instrument all dividends, other
than dividends in additional shares of common stock, paid on the voting trust
shares.
This agreement and the voting trust will terminate on the tenth anniversary
of the closing date and will be irrevocable, except that this agreement and the
voting trust may be terminated by General Instrument if:
- the voting power represented by the voting trust shares is not more than
the threshold percentage of the total voting power of all outstanding
shares of common stock;
- it beneficially owns 85% or more of all outstanding shares of common
stock;
- any person acquires more than 75% of the outstanding shares of common
stock other than the voting trust shares; or
- any person acquires more than 50% of the outstanding shares of common
stock of General Instrument, including pursuant to its pending merger
with Motorola.
Notwithstanding the foregoing, General Instrument may assign this agreement
to any transferee of voting trust shares, in which case the voting trust will
continue to remain in effect.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 30, 1999, giving effect to
our recapitalization, and as adjusted to reflect the sale of the shares of
common stock in this offering, certain information with respect to the
beneficial ownership of common stock as to:
- each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of the named executive officers;
- each of our current and anticipated directors; and
- all of our current and anticipated directors and executive officers as a
group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with respect
to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 77,043,056 shares
of common stock outstanding as of September 30, 1999 and 85,543,056 shares of
common stock outstanding immediately following the completion of this offering.
Beneficial ownership is determined in accordance with the rules of the SEC.
Shares of common stock subject to options that are presently exercisable or
exercisable within 60 days of September 30, 1999 are deemed outstanding for the
purpose of computing the percentage ownership of the person or entity holding
the options, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
General Instrument Corporation....... 71,179,727 92.4% 83.2%
101 Tournament Drive
Horsham, PA 19044
Spencer Trask Investors LLC(1)....... 14,343,431 16.8 15.3
535 Madison Avenue, 18th Floor
New York, NY 10022
Peter W. Keeler(2)................... 1,526,875 1.9 1.8
Richard C. Smith(3).................. 71,179,727 92.4 83.2
Lynn Forester(4)..................... 71,179,727 92.4 83.2
Paul S. Latchford.................... -- * *
John McCartney....................... -- * *
Thomas R. Eames(5)................... 1,336,088 1.7 1.5
Charles H. Seebock(6)................ 97,223 * *
T. Murat Uraz........................ 128,889 * *
William A. Weeks(7).................. 90,890 * *
All directors and officers as a
group
(13 persons)(8).................... 74,359,692 92.7% 83.8%
</TABLE>
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- -------------------------
* Less than 1%.
(1) Includes 8,480,102 shares of common stock subject to warrants held by
affiliates. Such warrant becomes exercisable upon closing of this offering.
Spencer Trask Investors LLC is beneficially owned by entities controlled by,
or affiliated with, Kevin Kimberlin and Spencer Segura.
(2) Includes 1,526,875 options exercisable within 60 days.
(3) All 71,179,727 shares are held by General Instrument. Mr. Smith disclaims
beneficial ownership of such shares.
(4) All 71,179,727 shares are held by General Instrument. Ms. Forester disclaims
beneficial ownership of such shares.
(5) Includes 1,336,088 options exercisable within 60 days. Such options become
exercisable upon the closing of this offering.
(6) Includes 97,223 options exercisable within 60 days. Such options become
exercisable upon the closing of this offering.
(7) Includes 90,890 options exercisable within 60 days. Such options become
exercisable upon the closing of this offering. Also includes 7,389 options
held by Brenda Weeks, Mr. Weeks' wife. Mr. Weeks disclaims beneficial
ownership of such options.
(8) Includes 11,660,067 options exercisable within 60 days. Such options become
exercisable upon the closing of this offering.
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DESCRIPTION OF CAPITAL STOCK
We have summarized below the material terms of our capital stock. We
encourage you to read our certificate of incorporation and by-laws, which we
have filed as exhibits to the registration statement of which this prospectus is
a part.
AUTHORIZED SHARES
Our authorized capital stock will consist of:
- 200,000,000 shares of common stock;
- 70,000,000 shares of Class B non-voting common stock; and
- 10,000,000 shares of preferred stock.
Of the 200,000,000 authorized shares of common stock, on the closing date,
- 8,500,000 shares will be offered in this offering;
- 71,179,727 shares will be beneficially owned by General Instrument and
held in the voting trust in connection with our recapitalization;
- 5,863,329 shares will be issued to Spencer Trask in our
recapitalization;
- 8,480,102 shares will be reserved for issuance pursuant to outstanding
warrants held by affiliates of Spencer Trask; and
- 17,964,904 shares will be reserved for issuance pursuant to our
employee benefit plans, of which options to purchase 12,319,748 shares
will be outstanding upon completion of this offering.
No shares of Class B non-voting common stock will be issued or outstanding
at any time following the completion of this offering. No shares of preferred
stock will be outstanding immediately following the completion of the offering.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. Holders of common stock are not entitled
to cumulate their votes in the election of directors. Election of directors will
be decided by a plurality of the votes cast. Generally, all other matters to be
voted on by stockholders must be approved by the holders of a majority of the
votes entitled to be cast by all shares of common stock present in person or
represented by proxy, subject to any voting rights granted to holders of any
preferred stock.
Holders of common stock are entitled to dividends, when, as and if,
declared by the board of directors, subject to any preferential rights of any
outstanding preferred stock. If we liquidate, dissolve or wind-up, after payment
in full of the amounts required to be paid to holders of any preferred stock,
holders of common stock are entitled to share ratably in any assets available
for distribution. Shares of common stock are not subject to redemption. Holders
do not have preemptive rights to purchase additional shares of common stock,
although General Instrument and its affiliates have a right to purchase
additional shares under our corporate and intercompany agreement to the extent
necessary to maintain their ownership percentage upon future equity issuances by
us,. See "Certain
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Relationships and Related Transactions -- Corporate and Intercompany Agreement."
Upon consummation of this offering, all the outstanding shares of common stock
will be legally issued, fully paid and nonassessable.
PREFERRED STOCK
The preferred stock is issuable from time to time in one or more series and
with the designations and preferences for each series as will be stated in the
resolutions providing for the designation and issue of each series adopted by
our board of directors. Our board of directors is authorized by our certificate
of incorporation to determine, among other things, the voting, dividend,
redemption, conversion and liquidation powers, rights and preferences and the
limitations thereon pertaining to each series of preferred stock. Our board of
directors, without stockholder approval, may issue preferred stock with voting
and other rights that could adversely affect the voting power of the holders of
the common stock and that could have anti-takeover effects. We have no present
plans to issue any shares of preferred stock. The ability of our board of
directors to issue preferred stock without stockholder approval could have the
effect of delaying, deferring or preventing a change in control or the removal
of existing management.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS THAT MAY HAVE AN ANTITAKEOVER
EFFECT
The provisions of our certificate of incorporation and by-laws summarized
below may have an anti-takeover effect and may delay, deter, or prevent a tender
offer or takeover attempt that a stockholder might consider to be in its best
interest, including offers or attempts that might result in a premium being paid
over the market price for its shares.
Board of Directors
Our certificate of incorporation provides that our board of directors will
be divided into three classes of directors, with the classes to be as nearly
equal in number as possible. One class will be originally elected for a term
expiring at the annual meeting of stockholders to be held in 2000, another will
be originally elected for a term expiring at the annual meeting of stockholders
to be held in 2001 and another will be originally elected for a term expiring at
the annual meeting of stockholders to be held in 2002. Each director will hold
office until his or her successor is duly elected and qualified. Commencing with
the 2000 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term expiring at the third
succeeding annual meeting of stockholders after their election, with each
director to hold office until this person's successor is duly elected and
qualified.
Upon completion of this offering, we expect our board of directors to
consist of five members. Our certificate of incorporation provides that the
number of directors will be fixed from time to time exclusively by resolution
adopted by the affirmative vote of a majority of the entire board of directors,
but will consist of not more than twelve nor less than three directors. In
addition, our certificate of incorporation provides that any vacancies will be
filled by the affirmative vote of a majority of the remaining directors, even if
less than a quorum, or by a sole remaining director, unless the vacancy was
caused by the action of stockholders in which event the vacancy will be filled
by the stockholders and not the directors.
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Under our certificate of incorporation, directors may be removed, with or
without cause, by the affirmative vote of shares representing a majority of the
votes entitled to be cast by the then outstanding shares of common stock.
However, after the first date that General Instrument or a "Majority
Transferee," together with their respective affiliates, ceases to beneficially
own at least 49% of the outstanding shares of common stock, directors may not be
removed without cause. "Majority Transferee" is any transferee or group of
related transferees of General Instrument which is unaffiliated with General
Instrument of more than a majority of the outstanding shares of common stock in
a single transaction or a group of related transactions.
Our by-laws provide that General Instrument or the Majority Transferee, as
applicable, together with their respective affiliates, shall have the right to
designate at least one member of any committee of our board of directors so long
as it owns beneficially at least 10% of the outstanding shares of common stock.
Special Meetings of Stockholders; Actions by Written Consent of
Stockholders
Under our certificate of incorporation, special meetings of stockholders
may be called by certain specified officers or by any officer at the request in
writing of a majority of the board of directors. In addition, but only prior to
the first date that General Instrument or the Majority Transferee, together with
their respective affiliates, ceases to beneficially own at least 49% of the
outstanding shares of common stock, special meetings may also be called by the
holders of shares representing a majority of the total voting power of all
outstanding shares of common stock. In addition, our certificate of
incorporation will provide that any action required or permitted to be taken by
stockholders may be effected by written consent without a meeting only prior to
that date.
Business Combinations with Interested Stockholders
We will not be subject to the business combination provisions of Section
203 of the Delaware General Corporation Law, but our certificate of
incorporation will contain provisions substantially similar to Section 203. In
general, these provisions will prohibit us from engaging in various business
combination transactions with any interested stockholder for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
- the business combination transaction, or the transaction in which the
interested stockholder became an interested stockholder, is approved by
our board of directors prior to the date the interested stockholder
obtained this status,
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our common stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by:
- persons who are directors and also officers; and
- employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
- on or subsequent to this date the business combination is approved by our
board of directors and authorized at an annual or special meeting of
stockholders by the
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affirmative vote of at least 66 2/3% of our outstanding common stock
which is not owned by the interested stockholder.
Under our certificate of incorporation, a business combination is defined
to include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an interested stockholder is a person who,
together with affiliates and associates, owns or, within three years, did own,
15% or more of our common stock. General Instrument and its affiliates,
including Motorola upon the completion of General Instrument's pending merger
with Motorola, and the Majority Transferee and its affiliates will be exempt
from these provisions.
Advance Notice Procedures
Our by-laws provide for an advance notice procedure for the nomination,
other than by or at the direction of our board of directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, a written notice of
intent to nominate a director or raise matters at the meetings will have to be
received by us not less than 60 nor more than 90 days prior to the anniversary
of the previous year's annual meeting of stockholders. This notice must contain
information concerning the person to be nominated or the matters to be brought
before the meeting and information concerning the stockholder submitting the
proposal. So long as General Instrument or the Majority Transferee, together
with their respective affiliates, owns beneficially at least 10% of the
outstanding shares of common stock, General Instrument or the Majority
Transferee, as applicable, will be exempt from these advance notice procedures.
Amendment
Our certificate of incorporation also provides that, after the first date
that General Instrument or the Majority Transferee, together with their
respective affiliates, ceases to beneficially own at least 49% of the
outstanding shares of common stock, the affirmative vote of the holders of at
least 80% of the outstanding shares of common stock is required to amend the
provisions of our certificate of incorporation described above under "-- Board
of Directors," "-- Special Meetings of Stockholders; Actions by Written Consent
of Stockholders" or "-- Business Combinations with Interested Stockholders."
Under our certificate of incorporation and by-laws, our by-laws may only be
amended:
- at any time by the affirmative vote of directors constituting not less
than a majority of the entire board of directors;
- prior to the first date that General Instrument or the Majority
Transferee, together with their respective affiliates, ceases to
beneficially own at least 49% of the outstanding shares of common stock,
by the affirmative vote of the holders of a majority of the outstanding
shares of common stock; or
- after that date, by the affirmative vote of the holders of at least 80%
of the outstanding shares of common stock.
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OTHER CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
Corporate Opportunities
Our certificate of incorporation provides that General Instrument will have
no duty to refrain from engaging in the same or similar activities or lines of
business as us, and neither General Instrument nor any of its officers or
directors, except as provided below, will be liable to us or our stockholders
for breach of any fiduciary duty solely by reason of any of these activities. If
General Instrument acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for both General Instrument and us, General
Instrument will have no duty to communicate or offer this corporate opportunity
to us. In addition, General Instrument will not be liable to us or our
stockholders for breach of any fiduciary duty as a stockholder solely by reason
of the fact that General Instrument pursues or acquires this corporate
opportunity for itself, directs this corporate opportunity to another person, or
does not communicate information regarding this corporate opportunity to us.
If a director or officer of us who is also a director or officer of General
Instrument acquires knowledge of a potential transaction or matter which may be
a corporate opportunity for both us and General Instrument, this individual will
have fully satisfied and fulfilled his or her fiduciary duty to us and our
stockholders with respect to this corporate opportunity if he or she acts in a
manner consistent with the following policy:
- The corporate opportunity will belong to us if this opportunity is
expressly offered to the person in writing solely in his or her capacity
as our director or officer.
- Otherwise, this opportunity will belong to General Instrument.
These provisions will expire on the date that General Instrument and its
affiliates cease to own beneficially at least 20% of the outstanding shares of
common stock and no person who is a director or officer of us is also a director
or officer of General Instrument.
In addition to any vote of the stockholders required by our certificate of
incorporation, until the time that General Instrument and its affiliates cease
to own beneficially at least 20% of the outstanding shares of common stock, the
affirmative vote of the holders of more than 80% of the outstanding shares of
common stock will be required to alter, amend or repeal, or adopt any provision
inconsistent with, the corporate opportunity provisions described above.
Accordingly, so long as General Instrument and its affiliates beneficially own
at least 20% of the outstanding shares of common stock, it can prevent any such
alteration, amendment, repeal or adoption.
Upon the completion of General Instrument's pending merger with Motorola,
Motorola will also be entitled to the protections of the foregoing provisions to
the same extent as General Instrument.
Any person purchasing or otherwise acquiring common stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of our
certificate of incorporation.
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Limitations on Directors' Liability
Our certificate of incorporation provides that no director will be liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- in respect of certain unlawful dividend payments or stock redemptions or
repurchases; or
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and our
stockholders' rights, through stockholders' derivative suits on our behalf, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services LLC.
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UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following discussion is a summary of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock to Non-United States holders. This discussion does not deal with
all aspects of United States income and estate taxation and does not deal with
foreign, state and local tax consequences that may be relevant to Non-United
States holders in light of their personal circumstances. Furthermore, this
discussion is based on the Internal Revenue Code of 1986, as amended, Treasury
Department regulations, published positions of the Internal Revenue Service and
court decisions now in effect, all of which are subject to change. YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR WITH REGARD TO THE APPLICATION OF THE FEDERAL
INCOME TAX LAWS, AS WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS TO WHICH YOU MAY BE SUBJECT.
As used in this section, a "United States holder" means a beneficial owner
of stock that is:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source;
- a trust that:
- is subject to the supervision of a court within the United States and
the control of one or more United States persons; or
- has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
A "Non-United States holder" is a holder that is not a United States
holder.
DIVIDENDS
Generally, any dividend paid to a Non-United States holder will be subject
to United States withholding tax either at a rate of 30% of the gross amount of
the dividend or at a lesser applicable treaty rate. However, dividends that are
effectively connected with the conduct of a trade or business within the United
States and, where a tax treaty applies, that are attributable to a United States
permanent establishment are not subject to the withholding tax but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates.
Certain certification and disclosure requirements must be complied with in
order to be exempt from withholding under the effectively connected income
exemption. Any effectively connected dividends received by a foreign corporation
may, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or a lower rate as may be specified by an applicable income
tax treaty.
Until January 1, 2001, dividends paid to an address outside the United
States are presumed to be paid to a resident of that country, unless the payer
has knowledge to the
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contrary, for purposes of the withholding tax discussed above and, under the
current interpretation of the United States treasury regulations, for purposes
of determining the applicability of a tax treaty rate. However, under United
States treasury regulations, if you wish to claim the benefit of an applicable
treaty rate and avoid backup withholding, as discussed below, for dividends paid
after December 31, 2000, you will be required to satisfy applicable
certification and other requirements.
If you are eligible for a reduced treaty rate of United States withholding
tax pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
If you are a Non-United States holder, you will generally not be subject to
United States federal income tax with respect to gain recognized on a sale or
other disposition of our common stock unless:
- the gain is effectively connected with a trade or business in the United
States and, where a tax treaty provides, the gain is attributable to a
United States permanent establishment;
- if you are an individual and hold our common stock as a capital asset,
you are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and certain other conditions are
met; or
- we are or have been a "United States real property holding corporation"
for United States federal income tax purposes.
We believe that we are not, and do not anticipate becoming, a "United
States real property holding corporation" for United States federal income tax
purposes. If we were to become a United States real property holding
corporation, so long as our common stock continues to be regularly traded on an
established securities market, you would be subject to federal income tax on any
gain from the sale or other disposition of the stock only if you actually or
constructively owned, during the five-year period preceding the disposition,
more than 5% of our common stock.
Special rules may apply to certain Non-United States holders, such as
"controlled foreign corporations," "passive foreign investment companies" and
"foreign personal holding companies," that are subject to special treatment
under the Code. These entities should consult their own tax advisors to
determine the United States federal, state, local and other tax consequences
that may be relevant to them.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to these
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to you at an address outside the United States, unless
the payer has knowledge that you are a United States person. Under the final
regulations effective
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December 31, 2000, however, you will be subject to backup withholding unless
applicable certification requirements are met.
Payment of the proceeds of a sale of our common stock within the United
States or conducted through certain U.S. related financial intermediaries is
subject to both backup withholding and information reporting unless you certify
under penalties of perjury that you are a Non-U.S. Holder, and the payor does
not have actual knowledge that you are a United States person, or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the Internal Revenue Service.
ESTATE TAX
Common stock held by an individual Non-United States holder at the time of
death will be included in that holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts of common stock in the open market
may adversely affect the market price of our common stock. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale, as described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have 85,543,056 shares of common
stock outstanding. Of the shares of common stock to be outstanding, the
8,500,000 shares offered hereby will be available for immediate sale in the
public market as of the date of this prospectus, except that any shares acquired
by our "affiliates," as that term is defined in Rule 144 under the Securities
Act, generally may be resold in the public market only in compliance with the
provisions of Rule 144 other than the holding period required by Rule 144.
All the remaining 77,043,056 shares of common stock to be outstanding will
be issued to Spencer Trask and to General Instrument in private transactions as
part of our recapitalization. Accordingly, all of these shares, as well as the
8,480,102 shares of common stock issuable upon the exercise of warrants held by
affiliates of Spencer Trask, will be "restricted securities," as that term is
defined in Rule 144. As such, these shares generally may be resold in the public
market only if registered under the Securities Act or sold in compliance with
the provisions of Rule 144, including the one-year holding period required by
Rule 144. Following the expiration of the one-year holding period, all of these
shares will be available for sale in the public market, subject to compliance
with the other provisions of Rule 144. In addition, General Instrument and
Spencer Trask will be entitled to registration rights pursuant to which they may
require that we register their shares under the Securities Act for sale in the
public market prior to or following the expiration of the one-year holding
period under Rule 144. For more information on these registration rights, see
"Certain Relationships and Related Transactions -- Registration Rights
Agreements."
In addition to the legal restrictions on resale described above, each of
General Instrument and Spencer Trask has entered into a lockup agreement with
the underwriters pursuant to which they have agreed generally not to transfer or
dispose of shares of common stock or securities convertible into common stock
for a period of 180 days after the date of this prospectus. However, these
lockups may be waived on behalf of the underwriters by Credit Suisse First
Boston Corporation. For more information on these lockup agreements and those
described below, see "Underwriting -- No Sales of Similar Securities."
STOCK OPTIONS
Upon completion of this offering we will have outstanding employee stock
options to purchase 12,319,748 shares of common stock. Immediately following the
completion of this offering, options covering 5,728,160 shares will have vested
and become exercisable. The holders of options to purchase 3,309,213 shares (of
which options to purchase 2,926,559 shares will have vested upon completion of
this offering) have entered into 365-day lockup agreements with the
underwriters, and the holders of the remaining options to purchase 9,010,535
shares (of which options to purchase 2,801,601 shares will have vested upon
78
<PAGE> 83
completion of this offering) have entered into 180-day lockup agreements.
Following completion of this offering, we intend to file with the SEC a
registration statement covering the shares issuable upon the exercise of our
outstanding employee options as well as shares reserved for issuance under our
employee stock option and stock purchase plans. Accordingly, subject to vesting
provisions and, in the case of affiliates, the provisions of Rule 144 other than
the holding period, the shares of common stock issuable upon the exercise of our
outstanding employee options will be eligible for sale into the public market
after the expiration of the lockups. The lockups may be waived on behalf of the
underwriters by Credit Suisse First Boston Corporation.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the number of shares of common stock then outstanding; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above.
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<PAGE> 84
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse First
Boston Corporation, who are acting as joint book-running managers, and Lehman
Brothers Inc., Warburg Dillon Read LLC and Volpe Brown Whelan & Company, LLC are
acting as representatives of each of the underwriters named below. Subject to
the terms and conditions contained in an underwriting agreement dated
, 1999 between us and the underwriters, we have agreed to sell to
the underwriters, and each of the underwriters severally and not jointly has
agreed to purchase from us, the number of shares of our common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc.........................................
Warburg Dillon Read LLC.....................................
Volpe Brown Whelan & Company, LLC...........................
---------
Total......................................... 8,500,000
=========
</TABLE>
In the underwriting agreement, the several underwriters have agreed to
purchase all of the shares of our common stock being sold under the terms of the
agreement if any of the shares of common stock are purchased, other than those
shares covered by the over-allotment option described below. Under the
underwriting agreement, if an underwriter defaults, the commitments of
non-defaulting underwriters may be increased or the offering may be terminated.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
Lehman Brothers Inc., one of the representatives of the underwriters,
recently served as financial advisor to us and received a customary fee from us
for its services.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of our common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers at
such price less a concession not in excess of $ per share of common stock.
The underwriters may allow, and such dealers may allow, a discount not in excess
of $ per share of common stock to other dealers.
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<PAGE> 85
After the initial public offering, the public offering price and the concession
and discount may be changed.
The following table summarizes the compensation and expenses we will pay
with respect to the shares to be issued under the underwriting agreement. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us.... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $2.8 million and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 1,275,000 shares of our common stock at the initial public offering
price set forth on the cover of this prospectus, less the underwriting discount.
The underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated to
purchase a number of additional shares of our common stock proportionate to such
underwriter's initial amount reflected in the foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 765,000 of the shares offered hereby to be sold to
some of our employees, management, directors and other persons with
relationships with us. The number of shares of our common stock available for
sale to the general public will be reduced to the extent that those persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same terms as the other shares.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and all of our stockholders and
optionholders have agreed that we and they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days (or, in the case of Peter W. Keeler and Thomas R. Eames,
365 days) after the date of this prospectus, except, in our case, issuances in
connection with this offering or our recapitalization or pursuant to our
employee stock option and stock purchase plans.
81
<PAGE> 86
DETERMINATION OF OFFERING PRICE; QUALIFIED INDEPENDENT UNDERWRITER
Before this offering, there has been no market for our common stock. The
initial public offering price will be determined through negotiations between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly traded companies that
the representatives believe to be comparable to us, some of our financial
information, the history of, and the prospects for, us and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, our future revenues, the present
state of our development, the percentage interest of us being sold as compared
to our valuation and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to this offering at or above the initial public offering price.
This offering is being conducted in accordance with the applicable
provisions of Rule 2720 of the National Association of Securities Dealers, Inc.
Conduct Rules because Spencer Trask Securities, Inc., one of the selling group
members, is an affiliate of Spencer Trask Investments LLC, which beneficially
owns 10% or more of our common stock. Rule 2720 requires that the initial public
offering price of the shares of common stock not be higher than that recommended
by a "qualified independent underwriter" meeting certain standards. Accordingly,
Credit Suisse First Boston Corporation is assuming the responsibilities of
acting as the qualified independent underwriter in pricing the offering and
conducting due diligence. The initial public offering price of the shares of
common stock will be no higher than the price recommended by Credit Suisse First
Boston Corporation.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "NXTV."
SALES TO DISCRETIONARY ACCOUNTS
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and selling group members to bid for
and purchase our common stock. As an exception to these rules, the underwriters
are permitted to engage in transactions that stabilize the price of our common
stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the underwriters
may reduce that short position by purchasing our common stock in the open
market. The underwriters may also elect to
82
<PAGE> 87
reduce any short position by exercising all or part of the over-allotment option
described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our common stock in the open market to reduce their short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
83
<PAGE> 88
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws. These will
vary depending on the relevant jurisdiction and may require resales to be made
in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice before any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under such securities laws; (ii) where
required by law, the purchaser is purchasing as principal and not as agent; and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or these persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
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<PAGE> 89
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California will pass upon the validity of the common stock we are offering
pursuant to this prospectus. Simpson Thacher & Bartlett, New York, New York will
pass upon certain other legal matters for us. Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York will pass upon certain legal matters in connection
with this offering for the underwriters.
EXPERTS
The financial statements of Next Level Communications L.P. as of December
31, 1997 and 1998 and September 30, 1999 and for each of three years in the
period ended December 31, 1998, and for the nine months ended September 30,
1999, included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to additional funding requirements). The balance sheet of Next Level
Communications, Inc. as of August 24, 1999 included in this prospectus has been
audited by Deloitte & Touche LLP, independent auditors as stated in their report
appearing herein. Such financial statements and balance sheet have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
85
<PAGE> 90
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement, under
the Securities Act with respect to the common stock to be sold under this
prospectus. Prior to this offering we were not required to file reports with the
SEC. This prospectus does not contain all the information set forth in the
registration statement. For further information about our company and the shares
of common stock to be sold in this offering, please refer to the registration
statement. Complete exhibits have been filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement and other information filed with the
SEC are available at the web site maintained by the SEC on the worldwide web at
www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
86
<PAGE> 91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEXT LEVEL COMMUNICATIONS L.P.:
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and 1998, September
30, 1999 and Pro Forma as of September 30, 1999
(unaudited)............................................... F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended
September 30, 1998 (unaudited) and 1999................... F-4
Statements of Partners' Deficit/Stockholder's Deficit for
the Years Ended December 31, 1996, 1997 and 1998 and the
Nine Months Ended
September 30, 1999........................................ F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September
30, 1998 (unaudited) and 1999............................. F-6
Notes to Financial Statements............................... F-7
NEXT LEVEL COMMUNICATIONS, INC.:
Independent Auditors' Report................................ F-19
Balance Sheet as of August 24, 1999......................... F-20
Notes to Balance Sheet...................................... F-21
</TABLE>
F-1
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
Next Level Communications L.P.:
We have audited the accompanying balance sheets of Next Level
Communications L.P. (formerly Next Level Communications) as of December 31, 1997
and 1998 and September 30, 1999 and the related statements of operations,
partners' deficit/stockholder's deficit and cash flows for each of the three
years in the period ended December 31, 1998 and for the nine months ended
September 30, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Next Level Communications L.P. as of
December 31, 1997 and 1998 and September 30, 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 and for the nine months ended September 30, 1999 in conformity
with generally accepted accounting principles.
As discussed in Note 2, Next Level Communications L.P. has incurred
operating losses and negative cash flows and is dependent upon obtaining
additional capital to fund its operations and meet its obligations.
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
OCTOBER 15, 1999
F-2
<PAGE> 93
NEXT LEVEL COMMUNICATIONS L.P.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
----------------------- SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 3)
--------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $ 377 $ 28,983 $12,499 $12,499
Trade receivables, less allowance
for doubtful accounts of $170,
$490 and $1,237, respectively.... 4,745 11,068 14,343 14,343
Other receivables.................. 3,470 5,023 1,685 1,685
Inventories........................ 13,384 20,670 25,493 25,493
Receivable from General
Instrument....................... -- 3,350 3,575 3,575
Other current assets............... 4,844 735 1,319 1,319
--------- -------- ------- -------
Total current assets................. 26,820 69,829 58,914 58,914
Property and equipment, net.......... 18,020 21,558 22,955 22,955
Intangibles less accumulated
amortization of $739, $1,940 and
$2,841, respectively............... 7,467 6,266 5,365 5,365
Other assets......................... 382 118 -- --
--------- -------- ------- -------
Total assets......................... $ 52,689 $ 97,771 $87,234 $87,234
========= ======== ======= =======
LIABILITIES AND PARTNERS' DEFICIT/STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Payable to General Instrument...... $ 41,077 $ -- $ -- $ --
Accounts payable................... 9,326 16,467 12,145 12,145
Other accrued liabilities.......... 5,780 10,697 12,300 12,300
Deferred revenue................... 208 3,705 16,442 16,442
Current portion of capital lease
obligations...................... -- 396 668 668
--------- -------- ------- -------
Total current liabilities............ 56,391 31,265 41,555 41,555
Note payable to General Instrument... -- 80,940 85,950 --
Long-term capital lease
obligations........................ -- 335 446 446
Commitments and contingencies (Note
12)
Partners' Deficit/Stockholder's
Equity (Deficit):
Partners' deficit.................. -- (14,769) (40,717) --
Common stock -- 100 shares
authorized, 100 shares issued and
outstanding...................... 379,876 -- -- --
Accumulated deficit................ (383,578) -- -- --
Pro forma common stock -- $.01 par
value, 77,043,056 shares......... -- -- -- 770
Additional paid-in capital......... -- -- -- 44,463
--------- -------- ------- -------
Total partners'
deficit/stockholder's equity
(deficit)........................ (3,702) (14,769) (40,717) 45,233
--------- -------- ------- -------
Total liabilities and partners'
deficit/stockholder's equity
(deficit).......................... $ 52,689 $ 97,771 $87,234 $87,234
========= ======== ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 94
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment..................... $ -- $ 6,045 $ 39,243 $ 17,732 $ 29,848
Software.................... -- 2,266 4,587 3,476 2,582
--------- -------- -------- -------- --------
Total revenues................ -- 8,311 43,830 21,208 32,430
Cost of revenues:
Equipment................... -- 10,954 43,172 21,555 29,741
Software.................... -- 306 261 221 228
--------- -------- -------- -------- --------
Total cost of revenues........ -- 11,260 43,433 21,776 29,969
--------- -------- -------- -------- --------
Gross profit (loss)........... -- (2,949) 397 (568) 2,461
Operating expenses:
Research and development.... 17,102 37,064 47,086 32,493 35,861
Selling, general and
administrative........... 15,850 26,414 26,248 19,906 22,220
Litigation.................. 141,000 -- 5,000 5,000 --
--------- -------- -------- -------- --------
Total operating expenses...... 173,952 63,478 78,334 57,399 58,081
--------- -------- -------- -------- --------
Operating loss................ (173,952) (66,427) (77,937) (57,967) (55,620)
Other income (expense), net... 48 (2) 2,241 2,103 853
Interest expense.............. -- -- (6,035) (4,418) (5,181)
--------- -------- -------- -------- --------
Net loss...................... $(173,904) $(66,429) $(81,731) $(60,282) $(59,948)
========= ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 95
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF PARTNERS' DEFICIT/STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER COMMON STOCK
CAPITAL CAPITAL ------------------ UNEARNED ACCUMULATED
(DEFICIT) (DEFICIT) SHARES AMOUNT COMPENSATION DEFICIT TOTAL
--------- --------- ------ --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... $ -- $ -- 100 $ 141,845 $(1,166) $(143,245) $ (2,566)
Amortization of unearned
compensation................ -- -- -- -- 505 -- 505
Net loss.................. -- -- -- -- -- (173,904) (173,904)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1996...................... -- -- 100 141,845 (661) (317,149) (175,965)
Contribution of capital... -- -- -- 238,031 -- -- 238,031
Amortization of unearned
compensation............ -- -- -- -- 661 -- 661
Net loss.................. -- -- -- -- -- (66,429) (66,429)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1997...................... -- -- 100 379,876 -- (383,578) (3,702)
Conversion of predecessor
corporation into partnership... -- (3,702) (100) (379,876) -- 383,578 --
Partner capital
contributions........... 10,000 60,664 -- -- -- -- 70,664
Net loss.................. (8,990) (72,741) -- -- -- -- (81,731)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1998...................... 1,010 (15,779) -- -- -- -- (14,769)
Partner capital
contributions........... -- 34,000 -- -- -- -- 34,000
Net loss.................. (5,755) (54,193) -- -- -- -- (59,948)
------- -------- ---- --------- ------- --------- ---------
Balance, September 30,
1999...................... $(4,745) $(35,972) -- $ -- $ -- $ -- $ (40,717)
======= ======== ==== ========= ======= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 96
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $(173,904) $ (66,429) $(81,731) $(60,282) $(59,948)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 2,212 8,324 10,733 8,846 6,504
Loss on disposal of assets............. -- 385 1,162 825 300
Changes in assets and liabilities:
Trade receivables.................... -- (3,486) (6,323) (9,298) (3,275)
Inventories.......................... (2,031) (11,341) (7,286) (7,464) (4,823)
Other current assets................. (1,428) (2,797) (4,683) (4,755) 2,567
Bank overdraft....................... 1,853 (1,068) (785) (785) --
Accrued interest payable to General
Instrument........................ -- -- 5,940 4,370 5,010
Accounts payable..................... 1,298 6,552 7,926 3,083 (5,053)
Accrued liabilities and deferred
revenue........................... 139,029 (138,667) 8,414 2,443 14,340
--------- --------- -------- -------- --------
Net cash used in operating activities...... (32,971) (208,527) (66,633) (63,017) (44,378)
--------- --------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment........ (9,621) (9,882) (9,612) (7,178) (6,186)
Proceeds from notes receivable............. 306 110 264 240 80
--------- --------- -------- -------- --------
Net cash used in investing activities...... (9,315) (9,772) (9,348) (6,938) (6,106)
--------- --------- -------- -------- --------
FINANCING ACTIVITIES:
Limited Partner capital contribution....... -- 141,000 19,587 3,975 34,000
General Partner capital contribution....... -- -- 10,000 10,000 --
Net increase in payable to General
Instrument............................... 41,687 77,676 -- --
Proceeds from note payable to General
Instrument............................... -- -- 75,000 75,000 --
--------- --------- -------- -------- --------
Net cash provided by financing
activities............................... 41,687 218,676 104,587 88,975 34,000
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (599) 377 28,606 19,020 (16,484)
Cash and cash equivalents, beginning
of period................................ 599 -- 377 377 28,983
--------- --------- -------- -------- --------
Cash and cash equivalents, end of period... $ -- $ 377 $ 28,983 $ 19,397 $ 12,499
========= ========= ======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired from contribution of
Telenetworks............................. $ -- $ 14,224 $ -- $ -- --
Equipment acquired under capital leases.... -- -- 930 930 871
Conversion of payable to General Instrument
to stockholder's equity.................. -- 82,807 41,077 41,077 --
Conversion of stockholder's net deficit to
partnership deficit...................... -- -- (3,702) (3,702) --
</TABLE>
See notes to financial statements.
F-6
<PAGE> 97
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Next Level Communications L.P. (the "Partnership") is a leading provider of
broadband communications systems that enable telephone companies and other
emerging communications service providers to cost effectively deliver voice,
data and video services over the existing copper wire telephone infrastructure.
Next Level Communications ("NLC" or the "Limited Partner") was incorporated
as a California corporation on June 22, 1994 and commenced operations in July
1994. In September 1995, NLC was acquired by General Instrument Corporation
("General Instrument").
In January 1998, NLC transferred its net assets, management and workforce
to a newly formed limited partnership, Next Level Communications L.P., in
exchange for an 89% limited partnership interest. The Partnership recorded the
net assets transferred at their historical cost. At the same time, Spencer Trask
(the "General Partner") acquired an 11% general partner interest in the
Partnership in exchange for a $10.0 million cash contribution.
Net losses have been allocated to the partners based on their respective
partnership percentages. Upon the Partnership's conversion to a corporation (the
"Successor Corporation") in conjunction with an initial public offering, each
partner will receive voting common stock of the Successor Corporation based on
their respective partnership percentages. The General Partner has an option,
which expires on January 13, 2003, to acquire from the Limited Partner, up to
11% of the Successor Corporation common stock. This option is exercisable after
an IPO or in connection with a merger or sale of the Successor Corporation. Upon
dissolution of the Partnership, the assets would be used to pay all liabilities
of the Partnership and any remaining assets, after establishment of reserves,
would be distributed to the partners in accordance with their respective
partnership percentages.
On August 24, 1999 the Partnership formed a wholly owned subsidiary, Next
Level Communications, Inc., a Delaware corporation.
In anticipation of the Recapitalization (see note 3), management of NLC
effected a 1-for-3 reverse stock split on October 14, 1999. All share amounts in
the accompanying financial statements have been restated to give effect to the
reverse stock split.
The accompanying financial statements represent those of the Partnership
for 1998 and the nine months ended September 30, 1998 (unaudited) and 1999 and
those of NLC for 1997 and 1996. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of the results expected
for the full year.
2. RESULTS OF OPERATIONS FOR 1999, 1998, 1997 AND 1996 AND MANAGEMENT PLANS FOR
2000 AND 1999
The Partnership incurred net losses of $59.9 million, $81.7 million, $66.4
million, and $173.9 million in the nine months ended September 30, 1999 and the
fiscal years ended December 31, 1998, 1997 and 1996, respectively, as a result
of substantial research and
F-7
<PAGE> 98
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
development expenditures and litigation expenses. Net cash used in operating
activities was $44.4 million, $66.6 million, $208.5 million and $33.0 million in
the nine months ended September 30, 1999 and the fiscal years ended December 31,
1998, 1997 and 1996, respectively. At September 30, 1999, partners' deficit was
$40.7 million.
The Partnership has prepared cash flow projections for 1999 that indicate
additional capital will be required during the latter part of 1999 to fund its
operations and meet its obligations. The Partnership believes that it has
several alternatives available to it to obtain the required capital, including
additional equity contributions from its partners, private placement financing
and/or an IPO. Management of the Partnership believes that cash and cash
equivalents at September 30, 1999 and additional capital from the sources noted
above will enable the Partnership to fund its operations and meet its
obligations through at least September 30, 2000.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of the accompanying financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the year. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION (UNAUDITED) -- The financial statements for
the nine months ended September 30, 1998 are unaudited, and in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such period.
PRO FORMA INFORMATION (UNAUDITED) -- The unaudited pro forma balance sheet
as of September 30, 1999 presents the Partnership's balance sheet as if the
following (the "Recapitalization") had occurred on September 30, 1999:
(i) the $75.0 million note and accrued interest thereon payable to General
Instrument was contributed by General Instrument to Next Level
Communications, Inc., a newly formed Delaware corporation ("NLC
Delaware"); and
(ii) the Partnership and NLC were merged into NLC Delaware.
(iii) in conjunction with the transactions described in (i) and (ii) above
and based upon an assumed initial public offering price of $11.00 per
share, the General Partner received 5,863,329 shares of common stock
and the Limited Partner received 71,179,727 shares of common stock.
Pro forma basic and diluted net loss per share, discussed below, is
computed by dividing the pro forma net loss by the pro forma shares outstanding
for the period giving effect to the Recapitalization as if it had occurred on
January 1, 1998. The pro forma shares outstanding exclude warrants held by
affiliates of the General Partner to purchase approximately 8,480,102 shares of
common stock, employee stock options to purchase 6,964,904 shares of common
stock as of September 30, 1999 and options to purchase
F-8
<PAGE> 99
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5,354,844 shares of common stock that the Company anticipates will be granted in
October 1999. Shares under these options and warrants were not included in the
computation of pro forma diluted net loss per common share since the inclusion
of these shares would be antidilutive.
Pro forma basic and diluted net loss per share of $0.98 and $0.71 for the
year ended December 31, 1998 and the nine months ended September 30, 1999,
respectively, give effect to the contribution of the note and accrued interest
thereon payable to General Instrument and the related elimination of interest
expense of $5.9 million and $5.0 million for the year ended December 31, 1998
and the nine months ended September 30, 1999, respectively. Pro forma shares
outstanding were 77,043,056 for the pro forma periods presented.
REVENUE RECOGNITION -- The Partnership recognizes revenue from equipment
sales when the product has been shipped. Sales contracts do not permit the right
of return of product by the customer. Amounts received in excess of revenue
recognized are recorded as deferred revenue. As of September 30, 1999 deferred
revenue primarily relates to advance payments received on equipment sales.
Software license revenues are recognized when software revenue recognition
criteria have been met, pursuant to Statement of Position ("SOP") 97-2, Software
Revenue Recognition. Under SOP 97-2, license revenue is recognized when a
noncancelable license agreement has been signed, delivery has occurred, the fees
are fixed and determinable and collection is probable. The portion of revenues
from new license agreements which relate to the Partnership's obligations to
provide customer support are deferred, based upon the price charged for customer
support when it is sold separately, and recognized ratably over the maintenance
period.
PRODUCT WARRANTY -- The Partnership provides for the estimated costs to
fulfill customer warranty obligations upon the recognition of the related
equipment revenue. Actual warranty costs incurred are charged against the
accrual when paid.
CASH EQUIVALENTS -- The Partnership considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Provisions for depreciation are based on estimated useful lives of the assets
using the straight-line method. Useful lives range from the shorter of five to
ten years or the lease term for leasehold improvements and two to seven years
for machinery and equipment.
INTANGIBLE ASSETS -- Intangible assets consist principally of goodwill,
which is being amortized on a straight-line basis over seven years. Management
continually reassesses the appropriateness of both the carrying value and
remaining life of the intangible assets by assessing recoverability based on
forecasted operating cash flows, on an undiscounted basis, and other factors.
Management believes that the carrying value and remaining lives of these assets
are appropriate.
F-9
<PAGE> 100
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS -- Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles may not be recoverable, the
Partnership evaluates the carrying values of such assets using future
undiscounted cash flows. If the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset, the Partnership will
recognize an impairment loss equal to the difference between the fair value and
carrying value of such asset.
OTHER INCOME (EXPENSE), NET -- Other income (expense), net consists
primarily of interest income.
INCOME TAXES -- Income taxes are not included in the 1998 or 1999 financial
statements since income taxes on the Partnership's income are the responsibility
of the partners.
For the years ended December 31, 1996 and 1997, NLC accounted for income
taxes using the asset and liability method. Deferred income taxes reflect the
future tax consequences of differences between the financial reporting and tax
basis of assets and liabilities. The accompanying financial statements for 1996
and 1997 present NLC's income taxes on a separate company basis. In 1996 and
1997, the results of NLC were included in the consolidated tax returns of
General Instrument, and NLC's net operating losses were utilized by General
Instrument in its tax returns. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. At December 31, 1997, and 1996 there was a 100% valuation allowance
provided for these deferred tax assets due to the uncertainty of realizing
future tax benefits from these deferred tax assets on a stand-alone NLC basis.
At December 31, 1997, NLC had no amounts due to or from General Instrument
related to income taxes. For the years ended December 31, 1996 and 1997, there
was no current or deferred tax expense or benefit recorded by NLC.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value because of the short-term nature of these instruments. The fair value of
long-term debt is based upon current interest rates for debt instruments with
comparable maturities and characteristics.
COMPREHENSIVE INCOME -- Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. There were no items of other
comprehensive income (loss) and therefore comprehensive loss was the same as net
loss for all periods presented.
SEGMENT REPORTING -- SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information establishes standards for the reporting of
information about operating segments, including related disclosures about
products and services, geographic areas and major customers, and requires
selected information about operating segments in interim financial statements.
The Partnership operates in only one reportable segment and one geographic area
and therefore additional information is not required to be presented. For the
nine months ended September 30, 1999, revenues attributable to the Partnership's
F-10
<PAGE> 101
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
two largest customers were 61% and 14%, respectively, of total revenues. In 1998
these same customers accounted for 68% and 20%, respectively, of total revenues.
In 1997 these same customers accounted for 17% and 55%, respectively, of total
revenues.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- Two customers comprised
substantially all of the Partnership's revenue from equipment sales in 1997 and
1998. As of September 30, 1999 and December 31, 1998, 80% and 84%, respectively,
of the Partnership's trade accounts receivable were derived from these two
customers. The loss of either of these customers or any substantial reduction in
orders by either of these customers could have a material adverse affect on the
Partnership's operating results. Additionally, the Partnership relies on certain
contract manufacturers to perform substantially all of its manufacturing
activities. The inability of its contract manufacturers to fulfill their
obligations to the Partnership could adversely impact future results.
The Partnership performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Partnership
maintains allowances for potential losses, and has not incurred any significant
losses to date. Allowance for doubtful accounts activity consisted of (in
thousands):
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year-Ended December 31, 1997........... $ -- $170 -- $ 170
Year-Ended December 31, 1998........... $170 $320 -- $ 490
Nine Months Ended September 30, 1999... $490 $797 $(50) $1,237
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT -- SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be measured at fair value and recognized in the balance sheet as
either assets or liabilities. The Partnership is currently evaluating what
impact, if any, SFAS No. 133 may have on its financial statements.
4. ACQUISITION OF TELENETWORKS
In September 1997, General Instrument acquired all of the outstanding
capital stock of Telenetworks, a specialized data protocol communications
software company. The purchase price was approximately $7.0 million in cash. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair values as of the date of acquisition. The $6.9 million excess of
the purchase price over the net identifiable assets acquired was allocated to
goodwill. In January 1998, in conjunction with the formation of the Partnership,
the Limited Partner contributed the assets and liabilities of Telenetworks to
the Partnership at its cost. For financial statement purposes, Telenetworks'
assets, liabilities and results of operations have been included in the
accompanying financial statements since September 1, 1997.
F-11
<PAGE> 102
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the acquisition in September 1997, General Instrument
granted approximately 358,000 shares of restricted common stock of General
Instrument valued at $7.0 million in total to certain Telenetworks employees.
The restricted shares were valued at the quoted market price of $19.56 per share
of General Instrument's common stock at the date of grant. The restrictions on
the common stock of General Instrument lapsed over a 270-day period which ended
on May 31, 1998. Since this common stock was payable based solely on the
continued employment of the individuals, prepaid compensation of $7.0 million
was recorded and amortized to compensation expense over the life of the
restrictions. Compensation expense of $3.9 million and $3.1 million was recorded
in 1998 and 1997.
In June 1998, the Partnership issued approximately $2.9 million in loans to
former Telenetworks employees due to certain tax liabilities associated with the
restricted stock, $2.5 million of which was outstanding at December 31, 1998 and
recorded in other receivables. The loans were due in April 1999, and were
collateralized by the common stock of General Instrument held by such employees.
As of September 30, 1999 such loans were fully repaid.
5. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Raw materials.................................... $ 7,152 $ 7,203 $ 7,323
Work-in-process.................................. 1,453 1,157 563
Finished goods................................... 4,779 12,310 17,607
------- ------- -------
Total....................................... $13,384 $20,670 $25,493
======= ======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Machinery and equipment......................... $20,030 $ 28,315 $ 34,439
Leasehold improvements.......................... 3,817 4,457 5,068
------- -------- --------
Total...................................... 23,847 32,772 39,507
Less accumulated depreciation and
amortization.................................. (5,827) (11,214) (16,552)
------- -------- --------
Property and equipment -- net................... $18,020 $ 21,558 $ 22,955
======= ======== ========
</TABLE>
Machinery and equipment includes assets acquired under capital leases of
$930,000 and $1,801,000 and related accumulated depreciation and amortization of
$208,000 and $668,000 at December 31, 1998 and September 30, 1999, respectively.
F-12
<PAGE> 103
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Accrued payroll and related expenses.............. $4,346 $ 4,767 $ 6,320
Other accrued expenses............................ 1,434 5,930 5,980
------ ------- -------
Total........................................ $5,780 $10,697 $12,300
====== ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS WITH GENERAL INSTRUMENT
In January 1998, in conjunction with the formation of the Partnership,
General Instrument advanced $75.0 million to the Partnership in exchange for a
note (the "Note") bearing interest at a rate of 8%. The Note includes certain
covenants including limitations on borrowings, and is due in 2005. The Note
provides for the deferral of scheduled interest payments under certain
circumstances. Deferred interest payments bear interest at 10% and are not
payable until certain earnings levels, as defined, are met. The Partnership or
the Successor Corporation has an option, upon an IPO of the Successor
Corporation, to repay the Note, together with accrued interest, in shares of
stock of the Successor Corporation. At December 31, 1998, the Partnership owed
General Instrument $80.9 million under this Note, including accrued interest of
$5.9 million. The fair value of the Note, computed based upon current interest
rates for debt instruments with comparable maturities and characteristics, as at
December 31, 1998 was approximately $62.5 million. At September 30, 1999, the
Partnership owed General Instrument $86.0 million under this note, including
accrued interest of $11.0 million.
At December 31, 1997 NLC had a payable to General Instrument of $41.1
million representing net advances to it during 1997. This amount was contributed
to the Partnership in 1998. During 1998, an additional $19.6 million was
contributed to the Partnership by the Limited Partner.
In 1999, the Limited Partner provided an additional $34.0 million of
capital contributions and increased its Partnership interest to 90.4%.
In 1996 and 1997, General Instrument allocated the cost of certain
corporate general and administrative services and shared services (primarily
certain legal and other costs related to the litigation discussed in Note 12) to
NLC. Such allocations were based upon General Instrument's estimates of the
incremental costs of providing such services. Management believes that the
method used by General Instrument to determine the allocated expenses was
reasonable. The allocated expenses were $3.0 million and $1.0 million in 1996
and 1997, respectively. It is not practicable to determine the actual costs that
would have been incurred if NLC operated on a stand-alone basis; accordingly
such allocations may not necessarily be indicative of the level of expenses
which would have been incurred had it been operating as a separate stand-alone
entity through December 31, 1997. Since January 1, 1998, all costs to operate on
a stand-alone basis were incurred by the Partnership and have been reflected in
the accompanying financial statements. Accordingly, no costs were allocated to
the Partnership during such periods.
F-13
<PAGE> 104
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS
Certain employees of the Partnership have been granted contingently
exercisable stock options (included in the table which follows) in NLC which
vest over a period of two to three years and which expire in ten years. Such
options are exercisable only in the event of an IPO or a change in control of
NLC (the "Event"). Compensation expense will be recognized on the date of the
Event based on the difference between the exercise price of the options and the
fair value of the common stock of a successor corporation on the date of the
Event. Management believes that the compensation expense will be material.
In addition, in January 1997, as part of a tandem stock option grant,
certain employees of NLC were granted options at $1.11 per share for a total of
1.9 million shares of common stock of NLC, or options at $15.75 per share for a
total of 1.5 million shares of General Instrument common stock (the "GI
Options"). Under the terms of the grant, the exercise of options on either NLC
or General Instrument common stock results in the cancellation of options in the
other company's common stock at a ratio of approximately 1.4 shares of NLC
common stock to 1 share of General Instrument common stock. The NLC options are
exercisable only upon the Event. The options have a ten-year life and vest over
three years. If the GI options are more likely to be exercised no compensation
expense will be recognized. If it becomes more likely that the NLC options will
be exercised, compensation expense will be recognized at such time, based upon
the difference between the exercise price of the NLC options and the fair market
value of the NLC common stock on the date of the Event. Management believes that
such compensation expense, if the NLC options are more likely to be exercised,
will be material.
The following table summarizes stock option activity relating to NLC's
stock option plan (including those granted as part of the tandem stock option
grant):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1996............. -- --
Granted.................................. 6,914 $0.98
------
Balance at December 31, 1997............. 6,914 0.98
Granted.................................. 179 5.74
Canceled................................. (4) 1.11
------
Balance at December 31, 1998 (none
exercisable)........................... 7,089 1.10
======
</TABLE>
In the nine months ended September 30, 1999, options to purchase 112,750
shares were granted at an exercise price of $9.66 per share and options to
purchase 237,000 shares were canceled.
F-14
<PAGE> 105
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about NLC stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, REMAINING LIFE AVERAGE DECEMBER 31, AVERAGE
PRICES 1998 (IN YEARS) EXERCISE PRICE 1998 EXERCISE PRICE
- ----------- --------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.84-$1.53 6,927 8.8 $0.98 -- $ --
$6.18 162 9.8 6.18 -- --
------
7,089
======
</TABLE>
Stock-based awards granted to employees are accounted for using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS No. 123,
Accounting For Stock Based Compensation, requires the disclosure of pro forma
net income (loss) using the fair value method.
The estimated fair value of an option grant is based, in part, on the
estimated term of the option. NLC options granted under the NLC Plan are not
exercisable unless an Event occurs. As a result, it is not practicable to
determine the expected term of NLC options and therefore it is not possible to
estimate the fair value of such options. The weighted average fair value of the
GI options granted during 1997 was $5.70.
Had compensation cost been determined under SFAS 123 for the GI Options
under the tandem stock option grant, the Partnership's net loss would have been
changed to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Net loss:
As reported............................ $(66,429) $(81,731) $(59,948)
Pro forma............................ (69,190) (84,494) (62,020)
</TABLE>
The fair value of the GI options granted under the tandem stock option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<S> <C>
Dividend yield........................... 0.0%
Volatility............................... 35.0%
Risk free interest....................... 6.4%
Expected terms (years)................... 4.0
</TABLE>
F-15
<PAGE> 106
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Employees of the Partnership, who meet certain eligibility requirements are
able to participate in the General Instrument 401(k) Plan. Employees may
contribute up to 10% of their annual compensation, subject to the legal maximum.
The Partnership, contributes an amount equal to 50% of the first 6% of the
employee's salary that the employee contributes. The Partnership's expense
related to the 401(k) Plan was $430,000, $513,000, $409,000 and $213,000 for the
nine months ended September 30, 1999 and the years ended December 31, 1998, 1997
and 1996, respectively.
The Partnership employees participate in the General Instrument Pension
Plan. The Partnership expensed $360,000, $419,000, $229,000 and $210,000 related
to these plans for the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, respectively.
11. CAPITAL LEASE OBLIGATIONS
The Partnership leases certain equipment under capital leases. Leases
expire at various dates from 1999 to 2001 and all contain purchase options.
Future minimum lease payments at September 30, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999........................................... $ 378
2000......................................... 684
2001......................................... 367
------
Total................................ 1,429
Less amounts representing interest............. (315)
------
Present value of net minimum lease payments.... $1,114
======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Partnership leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 1999 to 2006 and certain facilities
leases have renewal options.
During 1998 the Partnership entered into an operating lease for one of its
buildings which expires in 2004. The lease provides for a purchase option but
does not allow for renewal options. General Instrument has provided a residual
value guarantee to the lessor of approximately 82% of the total building cost at
inception. The table of future minimum operating lease payments below excludes
any payments related to the residual guarantee. Rent expense recorded under the
lease was $0.8 million in 1998 and $1.0 million in the nine months ended
September 30, 1999.
F-16
<PAGE> 107
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999.................................. $ 3,154
2000................................ 2,943
2001................................ 2,357
2002................................ 2,181
2003................................ 2,098
Thereafter.......................... 2,548
-------
Total....................... $15,281
=======
</TABLE>
Rent expense was $0.4 million in 1996, $1.1 million in 1997, $3.8 million
in 1998, and $3.2 million in the nine months ended September 30, 1999.
The Partnership has a commitment with a supplier to purchase approximately
$2.1 million of components in the 12 months following the release of certain
products for sale and approximately $4.3 million in the subsequent 12 months. In
addition, the Partnership has a commitment to purchase $2.4 million of
components prior to September 2002 with a minimum purchase of $0.5 million each
12-month period following the release of the certain products for sale. The
Partnership has a commitment to another supplier to purchase approximately $14.7
million of components prior to December 2001.
In May 1998, actions by BroadBand Technologies, Inc. against General
Instrument and by Next Level Communications against BroadBand Technologies,
pending in the United States District Court for the Eastern District of North
Carolina, were dismissed with prejudice. The action brought by BroadBand related
to fiber optic communications systems for delivering television signals and a
patent held by BroadBand. The action brought by Next Level Communications
involved contentions that BroadBand infringed two patents held by Next Level
Communications relating to video compression and signal processing and that
BroadBand had violated antitrust laws. These dismissals were entered pursuant to
a settlement agreement under which, among other things, Next Level
Communications L.P. paid BroadBand Technologies $5.0 million, which was expensed
in 1998, and BroadBand Technologies and Next Level Communications L.P. have
entered into a perpetual cross-license of patents applied for or issued
currently or through May 2003.
In April 1995, DSC Communications Corporation and DSC Technologies
Corporation (collectively, "DSC") brought suit against NLC and the founders of
NLC. In June 1996, a final judgement against NLC and the individual defendants
was entered in favor of DSC, and an expense for the expected final award of
$141.0 million was recorded. General Instrument paid the $141.0 million
judgement in 1997 as required by the 1995 agreement for the acquisition of NLC;
accordingly, the $141.0 million has been shown as a capital contribution in
1997.
On March 5, 1998, an action entitled DSC Communications Corporation and DSC
Technologies Corporation v. Next Level Communications, L.P., Spencer Trask
Investors LLC, General Instrument Corporation and Spencer Trask & Co., Inc. was
filed in the Superior Court of the State of Delaware in and for New Castle
County (the "Delaware Action"). In that action, DSC alleged that in connection
with the formation of the
F-17
<PAGE> 108
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Partnership and the transfer of the switched digital video technology, the
Partnership and Spencer Trask Investors LLC misappropriated DSC's trade secrets;
that General Instrument improperly disclosed trade secrets when it conveyed such
technology to the Partnership; and that Spencer Trask conspired to
misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the
defendants' purported unjust enrichment, disgorgement of consideration,
exemplary damages and attorney's fees, all in unspecified amounts. In April
1998, General Instrument and the other defendants filed an action in the United
District Court for the Eastern District of Texas, requesting that the federal
court preliminarily and permanently enjoin DSC from prosecuting the Delaware
Action because by pursuing such action, DSC effectively was trying to circumvent
and relitigate the Texas federal court's November 1997 judgment in a previous
lawsuit involving DSC. On May 14, 1998, the United States District Court for the
Eastern District of Texas granted a preliminary injunction preventing DSC from
proceeding with the Delaware Action. On July 6, 1998, the defendants filed a
motion for summary judgement with the Texas Court requesting a permanent
injunction preventing DSC from proceeding with this litigation. In June 1999 the
United States Court of Appeals for the Fifth Circuit affirmed the judgment of
the Texas court. On July 15, 1999, the Texas federal court granted the Delaware
defendants' motion for summary judgement and issued its final judgement
permanently enjoining DSC from prosecuting and continuing the Delaware action.
F-18
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
Next Level Communications, Inc.:
We have audited the accompanying balance sheet of Next Level
Communications, Inc. as of August 24, 1999 (date of incorporation). This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Next Level Communications, Inc. as of August
24, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
AUGUST 25, 1999 (OCTOBER 11, 1999 AS TO NOTES 2 AND 3)
F-19
<PAGE> 110
NEXT LEVEL COMMUNICATIONS, INC.
BALANCE SHEET
AUGUST 24, 1999
(DATE OF INCORPORATION)
<TABLE>
<S> <C>
Assets
Cash........................................................ $ 1
======
Stockholder's Equity
Common Stock, $.01 par value, 1,000 shares authorized, 100
issued and
outstanding............................................ $ 1
======
</TABLE>
See notes to balance sheet.
F-20
<PAGE> 111
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION AND BUSINESS PURPOSE
Next Level Communications, Inc. (the "Company") is a wholly-owned
subsidiary of Next Level Communications L.P. The Company is a Delaware
corporation formed on August 24, 1999 for the purpose of merging with Next Level
Communications L.P. to effect an initial public offering (the "offering").
2. RECAPITALIZATION
Immediately prior to the completion of this offering, the following
interdependent recapitalization transactions will occur:
- the Next Level Communications L.P. $75.0 million note and accrued
interest thereon payable to General Instrument will be contributed by
General Instrument to Next Level Communications, Inc., in exchange for a
number of shares of common stock equal to the aggregate amount owed under
the note divided by the initial offering price (which would be 7,813,636
shares based upon $86.0 million owed as of September 30, 1999 and an
assumed initial offering price of $11.00 per share); and
- Next Level Communications L.P. and Next Level Communications, a wholly
owned subsidiary of General Instrument and the limited partner of Next
Level Communications L.P., each will be merged into Next Level
Communications, Inc. As part of these mergers:
- Spencer Trask, the general partner of the partnership, will receive
5,863,329 shares of common stock for its 9.6% general partnership
interest;
- General Instrument will receive a number of shares of common stock,
for Next Level Communications' 90.4% limited partnership interest and
other interests under the partnership agreement, equal to 55,366,091
plus a number equal to $88.0 million divided by the initial offering
price (which would be 8,000,000 shares based upon an assumed initial
offering price of $11.00 per share)(the $88 million is the value
receivable by us from affiliates of Spencer Trask with respect to
their warrants as described below);
- options granted to employees of the partnership to purchase shares of
Next Level Communications will become options to purchase a total of
6,964,904 shares of common stock on a one for one basis; and
- the option currently held by affiliates of Spencer Trask to purchase
shares of the partnership's successor under the partnership agreement
will become warrants to purchase from the Company 8,480,102 shares of
common stock at an exercise price of $10.38 per share.
The recapitalization will be accounted for at historical cost.
F-21
<PAGE> 112
3. EMPLOYEE STOCK PLANS
1999 STOCK PLAN
Our board of directors adopted our 1999 Stock Plan effective October 1,
1999. Our stockholder also approved this plan. We have reserved 6,000,000 shares
of our common stock for grants under the 1999 Stock Plan. If options or shares
awarded under the 1999 Stock Plan are forfeited, then those options or shares
will become available for new awards. Before this offering is completed, we
expect to grant options covering 5,354,844 shares of our common stock under the
1999 Stock Plan. These options will have an exercise price equal to $11.00 per
share, and they will become exercisable with respect to 25% of the shares after
12 months of service and the remaining 75% in equal monthly installments over
the next 36 months of service. We will make no awards under the 1999 Stock Plan
after this offering.
Participants in the plan may include employees, consultants and members of
the board of directors who are not employees. The board may grant options to
purchase shares of our common stock, or it may grant restricted shares of our
common stock. Options may be incentive stock options, which may qualify for
favorable tax treatment and which have a minimum exercise price equal to 100% of
the fair market value of the underlying stock on the date of grant. Options may
also be nonstatutory stock options, which cannot qualify for favorable tax
treatment and which have a minimum exercise price equal to 85% of the fair
market value of the underlying stock on the date of grant. Options expire not
later than 10 years after the date of grant, and they expire earlier if the
optionee's service ends earlier.
1999 EQUITY INCENTIVE PLAN
Our board of directors adopted our 1999 Equity Incentive Plan on October
10, 1999. Our stockholder also approved this plan. We have reserved 4,000,000
shares of our common stock for issuance under the 1999 Equity Incentive Plan. In
addition, any shares reserved under the 1999 Stock Plan for options not granted
at the time of this offering will become available for grants under the 1999
Equity Incentive Plan. In general, if options or shares awarded under the 1999
Stock Plan or the 1999 Equity Incentive Plan are forfeited, then those options
or shares will again become available for awards under the 1999 Equity Incentive
Plan. We have not yet granted any options under the 1999 Equity Incentive Plan,
and none will be granted until after this offering.
The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. Options
expire not later than 10 years after the date of grant.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
October 10, 1999. Our stockholder also approved this plan. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. We have reserved 1,000,000 shares of our common stock for issuance
under the plan. On November 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically be increased by 1,000,000
shares or 1% of the shares then outstanding, whichever is less.
All of our employees are eligible to participate. Eligible employees may
begin participating in the 1999 Employee Stock Purchase Plan at the start of any
offering period.
F-22
<PAGE> 113
Each offering period lasts 24 months. Overlapping offering periods start on May
1 and November 1 of each year. However, the first offering period will start on
the effective date of this offering and end on October 31, 2001.
The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
- the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- the fair market value per share of common stock on the purchase date;
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- the price per share to the public in this offering; or
- the fair market value per share of common stock on the purchase date.
F-23
<PAGE> 114
[Next Level Communications Logo]
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee....................................... $ 34,750
NASD fee................................................... 13,000
Nasdaq National Market listing fee......................... 95,000
Printing and engraving expenses............................ 400,000
Legal fees and expenses.................................... 1,600,000
Accounting fees and expenses............................... 500,000
Blue sky fees and expenses................................. 5,000
Transfer agent fees........................................ 15,000
Miscellaneous fees and expenses............................ 137,250
----------
Total............................................ $2,800,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Registrant's Certificate of Incorporation
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.1 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law." Reference is made to Section 6 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-1
<PAGE> 116
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, a predecessor to the Registrant sold
securities in the following transactions, each of which was intended to be
exempt from the registration requirements of the Securities Act of 1933, as
amended.
In January 1998, Next Level Communications, a subsidiary of General
Instrument, acquired an 89% limited partner interest in Next Level
Communications L.P. (the "Partnership") in exchange for the net assets,
management and workforce of Next Level Communications.
In January 1998, General Instrument advanced $75.0 million to the
Partnership in exchange for a note convertible by the partnership into shares.
The Partnership used these funds for general working capital.
From November 1998 through May 1999, Next Level Communications has provided
an additional $50.0 million of capital contribution in return for an increase in
its partnership interest from 89% to 90.4%. The Partnership used these funds for
general working capital.
The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities used
in such transactions. All recipients had adequate access, through their
relationships with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
1.1*** -- Form of Underwriting Agreement (preliminary form).
2.1** -- Form of Merger Agreement among General Instrument
Corporation, Spencer Trask Investors LLC, Next Level
Communications, Next Level Communications L.P. and
Registrant.
3.1** -- Form of Restated Certificate of Incorporation to be filed
upon the closing of this offering.
3.2** -- Bylaws of the Registrant.
4.1 -- Reference is made to Exhibits 3.1 and 3.2
4.2** -- Form of Registration Rights Agreement among General
Instrument Corporation, Spencer Trask Investors LLC and
Registrant.
4.3* -- Specimen Common Stock certificate.
5.1*** -- Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
9.1** -- Form of Voting Trust Agreement among General Instrument
Corporation, Registrant and Chase Mellon Shareholder
Services LLC.
10.1** -- Form of Indemnification Agreement.
</TABLE>
II-2
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
10.2** -- Form of Corporate and Intercompany Agreement between General
Instrument Corporation and Registrant.
10.3** -- 1999 Equity Incentive Plan.
10.4** -- 1999 Employee Stock Purchase Plan.
10.5*** -- Patent and Technical Information Cross-License Agreement.
10.8+** -- Agreement between U S WEST Communications, Inc. and the
Registrant.
10.9+** -- Agreement by and among Telesector Resources Group, Inc.,
General Instrument Corporation and the Registrant.
10.10+** -- Agreement between the Registrant and SCI Technology, Inc.
10.11+** -- Agreement between the Registrant and CMC Mississippi, Inc.
10.12** -- 1999 Stock Plan.
23.1*** -- Independent Auditors' Consent.
23.2** -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule.
99.1** -- Consent of Lynn Forester filed pursuant to Rule 438 under
the Securities Act.
99.2** -- Consent of John McCartney filed pursuant to Rule 438 under
the Securities Act.
99.3** -- Consent of Paul S. Latchford filed pursuant to Rule 438
under the Securities Act.
</TABLE>
- ---------------
* To be supplied by amendment.
** Previously filed.
*** Filed herewith.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In
II-3
<PAGE> 118
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rohnert Park, State of California, on this 29th day of October, 1999.
NEXT LEVEL COMMUNICATIONS, INC.
By: /s/ JAMES T. WANDREY*
--------------------------------------
James T. Wandrey
Senior Vice President
and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C> <C>
/s/ PETER W. KEELER* Chief Executive Officer, October 29, 1999
- ------------------------------------------ (Principal Executive
Peter W. Keeler Officer) Chairman of the
Board
and President
/s/ JAMES T. WANDREY Senior Vice President and October 29, 1999
- ------------------------------------------ Chief Financial Officer
James T. Wandrey (Principal Financial and
Accounting Officer)
/s/ RICHARD C. SMITH* Director October 29, 1999
- ------------------------------------------
Richard C. Smith
*By: /s/ JAMES T. WANDREY
------------------------------------
James T. Wandrey
Attorney-in-fact
</TABLE>
II-5
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
1.1*** -- Form of Underwriting Agreement (preliminary form).
2.1** -- Form of Merger Agreement among General Instrument
Corporation, Spencer Trask Investors LLC, Next Level
Communications, Next Level Communications L.P. and
Registrant.
3.1** -- Form of Restated Certificate of Incorporation to be filed
upon the closing of this offering.
3.2** -- Bylaws of the Registrant.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2** -- Form of Registration Rights Agreement among General
Instrument Corporation, Spencer Trask Investors LLC and
Registrant.
4.3* -- Specimen Common Stock certificate.
5.1*** -- Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
9.1** -- Form of Voting Trust Agreement among General Instrument
Corporation, Registrant and Chase Mellon Shareholder
Services LLC.
10.1** -- Form of Indemnification Agreement.
10.2** -- Form of Corporate and Intercompany Agreement between General
Instrument Corporation and Registrant.
10.3** -- 1999 Equity Incentive Plan.
10.4** -- 1999 Employee Stock Purchase Plan.
10.5*** -- Patent and Technical Information Cross-License Agreement.
10.8+** -- Agreement between U S WEST Communications, Inc. and the
Registrant.
10.9+** -- Agreement by and among Telesector Resources Group, Inc.,
General Instrument Corporation and the Registrant.
10.10+** -- Agreement between the Registrant and SCI Technology, Inc.
10.11+** -- Agreement between the Registrant and CMC Mississippi, Inc.
10.12** -- 1999 Stock Plan.
23.1*** -- Independent Auditors' Consent.
23.2** -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule.
99.1** -- Consent of Lynn Forester filed pursuant to Rule 438 under
the Securities Act.
99.2** -- Consent of John McCartney filed pursuant to Rule 438 under
the Securities Act.
99.3** -- Consent of Paul S. Latchford filed pursuant to Rule 438
under the Securities Act.
</TABLE>
- ---------------
* To be supplied by amendment
** Previously filed.
*** Filed herewith.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
<PAGE> 1
- --------------------------------------------------------------------------------
NEXT LEVEL COMMUNICATIONS, INC.
(a Delaware corporation)
9,775,000 Shares of Common Stock
UNDERWRITING AGREEMENT
- --------------------------------------------------------------------------------
Dated: ________, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNDERWRITING AGREEMENT .................................................................... 1
SECTION 1. Representations and Warranties. ..................................... 3
(a) Representations and Warranties by the Company. ...................... 3
(i) Compliance with Registration Requirements. .................. 3
(ii) Independent Accountants. .................................... 4
(iii) Financial Statements. ....................................... 4
(iv) No Material Adverse Change in Business. ..................... 5
(v) Good Standing of the Company. ............................... 5
(vi) No Subsidiaries. ............................................ 5
(vii) Capitalization. ............................................. 6
(viii) Authorization of Agreement. ................................. 6
(ix) Authorization and Description of Securities. ................ 6
(x) Absence of Defaults and Conflicts. .......................... 6
(xi) Absence of Labor Dispute. ................................... 7
(xii) Absence of Proceedings. ..................................... 7
(xiii) Accuracy of Exhibits ........................................ 7
(xiv) Possession of Intellectual Property. ........................ 8
(xv) Absence of Further Requirements. ............................ 8
(xvi) Possession of Licenses and Permits. ......................... 8
(xvii) Title to Property. .......................................... 9
(xviii) Investment Company Act. ..................................... 9
(xix) Environmental Laws. ......................................... 9
(xx) Registration Rights. ........................................ 10
(xxi) Recapitalization Agreement. ................................. 10
(xxii) Restrictions on Sales of Securities. ........................ 10
(b) Officer's Certificates .............................................. 10
SECTION 2. Sale and Delivery to Underwriters; Closing. ......................... 10
(a) Initial Securities. ................................................. 10
(b) Option Securities. .................................................. 10
(c) Payment ............................................................. 11
(d) Denominations; Registration. ........................................ 11
SECTION 3. Covenants of the Company. ........................................... 12
(a) Compliance with Securities Regulations and Commission Requests. ..... 12
(b) Filing of Amendments. ............................................... 12
(c) Delivery of Registration Statements. ................................ 12
(d) Delivery of Prospectuses. ........................................... 12
(e) Continued Compliance with Securities Laws. .......................... 13
(f) Blue Sky Qualifications; Foreign Jurisdictions. ..................... 13
(g) Rule 158. ........................................................... 13
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(h) Use of Proceeds. .................................................... 14
(i) Listing. ............................................................ 14
(j) Restriction on Sale of Securities. .................................. 14
(k) Reporting Requirements. ............................................. 14
(l) Compliance with NASD Rules. ......................................... 14
(m) Qualification in California. ........................................ 14
SECTION 4. Payment of Expenses. ................................................ 15
(a) Expenses. ........................................................... 15
(b) Termination of Agreement. ........................................... 15
SECTION 5. Conditions of Underwriters' Obligations. ............................ 15
(a) Effectiveness of Registration Statement. ............................ 15
(b) Opinion of Counsel for Company ...................................... 16
(c) Opinion of Counsel for Underwriters. ................................ 16
(d) Officers' Certificate. .............................................. 16
(e) Accountant's Comfort Letter. ........................................ 17
(f) Bring-down Comfort Letter. .......................................... 17
(g) Approval of Listing. ................................................ 17
(h) No Objection. ....................................................... 17
(i) Lock-up Agreements. ................................................. 17
(k) Conditions to Purchase of Option Securities. ........................ 17
(l) Additional Documents. ............................................... 18
(m) Termination of Agreement. ........................................... 18
SECTION 6. Indemnification. .................................................... 18
(a) Indemnification of Underwriters. .................................... 18
(b) Indemnification of Company, Directors and Officers. ................. 20
(c) Actions against Parties; Notification. .............................. 20
(d) Settlement without Consent if Failure to Reimburse. ................. 20
(e) Indemnification for Reserved Securities. ............................ 21
SECTION 7. Contribution. ....................................................... 21
SECTION 8. Qualified Independent Underwriter. .................................. 22
SECTION 9. Representations, Warranties and Agreements to Survive Delivery. ..... 23
SECTION 10. Termination of Agreement. ........................................... 23
(a) Termination; General. ............................................... 23
(b) Liabilities. ........................................................ 23
SECTION 11. Default by One or More of the Underwriters. .......................... 23
SECTION 12. Notices. ............................................................. 24
SECTION 13. Parties. ............................................................. 24
SECTION 14. GOVERNING LAW AND TIME. .............................................. 25
SECTION 15. Effect of Headings. .................................................. 25
SCHEDULE A .................................................................. Sch A-1
SCHEDULE B .................................................................. Sch B-1
SCHEDULE C .................................................................. Sch C-1
Exhibit A ......................................................................... A-1
Exhibit B ......................................................................... B-1
</TABLE>
iii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Exhibit C ........................................................................ C-1
Exhibit D ........................................................................ D-1
</TABLE>
iv
<PAGE> 5
NEXT LEVEL COMMUNICATIONS, INC.
(a Delaware corporation)
9,775,000 Shares of Common Stock
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
__________, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Lehman Brothers Inc.
Warburg Dillon Read LLC
Volpe Brown Whelan & Company
as Representatives of the several Underwriters
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Ladies and Gentlemen:
Next Level Communications, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Credit Suisse First Boston Corporation and each of
the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 11 hereof), for whom Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers
Inc., Warburg Dillon Read LLC and Volpe Brown Whelan & Company are acting as
representatives (in such capacity, the "Representatives"), with respect to the
issue and sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of common stock,
par value $.01 per share, of the Company ("Common Stock") set forth in said
Schedule A, and with respect to the grant by the Company to the Underwriters,
acting severally and not jointly, of the option described in Section 2(b) hereof
to purchase all or any part of 1,275,000 additional shares of Common Stock to
cover over-allotments, if any. The aforesaid 8,500,000 shares of Common Stock
(the "Initial Securities") to be purchased by the Underwriters and all or any
part of the 1,275,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
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The Company and the Underwriters agree that up to 765,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale to certain eligible employees and persons having business
relationships with the Company, as part of the distribution of the Securities by
the Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Reserved Securities are not orally confirmed for purchase by
such eligible employees and persons having business relationships with the
Company by the end of the first business day after the date of this Agreement,
such Reserved Securities may be offered to the public as part of the public
offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-85999) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 1999 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
It is understood by all parties hereto that prior to or concurrently
with the Closing Time referred to in Section 2(c) hereof, pursuant to the
Agreement and Plan of Merger (the
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"Recapitalization Agreement") dated as of __________, 1999 among the Company,
Next Level Communications, L.P., a Delaware limited partnership (the
"Partnership"), Next Level Communications, a California corporation ("NLC-CA"),
Spencer Trask Investors LLC, a Delaware limited liability company ("Spencer
Trask"), and General Instrument Corporation, a Delaware corporation ("GI"), (a)
GI, the Company and Chase Mellon Shareholder Services LLC, as Trustee, will
enter into a Voting Trust Agreement creating a voting trust (the "Voting
Trust"), and GI will deposit all shares of common stock of NLC-CA held by it
(which shares constitute all of the issued and outstanding shares of capital
stock of NLC-CA) into the Voting Trust, (b) a $75 million note of the
Partnership payable to GI, and accrued interest thereon, will be contributed by
GI to the Company in exchange for _____ shares of Common Stock, and such shares
of Common Stock will be deposited into the Voting Trust, (c) the Partnership
will be merged with and into the Company, and as a result of such merger (i) the
shares of Common Stock held by the Partnership (which prior to the transactions
contemplated hereby constitute all of the issued and outstanding shares of
capital stock of the Company) will be cancelled, (ii) the Company will issue to
NLC-CA, as consideration for NLC-CA's limited partnership interest in the
Partnership, _____ shares of the Company's Class B Non-Voting Common Stock, par
value $.01 per share (the "Class B Common Stock"), and (iii) the Company will
issue to Spencer Trask, as consideration for Spencer Trask's general partnership
interest in the Partnership, 5,863,329 shares of Common Stock, (d) NLC-CA will
be merged with and into the Company, and as a result of such merger (i) each
share of Class B Common Stock held by NLC-CA will be cancelled, (ii) the Company
will issue to GI, as consideration for all of the shares of common stock of
NLC-CA held by GI, ________ shares of Common Stock, and such shares of Common
Stock will be deposited into the Voting Trust, (iii) the outstanding shares of
Common Stock held by Spencer Trask will remain outstanding and unchanged, and
(iv) all outstanding options to purchase shares of common stock of NLC-CA will
be converted into options to purchase the same number of shares of Common Stock,
(e) the option held by Spencer Trask and referred to in Section 10.2 of the
Agreement of Limited Partnership of the Partnership dated as of January 13, 1998
will be converted into a warrant to purchase 8,480,102 shares of Common Stock,
and (f) each other transaction contemplated by the Recapitalization Agreement,
including the execution and delivery of all other agreements and instruments
required by the Recapitalization Agreement to be executed and delivered at such
time, will be consummated (the transactions described in clauses (a)-(f) above
being referred to herein as the "Recapitalization").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are
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contemplated by the Commission, and any request on the part of the
Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. The Prospectus, any preliminary
prospectus and any supplement thereto and any other materials
distributed in connection with the offer and sale of Reserved
Securities, at their respective times of issuance and at the Closing
Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus and such preliminary prospectus, as amended or supplemented,
if applicable, and such other materials are distributed in connection
with the offer and sale of Reserved Securities. Neither the Prospectus
nor any amendments or supplements thereto, at the time the Prospectus or
any such amendment or supplement was issued and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading. If Rule 434 is used, the Company will
comply with the requirements of Rule 434 and the Prospectus shall not be
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement
or Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Credit
Suisse First Boston Corporation expressly for use in the Registration
Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus delivered
to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in
the Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly
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(A) the financial position of the Company at the date indicated and (B)
the financial position of the Partnership at the dates indicated and the
results of operations, partners' deficit/stockholder's deficit and cash
flows of the Partnership for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data
and the summary financial data included in the Prospectus present fairly
the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the
related notes thereto included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances
referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company, the Partnership or NLC-CA, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company, the Partnership
or NLC-CA, other than those in the ordinary course of business, which
are material with respect to the Company, the Partnership or NLC-CA, and
(C) there has been no dividend or distribution of any kind declared,
paid or made by the Company or NLC-CA on any class of its respective
capital stock or by the Partnership on any of its partnership interests.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and, following the
Recapitalization, the properties of the Partnership and NLC-CA and to
conduct its business and, following the Recapitalization, the business
of the Partnership and NLC-CA as described in the Prospectus and to
enter into and perform its obligations under this Agreement and the
Recapitalization Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is, or following the
Recapitalization will be, required, whether by reason of the ownership
or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect.
(vi) No Subsidiaries. The Company has and following the
Recapitalization will have no subsidiaries.
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(vii) Capitalization. Prior to the Recapitalization, the issued
and outstanding capital stock of the Company consists solely of 100
shares of Common Stock held by the Partnership. Following the
Recapitalization, the authorized, issued and outstanding capital stock
of the Company will be as set forth in the Prospectus under the caption
"Description of Capital Stock" (except for subsequent issuances, if any,
pursuant to this Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the
Prospectus). The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable, and the shares of capital stock of the Company to be
issued in the Recapitalization have been duly authorized and upon
issuance will have been validly issued and will be fully paid and
nonassessable; none of the outstanding shares of capital stock of the
Company was, and upon issuance none of the shares of capital stock of
the Company to be issued in the Recapitalization will have been, issued
in violation of the preemptive or other similar rights of any
securityholder of the Company or in violation of the 1933 Act or any
state securities laws.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable;
the Common Stock conforms to all statements relating thereto contained
in the Prospectus and such description conforms to the rights set forth
in the instruments defining the same; no holder of the Securities will
be subject to personal liability by reason of being such a holder; and
the issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. The Company is not in
violation of its charter or by-laws, and none of the Company, the
Partnership and NLC-CA is in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company, the
Partnership or NLC-CA is a party or by which any of them may be bound,
or to which any of the property or assets of the Company, the
Partnership or NLC-CA is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the Recapitalization Agreement and the consummation
of the transactions contemplated herein, in the Recapitalization
Agreement and in the Registration Statement (including the issuance and
sale of the Securities, the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds" and the Recapitalization), and compliance by the Company with
its obligations hereunder and compliance by the Company, the Partnership
and NLC-CA with their respective obligations under the Recapitalization
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Agreement have been duly authorized by all necessary corporate or
partnership action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company, the Partnership or NLC-CA
pursuant to, the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
NLC-CA or the partnership agreement or certificate of limited
partnership of the Partnership or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company, the Partnership or NLC-CA or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company, the
Partnership or NLC-CA.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company, the Partnership or NLC-CA exists or, to the
knowledge of the Company, is imminent, and the Company is not aware of
any existing or imminent labor disturbance by the employees of any of
its, the Partnership's or NLC-CA's principal suppliers, manufacturers,
customers or contractors, which, in either case, may reasonably be
expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company, the Partnership or NLC-CA, which is required to be disclosed in
the Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the Recapitalization Agreement or the
performance by the Company, the Partnership or NLC-CA of its obligations
hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company, the Partnership or NLC-CA
is a party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
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(xiv) Possession of Intellectual Property. The Company, the
Partnership and NLC-CA own or possess or can acquire on reasonable
terms, and following the Recapitalization the Company will own or
possess, or will be able to acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the
business now operated by Partnership and to be operated by the Company
following the Recapitalization, and none of the Company, the Partnership
and NLC-CA has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect
to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect
the interest of the Company, the Partnership and NLC-CA therein, and
which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, singly or in
the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement and the Recapitalization Agreement,
except (i) such as have been already obtained or as may be required
under the 1933 Act or the 1933 Act Regulations or state securities laws,
(ii) such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved Securities
are offered, and (iii) filings or notifications required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, all of which
required filings or notifications have been made and the applicable
waiting period under such Act has expired or been earlier terminated.
(xvi) Possession of Licenses and Permits. The Company, the
Partnership and NLC-CA possess, and following the Recapitalization the
Company will possess, such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them or to be
operated by the Company following the Recapitalization; the Company, the
Partnership and NLC-CA are, and following the Recapitalization the
Company will be, in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are, and following the Recapitalization will be,
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not have a Material Adverse Effect; and
none of the Company, the Partnership and NLC-CA has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses
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which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xvii) Title to Property. Each of the Company, the Partnership
and NLC-CA has, and following the Recapitalization the Company will
have, good and marketable title to all real property owned by them and
good title to all other properties owned by them, in each case, free and
clear of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company,
the Partnership or NLC-CA; and all of the leases and subleases material
to the business of the Company, the Partnership and NLC-CA, and under
which the Company, the Partnership or NLC-CA holds properties described
in the Prospectus, are in full force and effect, and none of the
Company, the Partnership and NLC-CA has any notice of any material claim
of any sort that has been asserted by anyone adverse to the rights of
the Company, the Partnership or NLC-CA under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company, the Partnership or NLC-CA to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xviii)Investment Company Act. The Company is not, and upon the
completion of the Recapitalization, the issuance and sale of the
Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act").
(xix) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) none of the Company,
the Partnership and NLC-CA is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or
rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials (collectively, "Environmental Laws"), (B) the
Company, the Partnership and NLC-CA have, and following the
Recapitalization the Company will have, all permits, authorizations and
approvals required under any applicable Environmental Laws and are and
will be in compliance with their requirements, (C) there are no pending
or threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental
Law against the Company, the Partnership or NLC-CA and (D) there are no
events or circumstances that might reasonably
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be expected to form the basis of an order for clean-up or remediation,
or an action, suit or proceeding by any private party or governmental
body or agency, against or affecting the Company, the Partnership or
NLC-CA relating to Hazardous Materials or any Environmental Laws.
(xx) Registration Rights. Except as described in the Prospectus,
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xxi) Recapitalization Agreement. The Recapitalization Agreement
has been duly authorized, executed and delivered by each of the parties
thereto and constitutes the valid and binding agreement of each such
party, enforceable against each such party in accordance with its terms.
(xxii) Restrictions on Sales of Securities. During a period of
180 days from the date of the Prospectus, each holder of options to
purchase Common Stock will, pursuant to the terms of such options, be
prohibited from directly or indirectly selling, making any short sale
of, loaning, pledging, offering, granting or selling any option or other
contract for the purchase of, purchasing any option or other contract
for the sale of, or otherwise disposing of or transferring, or agreeing
to engage in any of the foregoing transactions with respect to, any
shares of Common Stock issuable upon the exercise of such options
without the prior written consent of the Company or Credit Suisse First
Boston Corporation.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any of its subsidiaries delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 1,275,000 shares of Common
Stock at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial Securities
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but not payable on the Option Securities. The option hereby granted will expire
30 days after the date hereof and may be exercised in whole or in part from time
to time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Securities upon
notice by the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York,
or at such other place as shall be agreed upon by the Representatives and the
Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (Eastern time) on any given day) business day after the date
hereof (unless postponed in accordance with the provisions of Section 11), or
such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
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<PAGE> 16
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, five signed copies of the Registration Statement as originally filed and
of each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
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<PAGE> 17
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications; Foreign Jurisdictions. The Company will use
its best efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws of such
states and other jurisdictions (domestic or foreign) as the Representatives may
designate and to maintain such qualifications in effect for a period of not less
than one year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so qualified,
the Company will file such statements and reports as may be required by the laws
of such jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration Statement and
any Rule 462(b) Registration Statement. Furthermore, the Company covenants with
the Underwriters that the Company will comply with all applicable securities and
other applicable laws, rules and regulations in each foreign jurisdiction in
which the Reserved Securities are offered.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
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<PAGE> 18
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the listing
of the Common Stock (including the Securities) on the Nasdaq National Market.
(j) Restriction on Sale of Securities. For a period of 180 days after
the date of the initial public offering of the Securities, the Company will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the 1933
Act relating to, any additional shares of Common Stock or securities convertible
into or exchangeable or exercisable for any shares of Common Stock or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation, except (i) issuances of Common Stock or options or warrants to
purchase Common Stock pursuant to the Recapitalization Agreement, (ii) issuance
of Common Stock pursuant to the exercise of options or warrants referred to in
(i) above or outstanding on the date hereof, and (iii) grants of employee stock
options pursuant to the terms of a plan in effect on the date hereof, issuances
of Common Stock pursuant to the exercise of such options or issuances of Common
Stock pursuant to the Company's employee stock purchase plan in effect on the
date hereof. Without the prior written consent of Credit Suisse First Boston
Corporation, the Company will not grant any consent to any sale, disposition or
other transaction described in Section 1(a)(xxii), and the Company will use its
best efforts to enforce the prohibitions of such transactions referred to in
Section 1(a)(xxii).
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Qualification in California. As soon as possible after the Closing
Time, the Company will take all action necessary to become qualified as a
foreign corporation to transact business in the State of California.
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<PAGE> 19
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the Securities, (x) the fees and expenses incurred in
connection with the listing of the Common Stock on the Nasdaq National Market
and (xi) all costs and expense of the Underwriters, including the fees and
disbursements of counsel for the Underwriters and stamp duties, similar taxes or
duties or other taxes, if any, incurred by the Underwriters, in connection with
the matters related to the Reserved Securities which are designated by the
Company for sale to employees and others having a business relationship with the
Company.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
10(a)(i) or (ii) hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and other
obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements
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<PAGE> 20
of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet
shall have been filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of (i)
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters, to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the Underwriters may reasonably request, (ii) Simpson
Thacher & Bartlett, counsel for the Company, in form and substance satisfactory
to counsel for the Underwriters, together with signed or reproduced copies of
such letter for each of the other Underwriters, to the effect set forth in
Exhibit B hereto and to such further effect as counsel to the Underwriters may
reasonably request and (iii) Covington & Burling, special counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters, to the effect set forth in Exhibit C hereto and to such further
effect as counsel to the Underwriters may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the charter or by-laws of the Company), (vii) through (x),
inclusive, (xi), (xiii) (solely as to the information in the Prospectus under
"Description of Capital Stock -- Common Stock") and the penultimate paragraph of
Exhibit B hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State of
New York, the federal law of the United States and the General Corporation Law
of the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company, the Partnership or NLC-CA, whether or not arising in the ordinary
course of business, and the Representatives shall have received a certificate of
the President or a Vice President of the Company and of the chief financial or
chief accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, (iv) the
Recapitalization has been completed, and (v) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or are contemplated by the
Commission.
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(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Deloitte & Touche LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Deloitte & Touche LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(g) Approval of Listing. At Closing Time, the Common Stock shall have
been approved for listing on the Nasdaq National Market, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit D hereto signed by the persons listed on Schedule C hereto and covering
the number of days specified for each such person on Schedule C.
(j) Recapitalization. The Recapitalization shall have been completed.
(k) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to Section
5(d) hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
(i) Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP,
counsel for the Company, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required of such counsel by Section
5(b) hereof, (ii) Simpson Thacher & Bartlett, counsel for the Company,
in form and substance satisfactory to counsel
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<PAGE> 22
for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required of such counsel by Section
5(b) hereof and (iii) Covington & Burling, special counsel for the
Company, in form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, to the same effect as the
opinion required of such counsel by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion
of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche
LLP, in form and substance satisfactory to the Representatives and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the Representatives pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than three days
prior to such Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter, its directors and officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act as follows:
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<PAGE> 23
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission
or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, (A) arising out of the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered, (B) arising out of any untrue statement or
alleged untrue statement of a material fact included in any material
prepared by or with the consent of the Company for distribution in
connection with the reservation and sale of the Reserved Securities to
eligible employees and persons having business relationships with the
Company or the omission or alleged omission therefrom of a material fact
necessary to make the statements therein, when considered in conjunction
with the Prospectus or preliminary prospectus, not misleading, and (c)
otherwise related to, arising out of or in connection with the offer and
sale of the Reserved Securities;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof;
provided that (subject to Section 6(d) below) any such settlement is
effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Credit Suisse
First Boston Corporation), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Credit Suisse First Boston Corporation expressly for use in
the Registration Statement (or any amendment thereto), including the Rule 430A
Information and
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<PAGE> 24
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through Credit
Suisse First Boston Corporation expressly for use in the Registration Statement
(or any amendment thereto) or such preliminary prospectus or the Prospectus (or
any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder (including under Section 8), but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder
(including under Section 8) to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 6(a) above or Section 8 below, counsel
to the indemnified parties shall be selected by Credit Suisse First Boston
Corporation, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6, Section 7 or Section 8 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and
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expenses of counsel, such indemnifying party agrees that it shall be liable for
any settlement of the nature contemplated by Section 6(a)(iii) effected without
its written consent if (i) such settlement is entered into more than 45 days
after receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees and persons having
business relationships with the Company to pay for and accept delivery of
Reserved Securities which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed agreement to
purchase.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions, or in connection with
any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, or any violation of the nature referred to in Section
6(a)(ii)(A) hereof.
21
<PAGE> 26
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Qualified Independent Underwriter. The Company hereby
confirms that at its request Credit Suisse First Boston Corporation has without
compensation acted as "qualified independent underwriter" (in such capacity, the
"QIU") within the meaning of Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. in connection with the offering of the
Securities. The Company will indemnify and hold harmless the QIU against any
losses, claims, damages or liabilities, joint or several, to which the QIU may
become subject, under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon the QIU's acting (or alleged failing to act) as such "qualified independent
underwriter" and will reimburse the QIU for any legal or other expenses
reasonably incurred by the QIU in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred.
22
<PAGE> 27
SECTION 9. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 10. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time, if
there has occurred, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, (i) any
change, or any development or event involving a prospective change, in the
condition (financial or other), business, properties or results of operations of
the Company which, in the judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it impractical
or inadvisable to proceed with completion of the public offering or the sale of
and payment for the Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or any
public announcement that any such organization has under surveillance or review
its rating of any debt securities of the Company (other than an announcement
with positive implications of a possible upgrading, and no implication of a
possible downgrading, of such rating); (iii) any material suspension or material
limitation of trading in securities generally on the New York Stock Exchange or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or
New York authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Securities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7, 8 and 9 shall survive such termination and remain in full force and
effect.
SECTION 11. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if,
23
<PAGE> 28
however, the Representatives shall not have completed such arrangements within
such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 11.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives c/o Credit Suisse First
Boston Corporation, Eleven Madison Avenue, New York, New York 10010-3629,
attention: Investment Banking Department - Transactions Advisory Group; and
notices to the Company shall be directed to it at 6085 State Farm Drive, Rohnert
Park, California 94928, attention: ____________.
SECTION 13. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal
24
<PAGE> 29
representatives, and for the benefit of no other person, firm or corporation. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SPECIFIED TIMES OF DAY REFER TO NEW
YORK CITY TIME.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
25
<PAGE> 30
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
NEXT LEVEL COMMUNICATIONS, INC.
By:________________________________
Title:_____________________________
CONFIRMED AND ACCEPTED,
as of the date first above written:
CREDIT SUISSE FIRST BOSTON CORPORATION
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Lehman Brothers Inc.
Warburg Dillon Read LLC
Volpe Brown Whelan & Company
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
26
<PAGE> 31
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation...............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................
Lehman Brothers Inc..................................................
Warburg Dillon Read LLC..............................................
Volpe Brown Whelan & Company.........................................
---------
Total ............................................................... 8,500,000
=========
</TABLE>
Sch A-1
<PAGE> 32
SCHEDULE B
NEXT LEVEL COMMUNICATIONS, INC.
9,775,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in Section 2, shall be $______.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $______, being an amount equal to the initial
public offering price set forth above less $_____ per share; provided that the
purchase price per share for any Option Securities purchased upon the exercise
of the over-allotment option described in Section 2(b) shall be reduced by an
amount per share equal to any dividends or distributions declared by the Company
and payable on the Initial Securities but not payable on the Option Securities.
Sch B-1
<PAGE> 33
SCHEDULE C
List of persons and entities
subject to lock-up
<TABLE>
<CAPTION>
Name Number of Days for Lock-Up
---- --------------------------
<S> <C>
General Instrument Corporation 180
Spencer Trask Investors LLC and
each affiliate of Spencer Trask
Investors LLC who will become the owner
of any part of the warrant to purchase
8,480,102 shares of Common Stock to be
issued in the Recapitalization 180
Peter W. Keeler 365
Thomas R. Eames 365
A. Pat Pachynski 180
Charles H. Seebok 180
Frank R. Tuhy 180
T. Murat Uraz 180
Hans L. Van Welzen 180
James T. Wandrey 180
William A. Weeks 180
Lynn Forester 180
Paul S. Latchford 180
John McCartney 180
Richard C. Smith 180
</TABLE>
Sch C-1
<PAGE> 34
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company (as successor to the Partnership or otherwise) is a
party, or to which the property of the Company is subject, before or
brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of
the transactions contemplated in the Purchase Agreement or the
Recapitalization Agreement or the performance by the Company of its
obligations thereunder.
(ii) All descriptions in the Registration Statement of contracts
and other documents to which the Company (as successor to the
Partnership or otherwise) is a party are accurate in all material
respects; to the best of our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto, and the descriptions thereof or
references thereto are correct in all material respects.
(iii) To the best of our knowledge, the Company is not in
violation of its charter or by-laws and no default by the Company exists
in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
(iv) The execution, delivery and performance of the Purchase
Agreement and the Recapitalization Agreement and the consummation of the
transactions contemplated in the Purchase Agreement, in the
Recapitalization Agreement and in the Registration Statement (including
the issuance and sale of the Securities, the use of the proceeds from
the sale of the Securities as described in the Prospectus under the
caption "Use Of Proceeds" and the Recapitalization) and compliance by
the Company with its obligations under the Purchase Agreement and
compliance by the Company, the Partnership and NLC-CA with their
respective obligations under the Recapitalization Agreement do not and
will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined in Section 1(a)(x) of the Purchase
A-1
<PAGE> 35
Agreement) under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument,
known to us, to which the Company (as successor to the Partnership or
otherwise) is a party or by which it may be bound, or to which any of
the property or assets of the Company is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not have a Material Adverse Effect), nor will such action result
in any violation of the provisions of the charter or by-laws of the
Company, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any of its properties, assets or operations.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-2
<PAGE> 36
Exhibit B
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(ii)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and to enter into and perform its obligations under the
Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure
so to qualify or to be in good standing would not result in a Material
Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Description
of Capital Stock" (except for subsequent issuances, if any, pursuant to
the Purchase Agreement or pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the
Prospectus); the shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable; and none of the outstanding shares of capital stock
of the Company was issued in violation of the preemptive or other
similar rights of any securityholder of the Company or in violation of
the 1933 Act or any state securities laws.
(v) The Securities have been duly authorized for issuance and
sale to the Underwriters pursuant to the Purchase Agreement and, when
issued and delivered by the Company pursuant to the Purchase Agreement
against payment of the consideration set forth in the Purchase
Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability
by reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive
or other similar rights of any securityholder of the Company.
(vii) The Purchase Agreement has been duly authorized, executed
and delivered by the Company.
B-1
<PAGE> 37
(viii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus and each amendment or
supplement to the Registration Statement and Prospectus as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to
which we need express no opinion) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(x) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
(xi) The form of certificate used to evidence the Class A Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and
by-laws of the Company and the requirements of the Nasdaq National
Market.
(xii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company (as successor to the Partnership or otherwise) is a
party, or to which the property of the Company is subject, before or
brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of
the transactions contemplated in the Purchase Agreement or the
Recapitalization Agreement or the performance by the Company of its
obligations thereunder.
(xiii) The information in the Prospectus under "Description of
Capital Stock--Common Stock", "Business--Regulation",
"Business--Litigation", "Description of Capital Stock--Preferred Stock"
and "Certain Federal Income Tax Consequences to Non-U.S. Holders" and in
the Registration Statement under Item 14, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
charter and by-laws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
B-2
<PAGE> 38
(xiv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required.
(xv) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required
in connection with the due authorization, execution and delivery of the
Purchase Agreement and the Recapitalization Agreement or for the
offering, issuance or sale of the Securities or the consummation of the
Recapitalization.
(xvi) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xvii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the 1940 Act.
(xviii) The Recapitalization Agreement has been duly authorized,
executed and delivered by each of the parties thereto and constitutes
the valid and binding agreement of each such party, enforceable against
each such party in accordance with its terms, except as such enforcement
may be limited by applicable bankruptcy, insolvency, Recapitalization,
moratorium or other similar laws affecting creditors' rights generally
and by general principles of equity.
(xix) The Recapitalization has been completed.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company
B-3
<PAGE> 39
and public officials. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991).
B-4
<PAGE> 40
Exhibit C
FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(iii)
(i) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required.
(ii) The information in the Prospectus under
"Business-Regulation of Customers," to the extent that it constitutes
matters of law, summaries of legal matters or legal conclusions, has
been reviewed by us and is correct in all material respects.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
C-1
<PAGE> 41
[Form of lock-up pursuant to Section 5(i)]
Exhibit D
__________, 1999
NEXT LEVEL COMMUNICATIONS, INC.
6085 State Farm Drive
Rohnert Park, California 94928
CREDIT SUISSE FIRST BOSTON CORPORATION
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Lehman Brothers Inc.
Warburg Dillon Read LLC
Volpe Brown Whelan & Company
as Representatives of the several
Underwriters to be named in the
within-mentioned Underwriting Agreement
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Dear Sirs:
As an inducement to the Underwriters to execute the Underwriting
Agreement, pursuant to which an offering will be made that is intended to result
in the establishment of a public market for shares of common stock, par value
$.01 per share (the "Securities"), of Next Level Communications, Inc. (the
"Company"), the undersigned hereby agrees that, for a period of [180][365] days
after the initial public offering (the "Commencement Date") of the Securities
pursuant to the Underwriting Agreement to which you are or expect to become
parties, the undersigned will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of Securities or
securities convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer, sale,
pledge or disposal without the prior written consent of Credit Suisse First
Boston Corporation.
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Securities if such transfer would constitute a violation or breach of this
Agreement.
This Agreement shall be binding on the undersigned and the respective
successors, heirs, personal representatives and assigns of the undersigned. This
agreement shall lapse and become null and void if the Commencement Date shall
not have occurred on or before December 31, 1999.
Very truly yours,
___________________________________
Name:______________________________
D-1
<PAGE> 1
EXHIBIT 5.1
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[GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN & HACHIGIAN, LLP LETTERHEAD]
October 29, 1999
Next Level Communications, Inc.
6085 State Farm Drive
Rohnert Park, CA 94928
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-85999) originally filed by Next Level Communications, Inc. (the "Company")
with the Securities and Exchange Commission (the "Commission") on August 27,
1999, as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 9,775,000 shares of the Company's Common Stock (the "Shares"). The
Shares, which include an over-allotment option granted by the Company to the
Underwriters to purchase up to 1,275,000 additional shares of the Company's
Common Stock, are to be sold to the Underwriters by the Company as described in
the Registration Statement for resale to the public. As your counsel in
connection with this transaction, we have examined the proceedings taken and are
familiar with the proceedings proposed to be taken by you in connection with the
sale and issuance of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement and in accordance with the resolutions
adopted by the Board of Directors of the Company, will be legally and validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment or supplement thereto.
Very truly yours,
/s/ GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
155 Constitution Drive, Menlo Park, California 94025
Phone 650.321.2400 Fax 650.321.2800
Menlo Park, California - Austin, Texas
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THIS PATENT AND TECHNICAL INFORMATION CROSS-LICENSE AGREEMENT is entered into by
NextLevel Communications, L.P. ("NLC") and General Instrument Corporation
("GI"), dated this ____ day of October, 1999, and effective as of the Effective
Date (as defined below).
SECTION 1. DEFINITIONS. The following terms have the meaning specified:
1.1 "Agreement" means this Patent and Technical Information Cross-License
Agreement, including all Appendices to this Agreement, as amended from time to
time.
1.2 "Affiliate" means, with respect to any entity, any other person or
entity that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such entity.
1.2 "Effective Date" means the date both parties have signed this
Agreement.
1.3 "End User" means a third-party system operator or such system
operator's customers.
1.4 "GI Digital and HFC Telephony Products" means digitable cable
subscriber terminals (for example, without limitation, DCT 1000, DCT 2000, DCT
5000, etc.), satellite and wireless subscriber terminals, cable modems, and
related headend, uplink, transmission or other network equipment and software.
GI Digital and HFC Telephony Products also include devices to provide telephony
and data services via HFC networks (for example, without limitation, IP
telephony over HFC networks and selling, monitoring or provisioning BTIs).
1.5 "GI Licensed Patents" means all patent applications and patents owned
by GI and filed before the Effective Date, and any future patents to issue from
same worldwide; but does not include claims covering only HFC, wireless or
satellite implementations. GI Licensed Patents do not include claims covering
conditional access or security methods or devices. Further, GI Licensed Patents
do not include patents and patent applications included, or which come to be
included, in open publicly available licensing programs listed in Appendix A.
1.6 "NLC Licensed Patents" means all patent applications and patents owned
by NLC and filed before the Effective Date, and any future patents to issue from
same, worldwide; but do not include claims covering embodiments basely solely on
DSL, DLC or fiber-to-the-curb or fiber-to-the-home implementations. Further, the
term does not include patents and patent applications included, or which come to
be included, in open publicly available licensing programs listed in Appendix B,
or individually listed in Appendix B.
1.7 "NLC Products" means the NLevel3 product or related switched digital
access (SDA) network equipment and software for providing voice, video and data
services.
1.8 "Technical Information" means the technical data and other
confidential information of one party rightfully in the possession of the other
party as of the Effective Date and which is reasonably required to design, make
or use products of the party rightfully possessing such information.
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SECTION 2. LICENSE GRANTS AND RIGHTS
2.1 Grant of License Rights in Patents. Subject to the terms of this
Agreement, NLC grants to GI and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license under its NLC Licensed Patents:
(1) to make and have made GI Digital and HFC Telephony Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import GI Digital and HFC Telephony Products.
2.2 Grant of License Rights in Technical Information. Subject to the terms
of this Agreement, NLC grants to GI and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license to use NLC's Technical Information:
(1) to make and have made GI Digital and HFC Technology Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import GI Digital and HFC Telephony Products.
2.3 Grant of License Rights in Patents. Subject to the terms of this
Agreement, GI grants to NLC and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license under GI Licensed Patents:
(1) to make and have made NLC Products; and
(2) to use (including for all End User uses), offer for sale, sell,
maintain and import NLC Products.
2.4 Grant of License Rights in Technical Information. Subject to the terms
of this Agreement, GI grants to NLC and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license to use GI's Technical Information:
(1) to make and have made NLC Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import NLC Products.
2.5 Reservation of Rights. Each party reserves all rights not expressly
granted to the other party under this Agreement and no other rights are granted
by implication, estoppel or otherwise.
2.6 Rights to Sublicense. The licenses granted do not include the right to
sublicense, except to End Users as provided in the foregoing license grants.
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SECTION 3. WARRANTIES
3.1 WARRANTIES. THE NLC LICENSED PATENTS AND THE GI LICENSED PATENTS AND
EACH PARTIES' RESPECTIVE TECHNICAL INFORMATION ARE PROVIDED "AS IS" AND EACH
PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, OR OTHERWISE. NOTHING IN THIS AGREEMENT SHALL BE
DEEMED TO BE A REPRESENTATION OR WARRANTY THAT ANYTHING MADE, USED, SOLD OR
OTHERWISE DISPOSED OF UNDER ANY LICENSE GRANTED IN THIS AGREEMENT IS OR WILL BE
FREE FROM INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. EACH
PARTY ASSUMES NO LIABILITY ARISING OUT OF THE SUPPLYING OF TECHNICAL INFORMATION
UNDER, IN CONNECTION WITH, OR AS A RESULT OF THIS AGREEMENT, WHETHER THE SAME
SHALL BE ALLEGED TO ARISE IN WARRANTY, CONTRACT, NEGLIGENCE, OR OTHERWISE,
EXCEPT AS MAY ARISE AS A RESULT OF A BREACH OF THE SPECIFIC PROVISIONS OF THIS
AGREEMENT.
SECTION 4. CONFIDENTIALITY
4.1 Confidentiality. Each party acknowledges that the Technical
Information of the other and the terms and conditions of this Agreement are
confidential information and agrees that it shall abide by the restrictions on
the use of such confidential information as stated in certain non-disclosure
agreements which have been signed by the parties from time to time.
Notwithstanding anything to the contrary in this or any other agreement,
however, each party agrees to protect the confidential information of the other
party with the same standard of care that such party uses with respect to its
own confidential information, provided that in no case shall such standard of
care be less than a reasonable standard of care.
SECTION 5. RELEASE AND COVENANT NOT TO SUE
5.1 Releases.
(1) Release by GI. GI, for itself and all its Affiliates, and their
successors, assigns, customers or any of their respective directors, officers or
employees and all others who may take any interest in the matters herein
released, hereby fully and forever releases, acquits and discharges NLC and its
Affiliates, and their successors, assigns, customers or any of their respective
directors, officers or employees from any and all claims, demands, damages,
losses, rights and causes of action known or unknown to GI that GI may have
against NLC that arise from (a) the use of the GI Patents, (b) the use of GI
Technical Information or (c) any other intellectual property rights of GI in
connection with the design, manufacture, sale or use of any NLC Products as of
or prior to the Effective Date of this Agreement.
(2) Release by NLC. NLC, for itself and all its Affiliates, and their
successors, assigns, customers or any of their respective directors, officers or
employees and all others who may take any interest in the matters herein
released, hereby fully and forever releases, acquits and discharges GI and its
Affiliates, and their successors, assigns, customers or any of their
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respective directors, officers or employees, from any and all claims, demands,
damages, losses, rights and causes of action known or unknown to NLC that NLC
may have against GI that arise from (a) the use of the NLC Patents, (b) the use
of NLC Technical Information or (c) the use of any other intellectual property
rights of NLC in connection with the design, manufacture, sale or use of any GI
Products as of or prior to the Effective Date of this Agreement.
5.2 Covenant Not to Sue
(1) GI Covenant Not to Sue. GI will not prosecute or assist in the
prosecution of any claim, demand, action or cause of action against NLC or its
Affiliates, and their successors, assigns, customers or any of their respective
directors, officers or employees, for, on account of, or arising out of any
claim of misappropriation of GI trade secrets, infringement of GI copyrights,
infringement of any GI Licensed Patents, use of any GI Technical Information or
any other GI intellectual property rights in connection with the design,
manufacture, sale or use of any NLC Products arising as of or prior to the
Effective Date.
(2) NLC Covenant Not to Sue. NLC will not prosecute or assist in the
prosecution of any claim, demand, action or cause of action against GI, or its
Affiliates and their successors, assigns, customers or any of their respective
directors, officers or employees, for, on account of, or arising out of any
claim of misappropriation of NLC trade secrets, infringement of NLC copyrights,
infringement of any NLC Licensed Patents , use of any NLC Technical Information
or any other NLC intellectual property rights in connection with the design,
manufacture, sale or use of GI Digital or HFC Telephony Products arising as of
or prior to the Effective Date.
SECTION 6. PROSECUTION AND MAINTENANCE OF PATENTS; CLAIMS AGAINST THIRD PARTY
INFRINGERS
6.1 Rights to Prosecute and Maintain Patents. NLC has sole right to file,
prosecute and maintain all of the NLC Licensed Patents. GI has sole right to
file, prosecute and maintain all of GI Licensed Patents. Subject to the
obligations of confidentiality hereunder, each party has the sole and exclusive
right to determine whether or not, and where, to file a patent application, to
abandon the prosecution of any patent or patent application, or to discontinue
the maintenance of its respective patent or patent applications.
6.2 Notification of Adverse Claims and Actions. Each party will promptly
notify the other party in writing of any claims by third parties of infringement
of third party rights by the other party's products of which it receives written
notice. Each party will also promptly notify the other party in writing of any
suspected infringement of the other party's patents licensed hereunder or other
such activity that could adversely affect the rights of such other party with
respect thereto during the term of this Agreement, and will inform such other
party of any evidence of such infringement or unlawful activity in its
possession and the identity of any parties responsible for the infringement.
6.3 Cooperation. Each party will cooperate with the other party upon
request, at the other party's expense, in all matters relating to litigation
brought to enforce such party's patent
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rights licensed to the other party hereunder, including providing information,
documents and other assistance necessary to the settlement or prosecution
thereof.
SECTION 7. TERM AND TERMINATION
7.1 Term. This Agreement will remain in effect perpetually, except with
respect to the licenses granted under the GI Licensed Patents or NLC Licensed
Patents, in which case this Agreement shall remain in effect until the last to
expire of such patents.
SECTION 8. MISCELLANEOUS
8.1 Amendment and Modification. This Agreement and its Appendices may be
amended, modified or supplemented only by a written agreement of the parties
referring expressly to this Agreement.
8.2 Waiver of Compliance; Consents. Any failure of a party to comply with
any obligation, covenant, agreement or condition in this Agreement may be waived
by the other party; provided that any such waiver may be made only by a written
instrument signed by the party granting such waiver. Any such waiver or failure
to insist upon strict compliance with such obligation, covenant, agreement or
condition will not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party, such consent must be given in writing in a manner
consistent with the requirements for a waiver of compliance as described above,
with appropriate notice provided in accordance with this Agreement.
8.3 Further Assurances. Each party will execute and deliver such other
documents and take such other action as the other party may reasonably request
in order to consummate more effectively the purpose of this Agreement and the
relationship between the parties as contemplated by this Agreement, including,
without limitation, the execution of documents in recordable form confirming the
existence of the grant of rights provided for under this Agreement, at the
expense of the requesting party.
8.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
principles of conflicts of law thereof. Except for injunctive relief which may
be sought immediately in any court of competent jurisdiction, and subject to the
provisions of Section 9.5, all actions, claims or legal proceedings in any way
pertaining to this Agreement shall be commenced and maintained in the courts of
New York, New York or in a federal court of the United States located in New
York, New York.
8.5 Obligation to Discuss. If either party believes the other party has
breached this Agreement, then a senior level executive with responsibilities in
the appropriate area (the "Senior Executive") of the party claiming breach shall
provide written notice of such alleged breach to the Senior Executive of the
party allegedly in breach. Within fifteen (15) days of receipt of such notice,
the Senior Executive of GI and Senior Executive of NLC shall meet in person or
by telephone to seek to resolve the situation in a mutually agreeable manner. If
the Senior Executives are unable to resolve the problem in good faith within
forty-five (45) days after the Senior Executive of the party allegedly in breach
has received the forgoing notice, then
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the party claiming breach may commence any actions to which it is entitled under
the terms of this Agreement.
8.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will constitute an original, but all of which
together constitute one and the same instrument and will become a binding
agreement when one or more of the counterparts have been signed by each of the
parties and delivered to the other party.
8.7 Publicity. Neither party will make any media or press release
concerning this Agreement or the relationship of the parties, without the prior
written consent of the other party. The preceding sentence will not apply to any
disclosure required to be made by law or by the regulations of any stock
exchange(s), as reasonably determined by counsel to the party determining that
such disclosure is required, except that such party, whenever practicable, must
consult with the other party concerning the timing and content of such
disclosure before making it.
Nothing in this Agreement should be construed to confer upon either party
any right to include in its advertising, packaging or other commercial
activities related to a product any reference to the trademarks or service marks
of the other party.
8.8 Compliance with Laws. Each party will be responsible for obtaining all
consents and permits required by any law or regulation for the performance of
its obligations under this Agreement, including compliance with restrictions
imposed by the United States of America governing the export of technical data
(including encryption software). Each party will take all steps necessary, at
its sole expense, for its performance of obligations under this Agreement.
8.9 Assignment. This Agreement and all rights and obligations hereunder
may not be assigned in whole or in part by either party without the prior
written consent of the other party except as a part of the sale, transfer or
conveyance (including a conveyance by virtue of a merger, consolidation or
reorganization) of substantially all of NLC's or GI's business or a substantial
part of its business segment which exploits this rights granted under this
Agreement. Either party may assign its rights under this Agreement to an
Affiliate of that party, but such assignment will not relieve the assignor of
any of its obligations under this Agreement.
8.10 Severability. If any of the provisions of this Agreement are held by a
court or other tribunal of competent jurisdiction to be invalid or
unenforceable, the remaining portions of this Agreement will remain in full
force and effect and construed so as to best effect the intention of the
parties.
8.11 Survival of Terms. Notwithstanding the termination of this Agreement,
those provisions that by their express terms are to survive termination will do
so as so expressly provided; in all other cases such provisions will survive as
necessary to effect their essential purposes.
8.12 Notices under this Agreement. All notices and other communications
under this Agreement must be in writing and will be duly given if (1) delivered
by hand; (2) deposited in registered or certified mail (return receipt
requested), in which case such notice will be deemed given three (3) days
following deposit; or (3) sent via facsimile transmission (and confirmed by
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copy sent via registered or certified mail (return receipt requested), to the
parties at the following addresses (or at such other address for a party as may
be specified by like notice):
NLC: NextLevel Communications, L.P.
and
GI: General Instrument Corporation
Attn: General Counsel
101 Tournament Drive
Horsham, PA 19044
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, NLC and GI have caused this Agreement to be executed by
their duly authorized officers as of the date below.
NEXTLEVEL COMMUNICATIONS, GENERAL INSTRUMENT
L.P. ("NLC") CORPORATION ("GI")
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
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APPENDIX A
EXCLUDED GI PATENTS
Several GI Patents, excluded from this Agreement, are or may come to be included
in the following publicly available licensing programs:
DOCSIS
MPEG2
MPEG4
PacketCable
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APPENDIX B
EXCLUDED NLC PATENTS
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Exhibit 23.1
Independent Auditors' Consent
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-85999 of Next Level Communications, Inc. on Form S-1 of our reports dated
October 15, 1999 (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to additional funding requirements) relating to
the financial statements of Next Level Communications L.P. and August 25, 1999
(October 11, 1999 as to Notes 2 and 3), related to the balance sheet of Next
Level Communications, Inc. appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
October 28, 1999
