<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1999.
REGISTRATION NO. 333-85999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 PENDING
(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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE(2)
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Common Stock, $.01 par
value....................... 9,775,000 $12.00 $117,300,000 $32,610
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</TABLE>
(1) Includes 1,275,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a). A registration fee in the amount
of $34,750 was previously paid pursuant to Rule 457(o) based on a proposed
maximum aggregate offering price of $125,000,000.
------------------------
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 12, 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
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.
<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>
---------------
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 an outstanding
warrant 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 are derived from audited financial statements included in this prospectus.
The statement of operations data for the nine months ended September 30, 1998
and September 30, 1999 and the balance sheet data as of September 30, 1999 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 all tandem stock option holders 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 $ 32,530 $ 32,530
Gross profit (loss)..................... -- (2,949) 397 397 (568) 3,161 3,161
Operating expenses:
Research and development.............. 17,102 37,064 47,086 47,086 32,493 35,761 35,761
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) (54,820) (54,820)
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) $(59,148) $(54,138)
========= ======== ======== ======== ======== ======== ========
Pro forma basic and diluted net loss
per share............................. $ (0.98) $ (0.70)
======== ========
Shares used in pro forma basic and
diluted net loss per share............ 77,043 77,043
======== ========
</TABLE>
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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............................................. 18,159 18,159 102,314
Total assets................................................ 87,934 87,934 172,089
Long-term obligations, net of current portion............... 86,396 446 446
Total partners' deficit/stockholders' equity................ (39,917) 46,033 130,188
</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 $59.1 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
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 adequate funds are not available, or are not
available on acceptable terms, we may not be
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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 15% 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;
- inexperience of telephone companies in providing broadband services and
the lack of sufficient technical expertise and personnel to install
products and implement services effectively;
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<PAGE> 13
- 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
U S 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. 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. 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.
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 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
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<PAGE> 14
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.
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),
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<PAGE> 15
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 NEGATIVELY AFFECT OUR SALES
Consolidation in the telecommunications equipment industry may strengthen
our competitors' position in our market 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.
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
If we lose the services of one or more of our executive officers or key
employees, or if one or more of them decide to join a competitor or otherwise
compete directly or indirectly with us, our business, operating results and
financial condition would be harmed. None of them 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
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<PAGE> 16
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 could be harmed.
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 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.
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<PAGE> 17
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.
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
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<PAGE> 18
cannot find alternative sources for the manufacture of our products, our
operating results would be harmed.
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.
WE WILL FACE NEW RISKS AND CHALLENGES FROM OUR PLANNED INTERNATIONAL EXPANSION
AND THESE COULD HARM OUR OPERATING RESULTS
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
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<PAGE> 19
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 ADVERSELY AFFECT THE EFFICIENT
OPERATION OF OUR BUSINESS
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
electronic data exchange systems 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 STOCKHOLDER
VOTES AND OUR BUSINESS AND AFFAIRS
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 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.
GENERAL INSTRUMENT IS EXPECTING A CHANGE OF CONTROL BY MOTOROLA, WHICH WOULD
THEN CONTROL US AND COULD IMPLEMENT CHANGES THAT MAY BE ADVERSE TO US AND TO OUR
OTHER STOCKHOLDERS
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.
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.
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<PAGE> 20
OUR PRINCIPAL STOCKHOLDER MAY HAVE CONFLICTS OF INTEREST WITH US
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. Our certificate of
incorporation contains provisions intended to protect our principal stockholder
and these individuals in these situations. 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 a warrant 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 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 the underwriters.
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
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<PAGE> 21
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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<PAGE> 22
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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<PAGE> 23
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 funding our continued research and development efforts and
working capital. 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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<PAGE> 24
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);
- 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 a warrant 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 an
outstanding warrant, 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).......................... -- 45,263 178,586
Partners' deficit...................................... (39,917) -- --
Accumulated deficit(2)................................. -- -- (49,253)
-------- ------- --------
Total partners' deficit/stockholders' equity... (39,917) 46,033 130,188
-------- ------- --------
Total capitalization........................... $ 46,479 $46,479 $130,634
======== ======= ========
</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
- a warrant 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 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 all tandem stock option holders 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
$40.7 million, or $0.53 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 $124.8
million, or $1.46 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 $9.54 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.............. $ 0.53
Increase per share attributable to new investors.......... 0.93
------
Pro forma net tangible book value per share, as adjusted for
this offering............................................. 1.46
------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 9.54
======
</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
- a warrant 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 balance sheet data at December 31, 1997 and 1998,
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 and
1999 and the balance sheet data as of September 30, 1999 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 $ 29,948
Software.................. 3,476 2,582
--------- --------
Total revenues.............. 21,208 32,530
--------- --------
Cost of revenues:
Equipment................. 21,555 29,141
Software.................. 221 228
--------- --------
Total cost of revenues...... 21,776 29,369
--------- --------
Gross profit (loss)......... (568) 3,161
--------- --------
Operating expenses:
Research and
development............. 32,493 35,761
Selling, general and
administrative.......... 19,906 22,220
Litigation................ 5,000 --
--------- --------
Total operating expenses.... 57,399 57,981
--------- --------
Operating loss.............. (57,967) (54,820)
--------- --------
Other income (expense),
net....................... 2,103 853
Interest expense............ (4,418) (5,181)
--------- --------
Net loss.................... $ (60,282) $(59,148)
========= ========
</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)... 18,159
Total assets................ 87,934
Long term obligations, net
of current portion........ 86,396
Total partners'
deficit/stockholder's
equity (deficit).......... (39,917)
</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 all tandem stock option holders
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 $ 32,530
Total cost of revenues.................................. 43,433 29,369
-------- --------
Gross profit.......................................... 397 3,161
Operating expenses:
Research and development.............................. 47,086 35,761
Selling, general and administrative................... 26,248 22,220
Litigation............................................ 5,000 --
-------- --------
Total operating expenses................................ 78,334 57,981
-------- --------
Operating loss.......................................... (77,937) (54,820)
Other income, net....................................... 2,241 853
Interest expense........................................ (95) (171)
-------- --------
Net loss................................................ $(75,791) $(54,138)
======== ========
Pro forma basic and diluted net loss per share.......... $ (0.98) $ (0.70)
======== ========
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............................................. 18,159 102,314
Total assets................................................ 87,934 172,089
Long-term obligations, net of current portion............... 446 446
Total stockholders' equity.................................. 46,033 130,188
</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 integrated 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 15% 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 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 all tandem stock option holders 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 was allocated to goodwill. As a
result, we amortized approximately $1.0 million of goodwill
27
<PAGE> 32
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,
1998 1998 1998 1998 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment.......... $ 1,682 $ 2,372 $ 13,678 $ 21,511 $ 7,947
Software........... 1,057 1,496 923 1,111 830
-------- -------- -------- -------- --------
Total revenues....... 2,739 3,868 14,601 22,622 8,777
Cost of revenues:
Equipment.......... 2,395 4,107 15,053 21,617 8,131
Software........... 122 54 45 40 74
-------- -------- -------- -------- --------
Total cost of
revenues........... 2,517 4,161 15,098 21,657 8,205
-------- -------- -------- -------- --------
Gross profit
(loss)............. 222 (293) (497) 965 572
Operating expenses:
Research and
development...... 10,033 10,385 12,075 14,593 11,253
Selling, general
and
administrative... 7,021 8,379 4,506 6,342 6,791
Litigation......... 5,000 -- -- -- --
-------- -------- -------- -------- --------
Total operating
expenses........... 22,054 18,764 16,581 20,935 18,044
-------- -------- -------- -------- --------
Operating loss....... (21,832) (19,057) (17,078) (19,970) (17,472)
Other income, net.... 867 710 526 138 108
Interest expense..... (1,300) (1,509) (1,609) (1,617) (1,693)
-------- -------- -------- -------- --------
Net loss............. $(22,265) $(19,856) $(18,161) $(21,449) $(19,057)
======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JUNE 30, SEPTEMBER 30,
1999 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Equipment.......... $ 8,482 $ 13,519
Software........... 931 821
-------- --------
Total revenues....... 9,413 14,340
Cost of revenues:
Equipment.......... 8,451 12,559
Software........... 84 70
-------- --------
Total cost of
revenues........... 8,535 12,629
-------- --------
Gross profit
(loss)............. 878 1,711
Operating expenses:
Research and
development...... 11,798 12,710
Selling, general
and
administrative... 7,593 7,836
Litigation......... -- --
-------- --------
Total operating
expenses........... 19,391 20,546
-------- --------
Operating loss....... (18,513) (18,835)
Other income, net.... 464 281
Interest expense..... (1,691) (1,797)
-------- --------
Net loss............. $(19,740) $(20,351)
======== ========
</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 five 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
independent telecommunications companies and competitive local exchange carriers
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 $32.5 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 $29.9 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 $4.8 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.
29
<PAGE> 34
Cost of Revenues. Total cost of revenues increased to $29.4 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 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 $0.8 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
$35.8 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.
30
<PAGE> 35
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.
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
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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."
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 $18.2 million of working capital. Other than capital lease commitments, we
have no material commitments for capital expenditures. 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
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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.
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.
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. 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 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.
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We use a variety of information technology systems, internally developed
and third-party provided software and embedded chip equipment in our products.
For these 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
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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 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 $59.1 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 remote access
users in the United States 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 known
as Digital Loop Carriers 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. These Digital Loop Carriers have 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 equipment known as Digital Subscriber Line Access Multiplexers 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 Digital Loop Carrier 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 diagram 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 15% 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 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 Integrated Circuits
Architecture. Applications Specific Integrated Circuits, or ASICs,
custom-designed silicon circuits that are optimized for a specific task or set
of tasks. ASICs are critical because they are performance-optimized to minimize
gate counts, packaging size, power dissipation and cost. In addition, an ASIC
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 ASIC
design and have developed a portfolio of over 15 ASICs, which enables flexible
delivery of voice, data and video from a single system. We will continue to
pursue additional service and system level ASICs as a mechanism for protecting
our intellectual property and to achieve ongoing cost reductions.
System Design and Integration. We employ a team of experienced system
design and integration engineers that is responsible for the end-to-end
integration of hardware, software, and management systems. System integration 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.
Wavelength Division Multiplexing Technology. Our system uses a technology
known as wavelength division multiplexing, or WDM. WDM allows multiple optical
signals to be carried on the same optical fiber. In particular, WDM 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 $35.8 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 integrated 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,
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 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 June 30, 1999, we had nine issued U.S. patents and 24 pending
U.S. patent applications and 61 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. The FCC in 1998 ruled that
facilities and equipment used by incumbent carriers to provide high-speed data
and video services are subject to the network unbundling requirements. This
means that incumbent carriers would be required to allow their competitors
access to equipment including some equipment provided by us. The FCC also
ordered that incumbent carriers must offer for resale, at wholesale rates, any
telecommunication services, including high-speed data or video services, that
incumbent carriers offer to customers. In response to a decision by the Supreme
Court overturning the FCC's rule identifying the specific unbundled elements
that incumbent carriers must provide, the FCC recently announced that, except in
limited circumstances, it will not require incumbent carriers to unbundle 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 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. To date, no incumbent carrier
has chosen to operate that way. 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.
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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 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
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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
Lynn Forester.................. 45 Director
Paul S. Latchford.............. 46 Director
John McCartney................. 47 Director
Richard C. Smith............... 55 Director
</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 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.
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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 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
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from the University of Missouri and an MS degree in Computer Science from North
Central College.
Lynn Forester has been one of our directors since October 11, 1999. 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 has been one of our directors since October 11, 1999 and has
served as the President of the Media and Communications Group of Spencer Trask
Securities, Inc. since June 1999. From February 1999 to June 1999, Mr. Latchford
has served as Vice President of Global Business Development for Bechtel Group,
Inc. Prior to that, Mr. Latchford was Vice President of Business Development
Operations for Bell Atlantic International 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 has been one of our directors since October 11, 1999. 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.
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.
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 terms will expire at different times. The Class I director,
initially Mr. McCartney, will stand for re-election at the first annual meeting
of stockholders following this offering. The Class II directors, initially 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 Messrs. Keeler and Smith, will stand for re-election at the third
annual meeting of
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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
Our board of directors has a compensation committee and an audit committee.
The compensation committee consists of Ms. Forester, Mr. Latchford and Mr.
Smith. The compensation committee makes recommendations regarding our stock
option plans and all matters concerning executive compensation, except that a
subcommittee consisting of Ms. Forester and Mr. Latchford will make
recommendations as to matters subject to Section 162(m) of the Internal Revenue
Code. The audit committee consists 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. Each of these committees was established in October 1999.
DIRECTOR COMPENSATION
We pay our non-employee directors who are not affiliated with General
Instrument 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 $11.00 per share) appreciates at the indicated
rate for the entire term of the option and that the option is exercised at the
exercise price and the shares sold on the last day of its term at the
appreciated price.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options during fiscal year
1998 and the year-end number and value of unexercised options with respect to
each of the named executive officers. No stock appreciation rights were
exercised by the named executive officers in fiscal year 1998 or were
outstanding at the end of that year.
Some of our options were granted in tandem with options to purchase shares
of the common stock of General Instrument. If all or a portion of one of our
options are exercised, all or a portion of the General Instrument options are
canceled, and if all or a portion of the General Instrument options are
exercised, all or a portion of our options are canceled. The number of
unexercised options set forth in the table does not include options to purchase
shares of General Instrument common stock.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
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 or 1% of the shares then outstanding, whichever is less. 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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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 a warrant
to acquire from us 8,480,102 shares of common stock at an exercise price of
$10.38 per share. This warrant becomes exercisable upon completion of this
offering and expires on January 13, 2003. In lieu of paying the exercise price
in cash, the holders may elect to receive, upon the exercise of this 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
combined 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 additional individuals to our board of directors. 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 our value; 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 owns 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:
- 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 predecessor's
activities or omissions before and after this offering.
The 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 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, General Instrument will not be limited in the number
of times it may make that request. After their ownership declines below that
level, General Instrument will be able to cause us to effect up to four
registrations of its shares. Spencer Trask will be able to cause us to effect up
to three registrations of its shares. Under customary "piggy-back" registration
rights, General Instrument and Spencer Trask 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 and Spencer Trask against liabilities under securities laws. General
Instrument and Spencer Trask 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 80% or more of all outstanding shares of common
stock; or
- 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 directors; and
- all of our 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 a warrant held by
affiliates. Such warrant becomes exercisable upon closing of this offering.
(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 an
outstanding warrant held by Spencer Trask; and
- 17,964,904 shares will be reserved for issuance pursuant to our
employee benefit plans, of which 12,319,748 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 and
holders do not have preemptive rights to purchase additional shares of common
stock. Upon consummation of this offering, all the outstanding shares of common
stock will be legally issued, fully paid and nonassessable.
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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.
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
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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 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,
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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 shares representing a majority
of the total voting power of all 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.
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
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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 ceases 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 ceases 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 beneficially owns 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.
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.
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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 a warrant 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, which will begin to run upon the completion of our recapitalization.
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. and Warburg Dillon Read 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.....................................
---------
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.
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. After the initial public
offering, the public offering price and the concession and discount may be
changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This
80
<PAGE> 85
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----- -------------- --------------
<S> <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 not to directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file any registration statement
under the Securities Act relating to any shares of our common stock; or
- enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise;
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<PAGE> 86
without the prior written consent of Credit Suisse First Boston Corporation on
behalf of the underwriters for a period of 180 days (or, in the case of Peter W.
Keeler and Thomas R. Eames, 365 days) after the date of the prospectus. See
"Shares Eligible for Future Sale."
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.
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<PAGE> 87
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 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.
84
<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 for each of three years in the period ended December 31,
1998, 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 25, 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 (unaudited) 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 and 1999 (unaudited)................... 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 (unaudited).......... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September
30, 1998 and 1999 (unaudited)............................. F-6
Notes to Financial Statements............................... F-7
NEXT LEVEL COMMUNICATIONS, INC.:
Independent Auditors' Report................................ F-19
Balance Sheet as of August 25, 1999......................... F-20
Notes to Balance Sheet...................................... F-21
</TABLE>
F-1
<PAGE> 92
The following report is in the form that will be signed upon completion of
the 1-for-3 reverse stock split of Next Level Communications as discussed in
Note 13 to the financial statements assuming that from February 9, 1999 to the
date of such completion, no other material events have occurred that would
affect the accompanying financial statements or required disclosures therein. If
the reverse stock split ratio changes, all references to stock option data
within the financial statements will also change.
Deloitte & Touche LLP
San Francisco, California
October 11, 1999
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 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. 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 the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 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.
San Francisco, California
February 9, 1999 (October , 1999 as to Note 13)
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 (unaudited),
respectively..................... 4,745 11,068 14,443 14,443
Other receivables.................. 3,470 5,023 1,685 1,685
Inventories........................ 13,384 20,670 26,093 26,093
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 59,614 59,614
Property and equipment, net.......... 18,020 21,558 22,955 22,955
Intangibles less accumulated
amortization of $739, $1,940 and
$2,841 (unaudited), respectively... 7,467 6,266 5,365 5,365
Other assets......................... 382 118 -- --
--------- -------- ------- -------
Total assets......................... $ 52,689 $ 97,771 $87,934 $87,934
========= ======== ======= =======
LIABILITIES AND PARTNERS' DEFICIT/STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Payable to General Instrument...... $ 41,077 $ -- $ -- $ --
Accounts payable................... 9,326 16,467 12,045 12,045
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 41,455 41,455
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) (39,917) --
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......... -- -- -- 45,263
--------- -------- ------- -------
Total partners'
deficit/stockholder's equity
(deficit)........................ (3,702) (14,769) (39,917) 46,033
--------- -------- ------- -------
Total liabilities and partners'
deficit/stockholder's equity
(deficit).......................... $ 52,689 $ 97,771 $87,934 $87,934
========= ======== ======= =======
</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 $ 29,948
Software.................... -- 2,266 4,587 3,476 2,582
--------- -------- -------- -------- --------
Total revenues................ -- 8,311 43,830 21,208 32,530
Cost of revenues:
Equipment................... -- 10,954 43,172 21,555 29,141
Software.................... -- 306 261 221 228
--------- -------- -------- -------- --------
Total cost of revenues........ -- 11,260 43,433 21,776 29,369
--------- -------- -------- -------- --------
Gross profit (loss)........... -- (2,949) 397 (568) 3,161
Operating expenses:
Research and development.... 17,102 37,064 47,086 32,493 35,761
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 57,981
--------- -------- -------- -------- --------
Operating loss................ (173,952) (66,427) (77,937) (57,967) (54,820)
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) $(59,148)
========= ======== ======== ======== ========
</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
(unaudited)............ -- 34,000 -- -- -- -- 34,000
Net loss (unaudited)..... (5,678) (53,470) -- -- -- -- (59,148)
------- -------- ---- --------- ------- --------- ---------
Balance, September 30, 1999
(unaudited).............. $(4,668) $(35,249) -- $ -- $ -- $ -- $ (39,917)
======= ======== ==== ========= ======= ========= =========
</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) $(59,148)
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) (3,375)
Inventories.......................... (2,031) (11,341) (7,286) (7,464) (5,423)
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 (5,153)
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.
The accompanying financial statements represent those of the Partnership
for 1998 and the nine months ended September 30, 1998 and 1999 (unaudited) and
those of NLC for 1997 and 1996.
2. RESULTS OF OPERATIONS FOR 1999 (UNAUDITED), 1998, 1997 AND 1996 AND
MANAGEMENT PLANS FOR 2000 AND 1999
The Partnership incurred net losses of $59.1 million (unaudited), $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 development expenditures
and litigation expenses. Net cash used in operating activities was $44.4 million
(unaudited), $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 December 31, 1998, partners' deficit was $14.8 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
F-7
<PAGE> 98
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 1998, cash
contributions from the Limited Partner (see Note 8), and additional capital from
the sources noted above will enable the Partnership to fund its operations and
meet its obligations through at least December 31, 1999.
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 as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999 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 periods. The results of operations for the
nine months ended September 30, 1999 are not necessarily indicative of the
results expected for the full year.
PRO FORMA INFORMATION (UNAUDITED) -- The unaudited pro forma balance sheet
at September 30, 1999 presents the Partnership's balance sheet as if the
following (the "Recapitalization") had occurred at 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 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 the General Partner's
warrant 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 5,354,844 shares of common stock that the Company
anticipates will be granted in October 1999. Shares under these options and
warrant were not included in the computation of pro forma diluted net loss per
common share since the inclusion of these shares would be antidilutive.
F-8
<PAGE> 99
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pro forma basic and diluted net loss per share of $0.98 and $0.70 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.
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
F-9
<PAGE> 100
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. In 1998,
revenues attributable to the Partnership's two largest customers were 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
F-10
<PAGE> 101
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 84% 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. The Partnership recorded provisions for doubtful accounts of
$320,000 in 1998 and $170,000 in 1997 primarily related to receivables from
software customers.
NEW ACCOUNTING PRONOUNCEMENTS -- 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.
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,
F-11
<PAGE> 102
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$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
------- ------- -------------
(UNAUDITED)
<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 18,207
------- ------- -------
Total....................................... $13,384 $20,670 $26,093
======= ======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
(UNAUDITED)
<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
$929,866 and $1,801,404 (unaudited) and related accumulated depreciation and
amortization of $207,687 and $667,530 (unaudited) at December 31, 1998 and
September 30, 1999, respectively.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
(UNAUDITED)
<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>
F-12
<PAGE> 103
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 (unaudited) under this note,
including accrued interest of $11.0 million (unaudited).
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.
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.
F-13
<PAGE> 104
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 options have a
ten-year life and vest over three years.
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
(unaudited) shares were granted at an exercise price of $9.66 per share and
options to purchase 237,000 (unaudited) shares were canceled.
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
F-14
<PAGE> 105
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
NINE
MONTHS
ENDED
SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss:
As reported........................... $(66,429) $(81,731) $(59,148)
Pro forma............................. (69,190) (84,494) (61,220)
</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>
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 $513,000, $409,000 and $213,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Partnership employees participate in the General Instrument Pension
Plan. The Partnership expensed $419,000, $229,000 and $210,000 related to these
plans for the years ended December 31, 1998, 1997 and 1996, respectively.
F-15
<PAGE> 106
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999......................................... $ 526
2000......................................... 342
2001......................................... 25
-----
Total................................ 893
Less amounts representing interest............. (162)
-----
Present value of net minimum lease payments.... $ 731
=====
</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 (unaudited) in the nine months
ended September 30, 1999.
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 (unaudited) 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
F-16
<PAGE> 107
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
products for sale. The Partnership has a commitment to another supplier to
purchase approximately $14.7 million of components prior to December 2001.
On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General
Instrument Corp., pending in the United States District Court for the Eastern
District of North Carolina, was dismissed with prejudice. The action brought by
BroadBand related to fiber optic communications systems for delivering
television signals and a patent held by BroadBand. In addition, on May 4, 1998,
the action entitled Next Level Communications v. BroadBand Technologies, Inc.,
was dismissed with prejudice. 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, the Partnership has paid
BroadBand Technologies ("BBT") $5.0 million, which was expensed in 1998, and BBT
and the Partnership have entered into a perpetual cross-license of patents
applied for or issued currently or during the next five years.
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., KK Manager 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 Partnership and the transfer of the switched digital video
technology, the Partnership and KK Manager 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
F-17
<PAGE> 108
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
judgement permanently enjoining DSC from prosecuting and continuing the Delaware
action.
13. SUBSEQUENT EVENTS
On August 24, 1999 the Partnership formed a wholly owned subsidiary, Next
Level Communications, Inc., a Delaware corporation.
In anticipation of the Recapitalization, management of NLC intends to
effect a 1-for-3 reverse stock split on October , 1999. All share amounts in
the accompanying financial statements have been restated to give effect to the
reverse stock split.
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);
- 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 Spencer Trask to purchase shares of the
partnership's successor under the partnership agreement will become a
warrant 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.
F-22
<PAGE> 113
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.
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.
</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 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
II-3
<PAGE> 118
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. 2 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 12th 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 12, 1999
- ----------------------------- (Principal Executive Officer)
Peter W. Keeler Chairman of the Board
and President
/s/ JAMES T. WANDREY Senior Vice President and October 12, 1999
- ----------------------------- Chief Financial Officer
James T. Wandrey (Principal Financial and
Accounting Officer)
/s/ RICHARD C. SMITH* Director October 12, 1999
- -----------------------------
Richard C. Smith
</TABLE>
* By:
/s/ JAMES T. WANDREY
- -------------------------------
James T. Wandrey
Attorney-in-fact
II-5
<PAGE> 120
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Richard C. Smith and James T. Wandrey,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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/ LYNN FORESTER Director October 12, 1999
- -----------------------------
Lynn Forester
/s/ JOHN MCCARTNEY Director October 12, 1999
---------------------------
John McCartney
/s/ PAUL S. LATCHFORD Director October 12, 1999
---------------------------
Paul S. Latchford
</TABLE>
II-6
<PAGE> 121
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.
</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
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of _______, 1999 (this
"Agreement"), among General Instrument Corporation, a Delaware corporation
("General Instrument"), Spencer Trask Investors LLC, a Delaware limited
liability company ("Spencer Trask"), Next Level Communications, a California
corporation and a wholly owned subsidiary of General Instrument ("NLC CA"), Next
Level Communications L.P., a Delaware limited partnership (the "Partnership"),
and Next Level Communications, Inc., a Delaware corporation and a wholly owned
subsidiary of the Partnership ("NLC DE").
NLC CA's authorized capital stock consists of 33 1/3 shares of
common stock, all of which are outstanding and held by General Instrument.
Spencer Trask and NLC CA are parties to the Limited
Partnership Agreement dated as of January 13, 1998 (as amended, the "Partnership
Agreement"), under which Spencer Trask holds a 9.576% general partnership
interest in the Partnership (the "GP Interest") and NLC CA holds a 90.424%
limited partnership interest in the Partnership (the "LP Interest").
NLC DE was formed by the Partnership on August 24, 1999 for
the purpose of effecting the transactions contemplated hereby and an initial
public offering (the "Initial Public Offering") of the common stock of a
successor corporation to the Partnership.
NLC DE's authorized capital stock consists of 200 million
shares of Common Stock, par value $.01 per share (the "Common Stock"), 70
million shares of Class B Non-Voting Common Stock, par value $.01 per share (the
"Class B Common Stock"), and 10 million shares of preferred stock, par value
$.01 per share, of which 100 shares of Common Stock are outstanding and held by
the Partnership. The terms of such classes of capital stock are set forth in the
certificate of incorporation of NLC DE attached hereto as Exhibit A.
The boards of directors and the stockholders of NLC CA and NLC
DE and the partners of the Partnership have approved and adopted this Agreement
in accordance with the California General Corporation Law (the "CGCL"), the
Delaware General Corporation Law (the "DGCL"), and Delaware Revised Uniform
Limited Partnership Act (the "DRULPA").
Contemporaneously with the execution and delivery of this
Agreement, General Instrument and NLC DE are entering into a Voting Trust
Agreement in the form of Exhibit B (the "Voting Trust Agreement") with Chase
Mellon Shareholder Services, LLC, as voting trustee (the "Voting Trustee").
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
THE MERGERS
1.1. Partnership Note. Simultaneously with the consummation of
the Partnership Merger (as defined below), General Instrument shall contribute
to NLC DE all of the indebtedness under the 8% Note due 2005 of the Partnership
held by General Instrument (the "Partnership Note") in exchange for a number of
validly issued, fully paid and non-assessable shares of Common Stock (the
certificate for which shares shall be issued to and in the name of the Voting
Trustee) equal to the amount of indebtedness outstanding under the Partnership
Note (including accrued and unpaid interest) at such time divided by the per
share initial public offering price of Common Stock pursuant to the Initial
Public Offering.
1.2. The Partnership Merger. Simultaneously with the
contribution of the Partnership Note, at the Effective Time of the Partnership
Merger, the Partnership shall be merged with and into NLC DE in accordance with
the DGCL and DRULPA (the "Partnership Merger"). From and after the Effective
Time of the Partnership Merger, the separate partnership existence of the
Partnership shall cease and NLC DE shall continue as the surviving entity under
the name "Next Level Communications, Inc." (the "Surviving Entity"). From and
after the Effective Time of the Partnership Merger, the Surviving Entity shall
possess all of the rights, privileges, immunities, powers and purposes, and be
subject to all of the liabilities, obligations and penalties, of the Partnership
and NLC DE, all as provided under applicable law.
1.3. Conversion Pursuant to the Partnership Merger. As of the
Effective Time of the Partnership Merger, by virtue of the Partnership Merger
and without any action on the part of any party hereto:
(a) Each share of Common Stock issued and outstanding
immediately prior to the Effective Time of the Partnership Merger
(which shall not include the shares of Common Stock simultaneously
being issued pursuant to Section 1.1) shall be canceled and retired
without any conversion thereof.
(b) The GP Interest shall be canceled and converted into and
become 5,863,329 validly issued, fully paid and non-assessable shares
of Common Stock. NLC DE shall cause to be delivered certificate(s) for
such shares to and in the name of Spencer Trask or its designees or
transferees in the denominations requested by Spencer Trask.
<PAGE> 3
(c) The LP Interest shall be canceled and converted into and
become a number (the "LP Interest Share Number") of validly issued,
fully paid and non-assessable shares of Class B Common Stock equal to
the sum of (i) 55,366,091 and (ii) $88 million divided by the per share
initial public offering price of Common Stock pursuant to the Initial
Public Offering. NLC DE shall cause to be delivered a certificate for
such shares to and in the name of NLC CA.
1.4. Certificate of Incorporation and By-laws of the Surviving
Entity. The certificate of incorporation of NLC DE shall be the certificate of
incorporation of the Surviving Entity after the Effective Time of the
Partnership Merger, until amended in accordance with applicable law. The by-laws
of NLC DE shall be the by-laws of the Surviving Entity after the Effective Time
of the Partnership Merger, until amended in accordance with applicable law.
1.5. Directors and Officers of the Surviving Entity. The
directors and officers of NLC DE at the Effective Time of the Partnership Merger
shall be the directors and officers of the Surviving Entity after the Effective
Time of the Partnership Merger, until expiration of their current terms, or
their prior resignation, removal or death, subject to the certificate of
incorporation and the by-laws of the Surviving Entity.
1.6. Voting Trust. Immediately after the Effective Time of the
Partnership Merger, General Instrument shall deposit with the Voting Trustee all
of the outstanding shares of common stock of NLC CA pursuant to and in
accordance with the Voting Trust Agreement.
1.7. The NLC Merger. Immediately after the Effective Time of
the Partnership Merger and the transaction contemplated by Section 1.6, at the
Effective Time of the NLC Merger (as defined below), NLC CA shall be merged with
and into the Surviving Entity in accordance with the DGCL and the CGCL (the "NLC
Merger"; together with the Partnership Merger, the "Mergers"). From and after
the Effective Time of the NLC Merger, the separate corporate existence of NLC CA
shall cease and the Surviving Entity shall continue as the surviving corporation
under the name "Next Level Communications, Inc." (the "Surviving Corporation").
From and after the Effective Time of the NLC Merger, the Surviving Corporation
shall possess all of the rights, privileges, immunities, powers and purposes,
and be subject to all of the liabilities, obligations and penalties, of NLC CA
and the Surviving Entity, all as provided under applicable law.
1.8. Conversion Pursuant to the NLC Merger. As of the
Effective Time of the NLC Merger, by virtue of the NLC Merger and without any
action on the part of any party hereto:
<PAGE> 4
(a) Each share of Common Stock issued and outstanding
immediately prior to the Effective Time of the NLC Merger shall remain
outstanding as one share of Common Stock.
(b) Each share of Class B Common Stock issued and outstanding
immediately prior to the Effective Time of the NLC Merger shall be
canceled and retired without any conversion thereof.
(c) Each share of common stock of NLC CA issued and
outstanding immediately prior to the Effective Time of the NLC Merger
shall be canceled and converted into and become a number of validly
issued, fully paid and non-assessable shares of Common Stock equal to
the LP Interest Share Number divided by 33 1/3. NLC DE shall cause to
be delivered a certificate for such shares to and in the name of the
Voting Trustee.
1.9. Certificate of Incorporation and By-laws of the Surviving
Corporation. The certificate of incorporation of the Surviving Entity shall be
the certificate of incorporation of the Surviving Corporation after the
Effective Time of the NLC Merger, until amended in accordance with applicable
law. The by-laws of the Surviving Entity shall be the by-laws of the Surviving
Corporation after the Effective Time of the NLC Merger, until amended in
accordance with applicable law.
1.10. Directors and Officers of the Surviving Corporation. The
directors and officers of the Surviving Entity at the Effective Time of the NLC
Merger shall be the directors and officers of the Surviving Corporation after
the Effective Time of the NLC Merger, until expiration of their current terms,
or their prior resignation, removal or death, subject to the certificate of
incorporation and the by-laws of the Surviving Corporation.
1.11. Effective Time. The Partnership Merger shall become
effective (the "Effective Time of the Partnership Merger") upon the due filing
of a certificate of merger with the Secretary of State of Delaware in accordance
with the DGCL and the DRULPA, or at such later time as is specified in such
certificate of merger. The NLC Merger shall become effective (the "Effective
Time of the NLC Merger") upon the due filing of certificates of merger with the
Secretary of State of Delaware and the Secretary of State of California in
accordance with the DGCL and the CGCL, or at such later time as is specified in
such certificate of merger.
1.12. Treatment of Employee Stock Options. Prior to the
Effective Time of the NLC Merger, the Board of Directors of NLC CA shall take
appropriate actions so that, at the Effective Time of the NLC Merger, each of
the employee stock options
<PAGE> 5
previously issued by NLC CA which is outstanding immediately prior to the
Effective Time of the NLC Merger shall be converted automatically pursuant to
the NLC Merger into an option to purchase the same number of shares of Common
Stock at the same exercise price.
1.13. Warrant. By operation of the NLC Merger, the option
contemplated by Section 10.2 of the Limited Partnership Agreement shall be
converted automatically into a Warrant of NLC DE. To further evidence such
conversion, NLC DE and Spencer Trask shall enter into the Warrant Agreement in
the form of Exhibit C hereto.
ARTICLE II
CONDITIONS
Consummation of the transactions contemplated hereby is
subject to the satisfaction at or before the Effective Time of the Partnership
Merger of the following conditions:
2.1. Registration Statement. The registration statement
relating to the Initial Public Offering shall have been declared effective under
the Securities Act of 1933, as amended.
2.2. Underwriting Agreement. All conditions required to be
satisfied under the underwriting agreement relating to the Initial Public
Offering (other than the Mergers and the other transactions contemplated by
Article I) shall have been satisfied and the parties to such underwriting
agreement shall be willing and prepared to immediately consummate the Initial
Public Offering.
ARTICLE III
MISCELLANEOUS
3.1. Termination. At any time prior to the Effective Time of
the Partnership Merger, subject to the letter agreement dated September 14, 1999
among General Instrument, Motorola, Inc. and Spencer Trask, this Agreement may
be terminated by General Instrument.
3.2. Amendment. This Agreement may be amended at any time by a
written instrument executed by each of the parties hereto only.
3.3. Further Assurances. Each of NLC CA and Spencer Trask
(in its capacity as the general partner of the Partnership only) shall at any
time, or from time to time, as and when
<PAGE> 6
requested by the Surviving Corporation, execute and deliver, or cause to be
executed and delivered in its name, all such conveyances, assignments,
transfers, deeds or other instruments, and shall take, or cause to be taken,
such further or other action in order to evidence the transfer, vesting or
devolution of any property, right, privilege, immunity, power or purpose, or to
vest or perfect or confirm to the Surviving Corporation title to and possession
of all the properties, rights, privileges, immunities, powers and purposes of
NLC CA or the Partnership, as the case may be, and otherwise to carry out the
intent and purposes hereof.
3.4. Reorganization. The parties hereto intend the Mergers to
qualify as a tax-free reorganization under the Internal Revenue Code.
3.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be signed by its respective officers hereunto duly authorized all
as of the date first above written.
GENERAL INSTRUMENT CORPORATION
By: ________________________________________
Name:
Title:
SPENCER TRASK INVESTORS LLC
By: ________________________________________
Name:
Title:
NEXT LEVEL COMMUNICATIONS
By: ________________________________________
Name:
Title:
<PAGE> 7
NEXT LEVEL COMMUNICATIONS L.P.
By: Spencer Trask Investors LLC,
its General Partner
By: ________________________________________
Name:
Title:
NEXT LEVEL COMMUNICATIONS, INC.
By: ________________________________________
Name:
Title:
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
NEXT LEVEL COMMUNICATIONS, INC.
FIRST: The name of the corporation is Next Level
Communications, Inc. (the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law as the same exists or may hereafter be amended
(the "GCL").
FOURTH: A. AUTHORIZATION. The total number of shares of stock
that the Corporation shall have authority to issue is 280,000,000 of which (i)
200,000,000 shares shall be shares of Common Stock, par value $.01 per share
(the "Common Stock"), (ii) 70,000,000 shares shall be shares of Class B
Non-Voting Common Stock, par value $.01 per share (the "Class B Common Stock"),
and (iii) 10,000,000 shares shall be shares of preferred stock, par value $.01
per share (the "Preferred Stock"). The number of authorized shares of any class
or classes of stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock, without the separate vote of
any class or series of the Corporation's stock. Shares of Class B Common Stock
shall be issued only in connection with the Agreement and Plan of Merger dated
as of _______ ___, 1999 among General Instrument Corporation, Spencer Trask
Investors LLC, Next Level Communications, a California corporation, Next Level
Communications, L.P. and the Corporation.
B. PREFERRED STOCK. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or series
the voting powers (if any) and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the
<PAGE> 2
2
Corporation; or (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock, of the Corporation at such price or prices or at such rates
of exchange and with such adjustments; all as may be stated in such resolution
or resolutions.
C. COMMON STOCK. The following is a statement of the relative
powers, preferences and participating, optional or other special rights, and the
qualifications, limitations and restrictions of the Common Stock and Class B
Common Stock of the Corporation:
(1) Except as otherwise set forth below in paragraph (C)(2),
the relative powers, preferences and participating, optional or other special
rights, and the qualifications, limitations or restrictions of the Common Stock
and Class B Common Stock shall be identical in all respects.
(2) At every meeting of the stockholders of the Corporation
every holder of Common Stock shall be entitled to one vote in person or by proxy
for each share of Common Stock standing in his or her name on the transfer books
of the Corporation in connection with the election of directors and all other
matters submitted to a vote of stockholders. Except as may be otherwise required
by law or by this Restated Certificate of Incorporation (the "Certificate of
Incorporation"), holders of Class B Common Stock shall not be entitled to vote.
No stockholder shall be entitled to exercise any right of cumulative voting.
FIFTH: A. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors initially consisting
of seven directors, the exact number of directors to be not less than three nor
more than twelve as determined from time to time exclusively by resolution
adopted by affirmative vote of a majority of the entire Board of Directors. The
directors shall be divided into three classes, designated Class I, Class II and
Class III. Each class shall consist, as nearly as may be possible, of one-third
of the total number of directors constituting the entire Board of Directors.
Class I directors shall be elected initially for a one-year term, Class II
directors initially for a two-year term and Class III directors initially for a
three-year term. At each succeeding annual meeting of stockholders beginning in
2000, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A director shall
hold office until the annual meeting of the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however, to
prior death, resignation or removal from office. Any vacancy on the Board of
Directors may be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director or by stockholders if such
vacancy was caused by the action of
<PAGE> 3
3
stockholders (in which event such vacancy may not be filled by the directors or
a majority thereof). Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of his predecessor. Election of directors need not be by written ballot,
unless so provided in the By-laws of the Corporation.
B. Any director or the entire Board of Directors may be
removed, with or without cause, by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock; provided, however, that
after the Trigger Date (as defined in paragraph (C) below), a director may not
be removed without cause.
C. For purposes of this Certificate of Incorporation, "Trigger
Date" shall mean the first date on which General Instrument Corporation (General
Instrument Corporation, together with its successors, "General Instrument") and
its affiliates (as defined in Article SEVENTH) or the Majority Transferee (as
defined below) and its affiliates ceases to beneficially own at least 49% of the
outstanding shares of Common Stock. Promptly upon becoming aware of the
occurrence of the Trigger Date, the Corporation shall promptly notify holders of
the Common Stock of such occurrence in any reasonably practicable manner.
D. In the event that General Instrument transfers more than
50% of the outstanding shares of Common Stock in a single transaction or group
of related transactions to one person or group of affiliated persons
(unaffiliated with General Instrument), such person or group, together with
their successors, shall be referred to herein as the "Majority Transferee." For
purposes of this paragraph D, each reference to a "person" shall be deemed to
include not only a natural person, but also a corporation, partnership, joint
venture, association, or legal entity of any kind; each reference to a "natural
person" (or to a "record holder" of shares, if a natural person) shall be deemed
to include in his or her representative capacity a guardian, committee,
executor, administrator or other legal representative of such natural person or
record holder.
E. In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Certificate of Incorporation, and the By-laws of the Corporation; provided,
however, that no By-laws hereafter adopted shall invalidate any prior act of the
directors which would have been valid if such By-laws had not been adopted.
F. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, after the Trigger Date, the affirmative vote of
the holders of at least 80% of the outstanding shares of Common Stock shall be
required to amend, repeal or adopt any provision inconsistent with this Article
FIFTH.
<PAGE> 4
4
SIXTH: A. In anticipation that General Instrument will remain
a substantial stockholder of the Corporation, and in anticipation that the
Corporation and General Instrument may engage in the same or similar activities
or lines of business and have an interest in the same areas of corporate
opportunities, and in recognition of the benefits to be derived by the
Corporation through its continued contractual, corporate and business relations
with General Instrument (including possible service of officers and directors of
General Instrument as officers and directors of the Corporation), the provisions
of this Article SIXTH are set forth to regulate and define the conduct of
certain affairs of the Corporation as they may involve General Instrument and
its officers and directors, and the powers, rights, duties and liabilities of
the Corporation and its officers, directors and stockholders in connection
therewith.
B. General Instrument shall have no duty to refrain from
engaging in the same or similar activities or lines of business as the
Corporation, and neither General Instrument nor any officer or director thereof
(except as provided in paragraph (c) below) shall be liable to the Corporation
or its stockholders for breach of any fiduciary duty solely by reason of any
such activities of General Instrument. In the event that General Instrument
acquires knowledge of a potential transaction or matter which may be a corporate
opportunity for both General Instrument and the Corporation, General Instrument
shall have no duty to communicate or offer such corporate opportunity to the
Corporation and shall not be liable to the Corporation or its stockholders for
breach of any fiduciary duty as a stockholder of the Corporation solely by
reason of the fact that General Instrument pursues or acquires such corporate
opportunity for itself, directs such corporate opportunity to another person, or
does not communicate information regarding such corporate opportunity to the
Corporation.
C. In the event that a director or officer of the Corporation
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
the Corporation and General Instrument, such director or officer of the
Corporation shall have fully satisfied and fulfilled the fiduciary duty of such
director or officer to the Corporation and its stockholders with respect to such
corporate opportunity, if such director or officer acts in a manner consistent
with the following policy:
(i) A corporate opportunity offered to any person who is a
director or officer of the Corporation, and who is also a director or
officer of General Instrument, shall belong to the Corporation if such
opportunity is expressly offered to such person in writing solely in
his or her capacity as a director or officer of the Corporation.
(ii) Otherwise, such corporate opportunity shall belong to
General Instrument.
D. For purposes of this Article SIXTH only: (i) The term
"Corporation" shall mean the Corporation and all corporations, partnerships,
joint ventures, associations and other entities in which the Corporation
beneficially owns (directly or indirectly) 50% or more of the outstanding voting
stock, voting power, partnership interests or similar voting interests, and
<PAGE> 5
5
(b) the term "General Instrument" shall mean General Instrument and all
corporations, partnerships, joint ventures, associations and other entities
which are affiliates (as defined in Article SEVENTH) of General Instrument
(other than the Corporation, defined in accordance with clause (i) of this
paragraph (D)).
E. Any person or entity purchasing or otherwise acquiring any
interest in any shares of capital stock of the Corporation will be deemed to
have notice of and to have consented to the provisions of this Article SIXTH.
F. Notwithstanding anything in this Certificate of
Incorporation to the contrary, (i) the foregoing provisions of this Article
SIXTH shall expire on the date that General Instrument ceases to own
beneficially at least 20% of the outstanding shares of Common Stock and no
person who is a director or officer of the Corporation is also a director or
officer of General Instrument; and (ii) in addition to any vote of the
stockholders required by this Certificate of Incorporation, until the time that
General Instrument ceases 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 shall be required to alter, amend or
repeal, or adopt any provision inconsistent with, any provision of this Article
SIXTH. Neither the alteration, amendment or repeal of this Article SIXTH nor the
adoption of any provision of this Certificate of Incorporation inconsistent with
this Article SIXTH shall eliminate or reduce the effect of this Article SIXTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article SIXTH, would accrue or arise, prior to such alteration,
amendment, repeal or adoption.
SEVENTH: A. This Corporation shall not be governed by Section
203 of the GCL. Notwithstanding any provision of the GCL, the Corporation shall
not engage in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
(1) prior to such time the Board of Directors approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, or
(2) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the Corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and also
officers and (b) 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
<PAGE> 6
6
(3) at or subsequent to such time the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66-2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
B. The restrictions contained in this Article SEVENTH shall
not apply if:
(1) the Corporation, by action of its stockholders, adopts an
amendment to the Certificate of Incorporation or the By-laws expressly electing
not to be governed by such restrictions, provided that, in addition to any other
vote required by law, such amendment to the Certificate of Incorporation or
By-laws must be approved by the affirmative vote of a majority of the shares
entitled to vote. An amendment adopted pursuant to this paragraph shall not be
effective until 12 months after the adoption of such amendment and shall not
apply to any business combination between the Corporation and any person who
became an interested stockholder of the Corporation on or prior to such
adoption. A By-law amendment adopted pursuant to this paragraph shall not be
further amended by the Board of Directors;
(2) a stockholder becomes an interested stockholder
inadvertently and (a) as soon as practicable divests itself of ownership of
sufficient shares so that the stockholder ceases to be an interested stockholder
and (b) would not, at any time within the three year period immediately prior to
a business combination between the Corporation and such stockholder, have been
an interested stockholder but for the inadvertent acquisition of ownership; or
(3) the business combination is proposed prior to consummation
or abandonment of and subsequent to the earlier of the public announcement or
the notice required under this Article SEVENTH of a proposed transaction which
(a) constitutes one of the transactions described in the second sentence of this
paragraph (B)(3); (b) is with or by a person who either was not an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the Board of Directors; and (c) is approved or
not opposed by a majority of the members of the Board of Directors then in
office (but not less than one) who were directors prior to any person becoming
an interested stockholder during the previous three years or were recommended
for election or elected to succeed such directors by a majority of such
directors. The proposed transactions referred to in the preceding sentence are
limited to (x) a merger or consolidation of the Corporation (except for a merger
in respect of which, pursuant to Section 251(f) of the GCL, no vote of the
stockholders of the Corporation is required); (y) a sale, lease, exchange,
mortgage, pledge, transfer or other disposition (in one transaction or a series
of transactions), whether as part of a dissolution or otherwise, of assets of
the Corporation or of any direct or indirect majority-owned subsidiary of the
Corporation (other than to any direct or indirect wholly-owned subsidiary or to
the Corporation) having an aggregate market value equal to 50% or more of either
that aggregate market value of all of the assets of the Corporation determined
on a consolidated basis or the aggregate market value of all the outstanding
stock of the Corporation; or (z) a proposed tender or exchange offer for 50% or
<PAGE> 7
7
more of the outstanding voting stock of the Corporation. The Corporation shall
give not less than 20 days notice to all interested stockholders prior to the
consummation of any of the transactions described in clauses (x) or (y) of the
second sentence of this paragraph (B)(3).
C. As used herein, the term:
(1) "affiliate" means a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, another person.
(2) "associate," when used to indicate a relationship with any
person, means (i) any corporation, partnership, unincorporated association or
other entity of which such person is a director, officer or partner or is,
directly or indirectly, the owner of 20% or more of any class of voting stock,
(ii) any trust or other estate in which such person has at least a 20%
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity, and (iii) any relative or spouse of such person, or any
relative of such spouse, who has the same residence as such person.
(3) "business combination," when used in reference to any
corporation and any interested stockholder of such corporation, means:
(a) any merger or consolidation of the corporation or any
direct or indirect majority-owned subsidiary of the corporation with
(A) the interested stockholder, or (B) with any other corporation,
partnership, unincorporated association or other entity if the merger
or consolidation is caused by the interested stockholder and as a
result of such merger or consolidation paragraph A of this Article
SEVENTH is not applicable to the surviving entity;
(b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions),
except proportionately as a stockholder of such corporation, to or with
the interested stockholder, whether as part of a dissolution or
otherwise, of assets of the corporation or of any direct or indirect
majority-owned subsidiary of the corporation which assets have an
aggregate market value equal to 10% or more of either the aggregate
market value of all the assets of the corporation determined on a
consolidated basis or the aggregate market value of all the outstanding
stock of the corporation;
(c) any transaction which results in the issuance or transfer
by the corporation or by any direct or indirect majority-owned
subsidiary of the corporation of any stock of the corporation or of
such subsidiary to the interested stockholder, except (A) pursuant to
the exercise, exchange or conversion of securities exercisable for,
exchangeable for or convertible into stock of such corporation or any
such subsidiary which securities were outstanding prior to the time
that the interested stockholder became such, (B) pursuant to
<PAGE> 8
8
a merger under Section 251(g) of the GCL; (C) pursuant to a dividend or
distribution paid or made, or the exercise, exchange or conversion of
securities exercisable for, exchangeable for or convertible into stock
of the corporation or any such subsidiary which security is
distributed, pro rata to all holders of a class or series of stock of
the corporation subsequent to the time the interested stockholder
became such, (D) pursuant to an exchange offer by the corporation to
purchase stock made on the same terms to all holders of said stock, or
(E) any issuance or transfer of stock by the corporation, provided,
however, that in no case under (C) -- (E) above shall there be an
increase in the interested stockholder's proportionate share of the
stock of any class or series of the corporation or of the voting stock
of the corporation;
(d) any transaction involving the corporation or any direct or
indirect majority-owned subsidiary of the corporation which has the
effect, directly or indirectly, of increasing the proportionate share
of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation or of any such
subsidiary which is owned by the interested stockholder, except as a
result of immaterial changes due to fractional share adjustments or as
a result of any purchase or redemption of any shares of stock not
caused, directly or indirectly, by the interested stockholder; or
(e) any receipt by the interested stockholder of the benefit,
directly or indirectly (except proportionately as a stockholder of such
corporation) of any loans, advances, guarantees, pledges, or other
financial benefits (other than those expressly permitted in
subparagraphs (a) -- (d) above) provided by or through the corporation
or any direct or indirect majority-owned subsidiary.
(4) "control," including the term "controlling," "controlled
by" and "under common control with," means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting stock, by
contract, or otherwise. A person who is the owner of 20% or more of the
outstanding voting stock of any corporation, partnership, unincorporated
association or other entity shall be presumed to have control of such entity, in
the absence of proof by a preponderance of the evidence to the contrary.
Notwithstanding the foregoing, a presumption of control shall not apply where
such person holds voting stock, in good faith and not for the purpose of
circumventing this section, as an agent, bank, broker, nominee, custodian or
trustee for one or more owners who do not individually or as a group have
control of such entity.
(5) "interested stockholder" means any person (other than the
Corporation and any direct or indirect majority-owned subsidiary of the
Corporation and other than General Instrument and its affiliates and the
Majority Transferee and its affiliates) that (i) is the owner of 15% or more of
the outstanding voting stock of the Corporation or (ii) is an affiliate or
associate of the Corporation and was the owner of 15% or more of the outstanding
voting stock of the Corporation at any time within the three year period
immediately prior to the date on which it is
<PAGE> 9
9
sought to be determined whether such person is an interested stockholder, and
the affiliates and associates of such person; provided, however, that the term
"interested stockholder" shall not include any person whose ownership of shares
in excess of the 15% limitation set forth herein in the result of action taken
solely by the Corporation provided that such person shall be an interested
stockholder if thereafter such person acquires additional shares of voting stock
of the Corporation, except as a result of further corporate action not caused,
directly or indirectly, by such person. For the purpose of determining whether a
person is an interested stockholder, the voting stock of the Corporation deemed
to be outstanding shall include stock deemed to be owned by the person through
application of paragraph (C)(8) but shall not include any other unissued stock
of the Corporation which may be issuable pursuant to any agreement, arrangement
or understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
(6) "person" means any individual, corporation, partnership,
unincorporated association or other entity.
(7) "stock" means, with respect to any corporation, capital
stock and, with respect to any other entity, any equity interest.
(8) "voting stock" means, with respect to any corporation,
stock of any class or series entitled to vote generally in the election of
directors and, with respect to any entity that is not a corporation, any equity
interest entitled to vote generally in the election of the governing body of
such entity.
(9) "owner" including the terms "own" and "owned" when used
with respect to any stock means a person that individually or with or through
any of its affiliates or associates:
(a) beneficially owns such stock, directly or indirectly; or
(b) has (i) the right to acquire such stock (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding, or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise; provided, however, that a person shall not be deemed the
owner of stock tendered pursuant to a tender or exchange offer made by
such person or any of such person's affiliates or associates until such
tendered stock is accepted for purchase or exchange; or (ii) the right
to vote such stock pursuant to any agreement, arrangement or
understanding; provided, however, that a person shall not be deemed the
owner of any stock because of such person's right to vote such stock if
the agreement, arrangement or understanding to vote such stock arises
solely from a revocable proxy or consent given in response to a proxy
or consent solicitation made to ten or more persons; or
<PAGE> 10
10
(c) has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting (except voting pursuant to a
revocable proxy or consent as described in item (ii) of this paragraph
(C)(9)), or disposing of such stock with any other person that
beneficially owns, or whose affiliates or associates beneficially own,
directly or indirectly, such stock.
D. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, after the Trigger Date, the affirmative vote of
the holders of at least 80% of the outstanding shares of Common Stock shall be
required to amend, repeal or adopt any provision inconsistent with this Article
SEVENTH.
EIGHTH: A. Meetings of stockholders may be held within or
without the State of Delaware, as the By-laws may provide. The books of the
Corporation may be kept (subject to any provision contained in the GCL) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the By-laws of the Corporation.
B. Any action required or permitted to be taken by the
stockholders of the Corporation may be effected by a consent in writing by such
holders in accordance with Section 228 of the GCL; provided, however, that, on
and after the Trigger Date, any action required or permitted to be taken by the
stockholders of the Corporation may be effected only at a duly called annual or
special meeting of such holders and may not be effected by a consent in writing
by such holders in lieu of such a meeting.
C. Except as otherwise required by law, special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
by the Chairman of the Board of Directors or the Chief Executive Officer or by
any officer at the request in writing of a majority of the Board of Directors
or, prior to the Trigger Date, by the holders of a majority of the outstanding
shares of Common Stock. No business other than that stated in the notice of such
meeting shall be transacted at any special meeting.
D. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, after the Trigger Date, the affirmative vote of
the holders of at least 80% of the outstanding shares of Common Stock shall be
required to amend, repeal or adopt any provision inconsistent with this Article
EIGHTH.
NINTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is amended after approval
<PAGE> 11
11
by the stockholders of this Article NINTH to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL, as so amended. Any repeal or modification of this
Article NINTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification.
TENTH: A. Each person who was or is made a party to or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative, investigative or otherwise
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director or officer of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the GCL, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person (other
than pursuant to paragraph (b) of this Article TENTH) only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this paragraph (A) of Article TENTH
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the GCL requires, the payment
of such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer) in advance of the final
disposition of a proceeding shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this paragraph (A) of Article
TENTH or otherwise.
B. If a claim which the Corporation is obligated to pay under
paragraph (A) of this Article TENTH is not paid in full by the Corporation
within 60 days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred
<PAGE> 12
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in defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the Corporation)
that the claimant has not met the standards of conduct which make it permissible
under the GCL for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the GCL, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
C. The provisions of this Article TENTH shall cover claims,
actions, suits and proceedings, civil or criminal, whether now pending or
hereafter commenced and shall be retroactive to cover acts or omissions or
alleged acts or omissions which heretofore have taken place. If any part of this
Article TENTH should be found to be invalid or ineffective in any proceeding,
the validity and effect of the remaining provisions shall not be affected.
D. The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of this Certificate
of Incorporation, By-law, agreement, vote of stockholders or disinterested
directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the GCL.
F. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification, and rights to
be paid by the Corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of directors or officers of the
Corporation.
ELEVENTH: The By-laws of the Corporation may be altered,
amended or repealed at any meeting of the Board of Directors or of the
stockholders, provided that notice of such alteration, amendment or repeal be
contained in the notice of such meeting of the Board of Directors or
stockholders, as the case may be. All such amendments must be approved by the
<PAGE> 13
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affirmative vote of the holders of a majority of the outstanding shares of
Common Stock (if effected by action of the stockholders prior to the Trigger
Date), by the affirmative vote of the holders of at least 80% of the outstanding
shares of Common Stock (if effected by action of the stockholders on or after
the Trigger Date), or by the affirmative vote of directors constituting not less
than a majority of the entire Board of Directors (if effected by action of the
Board of Directors).
TWELFTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by the law of the State of Delaware,
and all rights of the stockholders herein are granted subject to this
reservation.
<PAGE> 14
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation
which restates, integrates and further amends the provisions of the Certificate
of Incorporation of the Corporation and which has been duly adopted in
accordance with Sections 242 and 245 of the Delaware General Corporation Law,
has been executed by an authorized officer of the Corporation this ___ day of
_________, 1999.
NEXT LEVEL COMMUNICATIONS,
INC.
By: ______________________________
Name:
Title:
<PAGE> 1
Exhibit 3.2
BY-LAWS
OF
NEXT LEVEL COMMUNICATIONS, INC.
------------
ARTICLE I.
STOCKHOLDERS
Section 1. The annual meeting of the stockholders of the
corporation for the purpose of electing directors and for the transaction of
such other business as may properly be brought before the meeting shall be held
on such date, and at such time and place within or without the State of Delaware
as may be designated from time to time by the Board of Directors.
Section 2. Special meetings of the stockholders shall be
called at any time by the Chairman of the Board or the Chief Executive Officer
or by any officer at the request in writing of a majority of the Board of
Directors or as expressly authorized in the Certificate of Incorporation. The
purpose or purposes of the proposed meeting shall be included in the notice
setting forth such call.
Section 3. Except as otherwise provided by law, notice of the
time, place and, in the case of a special meeting, the purpose or purposes of
the meeting of stockholders shall be delivered personally or mailed not earlier
than sixty, nor less than ten days previous thereto, to each stockholder of
record entitled to vote at the meeting at such address as appears on the records
of the corporation.
Section 4. At any meeting of stockholders, the presence in
person or by proxy of the holders of shares entitled to cast a majority of all
the votes which could be cast at such meeting by the holders of all of the
outstanding shares of stock of the corporation entitled to vote on every matter
that is to be voted on without regard to class at such meeting shall constitute
a quorum, except as otherwise expressly required by applicable law or by the
Certificate of Incorporation; but if at any regularly called meeting of
stockholders there be less than a quorum present, the stockholders present may
adjourn the meeting from time to time without further notice other than
announcement at the meeting until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than 30 days, or if, after the
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 5. The Chairman of the Board, or in the Chairman's
absence or at the Chairman's direction, the Chief Executive Officer, or in the
Chief Executive Officer's absence
<PAGE> 2
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or at the Chief Executive Officer's direction, any officer of the corporation
shall call all meetings of the stockholders to order and shall act as Chairman
of such meeting. The Secretary of the corporation or, in such officer's absence,
an Assistant Secretary shall act as secretary of the meeting. If neither the
Secretary nor an Assistant Secretary is present, the Chairman of the meeting
shall appoint a secretary of the meeting. Unless otherwise determined by the
Board of Directors prior to the meeting, the Chairman of the meeting shall
determine the order of business and shall have the authority in his or her
discretion to regulate the conduct of any such meeting, including, without
limitation, by imposing restrictions on the persons (other than stockholders of
the corporation or their duly appointed proxies) who may attend any such
meeting, whether any stockholder or stockholders' proxy may be excluded from any
meeting of stockholders based upon any determination by the Chairman, in his or
her sole discretion, that any such person has unduly disrupted or is likely to
disrupt the proceedings thereat, and the circumstances in which any person may
make a statement or ask questions at any meeting of stockholders. The Chairman
of the meeting shall have authority to adjourn any meeting of stockholders.
Section 6. At all meetings of stockholders, any stockholder
entitled to vote thereat shall be entitled to vote in person or by proxy, but no
proxy shall be voted after three years from its date, unless such proxy provides
for a longer period. Without limiting the manner in which a stockholder may
authorize another person or persons to act for the stockholder as proxy pursuant
to the General Corporation Law of the State of Delaware (the "GCL"), the
following shall constitute a valid means by which a stockholder may grant such
authority: (1) a stockholder may execute a writing authorizing another person or
persons to act for the stockholder as proxy, and execution of the writing may be
accomplished by the stockholder or the stockholder's authorized officer,
director, employee or agent signing such writing or causing his or her signature
to be affixed to such writing by any reasonable means including, but not limited
to, by facsimile signature; or (2) a stockholder may authorize another person or
persons to act for the stockholder as proxy by transmitting or authorizing the
transmission of a telegram, cablegram, or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such transmission,
provided that any such telegram, cablegram or other means of electronic
transmission must either set forth or be submitted with information from which
it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. If it is determined that such
telegrams, cablegrams or other electronic transmissions are valid, the judge or
judges of stockholder votes or, if there are no such judges, such other persons
making that determination shall specify the information upon which they relied.
Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to the preceding
paragraph of this Section 6 may be substituted or used in lieu of the original
writing or transmission for any and all purposes for which the original writing
or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
<PAGE> 3
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Proxies shall be filed with the Secretary of the meeting prior
to or at the commencement of the meeting to which they relate.
Section 7. When a quorum is present at any meeting, the vote
of the holders of a majority in voting power of the stock present in person or
represented by proxy and entitled to vote on the matter shall decide any
question brought before such meeting (other than the election of directors),
unless the question is one upon which by express provision of statute or of the
Certificate of Incorporation or these By-Laws, a different vote is required, in
which case such express provision shall govern and control the decision of such
question.
Section 8. In order that the corporation may determine the
stockholders (a) entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or (b) entitled to consent to corporate action in
writing without a meeting, or (c) entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date (i) in the case of
clause (a) above, shall not be more than sixty nor less than ten days before the
date of such meeting, (ii) in the case of clause (b) above, shall not be more
than ten days after the date upon which the resolution fixing the record date is
adopted by the board of directors, and (iii) in the case of clause (c) above,
shall not be more than sixty days prior to such action. If for any reason the
Board of Directors shall not have fixed a record date for any such purpose, the
record date for such purpose shall be determined as provided by law. Only those
stockholders of record on the date so fixed or determined shall be entitled to
any of the foregoing rights, notwithstanding the transfer of any such stock on
the books of the corporation after any such record date so fixed or determined.
Section 9. The officer who has charge of the stock ledger of
the corporation shall prepare and make at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of meeting,
or, if not so specified, at the place where the meeting is to be held. The list
shall also be produced at the time and kept at the place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is present.
Section 10. The Board of Directors may, and shall to the
extent required by the GCL, in advance of all meetings of the stockholders,
appoint one or more inspectors of election. In the event that the Board of
Directors fails to so appoint inspectors of election or, in the event that one
or more inspectors of election previously designated by the Board of Directors
fails to appear or act at the meeting of stockholders, the Chairman of the
meeting may appoint one or more inspectors of election to fill such vacancy or
vacancies. Inspectors of election appointed to
<PAGE> 4
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act at any meeting of the stockholders, before entering upon the discharge of
their duties, shall be sworn faithfully to execute the duties of inspectors of
election with strict impartiality and according to the best of their ability and
the oath so taken shall be subscribed by them. Inspectors of election shall,
subject to the power of the Chairman of the meeting to open and close the polls,
take charge of the polls, and, after the voting, shall make a certificate of the
result of the vote taken.
Section 11. (A) Annual Meetings of Stockholders. (1)
Nominations of persons for election to the Board of Directors of the corporation
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (a) pursuant to the corporation's notice of
meeting delivered pursuant to Article 1, Section 3 of these By-Laws, (b) by or
at the direction of the Chairman of the Board or (c) by any stockholder of the
corporation who is entitled to vote at the meeting, who complied with the notice
procedures set forth in subparagraphs (2) and (3) of this paragraph (A) of this
Section and who was a stockholder of record at the time such notice is delivered
to the Secretary of the corporation.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this Section, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation, and, in the case of business other
than nominations, such other business must be a proper matter for stockholder
action. To be timely, a stockholder's notice shall be delivered to the Secretary
at the principal executive offices of the corporation not less than sixty days
nor more than ninety days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty days, or delayed by more than sixty
days, from such anniversary date, notice by the stockholder to be timely must be
so delivered not earlier than the ninetieth day prior to such annual meeting and
not later than the close of business on the later of the sixtieth day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
<PAGE> 5
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(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
corporation at least eighty days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by these By-Laws shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the corporation.
(4) Notwithstanding anything in these By-Laws to the contrary,
the requirement to give advance notice pursuant to this paragraph (A) shall not
apply to General Instrument Corporation or the Majority Transferee (as defined
in the Certificate of Incorporation) so long as such stockholder and its
affiliates beneficially own shares representing at least 10% of the total voting
power of all outstanding shares of common stock of the corporation.
(B) Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the corporation's notice of meeting pursuant to
Article I, Section 2 of these By-Laws.
(C) General. (1) Only persons who are nominated in accordance
with the procedures set forth in these By-Laws shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in these By-Laws. Except as otherwise provided by law, the Certificate
of Incorporation or these By-Laws, the Chairman of the meeting shall have the
power and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in these By-Laws and, if any proposed nomination or business is not in
compliance with these By-Laws, to declare that such defective nomination shall
be disregarded or that such proposed business shall not be transacted.
(2) For purposes of these By-Laws, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) For purposes of these By-Laws, no adjournment nor notice
of adjournment of any meeting shall be deemed to constitute a new notice of such
meeting for purposes of this Section 11, and in order for any notification
required to be delivered by a stockholder pursuant to this Section 11 to be
timely, such notification must be delivered within the periods set forth above
with respect to the originally scheduled meeting.
(4) Notwithstanding the foregoing provisions of these By-Laws,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations
<PAGE> 6
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thereunder with respect to the matters set forth in these By-Laws. Nothing in
these By-Laws shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
ARTICLE II.
BOARD OF DIRECTORS
Section 1. The Board of Directors of the corporation shall
consist of such number of directors as shall from time to time be fixed
exclusively by resolution adopted by the affirmative vote of a majority of the
entire Board of Directors. The directors shall be divided into three classes in
the manner set forth in the Certificate of Incorporation, each class to be
elected for the term set forth therein. Directors shall (except as hereinafter
provided for the filling of vacancies and newly created directorships) be
elected by the holders of a plurality of the voting power present in person or
represented by proxy and entitled to vote. A majority of the total number of
directors then in office (but not less than one-third of the number of directors
constituting the entire Board of Directors) shall constitute a quorum for the
transaction of business and, except as otherwise provided by law or by the
Certificate of Incorporation or by these By-Laws, the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. Directors need not be stockholders.
Section 2. Any vacancy on the Board of Directors (including a
vacancy due to an increase in the number of directors) may be filled by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director or by stockholders if such vacancy was caused by the
action of stockholders (in which event such vacancy may not be filled by the
directors or a majority thereof). Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall have the same
remaining term as that of his predecessor.
Section 3. Meetings of the Board of Directors shall be held at
such place within or without the State of Delaware as may from time to time be
fixed by resolution of the Board or as may be specified in the notice of any
meeting. Regular meetings of the Board of Directors shall be held at such times
as may from time to time be fixed by resolution of the Board and special
meetings may be held at any time upon the call of the Chairman of the Board or
the Chief Executive Officer, by oral, or written notice including, telegraph,
telex or transmission of a telecopy, e-mail or other means of transmission, duly
served on or sent or mailed to each director to such director's address or
telecopy number as shown on the books of the corporation not less than one day
before the meeting. The notice of any meeting need not specify the purposes
thereof. A meeting of the Board may be held without notice immediately after the
annual meeting of stockholders at the same place at which such meeting is held.
Notice need not be given of regular meetings of the Board held at times fixed by
resolution of the Board. Notice of any meeting need not be given to any director
who shall attend such meeting in person (except when the director attends a
meeting for the express purpose of objecting at the beginning of the meeting,
<PAGE> 7
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to the transaction of any business because the meeting is not lawfully called or
convened), or who shall waive notice thereof, before or after such meeting, in
writing.
Section 4. Notwithstanding the foregoing, whenever the holders
of any one or more class or series of Preferred Stock issued by the corporation
shall have the right, voting separately by class or series, to elect directors
at an annual or special meeting of stockholders, the election, term of office,
removal, filling of vacancies and other features of such directorships shall be
governed by the terms of the Certificate of Incorporation and the Certificate of
Designation applicable thereto, and such directors so elected shall not be
divided into classes pursuant to Article FIFTH of the Certificate of
Incorporation unless expressly provided by such terms. Except as otherwise
expressly provided in the terms of such series, the number of directors that may
be so elected by the holders of any such series of stock shall be elected for
terms expiring at the next annual meeting of stockholders and without regard to
the classification of the members of the Board of Directors, and vacancies among
directors so elected by the separate vote of the holders of any such series of
Preferred Stock shall be filled by the affirmative vote of a majority of the
remaining directors elected by such series, or, if there are no such remaining
directors, by the holders of such series in the same manner in which such series
initially elected a director.
Section 5. If at any meeting for the election of directors,
the corporation has outstanding more than one class of stock, and one or more
such classes or series thereof are entitled to vote separately as a class, and
there shall be a quorum of only one such class or series of stock, that class or
series of stock shall be entitled to elect its quota of directors
notwithstanding absence of a quorum of the other class or series of stock.
Section 6. (A) The Board of Directors may designate three or
more directors to constitute an executive committee, one of whom shall be
designated Chairman of such committee. The members of such committee shall hold
such office until the next election of the Board of Directors and until their
successors are elected and qualify. Any vacancy occurring in the committee shall
be filled by the Board of Directors. Regular meetings of the committee shall be
held at such times and on such notice and at such places as it may from time to
time determine. The committee shall act, advise with and aid the officers of the
corporation in all matters concerning its interest and the management of its
business, and shall generally perform such duties and exercise such powers as
may from time to time be delegated to it by the Board of Directors, and shall
have authority to exercise all the powers of the Board of Directors, so far as
may be permitted by law, in the management of the business and the affairs of
the corporation whenever the Board of Directors is not in session or whenever a
quorum of the Board of Directors fails to attend any regular or special meeting
of such Board. The committee shall have power to authorize the seal of the
corporation to be affixed to all papers which are required by the Delaware
General Corporation Law to have the seal affixed thereto. The fact that the
executive committee has acted shall be conclusive evidence that the Board of
Directors was not in session at such time or that a quorum of the Board had
failed to attend the regular or special meeting thereof.
The executive committee shall keep regular minutes of its
meetings and shall cause them to be recorded in a book kept in the office of the
corporation designated for that purpose,
<PAGE> 8
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and shall report the same to the Board of Directors at their regular meeting.
The committee shall make and adopt its own rules for the government thereof.
(B) The Board of Directors may from time to time establish
such other committees to serve at the pleasure of the Board which shall be
comprised of such members of the Board and have such duties as the Board shall
from time to time establish. Any director may belong to any number of committees
of the Board. The Board may also establish such other committees with such
members and such duties as the Board may from time to time determine.
(C) General Instrument Corporation or the Majority Transferee,
as applicable, shall have the right to designate at least one member of any
committee of the Board so long as such stockholder and its affiliates own
beneficially shares representing at least 10% of the total voting power of all
outstanding shares of common stock.
Section 7. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or such committee.
Section 8. The members of the Board of Directors or any
committee thereof may participate in a meeting of such Board or committee, as
the case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this subsection shall
constitute presence in person at such a meeting.
Section 9. The Board of Directors may establish policies for
the compensation of directors and for the reimbursement of the expenses of
directors, in each case, in connection with services provided by directors to
the corporation.
ARTICLE III.
OFFICERS
Section 1. The Board of Directors, as soon as may be after
each annual meeting of the stockholders, shall elect officers of the
corporation, including a Chairman of the Board or Chief Executive Officer and a
Secretary. The Board of Directors may also from time to time elect such other
officers (including a President, one or more Vice Presidents, a Treasurer, one
or more Assistant Vice Presidents, one or more Assistant Secretaries and one or
more Assistant Treasurers) as it may deem proper or may delegate to any elected
officer of the corporation the power to appoint and remove any such other
officers and to prescribe their respective terms of office, authorities and
duties. Any Vice President may be designated Executive, Senior or
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Corporate, or may be given such other designation or combination of designations
as the Board of Directors may determine. Any two or more offices may be held by
the same person.
Section 2. All officers of the corporation elected by the
Board of Directors shall hold office for such term as may be determined by the
Board of Directors or until their respective successors are chosen and
qualified. Any officer may be removed from office at any time either with or
without cause by the affirmative vote of a majority of the members of the Board
then in office, or, in the case of appointed officers, by any elected officer
upon whom such power of removal shall have been conferred by the Board of
Directors.
Section 3. Each of the officers of the corporation elected by
the Board of Directors or appointed by an officer in accordance with these
By-laws shall have the powers and duties prescribed by law, by these By-Laws or
by the Board of Directors and, in the case of appointed officers, the powers and
duties prescribed by the appointing officer, and, unless otherwise prescribed by
these By-Laws or by the Board of Directors or such appointing officer, shall
have such further powers and duties as ordinarily pertain to that office. The
Chief Executive Officer shall have the general direction of the affairs of the
corporation.
Section 4. Unless otherwise provided in these By-Laws, in the
absence or disability of any officer of the corporation, the Board of Directors
may, during such period, delegate such officer's powers and duties to any other
officer or to any director and the person to whom such powers and duties are
delegated shall, for the time being, hold such office.
ARTICLE IV.
CERTIFICATES OF STOCK
Section 1. The shares of stock of the corporation shall be
represented by certificates, provided that the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
the corporation's stock shall be uncertificated shares. Any such resolution
shall not apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the Chairman of the Board or the President (or, if there is no Chairman of the
Board or President, by the Chief Executive Officer, who shall in such
circumstances also serve as President of the corporation for purposes of signing
stock certificates) or a Vice President, and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the corporation, or as
otherwise permitted by law, representing the number of shares registered in
certificate form. Any or all the signatures on the certificate may be a
facsimile.
Section 2. Transfers of stock shall be made on the books of
the corporation by the holder of the shares in person or by such holder's
attorney upon surrender and cancellation of
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certificates for a like number of shares, or as otherwise provided by law with
respect to uncertificated shares.
Section 3. No certificate for shares of stock in the
corporation shall be issued in place of any certificate alleged to have been
lost, stolen or destroyed, except upon production of such evidence of such loss,
theft or destruction and upon delivery to the corporation of a bond of indemnity
in such amount, upon such terms and secured by such surety, as the Board of
Directors in its discretion may require.
ARTICLE V.
CORPORATE BOOKS
The books of the corporation may be kept outside of the State
of Delaware at such place or places as the Board of Directors may from time to
time determine.
ARTICLE VI.
CHECKS, NOTES, PROXIES, ETC.
All checks and drafts on the corporation's bank accounts and
all bills of exchange and promissory notes, and all acceptances, obligations and
other instruments for the payment of money, shall be signed by such officer or
officers or agent or agents as shall be hereunto authorized from time to time by
the Board of Directors. Proxies to vote and consents with respect to securities
of other corporations owned by or standing in the name of the corporation may be
executed and delivered from time to time on behalf of the corporation by the
Chairman of the Board, the Chief Executive Officer, the President, or by such
officers as the Board of Directors may from time to time determine.
ARTICLE VII.
FISCAL YEAR
The fiscal year of the corporation shall begin on the first
day of January in each year and shall end on the thirty-first day of December
following.
ARTICLE VIII.
CORPORATE SEAL
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The corporate seal shall have inscribed thereon the name of
the corporation. In lieu of the corporate seal, when so authorized by the Board
of Directors or a duly empowered committee thereof, a facsimile thereof may be
impressed or affixed or reproduced.
ARTICLE IX.
AMENDMENTS
These By-Laws may be altered, amended or repealed at any
meeting of the Board of Directors or of the stockholders, provided that notice
of such alteration, amendment or repeal be contained in the notice of such
meeting of the Board of Directors or stockholders (subject, in the case of
meetings of stockholders, to the provisions of Article I of these By-Laws), as
the case may be. All such amendments must be approved by the affirmative vote of
the holders of a majority of the total voting power of all classes of
outstanding capital stock of the corporation, voting together as a single class
(if effected by action of the stockholders prior to the first date on which
General Instrument Corporation and its affiliates or the Majority Transferee and
its affiliates cease to beneficially own shares representing at least 49% of the
votes entitled to be cast by the outstanding common stock of the corporation),
by the affirmative vote of the holders of at least 80% of the total voting power
of all classes of outstanding capital stock of the corporation, voting together
as a single class (if effected by action of the stockholders on or after such
first date), or by the affirmative vote of directors constituting not less than
a majority of the entire Board of Directors (if effected by action of the Board
of Directors).
<PAGE> 1
Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
________________, 1999 by and among GENERAL INSTRUMENT CORPORATION, a Delaware
corporation ("General Instrument"), Spencer Trask Investors LLC, a Delaware
limited liability company ("Spencer Trask"), and NEXT LEVEL COMMUNICATIONS,
INC., a Delaware corporation ("Next Level").
General Instrument beneficially owns _____ shares of Common Stock,
par value $.01 per share (the "Common Stock"), of Next Level and Spencer Trask
beneficially owns _____ shares of Common Stock.
On the date hereof, Next Level will issue shares of Common Stock in
an initial public offering (the "Initial Public Offering") registered under the
Securities Act of 1933, as amended.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, General Instrument, Spencer Trask
and Next Level, for themselves, their successors, and assigns, hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms will
have the following meanings, applicable both to the singular and the plural
forms of the terms described:
"Affiliate" means, with respect to a given Person, any Person
controlling, controlled by or under common control with such Person. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as applied to any
Person, means the possession, directly or indirectly, of the power to vote
securities having a majority of the voting power for the election of directors
(or other Persons acting in similar capacities) of such Person or otherwise to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
<PAGE> 2
2
"Agreement" has the meaning ascribed thereto in the preamble hereto,
as such agreement may be amended and supplemented from time to time in
accordance with its terms.
"Common Stock" means the Common Stock and any other class of Next
Level's common stock.
"General Instrument Entities" means General Instrument and
Affiliates of General Instrument (other than Subsidiaries that constitute Next
Level Entities), and "General Instrument Entity" shall mean any of the General
Instrument Entities.
"General Instrument Ownership Reduction" means the reduction of the
percentage of Common Stock beneficially owned by the General Instrument Entities
to less than 30% of the outstanding Common Stock.
"GI Holders" means the General Instrument Entities and any
transferees thereof.
"Holder" means the GI Holders and the ST Holders.
"Next Level Entities" means Next Level and its Subsidiaries, and
"Next Level Entity" shall mean any of the Next Level Entities.
"Person" means any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization,
government (and any department or agency thereof) or other entity.
"Registrable Securities" means shares of Common Stock held by the
Holders, including shares of Common Stock issuable upon exercise of warrants or
options. As to any particular Registrable Securities, such Registrable
Securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale by the Holder thereof shall have been
declared effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (ii) they shall have
been distributed to the public in accordance with Rule 144, (iii) they shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by Next Level and
subsequent disposition of them shall not require registration or qualification
of them under the Securities Act or any state securities or blue sky law then in
effect or (iv) they shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
this Agreement, including, without
<PAGE> 3
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limitation, (i) the fees, disbursements and expenses of Next Level's counsel and
accountants and the reasonable fees and expenses of counsel selected by the
Holders in accordance with this Agreement in connection with the registration of
the securities to be disposed of; (ii) all expenses, including filing fees, in
connection with the preparation, printing and filing of the registration
statement, any preliminary prospectus or final prospectus, any other offering
document and amendments and supplements thereto and the mailing and delivering
of copies thereof to any underwriters and dealers; (iii) the cost of printing or
producing any underwriting agreements and blue sky or legal investment memoranda
and any other documents in connection with the offering, sale or delivery of the
securities to be disposed of; (iv) all expenses in connection with the
qualification of the securities to be disposed of for offering and sale under
state securities laws, including the fees and disbursements of counsel for the
underwriters or the Holders of securities in connection with such qualification
and in connection with any blue sky and legal investment surveys; (v) the filing
fees incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (vi) transfer agents' and registrars, fees and expenses and the
fees and expenses of any other agent or trustee appointed in connection with
such offering; (vii) all security engraving and security printing expenses;
(viii) all fees and expenses payable in connection with the listing of the
securities on any securities exchange or automated interdealer quotation system
or the rating of such securities; (ix) any other fees and disbursements of
underwriters customarily paid by the sellers of securities, but excluding
underwriting discounts and commissions and transfer taxes, if any, and (x) other
reasonable out-of-pocket expenses of Holders other than legal fees and expenses
referred to in clause (i) above.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 415 Offering" means an offering on a delayed or continuous
basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated
under the Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or
any successor statute.
<PAGE> 4
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"Subsidiary" means, as to any Person, any corporation, association,
partnership, joint venture or other business entity of which more than 50% of
the voting capital stock or other voting ownership interests is owned or
controlled, directly or indirectly, by such Person or by one or more of the
Subsidiaries of such Person or by a combination thereof. "Subsidiary," when used
with respect to General Instrument or Next Level, shall also include any other
entity affiliated with General Instrument or Next Level, as the case may be,
that General Instrument and Next Level may hereafter agree in writing shall be
treated as a "Subsidiary" for the purposes of this Agreement.
"ST Holders" means Spencer Trask and any transferees thereof.
1.2 Internal References. Unless the context indicates otherwise,
references to Articles, Sections and paragraphs shall refer to the corresponding
articles, sections and paragraphs in this Agreement and references to the
parties shall mean the parties to this Agreement.
ARTICLE II
REGISTRATION RIGHTS
2.1 Demand Registration - Registrable Securities. (a) Upon written
notice provided (i) at any time from General Instrument requesting that Next
Level effect the registration under the Securities Act of any or all of the
Registrable Securities held by the GI Holders or (ii) at any time from Spencer
Trask requesting that Next Level effect the registration under the Securities
Act of any or all of the Registrable Securities held by the ST Holders, each of
which notices shall specify the intended method or methods of disposition of
such Registrable Securities, Next Level shall use its best efforts to effect the
registration under the Securities Act and applicable state securities laws of
such Registrable Securities for disposition in accordance with the intended
method or methods of disposition stated in such request (including in a Rule 415
Offering, if Next Level is then eligible to register such Registrable Securities
on Form S-3 (or a successor form) for such offering); provided that,
(i) with respect to any registration statement filed, or to be
filed, pursuant to this Section 2.1, if Next Level shall furnish to the
Holders that have made such request a
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certified resolution of the Board of Directors of Next Level stating that
in the Board of Directors' good faith judgment it would (because of the
existence of, or in anticipation of, any acquisition or financing
activity, or the unavailability for reasons beyond Next Level's reasonable
control of any required financial statements, or any other event or
condition of similar significance to Next Level) be significantly
disadvantageous (a "Disadvantageous Condition") to Next Level for such a
registration statement to be maintained effective, or to be filed and
become effective, and setting forth the general reasons for such judgment,
Next Level shall be entitled to cause such registration statement to be
withdrawn and the effectiveness of such registration statement terminated,
or, in the event no registration statement has yet been filed, shall be
entitled not to file any such registration statement, until such
Disadvantageous Condition no longer exists (notice of which Next Level
shall promptly deliver to such Holders). Upon receipt of any such notice
of a Disadvantageous Condition, such Holders shall forthwith discontinue
use of the prospectus contained in such registration statement and, if so
directed by Next Level, each such Holder will deliver to Next Level all
copies, other than permanent file copies then in such Holder's possession,
of the prospectus then covering such Registrable Securities current at the
time of receipt of such notice; provided, that the filing of any such
registration statement may not be delayed for a period in excess of 60
days in any calendar year due to the occurrence of one or more
Disadvantageous Conditions;
(ii) after the General Instrument Ownership Reduction, the GI
Holders may collectively exercise their rights under this Section 2.1
(through notice delivered by the GI Holders owning in the aggregate a
majority in economic interest of the Registrable Securities then held by
the GI Holders) on not more than four occasions (it being acknowledged
that prior to the General Instrument Ownership Reduction, there shall be
no limit to the number of occasions on which the GI Holders may exercise
such rights);
(iii) the ST Holders may collectively exercise their rights under
this Section 2.1 (through notice delivered by Spencer Trask) on not more
than three occasions;
(iv) except as otherwise provided in Section 2.2 or elsewhere in
this Agreement, the Holders shall not have the right to exercise
registration rights pursuant to this
<PAGE> 6
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Section 2.1 within the 180-day period following the date hereof or
following the registration and sale of Registrable Securities effected
pursuant to a prior exercise of the registration rights provided in this
Section 2.1.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a registration requested by a Holder pursuant to this Section 2.1
shall not be deemed to have been effected (and, therefore, not requested for
purposes of paragraph (a) above), (i) if it shall not have become effective,
(ii) if after it has become effective such registration is interfered with by
any stop order, injunction or other order or requirement of the SEC or other
governmental agency or court for any reason other than a misrepresentation or an
omission by a Holder or cease to be maintained effective due to a
Disadvantageous Condition and, as a result thereof, the Registrable Securities
requested to be registered cannot be completely distributed in accordance with
the plan of distribution set forth in the related registration statement or
(iii) if the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such registration are not
satisfied or waived other than by reason of some act or omission by a Holder
within its control.
(c) In the event that any registration pursuant to this Section 2.1
shall involve, in whole or in part, an underwritten offering, the Holders of a
majority of the Registrable Securities to be registered pursuant to this Section
2.1 shall have the right to designate an underwriter or underwriters reasonably
acceptable to Next Level as the lead or managing underwriters of such
underwritten offering and, in connection with each registration pursuant to this
Section 2.1, such Holders may select one counsel reasonably acceptable to Next
Level to represent all such Holders.
(d) Next Level shall have the right to cause the registration of
additional equity securities for sale for its account or any existing or former
directors, officers or employees of the Next Level Entities in any registration
of Registrable Securities requested for the benefit of the GI Holders or the ST
Holders, as the case may be, pursuant to paragraph (a) above; provided, however,
that, if such Holders are advised in writing (with a copy to Next Level) by a
nationally recognized investment banking firm selected by such Holders
reasonably acceptable to Next Level (which shall be the lead underwriter or a
managing underwriter in the case of an underwritten offering) that, in such
firm's good faith view, the
<PAGE> 7
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inclusion of such additional equity securities in such registration would be
likely to have an adverse effect on the price, timing or distribution of the
offering and sale of the Registrable Securities then contemplated by such
Holders, the registration of such additional equity securities or part thereof
shall not be permitted. The Holders of the Registrable Securities to be
registered pursuant to this Section 2.1 may require that any such additional
equity securities be included in the offering proposed by such Holders on the
same conditions as the Registrable Securities that are included therein. In the
event that the number of Registrable Securities requested to be included in such
registration by such Holders exceeds the number which, in the good faith view
(delivered in writing) of such investment banking firm, can be sold without
adversely affecting the price, timing, distribution or sale of securities in the
offering, the number shall be allocated pro rata among the requesting Holders on
the basis of the relative number of Registrable Securities then held by each
such Holder (provided that any number in excess of a Holder's request may be
reallocated among the remaining requesting Holders in a like manner).
2.2 Piggyback Registration. In the event that Next Level at any time
after the date hereof proposes to register any Common Stock or any securities
convertible into or exchangeable for Common Stock under the Securities Act,
whether or not for sale for its own account and including pursuant to Section
2.1 (such stock or securities, "Other Securities"), in a manner that would
permit registration of Registrable Securities for sale for cash to the public
under the Securities Act, it shall at each such time give prompt written notice
to each of the Holders of its intention to do so and of the rights of such
Holders under this Section 2.2. Subject to the terms and conditions hereof, such
notice shall offer each such Holder the opportunity to include in such
registration statement such number of Registrable Securities as such Holder may
request. Upon the written request of any such Holder made within 15 days after
the receipt of Next Level's notice (which request shall specify the number of
Registrable Securities intended to be disposed of and the intended method of
disposition thereof), Next Level shall use its best efforts to effect, in
connection with the registration of the Other Securities, the registration under
the Securities Act of all Registrable Securities which Next Level has been so
requested to register, to the extent required to permit the disposition (in
accordance with such intended method of disposition thereof) of the Registrable
Securities so requested to be registered; provided, that:
<PAGE> 8
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(a) if, at any time after giving such written notice of its
intention to register any Other Securities and prior to the effective date of
the registration statement filed in connection with such registration, Next
Level shall determine for any reason not to register the Other Securities, Next
Level may, at its election, give written notice of such determination to such
Holders and thereupon Next Level shall be relieved of its obligation to register
such Registrable Securities in connection with the registration of such Other
Securities, without prejudice, however, to the rights of the Holders immediately
to request that such registration be effected as a registration under Section
2.1 to the extent permitted thereunder;
(b) if a nationally recognized investment banking firm selected by
Next Level advises Next Level in writing that, in such firm's good faith view,
all or a part of such Registrable Securities cannot be sold and the inclusion of
all or a part of such Registrable Securities in such registration would be
likely to have an adverse effect upon the price, timing or distribution of the
offering and sale of the Other Securities then contemplated, Next Level shall
include in such registration: (i) first, the Other Securities being sold for its
own account or the Other Securities which are Registrable Securities included
pursuant to Section 2.1 and/or, if such registration is being effected after the
General Instrument Ownership Reduction, any Other Securities being registered
pursuant to any demand registration rights held by Persons other than Next Level
and the Holders and (ii) second, up to the full number of Registrable Securities
requested to be included pursuant to this Section 2.2 and the remaining Other
Securities that are requested to be included in such registration in excess of
the number of securities referred to in clause (i) which, in the good faith view
of such investment banking firm, can be sold without adversely affecting such
offering, such full number to be allocated pro rata among the holders of the
securities referred to in this clause (ii) based on the relative number of
securities requested to be included by each such holder(provided further that,
in the event that such investment banking firm advises in writing that less than
all of such Registrable Securities may be included in such offering, one or more
of such Holders may withdraw their request for registration of their Registrable
Securities under this Section 2.2 and 90 days subsequent to the effective date
of the registration statement for the registration of such Other Securities
request that such registration be effected as a registration under Section 2.1
to the extent permitted thereunder);
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(c) Next Level shall not be required to effect any registration of
Registrable Securities under this Section 2.2 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
executive or employee benefit or compensation plans; and
(d) no registration of Registrable Securities effected under this
Section 2.2 shall relieve Next Level of its obligation to effect a registration
of Registrable Securities pursuant to Section 2.1.
2.3 Expenses. Next Level shall pay all Registration Expenses with
respect to a particular offering (or proposed offering). Notwithstanding the
foregoing, each of the Holders and Next Level shall be responsible for its own
internal administrative and similar costs, which shall not constitute
Registration Expenses.
2.4 Registration and Qualification. If and whenever Next Level is
required to effect the registration of any Registrable Securities under the
Securities Act as provided in Sections 2.1 or 2.2, Next Level shall as promptly
as practicable:
(a) prepare, file and use its best efforts to cause to become
effective a registration statement under the Securities Act relating to the
Registrable Securities to be offered;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (A) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement and (B) the
expiration of three months after such registration statement becomes effective;
provided, that such three-month period shall be extended for such number of days
that equals the number of days elapsing from (x) the date the written notice
contemplated by paragraph (f) below is given by Next Level to (y) the date on
which Next Level delivers to the Holders of Registrable Securities the
supplement or amendment contemplated by paragraph (f) below;
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(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
included in such registration statement (including each preliminary prospectus
and any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such registration
statement or prospectus, and such other documents, as the Holders of Registrable
Securities or such underwriter may reasonably request, and upon request a copy
of any and all transmittal letters or other correspondence to or received from,
the SEC or any other governmental agency or self-regulatory body or other body
having jurisdiction (including any domestic or foreign securities exchange)
relating to such offering;
(d) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under the securities or blue
sky laws of such U.S. jurisdictions as the Holders of such Registrable
Securities or any underwriter to such Registrable Securities shall reasonably
request, and use its reasonable best efforts to obtain all appropriate
registrations, permits and consents in connection therewith, and do any and all
other acts and things which may be necessary or advisable to enable the Holders
of Registrable Securities or any such underwriter to consummate the disposition
in such jurisdictions of its Registrable Securities covered by such registration
statement; provided, that Next Level shall not for any such purpose be required
to qualify generally to do business as a foreign corporation in any such
jurisdiction wherein it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) (i) use its best efforts to furnish to each of the Holders of
Registrable Securities included in such registration (each, a "Selling Holder")
and to any underwriter of such Registrable Securities an opinion of counsel for
Next Level addressed to each Selling Holder and dated the date of the closing
under the underwriting agreement (if any) (or if such offering is not
underwritten, dated the effective date of the registration statement) and (ii)
use its best efforts to furnish to each Selling Holder a "cold comfort" letter
addressed to each Selling Holder and signed by the independent public
accountants who have audited the financial statements of Next Level included in
such registration statement, in each such case covering substantially the same
matters with respect to such registration
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statement (and the prospectus included therein) as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such other
matters as the Selling Holders may reasonably request and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements;
(f) as promptly as practicable, notify the Selling Holders in
writing (i) at any time when a prospectus relating to a registration pursuant to
Sections 2.1 or 2.2 is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) of any request by the SEC or any
other regulatory body or other body having jurisdiction for any amendment of or
supplement to any registration statement or other document relating to such
offering, and in either such case, at the request of the Selling Holders prepare
and furnish to the Selling Holders a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include 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, in light of the circumstances under which they are made, not
misleading;
(g) if requested by the lead or managing underwriters, use its best
efforts to list all such Registrable Securities covered by such registration on
each securities exchange and automated inter-dealer quotation system on which
common equity securities of Next Level are then listed;
(h) to the extent reasonably requested by the lead or managing
underwriters, send appropriate officers of Next Level to attend and participate
in any "road shows" scheduled in connection with any such registration, with all
out-of-pocket costs and expense incurred by Next Level or such officers in
connection with such attendance to be paid by Next Level; and
(i) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Sections 2.1 or 2.2 unlegended
<PAGE> 12
12
certificates representing ownership of the Registrable Securities being sold in
such denominations as shall be requested by the Selling Holders or the
underwriters.
2.5 Conversion of other Securities, Etc. In the event that any
Holder offers any options, rights, warrants or other securities issued by it or
any other Person that are offered with, convertible into or exercisable or
exchangeable for any Registrable Securities, the Registrable Securities
underlying such options, rights, warrants or other securities shall continue to
be eligible for registration pursuant to Sections 2.1 and 2.2.
2.6 Underwriting; Due Diligence. (a) If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under this Agreement, Next Level shall enter into an
underwriting agreement with such underwriters for such offering, which agreement
will contain such representations and warranties by Next Level and such other
terms and provisions as are customarily contained in underwriting agreements of
Next Level to the extent relevant and as are customarily contained in
underwriting agreements generally with respect to secondary distributions to the
extent relevant, including, without limitation, indemnification and contribution
provisions substantially to the effect and to the extent provided in Section
2.7, and agreements as to the provision of opinions of counsel and accountants'
letters to the effect and to the extent provided in Section 2.4(e). The Selling
Holders on whose behalf the Registrable Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement and the
representations and warranties by, and the other agreements on the part of, Next
Level to and for the benefit of such underwriters, shall also be made to and for
the benefit of such Selling Holders. Such underwriting agreement shall also
contain such representations and warranties by such Selling Holders and such
other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, when relevant, including,
without limitation, indemnification and contribution provisions substantially to
the effect and to the extent provided in Section 2.7.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the Securities
Act pursuant to this Agreement, Next Level shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants, such reasonable and customary access to its books and
records and such opportunities to discuss the business of
<PAGE> 13
13
Next Level with its officers and the independent public accountants who have
certified the financial statements of Next Level as shall be necessary, in the
opinion of such Holders and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
2.7 Indemnification and Contribution. (a) In the case of each offering
of Registrable Securities made pursuant to this Agreement, Next Level agrees to
indemnify and hold harmless, to the extent permitted by law, each of the Selling
Holders, each underwriter of Registrable Securities so offered and each Person,
if any, who controls any of the foregoing Persons within the meaning of the
Securities Act and the officers, directors, affiliates, employees and agents of
each of the foregoing, against any and all losses, liabilities, costs (including
reasonable attorney's fees and disbursements and reasonable costs of
investigation and preparation), claims and damages, joint or several, to which
they or any of them may become subject, under the Securities Act or otherwise,
including any amount paid in settlement of any litigation commenced or
threatened, insofar as such losses, liabilities, costs, claims and damages (or
actions or proceedings in respect thereof, whether or not such indemnified
Person is a party thereto) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement (or in any preliminary or final prospectus included therein) or in any
offering memorandum or other offering document relating to the offering and sale
of such Registrable Securities or at its direction, or any amendment thereof or
supplement thereto, or in any document incorporated by reference therein, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however that Next Level shall not be liable to any Person in any such
case to the extent that any such loss, liability, cost, claim or damage arises
out of or relates to any untrue statement or alleged untrue statement, or any
omission, if such statement or omission shall have been made in reliance upon
and in conformity with information relating to a Selling Holder, another holder
of securities included in such registration statement or underwriter furnished
in writing to Next Level by or on behalf of such Selling Holder, other holder or
underwriter specifically for use in the registration statement (or in any
preliminary or final prospectus included therein), offering memorandum or other
offering document, or any amendment thereof or supplement thereto. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf
<PAGE> 14
14
of any Selling Holder, any other holder or any underwriter and shall survive the
transfer of such securities. The foregoing indemnity agreement is in addition to
any liability that Next Level may otherwise have to each Selling Holder, other
holder or underwriter of the Registrable Securities or any controlling person of
the foregoing and the officers, directors, affiliates, employees and agents of
each of the foregoing; provided, further, that, in the case of an offering with
respect to which a Selling Holder has designated the lead or managing
underwriters (or a Selling Holder is offering Registrable Securities directly,
without an underwriter), this indemnity does not apply to any loss, liability,
cost, claim or damage arising out of or relating to any untrue statement or
alleged untrue statement or omission or alleged omission in any preliminary
prospectus or offering memorandum if a copy of a final prospectus or offering
memorandum was available on a timely basis not sent or given by or on behalf of
any underwriter (or such Selling Holder or other holder, as the case may be) to
such Person asserting such loss, liability, cost, claim or damage at or prior to
the written confirmation of the sale of the Registrable Securities as required
by the Securities Act and such untrue statement or omission had been corrected
in such final prospectus or offering memorandum.
(b) In the case of each offering made pursuant to this
Agreement, each Selling Holder, by exercising its registration rights hereunder,
agrees to indemnify and hold harmless, and to use reasonable best efforts to
cause each underwriter of Registrable Securities included in such offering (in
the same manner and to the same extent as set forth in Section 2.7(a)) to agree
to indemnify and hold harmless, Next Level, each other underwriter who
participates in such offering, each other Selling Holder or other holder with
securities included in such offering and in the case of an underwriter, such
Selling Holder or other holder, and each Person, if any, who controls any of the
foregoing within the meaning of the Securities Act and the officers, directors,
affiliates, employees and agents of each of the foregoing, against any and all
losses, liabilities, costs (including reasonable attorney's fees and
disbursements and reasonable costs of investigation and preparation), claims and
damages to which they or any of them may become subject, under the Securities
Act or otherwise, including any amount paid in settlement of any litigation
commenced or threatened, insofar as such losses, liabilities, costs, claims and
damages (or actions or proceedings in respect thereof, whether or not such
indemnified Person is a party thereto) arise out of or are based upon any untrue
statement or alleged untrue statement by such Selling Holder or underwriter, as
the case may be, of a material
<PAGE> 15
15
fact contained in the registration statement (or in any preliminary or final
prospectus included therein) or in any offering memorandum or other offering
document relating to the offering and sale of such Registrable Securities
prepared by Next Level or at its direction, or any amendment thereof or
supplement thereto, or any omission by such Selling Holder or underwriter, as
the case may be, or alleged omission by such Selling Holder or underwriter, as
the case may be, of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but in each case only to the
extent that such untrue statement of a material fact is contained in, or such
material fact is omitted from information relating to such Selling Holder or
underwriter, as the case may be, furnished in writing to Next Level by or on
behalf of such Selling Holder or underwriter, as the case may be, specifically
for use in such registration statement (or in any preliminary or final
prospectus included therein), offering memorandum or other offering document, or
any amendment thereof or supplement thereto. The foregoing indemnity is in
addition to any liability which such Selling Holder or underwriter, as the case
may be, may otherwise have to Next Level, or controlling persons and the
officers, directors, affiliates, employees, and agents of each of the foregoing;
provided, however, that, in the case of an offering made pursuant to this
Agreement with respect to which Next Level has designated the lead or managing
underwriters (or Next Level is offering securities directly, without an
underwriter), this indemnity does not apply to any loss, liability, cost, claim,
or damage arising out of or based upon any untrue statement or alleged untrue
statement or omission or alleged omission in any preliminary prospectus or
offering memorandum if a copy of a final prospectus or offering memorandum was
not sent or given by or on behalf of any underwriter (or Next Level, as the case
may be) to such Person asserting such loss, liability, cost, claim or damage at
or prior to the written confirmation of the sale of the Registrable Securities
as required by the Securities Act and such untrue statement or omission had been
corrected in such final prospectus or offering memorandum.
(c) Each party indemnified under paragraph (a) or (b) above
shall, promptly after receipt of notice of a claim or action against such
indemnified party in respect of which indemnity may be sought hereunder, notify
the indemnifying party in writing of the claim or action; provided, that the
failure to notify the indemnifying party shall not relieve it from any liability
that it may have to an indemnified party on account of the indemnity agreement
contained in paragraph (a) or (b) above. If any such claim or action shall be
brought against an
<PAGE> 16
16
indemnified party, and it shall have notified the indemnifying party thereof,
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified party and indemnifying parties may exist in respect of
such claim, the indemnifying party shall be entitled to participate therein,
and, to the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel satisfactory to
the indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party). After notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to the indemnified
party under this Section 2.7 for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof other
than reasonable costs of investigation. If the indemnifying party does not
assume the defense of such claim or action, it is understood that the
indemnifying party shall not, in connection with any one such claim or action or
separate but substantially similar or related claims or actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to one separate firm of local attorneys in each such jurisdiction) at
any time for all such indemnified parties. No indemnifying party shall (i)
without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent, but if
settled with its written consent or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss of liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 2.7
shall for any reason be unavailable (other than in accordance with its terms) to
an indemnified party in respect of any loss, liability, cost, claim or damage
referred to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by
<PAGE> 17
17
such indemnified party as a result of such loss, liability, cost, claim or
damage in such proportion as shall be appropriate to reflect the relative fault
of the indemnifying party on the one hand and the indemnified party on the other
with respect to the statements or omissions which resulted in such loss,
liability, cost, claim or damage as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to whether
the 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
indemnifying party on the one hand or the indemnified party on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission, but not by
reference to any indemnified party's stock ownership in Next Level. The amount
paid or payable by an indemnified party as a result of the loss, cost, claim,
damage or liability, or action in respect thereof, referred to above in this
paragraph (d) shall be deemed to include, for purposes of this paragraph (d),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) Indemnification and contribution similar to that specified
in the preceding paragraphs of this Section 2.7 (with appropriate modifications)
shall be given by Next Level, the Selling Holders and underwriters with respect
to any required registration or other qualification of securities under any
state law or regulation or governmental authority.
(f) The obligations of the parties under this Section 2.7
shall be in addition to any liability which any party may otherwise have to any
other party.
2.8 Rule 144 and Form S-3. Commencing 90 days after the date hereof,
Next Level shall use its best efforts to ensure that the conditions to the
availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied.
Upon the request of any Holder of Registrable Securities, Next Level will
deliver to such Holder a written statement as to whether it has complied with
such requirements. Next Level further agrees to use its reasonable efforts to
cause all conditions to the availability of Form S-3 (or any successor form)
under the Securities Act of the filing of registration statements under this
Agreement to be met as soon as practicable after the date hereof.
<PAGE> 18
18
2.9 Transfer of Registration Rights. Any Holder may transfer
all or any portion of its rights under this Agreement to any transferee of
Registrable Securities owned by such Holder; provided that all or any portion of
the rights under Section 2.1 may only be transferred to a transferee of at least
three percent (3%) of the outstanding shares of Common Stock at the time of
transfer (other than shares held by the General Instrument Entities and Spencer
Trask). Any transfer of registration rights pursuant to this Section 2.9 shall
be effective upon receipt by Next Level of (i) written notice from such Holder
stating the name and address of any transferee and identifying the number of
Registrable Securities with respect to which the rights under this Agreement are
being transferred and the nature of the rights so transferred and (ii) a written
agreement from such transferee to be bound by the terms of this Agreement. The
Holders may exercise their rights hereunder in such priority as they shall agree
upon among themselves.
2.10 Holdback Agreement. If Next Level effects any
registration of equity securities of Next Level or any securities convertible
into or exchangeable or exercisable for any equity securities of Next Level
pursuant to this Agreement or otherwise in which 20% or more of the securities
registered thereby are Registrable Securities, each Holder agrees not to effect
any public sale or distribution, including any sale under Rule 144, of any
equity security of Next Level or any security convertible into or exchangeable
or exercisable for any equity security of Next Level (otherwise than through the
registered public offering then being made) within 7 days prior to or 90 days
(or such lesser period as the lead or managing underwriters may permit) after
the effective date of the registration statement (or the commencement of the
offering to the public of such Registrable Securities in the case of Rule 415
offerings). Next Level hereby also so agrees; provided, that, subject to Section
2.6(a) hereof, Next Level shall not be so restricted from effecting any public
sale or distribution of any security in connection with any merger, acquisition,
exchange offer, subscription offer, dividend reinvestment plan or stock option
or other executive or employee benefit or compensation plan.
2.11 Registration of Other Stock. Next Level agrees that it
shall from time to time enter into one or more agreements with General
Instrument and/or the Majority Transferee (as defined in Next Level's
certificate of incorporation), if any, in form and substance reasonably
satisfactory to the parties thereto, granting to General Instrument or the
Majority
<PAGE> 19
19
Transferee, as the case may be, registration rights for the registration of any
shares of any class of capital stock of Next Level other than Common Stock that
may hereafter be owned, directly or indirectly, by General Instrument or the
Majority Transferee, as the case may be, substantially upon the same terms and
conditions as those contained in this Agreement for the benefit of General
Instrument.
ARTICLE III
MISCELLANEOUS
3.1 Limitation of Liability. No party hereto shall be liable
hereunder for any special, indirect, incidental or consequential damages of the
other arising in connection with this Agreement.
3.2 Affiliates. General Instrument agrees and acknowledges
that General Instrument shall be responsible for the performance by each General
Instrument Entity of the obligations hereunder applicable to such General
Instrument Entity.
3.3 Amendments. This Agreement may not be amended or
terminated orally, but only by a writing duly executed by or on behalf of each
of the parties hereto. Any such amendment shall be validly and sufficiently
authorized for purposes of this Agreement if it is signed on behalf of the
parties hereto by any of their respective presidents or vice presidents.
3.4 Term. This Agreement shall remain in effect until all
Registrable Securities held by the Holders have been transferred by them to
Persons other than Transferees; provided, that the provisions of Section 2.7,
2.8 and 3.1 shall survive any such expiration.
3.5 Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable to any extent, the remainder of this Agreement or such provision
of the application of such provision to such party or circumstances, other than
those to which it is so determined to be invalid, illegal or unenforceable,
shall remain in full force and effect to the fullest extent permitted by law and
shall not be affected thereby, unless such a construction would be unreasonable.
<PAGE> 20
20
3.6 Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be deemed duly given upon actual
receipt, and shall be delivered (a) in person, (b) by registered or certified
mail, postage prepaid, return receipt requested or (c) by facsimile or other
generally accepted means of electronic transmission (provided that a copy of any
notice delivered pursuant to this clause (c) shall also be sent pursuant to
clause (b)), addressed as follows:
(a) if to Next Level, to:
Next Level Communications, Inc.
6085 State Farm Drive
Rohnert Park, CA 94928
Attention:
Telecopy No.:
(b) If to General Instrument, to:
General Instrument Corporation
101 Tournament Drive
Horsham, PA 19044
Attention:
Telecopy No.:
(c) If to Spencer Trask, to:
Spencer Trask Investors LLC
535 Madison Avenue
New York, NY 10022
Attention:
Telecopy No.:
or to such other addresses or telecopy numbers as may be specified by like
notice to the other parties.
3.7 Further Assurances. The parties hereto shall execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such instruments and take such other action as may be necessary or advisable to
carry out their obligations under this Agreement and under any exhibit, document
or other instrument delivered pursuant hereto.
3.8 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original
<PAGE> 21
21
instrument, but all of which together shall constitute but one and the same
agreement.
3.9 Governing Law. This Agreement and the transactions
contemplated hereby shall be construed in accordance with, and governed by, the
laws of the State of Delaware.
3.10 Entire Agreement. This Agreement constitutes the entire
understanding of the parties hereto with respect to the subject matter hereof.
3.11 Majority Transferee. Upon General Instrument's request,
Next Level agrees that it shall enter into an agreement with the Majority
Transferee (in substitution of this Agreement), if any, in form and substance
reasonably satisfactory to the Majority Transferee and Next Level (i) granting
to the Majority Transferee registration rights for the registration of
Registrable Securities substantially upon the same terms and conditions as those
contained in this Agreement for the benefit of General Instrument and (ii)
containing other covenants and agreements for the benefit of the Majority
Transferee that are substantially similar to the other covenants and agreements
contained in this Agreement for the benefit of General Instrument; provided,
that such agreement shall contain terms (including covenants and agreements of
the Majority Transferee) for the benefit of Next Level that are substantially
similar to the terms (including the covenants and agreements of General
Instrument) for the benefit of Next Level contained herein.
3.12 Successors. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and assigns (including transferees). Nothing contained in this
Agreement, express or implied, is intended to confer upon any other person or
entity any benefits, rights or remedies.
3.13 Specific Performance. The parties hereto acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in
<PAGE> 22
22
addition to any other remedy to which they may be entitled at law or equity.
<PAGE> 23
23
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
GENERAL INSTRUMENT CORPORATION
By: __________________________
Name:
Title
SPENCER TRASK INVESTORS LLC
By: __________________________
Name:
Title
NEXT LEVEL COMMUNICATIONS, INC.
By: __________________________
Name:
Title
<PAGE> 1
EXHIBIT 5.1
- --------------------------------------------------------------------------------
[GUNDERSON DETTMER LETTERHEAD]
October 12, 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, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, 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
<PAGE> 1
Exhibit 9.1
VOTING TRUST AGREEMENT (this "Agreement"), dated as of _____
___, 1999, by and among GENERAL INSTRUMENT CORPORATION, a Delaware corporation
("Holder"), NEXT LEVEL COMMUNICATIONS, INC., a Delaware corporation ("NLC"), and
CHASE MELLON SHAREHOLDER SERVICES LLC, as Trustee (the "Trustee").
NLC is authorized to issue 200 million shares of its Common
Stock (the "Voting Stock") and 70 million shares of its Class B Non-Voting
Common Stock;
Holder owns all of the outstanding shares of common stock of
Next Level Communications, a California corporation ("NLC (CA)");
On the date hereof, it is contemplated that Next Level
Communications, L.P. (the "Partnership") will merge with and into NLC (the
"Partnership Merger"), upon which NLC (CA) will own all of the outstanding
shares of Class B Non-Voting Common Stock;
Simultaneously with the Partnership Merger, Holder intends to
contribute an outstanding $75 million principal amount note of the Partnership
(the "Note") to NLC in exchange for shares of Voting Stock, which will be
delivered by NLC directly to the Trustee;
Holder intends to deposit all of the outstanding shares of
common stock of NLC (CA) with the Trustee immediately following the Partnership
Merger;
Immediately thereafter, NLC (CA) will be merged with and into
NLC (the "NLC Merger"), pursuant to which shares of Class B Non-Voting Common
Stock will be canceled and shares of common stock of NLC (CA) will be converted
into shares of Voting Stock;
As a result of the foregoing transactions and other
transactions occuring on the date hereof, NLC will have issued and outstanding
___ million shares of Voting Stock, ________ of which will be beneficially owned
by Holder and held by the Trustee, and no shares of Class B Non-Voting Common
Stock;
Holder intends, by entering into this Agreement, to limit its
voting power to the Threshold Percentage (as defined below) of the total voting
power of all of the outstanding shares of Voting Stock; and
The "Threshold Percentage" shall initially be 49% but may be
decreased to a lower percentage by Holder from time to time by written notice to
the Trustee and NLC;
NOW, THEREFORE, in consideration of the mutual agreements, and
subject to all the conditions herein contained, and intending to be legally
bound, the parties hereto agree as follows:
<PAGE> 2
2
I. THE TRUST STOCK
1.1 Assignment of Trust Stock to Trustee. (a) Effective
simultaneously with the Partnership Merger, Holder hereby transfers, assigns and
delivers to and deposits with the Trustee shares of Voting Stock represented by
Certificate No. [B-1], which certificate has been directed by Holder to be
issued by NLC in the name of the Trustee or its nominee or agent, receipt of
which certificate the Trustee hereby acknowledges.
(b) Effective immediately after the Partnership Merger, Holder
hereby also transfers, assigns and delivers to and deposits with the Trustee
shares of common stock of NLC (CA) represented by Certificate No. [3], which
certificate has been duly endorsed by Holder for transfer to the Trustee,
receipt of which certificate the Trustee hereby acknowledges. Holder and NLC
acknowledge and agree that such deposit was made prior to the NLC Merger. Holder
and NLC further acknowledge and agree that Certificate No. [B-2] for the shares
of Voting Stock to be issued in the NLC Merger in cancellation of the common
stock of NLC (CA) will be issued by NLC in the name of the Trustee or its
nominee or agent. The Voting Stock held by the Trustee pursuant to Sections
1.1(a) and (b) are herein referred to as the "Initial Trust Stock."
(c) In addition, Holder may, but shall not be obligated to,
transfer, assign and deliver to and deposit with the Trustee, from time to time,
such number of additional shares of Voting Stock as Holder may elect to be
subject to this Agreement ("Additional Trust Stock," together with the Initial
Trust Stock, the "Trust Stock").
(d) Holder agrees to execute and deliver to the Trustee, from
time to time, such additional assignments or other instruments of transfer as
may be necessary in the reasonable opinion of the Trustee, NLC or NLC's transfer
agent to confirm and make effective any transfer, assignment, delivery and
deposit of Trust Stock to the Trustee pursuant to this Agreement. The Trustee
agrees to accept each such transfer, assignment, delivery and deposit, and to
hold all Trust Stock in accordance with and subject to this Agreement.
(e) All certificates for Trust Stock shall show the Trustee or
its nominee or agent as owner of record thereof in its capacity as Trustee under
this Agreement, and the stock transfer books and records of NLC shall reflect
such ownership.
1.2 Power of Trustee to Vote Trust Stock. As used herein, (i)
"Holder Voted Shares" shall mean shares of Trust Stock representing up to the
Threshold Percentage of the total voting power of all outstanding shares of
Voting Stock, (ii) "Neutrally Voted Shares" shall mean all shares of Trust Stock
<PAGE> 3
3
other than the Holder Voted Shares and (iii) "Non-Trust Shares" shall mean all
outstanding shares of Voting Stock other than the Trust Stock.
(b) At every meeting of the stockholders of NLC of which the
Trustee, its nominee or agent has written notice, the Trustee shall cause the
Holder Voted Shares:
(i) with respect to any election of directors, to be voted in
favor of any individuals designated in writing by Holder in such
numbers of shares as directed in writing by Holder so long as the
number of individuals designated by Holder and elected to the board of
directors would not exceed one less than a majority of the board of
directors, and
(ii) with respect to each other matter, to be voted "for,"
"against" or to abstain from voting in such number of shares as
directed in writing by Holder.
The Trustee shall also cause to be present for purposes of determining the
presence of a quorum at such meeting the Holder Voted Shares which are directed
to be voted pursuant to the immediately preceding sentence (and, if so directed
in writing by Holder, any other Holder Voted Shares). Whenever any consent in
writing of the stockholders of NLC is sought with respect to any action, the
Trustee shall consent thereto with respect to the Holder Voted Shares in such
number of shares as directed in writing by the Holder.
(c) At every meeting of the stockholders of NLC of which the
Trustee, its nominee or agent has written notice, the Trustee shall cause the
Neutrally Voted Shares:
(i) with respect to any election of directors, to be voted in
favor of any individual in the same proportion as all Non-Trust Shares
are validly voted in favor of such individual.
(ii) with respect to each other matter, to be voted "for,"
"against" or to abstain from voting in the same proportion as all
Non-Trust Shares are validly voted "for," "against" or abstain from
voting, as the case may be, with respect to such matter.
The Trustee shall also cause to be present for purposes of determining the
presence of a quorum at such meeting Neutrally Voted Shares in such number which
is in proportion to the number of Non-Trust Shares which are present at such
meeting in relation to the number of outstanding Non-Trust Shares. Whenever any
consent in writing of the stockholders of NLC is sought with respect to any
action, the Trustee shall consent thereto with respect to the Neutrally Voted
Shares in such number which is in proportion to the number of Non-Trust Shares
with respect to
<PAGE> 4
4
which a consent has been delivered in relation to the number of outstanding
Non-Trust Shares.
(d) NLC agrees that it shall recognize any proxy or written
consent delivered by the Trustee pursuant to this Section 1.2 as effective in
the manner and to the extent provided in this Agreement.
(e) In causing the Trust Stock to be present at any
stockholder meeting for purposes of determining a quorum or to be voted on at
such a meeting or in consenting to the taking of any action, in each case
pursuant to this Section 1.2, the Trustee shall have no discretion and shall act
solely in accordance with this Agreement.
1.3 Limitation on Power of Trustee. Except as provided in
Section 1.2, the Trustee shall not possess or be entitled to exercise any right
or power with respect to the Trust Stock and shall act in accordance with
written directions provided by Holder from time to time with respect to the
Trust Stock. In illustration and not in limitation of the foregoing, Holder may
from time to time direct the Trustee to sell, assign or otherwise transfer
shares of Trust Stock, as provided in Section 1.4 below; to tender shares of
Trust Stock in connection with any tender, exchange or other offer and to
distribute the consideration received for such shares in any such tender,
exchange or other offer directly to Holder free of this Trust; to register a
dissent from corporate action and take all steps necessary or desirable to
perfect any dissenters' rights with respect to shares of Trust Stock; and to
exercise any other rights as a stockholder of NLC (other than voting rights to
the extent limited by this Agreement).
1.4 Transfer of Trust Stock. The Trustee shall, promptly upon
written notice from Holder that Holder has sold, assigned or otherwise
transferred (or that Holder intends to pay a dividend or make a distribution to
its stockholders) some or all of the shares of Trust Stock, deliver to Holder or
to Holder's order a certificate or certificates for such shares (in no event
later than 5 business days after receipt of such notice), endorsed for transfer
in such manner as Holder shall direct; provided, however, that the Trustee shall
have no duty to so deliver any certificate unless, subject to the last sentence
of this Section 1.4, (i) such sale, assignment or other transfer by Holder is a
bona fide sale, assignment or other transfer to a person other than a direct or
indirect subsidiary of General Instrument Corporation, (ii) Holder is not in
default of any of its obligations under this Agreement and (iii) Holder shall
deliver to the Trustee a certificate signed on behalf of Holder by a duly
authorized officer of Holder, in form and substance reasonably satisfactory to
the Trustee, certifying as to the preceding clauses (i) and (ii). Any
consideration received or to be received by Holder in connection with any such
sale, assignment or other transfer shall not be subject to this
<PAGE> 5
5
Agreement and if received by the Trustee shall promptly be distributed to Holder
in accordance with Section 1.5. In the event of any sale, assignment or other
transfer by Holder of any Trust Stock which satisfies the conditions set forth
in this Section 1.4, the shares of Trust Stock so sold, assigned or otherwise
transferred shall thereafter not be subject to this Agreement in any respect and
shall cease to be Trust Stock. Nothing in this Agreement shall prohibit the
sale, assignment or other transfer of any shares of Trust Stock to any person so
long as such person agrees that such shares will continue to be Trust Stock and
remain subject to this Agreement.
1.5 Trustee to Receive And Distribute Dividends. The Trustee
shall receive all dividends paid upon the Trust Stock in any manner (other than
in shares of Voting Stock), including, without limitation, cash, and shall
promptly pay such dividends to Holder. Any and all shares of Voting Stock
received by the Trustee as a dividend or distribution on, or upon any split-up
or subdivision of, any of the Trust Stock, shall be held by the Trustee as Trust
Stock.
II. THE TRUSTEE
2.1 Appointment of Trustee. Chase Mellon Shareholder Services
LLC is hereby appointed as Trustee for the purposes and with the powers set
forth herein, and hereby accepts such appointment and agrees to act as Trustee
hereunder in accordance with the terms hereof.
2.2 Trust Certificates Not to Be Issued. The Trustee shall not
issue any trust certificates in connection with this Trust.
2.3 Duties and Responsibilities. (a) The Trustee owes no
fiduciary duties to any person by reason of this Agreement. The Trustee
undertakes to perform such duties and only such duties as are specifically set
forth in this Agreement, and no implied covenants or obligations shall be read
into this Agreement against the Trustee.
(b) In the absence of bad faith or gross negligence on its
part, the Trustee shall not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
this Agreement. The Trustee shall not be liable for any error of judgment made
in good faith unless the Trustee shall have been grossly negligent in
ascertaining the pertinent facts. In no event shall the Trustee be liable for
special, indirect or consequential damages or loss of any kind whatsoever
(including but not limited to lost profits) even if the Trustee has been advised
of the likelihood of such loss or damage and regardless of the form of action.
<PAGE> 6
6
(c) The Trustee may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
form of bond certificate or other instrument, paper or document in good faith
believed by it to be genuine. The Trustee shall not be liable for acting upon
any telephone communication authorized hereby which the Trustee believes in good
faith to have been given by the proper party or parties.
(d) The Trustee may consult with counsel of its choice and the
advice of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(e) The Trustee shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
(f) The Trustee may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and shall not be
responsible for any misconduct or negligence on the part of any agent or
attorney appointed by it with due care hereunder.
(g) The Trustee makes no representation as to the validity or
adequacy of this Agreement or the Voting Stock.
2.4 Costs and Expenses. The Trustee shall be entitled to incur
such reasonable costs, expenses and other charges, including, but not limited
to, reasonable attorneys' fees and expenses, of every kind and nature whatsoever
as it may deem necessary or appropriate in connection with this Agreement,
including, without limitation, costs, expenses and other charges incurred in
connection with administering the voting trust created hereby and in enforcing
or defending the validity of this Agreement or any part hereof. All of such
costs, expenses and other charges shall be borne and paid by Holder.
2.5 Indemnification. Holder shall indemnify the Trustee
against any cost or expense (including counsel fees and disbursements),
reasonably incurred by it in connection herewith and any claim, demand, action,
loss or liability (collectively, "Liability") that the Trustee may suffer or
incur in connection with this Agreement or any action taken or omitted by the
Trustee hereunder, except to the extent such Liability results from the gross
negligence or willful misconduct of the Trustee.
2.6 Successor Trustee. The Trustee may resign at any time by
giving notice thereof to NLC and Holder; provided, that no such resignation
shall be effective until a successor trustee shall have been appointed and
agreed to act as Trustee. Upon any
<PAGE> 7
7
such resignation, NLC shall have the right to appoint a successor Trustee,
subject to the approval of Holder, which shall not be unreasonably withheld. If
no successor Trustee shall have been so appointed by NLC and approved by Holder,
and shall have accepted such appointment, within 30 days after the retiring
Trustee's giving of notice of resignation, then the retiring Trustee may appoint
a successor, also subject to the reasonable approval of Holder, and/or petition
a court of competent jurisdiction for the appointment of a successor. The
Trustee hereunder shall at all times be a corporation organized and doing
business under the laws of the United States or of any State or Territory
thereof or of the District of Columbia, which (i) is authorized under such laws
to exercise corporate trust powers, (ii) is subject to examination or
supervision by Federal, State, Territorial or District of Columbia authority and
(iii) has at all times a combined capital and surplus of not less than
$10,000,000. In case at any time the Trustee shall cease to be eligible in
accordance with this Section 2.6, the Trustee shall resign immediately in the
manner and with the effect specified in this Section 2.6.
2.7 Compensation of the Trustee. Holder covenants and agrees
to pay to the Trustee from time to time, and the Trustee shall be entitled to,
reasonable compensation, and, except as otherwise expressly provided, Holder
will pay or reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement (including the reasonable compensation,
expenses and disbursements of its counsel and all persons not regularly in its
employ) except any such expense, disbursement or advance as may arise from its
gross negligence or intentional misconduct.
III. MISCELLANEOUS
3.1 Termination and Irrevocability of Trust. This Agreement
and the voting trust hereby created shall terminate on _______ ___, 2009, and
shall be, and are hereby expressly declared to be irrevocable, except that this
Agreement and the voting trust hereby created may be terminated at any time by
Holder, by written notice to the Trustee and NLC in the event (a) the voting
power represented by the Trust Stock is not more than the Threshold Percentage
of the total voting power of all shares of Voting Stock then outstanding, (b)
the total number of shares of Voting Stock beneficially owned by Holder is
eighty percent (80%) or more of all shares of Voting Stock then outstanding, (c)
any person shall acquire beneficial ownership of more than seventy-five percent
(75%) of the Non-Trust Shares, or (d) any person shall acquire beneficial
ownership of more than fifty percent (50%) of the outstanding shares of common
stock of Holder; and the Trustee shall be entitled to receive an officer's
certificate certifying as to the existence of any such condition.
<PAGE> 8
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3.2 Effect of Termination. Upon the termination of this
Agreement and the voting trust created hereby, in any manner provided for
herein, the Trustee shall deliver the Trust Stock to Holder, duly endorsed for
transfer to Holder or to Holder's order. When the Trustee shall have so
distributed all the Trust Stock and paid or distributed to all persons entitled
thereto any money or other property then held by the Trustee in its capacity as
Trustee hereunder, whether or not a part of the trust, the Trustee shall be
discharged of all further obligations hereunder.
3.3 Amendment of Agreement. This Agreement may be amended at
any time by Holder for one or more of the following purposes:
(a) to evidence the succession of another person to Holder, or
successive successions, or the assignment of this Agreement by Holder,
in whole or in part, and the assumption by the successor or the
assignee of the covenants, agreements and obligations of Holder
pursuant to this Agreement;
(b) to add to the covenants of Holder such further covenants,
restrictions, conditions or provisions as Holder may desire;
(c) to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with
any other provision contained herein or to make such other provisions
in regard to matters or questions arising under this Agreement; and
(d) to evidence the appointment and acceptance of appointment
of a successor trustee and to add to or change any of the provisions of
this Agreement as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one trustee;
provided that no such amendment shall be inconsistent with the purpose of this
Agreement. In executing or accepting any amendments hereto, the Trustee shall be
entitled to receive and shall be fully protected in relying upon an opinion of
counsel and officer's certificate stating that the execution of such amendment
is authorized or permitted by this Agreement.
3.4 Effect of Partial Invalidity. If any one or more
provisions of this Agreement should be or become contrary to law, then such
provisions only shall be null and void and shall be deemed separable from the
remaining provisions hereof, and its or their invalidity shall not in any way
affect the validity of this Agreement as a whole or of any other provision or
portion thereof; provided, however, that this Agreement as thereby modified
continues to be consistent with the original purpose hereof. In the event this
Agreement as so modified is not consistent with such purpose, this Agreement
shall be deemed
<PAGE> 9
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rescinded or terminated at such time and in such manner or upon such grounds as
a court of competent jurisdiction may deem equitable.
3.5 Agreement May Be Executed in Counterparts. This Agreement
may be signed in any number of counterparts with the same force and effect as
though all of the parties hereto had signed but one instrument.
3.6 Persons Bound. This Agreement shall inure to the benefit
of and bind, as the case may require, the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
3.7 Entire Agreement. This Agreement, in conjunction with
those additional references made herein, is intended to embody the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes any and all negotiations, prior
discussions, or prior agreements and understandings.
3.8 Paragraph Headings. The headings of the several paragraphs
of this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern or aid in the construction of any of the
terms or provisions thereof.
3.9 Governing Law. This Agreement is to be governed by and
construed in accordance with the laws of the State of Delaware.
3.10 Additional Covenants. (a) NLC agrees to give Holder and
the Trustee prompt written notice of any change in the number of shares of
Voting Stock which are (i) issued and outstanding or (ii) owned by NLC.
(b) If the number of directors designated by Holder and
elected to the board of directors pursuant to Section 1.2(b), any time for any
reason, exceeds one less than a majority of the board of directors, (i) NLC
agrees to use reasonable efforts to cause, as promptly as practicable,
additional directors to be elected or appointed to the board of directors so
that the number of directors designated and elected to the board of directors
pursuant to Section 1.2(b) does not exceed one less than a majority of the board
of directors and (ii) until such individuals are so elected or appointed, Holder
agrees to use reasonable efforts to cause one or more individuals previously
designated by Holder and elected to the board of directors pursuant to Section
1.2(b) to, subject to applicable law and their fiduciary duties, refrain from
voting in any action of the board of directors (other than actions necessary or
desirable to implement the provisions and purposes of this Agreement) so that
the number of directors designated and elected to the board of directors
pursuant to Section 1.2(b) (other than those refraining
<PAGE> 10
10
from taking action pursuant to this sentence) does not exceed one less than a
majority of the board of directors.
IN WITNESS WHEREOF, each of the undersigned has executed this
Agreement or caused this Agreement to be executed on its behalf as of the date
first written above.
GENERAL INSTRUMENT CORPORATION
By ________________________________________________
Name:
Title:
NEXT LEVEL COMMUNICATIONS, INC.
By ________________________________________________
Name:
Title:
CHASE MELLON SHAREHOLDER SERVICES LLC
By ________________________________________________
Name:
Title:
<PAGE> 1
Exhibit 10.2
CORPORATE AND INTERCOMPANY AGREEMENT
CORPORATE AND INTERCOMPANY AGREEMENT (this "Agreement") dated
as of ________________, 1999 by and between GENERAL INSTRUMENT CORPORATION, a
Delaware corporation ("General Instrument"), and NEXT LEVEL COMMUNICATIONS,
INC., a Delaware corporation ("Next Level").
General Instrument beneficially owns ____ shares of Common
Stock, par value $.01 per share ("Common Stock"), of Next Level.
On the date hereof, Next Level will issue shares of Common
Stock in an initial public offering (the "Initial Public Offering") registered
under the Securities Act of 1933, as amended.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, General Instrument and
Next Level, for themselves, their successors, and assigns, hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following
terms shall have the following meanings, applicable both to the singular and the
plural forms of the terms described:
"Affiliate" means, with respect to a given Person, any Person
controlling, controlled by or under common control with such Person. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as applied to any
Person, means the possession, directly or indirectly, of the power to vote
securities having a majority of the voting power for the election of directors
(or other Persons acting in similar capacities) of such Person or otherwise to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"Agreement" has the meaning ascribed thereto in the preamble
hereto, as such agreement may be amended and supplemented from time to time in
accordance with its terms.
"Applicable Stock" means at any time the (i) shares of Common
Stock owned by the General Instrument Entities owned on the date hereof, plus
(ii) shares of Common Stock purchased by the General Instrument Entities
pursuant to Article II of this
<PAGE> 2
2
Agreement or otherwise, plus (iii) shares of Common Stock that were issued to
General Instrument Entities in respect of shares described in either clause (i)
or clause (ii) in any reclassification, share combination, share subdivision,
share dividend, share exchange, merger, consolidation or similar transaction or
event.
"Common Stock" means the Common Stock, any other class of Next
Level's capital stock representing the right to vote generally for the election
of directors and, if Next Level becomes a subsidiary corporation includable in a
consolidated federal income tax return of General Instrument, any other security
of Next Level treated as stock for purposes of Section 1504 of the Internal
Revenue Code of 1986, as amended.
"General Instrument Entities" means General Instrument and its
Affiliates (other than Affiliates that constitute Next Level Entities), and
"General Instrument Entity" shall mean any of the General Instrument Entities.
"Market Price" of any shares of Common Stock on any date means
(i) the average of the last sale price of such shares for the five trading days
immediately preceding such date on The Nasdaq Stock Market, Inc. or, if such
shares are not listed thereon, on the principal national securities exchange or
automated interdealer quotation system on which such shares are traded or (ii)
if such sale prices are unavailable or such shares are not so traded, the value
of such shares on such date determined in accordance with agreed-upon procedures
reasonably satisfactory to Next Level and General Instrument.
"Next Level California" means Next Level Communications, a
California corporation, and a wholly-owned subsidiary of General Instrument.
"Next Level Entities" means Next Level and its Subsidiaries,
and "Next Level Entity" shall mean any of the Next Level Entities.
"Next Level California Merger" means the merger of Next Level
California with and into Next Level, pursuant to the Agreement and Plan of
Merger, dated as of _______, 1999, among General Instrument, Spencer Trask
Investors LLC, a Delaware limited liability company, Next Level California, Next
Level Communications L.P., a Delaware limited partnership, and Next Level.
"Nonvoting Stock" means any class of Next Level's capital
stock not representing the right to vote generally for the election of
directors.
<PAGE> 3
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"Ownership Percentage" means, at any time, the fraction,
expressed as a percentage and rounded to the next highest thousandth of a
percent, whose numerator is the aggregate Value of the Applicable Stock and
whose denominator is the aggregate Value of outstanding shares of Common Stock
of Next Level; provided, however, that any shares of Common Stock issued by Next
Level in violation of its obligations under Article II of this Agreement shall
not be deemed outstanding for the purpose of determining the Ownership
Percentage. For purposes of this definition, "Value" means, with respect to any
share of stock, the value of such share determined by General Instrument under
principles applicable for purposes of Section 1504 of the Internal Revenue Code
of 1986, as amended.
"Person" means any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization,
government (and any department or agency thereof) or other entity.
"Subsidiary" means, as to any Person, any corporation,
association, partnership, joint venture or other business entity of which more
than 50% of the voting capital stock or other voting ownership interests is
owned or controlled, directly or indirectly, by such Person or by one or more of
the Subsidiaries of such Person or by a combination thereof. "Subsidiary," when
used with respect to General Instrument or Next Level, shall also include any
other entity Affiliated with General Instrument or Next Level, as the case may
be, that General Instrument and Next Level may hereafter agree in writing shall
be treated as a "Subsidiary" for the purposes of this Agreement.
"Tax" or "Taxes" means any Federal, state, local or foreign
tax, fee or other assessment or charge of any kind whatsoever including any net
income, gross income, gross receipts, sales, use, ad valorem, value added,
transfer, franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, capital stock, occupation, property, environmental or windfall
tax, premium, custom, duty or other tax, together with any interest, penalty,
addition to tax, additional amount due or similar items with respect thereto.
1.2 Internal References. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement and references
to the parties shall mean the parties to this Agreement.
<PAGE> 4
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ARTICLE II
OPTIONS
2.1 Options. (a) Next Level hereby grants to General
Instrument, on the terms and conditions set forth herein, a continuing right
(the "Common Stock Option") to purchase from Next Level, at the times set forth
herein, the number of shares of Common Stock provided in the first sentence of
Section 2.3. The Common Stock Option shall be assignable, in whole or in part
and from time to time, by General Instrument to any General Instrument Entity.
The exercise price for the shares of Common Stock purchased pursuant to the
Common Stock Option shall be the Market Price of the Common Stock as of the date
of first delivery of notice of exercise of the Common Stock Option by General
Instrument (or its permitted assignee hereunder) to Next Level.
(b) The provisions of Section 2.1(a) hereof notwithstanding,
the Common Stock Option granted pursuant to Section 2.1(a) shall not apply and
shall not be exercisable in connection with the issuance by Next Level of any
shares of Common Stock pursuant to any stock option or other executive or
employee benefit or compensation plan maintained by Next Level, so long as, from
and after the date hereof and prior to the issuance of such shares, Next Level
has repurchased from stockholders and not subsequently reissued a number of
shares equal or greater to the number of shares to be issued in any such
issuance.
(c) Next Level hereby grants to General Instrument, on the
terms and conditions set forth herein, a continuing right (the "Nonvoting Stock
Option" and, together with the Common Stock Option, the "Options") to purchase
from Next Level, at the times set forth herein, such number of shares of
Nonvoting Stock as is necessary to allow the General Instrument Entities to own
80 percent of each class of outstanding Nonvoting Stock. The Nonvoting Stock
Option shall be assignable, in whole or in part and from time to time, by
General Instrument to any General Instrument Entity. The exercise price for the
shares of Nonvoting Stock purchased pursuant to the Nonvoting Stock Option shall
be the price at which such Nonvoting Stock is then being sold to third parties,
or, if no Nonvoting Stock is being sold, the fair market value thereof as
determined in good faith by the Board of Directors of Next Level.
2.2 Notice. At least 20 business days prior to the issuance
of any shares of Common Stock (other than in connection with the Initial Public
Offering, including the full exercise of all underwriters' over-allotment
options granted in connection therewith and other than issuances of Common Stock
to any General Instrument Entity and other than pursuant to any stock option or
<PAGE> 5
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other executive or employee benefit or compensation plan maintained by Next
Level) or the first date on which any other event could occur that, in the
absence of a full or partial exercise of the Common Stock Option, would result
in any reduction in the Ownership Percentage, Next Level will notify General
Instrument in writing (a "Common Stock Option Notice") of any plans it has to
issue such shares or the date on which such event could first occur. At least 20
business days prior to the issuance of any shares of Nonvoting Stock (other than
issuances of Nonvoting Stock to any General Instrument Entity) or the first date
on which any event could occur that, in the absence of a full or partial
exercise of the Nonvoting Stock Option, would result in the General Instrument
Entities owning less than 80 percent of each class of outstanding Nonvoting
Stock, Next Level will notify General Instrument in writing (a "Nonvoting Stock
Option Notice" and, together with a Common Stock Option Notice, an "Option
Notice") of any plans it has to issue such shares or the date on which such
event could first occur. Each Option Notice must specify the date on which Next
Level intends to issue such additional shares or on which such event could first
occur (such issuance or event being referred to herein as an "Issuance Event"
and the date of such issuance or event as an "Issuance Event Date"), the number
of shares Next Level intends to issue or may issue and the other terms and
conditions of such Issuance Event.
2.3 Option Exercise and Payment. The Common Stock Option may
be exercised by General Instrument (or any General Instrument Entity to which
all or any part of the Common Stock Option has been assigned) for a number of
shares equal to or less than the number of shares that are necessary for the
General Instrument Entities to maintain, in the aggregate, the Ownership
Percentage prior to giving effect to the applicable Issuance Event or any
issuance by Next Level of any shares of Common Stock pursuant to any stock
option or other executive or employee benefit or compensation plan maintained by
Next Level prior to the applicable Issuance Event. The Nonvoting Stock Option
may be exercised by General Instrument (or any General Instrument Entity to
which all or any part of the Nonvoting Stock Option has been assigned) for a
number of shares equal to or less than the number of shares that are necessary
for the General Instrument Entities to own, in the aggregate, 80 percent of each
class of outstanding Nonvoting Stock. Each Option may be exercised at any time
after receipt of an applicable Option Notice and prior to the applicable
Issuance Event Date by the delivery to Next Level of a written notice to such
effect specifying (i) the number of shares of Common Stock or Nonvoting Stock,
as the case may be, to be purchased by General Instrument, or any of the General
Instrument Entities and (ii) a calculation of the exercise price for such
shares. Upon any such exercise of either Option, Next Level
<PAGE> 6
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will, prior to the applicable Issuance Event Date, deliver to General Instrument
(or any General Instrument Entity designated by General Instrument), against
payment therefor, certificates (issued in the name of General Instrument or its
permitted assignee hereunder or as directed by General Instrument) representing
the shares of Common Stock or Nonvoting Stock, as the case may be, being
purchased upon such exercise. Payment for such shares shall be made by wire
transfer or intrabank transfer of immediately-available funds to such account as
shall be specified by Next Level, for the full purchase price for such shares.
2.4 Effect of Failure to Exercise. Except as provided in
Section 2.6, any failure by General Instrument to exercise either Option, or any
exercise for less than all shares purchasable under either Option, in connection
with any particular Issuance Event shall not affect General Instrument's right
to exercise the relevant Option in connection with any subsequent Issuance
Event.
2.5 Initial Public Offering. Notwithstanding the foregoing,
General Instrument shall not be entitled to exercise the Common Stock Option in
connection with the Initial Public Offering.
2.6 Termination of Options. The Options shall terminate upon
the occurrence of any Issuance Event that, after considering General
Instrument's response thereto and to any other Issuance Events, results in the
Ownership Percentage being less than 30%, other than any Issuance Event in
violation of this Agreement. Each Option, or any portion thereof assigned to any
General Instrument Entity other than General Instrument, also shall terminate in
the event that the Person to whom such Option, or such portion thereof has been
transferred, ceases to be a General Instrument Entity for any reason whatsoever.
Each Option shall also terminate at the election of General Instrument.
ARTICLE III
CERTAIN COVENANT AND AGREEMENTS
3.1 No Violations. (a) For so long as the Ownership
Percentage is greater than 50%, Next Level covenants and agrees that it will not
take any action or enter into any commitment or agreement which may reasonably
be anticipated to result, with or without notice and with or without lapse of
time or otherwise, in a contravention or event of default by any General
Instrument Entity of (i) any provisions of applicable law or regulation,
including but not limited to provisions pertaining to the Internal Revenue Code
of 1986, as amended, or the Employee
<PAGE> 7
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Retirement Income Security Act of 1974, as amended, (ii) any provision of the
certificate of incorporation or by-laws of any General Instrument Entity, (iii)
any credit agreement or other material instrument binding upon any General
Instrument Entity or (iv) any judgment, order or decree of any governmental
body, agency or court having jurisdiction over any General Instrument Entity or
any of its assets.
(b) Next Level and General Instrument agree to provide to the
other any information and documentation requested by the other for the purpose
of evaluating and ensuring compliance with Section 3.1(a) hereof.
(c) Notwithstanding the foregoing Sections 3.1(a) and 3.1(b),
nothing in this Agreement is intended to limit or restrict in any way any
General Instrument Entity's rights as a stockholder of Next Level.
3.2 Tax Matters. (a) For all taxable periods ending on or
before the date hereof, General Instrument shall timely prepare and file with
the appropriate tax authority all returns with respect to Taxes for Next Level
California and shall pay all Taxes shown due on such returns (other than any
Taxes attributable to any action taken after the closing of the Next Level
California Merger by Next Level or any of its Affiliates or any transferee of
Next Level or any of its Affiliates), and such returns shall be prepared
consistently with past practices. Both General Instrument and Next Level shall
prepare any Tax returns relating to General Instrument and Next Level,
respectively, in a manner consistent with the positions taken on such returns.
(b) In the case of an audit or judicial proceeding that
relates to Next Level California or Next Level for periods ending on or before
the date hereof, General Instrument shall have the sole right to control the
conduct of such audit or proceeding. Next Level shall not enter into any
settlement or closing or other agreement with respect thereto without the
consent of General Instrument.
(c) After the date hereof, Next Level shall notify General
Instrument in writing within 10 days following the receipt of written notice of
the commencement of any Tax audit or administrative or judicial proceeding or of
any demand or claim on Next Level. Such notice shall contain factual information
describing the asserted Tax liability in reasonable detail and shall include
copies of any notice or other document received from any taxing authority in
respect of any such asserted tax liability.
<PAGE> 8
8
(d) In the case of an audit or administrative or judicial
proceeding that relates to periods ending after the date hereof, so long as
General Instrument owns at least 30% of the number of outstanding shares of
common stock of Next Level, General Instrument and Next Level shall jointly
control the defense and settlement of any such contest and each party shall
cooperate with the other party at its own expense and there shall be no
settlement or closing or other agreement with respect thereto without the
consent of the other party, which consent shall not be unreasonably withheld
and, if Next Level does not assume the defense of any such audit or proceeding,
General Instrument may defend the same in such manner as it may deem
appropriate, including but not limited to, settling such audit or proceeding.
(e) Next Level shall prepare and file any Tax returns for all
taxable periods that end after the date hereof and Taxes shown to be due on such
returns. Such returns shall be prepared in a manner consistent with the prior
practice of Next Level California and, so long as General Instrument owns at
least 30% of the number of outstanding shares of common stock of Next Level,
Next Level shall deliver to General Instrument such returns at least 15 business
days before such return is due to be filed (taking into account any extensions
of time to file such return that have been properly obtained) for General
Instrument's review and comment.
(f) General Instrument shall have the right to object to any
items set forth on any return prepared by Next Level within 7 days of the
delivery of a particular return under section 3.2(e) but only if there is no
reasonable basis for the position taken with respect to an item or items set
forth on such return or such return is otherwise inaccurate. In the event of
such objection, the parties shall attempt in good faith to resolve the dispute
and any resolution shall be final and binding on them. If the parties cannot
resolve any such dispute within 7 days of such delivery, the items remaining in
dispute shall be submitted to an independent accounting firm of international
reputation selected by, and mutually acceptable to, General Instrument and Next
Level and which expense shall be shared equally between General Instrument and
Next Level. The independent accounting firm so selected shall determine the
proper amounts for the items remaining in dispute and General Instrument and
Next Level shall be bound by the determination by the independent accounting
firm absent manifest error. The independent accounting firm shall make any such
determination within 7 days after submission of the remaining disputed items. If
a return is due before the date a disputed item is resolved hereunder, it shall
be filed as prepared and resolved items shall be reflected on an amended return.
<PAGE> 9
9
(g) General Instrument and Next Level each shall provide the
other party with such cooperation and information as such other party may
reasonably request in filing any Tax return, amended return or claim for refund,
determining a liability for taxes or a right to refund of Taxes or participating
in or conducting any audit or other proceeding in respect of Taxes. Such
cooperation and information shall include providing copies of relevant tax
returns or portions thereof, together with accompanying schedules and related
work papers and documents relating to rulings or other determinations by taxing
authorities. Next Level shall retain all returns, schedules and work papers and
all material records or other documents relating to Tax matters until the later
of (i) the expiration of the statute of limitations of the taxable periods to
which such returns and other documents relate or (ii) five years following the
date for such returns provided, however, that Next Level shall not dispose of
any such materials if at least 90 business days before the later of the end of
either of the periods described in clauses (i) or (ii) General Instrument has
notified Next Level of its desire to review such material in which case General
Instrument shall be given an opportunity to remove and retain all or any part of
such materials.
3.3 Rohnert Park Lease. (a) Next Level shall sublease the
Rohnert Park facility currently occupied by Next Level (the "Facility") from
General Instrument. Until December 31, 1999, sublease payments shall be in an
amount equal to the amount payable by General Instrument pursuant to the lease
and financing documents entered into under the Participation Agreement dated as
of June 30, 1997 (the "Lease and Finance Agreements"), and Next Level shall make
such payments directly to the parties contemplated by the Lease and Finance
Agreements. Thereafter, Next Level shall pay directly to General Instrument the
greater of a fair market value rent on the Facility or the amounts payable by
General Instrument pursuant to the Lease and Finance Agreements.
(b) Next Level shall have an option to require General
Instrument to exercise its purchase option under the Lease and Finance
Agreements for the Facility and to designate Next Level as the purchaser. The
purchase price to be paid by Next Level to General Instrument shall be equal to
(i) until December 31, 1999, the amount of indebtedness outstanding under the
loans and lessor contributions obtained to facilitate the purchase and
construction of the Facility and sufficient to permit the acquisition of the
Facility and meet the purchase requirements set out in the Lease and Finance
Agreements and obtain a complete release of General Instrument as a guarantor
under the Lease and Finance Agreements and (ii) thereafter, the greater of the
amount
<PAGE> 10
10
determined under clause (i) above or the fair market value of the Facility.
(c) For purposes of Section 3.3(a) or (b), "fair market value"
shall be determined in the following manner: General Instrument and Next Level
shall endeavor in good faith to reach a mutual agreement as to such amount for a
period of ten (10) business days, and if they cannot agree within ten (10)
business days, then such amount shall be determined by an independent third
party appraiser selected by General Instrument and reasonably acceptable to Next
Level. The fees and expenses of such appraiser shall be borne equally by General
Instrument and Next Level.
3.4 Board of Directors. Upon the termination of the Voting
Trust Agreement dated the date hereof among General Instrument, Next Level and
ChaseMellon Shareholder Services, LLC (and if at such time General Instrument
holds at least a majority of the outstanding shares of Common Stock and gives
Next Level reasonable advance notice thereof), Next Level and its board of
directors shall take all actions necessary (without requiring any action on the
part of any stockholder of Next Level) to appoint on the date of such
termination any number of additional directors nominated by General Instrument.
Prior to such termination, Next level will not increase the size of its board of
directors without the prior written consent of General Instrument.
3.5 Indemnification. Next Level shall indemnify and hold
harmless each of the General Instrument Entities and each of their respective
officers, directors, employees and agents (collectively, the "Indemnified
Parties"), against any and all costs and expenses from third party claims
(including, without limitation, attorneys' fees, interest, penalties and costs
of investigation, preparation or defense), judgments, fines, losses, claims,
damages, liabilities, demands, actions, causes of action, assessments and
amounts paid in settlement (collectively, "Losses"), including, without
limitation, Losses under indemnification obligations of the Indemnified Parties
to third parties, in each case, based on, arising out of, resulting from or in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative,
investigative or other (collectively, the "Actions"), based on, arising out of,
pertaining to or in connection with (a) any activities or omissions of the Next
Level Entities (and their predecessors) or any of their officers, directors,
employees, affiliates (other than the General Instrument Entities) or agents or
(b) any breach by the Next Level Entities of this Agreement. This indemnity
shall be applicable whether or not such Actions or the facts or
<PAGE> 11
11
transactions giving rise to such Actions arose prior to, on or subsequent to the
date hereof. Next Level shall, if and to the extent requested in writing by the
Indemnified Parties, participate in the defense of any such Action with counsel
satisfactory to General Instrument; provided that, if any Indemnified Party
determines that such Indemnified Party has a conflict of interest with Next
Level or any other Indemnified Party, such Indemnified Party shall have the
right to employ in its sole discretion separate counsel to represent such
Indemnified Party. Next Level shall pay all fees and expenses of such separate
counsel. Next Level shall not without the prior written consent of the
Indemnified Parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened Action in respect of which
indemnification may be sought hereunder (whether or not the Indemnified Parties
are actual or potential parties to such Action) unless such settlement,
compromise or consent includes an unconditional release of each Indemnified
Party from all liability arising out of such Action. The provisions of this
Section are for the benefit of, and are intended to create third party
beneficiary rights in favor of, each of the Indemnified Parties.
3.6 Guaranty. Next Level shall obtain a complete release of
General Instrument from its guaranty of Next Level's contract with Bell Atlantic
as promptly as practicable after the date hereof and in any event not later than
December 31, 1999.
3.7 Confidentiality. Except as required by law, regulation
or legal or judicial process, General Instrument agrees that neither it nor any
General Instrument Entity nor any of their respective directors, officers,
advisors, agents or employees will without the prior written consent of Next
Level disclose to any other Person any material, non-public information
concerning the business or affairs of Next Level acquired from any director,
officer, advisor, agent or employee of Next Level (including any director,
officer, advisor, agent or employee of Next Level who is also a director,
officer, advisor, agent or employee of General Instrument).
ARTICLE IV
MISCELLANEOUS
4.1 Limitation of Liability. Neither General Instrument nor
Next Level shall be liable to the other for any special, indirect, incidental or
consequential damages of the other arising in connection with this Agreement.
4.2 Affiliates. General Instrument agrees and acknowledges
that it shall be responsible for the performance by
<PAGE> 12
12
each General Instrument Entity of the obligations hereunder applicable to such
General Instrument Entity.
4.3 Amendments. This Agreement may be amended only by a
writing duly executed by or on behalf of each of the parties hereto; provided
that, any amendments materially adverse to Next Level shall be approved by a
majority of the directors of Next Level who are not affiliated with General
Instrument.
4.4 Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable to any extent, the remainder of this Agreement or such provision
of the application of such provision to such party or circumstances, other than
those to which it is so determined to be invalid, illegal or unenforceable,
shall remain in full force and effect to the fullest extent permitted by law and
shall not be affected thereby, unless such a construction would be unreasonable.
4.5 Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be deemed duly given upon actual
receipt, and shall be delivered (a) in person, (b) by registered or certified
mail, postage prepaid, return receipt requested or (c) by facsimile or other
generally accepted means of electronic transmission (provided that a copy of any
notice delivered pursuant to this clause (c) shall also be sent pursuant to
clause (b)), addressed as follows:
(a) if to Next Level, to:
Next Level Communications, Inc.
6085 State Farm Drive
Rohnert Park, CA 94928
Attention:
Telecopy No.:
(b) If to General Instrument, to:
General Instrument Corporation
101 Tournament Drive
Horsham, PA 19044
Attention:
Telecopy No.:
or to such other addresses or telecopy numbers as may be specified by like
notice to the other parties.
4.6 Further Assurances. General Instrument and Next Level
shall execute, acknowledge and deliver, or cause to be
<PAGE> 13
13
executed, acknowledged and delivered, such instruments and take such other
action as may be necessary or advisable to carry out their obligations under
this Agreement and under any exhibit, document or other instrument delivered
pursuant hereto.
4.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original instrument,
but all of which together shall constitute but one and the same agreement.
4.8 Governing Law. This Agreement and the transactions
contemplated hereby shall be construed in accordance with, and governed by, the
laws of the State of Delaware.
4.9 Entire Agreement. This Agreement constitutes the entire
understanding of the parties hereto with respect to the subject matter hereof.
4.10 Majority Transferee. Upon General Instrument's request,
Next Level agrees that it shall enter into an agreement with the Majority
Transferee (as defined in Next Level's certificate of incorporation) (in
substitution of this Agreement), if any, in form and substance reasonably
satisfactory to the Majority Transferee and Next Level (i) granting to the
Majority Transferee options for the purchase of Common Stock and Nonvoting Stock
substantially upon the same terms and conditions as those contained in Article
II, and (ii) containing other covenants and agreement for the benefit of the
Majority Transferee that are substantially similar to the other covenants and
agreements contained in this Agreement for the benefit of General Instrument;
provided, that such agreement shall contain terms (including covenants and
agreements of the Majority Transferee) for the benefit of Next Level that are
substantially similar to the terms (including the covenants and agreements of
General Instrument) for the benefit of Next Level contained herein.
4.11 Successors. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and assigns. Nothing contained in this Agreement (other than Section
3.5), express or implied, is intended to confer upon any other person or entity
any benefits, rights or remedies.
4.12 Specific Performance. The parties hereto acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent breaches of
<PAGE> 14
14
the provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in addition to any other remedy to which they may be entitled
at law or equity.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
GENERAL INSTRUMENT CORPORATION
By: __________________________
Name:
Title
NEXT LEVEL COMMUNICATIONS, INC.
By: ___________________________
Name:
Title:
<PAGE> 1
Exhibit 10.3
NEXT LEVEL COMMUNICATIONS, INC.
1999 EQUITY INCENTIVE PLAN
(AS ADOPTED EFFECTIVE OCTOBER 10, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. INTRODUCTION..........................................................................................1
ARTICLE 2. ADMINISTRATION........................................................................................1
2.1 Committee Composition...............................................................................1
2.2 Committee Responsibilities..........................................................................1
2.3 Committee for Non-Officer Grants....................................................................2
ARTICLE 3. SHARES AVAILABLE FOR GRANTS...........................................................................2
3.1 Basic Limitation....................................................................................2
3.2 Additional Shares...................................................................................2
3.3 Dividend Equivalents................................................................................2
ARTICLE 4. ELIGIBILITY...........................................................................................3
4.1 Incentive Stock Options.............................................................................3
4.2 Other Grants........................................................................................3
ARTICLE 5. OPTIONS...............................................................................................3
5.1 Stock Option Agreement..............................................................................3
5.2 Number of Shares....................................................................................3
5.3 Exercise Price......................................................................................3
5.4 Exercisability and Term.............................................................................3
5.5 Effect of Change in Control.........................................................................4
5.6 Modification or Assumption of Options...............................................................4
5.7 Buyout Provisions...................................................................................4
ARTICLE 6. PAYMENT FOR OPTION SHARES.............................................................................4
6.1 General Rule........................................................................................4
6.2 Surrender of Stock..................................................................................4
6.3 Exercise/Sale.......................................................................................5
6.4 Exercise/Pledge.....................................................................................5
6.5 Other Forms of Payment..............................................................................5
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS..........................................................5
7.1 Initial Grants......................................................................................5
7.2 Annual Grants.......................................................................................5
7.3 Accelerated Exercisability..........................................................................6
7.4 Exercise Price......................................................................................6
7.5 Term 6
7.6 Affiliates of Outside Directors.....................................................................6
ARTICLE 8. STOCK APPRECIATION RIGHTS.............................................................................6
8.1 SAR Agreement.......................................................................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
8.2 Number of Shares....................................................................................6
8.3 Exercise Price......................................................................................7
8.4 Exercisability and Term.............................................................................7
8.5 Effect of Change in Control.........................................................................7
8.6 Exercise of SARs....................................................................................7
8.7 Modification or Assumption of SARs..................................................................7
ARTICLE 9. RESTRICTED SHARES.....................................................................................8
9.1 Restricted Stock Agreement..........................................................................8
9.2 Payment for Awards..................................................................................8
9.3 Vesting Conditions..................................................................................8
9.4 Voting and Dividend Rights..........................................................................8
ARTICLE 10. STOCK UNITS..........................................................................................8
10.1 Stock Unit Agreement...............................................................................8
10.2 Payment for Awards.................................................................................9
10.3 Vesting Conditions.................................................................................9
10.4 Voting and Dividend Rights.........................................................................9
10.5 Form and Time of Settlement of Stock Units.........................................................9
10.6 Death of Recipient.................................................................................9
10.7 Creditors' Rights.................................................................................10
ARTICLE 11. PROTECTION AGAINST DILUTION.........................................................................10
11.1 Adjustments.......................................................................................10
11.2 Dissolution or Liquidation........................................................................10
11.3 Reorganizations...................................................................................10
ARTICLE 12. DEFERRAL OF AWARDS..................................................................................11
ARTICLE 13. AWARDS UNDER OTHER PLANS............................................................................11
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES............................................................12
14.1 Effective Date....................................................................................12
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units.......................................12
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units........................................12
ARTICLE 15. LIMITATION ON RIGHTS................................................................................12
15.1 Retention Rights..................................................................................12
15.2 Stockholders' Rights..............................................................................12
15.3 Regulatory Requirements...........................................................................13
ARTICLE 16. WITHHOLDING TAXES...................................................................................13
16.1 General...........................................................................................13
16.2 Share Withholding.................................................................................13
ARTICLE 17. FUTURE OF THE PLAN..................................................................................13
17.1 Term of the Plan..................................................................................13
17.2 Amendment or Termination..........................................................................13
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 18. LIMITATION ON PAYMENTS..............................................................................14
18.1 Scope of Limitation...............................................................................14
18.2 Basic Rule........................................................................................14
18.3 Reduction of Payments.............................................................................14
18.4 Overpayments and Underpayments....................................................................15
18.5 Related Corporations..............................................................................15
ARTICLE 19. DEFINITIONS.........................................................................................15
ARTICLE 20. EXECUTION...........................................................................................20
</TABLE>
iii
<PAGE> 5
NEXT LEVEL COMMUNICATIONS, INC.
1999 EQUITY INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective as of the date of
the Company's initial public offering. The purpose of the Plan is to promote the
long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical
long-range objectives, (b) encouraging the attraction and retention of
Employees, Outside Directors and Consultants with exceptional qualifications and
(c) linking Employees, Outside Directors and Consultants directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Stock Units,
Options (which may constitute incentive stock options or nonstatutory stock
options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance
with, the laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by
the Committee. The Committee shall consist exclusively of two or more directors
of the Company, who shall be appointed by the Board. In addition, the
composition of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended
to qualify for exemption under Rule 16b-3 (or its successor) under the
Exchange Act; and
(b) Such requirements as the Internal Revenue Service
may establish for outside directors acting under plans intended to
qualify for exemption under section 162(m)(4)(C) of the Code.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select
the Employees, Outside Directors and Consultants who are to receive Awards under
the Plan, (b) determine the type, number, vesting requirements and other
features and conditions of such Awards, (c) interpret the Plan and (d) make all
other decisions relating to the operation of the Plan. The Committee may adopt
such rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also
appoint a secondary committee of the Board, which shall be composed of one or
more directors of the
<PAGE> 6
Company who need not satisfy the requirements of Section 2.1. Such secondary
committee may administer the Plan with respect to Employees and Consultants who
are not considered officers or directors of the Company under section 16 of the
Exchange Act, may grant Awards under the Plan to such Employees and Consultants
and may determine all features and conditions of such Awards. Within the
limitations of this Section 2.3, any reference in the Plan to the Committee
shall include such secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the
Plan may be authorized but unissued shares or treasury shares. The aggregate
number of Options, SARs, Stock Units and Restricted Shares awarded under the
Plan shall not exceed (a) four million plus (b) the aggregate number of Common
Shares remaining available for grants under the Predecessor Plan on the date of
the Company's initial public offering plus (c) the additional Common Shares
described in Section 3.2. No additional grants shall be made under the
Predecessor Plan after the date of the Company's initial public offering. The
limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment
pursuant to Article 11.
3.2 ADDITIONAL SHARES. If Options granted under this Plan or
the Predecessor Plan are forfeited or terminate for any other reason before
being exercised, then the corresponding Common Shares shall again become
available for Awards under this Plan. If Common Shares issued upon the exercise
of Options granted under this Plan or the Predecessor Plan are forfeited, then
such Common Shares shall again become available for Awards under this Plan. If
Restricted Shares issued under this Plan or the Predecessor Plan are forfeited,
then the corresponding Common Shares shall again become available for Awards
under this Plan. If Stock Units or SARs are forfeited or terminate for any other
reason before being exercised, then the corresponding Common Shares shall again
become available for Awards under the Plan. If Stock Units are settled, then
only the number of Common Shares (if any) actually issued in settlement of such
Stock Units shall reduce the number available under Section 3.1 and the balance
shall again become available for Awards under the Plan. If SARs are exercised,
then only the number of Common Shares (if any) actually issued in settlement of
such SARs shall reduce the number available under Section 3.1 and the balance
shall again become available for Awards under the Plan. The foregoing
notwithstanding, the aggregate number of Common Shares that may be issued under
the Plan upon the exercise of ISOs shall not be increased when Restricted Shares
or other Common Shares are forfeited.
3.3 DIVIDEND EQUIVALENTS. Any dividend equivalents paid or
credited under the Plan shall not be applied against the number of Restricted
Shares, Stock Units, Options or SARs available for Awards, whether or not such
dividend equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 INCENTIVE STOCK OPTIONS. Only Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, an Employee who owns more than 10% of the total
combined voting power of all
2
<PAGE> 7
classes of outstanding stock of the Company or any of its Parents or
Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
4.2 OTHER GRANTS. Only Employees, Outside Directors and
Consultants shall be eligible for the grant of Restricted Shares, Stock Units,
NSOs or SARs.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction in
the Optionee's other compensation. A Stock Option Agreement may provide that a
new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall
specify the number of Common Shares subject to the Option and shall provide for
the adjustment of such number in accordance with Article 11. Options granted to
any Optionee in a single fiscal year of the Company shall not cover more than
two million Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first
commences shall not cover more than three million Common Shares. The limitations
set forth in the preceding sentence shall be subject to adjustment in accordance
with Article 11.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify
the Exercise Price; provided that the Exercise Price shall in no event be less
than 100% of the Fair Market Value of a Common Share on the date of grant. In
the case of an NSO, a Stock Option Agreement may specify an Exercise Price that
varies in accordance with a predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify the date or event when all or any installment of the Option is to become
exercisable. Each Option shall become exercisable in full in the event of the
Optionee's death or Total Disability. The Stock Option Agreement shall also
specify the term of the Option; provided that the term of an ISO shall in no
event exceed 10 years from the date of grant. A Stock Option Agreement may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited.
5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine,
at the time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Common Shares subject to such Option in the
event that the Company is subject to a Change in Control or in the event that
the Optionee is subject to an Involuntary Termination within six
3
<PAGE> 8
months after a Change in Control. However, in the case of an ISO, the
acceleration of exercisability shall not occur without the Optionee's written
consent.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
options or may accept the cancellation of outstanding options (whether granted
by the Company or by another issuer) in return for the grant of new options for
the same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, alter or impair his or her rights or
obligations under such Option.
5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer
to buy out for a payment in cash or cash equivalents an Option previously
granted or (b) authorize an Optionee to elect to cash out an Option previously
granted, in either case at such time and based upon such terms and conditions as
the Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash or cash equivalents at
the time when such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan,
payment shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement. The Stock Option Agreement may
specify that payment may be made in any form(s) described in this
Article 6.
(b) In the case of an NSO, the Committee may at any
time accept payment in any form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee shall
not surrender, or attest to the ownership of, Common Shares in payment of the
Exercise Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Option for
financial reporting purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) an irrevocable
direction to a securities broker approved by the Company to sell all or part of
the Common Shares being purchased under the Plan and to deliver all or part of
the sales proceeds to the Company.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form
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prescribed by the Company) an irrevocable direction to pledge all or part of the
Common Shares being purchased under the Plan to a securities broker or lender
approved by the Company, as security for a loan, and to deliver all or part of
the loan proceeds to the Company.
6.5 OTHER FORMS OF PAYMENT. To the extent that this Section
6.5 is applicable, all or any part of the Exercise Price and any withholding
taxes may be paid in any other form that is consistent with applicable laws,
regulations and rules.
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.
7.1 INITIAL GRANTS. Each Outside Director who first becomes a
member of the Board after the date of the Company's initial public offering
shall receive a one-time grant of an NSO covering 20,000 Common Shares (subject
to adjustment under Article 11). Such NSO shall be granted on the date when such
Outside Director first joins the Board. Such NSO shall become exercisable with
respect to 5,000 Common Shares upon completion of the first 12 months of service
as an Outside Director and with respect to an additional 416.667 Common Shares
upon completion of each of the next 36 months of service as an Outside Director.
An Outside Director who previously was an Employee shall not receive a grant
under this Section 7.1.
7.2 ANNUAL GRANTS. Upon the conclusion of each regular annual
meeting of the Company's stockholders held in the year 2000 or thereafter, each
Outside Director who will continue serving as a member of the Board thereafter
shall receive an NSO covering 5,000 Common Shares (subject to adjustment under
Article 11), except that such NSO shall not be granted in the calendar year in
which the same Outside Director received the NSO described in Section 7.1. NSOs
granted under this Section 7.2 shall become exercisable in full on the first
anniversary of the date of grant. An Outside Director who previously was an
Employee shall be eligible to receive grants under this Section 7.2.
7.3 ACCELERATED EXERCISABILITY. All NSOs granted to an Outside
Director under this Article 7 shall also become exercisable in full in the event
of:
(a) The termination of such Outside Director's
service because of death, Total Disability or retirement at or after
age 65; or
(b) A Change in Control with respect to the Company.
7.4 EXERCISE PRICE. The Exercise Price under all NSOs granted
to an Outside Director under this Article 7 shall be equal to 100% of the Fair
Market Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2 or 6.3.
7.5 TERM. All NSOs granted to an Outside Director under this
Article 7 shall terminate on the earliest of (a) the 10th anniversary of the
date of grant or (b) the date 12 months after the termination of such Outside
Director's service for any reason.
7.6 AFFILIATES OF OUTSIDE DIRECTORS. The Committee may provide
that the NSOs that otherwise would be granted to an Outside Director under this
Article 7 shall instead be granted to an affiliate of such Outside Director.
Such affiliate shall then be deemed to be an
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Outside Director for purposes of the Plan, provided that the service-related
vesting and termination provisions pertaining to the NSOs shall be applied with
regard to the service of the Outside Director.
ARTICLE 8. STOCK APPRECIATION RIGHTS.
8.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall
be evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
8.2 NUMBER OF SHARES. Each SAR Agreement shall specify the
number of Common Shares to which the SAR pertains and shall provide for the
adjustment of such number in accordance with Article 11. SARs granted to any
Optionee in a single calendar year shall in no event pertain to more than two
million Common Shares, except that SARs granted to a new Employee in the fiscal
year of the Company in which his or her service as an Employee first commences
shall not pertain to more than three million Common Shares. The limitations set
forth in the preceding sentence shall be subject to adjustment in accordance
with Article 11.
8.3 EXERCISE PRICE. Each SAR Agreement shall specify the
Exercise Price; provided that the Exercise Price shall in no event be less than
100% of the Fair Market Value of a Common Share on the date of grant. An SAR
Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the SAR is outstanding.
8.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify
the date when all or any installment of the SAR is to become exercisable. Each
SAR shall become exercisable in full in the event of the Optionee's death or
Total Disability. The SAR Agreement shall also specify the term of the SAR. An
SAR Agreement may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service. SARs may be awarded in
combination with Options, and such an Award may provide that the SARs will not
be exercisable unless the related Options are forfeited. An SAR may be included
in an ISO only at the time of grant but may be included in an NSO at the time of
grant or thereafter. An SAR granted under the Plan may provide that it will be
exercisable only in the event of a Change in Control.
8.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine,
at the time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that the
Company is subject to a Change in Control or in the event that the Optionee is
subject to an Involuntary Termination within six months after a Change in
Control.
8.6 EXERCISE OF SARs. Upon exercise of an SAR, the Optionee
(or any person having the right to exercise the SAR after his or her death)
shall receive from the Company (a) Common Shares, (b) cash or (c) a combination
of Common Shares and cash, as the Committee shall determine. The amount of cash
and/or the Fair Market Value of Common
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Shares received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the Common
Shares subject to the SARs exceeds the Exercise Price. If, on the date when an
SAR expires, the Exercise Price under such SAR is less than the Fair Market
Value on such date but any portion of such SAR has not been exercised or
surrendered, then such SAR shall automatically be deemed to be exercised as of
such date with respect to such portion.
8.7 MODIFICATION OR ASSUMPTION OF SARs. Within the limitations
of the Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of outstanding SARs (whether granted by the Company or
by another issuer) in return for the grant of new SARs for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an SAR shall, without the consent
of the Optionee, alter or impair his or her rights or obligations under such
SAR.
ARTICLE 9. RESTRICTED SHARES.
9.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted
Shares under the Plan shall be evidenced by a Restricted Stock Agreement between
the recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
9.2 PAYMENT FOR AWARDS. Subject to the following sentence,
Restricted Shares may be sold or awarded under the Plan for such consideration
as the Committee may determine, including (without limitation) cash, cash
equivalents, full-recourse promissory notes, past services and future services.
To the extent that an Award consists of newly issued Restricted Shares, the
consideration shall consist exclusively of cash, cash equivalents or past
services rendered to the Company (or a Parent or Subsidiary) or, for the amount
in excess of the par value of such newly issued Restricted Shares, full-recourse
promissory notes, as the Committee may determine.
9.3 VESTING CONDITIONS. Each Award of Restricted Shares may or
may not be subject to vesting. Vesting shall occur, in full or in installments,
upon satisfaction of the conditions specified in the Restricted Stock Agreement.
A Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares or thereafter, that all
or part of such Restricted Shares shall become vested in the event that the
Company is subject to a Change in Control or in the event that the Participant
is subject to an Involuntary Termination within six months after a Change in
Control.
9.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted
Shares awarded under the Plan shall have the same voting, dividend and other
rights as the Company's other stockholders. A Restricted Stock Agreement,
however, may require that the holders of Restricted Shares invest any cash
dividends received in additional Restricted Shares. Such additional Restricted
Shares shall be subject to the same conditions and restrictions as the Award
with respect to which the dividends were paid.
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ARTICLE 10. STOCK UNITS.
10.1 STOCK UNIT AGREEMENT. Each grant of Stock Units under the
Plan shall be evidenced by a Stock Unit Agreement between the recipient and the
Company. Such Stock Units shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a
reduction in the recipient's other compensation.
10.2 PAYMENT FOR AWARDS. To the extent that an Award is
granted in the form of Stock Units, no cash consideration shall be required of
the Award recipients.
10.3 VESTING CONDITIONS. Each Award of Stock Units may or may
not be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The Committee may
determine, at the time of granting Stock Units or thereafter, that all or part
of such Stock Units shall become vested in the event that the Company is subject
to a Change in Control or in the event that the Participant is subject to an
Involuntary Termination within six months after a Change in Control.
10.4 VOTING AND DIVIDEND RIGHTS. The holders of Stock Units
shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit
awarded under the Plan may, at the Committee's discretion, carry with it a right
to dividend equivalents. Such right entitles the holder to be credited with an
amount equal to all cash dividends paid on one Common Share while the Stock Unit
is outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of Common Shares, or in a combination of both. Prior to distribution,
any dividend equivalents which are not paid shall be subject to the same
conditions and restrictions as the Stock Units to which they attach.
10.5 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c)
any combination of both, as determined by the Committee. The actual number of
Stock Units eligible for settlement may be larger or smaller than the number
included in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without limitation) a
method based on the average Fair Market Value of Common Shares over a series of
trading days. Vested Stock Units may be settled in a lump sum or in
installments. The distribution may occur or commence when all vesting conditions
applicable to the Stock Units have been satisfied or have lapsed, or it may be
deferred to any later date. The amount of a deferred distribution may be
increased by an interest factor or by dividend equivalents. Until an Award of
Stock Units is settled, the number of such Stock Units shall be subject to
adjustment pursuant to Article 11.
10.6 DEATH OF RECIPIENT. Any Stock Units Award that becomes
payable after the recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under the
Plan shall designate one or more beneficiaries for this
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purpose by filing the prescribed form with the Company. A beneficiary
designation may be changed by filing the prescribed form with the Company at any
time before the Award recipient's death. If no beneficiary was designated or if
no designated beneficiary survives the Award recipient, then any Stock Units
Award that becomes payable after the recipient's death shall be distributed to
the recipient's estate.
10.7 CREDITORS' RIGHTS. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock Units
represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Stock Unit Agreement.
ARTICLE 11. PROTECTION AGAINST DILUTION.
11.1 ADJUSTMENTS. In the event of a subdivision of the
outstanding Common Shares, a declaration of a dividend payable in Common Shares,
a declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of:
(a) The number of Options, SARs, Restricted Shares
and Stock Units available for future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and
8.2;
(c) The number of NSOs to be granted to Outside
Directors under Article 7;
(d) The number of Common Shares covered by each
outstanding Option and SAR;
(e) The Exercise Price under each outstanding Option
and SAR; or
(f) The number of Stock Units included in any prior
Award which has not yet been settled.
Except as provided in this Article 11, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
11.2 DISSOLUTION OR LIQUIDATION. To the extent not previously
exercised or settled, Options, SARs and Stock Units shall terminate immediately
prior to the dissolution or liquidation of the Company.
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11.3 REORGANIZATIONS. In the event that the Company is a party
to a merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Awards by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Awards by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own awards for the
outstanding Awards, (d) full exercisability or vesting and accelerated
expiration of the outstanding Awards or (e) settlement of the full value of the
outstanding Awards in cash or cash equivalents followed by cancellation of such
Awards.
ARTICLE 12. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such
Participant as a result of the exercise of an SAR or the settlement of
Stock Units credited to a deferred compensation account established for
such Participant by the Committee as an entry on the Company's books;
(b) Have Common Shares that otherwise would be
delivered to such Participant as a result of the exercise of an Option
or SAR converted into an equal number of Stock Units; or
(c) Have Common Shares that otherwise would be
delivered to such Participant as a result of the exercise of an Option
or SAR or the settlement of Stock Units converted into amounts credited
to a deferred compensation account established for such Participant by
the Committee as an entry on the Company's books. Such amounts shall be
determined by reference to the Fair Market Value of such Common Shares
as of the date when they otherwise would have been delivered to such
Participant.
A deferred compensation account established under this Article 12 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 12.
ARTICLE 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs.
Such awards may be settled in the form of Common Shares issued under this Plan.
Such Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.
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ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
14.1 EFFECTIVE DATE. No provision of this Article 14 shall be
effective unless and until the Board has determined to implement such provision.
14.2 ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK
UNITS. An Outside Director may elect to receive his or her annual retainer
payments and/or meeting fees from the Company in the form of cash, NSOs,
Restricted Shares or Stock Units, or a combination thereof, as determined by the
Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the
Plan. An election under this Article 14 shall be filed with the Company on the
prescribed form.
14.3 NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK
UNITS. The number of NSOs, Restricted Shares or Stock Units to be granted to
Outside Directors in lieu of annual retainers and meeting fees that would
otherwise be paid in cash shall be calculated in a manner determined by the
Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be
determined by the Board.
ARTICLE 15. LIMITATION ON RIGHTS.
15.1 RETENTION RIGHTS. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain an
Employee, Outside Director or Consultant. The Company and its Parents,
Subsidiaries and Affiliates reserve the right to terminate the service of any
Employee, Outside Director or Consultant at any time, with or without cause,
subject to applicable laws, the Company's certificate of incorporation and
by-laws and a written employment agreement (if any).
15.2 STOCKHOLDERS' RIGHTS. A Participant shall have no
dividend rights, voting rights or other rights as a stockholder with respect to
any Common Shares covered by his or her Award prior to the time when a stock
certificate for such Common Shares is issued or, if applicable, the time when he
or she becomes entitled to receive such Common Shares by filing any required
notice of exercise and paying any required Exercise Price. No adjustment shall
be made for cash dividends or other rights for which the record date is prior to
such time, except as expressly provided in the Plan.
15.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 16. WITHHOLDING TAXES.
16.1 GENERAL. To the extent required by applicable federal,
state, local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the
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Company for the satisfaction of any withholding tax obligations that arise in
connection with the Plan. The Company shall not be required to issue any Common
Shares or make any cash payment under the Plan until such obligations are
satisfied.
16.2 SHARE WITHHOLDING. The Committee may permit a Participant
to satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued at
their Fair Market Value on the date when they are withheld or surrendered.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall
become effective as of the date of the Company's initial public offering. The
Plan shall remain in effect until it is terminated under Section 17.2, except
that no ISOs shall be granted on or after the 10th anniversary of the later of
(a) the date when the Board adopted the Plan or (b) the date when the Board
adopted the most recent increase in the number of Common Shares available under
Article 3 which was approved by the Company's stockholders.
17.2 AMENDMENT OR TERMINATION. The Board may, at any time and
for any reason, amend or terminate the Plan. An amendment of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations or rules. No Awards shall be granted
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Award previously granted under the
Plan.
ARTICLE 18. LIMITATION ON PAYMENTS.
18.1 SCOPE OF LIMITATION. This Article 18 shall apply to an
Award only if:
(a) The independent auditors most recently selected
by the Board (the "Auditors") determine that the after-tax value of
such Award to the Participant, taking into account the effect of all
federal, state and local income taxes, employment taxes and excise
taxes applicable to the Participant (including the excise tax under
section 4999 of the Code), will be greater after the application of
this Article 18 than it was before the application of this Article 18;
or
(b) The Committee, at the time of making an Award
under the Plan or at any time thereafter, specifies in writing that
such Award shall be subject to this Article 18 (regardless of the
after-tax value of such Award to the Participant).
If this Article 18 applies to an Award, it shall supersede any contrary
provision of the Plan or of any Award granted under the Plan.
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18.2 BASIC RULE. In the event that the Auditors determine that
any payment or transfer by the Company under the Plan to or for the benefit of a
Participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Article 18, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
18.3 REDUCTION OF PAYMENTS. If the Auditors determine that any
Payment would be nondeductible by the Company because of section 280G of the
Code, then the Company shall promptly give the Participant notice to that effect
and a copy of the detailed calculation thereof and of the Reduced Amount, and
the Participant may then elect, in his or her sole discretion, which and how
much of the Payments shall be eliminated or reduced (as long as after such
election the aggregate present value of the Payments equals the Reduced Amount)
and shall advise the Company in writing of his or her election within 10 days of
receipt of notice. If no such election is made by the Participant within such
10-day period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the aggregate
present value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 18, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 18 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
18.4 OVERPAYMENTS AND UNDERPAYMENTS. As a result of
uncertainty in the application of section 280G of the Code at the time of an
initial determination by the Auditors hereunder, it is possible that Payments
will have been made by the Company which should not have been made (an
"Overpayment") or that additional Payments which will not have been made by the
Company could have been made (an "Underpayment"), consistent in each case with
the calculation of the Reduced Amount hereunder. In the event that the Auditors,
based upon the assertion of a deficiency by the Internal Revenue Service against
the Company or the Participant which the Auditors believe has a high probability
of success, determine that an Overpayment has been made, such Overpayment shall
be treated for all purposes as a loan to the Participant which he or she shall
repay to the Company, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.
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18.5 RELATED CORPORATIONS. For purposes of this Article 18,
the term "Company" shall include affiliated corporations to the extent
determined by the Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 19. DEFINITIONS.
19.1 "AFFILIATE" means any entity other than a Subsidiary, if
the Company and/or one or more Subsidiaries own not less than 50% of such
entity.
19.2 "AWARD" means any award of an Option, an SAR, a
Restricted Share or a Stock Unit under the Plan.
19.3 "BOARD" means the Company's Board of Directors, as
constituted from time to time.
19.4 "CAUSE" means:
(a) The unauthorized use or disclosure of the
confidential information or trade secrets of the Company, which use or
disclosure causes material harm to the Company;
(b) Conviction of, or a plea of "guilty" or "no
contest" to, a felony under the laws of the United States or any state
thereof;
(c) Gross negligence or willful misconduct, after the
Board has given the Participant written notice and a reasonable
opportunity to cure such negligence or misconduct; or
(d) Continued failure to perform assigned duties,
after the Board has given the Participant written notice and a
reasonable opportunity to cure such failure.
The foregoing, however, shall not be deemed an exclusive list of all acts or
omissions that the Company (or a Parent, Subsidiary or Affiliate) may consider
as grounds for the discharge of a Participant without Cause.
19.5 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of
the Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the Company
immediately prior to such merger, consolidation or other reorganization
own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding
securities of each of (i) the continuing or surviving entity and (ii)
any direct or indirect parent corporation of such continuing or
surviving entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
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(c) A change in the composition of the Board, as a
result of which fewer than 50% of the incumbent directors are directors
who either (i) had been directors of the Company on the date 24 months
prior to the date of the event that may constitute a Change in Control
(the "original directors") or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a
majority of the aggregate of the original directors who were still in
office at the time of the election or nomination and the directors
whose election or nomination was previously so approved; or
(d) Any transaction as a result of which any person
is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing
at least 50% of the total voting power represented by the Company's
then outstanding voting securities. For purposes of this Paragraph (d),
the term "person" shall have the same meaning as when used in sections
13(d) and 14(d) of the Exchange Act but shall exclude:
(i) A trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of
a Parent or Subsidiary;
(ii) A corporation owned directly or
indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of the common stock of
the Company; and
(iii) General Instrument Corporation or a
direct or indirect parent, subsidiary or successor corporation
of General Instrument Corporation.
This Paragraph (d) shall not include any transaction whereby General
Instrument Corporation, or a direct or indirect parent, subsidiary or
successor corporation of General Instrument Corporation, disposes all
or part of its equity interest in the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
19.6 "CODE" means the Internal Revenue Code of 1986, as
amended.
19.7 "COMMITTEE" means a committee of the Board, as described
in Article 2.
19.8 "COMMON SHARE" means one share of the Common Stock of the
Company, with a par value of $0.01 per share.
19.9 "COMPANY" means Next Level Communications, Inc., a
Delaware corporation.
15
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19.10 "CONSULTANT" means a consultant or adviser who provides
bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
19.11 "EMPLOYEE" means a common-law employee of the Company, a
Parent, a Subsidiary or an Affiliate.
19.12 "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
19.13 "EXERCISE PRICE," in the case of an Option, means the
amount for which one Common Share may be purchased upon exercise of such Option,
as specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
19.14 "FAIR MARKET VALUE" means the market price of Common
Shares, determined by the Committee in good faith on such basis as it deems
appropriate. Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in The Wall Street Journal. Such
determination shall be conclusive and binding on all persons.
19.15 "INVOLUNTARY TERMINATION" means the termination of the
Participant's service by reason of:
(a) The involuntary discharge of the Participant by
the Company (or the Parent, Subsidiary or Affiliate employing him or
her) for reasons other than Cause; or
(b) The voluntary resignation of the Participant
following (i) a change in his or her position with the Company (or the
Parent, Subsidiary or Affiliate employing him or her) that materially
reduces his or her stature, authority or responsibilities, (ii) a
reduction in his or her compensation, including base salary, fringe
benefits and participation in bonus or incentive programs based on
corporate performance, or (iii) a relocation of his or her principal
workplace by more than 30 miles.
19.16 "ISO" means an incentive stock option described in
section 422(b) of the Code.
19.17 "NSO" means a stock option not described in sections 422
or 423 of the Code.
19.18 "OPTION" means an ISO or NSO granted under the Plan and
entitling the holder to purchase Common Shares.
19.19 "OPTIONEE" means an individual or estate who holds an
Option or SAR.
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19.20 "OUTSIDE DIRECTOR" shall mean a member of the Board who
is not an Employee and who is not affiliated with General Instrument
Corporation, a direct or indirect parent, subsidiary or successor corporation of
General Instrument Corporation. Service as an Outside Director shall be
considered employment for all purposes of the Plan, except as provided in
Section 4.1.
19.21 "PARENT" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
19.22 "PARTICIPANT" means an individual or estate who holds an
Award.
19.23 "PLAN" means this Next Level Communications, Inc. 1999
Equity Incentive Plan, as amended from time to time.
19.24 "PREDECESSOR PLAN" means the Next Level Communications,
Inc. 1999 Stock Plan.
19.25 "RESTRICTED SHARE" means a Common Share awarded under
the Plan.
19.26 "RESTRICTED STOCK AGREEMENT" means the agreement between
the Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Share.
19.27 "SAR" means a stock appreciation right granted under the
Plan.
19.28 "SAR AGREEMENT" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her SAR.
19.29 "STOCK OPTION AGREEMENT" means the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to his or her Option.
19.30 "STOCK UNIT" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
19.31 "STOCK UNIT AGREEMENT" means the agreement between the
Company and the recipient of a Stock Unit which contains the terms, conditions
and restrictions pertaining to such Stock Unit.
19.32 "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A
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corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
19.33 "TOTAL DISABILITY" means that the Participant is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than one year.
ARTICLE 20. EXECUTION.
To record the adoption of the Plan by the Board on October 10,
1999, the Company has caused its duly authorized officer to execute this
document in the name of the Company.
NEXT LEVEL COMMUNICATIONS, INC.
By:
-------------------------------------
Title:
----------------------------------
18
<PAGE> 1
Exhibit 10.4
NEXT LEVEL COMMUNICATIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED EFFECTIVE OCTOBER 10, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. PURPOSE OF THE PLAN............................................................................1
SECTION 2. ADMINISTRATION OF THE PLAN.....................................................................1
(a) Committee Composition..........................................................................1
(b) Committee Responsibilities.....................................................................1
SECTION 3. ENROLLMENT AND PARTICIPATION...................................................................1
(a) Offering Periods...............................................................................1
(b) Accumulation Periods...........................................................................1
(c) Enrollment.....................................................................................1
(d) Duration of Participation......................................................................2
(e) Applicable Offering Period.....................................................................2
SECTION 4. EMPLOYEE CONTRIBUTIONS.........................................................................2
(a) Frequency of Payroll Deductions................................................................2
(b) Amount of Payroll Deductions...................................................................3
(c) Changing Withholding Rate......................................................................3
(d) Discontinuing Payroll Deductions...............................................................3
(e) Limit on Number of Elections...................................................................3
SECTION 5. WITHDRAWAL FROM THE PLAN.......................................................................3
(a) Withdrawal.....................................................................................3
(b) Re-Enrollment After Withdrawal.................................................................3
SECTION 6. CHANGE IN EMPLOYMENT STATUS....................................................................3
(a) Termination of Employment......................................................................3
(b) Leave of Absence...............................................................................4
(c) Death..........................................................................................4
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES...........................................................4
(a) Plan Accounts..................................................................................4
(b) Purchase Price.................................................................................4
(c) Number of Shares Purchased.....................................................................4
(d) Available Shares Insufficient..................................................................5
(e) Issuance of Stock..............................................................................5
(f) Unused Cash Balances...........................................................................5
(g) Stockholder Approval...........................................................................5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.................................................................5
(a) Five Percent Limit.............................................................................5
(b) Dollar Limit...................................................................................6
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE........................................................................6
SECTION 10. NO RIGHTS AS AN EMPLOYEE.......................................................................7
SECTION 11. NO RIGHTS AS A STOCKHOLDER.....................................................................7
SECTION 12. SECURITIES LAW REQUIREMENTS....................................................................7
SECTION 13. STOCK OFFERED UNDER THE PLAN...................................................................7
(a) Authorized Shares..............................................................................7
(b) Anti-Dilution Adjustments......................................................................7
(c) Reorganizations................................................................................8
SECTION 14. AMENDMENT OR DISCONTINUANCE....................................................................8
SECTION 15. DEFINITIONS....................................................................................8
(a) Accumulation Period............................................................................8
(b) Board..........................................................................................8
(c) Code...........................................................................................8
(d) Committee......................................................................................8
(e) Company........................................................................................8
(f) Compensation...................................................................................8
(g) Corporate Reorganization.......................................................................9
(h) Eligible Employee..............................................................................9
(i) Exchange Act...................................................................................9
(j) Fair Market Value..............................................................................9
(k) IPO............................................................................................9
(l) Offering Period................................................................................9
(m) Participant...................................................................................10
(n) Participating Company.........................................................................10
(o) Plan..........................................................................................10
(p) Plan Account..................................................................................10
(q) Purchase Price................................................................................10
(r) Stock.........................................................................................10
(s) Subsidiary....................................................................................10
SECTION 15. EXECUTION.....................................................................................10
</TABLE>
<PAGE> 4
NEXT LEVEL COMMUNICATIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board effective as of the date of
the IPO. The purpose of the Plan is to provide Eligible Employees with an
opportunity to increase their proprietary interest in the success of the Company
by purchasing Stock from the Company on favorable terms and to pay for such
purchases through payroll deductions. The Plan is intended to qualify under
section 423 of the Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by
the Committee. The Committee shall consist exclusively of one or more directors
of the Company, who shall be appointed by the Board.
(b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret
the Plan and make all other policy decisions relating to the operation of the
Plan. The Committee may adopt such rules, guidelines and forms as it deems
appropriate to implement the Plan. The Committee's determinations under the Plan
shall be final and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) OFFERING PERIODS. While the Plan is in effect, two
overlapping Offering Periods shall commence in each calendar year. The Offering
Periods shall consist of the 24-month periods commencing on each May 1 and
November 1, except that the first Offering Period shall commence on the date of
the IPO and end on October 31, 2001.
(b) ACCUMULATION PERIODS. While the Plan is in effect, two
Accumulation Periods shall commence in each calendar year. The Accumulation
Periods shall consist of the six-month periods commencing on each May 1 and
November 1, except that the first Accumulation Period shall commence on the date
of the IPO and end on April 30, 2000.
(c) ENROLLMENT. Any individual who, on the day preceding the
first day of an Offering Period, qualifies as an Eligible Employee may elect to
become a Participant in the Plan for such Offering Period by executing the
enrollment form prescribed for this purpose by the Committee. The enrollment
form shall be filed with the Company at the prescribed location not later than
five business days prior to the commencement of such Offering Period.
(d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a
Participant shall continue to participate in the Plan until he or she ceases to
be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches
the end of the Accumulation Period in which his or her employee contributions
were discontinued under Section 4(d) or 8(b). A Participant who
<PAGE> 5
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) APPLICABLE OFFERING PERIOD. For purposes of calculating
the Purchase Price under Section 7(b), the applicable Offering Period shall be
determined as follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her
until the earliest of (A) the end of such Offering Period, (B) the end
of his or her participation under Subsection (d) above or (C)
re-enrollment for a subsequent Offering Period under Paragraph (ii) or
(iii) below.
(ii) In the event that the Fair Market Value of Stock on the
last trading day before the commencement of the Offering Period for
which the Participant is enrolled is higher than on the last trading
day before the commencement of any subsequent Offering Period, the
Participant shall automatically be re-enrolled for such subsequent
Offering Period.
(iii) Any other provision of the Plan notwithstanding, the
Company (at its sole discretion) may determine prior to the
commencement of any new Offering Period that all Participants shall be
re-enrolled for such new Offering Period.
(iv) When a Participant reaches the end of an Offering Period
but his or her participation is to continue, then such Participant
shall automatically be re-enrolled for the Offering Period that
commences immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may
purchase shares of Stock under the Plan solely by means of payroll deductions.
Payroll deductions, as designated by the Participant pursuant to Subsection (b)
below, shall occur on each payday during participation in the Plan.
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall
designate on the enrollment form the portion of his or her Compensation that he
or she elects to have withheld for the purchase of Stock. Such portion shall be
a whole percentage of the Eligible Employee's Compensation, but not less than 1%
nor more than 20%.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to
change the rate of payroll withholding, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time. The new
withholding rate shall be effective as soon as
2
<PAGE> 6
reasonably practicable after such form has been received by the Company. The new
withholding rate shall be a whole percentage of the Eligible Employee's
Compensation, but not less than 1% nor more than 20%.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes
to discontinue employee contributions entirely, he or she may do so by filing a
new enrollment form with the Company at the prescribed location at any time.
Payroll withholding shall cease as soon as reasonably practicable after such
form has been received by the Company. (In addition, employee contributions may
be discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make
more than two elections under Subsection (c) or (d) above during any
Accumulation Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) WITHDRAWAL. A Participant may elect to withdraw from the
Plan by filing the prescribed form with the Company at the prescribed location
at any time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who
has withdrawn from the Plan shall not be a Participant until he or she
re-enrolls in the Plan under Section 3(c). Re-enrollment may be effective only
at the commencement of an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an
Eligible Employee for any reason, including death, shall be treated as an
automatic withdrawal from the Plan under Section 5(a). (A transfer from one
Participating Company to another shall not be treated as a termination of
employment.)
(b) LEAVE OF ABSENCE. For purposes of the Plan, employment
shall not be deemed to terminate when the Participant goes on a military leave,
a sick leave or another bona fide leave of absence, if the leave was approved by
the Company in writing. Employment, however, shall be deemed to terminate 90
days after the Participant goes on a leave, unless a contract or statute
guarantees his or her right to return to work. Employment shall be deemed to
terminate in any event when the approved leave ends, unless the Participant
immediately returns to work.
(c) DEATH. In the event of the Participant's death, the amount
credited to his or her Plan Account shall be paid to a beneficiary designated by
him or her for this purpose on
3
<PAGE> 7
the prescribed form or, if none, to the Participant's estate. Such form shall be
valid only if it was filed with the Company at the prescribed location before
the Participant's death.
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account
on its books in the name of each Participant. Whenever an amount is deducted
from the Participant's Compensation under the Plan, such amount shall be
credited to the Participant's Plan Account. Amounts credited to Plan Accounts
shall not be trust funds and may be commingled with the Company's general assets
and applied to general corporate purposes. No interest shall be credited to Plan
Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock
purchased at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last
trading day in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last
trading day before the commencement of the applicable Offering Period
(as determined under Section 3(e)) or, in the case of the first
Offering Period under the Plan, 85% of the price at which one share of
Stock is offered to the public in the IPO.
(c) NUMBER OF SHARES PURCHASED. As of the last day of each
Accumulation Period, each Participant shall be deemed to have elected to
purchase the number of shares of Stock calculated in accordance with this
Subsection (c), unless the Participant has previously elected to withdraw from
the Plan in accordance with Section 5(a). The amount then in the Participant's
Plan Account shall be divided by the Purchase Price, and the number of shares
that results shall be purchased from the Company with the funds in the
Participant's Plan Account. The foregoing notwithstanding, no Participant shall
purchase more than 1,500 shares of Stock with respect to any Accumulation Period
nor more than the amounts of Stock set forth in Sections 8(b) and 13(a). The
Committee may determine with respect to all Participants that any fractional
share, as calculated under this Subsection (c), shall be (i) rounded down to the
next lower whole share or (ii) credited as a fractional share.
(d) AVAILABLE SHARES INSUFFICIENT. In the event that the
aggregate number of shares that all Participants elect to purchase during an
Accumulation Period exceeds the maximum number of shares remaining available for
issuance under Section 13(a), then the number of shares to which each
Participant is entitled shall be determined by multiplying the number of shares
available for issuance by a fraction, the numerator of which is the number of
shares that such Participant has elected to purchase and the denominator of
which is the number of shares that all Participants have elected to purchase.
(e) ISSUANCE OF STOCK. Certificates representing the shares of
Stock purchased by a Participant under the Plan shall be issued to him or her as
soon as reasonably practicable after the close of the applicable Accumulation
Period, except that the Committee may determine that such shares shall be held
for each Participant's benefit by a broker designated by
4
<PAGE> 8
the Committee (unless the Participant has elected that certificates be issued to
him or her). Shares may be registered in the name of the Participant or jointly
in the name of the Participant and his or her spouse as joint tenants with right
of survivorship or as community property.
(f) UNUSED CASH BALANCES. An amount remaining in the
Participant's Plan Account that represents the Purchase Price for any fractional
share shall be carried over in the Participant's Plan Account to the next
Accumulation Period. Any amount remaining in the Participant's Plan Account that
represents the Purchase Price for whole shares that could not be purchased by
reason of Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded
to the Participant in cash, without interest.
(g) STOCKHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) FIVE PERCENT LIMIT. Any other provision of the Plan
notwithstanding, no Participant shall be granted a right to purchase Stock under
the Plan if such Participant, immediately after his or her election to purchase
such Stock, would own stock possessing more than 5% of the total combined voting
power or value of all classes of stock of the Company or any parent or
Subsidiary of the Company. For purposes of this Subsection (a), the following
rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he
or she has a right or option to purchase under this or any other plan;
and
(iii) Each Participant shall be deemed to have the right to
purchase 1,500 shares of Stock under this Plan with respect to each
Accumulation Period.
(b) DOLLAR LIMIT. Any other provision of the Plan
notwithstanding, no Participant shall purchase Stock with a Fair Market Value in
excess of the following limit:
(i) In the case of Stock purchased during an Offering Period
that commenced in the current calendar year, the limit shall be equal
to (A) $25,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased in the current calendar year (under
this Plan and all other employee stock purchase plans of the Company or
any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period
that commenced in the immediately preceding calendar year, the limit
shall be equal to (A) $50,000 minus (B) the Fair Market Value of the
Stock that the Participant previously purchased (under this Plan and
all other employee stock purchase
5
<PAGE> 9
plans of the Company or any parent or Subsidiary of the Company) in the
current calendar year and in the immediately preceding calendar year.
(iii) In the case of Stock purchased during an Offering Period
that commenced in the second preceding calendar year, the limit shall
be equal to (A) $75,000 minus (B) the Fair Market Value of the Stock
that the Participant previously purchased (under this Plan and all
other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company) in the current calendar year and in the two
preceding calendar years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which such
Stock is purchased. Employee stock purchase plans not described in section 423
of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any
Participant's interest in any Stock or moneys to which he or she may be entitled
under the Plan, shall not be transferable by voluntary or involuntary assignment
or by operation of law, or in any other manner other than by beneficiary
designation or the laws of descent and distribution. If a Participant in any
manner attempts to transfer, assign or otherwise encumber his or her rights or
interest under the Plan, other than by beneficiary designation or the laws of
descent and distribution, then such act shall be treated as an election by the
Participant to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan
shall confer upon the Participant any right to continue in the employ of a
Participating Company for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Participating Companies or of
the Participant, which rights are hereby expressly reserved by each, to
terminate his or her employment at any time and for any reason, with or without
cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with
respect to any shares of Stock that he or she may have a right to purchase under
the Plan until such shares have been purchased on the last day of the applicable
Accumulation Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the
issuance and delivery of such shares comply with (or are exempt from) all
applicable requirements of law, including
6
<PAGE> 10
(without limitation) the Securities Act of 1933, as amended, the rules and
regulations promulgated thereunder, state securities laws and regulations, and
the regulations of any stock exchange or other securities market on which the
Company's securities may then be traded.
SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) AUTHORIZED SHARES. The number of shares of Stock available
for purchase under the Plan shall be one million (subject to adjustment pursuant
to this Section 13). On November 1 of each year, commencing with November 1,
2000, the aggregate number of shares of Stock available for purchase during the
life of the Plan shall automatically increase by a number equal to the lowest of
(a) 1% of the total number of shares of the Company's Common Stock then
outstanding, (b) one million shares (subject to adjustment pursuant to this
Section 13) or (c) a number determined by the Board prior to such November 1.
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares
of Stock offered under the Plan, the 1,500-share limitation described in Section
7(c) and the price of shares that any Participant has elected to purchase shall
be adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other increase
or decrease in such shares effected without receipt or payment of consideration
by the Company, the distribution of the shares of a Subsidiary to the Company's
stockholders or a similar event.
(c) REORGANIZATIONS. Any other provision of the Plan
notwithstanding, immediately prior to the effective time of a Corporate
Reorganization, the Offering Period and Accumulation Period then in progress
shall terminate and shares shall be purchased pursuant to Section 7, unless the
Plan is continued or assumed by the surviving corporation or its parent
corporation. The Plan shall in no event be construed to restrict in any way the
Company's right to undertake a dissolution, liquidation, merger, consolidation
or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate
the Plan at any time and without notice. Except as provided in Section 13, any
increase in the aggregate number of shares of Stock to be issued under the Plan
shall be subject to approval by a vote of the stockholders of the Company. In
addition, any other amendment of the Plan shall be subject to approval by a vote
of the stockholders of the Company to the extent required by an applicable law
or regulation. The Plan shall terminate automatically 20 years after its
adoption by the Board, unless (a) the Plan is extended by the Board and (b) the
extension is approved within 12 months by a vote of the stockholders of the
Company.
SECTION 15. DEFINITIONS.
(a) "ACCUMULATION PERIOD" means a six-month period during
which contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
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(b) "BOARD" means the Board of Directors of the Company, as
constituted from time to time.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" means a committee of the Board, as described
in Section 2.
(e) "COMPANY" means Next Level Communications, Inc., a
Delaware corporation.
(f) "COMPENSATION" means (i) the total compensation paid in
cash to a Participant by a Participating Company, including salaries, wages,
bonuses, incentive compensation, commissions, overtime pay and shift premiums,
plus (ii) any pre-tax contributions made by the Participant under section 401(k)
or 125 of the Code. "Compensation" shall exclude all non-cash items, moving or
relocation allowances, cost-of-living equalization payments, car allowances,
tuition reimbursements, imputed income attributable to cars or life insurance,
severance pay, fringe benefits, contributions or benefits received under
employee benefit plans, income attributable to the exercise of stock options,
and similar items. The Committee shall determine whether a particular item is
included in Compensation.
(g) "CORPORATE REORGANIZATION" means:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets or the complete liquidation
or dissolution of the Company.
(h) "ELIGIBLE EMPLOYEE" means any employee of a Participating
Company. The foregoing notwithstanding, an individual shall not be considered an
Eligible Employee if his or her participation in the Plan is prohibited by the
law of any country which has jurisdiction over him or her or if he or she is
subject to a collective bargaining agreement that does not provide for
participation in the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means the market price of Stock,
determined by the Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on
the date in question, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by The Nasdaq National
Market;
(ii) If the Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite transactions report for such
date; or
8
<PAGE> 12
(iii) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal or as reported
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public
pursuant to a registration statement filed by the Company with the Securities
and Exchange Commission.
(l) "OFFERING PERIOD" means a 24-month period with respect to
which the right to purchase Stock may be granted under the Plan, as determined
pursuant to Section 3(a).
(m) "PARTICIPANT" means an Eligible Employee who elects to
participate in the Plan, as provided in Section 3(c).
(n) "PARTICIPATING COMPANY" means (i) the Company and (ii)
each present or future Subsidiary designated by the Committee as a Participating
Company.
(o) "PLAN" means this Next Level Communications, Inc. 1999
Employee Stock Purchase Plan, as it may be amended from time to time.
(p) "PLAN ACCOUNT" means the account established for each
Participant pursuant to Section 7(a).
(q) "PURCHASE PRICE" means the price at which Participants may
purchase Stock under the Plan, as determined pursuant to Section 7(b).
(r) "STOCK" means the Common Stock of the Company, with a par
value of $0.01 per share.
(s) "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
9
<PAGE> 13
SECTION 16. EXECUTION.
To record the adoption of the Plan by the Board on October 10,
1999, the Company has caused its duly authorized officer to execute this
document in the name of the Company.
NEXT LEVEL COMMUNICATIONS, INC.
By:
-------------------------------------
Title:
----------------------------------
10
<PAGE> 1
Exhibit 10.12
NEXT LEVEL COMMUNICATIONS, INC.
1999 STOCK PLAN
ADOPTED ON OCTOBER 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
SECTION 1. ESTABLISHMENT AND PURPOSE.............................................................................1
SECTION 2. ADMINISTRATION........................................................................................1
(a) Committees of the Board of Directors......................................................................1
(b) Authority of the Board of Directors.......................................................................1
SECTION 3. ELIGIBILITY...........................................................................................1
(a) General Rule..............................................................................................1
(b) Ten-Percent Stockholders..................................................................................1
SECTION 4. STOCK SUBJECT TO PLAN.................................................................................2
(a) Basic Limitation..........................................................................................2
(b) Additional Shares.........................................................................................2
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES...............................................................2
(a) Stock Purchase Agreement..................................................................................2
(b) Duration of Offers and Nontransferability of Rights.......................................................2
(c) Purchase Price............................................................................................2
(d) Withholding Taxes.........................................................................................3
(e) Restrictions on Transfer of Shares and Minimum Vesting....................................................3
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.......................................................................3
(a) Stock Option Agreement....................................................................................3
(b) Number of Shares..........................................................................................3
(c) Exercise Price............................................................................................3
(d) Withholding Taxes.........................................................................................4
(e) Exercisability............................................................................................4
(f) Basic Term................................................................................................4
(g) Nontransferability........................................................................................4
(h) Termination of Service (Except by Death)..................................................................4
(i) Leaves of Absence.........................................................................................5
(j) Death of Optionee.........................................................................................5
(k) No Rights as a Stockholder................................................................................5
(l) Modification, Extension and Assumption of Options.........................................................5
(m) Restrictions on Transfer of Shares and Minimum Vesting....................................................6
SECTION 7. PAYMENT FOR SHARES....................................................................................6
(a) General Rule..............................................................................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
(b) Surrender of Stock........................................................................................6
(c) Services Rendered.........................................................................................6
(d) Promissory Note...........................................................................................6
(e) Exercise/Sale.............................................................................................7
(f) Exercise/Pledge...........................................................................................7
SECTION 8. ADJUSTMENT OF SHARES..................................................................................7
(a) General...................................................................................................7
(b) Mergers and Consolidations................................................................................7
(c) Reservation of Rights.....................................................................................8
SECTION 9. SECURITIES LAWS REQUIREMENTS..........................................................................8
(a) General...................................................................................................8
(b) Financial Reports.........................................................................................8
SECTION 10. NO RETENTION RIGHTS..................................................................................8
SECTION 11. DURATION AND AMENDMENTS..............................................................................9
(a) Term of the Plan..........................................................................................9
(b) Right to Amend or Terminate the Plan......................................................................9
(c) Effect of Amendment or Termination........................................................................9
SECTION 12. DEFINITIONS..........................................................................................9
SECTION 13. EXECUTION...........................................................................................11
</TABLE>
ii
<PAGE> 4
NEXT LEVEL COMMUNICATIONS, INC. 1999 STOCK PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The purpose of the Plan is to offer selected individuals an
opportunity to acquire a proprietary interest in the success of the Company, or
to increase such interest, by purchasing Shares of the Company's Stock. The Plan
provides both for the direct award or sale of Shares and for the grant of
Options to purchase Shares. Options granted under the Plan may include
Nonstatutory Options as well as ISOs intended to qualify under Section 422 of
the Code.
Capitalized terms are defined in Section 12.
SECTION 2. ADMINISTRATION.
(a) COMMITTEES OF THE BOARD OF DIRECTORS. The Plan may be
administered by one or more Committees. Each Committee shall consist of one or
more members of the Board of Directors who have been appointed by the Board of
Directors. Each Committee shall have such authority and be responsible for such
functions as the Board of Directors has assigned to it. If no Committee has been
appointed, the entire Board of Directors shall administer the Plan. Any
reference to the Board of Directors in the Plan shall be construed as a
reference to the Committee (if any) to whom the Board of Directors has assigned
a particular function.
(b) AUTHORITY OF THE BOARD OF DIRECTORS. Subject to the
provisions of the Plan, the Board of Directors shall have full authority and
discretion to take any actions it deems necessary or advisable for the
administration of the Plan. All decisions, interpretations and other actions of
the Board of Directors shall be final and binding on all Purchasers, all
Optionees and all persons deriving their rights from a Purchaser or Optionee.
SECTION 3. ELIGIBILITY.
(a) GENERAL RULE. Only Employees, Outside Directors and
Consultants shall be eligible for the grant of Options or the direct award or
sale of Shares. Only Employees who are common-law employees of the Company, a
Parent or a Subsidiary shall be eligible for the grant of ISOs.
(b) TEN-PERCENT STOCKHOLDERS. An individual who owns more than
10% of the total combined voting power of all classes of outstanding stock of
the Company, its Parent or any of its Subsidiaries shall not be eligible for
designation as an Optionee or Purchaser unless (i) the Exercise Price is at
least 110% of the Fair Market Value of a Share on the date of grant, (ii) the
Purchase Price (if any) is at least 100% of the Fair Market Value of a Share and
(iii) in the case of an ISO, such ISO by its terms is not exercisable after the
expiration of five years from the date of grant. For purposes of this Subsection
(b), in determining stock ownership, the attribution rules of Section 424(d) of
the Code shall be applied.
<PAGE> 5
SECTION 4. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. Shares offered under the Plan may be
authorized but unissued Shares or treasury Shares. The aggregate number of
Shares that may be issued under the Plan (upon exercise of Options or other
rights to acquire Shares) shall not exceed six million Shares, subject to
adjustment pursuant to Section 8. The number of Shares that are subject to
Options or other rights outstanding at any time under the Plan shall not exceed
the number of Shares that then remain available for issuance under the Plan. The
Company, during the term of the Plan, shall at all times reserve and keep
available sufficient Shares to satisfy the requirements of the Plan.
(b) ADDITIONAL SHARES. In the event that any outstanding
Option or other right for any reason expires or is canceled or otherwise
terminated, the Shares allocable to the unexercised portion of such Option or
other right shall again be available for the purposes of the Plan. In the event
that Shares issued under the Plan are reacquired by the Company pursuant to any
forfeiture provision, right of repurchase or right of first refusal, such Shares
shall again be available for the purposes of the Plan, except that the aggregate
number of Shares which may be issued upon the exercise of ISOs shall in no event
exceed six million Shares (subject to adjustment pursuant to Section 8).
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.
(a) STOCK PURCHASE AGREEMENT. Each award or sale of Shares
under the Plan (other than upon exercise of an Option) shall be evidenced by a
Stock Purchase Agreement between the Purchaser and the Company. Such award or
sale shall be subject to all applicable terms and conditions of the Plan and may
be subject to any other terms and conditions which are not inconsistent with the
Plan and which the Board of Directors deems appropriate for inclusion in a Stock
Purchase Agreement. The provisions of the various Stock Purchase Agreements
entered into under the Plan need not be identical.
(b) DURATION OF OFFERS AND NONTRANSFERABILITY OF RIGHTS. Any
right to acquire Shares under the Plan (other than an Option) shall
automatically expire if not exercised by the Purchaser within 30 days after the
grant of such right was communicated to the Purchaser by the Company. Such right
shall not be transferable and shall be exercisable only by the Purchaser to whom
such right was granted.
(c) PURCHASE PRICE. The Purchase Price of Shares to be offered
under the Plan shall not be less than 85% of the Fair Market Value of such
Shares, and a higher percentage may be required by Section 3(b). Subject to the
preceding sentence, the Purchase Price shall be determined by the Board of
Directors at its sole discretion. The Purchase Price shall be payable in a form
described in Section 7.
(d) WITHHOLDING TAXES. As a condition to the purchase of
Shares, the Purchaser shall make such arrangements as the Board of Directors may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with such purchase.
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<PAGE> 6
(e) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING.
Any Shares awarded or sold under the Plan shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Board of Directors may determine. Such restrictions
shall be set forth in the applicable Stock Purchase Agreement and shall apply in
addition to any restrictions that may apply to holders of Shares generally. In
the case of a Purchaser who is not an officer of the Company, an Outside
Director or a Consultant, any right to repurchase the Purchaser's Shares at the
original Purchase Price (if any) upon termination of the Purchaser's Service
shall lapse at least as rapidly as 20% per year over the five-year period
commencing on the date of the award or sale of the Shares. Any such right may be
exercised only within 90 days after the termination of the Purchaser's Service
for cash or for cancellation of indebtedness incurred in purchasing the Shares.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Board of Directors deems appropriate
for inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall
specify the number of Shares that are subject to the Option and shall provide
for the adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify
the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of
the Fair Market Value of a Share on the date of grant, and a higher percentage
may be required by Section 3(b). The Exercise Price of a Nonstatutory Option
shall not be less than 85% of the Fair Market Value of a Share on the date of
grant, and a higher percentage may be required by Section 3(b). Subject to the
preceding two sentences, the Exercise Price under any Option shall be determined
by the Board of Directors at its sole discretion. The Exercise Price shall be
payable in a form described in Section 7.
(d) WITHHOLDING TAXES. As a condition to the exercise of an
Option, the Optionee shall make such arrangements as the Board of Directors may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with such exercise. The Optionee
shall also make such arrangements as the Board of Directors may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with the disposition of Shares acquired by
exercising an Option.
(e) EXERCISABILITY. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. In
the case of an Optionee who is not an officer of the Company, an Outside
Director or a Consultant, an Option shall become exercisable at least as rapidly
as 20% per year over the five-year period commencing on the date
3
<PAGE> 7
of grant. Subject to the preceding sentence, the exercisability provisions of
any Stock Option Agreement shall be determined by the Board of Directors at its
sole discretion.
(f) BASIC TERM. The Stock Option Agreement shall specify the
term of the Option. The term shall not exceed 10 years from the date of grant,
and a shorter term may be required by Section 3(b). Subject to the preceding
sentence, the Board of Directors at its sole discretion shall determine when an
Option is to expire.
(g) NONTRANSFERABILITY. No Option shall be transferable by the
Optionee other than by beneficiary designation, will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee or by the Optionee's guardian or legal representative. No
Option or interest therein may be transferred, assigned, pledged or hypothecated
by the Optionee during the Optionee's lifetime, whether by operation of law or
otherwise, or be made subject to execution, attachment or similar process.
(h) TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's
Service terminates for any reason other than the Optionee's death, then the
Optionee's Options shall expire on the earliest of the following occasions:
(i) The expiration date determined pursuant to Subsection (f)
above;
(ii) The date 30 days after the termination of the Optionee's
Service for any reason other than Disability, or such later date as the
Board of Directors may determine; or
(iii) The date six months after the termination of the
Optionee's Service by reason of Disability, or such later date as the
Board of Directors may determine.
The Optionee may exercise all or part of the Optionee's Options at any time
before the expiration of such Options under the preceding sentence, but only to
the extent that such Options had become exercisable before the Optionee's
Service terminated (or became exercisable as a result of the termination) and
the underlying Shares had vested before the Optionee's Service terminated (or
vested as a result of the termination). The balance of such Options shall lapse
when the Optionee's Service terminates. In the event that the Optionee dies
after the termination of the Optionee's Service but before the expiration of the
Optionee's Options, all or part of such Options may be exercised (prior to
expiration) by the executors or administrators of the Optionee's estate or by
any person who has acquired such Options directly from the Optionee by
beneficiary designation, bequest or inheritance, but only to the extent that
such Options had become exercisable before the Optionee's Service terminated (or
became exercisable as a result of the termination) and the underlying Shares had
vested before the Optionee's Service terminated (or vested as a result of the
termination).
(i) LEAVES OF ABSENCE. For purposes of Subsection (h) above,
Service shall be deemed to continue while the Optionee is on a bona fide leave
of absence, if such leave was approved by the Company in writing and if
continued crediting of Service for this purpose is expressly required by the
terms of such leave or by applicable law (as determined by the Company).
4
<PAGE> 8
(j) DEATH OF OPTIONEE. If an Optionee dies while the Optionee
is in Service, then the Optionee's Options shall expire on the earlier of the
following dates:
(i) The expiration date determined pursuant to Subsection (f)
above; or
(ii) The date six months after the Optionee's death, or such
later date as the Board of Directors may determine.
All or part of the Optionee's Options may be exercised at any time before the
expiration of such Options under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Options directly from the Optionee by beneficiary designation, bequest or
inheritance, but only to the extent that such Options had become exercisable
before the Optionee's death or became exercisable as a result of the death. The
balance of such Options shall lapse when the Optionee dies.
(k) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee
of an Optionee, shall have no rights as a stockholder with respect to any Shares
covered by the Optionee's Option until such person becomes entitled to receive
such Shares by filing a notice of exercise and paying the Exercise Price
pursuant to the terms of such Option.
(l) MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within
the limitations of the Plan, the Board of Directors may modify, extend or assume
outstanding Options or may accept the cancellation of outstanding Options
(whether granted by the Company or another issuer) in return for the grant of
new Options for the same or a different number of Shares and at the same or a
different Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair the Optionee's rights
or increase the Optionee's obligations under such Option.
(m) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING.
Any Shares issued upon exercise of an Option shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Board of Directors may determine. Such restrictions
shall be set forth in the applicable Stock Option Agreement and shall apply in
addition to any restrictions that may apply to holders of Shares generally. In
the case of an Optionee who is not an officer of the Company, an Outside
Director or a Consultant:
(i) Any right to repurchase the Optionee's Shares at the
original Exercise Price upon termination of the Optionee's Service
shall lapse at least as rapidly as 20% per year over the five-year
period commencing on the date of the option grant;
(ii) Any such right may be exercised only for cash or for
cancellation of indebtedness incurred in purchasing the Shares; and
(iii) Any such right may be exercised only within 90 days
after the later of (A) the termination of the Optionee's Service or (B)
the date of the option exercise.
5
<PAGE> 9
SECTION 7. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Purchase Price or Exercise Price
of Shares issued under the Plan shall be payable in cash or cash equivalents at
the time when such Shares are purchased, except as otherwise provided in this
Section 7.
(b) SURRENDER OF STOCK. To the extent that a Stock Option
Agreement so provides, all or any part of the Exercise Price may be paid by
surrendering, or attesting to the ownership of, Shares that are already owned by
the Optionee. Such Shares shall be surrendered to the Company in good form for
transfer and shall be valued at their Fair Market Value on the date when the
Option is exercised. The Optionee shall not surrender, or attest to the
ownership of, Shares in payment of the Exercise Price if such action would cause
the Company to recognize compensation expense (or additional compensation
expense) with respect to the Option for financial reporting purposes.
(c) SERVICES RENDERED. At the discretion of the Board of
Directors, Shares may be awarded under the Plan in consideration of services
rendered to the Company, a Parent or a Subsidiary prior to the award.
(d) PROMISSORY NOTE. To the extent that a Stock Option
Agreement or Stock Purchase Agreement so provides, all or a portion of the
Exercise Price or Purchase Price (as the case may be) of Shares issued under the
Plan may be paid with a full-recourse promissory note. However, the par value of
the Shares, if newly issued, shall be paid in cash or cash equivalents. The
Shares shall be pledged as security for payment of the principal amount of the
promissory note and interest thereon. The interest rate payable under the terms
of the promissory note shall not be less than the minimum rate (if any) required
to avoid the imputation of additional interest under the Code. Subject to the
foregoing, the Board of Directors (at its sole discretion) shall specify the
term, interest rate, amortization requirements (if any) and other provisions of
such note.
(e) EXERCISE/SALE. To the extent that a Stock Option Agreement
so provides, and if Stock is publicly traded, payment may be made all or in part
by the delivery (on a form prescribed by the Company) of an irrevocable
direction to a securities broker approved by the Company to sell Shares and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
(f) EXERCISE/PLEDGE. To the extent that a Stock Option
Agreement so provides, and if Stock is publicly traded, payment may be made all
or in part by the delivery (on a form prescribed by the Company) of an
irrevocable direction to pledge Shares to a securities broker or lender approved
by the Company, as security for a loan, and to deliver all or part of the loan
proceeds to the Company in payment of all or part of the Exercise Price and any
withholding taxes.
SECTION 8. ADJUSTMENT OF SHARES.
(a) GENERAL. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Shares, a declaration of an
extraordinary dividend payable in
6
<PAGE> 10
a form other than Shares in an amount that has a material effect on the Fair
Market Value of the Stock, a combination or consolidation of the outstanding
Stock into a lesser number of Shares, a recapitalization, a spin-off, a
reclassification or a similar occurrence, the Board of Directors shall make
appropriate adjustments in one or more of (i) the number of Shares available for
future grants under Section 4, (ii) the number of Shares covered by each
outstanding Option or (iii) the Exercise Price under each outstanding Option.
(b) MERGERS AND CONSOLIDATIONS. In the event that the Company
is a party to a merger or consolidation, outstanding Options shall be subject to
the agreement of merger or consolidation. Such agreement, without the Optionees'
consent, may provide for:
(i) The continuation of such outstanding Options by the
Company (if the Company is the surviving corporation);
(ii) The assumption of the Plan and such outstanding Options
by the surviving corporation or its parent;
(iii) The substitution by the surviving corporation or its
parent of options with substantially the same terms for such
outstanding Options;
(iv) The full exercisability of such outstanding Options and
full vesting of the Shares subject to such Options, followed by the
cancellation of such Options; or
(v) The settlement of the full value of such outstanding
Options (whether or not then exercisable) in cash or cash equivalents,
followed by the cancellation of such Options.
(c) RESERVATION OF RIGHTS. Except as provided in this Section
8, an Optionee or Purchaser shall have no rights by reason of (i) any
subdivision or consolidation of shares of stock of any class, (ii) the payment
of any dividend or (iii) any other increase or decrease in the number of shares
of stock of any class. Any issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number or Exercise Price of Shares subject to an Option. The grant of an Option
pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
SECTION 9. SECURITIES LAW REQUIREMENTS.
(a) GENERAL. Shares shall not be issued under the Plan unless
the issuance and delivery of such Shares comply with (or are exempt from) all
applicable requirements of law, including (without limitation) the Securities
Act of 1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange or
other securities market on which the Company's securities may then be traded.
7
<PAGE> 11
(b) FINANCIAL REPORTS. The Company each year shall furnish to
Optionees, Purchasers and stockholders who have received Stock under the Plan
its balance sheet and income statement, unless such Optionees, Purchasers or
stockholders are key Employees whose duties with the Company assure them access
to equivalent information. Such balance sheet and income statement need not be
audited.
SECTION 10. NO RETENTION RIGHTS.
Nothing in the Plan or in any right or Option granted under
the Plan shall confer upon the Purchaser or Optionee any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Company (or any Parent, Subsidiary or
Affiliate employing or retaining the Purchaser or Optionee) or of the Purchaser
or Optionee, which rights are hereby expressly reserved by each, to terminate
his or her Service at any time and for any reason, with or without cause.
SECTION 11. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall
become effective on the date of its adoption by the Board of Directors, subject
to the approval of the Company's stockholders. In the event that the
stockholders fail to approve the Plan within 12 months after its adoption by the
Board of Directors, any grants of Options or sales or awards of Shares that have
already occurred shall be rescinded, and no additional grants, sales or awards
shall be made thereafter under the Plan. The Plan shall terminate automatically
10 years after its adoption by the Board of Directors and may be terminated on
any earlier date pursuant to Subsection (b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of
Directors may amend, suspend or terminate the Plan at any time and for any
reason; provided, however, that any amendment of the Plan which increases the
number of Shares available for issuance under the Plan (except as provided in
Section 8), or which materially changes the class of persons who are eligible
for the grant of ISOs, shall be subject to the approval of the Company's
stockholders. Stockholder approval shall not be required for any other amendment
of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be
issued or sold under the Plan after the termination thereof, except upon
exercise of an Option granted prior to such termination. The termination of the
Plan, or any amendment thereof, shall not affect any Share previously issued or
any Option previously granted under the Plan.
SECTION 12. DEFINITIONS.
(a) "AFFILIATE" shall mean any entity other than a Subsidiary,
if the Company and/or one or more Subsidiaries own not less than 50% of such
entity.
(b) "BOARD OF DIRECTORS" shall mean the Board of Directors of
the Company, as constituted from time to time.
8
<PAGE> 12
(c) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" shall mean a committee of the Board of
Directors, as described in Section 2(a).
(e) "COMPANY" shall mean Next Level Communications, Inc., a
Delaware corporation.
(f) "CONSULTANT" shall mean a person who performs bona fide
services for the Company, a Parent, a Subsidiary or an Affiliate as a consultant
or advisor, excluding Employees and Outside Directors.
(g) "DISABILITY" shall mean that the Optionee is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment.
(h) "EMPLOYEE" shall mean any individual who is a common-law
employee of the Company, a Parent, a Subsidiary or an Affiliate.
(i) "EXERCISE PRICE" shall mean the amount for which one Share
may be purchased upon exercise of an Option, as specified by the Board of
Directors in the applicable Stock Option Agreement.
(j) "FAIR MARKET VALUE" shall mean the fair market value of a
Share, as determined by the Board of Directors in good faith. Such determination
shall be conclusive and binding on all persons.
(k) "ISO" shall mean an employee incentive stock option
described in Section 422(b) of the Code.
(l) "NONSTATUTORY OPTION" shall mean a stock option not
described in Sections 422(b) or 423(b) of the Code.
(m) "OPTION" shall mean an ISO or Nonstatutory Option granted
under the Plan and entitling the holder to purchase Shares.
(n) "OPTIONEE" shall mean an individual who holds an Option.
(o) "OUTSIDE DIRECTOR" shall mean a member of the Board of
Directors who is not an Employee.
(p) "PARENT" shall mean any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
9
<PAGE> 13
(q) "PLAN" shall mean this Next Level Communications, Inc.
1999 Stock Plan.
(r) "PURCHASE PRICE" shall mean the consideration for which
one Share may be acquired under the Plan (other than upon exercise of an
Option), as specified by the Board of Directors.
(s) "PURCHASER" shall mean an individual to whom the Board of
Directors has offered the right to acquire Shares under the Plan (other than
upon exercise of an Option).
(t) "SERVICE" shall mean service as an Employee, Outside
Director or Consultant.
(u) "SHARE" shall mean one share of Stock, as adjusted in
accordance with Section 8 (if applicable).
(v) "STOCK" shall mean the Class A Common Stock of the
Company, with a par value of $0.01 per Share.
(w) "STOCK OPTION AGREEMENT" shall mean the agreement between
the Company and an Optionee which contains the terms, conditions and
restrictions pertaining to the Optionee's Option.
(x) "STOCK PURCHASE AGREEMENT" shall mean the agreement
between the Company and a Purchaser who acquires Shares under the Plan which
contains the terms, conditions and restrictions pertaining to the acquisition of
such Shares.
(y) "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
SECTION 13. EXECUTION.
To record the adoption of the Plan by the Board of Directors,
the Company has caused its authorized officer to execute the same.
NEXT LEVEL COMMUNICATIONS, INC.
By:
-------------------------------------
Title:
----------------------------------
10
<PAGE> 1
Exhibit 23.1
Independent Auditors' Consent
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-85999 of Next Level Communications, Inc. on Form S-1 of our report dated
August 25, 1999 (October 11, 1999 as to Notes 2 and 3), appearing in the
Prospectus, which is part of this Registration Statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
October 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
REGISTRATION STATEMENT ON FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 28,983 34,722
<SECURITIES> 0 0
<RECEIVABLES> 11,558 8,749
<ALLOWANCES> 490 488
<INVENTORY> 20,670 28,506
<CURRENT-ASSETS> 69,829 75,622
<PP&E> 32,772 36,989
<DEPRECIATION> (11,214) (14,550)
<TOTAL-ASSETS> 97,771 103,793
<CURRENT-LIABILITIES> 31,265 39,012
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (14,769) (19,566)
<TOTAL-LIABILITY-AND-EQUITY> 97,771 103,793
<SALES> 43,830 18,190
<TOTAL-REVENUES> 43,830 18,190
<CGS> 43,433 16,740
<TOTAL-COSTS> 121,767 54,175
<OTHER-EXPENSES> (2,241) (572)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (6,035) (3,384)
<INCOME-PRETAX> (81,731) (38,797)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (81,731) (38,797)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (81,731) (38,797)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
