<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1999.
REGISTRATION NO. 333-85999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 6
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEXT LEVEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 94-3342408
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(707) 584-6820
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES T. WANDREY
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
NEXT LEVEL COMMUNICATIONS, INC.
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(707) 584-6820
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C> <C>
JAY K. HACHIGIAN, ESQ. RAYMOND W. WAGNER, ESQ. VINCENT J. PISANO, ESQ.
GUNDERSON DETTMER STOUGH SIMPSON THACHER & BARTLETT SKADDEN, ARPS, SLATE,
VILLENEUVE FRANKLIN & HACHIGIAN, 425 LEXINGTON AVENUE MEAGHER & FLOM LLP
LLP NEW YORK, NEW YORK 10017 919 THIRD AVENUE
155 CONSTITUTION DRIVE (212) 455-2000 NEW YORK, NEW YORK 10022
MENLO PARK, CALIFORNIA 94025 (212) 735-3000
(650) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION DATED NOVEMBER 9, 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 $17.00 and $19.00 per share. Our common stock has been approved for
listing on The Nasdaq Stock Market's National Market under the symbol "NXTV."
General Instrument Corporation will own approximately 82% 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.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEXT LEVEL
------------ ----------------- ---------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Merrill Lynch & Co. and Credit Suisse First Boston are acting as joint
book-running managers. Delivery of the shares of common stock will be made on or
about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
WARBURG DILLON READ LLC
VOLPE BROWN WHELAN & COMPANY
The date of the prospectus is , 1999.
<PAGE> 3
EDGAR DESCRIPTION OF ARTWORK: INSIDE COVER GRAPHICS OF PROSPECTUS.
The heading for the page reads "Our Products at Work, Delivering Voice,
Data and Video over Copper Telephone Wires."
This diagram depicts the process by which Next Level facilitates the
delivery, by telephone companies, of voice from the public telephone network,
data from high-speed data and internet service providers and video from
entertainment video service providers to a customer's home or business through
our products located at the telephone company central office, field and
subscribers' home or business.
The graphics include photographs of our products.
<PAGE> 4
---------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
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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<S> <C>
MANAGEMENT.......................... 51
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................... 62
PRINCIPAL STOCKHOLDERS.............. 67
DESCRIPTION OF CAPITAL STOCK........ 69
UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS......... 75
SHARES ELIGIBLE FOR FUTURE SALE..... 78
UNDERWRITING........................ 80
NOTICE TO CANADIAN RESIDENTS........ 84
LEGAL MATTERS....................... 85
EXPERTS............................. 85
WHERE YOU CAN FIND ADDITIONAL
INFORMATION....................... 86
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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<PAGE> 5
PROSPECTUS SUMMARY
You should read this prospectus summary together with the more detailed
information contained in this prospectus, including the risk factors and
financial statements and the notes to the financial statements.
NEXT LEVEL COMMUNICATIONS, INC.
We design and market high-speed, high-volume, also known as broadband,
communications equipment that enables telephone companies and other
communications service providers to cost-effectively deliver a full suite of
voice, data and video services over the existing copper telephone wire
infrastructure. Service providers deploying our equipment can either offer
voice, data and video services in a single product offering or offer each
service separately depending on subscriber demand and the service providers'
objectives. We believe that by installing our equipment, telephone companies and
other communications service providers will be able to capitalize on, and
compete effectively in, the market for integrated voice, data and video
services.
Telephone companies face increasing competition from cable companies that
have recently announced plans to offer traditional voice services, as well as
high-speed data and video services. Telephone companies, however, have been
constrained in their response to this increased competition because the copper
wire infrastructure used by most telephone companies has not been capable of
delivering high-speed data and video services. Telephone companies seeking to
provide broadband services have generally needed to adopt a complex and costly
strategy of installing independent equipment from multiple vendors.
We believe that our equipment enables telephone companies to effectively
compete with cable companies in the growing data and video markets. Our
equipment is engineered to provide flexibility to enable telephone companies to
cost-effectively deploy multiple services to large numbers of subscribers. Our
products include equipment located at a telephone company's central office, in
the field and at a subscriber's home or business. Telephone companies using our
equipment can generate incremental revenues from their existing subscribers and
respond to competing service offerings. Additionally, our products are
engineered to provide enhanced security for applications such as electronic
commerce.
Our objective is to be the leading supplier of communications equipment
used by telephone companies to deliver voice, data and video services to their
residential and business customers. To accomplish this objective, we intend to:
- capitalize on our existing relationships with key regional Bell operating
companies to increase our sales as they deploy voice, data and video
services more broadly;
- expand our sales into new markets by targeting other communications
providers that use a copper telephone wire infrastructure, including
local, independent and international telephone companies;
- maintain and extend our technology leadership to offer new products and
features that will provide competitive advantages for all of these
communications service providers; and
- continue to outsource manufacturing of our products to maintain
flexibility and reduce costs.
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<PAGE> 6
We commenced operations in July 1994 and recorded our first sale in
September 1997. From inception through September 30, 1999, approximately 82% of
our total revenues were from sales to U S WEST and Bell Atlantic. In 1999, we
also began to sell our equipment to the local, independent and international
telecommunications markets.
Our principal executive offices are located at 6085 State Farm Drive,
Rohnert Park, California 94928 and our telephone number is (707) 584-6820. Our
world wide web address is www.nlc.com. The information on this web site does not
constitute part of this prospectus.
2
<PAGE> 7
THE OFFERING
Common stock offered................ 8,500,000 shares
Common stock to be outstanding after
this offering....................... 79,437,902 shares. This does not
include 12,358,758 shares that are
reserved for issuance pursuant to
outstanding employee stock options and
8,480,102 shares that are reserved for
issuance pursuant to outstanding
warrants held by affiliates of Spencer
Trask Investors LLC.
Use of proceeds..................... For general corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol............................ NXTV
Unless otherwise indicated, the information in this prospectus (excluding
the historical financial statements):
- assumes that we have completed our recapitalization as described in this
prospectus under the heading "Our Recapitalization;" and
- assumes no exercise of the underwriters' over-allotment option.
In addition, the number of shares of common stock to be received by General
Instrument in our recapitalization is partially dependent upon an assumed
initial offering price of the common stock of $18.00 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.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table presents summary historical, pro forma and pro forma,
as adjusted financial data. The information set forth below should be read in
conjunction with the "Pro Forma Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes included in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the nine months ended September 30, 1999 and the balance sheet data as
of September 30, 1999 are derived from audited financial statements included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1998 are derived from the unaudited financial statements included
in this prospectus and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements.
The unaudited pro forma statement of operations data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
our recapitalization as if it occurred on January 1, 1998. The pro forma
statement of operations data do not give effect to the non-cash compensation
expense associated with employee stock options to be recorded upon completion of
this offering. The compensation expense, based upon an assumed initial offering
price of $18.00 per share and assuming no forfeitures, will be approximately
$88.5 million, approximately $84.2 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 $28.2 million, based on an assumed initial offering price of
$18.00 per share, assuming it becomes more likely that all tandem stock option
holders will elect to exercise Next Level options.
The unaudited pro forma balance sheet data give effect to our
recapitalization as if it occurred on September 30, 1999. The unaudited pro
forma, as adjusted balance sheet data further give effect to our receipt of the
estimated net proceeds from the sale of 8,500,000 shares of common stock in this
offering at an assumed initial public offering price of $18.00 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, as if this offering had been completed on September 30, 1999.
The pro forma and pro forma, as adjusted financial data do not necessarily
represent what the operating results or financial position would have been or
project the operating results or financial position for any future period or
date.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1998 1998 1999 1999
--------- -------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ -- $ 8,311 $ 43,830 $ 43,830 $ 21,208 $ 32,430 $ 32,430
Gross profit (loss)..................... -- (2,949) 397 397 (568) 2,461 2,461
Operating expenses:
Research and development.............. 17,102 37,064 47,086 47,086 32,493 35,861 35,861
Selling, general and administrative... 15,850 26,414 26,248 26,248 19,906 22,220 22,220
Litigation............................ 141,000 -- 5,000 5,000 5,000 -- --
Operating loss.......................... (173,952) (66,427) (77,937) (77,937) (57,967) (55,620) (55,620)
Other income (expense), net............. 48 (2) 2,241 2,241 2,103 853 853
Interest expense........................ -- -- (6,035) (95) (4,418) (5,181) (171)
--------- -------- -------- -------- -------- -------- --------
Net loss................................ $(173,904) $(66,429) $(81,731) $(75,791) $(60,282) $(59,948) $(54,938)
========= ======== ======== ======== ======== ======== ========
Pro forma basic and diluted net loss
per share............................. $ (1.07) $ (0.77)
======== ========
Shares used in pro forma basic and
diluted net loss per share............ 70,893 70,893
======== ========
</TABLE>
4
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 12,499 $ 12,499 $151,989
Working capital............................................. 17,359 17,359 156,849
Total assets................................................ 87,234 87,234 226,724
Long-term obligations, net of current portion............... 86,396 446 446
Total partners' deficit/stockholders' equity................ (40,717) 45,233 184,723
</TABLE>
See notes 3 and 9 of notes to the financial statements of Next Level
Communications L.P. for an explanation of the determination of the number of
shares used in computing pro forma per share data and for a description of the
tandem stock option grant.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. You should also refer to the other information set forth in
this prospectus, including our financial statements and the related notes.
RISKS RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS
WE HAVE INCURRED NET LOSSES AND NEGATIVE CASH FLOW FOR OUR ENTIRE HISTORY, WE
EXPECT TO INCUR FUTURE LOSSES AND NEGATIVE CASH FLOW AND WE MAY NEVER ACHIEVE
PROFITABILITY
We incurred net losses of $59.9 million for the nine months ended September
30, 1999, $81.7 million for the year ended December 31, 1998, $66.4 million for
the year ended December 31, 1997 and $173.9 million for the year ended December
31, 1996. Our ability to achieve profitability on a continuing basis will depend
on the successful design, development, testing, introduction, marketing and
broad commercial distribution of our broadband equipment products.
We expect to continue to incur significant product development, sales and
marketing, and administrative expenses. In addition, we depend in part on cost
reductions to improve gross profit margins because the fixed-price nature of
most of our long-term customer agreements prevents us from increasing prices. As
a result, we will need to generate significant revenues and improve gross profit
margins to achieve and maintain profitability. We may not be successful in
reducing our costs or in selling our products in sufficient volumes to realize
cost benefits from our manufacturers. We cannot be certain that we can achieve
sufficient revenues or gross profit margin improvements to achieve
profitability.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS
We recorded our first sale in September 1997. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. You should consider our prospects in light of the heightened risks
and unexpected expenses and difficulties frequently encountered by companies in
an early stage of development. These risks, expenses and difficulties, which are
described below, apply particularly to us because the market for equipment for
delivering voice, data and video services is new and rapidly evolving. Due to
our limited operating history, it will be difficult for you to evaluate whether
we will successfully address these risks.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE AND THESE
FLUCTUATIONS MAY MAKE OUR STOCK PRICE VOLATILE
Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly in the future. As a result, we believe
that quarter-to-quarter comparisons of our operating results may not be
meaningful. Fluctuations in our quarterly revenues or operating results may
cause volatility in the price of our stock. It is likely that in some future
quarter our operating results may be below the expectations of public
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<PAGE> 11
market analysts and investors, which may cause the price of our stock to fall.
Factors likely to cause variations in our quarterly revenues and operating
results include:
- delays or cancellations of any orders by U S WEST, which accounted for
approximately 61% of our revenues for the nine months ended September 30,
1999, or by any other customer accounting for a significant portion of
our revenues;
- variations in the timing, mix and size of orders and shipments of our
products throughout the quarter or year;
- new product introductions by us or by our competitors;
- the timing of upgrades of telephone companies' infrastructure;
- variations in capital spending budgets of telephone companies; and
- increased expenses, whether related to sales and marketing, product
development or administration.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activity. Because most of our operating expenses are fixed in the short term, we
may not be able to quickly reduce spending if our revenues are lower than we had
projected and our results of operations could be harmed.
BECAUSE OUR SALES CYCLE IS LENGTHY AND VARIABLE, THE TIMING OF OUR REVENUE IS
DIFFICULT TO PREDICT AND WE MAY INCUR SALES AND MARKETING EXPENSES WITH NO
GUARANTEE OF A FUTURE SALE
Customers view the purchase of our products as a significant and strategic
decision. As a result, customers typically undertake significant evaluation,
testing and trial of our products before deployment. This evaluation process
frequently results in a lengthy sales cycle, typically ranging from six months
to more than a year. Before a customer places an order, we may incur substantial
sales and marketing expenses and expend significant management efforts. In
addition, product purchases are frequently subject to unexpected administrative,
processing and other delays on the part of our customers. This is particularly
true for customers for whom our products represent a very small percentage of
their overall purchasing activities. As a result, sales forecasted from a
specific customer for a particular quarter may not be realized in that quarter
and this could result in lower than expected revenues.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FINANCING TO FUND OUR BUSINESS AND, AS A
RESULT, WE MAY NOT BE ABLE TO GROW AND COMPETE EFFECTIVELY
In the past, we have relied on General Instrument to provide capital, but
it will not provide us additional funds after this offering. We may need to
raise additional funds if our estimates of revenues or capital requirements
change or prove inaccurate. If we cannot raise these funds, we may not be able
to grow our business. We may need additional capital if we need to respond to
unforeseen technological or marketing hurdles or if we desire to take advantage
of unanticipated opportunities. In addition, we expect to review potential
acquisitions that would complement our existing product offerings or enhance our
technical capabilities that could require potentially significant amounts of
capital. Funds may not be available at the time or times needed on terms
acceptable to us, if at all. If
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adequate funds are not available, or are not available on acceptable terms, we
may not be able to take advantage of market opportunities, to develop new
products or to otherwise respond to competitive pressures effectively.
RISKS RELATED TO OUR CUSTOMERS
OUR CUSTOMER BASE OF TELEPHONE COMPANIES IS EXTREMELY CONCENTRATED AND THE LOSS
OF OR REDUCTION IN BUSINESS FROM EVEN ONE OF OUR CUSTOMERS COULD CAUSE OUR SALES
TO FALL SIGNIFICANTLY
A small number of customers have accounted for a large part of our revenues
to date. We expect this concentration to continue in the future. If we lose one
of our significant customers, our revenues could be significantly affected. U S
WEST accounted for 68% of total revenues for the year ended December 31, 1998
and 61% of total revenues for the nine months ended September 30, 1999. Bell
Atlantic accounted for 20% of total revenues for the year ended December 31,
1998 and 14% of total revenues for the nine months ended September 30, 1999. Our
agreements with our customers are cancelable by these customers on short notice,
without penalty, do not obligate the customers to purchase any products and are
not exclusive. Accordingly, we may lose revenue from our significant customers
at any time.
A SIGNIFICANT MARKET FOR OUR PRODUCTS MAY NOT DEVELOP IF TELEPHONE COMPANIES DO
NOT SUCCESSFULLY DEPLOY BROADBAND SERVICES SUCH AS HIGH-SPEED DATA AND VIDEO
Telephone companies have just recently begun offering high-speed data
services, and most telephone companies have not offered video services at all.
Unless telephone companies make the strategic decision to enter the market for
providing broadband services, a significant market for our products may not
develop. Sales of our products depend on the increased use and widespread
adoption of broadband services and the ability of our customers to market and
sell broadband services, including video services, to their customers. Certain
critical issues concerning use of broadband services are unresolved and will
likely affect their use. These issues include security, reliability, speed and
volume, cost, government regulation and the ability to operate with existing and
new equipment.
Even if telephone companies decide to deploy broadband services, this
deployment may not be successful. Our customers have delayed deployments in the
past and may delay deployments in the future. Factors that could cause telephone
companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which our products are designed include the
following:
- industry consolidation;
- regulatory uncertainties and delays affecting telephone companies;
- varying quality of telephone companies' network infrastructure and cost
of infrastructure upgrades and maintenance;
- inexperience of telephone companies in obtaining access to video
programming content from third party providers;
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<PAGE> 13
- inexperience of telephone companies in providing broadband services and
the lack of sufficient technical expertise and personnel to install
products and implement services effectively;
- uncertain subscriber demand for broadband services; and
- inability of telephone companies to predict return on their investment in
broadband capable infrastructure and equipment.
Unless our products are successfully deployed and marketed by telephone
companies, we will not be able to achieve our business objectives and increase
our revenues.
CONSOLIDATION AMONG TELEPHONE COMPANIES MAY REDUCE OUR SALES
Consolidation in the telecommunications industry may cause delays in the
purchase of our products and cause a reexamination of strategic and purchasing
decisions by our customers. In addition, we may lose relationships with key
personnel within a customer's organization due to budget cuts, layoffs, or other
disruptions following a consolidation. For example, US WEST, which has announced
a pending merger with Qwest, and Bell Atlantic, which has announced a pending
merger with GTE, are our two largest customers. Any of these factors relating to
consolidation could impair our ability to generate revenues.
GOVERNMENT REGULATION OF OUR CUSTOMERS AND RELATED UNCERTAINTY COULD CAUSE OUR
CUSTOMERS TO DELAY THE PURCHASE OF OUR PRODUCTS
The FCC is in the process of developing new rules that could force
telephone companies, such as the regional Bell operating companies, to offer
their competitors cost-based access to some elements of their networks,
including facilities and equipment used to provide high-speed data and video
services. These telephone companies may not wish to make expenditures for
infrastructure and equipment required to provide broadband services if they will
be forced to allow competitors access to this infrastructure and equipment.
Although the FCC recently announced that, except in limited circumstances, it
will not require incumbent carriers to offer their competitors access to the
facilities and equipment used to provide high-speed data services, the full text
of the FCC's decision and the new rule have not yet been released. Thus, some
uncertainty still remains as to what the exact rule will be and how it will
apply in any given circumstance. Accordingly, the uncertainties caused by these
regulatory proceedings may cause these telephone companies to delay purchasing
decisions at least until the proceedings and any related judicial appeals are
completed. The outcomes of these regulatory proceedings, as well as other FCC
regulation, may cause these telephone companies not to deploy services for which
our products are designed or to further delay deployment. Additionally,
telephone companies' deployment of broadband services may be slowed down or
stopped because of the need for telephone companies to obtain permits from city,
state or federal authorities to implement infrastructure for products such as
ours. Any delay in deployment of products by our customers could harm our sales.
For a more detailed description of these and other regulatory matters that may
affect our business, see "Business -- Regulation of Customers."
OUR CUSTOMERS AND POTENTIAL CUSTOMERS WILL NOT PURCHASE OUR PRODUCTS IF THEY DO
NOT HAVE THE INFRASTRUCTURE NECESSARY TO USE OUR PRODUCTS
The copper wire infrastructures over which telephone companies may deliver
voice, data and video services using our products vary in quality and
reliability. As a result, some
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of these telephone companies may not be able to deliver a full set of voice,
data and video services to their customers, despite their intention to do so,
and this could harm our sales. Even after installation of our products, we
remain highly dependent on telephone companies to continue to maintain their
infrastructure so that our products will operate at a consistently high
performance level. Infrastructure upgrades and maintenance may be costly, and
telephone companies may not have the necessary financial resources. This may be
particularly true for our smaller customers and potential customers such as
independent telephone companies and domestic local telephone companies. If our
current and potential customers' infrastructure is inadequate, we may not be
able to generate anticipated revenues from them.
RISKS RELATED TO OUR INDUSTRY
IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PRODUCTS
ACHIEVE WIDESPREAD ACCEPTANCE, THE DEMAND FOR OUR PRODUCTS MAY NOT DEVELOP
Technologies that compete with our system include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If these alternative
technologies are chosen by our existing and potential customers, our business,
financial condition and results of operations could be harmed. In particular,
cable operators are currently deploying products that will be capable of
delivering voice, high-speed data and video services over cable, including
products from General Instrument, our principal stockholder. Our technology may
not be able to compete effectively against these technologies on price,
performance or reliability.
Our customers or potential customers that also offer cable-based services
may choose to purchase cable-based technologies. Cable service providers that
offer not only data and video but also telephony over cable systems will give
subscribers the alternative of purchasing all communications services from a
single communications service provider, allowing the potential for more
favorable pricing and a single point of contact for bill payment and customer
service. If these services are implemented successfully over cable connections,
they will compete directly with the services offered by telephone companies
using our products. In addition, several telephone companies have commenced the
marketing of video services over direct broadcast satellite while continuing to
provide voice and data services over their existing copper wire infrastructure.
If any of these services are accepted by consumers, the demand for our products
may not develop and our ability to generate revenue will be harmed.
WE FACE INTENSE COMPETITION IN PROVIDING EQUIPMENT FOR TELECOMMUNICATIONS
NETWORKS FROM LARGER AND MORE WELL-ESTABLISHED COMPANIES AND WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY WITH THESE COMPANIES
Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than we do. These competitors
may undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products than
we are able to, which could result in the loss of current and potential
customers.
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<PAGE> 15
Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC (recently acquired by GEC Marconi),
Scientific Atlanta, Siemens and our largest stockholder, General Instrument
(which has announced a pending merger with Motorola), as well as emerging
companies that are developing new technologies. Some of these competitors have
existing relationships with our current and prospective customers. In addition,
we anticipate that other large companies, such as Matsushita Electric Industrial
(which markets products under the Panasonic brand name), Microsoft, Network
Computer, Philips, Sony, STMicroelectronics and Toshiba America, will likely
introduce products that compete with our Residential Gateway product in the
future. Our customer base may be attracted by the name and resources of these
large, well-known companies and may prefer to purchase products from them
instead of us.
CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND NEGATIVELY
AFFECT OUR SALES
Consolidation in the telecommunications equipment industry may strengthen
our competitors' position in our market, cause us to lose customers and hurt our
sales. For example, Alcatel acquired DSC Communications, Lucent recently
acquired Ascend Communications and GEC Marconi recently acquired RELTEC.
Acquisitions such as these may strengthen our competitors' financial, technical
and marketing resources and provide access to regional Bell operating companies
and other potential customers. Consolidation may also allow some of our
competitors to penetrate new markets that we have targeted, such as domestic
local, independent and international telephone companies. This consolidation may
affect our ability to increase revenues.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE
Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:
- the increasing use of the Internet;
- the growth in remote access by telecommuters;
- the increasingly diverse distribution sources for high quality digital
video; and
- other industry and technological trends.
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost-effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall and we could lose revenues.
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<PAGE> 16
RISKS ASSOCIATED WITH OTHER ASPECTS OF OUR BUSINESS
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THE LOSS OF THEIR SERVICES COULD DISRUPT OUR OPERATIONS AND OUR CUSTOMER
RELATIONSHIPS
None of our executive officers or key employees are bound by an employment
agreement. Many of these employees have a significant amount of options to
purchase our common stock. Many of these options are currently vested and are
exercisable upon consummation of this offering and some of our key employees may
leave us once they have exercised their options. In addition, our engineering
and product development teams are critical in developing our products and have
developed important relationships with our regional Bell operating company
customers and their technical staffs. The loss of any of these key personnel
could harm our operations and customer relationships.
COMPETITION FOR QUALIFIED PERSONNEL IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY
IS INTENSE, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE
PERSONNEL, OUR ABILITY TO GROW OUR BUSINESS MAY BE HARMED
Competition for qualified personnel in the telecommunications equipment
industry, specifically in the Rohnert Park, California area, is intense, and we
may not be successful in attracting and retaining such personnel. Failure to
attract qualified personnel could harm the growth of our business.
We are actively searching for research and development engineers and sales
and marketing personnel who are in short supply. Competitors and others have in
the past and may in the future attempt to recruit our employees. In addition,
companies in the telecommunications industry whose employees accept positions
with competitors frequently claim that the competitors have engaged in unfair
hiring practices. We may receive such notices in the future as we seek to hire
qualified personnel and such notices may result in material litigation and
related disruption to our operations.
OUR OPERATIONS AND CUSTOMER RELATIONSHIPS MAY BECOME STRAINED DUE TO RAPID
EXPANSION
We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities both inside and outside the United States. This rapid
growth places a significant demand on management and operational resources. Our
management, personnel, systems, procedures, controls and customer service may be
inadequate to support our future operations. To manage expansion effectively, we
must implement and improve our operational systems, procedures, controls and
customer service on a timely basis. We expect significant strain on our order
and fulfillment process and our quality control systems if significant expansion
of business activity occurs. If we are unable to properly manage this growth,
our operating results, reputation and customer relationships could be harmed. As
a result, our stock price could fall.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY AFFECT OUR ABILITY
TO COMPETE AND WE COULD LOSE CUSTOMERS
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual provisions to
protect our intellectual property. There is no guarantee that these safeguards
will protect our
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<PAGE> 17
intellectual property and other valuable confidential information. If our
methods of protecting our intellectual property in the United States or abroad
are not adequate, our competitors may copy our technology or independently
develop similar technologies and we could lose customers. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully as do
the laws of the United States. If we fail to adequately protect our intellectual
property, it would be easier for our competitors to sell competing products
which could harm our business.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS, LICENSE ADDITIONAL TECHNOLOGY OR PAY MONETARY DAMAGES
From time to time, third parties, including our competitors and customers,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to us. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in our
market grows and the functionality of products overlaps, and our products may
currently infringe on one or more United States or international patents. The
results of any litigation are inherently uncertain. In the event of an adverse
result in any litigation with third parties that could arise in the future, we
could be required:
- to pay substantial damages, including paying treble damages if we are
held to have willfully infringed;
- to halt the manufacture, use and sale of infringing products;
- to expend significant resources to develop non-infringing technology;
and/or
- to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail. In
addition, we indemnify our customers for patent infringement claims and we may
be required to obtain licenses on their behalf which could subject us to
significant additional costs.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND ANY DISRUPTION IN THEIR MANUFACTURE
OF OUR PRODUCTS WOULD HARM OUR OPERATING RESULTS
We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We rely primarily on two large contract
manufacturers: SCI Systems and CMC Industries. The efficient operation of our
business will depend, in large part, on our ability to have these and other
companies manufacture our products timely, cost-effectively and in sufficient
volumes while maintaining consistent quality. As our business grows, these
manufacturers may not have the capacity to keep up with the increased demand.
Any manufacturing disruption could impair our ability to fulfill orders and
could cause us to lose customers.
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<PAGE> 18
WE HAVE NO LONG-TERM CONTRACTS WITH OUR MANUFACTURERS AND WE MAY NOT BE ABLE TO
DELIVER OUR PRODUCTS ON TIME IF ANY OF THESE MANUFACTURERS STOP MAKING OUR
PRODUCTS
We have no long-term contracts or arrangements with any of our contract
manufacturers that guarantee product availability, the continuation of
particular payment terms or the extension of credit limits. If our manufacturers
are unable or unwilling to continue manufacturing our products in required
volumes, we will have to identify acceptable alternative manufacturers, which
could take in excess of three months. For example, Flextronics International,
previously designated to be the sole manufacturer of our ETHERset product,
discontinued its relationship with us due to lack of order volume. It is
possible that a source may not be available to us when needed or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis. If we cannot find alternative sources for the manufacture of our
products, we will not be able to meet existing demand. As a result, we may lose
existing customers and our ability to gain new customers may be significantly
constrained.
OUR INABILITY TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE OF OUR
DEPENDENCE ON COMPONENTS FROM KEY SOLE SUPPLIERS COULD RESULT IN DELAYS IN THE
DELIVERY OF OUR PRODUCTS AND COULD HARM OUR REVENUES
Some parts, components and equipment used in our products are obtained from
sole sources of supply. If we or our sole source suppliers fail to obtain
components in sufficient quantities when required, delivery of our products
could be delayed resulting in decreased revenues. Additional sole-sourced
components may be incorporated into our equipment in the future. We do not have
any long term supply contracts to ensure sources of supply. In addition, our
suppliers may enter into exclusive arrangements with our competitors, stop
selling their products or components to us at commercially reasonable prices or
refuse to sell their products or components to us at any price, which could harm
our operating results.
THE OCCURRENCE OF ANY DEFECTS, ERRORS, OR FAILURES IN OUR PRODUCTS COULD RESULT
IN DELAYS IN INSTALLATION, PRODUCT RETURNS AND OTHER LOSSES TO US OR TO OUR
CUSTOMERS OR END-USERS
Our products are complex and may contain undetected defects, errors or
failures. These problems have occurred in our products in the past and
additional errors may occur in our products in the future and could result in
the loss of or delay in market acceptance of our products. In addition, we have
limited experience with commercial deployment and we expect additional defects,
errors and failures as our business expands from trials to commercial deployment
at certain customers. We will have limited experience with the problems that
could arise with any new products that we introduce. Further, our customer
agreements generally include a longer warranty for defects than our
manufacturing agreements. These defects could result in a loss of sales and
additional costs as well as damage to our reputation and the loss of our
customers.
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<PAGE> 19
WE DO NOT HAVE SIGNIFICANT EXPERIENCE IN INTERNATIONAL MARKETS AND MAY HAVE
UNEXPECTED COSTS AND DIFFICULTIES IN DEVELOPING INTERNATIONAL REVENUES
We plan to extend the marketing and sales of our products internationally.
International operations are generally subject to inherent risks and challenges
that could harm our operating results, including:
- unexpected changes in telecommunications regulatory requirements;
- limited number of telephone companies operating internationally;
- expenses associated with developing and customizing our products for
foreign countries;
- tariffs, quotas and other import restrictions on telecommunications
equipment;
- longer sales cycles for our products; and
- compliance with international standards that differ from domestic
standards.
To the extent that we generate international sales in the future, any
negative effects on our international business could harm our business,
operating results and financial condition as a whole. In particular, fluctuating
exchange rates may contribute to fluctuations in our results of operations.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD HARM OUR PRODUCTS OR OUR
REPUTATION OR CAUSE OUR CUSTOMERS TO DECREASE SPENDING ON OUR PRODUCTS
Computer systems, software packages and microprocessor-dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives. If
systems material to our business are not year 2000 compliant or if third parties
fail to make their systems year 2000 compliant in a timely manner, the year 2000
issue could affect our operations. The potential areas of exposure include
systems and equipment operated by third parties with which we transact business
and computers, software, telephone systems and other equipment used internally.
Our year 2000 compliance program may not fully address all potential year 2000
problems. Additionally, our customers' purchasing and deployment plans could be
affected by year 2000 issues. Some customers may wait to purchase or deploy our
products, if at all, which may reduce our future revenues. For a discussion of
our year 2000 preparedness program, see "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
RISKS RELATED TO THIS OFFERING
GENERAL INSTRUMENT WILL EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS AND
AFFAIRS AND OUR STOCKHOLDER VOTES AND, FOR ITS OWN REASONS, COULD PREVENT
TRANSACTIONS WHICH OUR OTHER STOCKHOLDERS MAY VIEW AS FAVORABLE
Upon completion of this offering, General Instrument will beneficially own
approximately 82% of the outstanding shares of our common stock. Although
General Instrument will enter into a voting trust agreement to limit its voting
power to 49% of the voting power of all outstanding common stock and to limit
the number of its designees to the board of directors to one less than a
majority, General Instrument will be able to exercise significant
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<PAGE> 20
influence over all matters relating to our business and affairs, including
approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us and could prevent you from receiving a
premium for your shares. In addition, General Instrument intends to terminate
the voting trust agreement immediately upon the completion of its pending merger
with Motorola.
AFTER THE COMPLETION OF GENERAL INSTRUMENT'S PENDING MERGER WITH MOTOROLA,
MOTOROLA WOULD THEN CONTROL US AND COULD PREVENT CHANGES THAT MAY BE FAVORABLE
TO US AND TO OUR OTHER STOCKHOLDERS AND IMPLEMENT CHANGES THAT MAY BE ADVERSE TO
US AND TO OUR OTHER STOCKHOLDERS, AND THIS COULD CAUSE OUR STOCK PRICE TO FALL
On September 14, 1999, General Instrument entered into an agreement and
plan of merger with Motorola, Inc. Immediately upon the completion of this
pending merger, General Instrument intends to terminate the voting trust
agreement and appoint additional individuals to our board of directors
sufficient to exercise control. Accordingly, upon completion of this pending
merger, Motorola will be able to exercise voting power over a majority of our
shares and will have the ability to control our board of directors and all
matters relating to our business and affairs. We do not know whether Motorola's
plans for our business and affairs will be different than our existing plans and
whether any changes that may be implemented under Motorola's control will be
beneficial or detrimental to our other stockholders.
OUR PRINCIPAL STOCKHOLDER MAY HAVE INTERESTS WHICH CONFLICT WITH THE BEST
INTERESTS OF US AND OUR OTHER STOCKHOLDERS AND MAY CAUSE US TO FORGO
OPPORTUNITIES OR TAKE ACTIONS WHICH DISPROPORTIONATELY BENEFIT OUR PRINCIPAL
STOCKHOLDER
It is possible that General Instrument or Motorola could be in a position
involving a conflict of interest with us. In addition, individuals who are
officers or directors of both us and our principal stockholder may have
fiduciary duties to both companies. For example, a conflict may arise if our
principal stockholder were to engage in activities or pursue corporate
opportunities that may overlap with our business. These conflicts could harm our
business and, as a result, could cause our stock price to fall. Our certificate
of incorporation contains provisions intended to protect our principal
stockholder and these individuals in these situations. These provisions would
limit your legal remedies. For a description of these provisions, see
"Description of Capital Stock -- Other Certificate of Incorporation and By-law
Provisions -- Corporate Opportunities."
By becoming a stockholder of Next Level, investors will be considered to
have consented to the provisions of our certificate of incorporation, except to
the extent any of the provisions are inconsistent with Delaware law.
OVER 70 MILLION, OR APPROXIMATELY 89% 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 79,437,902 shares of common
stock. After this offering, General Instrument will own 65,074,573 shares of our
common stock and Spencer Trask will own 5,863,329 shares of our common stock and
its affiliates will hold warrants to purchase an additional 8,480,102 shares of
our 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
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<PAGE> 21
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 Credit Suisse First Boston Corporation.
In addition, there are outstanding options to purchase 12,358,758 shares of
our common stock. The holders of options to purchase 3,074,794 shares of our
common stock have entered into 365-day lockup agreements with the underwriters,
and the holders of the remaining options have entered into 180-day lockup
agreements. Following completion of this offering, we intend to file with the
SEC a registration statement covering the shares issuable upon the exercise of
our outstanding employee options. Accordingly, subject to vesting provisions
and, in the case of our affiliates, volume and manner of sale restrictions, the
shares of common stock issuable upon the exercise of our outstanding employee
options will be eligible for sale into the public market at various times after
the expiration of the applicable lockup period. The lockups may be waived by
Credit Suisse First Boston Corporation. For a more detailed description, see
"Shares Eligible for Future Sale."
ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE
Several provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three year
terms;
- prohibiting cumulative voting in the election of directors;
- restricting business combinations with interested stockholders;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent;
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings; and
- requiring super-majority voting to effect amendments to our certificate
of incorporation and bylaws.
Some of these provisions will not currently apply to General Instrument and its
affiliates. For a more detailed description of these provisions, see
"Description of Capital Stock."
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<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
$139.5 million ($160.8 million if the underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $18.00 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. The primary purposes of this offering are to
increase our equity capital, to create a public market for our common stock and
to facilitate future access to public markets. As of the date of this
prospectus, we have no specific plans to use the net proceeds from this offering
other than as set forth below.
We expect to use the net proceeds of this offering for general corporate
purposes, including working capital and using a currently estimated $55 million
to fund our continued research and development efforts. From time to time we
will evaluate our opportunities to acquire businesses, products and technologies
that complement our business. We may use a portion of the net proceeds from this
offering for these acquisitions. Currently, however, we do not have any
understandings, commitments or agreements with respect to these acquisitions.
Pending our use of the proceeds, we will most likely invest the net proceeds in
short-term, interest-bearing, investment-grade obligations.
DIVIDEND POLICY
We do not expect to pay dividends on our common stock in the foreseeable
future. We anticipate that all future earnings, if any, generated from
operations will be retained to develop and expand our business. Any future
determination with respect to the payment of dividends will be at the discretion
of the board of directors and will depend upon, among other things, our
operating results, financial condition and capital requirements, the terms of
then-existing indebtedness, general business conditions and such other factors
as our board of directors deems relevant.
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OUR RECAPITALIZATION
Immediately prior to the completion of this offering, the following
interdependent recapitalization transactions will occur:
- the Next Level Communications L.P. $75.0 million note and accrued
interest thereon payable to General Instrument will be contributed by
General Instrument to Next Level Communications, Inc., a newly formed
Delaware corporation and the issuer of the common stock being offered in
this offering, in exchange for a number of shares of common stock equal
to the aggregate amount owed under the note divided by the initial
offering price (which would be 4,819,593 shares based upon $86.8 million
which will be owed upon completion of the recapitalization and an assumed
initial offering price of $18.00 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 4,888,889 shares based upon an assumed initial
offering price of $18.00 per share) (General Instrument is receiving
the additional number of shares of common stock to reflect the
additional value, $88.0 million, that will be received by us upon
exercise of the warrants, as described below, by affiliates of Spencer
Trask. In accordance with the partnership agreement, Next Level
Communications is entitled to receive the $88.0 million exercise price
from affiliates of Spencer Trask. As a result of the mergers, such
amount will be received by us should these warrants be exercised.
Accordingly, General Instrument will receive $88.0 million of common
stock because it would have received that amount under the partnership
agreement);
- options granted to employees of the partnership to purchase shares of
Next Level Communications will become options to purchase a total of
6,964,904 shares of common stock on a one for one basis; and
- the option currently held by affiliates of Spencer Trask to purchase
shares of the partnership's successor under the partnership agreement
will become warrants to purchase from us 8,480,102 shares of common
stock at an exercise price of $10.38 per share.
As a result of these transactions and upon completion of this offering,
General Instrument will own 65,074,573 shares of common stock, constituting
64.9% of our outstanding common stock on a fully diluted basis. Spencer Trask
and its affiliates will own, including shares issuable upon exercise of
outstanding warrants, 14,343,431 shares of common stock in the aggregate,
constituting 14.3% 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 $18.00 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; 400,000,000
shares authorized, pro forma and pro forma, as
adjusted and 70,893,309 shares issued and
outstanding, pro forma and 79,393,309 shares issued
and outstanding pro forma, as adjusted(1)........... -- 709 794
Additional paid-in capital(2).......................... -- 44,524 268,177
Partners' deficit...................................... (40,717) -- --
Accumulated deficit(2)................................. -- -- (84,247)
-------- ------- --------
Total partners' deficit/stockholders' equity... (40,717) 45,233 184,723
-------- ------- --------
Total capitalization........................... $ 45,679 $45,679 $185,169
======== ======= ========
</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 outstanding to purchase 5,393,854 shares of common stock at an
exercise price of $11.00 per share under our 1999 Stock Plan, and
- warrants held by affiliates of Spencer Trask to purchase 8,480,102 shares
of common stock at an exercise price of $10.38 per share.
(2) The pro forma, as adjusted amount reflects the non-cash compensation expense
associated with employee stock options to be recorded upon completion of
this offering. The non-cash compensation expense related to these options,
assuming no forfeitures, will be approximately $88.5 million, approximately
$84.2 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 $18.00 per share. These charges exclude any non-cash compensation expense
which may result from the tandem stock option grant made in January 1997 to
some of our employees. The tandem stock option grant permits these employees
to exercise options for shares of either our or General Instrument's common
stock. This non-cash compensation expense would be an additional $28.2
million, based on an assumed initial offering price of $18.00 per share,
assuming it becomes more likely that all tandem stock option holders will
elect to exercise Next Level options. See note 9 of notes to the financial
statements of Next Level Communications L.P. for a description of the tandem
stock option grant.
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<PAGE> 26
DILUTION
The pro forma net tangible book value of our common stock as of September
30, 1999, assuming the completion of our recapitalization on that date, was
$39.9 million, or $0.56 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 $18.00 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 $179.4
million, or $2.26 per share. This represents an immediate increase in net
tangible book value of $1.70 per share to existing stockholders and an immediate
dilution in net tangible book value of $15.74 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............. $18.00
Pro forma net tangible book value per share as of September
30, 1999 prior to this offering............................. $0.56
Increase per share attributable to new investors.......... 1.70
-----
Pro forma net tangible book value per share, as adjusted for
this offering............................................. 2.26
------
Pro forma net tangible book value dilution per share to new
investors................................................. $15.74
======
</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.......... 70,893,309 89.3% $520,630,000 77.3% $ 7.34
New stockholders............... 8,500,000 10.7 153,000,000 22.7 18.00
----------- ----- ------------ -----
Total................ 79,393,309 100.0% $673,630,000 100.0%
=========== ===== ============ =====
</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 outstanding to purchase 5,393,854 shares of common stock at an
exercise price of $11.00 per share under our 1999 Stock Plan, and
- warrants held by affiliates of Spencer Trask to purchase 8,480,102 shares
of common stock at an exercise price of $10.38 per share.
To the extent outstanding options or the warrant are exercised, there will
be further dilution to new investors. For a more complete description, see
"Certain Relationships and Related Transactions" and notes 3 and 9 of notes to
the financial statements of Next Level Communications L.P.
22
<PAGE> 27
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes included in this
prospectus. The statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1999, and the
balance sheet data as of December 31, 1997 and 1998 and as of September 30,
1999, are derived from financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, and are included in this prospectus. The
statement of operations data for the nine months ended September 30, 1998 are
derived from unaudited financial statements included in this prospectus and
include all adjustments (consisting of normal recurring items) that management
considers necessary for a fair presentation of the financial statements. The
statement of operations data for the periods from our inception on June 22, 1994
to December 31, 1994, from January 1, 1995 to August 31, 1995 and from September
1, 1995 to December 31, 1995 and the balance sheet data as of December 31, 1994,
1995 and 1996 are derived from unaudited financial statements not included in
this prospectus.
The statement of operations data and balance sheet data for the periods
subsequent to August 31, 1995 reflect adjustments resulting from the application
of the purchase method of accounting in connection with our acquisition by
General Instrument in 1995. The financial information prior to August 31, 1995
is that of a predecessor company prior to its acquisition by General Instrument
and may not be comparable to the financial information for periods which began
subsequent to August 31, 1995. The results for the nine months ended September
30, 1999 are not necessarily indicative of the operating results to be expected
in the future.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 22, 1994 JANUARY 1, SEPTEMBER 1,
(INCEPTION) 1995 1995 TO YEAR ENDED DECEMBER 31,
TO DECEMBER 31, TO AUGUST 31, DECEMBER 31, -------------------------------
1994 1995 1995 1996 1997 1998
--------------- ------------- ------------- --------- -------- --------
(PREDECESSOR) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Equipment................. $ -- $ -- $ -- $ -- $ 6,045 $ 39,243
Software.................. -- -- -- -- 2,266 4,587
----- ------- --------- --------- -------- --------
Total revenues.............. -- -- -- -- 8,311 43,830
----- ------- --------- --------- -------- --------
Cost of revenues:
Equipment................. -- -- -- -- 10,954 43,172
Software.................. -- -- -- -- 306 261
----- ------- --------- --------- -------- --------
Total cost of revenues...... -- -- -- -- 11,260 43,433
----- ------- --------- --------- -------- --------
Gross profit (loss)......... -- -- -- -- (2,949) 397
----- ------- --------- --------- -------- --------
Operating expenses:
Research and
development............. 505 4,937 142,249 17,102 37,064 47,086
Selling, general and
administrative.......... 126 1,646 1,016 15,850 26,414 26,248
Litigation................ -- -- -- 141,000 -- 5,000
----- ------- --------- --------- -------- --------
Total operating expenses.... 631 6,583 143,265 173,952 63,478 78,334
----- ------- --------- --------- -------- --------
Operating loss.............. (631) (6,583) (143,265) (173,952) (66,427) (77,937)
----- ------- --------- --------- -------- --------
Other income (expense),
net....................... -- -- -- 48 (2) 2,241
Interest expense............ -- -- -- -- -- (6,035)
----- ------- --------- --------- -------- --------
Net loss.................... $(631) $(6,583) $(143,265) $(173,904) $(66,429) $(81,731)
===== ======= ========= ========= ======== ========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Equipment................. $ 17,732 $ 29,848
Software.................. 3,476 2,582
--------- --------
Total revenues.............. 21,208 32,430
--------- --------
Cost of revenues:
Equipment................. 21,555 29,741
Software.................. 221 228
--------- --------
Total cost of revenues...... 21,776 29,969
--------- --------
Gross profit (loss)......... (568) 2,461
--------- --------
Operating expenses:
Research and
development............. 32,493 35,861
Selling, general and
administrative.......... 19,906 22,220
Litigation................ 5,000 --
--------- --------
Total operating expenses.... 57,399 58,081
--------- --------
Operating loss.............. (57,967) (55,620)
--------- --------
Other income (expense),
net....................... 2,103 853
Interest expense............ (4,418) (5,181)
--------- --------
Net loss.................... $ (60,282) $(59,948)
========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, -----------------------------------------------
1994 1995 1996 1997 1998
--------------- ------------- --------- -------- --------
(PREDECESSOR) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 362 $ 599 $ -- $ 377 $ 28,983
Working capital (deficit)... 4,175 (1,897) (143,001) (29,571) 38,564
Total assets................ 4,410 3,824 17,393 52,689 97,771
Long term obligations, net
of current portion........ -- -- -- -- 81,275
Total partners'
deficit/stockholder's
equity (deficit).......... 4,410 (2,566) (172,029) (3,702) (14,769)
<CAPTION>
SEPTEMBER 30,
1999
-------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 12,499
Working capital (deficit)... 17,359
Total assets................ 87,234
Long term obligations, net
of current portion........ 86,396
Total partners'
deficit/stockholder's
equity (deficit).......... (40,717)
</TABLE>
23
<PAGE> 28
PRO FORMA SELECTED FINANCIAL DATA
The following unaudited pro forma statement of operations data for the year
ended December 31, 1998 and the nine months ended September 30, 1999, were
prepared to give effect to our recapitalization as if it occurred on January 1,
1998. The unaudited pro forma balance sheet data give effect to our
recapitalization as if it occurred on September 30, 1999. The unaudited pro
forma, as adjusted balance sheet data further give effect to our receipt of the
estimated net proceeds from the sale of 8,500,000 shares of common stock in this
offering at an assumed initial public offering price of $18.00 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
$88.5 million, approximately $84.2 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 $18.00 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 $28.2 million, based on an assumed initial public
offering price of $18.00 per share, assuming it becomes more likely that all
tandem stock option holders will elect to exercise Next Level options. The pro
forma selected financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included in this
prospectus.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................................... $ 43,830 $ 32,430
Total cost of revenues.................................. 43,433 29,969
-------- --------
Gross profit.......................................... 397 2,461
Operating expenses:
Research and development.............................. 47,086 35,861
Selling, general and administrative................... 26,248 22,220
Litigation............................................ 5,000 --
-------- --------
Total operating expenses................................ 78,334 58,081
-------- --------
Operating loss.......................................... (77,937) (55,620)
Other income, net....................................... 2,241 853
Interest expense........................................ (95) (171)
-------- --------
Net loss................................................ $(75,791) $(54,938)
======== ========
Pro forma basic and diluted net loss per share.......... $ (1.07) $ (0.77)
======== ========
Shares used in pro forma basic and diluted net loss per
share................................................. 70,893 70,893
======== ========
</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 $151,989
Working capital............................................. 17,359 156,849
Total assets................................................ 87,234 226,724
Long-term obligations, net of current portion............... 446 446
Total stockholders' equity.................................. 45,233 184,723
</TABLE>
See notes 3 and 9 of notes to the financial statements of Next Level
Communications L.P. for an explanation of the determination of the number of
shares used in computing pro forma per share data and for a description of the
tandem stock option grant.
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with selected
financial data, financial statements and the respective notes thereto included
elsewhere in this prospectus.
OVERVIEW
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper wire telephone infrastructure. We commenced operations in July
1994 and recorded our first sale in September 1997. To date, we have sold our
products primarily to regional Bell operating companies through our direct sales
force. Since January 1998, we have operated through Next Level Communications
L.P., which was formed as the result of the transfer of all of the net assets,
management and workforce of a wholly owned subsidiary of General Instrument.
Immediately prior to the completion of this offering, the business and assets of
this partnership will be merged into Next Level Communications, Inc. as part of
our recapitalization.
From inception through September 1997, our operating activities related
primarily to establishing a research and development organization, testing
prototype designs, designing circuits, commencing the staffing of marketing,
sales and field service and technical support organizations and establishing
manufacturing relationships. Since then, we have expanded our sales and
marketing and customer support activities. These activities include commencing
trials with our customers, expanding our customer base, developing customer
relationships, marketing our brand, hiring field service and customer support
personnel, developing new products and technologies and enhancing existing
products.
Our revenue is primarily generated from sales of our equipment. A small
number of customers have accounted for a large part of our revenues to date, and
we expect this concentration to continue in the future. U S WEST accounted for
68% of total revenues for the year ended December 31, 1998 and 61% of total
revenues for the nine months ended September 30, 1999. Bell Atlantic accounted
for 20% of total revenues for the year ended December 31, 1998 and 14% of total
revenues for the nine months ended September 30, 1999. Our agreements with our
largest customers are cancelable by these customers on short notice and without
penalty, and do not obligate the customers to purchase any products. In
addition, our significant customer agreements generally contain fixed-price
provisions. As a result, our ability to generate a profit on these contracts
depends upon our ability to produce and market our products at costs lower than
these fixed prices.
The timing of our revenue is difficult to predict because of the length and
variability of the sales cycle for our products. Customers view the purchase of
our products as a significant and strategic decision. As a result, customers
typically undertake significant evaluation, testing and trial of our products
before deploying them. This evaluation process frequently results in a lengthy
sales cycle, typically ranging from six months to more than a year. While our
customers are evaluating our products and before they place an order, if at all,
we may incur substantial sales and marketing expenses and expend significant
management efforts.
26
<PAGE> 31
Revenues. Our revenues consist primarily of sales of equipment and sales of
data communications software. We recognize equipment revenue upon shipment of
our products. Software revenue consists of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
Software license revenue is recognized when a noncancelable license agreement
has been signed, delivery has occurred, the fees are fixed and determinable and
collection is probable. The portion of revenues from new software license
agreements which relate to our obligation to provide customer support are
deferred and recognized ratably over the maintenance period.
Cost of revenues. Cost of equipment revenue includes direct material and
labor, depreciation and amortization expense on property and equipment, warranty
expenses, license fees and manufacturing and service overhead. Cost of software
revenue primarily includes the cost of the media the software is shipped on
(usually CDs) and documentation costs.
Research and development. Research and development expense consists
principally of salaries and related personnel expenses, consultant fees,
prototype component expenses and development contracts related to the design,
development, testing and enhancement of our products. All research and
development costs are expensed as incurred.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of salaries and related expenses for personnel
engaged in direct marketing and field service support functions, executive,
accounting and administrative personnel, recruiting expenses, professional fees
and other general corporate expenses.
Stock compensation expense. Substantially all of our employees have been
granted contingently exercisable stock options that will become options to
purchase our common stock upon our recapitalization. These options are
exercisable only in the event of our initial public offering or in a change of
control event such as a merger or acquisition. As a result, non-cash
compensation expense will be recognized upon the completion of this offering
based on the difference between the exercise price of these options and the
initial public offering price of our common stock. The non-cash compensation
expense related to these option grants, assuming no forfeitures, will be
approximately $88.5 million, approximately $84.2 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 $18.00 per share. These charges
exclude any non-cash compensation expense which may result from the tandem stock
option grant made in January 1997 to some of our employees. The tandem stock
option grant permits these employees to exercise options for shares of either
our or General Instrument's common stock. This non-cash compensation expense
would be an additional $28.2 million based on an assumed initial offering price
of $18.00 per share, assuming it becomes more likely that all tandem stock
option holders will elect to exercise our options.
Litigation. The litigation expense incurred in 1996 was attributable to a
judgment in connection with litigation involving DSC Communications and was paid
in 1997. The litigation expense incurred in 1998 was attributable to the cost of
the settlement of the litigation with BroadBand Technologies. For a more
detailed description of these litigation matters, see "Business -- Litigation."
Acquisition. In September 1997, General Instrument acquired all of the
outstanding capital stock of Telenetworks for $7.0 million in cash, and
subsequently contributed the business to the Next Level partnership.
Approximately $6.9 million of the purchase price
27
<PAGE> 32
was allocated to goodwill. As a result, we amortized approximately $1.0 million
of goodwill during 1998 and will continue to amortize the goodwill at a rate of
approximately $1.0 million per year for each of the next six years. In
conjunction with the granting of restricted common stock of General Instrument
to Telenetworks employees, which restrictions lapsed over a nine month period
that ended May 31, 1998, we recorded compensation expense of $3.9 million in
1998 and $3.1 million in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
our seven most recent quarters ended September 30, 1999. This unaudited
information has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting of normal recurring items)
that management considers necessary for a fair presentation of the financial
information for the periods presented. This information should be read in
conjunction with the audited and unaudited financial statements and related
notes included in this prospectus. The operating results for any quarter are not
necessarily indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
------------- ------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment............ $ 1,682 $ 2,372 $ 13,678 $ 21,511 $ 7,947 $ 8,482 $ 13,419
Software........... 1,057 1,496 923 1,111 830 931 821
-------- -------- -------- -------- -------- -------- --------
Total revenues....... 2,739 3,868 14,601 22,622 8,777 9,413 14,240
Cost of revenues:
Equipment.......... 2,395 4,107 15,053 21,617 8,331 8,651 12,759
Software........... 122 54 45 40 74 84 70
-------- -------- -------- -------- -------- -------- --------
Total cost of
revenues........... 2,517 4,161 15,098 21,657 8,405 8,735 12,829
-------- -------- -------- -------- -------- -------- --------
Gross profit
(loss)............. 222 (293) (497) 965 372 678 1,411
Operating expenses:
Research and
development...... 10,033 10,385 12,075 14,593 11,253 11,798 12,810
Selling, general
and
administrative... 7,021 8,379 4,506 6,342 6,791 7,593 7,836
Litigation......... 5,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses........... 22,054 18,764 16,581 20,935 18,044 19,391 20,646
-------- -------- -------- -------- -------- -------- --------
Operating loss....... (21,832) (19,057) (17,078) (19,970) (17,672) (18,713) (19,235)
Other income, net.... 867 710 526 138 108 464 281
Interest expense..... (1,300) (1,509) (1,609) (1,617) (1,693) (1,691) (1,797)
-------- -------- -------- -------- -------- -------- --------
Net loss............. $(22,265) $(19,856) $(18,161) $(21,449) $(19,257) $(19,940) $(20,751)
======== ======== ======== ======== ======== ======== ========
</TABLE>
The significant increase in equipment revenue from the second quarter of
1998 through the fourth quarter of 1998 was primarily attributable to the
purchases of our products by U S WEST in connection with its introduction of
video service in Phoenix, Arizona. U S WEST, however, did not deploy its video
service as rapidly as it had planned. As a result, in the first three quarters
of 1999, U S WEST slowed its purchases of our products for video applications
while it used its existing inventory, which accounted for the significant
decrease in our equipment revenue. The reduction in sales of our products for
video applications in the second and third quarters of 1999 was partially offset
by an increase in the sale of our products for voice applications to U S WEST
and new customers.
28
<PAGE> 33
The gross margins on our equipment revenue have been negative in six of our
last seven quarters primarily due to our relatively high fixed costs associated
with the manufacturing and testing of our products. At relatively low historical
volumes, we have not been able to cover our fixed costs and, as a result, our
unit costs are high. We expect to achieve margin improvements in future
quarters, based on higher sales volumes, cost reductions and increased demand
for higher margin products.
The increase in research and development expense in the fourth quarter of
1998 reflects the higher level of spending in the second half of 1998 due to
increased product development costs in connection with increased demand for our
products. In addition, there were higher engineering costs incurred in
connection with the U S WEST deployment. We view research and development as
critical to attaining our goals and thus we expect research and development
expense to increase as we continue to enhance existing products and begin new
product initiatives.
Selling, general and administrative expense in the first two quarters of
1998 included the amortization of the compensation expense incurred in
connection with the acquisition of Telenetworks and legal fees incurred in
connection with the settlement of the BroadBand Technologies litigation.
Beginning in the fourth quarter of 1998, we expanded our customer focus to local
and independent telephone companies and thus we have been adding personnel in
our sales and marketing group. As a result, selling, general and administrative
expense has continued to increase and we expect this trend to continue.
The litigation expense incurred in the first quarter of 1998 reflects the
cost of the settlement of the litigation with BroadBand Technologies.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues increased to $32.4 million for the nine months
ended September 30, 1999 from $21.2 million for the nine months ended September
30, 1998. This increase was primarily due to an increase in equipment sales.
Equipment revenue increased to $29.8 million for the nine months ended
September 30, 1999, from $17.7 million for the nine months ended September 30,
1998. Sales to two regional Bell operating companies, U S WEST and Bell
Atlantic, comprise substantially all of the equipment revenue to date. U S WEST
accounted for $19.9 million and Bell Atlantic accounted for $4.7 million of
equipment revenue for the nine months ended September 30, 1999. Sales of
equipment to the local and independent telephone markets were $4.8 million for
the nine months ended September 30, 1999, with most of those sales occurring in
the third quarter. The growth in equipment revenue in future periods will depend
upon whether and how quickly our existing customers roll out broadband services
in their coverage areas and whether and how quickly we obtain new customers.
Data communications software revenue decreased to $2.6 million for the nine
months ended September 30, 1999 from $3.5 million for the nine months ended
September 30, 1998 due primarily to a shift in demand from 1999 into 1998. We
expect demand for our software to remain relatively flat in the near term
because the market for these products is mature, and we are not making any
significant investment in new products for that market. As a result, we expect
our level of software revenue to remain relatively stable.
Cost of Revenues. Total cost of revenues increased to $30.0 million for the
nine months ended September 30, 1999 from $21.8 million for the nine months
ended September 30, 1998. The increase in the cost of revenues was attributable
to an increase in
29
<PAGE> 34
equipment volume and consisted primarily of materials and costs associated with
increasing production at our contract manufacturers.
For the nine months ended September 30, 1999, our gross profit (loss) on
equipment was $0.1 million and for the nine months ended September 30, 1998, our
gross profit (loss) on equipment was $(3.8 million). The improvement in gross
profit (loss) was primarily the result of higher unit volumes, leading to
greater efficiencies, including lower fixed costs per unit. We plan to achieve
gross margin improvements as we increase sales of our higher margin products,
increase volume, and continue implementing cost reductions. Our software gross
margins in each period were comparable.
Research and development. Research and development expenses increased to
$35.9 million for the nine months ended September 30, 1999 from $32.5 million
for the nine months ended September, 1998. The increase was primarily due to an
increase in research and development personnel. We believe that continued
investment in research and development is critical to attaining our strategic
product development and cost reduction objectives and, as a result, expect these
expenses to increase in absolute dollars.
Selling, general and administrative. Selling, general and administrative
expenses increased to $22.2 million for the nine months ended September 30, 1999
from $19.9 million for the nine months ended September 30, 1998. Approximately
$3.9 million of compensation expense relating to the Telenetworks acquisition is
included in the amount for 1998. There was no Telenetworks compensation expense
during the nine months ended September 30, 1999. This decrease in compensation
expense was offset by a substantial increase in selling, general and
administrative expenses in the 1999 period due to the increase in scale of our
operations including additional personnel in the sales and marketing
organizations, promotional expenses and other administrative expenses. We expect
selling, general and administrative expenses to increase as we continue to add
personnel and incur additional costs as we increase the scale of our operations.
Litigation. Litigation expenses of $5.0 million for the nine months ended
September 30, 1998 related to the settlement cost of litigation with BroadBand
Technologies. For a detailed discussion of this litigation matter, see
"Business -- Litigation."
Other income (expense), net. Other income (expense) consists primarily of
interest income. The decrease in interest income to $0.9 million for the nine
months ended September 30, 1999 from $2.1 million for the nine months ended
September 30, 1998 was due to a reduced level of cash and cash equivalents
during the 1999 period.
Interest expense. Interest expense increased to $5.2 million for the nine
months ended September 30, 1999, from $4.4 million for the nine months ended
September 30, 1998. The interest expense in these periods is primarily
attributable to interest on a $75.0 million note and accrued interest thereon
payable to General Instrument that General Instrument will contribute to us in
exchange for shares of our common stock immediately prior to completion of this
offering as part of our recapitalization.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenues. Total revenues increased to $43.8 million in 1998 from $8.3
million in 1997. We recorded our first sale in September 1997 and, therefore,
the operating results for 1997 reflect only four months of revenues. We did not
ship product in 1996 and, accordingly, did not recognize any revenues in 1996.
30
<PAGE> 35
Total revenues for the year ended December 31, 1998 included $39.2 million
of equipment sales, compared to $6.0 million of equipment sales for the year
ended December 31, 1997. U S WEST accounted for $29.9 million and Bell Atlantic
accounted for $8.6 million of equipment revenue for the year ended December 31,
1998. U S WEST accounted for $1.4 million and NYNEX (now part of Bell Atlantic)
accounted for $4.6 million of equipment revenue for the year ended December 31,
1997. We expect to continue to derive substantially all of our revenues from
sales of equipment to the regional Bell operating companies and local and
independent telephone companies for the foreseeable future.
In 1998 and 1997, software revenue consisted of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
For the year ended December 31, 1998, software revenue was $4.6 million and for
the year ended December 31, 1997, software revenue was $2.3 million. Software
revenue for 1997 was comprised of four months of revenue from Telenetworks.
Cost of Revenues. Total cost of revenues increased to $43.4 million for the
year ended December 31, 1998 from $11.3 million for the year ended December 31,
1997 and related substantially to cost of equipment. The increase in cost of
revenues in 1998 and 1997 was primarily the result of materials cost and costs
associated with increasing production at our contract manufacturers as a result
of increased equipment sales volume.
Research and development. Research and development expenses increased to
$47.1 million for the year ended December 31, 1998, from $37.1 million for the
year ended December 31, 1997 and $17.1 million for the year ended December 31,
1996. The increase in 1998 was primarily the result of increased personnel,
increased component purchases and spending on third-party testing, development
of the Residential Gateway product, and the completion of our products for voice
applications. The increase in 1997 was primarily due to increased personnel in
research and development, the corresponding procurement of components and test
fixtures, increased system testing and the commencement of development of video
products.
Selling, general and administrative. Selling, general and administrative
expenses were $26.2 million for the year ended December 31, 1998, compared to
$26.4 million for the year ended December 31, 1997 and $15.9 million for the
year ended December 31, 1996. The decrease in 1998 reflects the reduction in
legal expenses associated with the DSC Communications litigation that was
partially offset by costs associated with the increased selling efforts
resulting from the commencement of the commercial sales of our products in
September 1997, as well as expansion into new markets. These costs include
recruiting, travel, tradeshows, print advertising, public relations and other
promotional expenses. The increase in 1997 was primarily due to higher costs
associated with increased personnel in the sales and marketing organizations as
well as higher legal expenses due to the litigation with DSC Communications.
Litigation. Litigation expense of $5.0 million for the year ended December
31, 1998 related to the settlement cost of litigation with BroadBand
Technologies. In 1996, a final judgment was entered in favor of DSC
Communications and DSC Technologies, and an expense for the expected final award
of $141.0 million was recorded in 1996. The $141.0 million judgment was paid in
1997. For a detailed discussion of these litigation matters, see
"Business -- Litigation."
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Other income, net. Other income of $2.2 million for the year ended December
31, 1998 was due to interest income on cash and cash equivalents. Other income,
net was not significant in 1997 or 1996.
Interest expense. Interest expense was $6.0 million in 1998 due almost
entirely to interest on the $75.0 million note and accrued interest thereon
payable to General Instrument. There was no interest expense in 1997 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash contributions and
borrowings from General Instrument. General Instrument will not provide us
additional funds after this offering.
Net cash used in operating activities was $44.4 million for the nine months
ended September 30, 1999 and $63.0 million for the nine months ended September
30, 1998. In each case, the use of cash in operating activities was primarily
due to our net losses, partially offset by an increase of $12.7 million in
deferred revenues in the 1999 period. Net cash used in operating activities of
$66.6 million in 1998 was primarily due to a net loss of $81.7 million,
partially offset by non-cash depreciation charges. Net cash used in operating
activities of $208.5 million in 1997 was due to a net loss of $66.4 million,
payments of litigation expenses of $141.0 million and an increase in
inventories. Net cash used in operating activities of $33.0 million in 1996 was
primarily due to a net loss of $173.9 million offset by $141.0 million of
accrued litigation expenses.
Net cash used in investing activities of $6.1 million for the nine months
ended September 30, 1999, $6.9 million for the nine months ended September 30,
1998, $9.3 million for the year ended December 31, 1998, $9.8 million for the
year ended December 31, 1997 and $9.3 million for the year ended December 31,
1996 was primarily attributable to capital expenditures to support our
engineering and testing activities. As we increase the scope of our operations,
we expect that our capital expenditures will increase.
Net cash provided by financing activities of $34.0 million in the nine
months ended September 30, 1999 and $89.0 million in the nine months ended
September 30, 1998 consisted of capital contributions from the partners and a
$75.0 million loan from General Instrument in the 1998 period. Net cash provided
by financing activities of $104.6 million for the year ended December 31, 1998
consisted of a $75.0 million loan from General Instrument, a $19.6 million
capital contribution from General Instrument and a $10.0 million capital
contribution from the general partner. Net cash provided by financing activities
of $218.7 million for the year ended December 31, 1997 consisted of
contributions from General Instrument. Net cash provided by financing activities
of $41.7 million for the year ended December 31, 1996 was due to borrowings from
General Instrument.
At September 30, 1999, we had $12.5 million of cash and cash equivalents
and $17.4 million of working capital. However, we anticipate that we will
increase our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. We may establish
sales offices and lease additional space, which will require us to commit to
additional lease obligations, purchase equipment and install leasehold
improvements.
We have commitments with suppliers to purchase a total of approximately
$24.0 million of components through 2002.
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In January 1998, we borrowed $75.0 million from General Instrument pursuant
to an 8% note due in 2005. Deferred interest payments bear interest at 10%. At
September 30, 1999, we owed General Instrument $86.0 million under the note,
including accrued interest of $11.0 million. This note, including accrued
interest thereon, will be contributed to us by General Instrument in exchange
for approximately 4,819,593 shares of common stock immediately prior to the
completion of this offering as part of our recapitalization. This number of
shares is based upon $86.8 million owed at completion of the recapitalization
and an assumed initial offering price of $18.00 per share. As a result of the
recapitalization, we do not expect to currently have material debt service
requirements.
We expect to experience significant growth in our operating expenses for
the foreseeable future. As a result, we anticipate that operating expenses, as
well as planned capital expenditures, will constitute a material use of our cash
resources. In addition, we may use cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. Our long
term operating and capital lease obligations are generally less than $3.0
million per year and are described in notes 11 and 12 to the financial
statements of Next Level Communications L.P. Other than capital lease
commitments, we have no material commitments for capital expenditures. As we
increase the scope of our operations, we expect that our capital expenditures
will increase. We believe that our cash on hand and the net proceeds from the
sale of the common stock in this offering will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
However, it may still be necessary to obtain additional equity or debt financing
either during or after the next 12 months if we are not able to generate
sufficient cash from operating activities to meet our capital expenditure and
working capital needs. In the event additional financing is required, we may not
be able to raise it on acceptable terms, or at all.
YEAR 2000
The year 2000 issue has arisen as a result of computer programs being
written using two digits rather that four to define the applicable year. Some
information technology systems and their associated software, and other
equipment that uses programmable logic chips to control aspects of their
operation, commonly referred to as embedded chip equipment, may recognize "00"
as a year other than the year 2000. Some information technology systems and
embedded chip equipment used by us and by third parties who do business with us
contain two-digit programming to define a year. The year 2000 issue could
result, for us and for others, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. We
believe our products are year 2000 compliant.
Readiness for Year 2000
We are addressing year 2000 issues relating to:
- embedded chip equipment sold by us;
- information technology systems and embedded chip equipment used by us;
- third parties who do business with us that may not be prepared for the
year 2000; and
- contingency planning.
We use a variety of information technology systems, internally developed
and third-party provided software and embedded chip equipment in our products.
For these
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information technology systems, software and embedded chip equipment, we have
divided our year 2000 efforts into four phases:
(1) identification and inventorying of information technology systems and
embedded chip equipment with potential year 2000 problems;
(2) evaluation of scope of year 2000 issues for, and assigning priorities
to, each item based on its importance to our operations;
(3) remediation of year 2000 issues in accordance with assigned priorities,
by correction, upgrade, replacement or retirement; and
(4) testing for and validation of year 2000 compliance on an application
and enterprise wide basis.
We have categorized as "mission critical" those information technology
systems and embedded chip equipment whose failure would cause cessation of
operations or significant detrimental financial impact on us. Phase (1) and (2)
are complete across all "mission critical" business functions and locations. All
mission critical information technology systems and embedded chip equipment are
currently in phase (3) or (4) and we expect these phases to be completed by
November 1999. We will conduct a comprehensive program of integration testing of
internal systems to ensure that all systems still work together properly and
without year 2000 problems.
Our operations are also dependent on the year 2000 readiness of third
parties, including our contract manufacturers, that we do business with. In
particular, we are in the process of configuring our information technology
systems to interact with commercial electronic transaction processing systems of
our customers. In addition, we are dependent on third-party suppliers of
infrastructure elements such as telecommunications services, electric power,
water and banking facilities.
We have identified and initiated formal communications with key third
parties, including our contract manufacturers, to determine the extent to which
we will be vulnerable to such parties' failure to resolve their own year 2000
issues. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from these vendors that their
systems are year 2000 compliant. As a follow-up, we plan to determine whether
our customers and suppliers are taking appropriate steps to achieve year 2000
readiness and ensure continued functioning in accordance with our business
needs. We are assessing our risks with respect to failure by third parities to
be year 2000 compliant and intend to seek to mitigate those risks. We are also
developing contingency plans, discussed below, to address issues related to
third parties we determine are not making sufficient progress toward becoming
year 2000 compliant.
Costs
Due to the lack of older systems subject to remediation, we expect that our
overall cost of achieving year 2000 compliance will not be material. The total
cost through September 30, 1999 of our year 2000 activities was approximately
$100,000 and the cost of our remaining year 2000 activities is estimated to be
approximately $64,000. Our estimate of the cost of achieving year 2000
compliance and the date by which year 2000 compliance will be achieved are based
on our best estimates, which were derived using numerous assumptions about
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no assurance
that
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these estimates will be achieved and actual results could differ materially from
these estimates. Specific facts that might cause such material differences
include the availability and cost of personnel trained in year 2000 remediation
work, the ability to locate and correct all relevant computer codes, the success
achieved by our customers and suppliers in reaching year 2000 readiness, the
timely availability of necessary replacement items and similar uncertainties.
Some commentators have predicted significant litigation regarding year 2000
compliance issues, and we are aware of these lawsuits against other vendors.
Because of the unprecedented nature of this litigation, it is uncertain whether
or to what extent we may be affected by it. If we are subject to claims by our
customers asserting liability, including liability for breach of warranties
related to the failure of our products to function properly, the cost of this
litigation and any settlement or judgment costs could be material.
Contingency Plans
We presently believe that the most likely worst-case year 2000 scenarios
would relate to the possible failure in one or more geographic regions of
third-party systems over which we have no control and for which we have no ready
substitute, such as, but not limited to, power and telecommunications services.
We have in place a business resumption plan that addresses recovery from various
kinds of disasters, including recovery from significant interruptions to data
flows and distribution capabilities. We are using that plan as a starting point
for developing specific year 2000 contingency plans, which will emphasize
locating alternate sources of supply, methods of distribution and ways of
processing information.
We anticipate this contingency planning will prepare our business for
disruptions but will not protect us fully from commercial impact. We are
currently initiating the following efforts:
- Prioritizing all hardware, software and services across the enterprise.
- Developing contingency plans for top priority items.
There can be no assurance that we will be able to complete our contingency
planning before January 1, 2000.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Statement of Financial Accounting Standards No. 133, as
amended by Statement of Financial Accounting Standards No. 137, will be
effective for our fiscal year ending December 31, 2001. Management is currently
evaluating what impact, if any, Statement of Financial Accounting Standards No.
133 may have on our financial statements.
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BUSINESS
OVERVIEW
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Service providers who deploy our
equipment can either offer voice, data and video services in a single product
offering or offer each service separately depending on subscriber demand and the
service provider's objectives. We believe that by installing our equipment,
telephone companies and other emerging communications service providers will be
able to capitalize on, and compete effectively in, the emerging market for
integrated voice, data and video services. Our products consist of equipment
located at the telephone company's central office, in the field and at the
subscriber's home or business.
We commenced operations in July 1994 and recorded our first sale in
September 1997. From inception through September 30, 1999, approximately 82% of
our revenues were from sales to U S WEST and Bell Atlantic. We incurred a net
loss of $59.9 million for the nine months ended September 30, 1999 and $81.7
million for the year ended December 31, 1998.
INDUSTRY BACKGROUND
Increasing Demand for Voice, Data and Video Services
In recent years, the volume of voice, data and video traffic across
communications networks has grown dramatically due to:
- the increasing use of the Internet as an essential communications and
transaction medium;
- the growth in remote access by telecommuters; and
- the increasingly diverse distribution sources for high quality digital
video.
According to International Data Corporation, the number of Internet users
worldwide reached approximately 142 million in 1998 and is forecasted to grow to
approximately 502 million by the end of 2003, while the number of homes
worldwide with remote access connections is expected to increase from 81 million
in 1999 to 157 million in 2003. In addition, in a June 1999 report, Paul Kagan
Associates estimates that the number of U.S. cable television subscribers is
expected to increase from 67 million in 1999 to 71 million in 2003, while the
number of digital set-top box units is expected to increase from 5 million in
1999 to 29 million in 2003. The growth in traffic and increasing demand for
high-speed data and video services has forced communications companies to find
ways to deliver these services more cost effectively.
Increased Competition for Communications Services
The increasing demand for voice, data and video services combined with
deregulation of the communications industry has created new opportunities and
challenges for communications service providers. As service providers seek to
capitalize on these opportunities to deliver a broader set of services, local
connections to residential and business subscribers have become an increasingly
valuable asset. The two most prevalent
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types of local connections in North America are copper wire and cable. Service
providers that use copper wire are facing increasing competitive pressures from
providers using cable. Recently, certain service providers have announced plans
to provide voice, data and video services over cable. For example, AT&T recently
acquired TCI and entered into an agreement to acquire Media One. AT&T then
announced plans to accelerate the upgrade of TCI's cable systems to offer
packaged services. AT&T plans to provide not only data and video but also voice
over its own cable systems and over other cable systems through partnerships
with other cable service providers. These packaged services will give
residential and business subscribers the ability to purchase all communications
services from a single provider. This could provide more favorable pricing and a
single point of contact for bill payment and customer service. If these cable
providers can successfully package and market these services, they will compete
directly with the services offered by telephone companies.
Although telephone companies have the opportunity to sell packaged
broadband services to their large number of voice customers, they have been
constrained by limitations in their existing networks. In particular, the
connection between the subscriber and the telephone company's central office,
referred to as the "last mile," is the slowest portion of the communications
infrastructure and often acts as a bottleneck in the delivery of high-speed data
and video traffic. As overall demand for services continues to rise, these
limitations are becoming increasingly apparent and are resulting in lost revenue
for service providers and inadequate network service for their customers.
Evolution of the "Last Mile"
Historically, the telephone company infrastructure consisted primarily of
twisted pairs of copper wires that spanned the distance from their customers'
homes or businesses to a central office where they connected to a voice switch.
This infrastructure was originally designed to transmit analog voice traffic.
Over the last several years, telephone companies have installed equipment in
some locations between the telephone company's central office and clusters of
end-users in an effort to make their networks more cost efficient. This
equipment has enabled telephone companies to convert their analog traffic into
more efficient digital data streams and extend higher capacity fiber optic cable
further into their networks. Although these systems have often resulted in more
cost efficient voice communications, they are generally not designed to deliver
data and video services to individuals and businesses.
To take advantage of their existing copper wire infrastructure and respond
to the increased demand for data services, some telephone companies have
recently begun to create data networks separate from their voice networks by
connecting additional equipment to their central office equipment. To date, most
of this equipment has been deployed to provide Internet access to individuals
and businesses. Although this equipment typically provides higher speed than the
earlier systems, it is generally not designed to provide high quality video
services. Thus, telephone companies seeking to offer a variety of services to
their customers often must do so from multiple and distinct networks. This is
because each individual system is typically unable to offer voice, data and
video services in a single package.
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Traditional telephone companies are seeking solutions that enable them to
continue to compete in their existing market for voice services as well as in
the emerging data and video markets because of:
- the increasing demand for high-speed data and video services;
- the greater competition among service providers; and
- the limitations of existing copper wire networks.
To match their capital expenditures to subscriber demand for services, many
telephone companies are seeking flexible solutions with which they can add new
services over time. Despite the desire by many telephone companies to simplify
and reduce costs, companies seeking to deploy multiple services have generally
needed to deploy separate networks from multiple vendors. This strategy is
costly and increases the complexity of installation, operation and maintenance.
OUR SOLUTION
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Our equipment is designed to
provide the following key competitive advantages and benefits:
Flexible, Integrated Products. Our products are designed with the
flexibility to allow our customers to deliver voice, data and video services in
a single packaged offering or to offer them individually. This flexibility
allows telephone companies to immediately serve the varying needs of their
diverse end-user base, including residential, corporate and telecommuter
customers. As a result, telephone companies can generate significant incremental
revenue from their existing networks by using our system. By offering the
flexibility inherent in an integrated system, our products enable telephone
companies to effectively time their network equipment expenditures and rapidly
introduce new services as demand warrants.
Cost Effective Product Deployment. Our product design reduces the cost and
complexity often associated with deploying multiple services to end-users.
Because telephone companies often use separate equipment for each communications
service, they require multiple equipment purchases, installations, training
procedures, maintenance procedures and network management packages. In contrast,
our products deliver all services from a single system. By integrating many
traditionally separate functions, our products allow telephone companies to
incrementally add services by simply installing new modules into our existing
equipment, rather than purchasing entirely new infrastructure equipment.
Additionally, our products installed in the house or office deliver video and
data services from a single networked set-top box, thus eliminating the need for
set-top boxes or modems for different services or separately located TVs and
PCs. We believe our products provide cost savings, reduce trouble calls and ease
installation compared to other equipment that often consists of separate
systems, each of which corresponds to one service and which may not operate
effectively together.
Complete Solution For Delivery of Voice, Data and Video. By supplying
equipment for the telephone company central office, the field and the
subscriber's home or office, we offer a single integrated system for the
delivery of voice, data and video services. With our
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products, telephone companies initially deploying voice service can subsequently
activate data and/or video service with a simple addition and installation of
equipment at the subscriber's home or office. We believe the flexibility found
in our products cannot currently be accomplished by attempting to integrate
multiple systems from multiple vendors.
Reliable and Compatible Technology. Because our products provide multiple
services, including voice, they are engineered to comply with rigorous industry
standards for reliability and safety. Our products are also designed to operate
with existing telephone company switches and billing systems, thereby minimizing
the cost of using our products.
Security. We believe that our products produce greater security compared to
cable systems that are based on shared network design in which data is broadcast
to all users simultaneously. Security has always been important to individuals
and businesses in voice transmission and is becoming increasingly important as
e-commerce applications and video-on-demand services become more prevalent.
OUR STRATEGY
Our objective is to be the leading supplier of products that enable
telephone companies and other emerging communication service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper telephone wire infrastructure. Key elements of this strategy
include the following:
Increase Penetration of Existing Customer Base. As the needs of our
customers evolve, we intend to:
- use our success achieved with key customers to increase sales;
- extend our product offerings; and
- maintain a high level of customer support.
To date, telephone companies have deployed our products to offer a subset
of services in a limited number of locations. We believe there is a significant
opportunity to increase our sales as customers expand to more locations within
their regions and/or as they offer more services at each location. In addition,
we believe our existing agreements with some of our customers provide us with a
competitive advantage as a preferred vendor if and when these customers develop
their next generation of broadband networks. We intend to leverage this
advantage to be the supplier of complete communications solutions to our
customers. For example, we recently expanded our relationship with U S WEST. In
the past, our relationship with U S WEST was confined to providing equipment to
offer voice, data and video services solely in the Phoenix, Arizona service
area. We recently entered into a new agreement with U S WEST to provide our
products for voice applications in six of the 14 states in U S WEST's territory.
Expand Customer Base to Other Communications Providers. We believe our
products' price and performance advantages offer communications service
providers using copper telephone wires a cost-effective solution to upgrade
their networks to offer voice, data and video services. Consequently, we have
recently aggressively expanded our product marketing beyond regional Bell
operating companies to other communications providers using copper wire
infrastructure, including local and independent telephone companies. These
companies have often been quick to embrace and adopt new technologies. Although
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many international telephone markets are still in the early stages of deploying
high-speed data and video services, we intend to market our products to targeted
international telephone companies. Accordingly, we are expanding our sales force
to capitalize on these new opportunities.
Provide Competitive Advantages to our Customers. Our system offers
flexibility to allow delivery of voice, data, and video traffic either in a
packaged or separate product offerings in any combination chosen by a service
provider. By supporting incremental deployment of services, rather than upfront
network buildouts, we believe our system provides telephone companies a more
effective means of managing system development and expansion by enabling these
companies to better match their capital expenditures to subscriber demand for
services. Additionally, our products offer a complete solution including our
set-top box, the Residential Gateway, at the subscriber's home or business. Our
set top box provides telephone companies and their customers with an integrated
solution that is more cost effective than deploying the separate modems or
set-tops often otherwise necessary to provide multiple services. As demand for
high-speed data and video services increases, we intend to continue focusing on
providing our customers products which allow them to cost-effectively deliver
multiple services.
Maintain and Extend Technology Leadership. We believe that we are currently
a technology leader in engineering integrated voice, data and video solutions.
We intend to maintain and extend our technology leadership through continued
research and development of integrated systems for voice, data and video
transmission over a variety of fiber, copper, satellite and various mixes of
these and other networks. Accordingly, we plan several new products and
enhancements, including integration of our customer premises equipment with
Direct Broadcast Satellite and other types of networks to deliver increased cost
savings, additional functionality and more flexible delivery capability to the
telephone companies and their customers.
Outsource Manufacturing. Our manufacturing strategy focuses on the use of
one or more contract manufacturers for the assembling, testing, packaging,
warehousing and shipping of products. Currently, we use two large contract
manufacturers: SCI Systems and CMC Industries. Using contract manufacturers
allows us to:
- achieve economies of scale in purchasing;
- respond rapidly to large customer orders;
- reduce costly investment in manufacturing capital; and
- reduce inventory warehousing.
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PRODUCTS
Our products include equipment located at a telephone company's central
office, in the field and at a subscriber's home or business. Key elements of our
solution, which are described below, are the Broadband Digital Terminal,
Universal Service Access Multiplexer, Broadband Network Unit, Residential
Gateway, ETHERset, N(3) NIC, N(3) View-1 Element Management System and N(3)
View-2 Service Manager. An application of our products is demonstrated in the
following diagram:
[This disgram depicts an application of our products from a WAN, to a telephone
company central office, to the field and to a customer's home or business.]
<TABLE>
<S> <C>
BNU............................... Broadband Network Unit
ETHERset.......................... High speed data product
RES. GTWY......................... Residential Gateway
USAM.............................. Universal Service Access Multiplexer
WAN............................... Wide Area Network
</TABLE>
Broadband Digital Terminal. The Broadband Digital Terminal is the central
element of our product suite, providing centralized access to both broadband and
narrowband networks and related voice, data and video services. The Broadband
Digital Terminal is typically located in a telephone company's central office,
or at a remote cabinet, building basement or hut where it connects with central
office equipment including voice and data switches and billing systems. On the
subscriber side, the Broadband Digital Terminal provides high-speed connections
to remote Universal Service Access Multiplexers or Broadband Network Units that
can support up to a maximum of 2,048 data or video subscribers, up to a maximum
of 6,144 telephone subscribers or combinations thereof. The Broadband Digital
Terminal has the capacity for broadband applications such as video-on-demand and
high definition television. Also, because the Broadband Digital Terminal
supports different remote terminals, changes to network layouts or transmission
media (copper or fiber) do not require different Broadband Digital Terminals.
Universal Service Access Multiplexer. The Universal Service Access
Multiplexer is designed to use existing copper wire to connect to a customer's
home or office and can be connected with fiber optic cable to the Broadband
Digital Terminal. Each Universal
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Service Access Multiplexer can support up to 32 video and/or data subscribers or
up to 96 voice subscribers. By using modular components, a single Universal
Service Access Multiplexer enables multiple voice, data and video services. The
Universal Service Access Multiplexer can be deployed in the telephone company's
central office or remotely. Because the Universal Service Access Multiplexer is
flexible in terms of where it can be located in the network, as well as the
services it can support, its use can reduce both the costs and the complexity of
deploying new high-speed data and video services.
Broadband Network Unit. The Broadband Network Unit is used with
installations where fiber optic cable is deployed up to a location relatively
close to the customer's home or office. The Broadband Network Unit supports
voice, data and video services, and can be mounted on a telephone pole, a
pedestal or a wall. The Broadband Network Unit provides voice, high-speed data
and video service for clusters of up to 24 video and/or data and up to 36 voice
subscribers. Our Broadband Network Unit is particularly suited to situations
where a new network is being built, or where existing copper wire is being
upgraded by the installation of fiber optic cable as the transmission medium for
residences or larger apartment buildings or offices. The advanced design and
environmentally secure housing of the Broadband Network Unit results in low
in-field trouble calls.
Residential Gateway. Our Residential Gateway product is a single set-top
box that delivers integrated data and video services. One Residential Gateway
enables multiple televisions and personal computers to be served from the same
access line into the customer's home or office. Traditionally, the high cost of
customer home or office equipment for broadband services has been a limiting
factor in the deployment of broadband services to multiple televisions or
personal computers. Historically, a customer would have to obtain multiple
modems or set-top boxes to support services to multiple televisions or personal
computers. In contrast, our Residential Gateway simultaneously provides three
independent high quality video streams that can be distributed throughout a home
or office using standard coaxial cable. The primary video stream is also
available in common video and stereo surround sound formats. The Residential
Gateway also supports enhanced telephone services, such as an indicator on the
television that a message is waiting on the customer's answering machine or
service as well as on-screen caller ID. The data port in our Residential Gateway
supports high-speed connectivity to the Internet or remote work-at-home access.
ETHERset. Our ETHERset is a data-only, desktop device that provides a
powerful, low-cost solution for delivering high-speed Internet or data services
to subscribers in residences, small businesses, branch offices and the like.
Individual or multiple personal computers can be connected to a single ETHERset.
N(3) NIC. The N(3) NIC is a card, designed to fit into a personal computer,
that provides the same functionality as our ETHERset.
Element Management Systems. Our products can be managed remotely by our
N(3) View-1 Element Management System and our N(3) View-2 Service Manager. The
View-1 Element Management System enables service providers to manage our
equipment and their other systems and products. The View-2 Service Manager
enables service providers to manage delivery of voice, data and video services
to their customers.
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CUSTOMERS
We market and sell our products through our direct sales force to service
providers that seek to deliver the next generation of broadband services. From
inception through September 30, 1999, approximately 82% of our sales were to U S
WEST and Bell Atlantic. We recently initiated customer relationships in the
local, independent and international telephone company markets. As of September
30, 1999, we had 12 customers who have purchased at least $100,000 of our
products. The following describes our relationship with some of these customers.
U S WEST: In August 1997, we entered into an agreement with U S WEST
through which U S WEST may purchase, without obligation to do so, up to 450,000
Residential Gateways and associated central office and field equipment, in eight
of the 14 states in which U S WEST currently operates over a five year period.
We recorded our first sale to U S WEST in September 1997 for deployment of video
and data service to U S WEST's customers in Phoenix, Arizona. In October 1998, U
S WEST selected our product to provide voice applications in six of the 14
states that U S WEST serves. Sales to U S WEST represented 68% of our revenues
in fiscal 1998 and 61% in the nine months ended September 30, 1999.
Bell Atlantic: In October 1996, we entered into an agreement with NYNEX
(now part of Bell Atlantic) through which Bell Atlantic may purchase, without
obligation to do so, equipment for up to 5,000,000 lines, consisting of
Broadband Network Units and associated equipment, throughout its service area
over a fifteen-year period. The primary application for these products is
rehabilitation of Bell Atlantic's existing network equipment from copper to
fiber. We recorded our first sale to Bell Atlantic in September 1997 for
deployment in the Boston area. Bell Atlantic is currently using our system to
serve customers in the New York City and Boston areas. Sales to Bell Atlantic
represented 20% of our revenues in fiscal 1998 and 14% in the nine months ended
September 30, 1999.
GTE: In April 1998, we entered into an agreement with GTE through which GTE
may purchase, without obligation to do so, our Residential Gateways and
associated central office and field equipment. Through a development agreement,
GTE has commenced a trial deployment of our products for video applications to
customers in the Clearwater, Florida area.
Hutchinson Telephone: In February 1999, we received our first order from an
independent telephone company, Hutchinson Telephone, for deployment of our
equipment. Hutchinson has announced that it intends to deploy our Universal
Services Access Multiplexers and Broadband Digital Terminals for voice,
high-speed data and other services.
Paul Bunyan Rural Telephone: In April 1999, Paul Bunyan Rural Telephone, an
independent telephone company based in Bemidji, Minnesota, began deploying our
equipment for voice applications in its service area.
Chibardun Telephone: In April 1999, Chibardun Telephone, an independent
telephone company based in Dallas, Wisconsin, began deploying our equipment for
voice and data applications in its service area.
Northstar Telephone: In June 1999, Northstar Telephone, a local telephone
company based in Big Lake, Minnesota, began deploying our equipment for voice,
data and video applications in its service area.
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TECHNOLOGY
We believe the following key technologies have been instrumental in our
ability to provide what we believe is the world's only integrated, complete
solution for the delivery of integrated voice, data and video services over the
existing telephone copper wires.
Advanced Application Specific Circuits Architecture. Applications Specific
Circuits are custom-designed silicon circuits that are optimized for a specific
task or set of tasks. These circuits are critical because they are
performance-optimized to minimize gate counts, packaging size, power dissipation
and cost. In addition, one of these circuits may be the only way to provide a
new or novel function that is not available in an off-the-shelf circuit. Our
engineers have substantial experience in the design of these circuits and have
developed a portfolio of over 15 of these circuits, which enables flexible
delivery of voice, data and video from a single system. We will continue to
pursue additional service and system level Application Specific Circuits as a
mechanism for protecting our intellectual property and to achieve ongoing cost
reductions.
System Design and Integration Expertise. We employ a team of experienced
system design and integration engineers in our research and development group.
These individuals provide research, design and development resources and ensure
that our products are able to be integrated by our customers. System integration
by our customers is required on our-specific access products, equipment at the
customers home or business, and management systems, as well as the integration
of our products into our customers' networks. System integration expertise is
critical to the successful deployment of new advanced full service
telecommunications systems and services by our customers.
Wavelength Division Multiplexing Technology. Our system uses a technology
known as wavelength division multiplexing. This technology allows multiple
optical signals to be carried on the same optical fiber. In particular, this
technology is used to communicate two-way voice, data and video over a single
optical fiber. This enables our customers to save fiber costs and increase
bandwidth.
Software and Protocol Stacks. Most of the system software in our products
has been developed internally using modern design principles and processes.
Where appropriate, various third-party software packages have been integrated
into the access system. Some examples include the real time operating system,
various protocol stack software packages.
Standards-based Architecture. We support multiple industry standards to
minimize interoperability issues and leverage industry hardware and software
capabilities, and improve time to market. On the customer side of the network,
we are working with industry standards for asynchronous digital subscriber line
and very high speed digital subscriber line standards to support various
equipment at the customer's home or business.
RESEARCH AND DEVELOPMENT
As of September 30, 1999, we had 215 full time employees and 15 full time
contractors engaged in research and development. We believe that our future
success depends on our ability:
- to adapt to the rapidly changing telecommunications environment;
- to maintain our expertise in core technologies; and
- to continue meeting and anticipating the evolving needs of telephone
companies.
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We continually review and evaluate technological changes affecting the
telecommunications market and invest substantially in applications-based
research and development. We are committed to an ongoing program of new product
development that combines internal development efforts with strategic
relationships and licensing or marketing arrangements relating to new products
and technologies from outside sources.
We have focused our research and development expenditures for the past
several years on creating a complete solution for the delivery of voice, data
and video services using the existing infrastructure of telephone companies. We
have also concentrated on developing the associated customer premises equipment,
including our Residential Gateway, and on developing our N(3) View-1 Element
Management Systems. For the years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1999, research and development expenses were
$17.1 million, $37.1 million, $47.1 million and $35.9 million. We believe that
our extensive experience in designing and implementing high-quality network
components has enabled us to develop integrated systems solutions. We seek to
constantly improve our existing products, including developing additional home
and office products and higher speed interfaces for our products.
SALES AND MARKETING
We primarily market and sell our products through a direct sales force
located in North America that consisted of 34 people as of September 30, 1999.
To date, sales activities have been focused primarily on the regional Bell
operating companies and GTE. More recently, we have focused on emerging
opportunities within the local, independent and international telephone markets.
We are currently expanding our sales organization to focus on these emerging
customer opportunities. As of September 30, 1999, 12 sales people were focused
solely on sales to local telephone companies. Because of the potential
importance of our products to our customers' networks, we focus our selling
efforts at many levels within each customer's organization.
We have a variety of marketing programs and initiatives to support the sale
and distribution of our products. As of September 30, 1999, we had 18 full time
employees engaged in marketing activities focusing on reaching technical experts
within telephone companies and creating product awareness and credibility for
our systems among telephone companies. A key factor to building brand awareness
for our products is promoting the success of our customers deploying our
products. We seek to educate telephone companies regarding the benefits of
deploying broadband-ready equipment across a diverse subscriber base. We also
build our brand name through continued publicity and referral efforts in both
media and industry-centered activities, including editorial presence in various
trade magazines, press releases, public speaking opportunities, national and
regional trade show participation, advertising, Internet-based communication and
promotion, media sponsorships and participation in industry standards
activities.
MANUFACTURING
We seek to deliver our products on time and defect-free by capitalizing on
the experience and expertise of strategic contract manufacturers. Based on their
quality assurance and strengths in the volume manufacture of our products, we
have established our primary contract manufacturing relationships with SCI
Systems and CMC Industries. SCI Systems is responsible for manufacturing a
majority of our circuit board plug-in assemblies. CMC Industries, which was
recently acquired by ACT Manufacturing, is
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responsible for manufacturing our Residential Gateway product. Using contract
manufacturers allows us to reduce the costly investment in manufacturing
capital, achieve economies of scale in purchasing selected components and reduce
inventory warehousing.
We maintain only a limited in-house manufacturing capability for final
assembly, testing and integration of our products. Our internal manufacturing
expertise is focused on product design for testability, design for
manufacturability and the transfer of products from development to
manufacturing. Each contract manufacturer typically assembles an account team of
personnel representing all the essential functions to deliver products from
prototype through volume production. This team works with our design, test, and
manufacturing engineers, and our quality, materials, logistics and program
management teams. All of our major contract manufacturers are certified under
international quality standards. Although our contract manufacturers manage
material procurement for the majority of the components that are incorporated in
our products, we continue to manage the evaluation and selection of certain key
components.
Our engineering team designs circuits and tests these designs using
computer simulations. When the fundamental design is stable, our outsourced
manufacturers make the circuits for testing. Upon completion of these tests,
vendors such as Oki Semiconductor, Broadcom, STMicroelectronics, VLSI (Philips)
and Motorola manufacture the circuit in volume. Warranty and repair support is
performed off-site by our contract manufacturers and by us at our Rohnert Park,
California facility.
CUSTOMER SERVICE AND SUPPORT
We believe that successful long-term relations with our customers require a
service organization committed to customer satisfaction. As of September 30,
1999, we had 16 technical support employees at our headquarters or in the field.
We also offer a five-day training course for all new customers prior to
receiving and installing a system. To date, revenues from customer service and
support have been immaterial.
We provide direct support by telephone or at a customer's office or other
location at any time. To monitor service activities, we maintain a customer call
tracking system. We also maintain a dial-up analog modem connection or an
Internet-based management interface to our equipment to assist with diagnostics.
COMPETITION
The market for providing equipment for local telecommunications networks is
extremely competitive. The principal competitive factors in this market include,
or are likely to include:
- product performance and price;
- features and reliability;
- technical support and service;
- relationships with phone companies and systems integrators;
- compliance with industry standards;
- compatibility with the products of other suppliers;
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- sales and distribution capabilities;
- strength of brand name;
- long-term cost of ownership to communications providers; and
- general industry and economic conditions.
Many of our current and potential competitors have longer operating histories
and greater name recognition and resources than we do. These competitors may
undertake more extensive marketing campaigns than we do. In addition, these
competitors may adopt more aggressive pricing policies than we do. Also, these
competitors may devote substantially more resources to developing new products
than we do. Many of our competitors have recently been acquired and now have
even greater resources to compete with us.
Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC Corporation (recently acquired by
GEC Marconi), Scientific Atlanta, Siemens and our largest stockholder, General
Instrument. Some of these competitors have existing relationships with our
current and prospective customers which could give them a competitive advantage
over us as a preferred provider. In addition, we anticipate that other large
companies, such as Matsushita Electric Industrial (which markets products under
the Panasonic brand name), Microsoft, Network Computer, Philips, Sony Corp.,
STMicroelectronics and Toshiba America, will likely introduce products that
compete with our Residential Gateway product in the future.
In addition, we are likely to face increasing competition from alternative
technologies. In particular, cable operators are currently deploying products
that deliver voice, high-speed data and video services over cable. Cable service
providers that offer these packaged services will give subscribers the
alternative of purchasing all communications services from a single service
provider. If these services are implemented successfully, they will compete
directly with the services offered by telephone companies using our products.
Consolidation in the telecommunications equipment industry may strengthen
our competitors' position in our market. Consolidation of our competitors has
occurred and we expect it to continue to occur in the foreseeable future. For
example, Alcatel acquired DSC Communications, Lucent recently acquired Ascend
Communications and GEC Marconi has recently acquired RELTEC Corporation.
Acquisitions such as these further strengthen our competitors' financial,
technical and marketing resources and provide access to regional Bell operating
company customers. As a result, these competitors are able to devote greater
resources to the development, promotion, sale and support of their products.
This consolidation may allow some of our competitors to penetrate new markets
that we have targeted, such as the domestic local, independent and international
telephone markets. If our competitors are successful in these markets, our
business, operating results and financial condition will be harmed.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets, confidentiality provisions and other contractual provisions to
protect our intellectual property. These measures afford only limited
protection. As of September 30, 1999, we had 11 issued U.S. patents and 23
pending U.S. patent applications and 96 pending international patent
applications.
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REGULATION OF CUSTOMERS
Although our products are not now directly subject to significant
regulation by the FCC or any other federal or state communications regulatory
agency, our customers and their networks, into which our products are
incorporated, are subject to government regulation. Accordingly, the effects of
regulation on our customers may, in turn, harm our business, operating results
and financial condition. FCC regulatory policies affecting either the
willingness or the ability of cable operators or telephone companies to offer
certain services, or the terms on which these companies offer the services and
conduct their businesses, may impede sales of our products.
Several FCC regulatory policies may affect the degree to which or way in
which incumbent local exchange carriers, which we refer to as incumbent
carriers, principally the regional Bell operating companies, can or choose to
make integrated voice, data and video offerings available. For example, the
Telecommunications Act of 1996 requires incumbent carriers to offer their
competitors cost-based access to certain parts of their networks to enable these
competitors to provide telecommunications services. In response to a decision by
the Supreme Court overturning the FCC's rule identifying the specific network
elements that incumbent carriers must offer to their competitors, the FCC
recently announced that, except in limited circumstances, it will not require
incumbent carriers to offer their competitors access to the facilities and
equipment used to provide high-speed data services. The full text of the FCC's
decision has not yet been released, and thus we cannot analyze completely how
this decision affects us. Also, judicial appeals of this recent FCC decision may
follow. The 1996 Telecommunications Act also requires incumbent carriers to
offer for resale, at wholesale rates, any telecommunications services that
incumbent carriers offer to customers. The FCC has determined that high-speed
data services are "telecommunications services," and thus incumbent carriers
must offer high-speed data services for resale by competitors.
The uncertainties caused by pending regulatory proceedings or appeals could
cause potential customers to delay purchasing decisions. In addition, the
outcomes of the various regulatory proceedings may cause potential customers to
not deploy all of the services for which our products are designed or to delay
the widespread introduction of one or more of these services. Certain members of
Congress have also expressed an interest in reducing the regulation of incumbent
carriers' provision of video and high-speed data services, but again there is no
way to predict whether this legislation will be adopted.
The FCC also has proposed allowing incumbent carriers to offer high-speed
data and video services through a structurally separate subsidiary that is not
subject to the unbundling and resale requirements. Our equipment is designed to
allow carriers to provide video, high-speed data, and digital voice on an
integrated basis. If incumbent carriers choose to offer video or data services
through a separate affiliate, incumbent carriers may prefer vendors whose
equipment does not provide for integration of service offerings. A separate
affiliate may choose to purchase less sophisticated equipment because it might
not be able to utilize fully our equipment's integrated features. We will not
know for certain the FCC's position on this issue until the full text of the
FCC's decision on the proposed separate affiliate requirement is released. In a
separate proceeding, the FCC recently released an order requiring two large
incumbent carriers, SBC and Ameritech, to provide high-speed data services
through a separate subsidiary as a condition to the FCC's approval of their
merger. Under the terms of the order, this condition terminates when the two
incumbent carriers satisfy certain requirements, but no sooner than 42 months
after the merger's closing.
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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 consideration, exemplary damages
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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.............. 45 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 November 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 November 1999 and has
served as the President of the Spencer Trask Media and Communications Group
since June 1999. From February 1997 to June 1999, Mr. Latchford has served as
Principal Vice President of Global Business Development for Bechtel Group, Inc.
Prior to that, Mr. Latchford was Vice President of Business Development and
Operations for Bell Atlantic International for the Asia Pacific Region from
February 1995 to February 1997 and Executive Director of Business Development
from March 1994 to February 1995. Mr. Latchford holds a BA in public
administration and government from Georgetown University.
John McCartney has been one of our directors since November 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. McCartney 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. McCartney 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.
DIRECTOR COMPENSATION
We pay our non-employee directors who are not employees of General
Instrument or its affiliates a retainer of $20,000 per year. In addition, we pay
them fees of $1,500 for each meeting of the board of directors or a board
committee that they attend. Non-employee directors also receive stock option
grants, as described under "Employee Stock Plans -- 1999 Equity Incentive Plan."
We anticipate that each of Ms. Forester, Mr. Latchford and Mr. McCartney will be
granted an option to purchase 20,000 shares prior to the closing of this
offering under our 1999 Stock Plan.
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EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth compensation
information for fiscal year 1998 paid by Next Level for services by our Chief
Executive Officer and our four other highest-paid executive officers whose total
salary and bonus for fiscal year 1998 exceeded $100,000 and whom we collectively
refer to as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------- ALL OTHER
------------------- SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (1)
- --------------------------- -------- -------- --------------------- ---------------
<S> <C> <C> <C> <C>
Peter W. Keeler........... $250,000 $125,000 -- $5,000
Chairman of the Board,
Chief Executive Officer
and
President
Thomas R. Eames........... 250,000 125,000 -- 5,000
Chief Technical Officer
T. Murat Uraz............. 148,993 79,698 33,334 4,368
Senior Vice President,
Chief Engineering Officer
Charles H. Seebock........ 166,910 50,074 8,334 5,000
Senior Vice President,
Chief Operating Officer
William A. Weeks.......... 146,300 43,890 8,334 4,268
Senior Vice President,
Chief Strategic Officer
</TABLE>
- -------------------------
(1) Represents our matching 401(k) contribution.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the named executive officers in fiscal year 1998. No stock
appreciation rights were granted to these individuals during that year.
Each of the option grants shown in the table was made under the Amended and
Restated 1997 Long-Term Incentive Plan. One-third of these options vests on each
of the first three anniversaries of the date of grant. The options vest in full
if we are subject to a change in control. Absent a change in control, none of
our options is exercisable before the completion of this offering. Once this
offering has been completed, our options will be exercisable in accordance with
their respective vesting schedules. These options may
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<PAGE> 60
terminate before their expiration dates if the optionee's status as an employee
is terminated or upon the optionee's death or disability.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------- ANNUAL RATES
NUMBER OF OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED 1998 (PER SHARE) DATE 5% 10%
---- ---------- --------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler...... -- -- -- -- -- --
Thomas R. Eames...... -- -- -- -- -- --
T. Murat Uraz........ 33,334 18.6% $6.18 9/1/08 $771,352 $1,350,272
Charles H. Seebock... 8,334 4.7% 6.18 9/1/08 192,850 337,588
William A. Weeks..... 8,334 4.7% 6.18 9/1/08 192,850 337,588
</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 $18.00 per share) appreciates at the indicated
rate for the entire term of the option and that the option is exercised at the
exercise price and the shares sold on the last day of its term at the
appreciated price.
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<PAGE> 61
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options during fiscal year
1998 and the year-end number and value of unexercised options with respect to
each of the named executive officers. No stock appreciation rights were
exercised by the named executive officers in fiscal year 1998 or were
outstanding at the end of that year.
Some of our options were granted in tandem with options to purchase shares
of the common stock of General Instrument. If all or a portion of one of our
options are exercised, all or a portion of the General Instrument options are
canceled, and if all or a portion of the General Instrument options are
exercised, all or a portion of our options are canceled. The number of
unexercised options set forth in the table does not include options to purchase
shares of General Instrument common stock.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler...... -- -- -- 1,750,000 -- $15,435,000
Thomas R. Eames...... -- -- -- 1,750,000 -- 15,435,000
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. We have granted options covering 5,393,854
shares of our common stock under the 1999 Stock Plan. These options 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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Options may be incentive stock options or nonstatutory stock options. An
optionee who exercises an incentive stock option may qualify for favorable tax
treatment under Section 422 of the Internal Revenue Code of 1986. On the other
hand, nonstatutory stock options do not qualify for this favorable tax
treatment. The exercise price for all options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of our common
stock on the option grant date. Optionees may pay the exercise price by using:
- cash;
- shares of common stock that the optionee already owns;
- an immediate sale of the option shares through a broker designated by us;
or
- a loan from a broker designated by us, secured by the option shares.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options will vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier.
The 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 2,000,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 3,000,000 shares in the first year of
employment.
Restricted shares may be awarded under the 1999 Equity Incentive Plan in
return for:
- cash;
- a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- services already provided to us; and
- in the case of treasury shares only, services to be provided to us in the
future.
Restricted shares and stock units vest at the time or times determined by
the compensation committee.
Our compensation committee may determine that an option or other award
under the 1999 Equity Incentive Plan will become fully or partially vested if we
are subject to a change in control or if a participant's employment is
terminated after a change in control. A change in control includes the
following, except that in no case does a change in control include the sale of
our stock by General Instrument or General Instrument's pending merger with
Motorola or any other change in control of General Instrument:
- a merger after which our own stockholders own 50% or less of the
surviving corporation or our parent company;
- a sale of all or substantially all of our assets;
- a proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- an acquisition of 50% or more of our outstanding stock by any person or
group, other than General Instrument or a person related to us, such as a
holding company owned by our stockholders.
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<PAGE> 64
The non-employee members of our board of directors, with the exception of
non-employee directors who are employees of General Instrument or its
affiliates, will be eligible for automatic option grants under the 1999 Equity
Incentive Plan. Each non-employee director who first joins our board after the
completion of this offering will receive an initial option for 20,000 shares of
our common stock. That grant will occur when the director takes office. The
initial option will vest over the four-year period following the date of grant.
At the time of each of our annual stockholders' meetings, beginning in
2000, each non-employee director, with the exception of non-employee directors
who are employees of General Instrument or its affiliates, who will continue to
be a director after that meeting will automatically be granted an annual option
for 5,000 shares of our common stock. However, a new non-employee director who
is receiving the 20,000-share initial option will not receive the 5,000-share
annual option in the same year. The annual options will vest one year after the
date of grant. If a change in control occurs, or if a non-employee director
leaves our board because of retirement after age 65, total disability or death,
then the non-employee director's options granted under the 1999 Equity Incentive
Plan will become fully vested.
The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. A director
may pay the exercise price by using cash, shares of common stock that the
director already owns, or an immediate sale of the option shares through a
broker designated by us. The non-employee directors' options have a 10-year
term, except that they expire one year after a director leaves the board (if
earlier).
Our board may amend or terminate the 1999 Equity Incentive Plan at any
time. If our board amends the plan, it does not need to ask for stockholder
approval of the amendment unless applicable law requires it. The 1999 Equity
Incentive Plan will continue in effect indefinitely, unless the board decides to
terminate the plan earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
October 10, 1999. Our stockholder also approved this plan. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. We have reserved 1,000,000 shares of our common stock for issuance
under the plan. On November 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically be increased by 1,000,000
shares, 1% of the shares then outstanding or the number determined by our board
of directors, whichever is lowest. The plan will be administered by the
compensation committee of our board of directors.
All of our employees are eligible to participate. Eligible employees may
begin participating in the 1999 Employee Stock Purchase Plan at the start of any
offering period. Each offering period lasts 24 months. Overlapping offering
periods start on May 1 and November 1 of each year. However, the first offering
period will start on the effective date of this offering and end on October 31,
2001.
Our 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 20% of the employee's cash compensation. Purchases of
our common stock will occur on April 30 and October 31 of each year. Each
participant may purchase up to
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<PAGE> 65
1,500 shares on any purchase date. But the value of the shares purchased in any
calendar year (measured as of the beginning of the offering period) may not
exceed $25,000.
The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
- the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- the fair market value per share of common stock on the purchase date;
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- the price per share to the public in this offering; or
- the fair market value per share of common stock on the purchase date.
Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us. If a change in control occurs, our 1999 Employee Stock
Purchase Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees, unless the plan is assumed by
the surviving corporation or its parent. Our board of directors may amend or
terminate the 1999 Employee Stock Purchase Plan at any time. If our board
increases the number of shares of common stock reserved for issuance under the
plan (except for the automatic increases described above), it must seek the
approval of our stockholders.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Currently, Next Level Communications, a subsidiary of General Instrument,
is the limited partner and Spencer Trask is the general partner of Next Level
Communications L.P., with the General Instrument subsidiary holding a 90.4%
limited partnership interest and Spencer Trask holding a 9.6% general
partnership interest. General Instrument also holds a $75.0 million principal
amount promissory note of Next Level Communications L.P., which, together with
accrued interest thereon, is convertible into shares of common stock of the
successor corporation to the partnership. Affiliates of Spencer Trask also have
an option to acquire additional shares of that successor corporation.
Immediately prior to the completion of this offering, General Instrument
will contribute the $75 million note and accrued interest thereon to us, and
Next Level Communications L.P. and the General Instrument subsidiary will be
merged into us. As a result, General Instrument will receive an estimated
65,074,573 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 89.3% of the outstanding common stock. Also pursuant to
this merger, the option held by Spencer Trask affiliates will become warrants to
acquire from us 8,480,102 shares of common stock at an exercise price of $10.38
per share. The warrants become exercisable upon completion of this offering and
expire on January 13, 2003. In lieu of paying the exercise price in cash, the
holders may elect to receive, upon the exercise of a warrant, the number of
shares subject to the warrant multiplied by a fraction, the numerator of which
is the market price per share less the exercise price and the denominator of
which is the market price per share.
Prior to this offering, General Instrument will enter into a voting trust
agreement, which is described below, to limit its voting power to 49% of the
voting power of all outstanding common stock and to limit the number of its
designees to the board of directors to one less than a majority. Notwithstanding
the voting trust agreement, as a result of its 49% voting power and board
representation, General Instrument will be able to exercise significant
influence over the business and affairs of Next Level, including dividend
policy, borrowings and access to capital, acquisition or disposition of assets,
mergers and other business combinations and change of control transactions.
On September 14, 1999, General Instrument entered into an agreement and
plan of merger with Motorola. Immediately upon the completion of this pending
merger, General Instrument intends to terminate the voting trust agreement and
appoint a number of additional individuals to our board of directors sufficient
to exercise control of us. Accordingly, upon the completion of this pending
merger, Motorola will be able to exercise a majority of our total voting power
and will have the ability to control our board of directors and all matters
relating to our business and affairs. We do not know whether Motorola's plans
for our business and affairs will be different than our existing plans and
whether any changes that may be implemented under Motorola's control will be
beneficial or detrimental to our other stockholders.
General Instrument and Spencer Trask have advised us that they currently
intend to hold all of their shares. However, they are not subject to any
contractual obligation to retain any of their shares, except that they have
agreed not to sell or otherwise dispose of any shares for 180 days after the
date of this prospectus without the prior written consent of Credit Suisse First
Boston Corporation. As a result, we cannot assure you as to how long General
Instrument or Spencer Trask will maintain their beneficial ownership of common
stock after this offering.
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It is possible that General Instrument or Motorola could be in a position
involving a conflict of interest with us. In addition, individuals who are
officers or directors of both our principal stockholder and us may have
fiduciary duties to both our principal stockholder and us. For example, a
conflict may arise if our principal stockholder were to engage in activities or
pursue corporate opportunities that may overlap with our business. Our
certificate of incorporation contains provisions intended to protect our
principal stockholder and these individuals in these situations. See
"Description of Capital Stock -- Other Certificate of Incorporation and By-law
Provisions -- Corporate Opportunities."
General Instrument leases one of the buildings at our Rohnert Park offices
from a Delaware realty trust set up specifically to permit the purchase and
lease of the facility. To purchase the land and construct the facility, this
trust obtained loans from several lenders which are guaranteed by General
Instrument. We intend to sublease the facility from General Instrument
immediately prior to the completion of this offering and will remain a
sublessee. General Instrument will remain lessee of the facility and guarantor
of the loans. We have the right to purchase the property by refinancing the
outstanding indebtedness. If we do so, General Instrument would be released from
the obligations under the loans. Under the terms of our proposed sublease with
General Instrument, until December 31, 1999, we will pay directly to the trust
all monthly payments owed by General Instrument on the facility. If we have not
refinanced the loans by that date, we will pay to General Instrument a fair
market rent of not less than the amount payable by General Instrument under its
lease. In addition, we also have the option to purchase the building from
General Instrument following December 31, 1999 at fair market value.
As a condition of our contract with Bell Atlantic, we are required to
maintain up to a $75 million performance bond or irrevocable letter of credit.
This obligation, currently $25 million, is guaranteed by General Instrument. We
are negotiating to replace this guarantee with a facility of our own.
Set forth below are descriptions of agreements which will be entered into
between us and our principal stockholders in connection with this offering.
CORPORATE AND INTERCOMPANY AGREEMENT
Before this offering is completed, we will enter into a corporate and
intercompany agreement with General Instrument under which we will grant to
General Instrument and its affiliates a continuing option to purchase additional
shares of common stock or shares of non-voting capital stock. If we issue any
additional equity securities after this offering, General Instrument and its
affiliates may exercise this option to purchase:
- shares of common stock to the extent necessary for them to maintain their
then-existing percentage of the total voting power; and
- shares of nonvoting capital stock to the extent necessary to own 80% of
any class of non-voting capital stock which may be outstanding.
The purchase price of the shares of common stock will be the market price of the
common stock. The purchase price of non-voting capital stock will be the price
at which third parties may purchase this stock. The stock option expires if
General Instrument and its affiliates beneficially own less than 30% of the
outstanding common stock.
Under this agreement, we have agreed to obtain a release of General
Instrument from its Bell Atlantic guaranty as promptly as practicable and in any
event not later than December 31, 1999.
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This agreement will also provide that, for as long as General Instrument
and its affiliates beneficially own a majority of the outstanding common stock,
we may not take any action which may be reasonably anticipated to result in a
violation by them of:
- any law or regulation, including the Internal Revenue Code or the
Employee Retirement Income Security Act;
- their certificates of incorporation or by-laws;
- any credit agreement or other material instrument binding upon them or
any of their assets; or
- any judgment, order or decree of any governmental authority having
jurisdiction over them or any of their assets.
This agreement will also provide that the parties will provide reasonable
cooperation with respect to their tax filings and any tax audits. Under this
agreement, we will also indemnify General Instrument and its affiliates against
any lawsuits or other claims arising out of any of our or our predecessors'
activities or omissions before and after this offering.
This agreement will also provide that, immediately upon the termination of
the voting trust agreement, we and our board of directors will take all actions
necessary to appoint on the date of termination any number of additional
directors nominated by General Instrument.
This agreement will also provide that we will enter into a similar
agreement for the benefit of any Majority Transferee, as defined under
"Description of Capital Stock."
CROSS LICENSE AGREEMENT
Before this offering is completed, we will enter into a cross license
agreement with General Instrument. Under this agreement, General Instrument will
grant to us a nonexclusive, perpetual, royalty free, worldwide license under all
patent applications and patents owned by General Instrument and filed prior to
this offering and any future patents issued from these General Instrument
patents and patent applications, to make our NLevel(3) product or related
switched digital video network equipment and software. This grant will not
include patent claims covering the implementations, methods or devices primarily
used or to be used by General Instrument. Also under this agreement, we will
grant to General Instrument and its affiliates, including Motorola upon
completion of General Instrument's pending merger with Motorola, a nonexclusive,
perpetual, royalty free, worldwide license under all patent applications and
patents owned by us and filed prior to this offering and any future patents
issued from these patents and patent applications to make digital cable
subscriber terminals, satellite and wireless subscriber terminals, cable modems,
HFC telephony and related headend, uplink, transmission or other network
equipment and software. This grant will not include patent claims covering the
implementations, methods or devices primarily used or to be used by us. We and
General Instrument will each also license to the other the right to use
confidential, technical and other information in each other's possession as of
the completion of this offering. These licenses do not include the right to
sublicense to any third parties. This agreement will permit General Instrument
and us to transfer their or our licenses pursuant to a sale of their or our
respective entire business, a sale of an entire business unit that benefits from
the license or to any of General Instrument's or our respective affiliates.
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REGISTRATION RIGHTS AGREEMENT
Before this offering is completed, we will enter into a registration rights
agreement with General Instrument and Spencer Trask. Under this agreement, we
will grant to these stockholders and their affiliates the right to request that
we use our best efforts to register their shares of common stock under federal
and state securities laws so that they may sell or dispose of their shares in
accordance with these laws. So long as General Instrument and its affiliates own
30% of our outstanding common stock, they will not be limited in the number of
times they may make that request. After their ownership declines below that
level, they will be able to cause us to effect up to four registrations of their
shares. Spencer Trask and its affiliates will be able to cause us to effect up
to three registrations of their shares. Under customary "piggy-back"
registration rights, General Instrument, Spencer Trask and their affiliates will
also be entitled to include their shares in all registrations of common stock we
make, either for a sale by us or any of our stockholders, subject to customary
exceptions. We will pay for all out-of-pocket expenses relating to these
registrations and indemnify General Instrument, Spencer Trask and their
affiliates against liabilities under securities laws. General Instrument,
Spencer Trask and their affiliates may generally assign these registration
rights to transferees of their shares. This agreement will also provide that we
will enter into a similar agreement for the benefit of any Majority Transferee.
VOTING TRUST AGREEMENT
Before this offering is completed, we and General Instrument will enter
into a voting trust agreement, which General Instrument intends to terminate
immediately upon the completion of its pending merger with Motorola. ChaseMellon
Shareholder Services LLC will also be a party to this agreement in its capacity
as voting trustee. All of the shares of common stock to be received by General
Instrument pursuant to the recapitalization will be held in the voting trust
created by this agreement. General Instrument may, but is not obligated to,
deposit in the voting trust additional shares from time to time. Through this
agreement, General Instrument intends to limit the voting power of the shares
held in the voting trust to 49% of the total voting power represented by all
outstanding shares of our common stock or a lower percentage as General
Instrument may elect from time to time by giving notice to the voting trustee
and us. We refer to this percentage as the "threshold percentage."
With respect to the voting trust shares representing up to the threshold
percentage of the total voting power of all outstanding shares of common stock,
the voting trustee will:
- vote or consent in writing in favor of any individuals designated by
General Instrument for election as director so long as the number of
individuals designated by General Instrument and elected to our board of
directors would not exceed one less than a majority;
- vote "for" or "against" or abstain from voting on any other matter
validly presented at a stockholder meeting or consent in writing as
directed by General Instrument; and
- cause to be present at any stockholder meeting for purposes of
determining a quorum a number of those voting trust shares as directed by
General Instrument, which will not be less than the number of shares
directed by General Instrument to be voted at that meeting.
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With respect to all other voting trust shares, the voting trustee will:
- vote or consent in writing in favor of any individual for election as
director in the same proportion as all shares of common stock other than
the voting trust shares are voted or consented to in writing in favor of
that individual;
- vote "for" or "against" or abstain from voting on any other matter
validly presented at a stockholder meeting or consent in writing in the
same proportion as all shares of common stock other than the voting trust
shares are voted "for" or "against" or abstain from voting or consented
to in writing on that matter; and
- cause to be present at any stockholder meeting for purposes of
determining a quorum a number of those voting trust shares which is in
proportion to the number of shares of common stock other than voting
trust shares which are present at that meeting in relation to the number
of outstanding shares of common stock other than the voting trust shares.
Except as described above, the voting trustee will not exercise any right
or power with respect to the voting trust shares but will instead act solely as
directed by General Instrument. For example, General Instrument may:
- direct the voting trustee to tender voting trust shares in connection
with any tender, exchange or other offer and to distribute the
consideration received for those shares free of the voting trust;
- sell, assign or otherwise transfer voting trust shares to any person and
cause certificates for those shares to be delivered, free of the voting
trust except in the case of a transfer to its subsidiary, to it or to its
order for that purpose;
- distribute voting trust shares to its stockholders in a tax-free spin-off
or otherwise and cause certificates for those shares to be delivered free
of the voting trust to it for that purpose; or
- dissent from any corporate action or perfect any dissenters' rights.
The voting trustee will deliver to General Instrument all dividends, other
than dividends in additional shares of common stock, paid on the voting trust
shares.
This agreement and the voting trust will terminate on the tenth anniversary
of the closing date and will be irrevocable, except that this agreement and the
voting trust may be terminated by General Instrument if:
- the voting power represented by the voting trust shares is not more than
the threshold percentage of the total voting power of all outstanding
shares of common stock;
- it beneficially owns 85% or more of all outstanding shares of common
stock;
- any person acquires more than 75% of the outstanding shares of common
stock other than the voting trust shares; or
- any person acquires more than 50% of the outstanding shares of common
stock of General Instrument, including pursuant to its pending merger
with Motorola.
Notwithstanding the foregoing, General Instrument may assign this agreement
to any transferee of voting trust shares, in which case the voting trust will
continue to remain in effect.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 30, 1999, giving effect to
our recapitalization, and as adjusted to reflect the sale of the shares of
common stock in this offering, certain information with respect to the
beneficial ownership of common stock as to:
- each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of the named executive officers;
- each of our current directors; and
- all of our current 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 70,893,309 shares
of common stock outstanding as of September 30, 1999 and 79,393,309 shares of
common stock outstanding immediately following the completion of this offering
(each giving effect to the recapitalization as if it had occurred on September
30, 1999). 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....... 65,029,980 91.7% 81.9%
101 Tournament Drive
Horsham, PA 19044
Spencer Trask Investors LLC(1)....... 14,343,431 18.1 16.3
535 Madison Avenue, 18th Floor
New York, NY 10022
Peter W. Keeler(2)................... 1,526,875 2.1 1.9
Richard C. Smith(3).................. 65,029,980 91.7 81.9
Lynn Forester(4)..................... 65,029,980 91.7 81.9
Paul S. Latchford.................... -- * *
John McCartney....................... -- * *
Thomas R. Eames(5)................... 1,336,088 1.8 1.7
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).................... 68,209,945 92.1% 82.6%
</TABLE>
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- -------------------------
* Less than 1%.
(1) Includes 8,480,102 shares of common stock subject to warrants held by
affiliates. Such warrant becomes exercisable upon closing of this offering.
Spencer Trask Investors LLC is beneficially owned by entities controlled by,
or affiliated with, Kevin Kimberlin and Spencer Segura.
(2) Includes 1,526,875 options exercisable within 60 days.
(3) All 65,029,980 shares are held by General Instrument. Mr. Smith disclaims
beneficial ownership of such shares.
(4) All 65,029,980 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. Mr. Eames has entered into an
agreement with his former wife pursuant to which she controls the exercise
of this option and the disposition of the underlying shares to the extent of
234,419 shares. Mr. Eames disclaims beneficial ownership of such 234,419
shares.
(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:
- 400,000,000 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 400,000,000 authorized shares of common stock, on the closing date,
- 8,500,000 shares will be offered in this offering;
- 65,074,573 shares will be beneficially owned by General Instrument and
held in the voting trust in connection with our recapitalization;
- 5,863,329 shares will be issued to Spencer Trask in our
recapitalization;
- 8,480,102 shares will be reserved for issuance pursuant to outstanding
warrants held by affiliates of Spencer Trask; and
- 17,964,904 shares will be reserved for issuance pursuant to our
employee benefit plans, of which options to purchase 12,358,758 shares
are outstanding.
No shares of Class B non-voting common stock will be issued or outstanding
at any time following the completion of this offering. No shares of preferred
stock will be outstanding immediately following the completion of the offering.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. Holders of common stock are not entitled
to cumulate their votes in the election of directors. Election of directors will
be decided by a plurality of the votes cast. Generally, all other matters to be
voted on by stockholders must be approved by the holders of a majority of the
votes entitled to be cast by all shares of common stock present in person or
represented by proxy, subject to any voting rights granted to holders of any
preferred stock.
Holders of common stock are entitled to dividends, when, as and if,
declared by the board of directors, subject to any preferential rights of any
outstanding preferred stock. If we liquidate, dissolve or wind-up, after payment
in full of the amounts required to be paid to holders of any preferred stock,
holders of common stock are entitled to share ratably in any assets available
for distribution. Shares of common stock are not subject to redemption. Holders
do not have preemptive rights to purchase additional shares of common stock,
although General Instrument and its affiliates have a right to purchase
additional shares under our corporate and intercompany agreement to the extent
necessary
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to maintain their ownership percentage upon future equity issuances by us,. See
"Certain Relationships and Related Transactions -- Corporate and Intercompany
Agreement."
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
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cast by the then outstanding shares of common stock. However, after the first
date that General Instrument or a "Majority Transferee," together with their
respective affiliates, ceases to beneficially own at least 49% of the
outstanding shares of common stock, directors may not be removed without cause.
"Majority Transferee" is any transferee or group of related transferees of
General Instrument which is unaffiliated with General Instrument of more than a
majority of the outstanding shares of common stock in a single transaction or a
group of related transactions.
Our by-laws provide that General Instrument or the Majority Transferee, as
applicable, together with their respective affiliates, shall have the right to
designate at least one member of any committee of our board of directors so long
as it owns beneficially at least 10% of the outstanding shares of common stock.
Special Meetings of Stockholders; Actions by Written Consent of
Stockholders
Under our certificate of incorporation, special meetings of stockholders
may be called by certain specified officers or by any officer at the request in
writing of a majority of the board of directors. In addition, but only prior to
the first date that General Instrument or the Majority Transferee, together with
their respective affiliates, ceases to beneficially own at least 49% of the
outstanding shares of common stock, special meetings may also be called by the
holders of a majority of the 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.
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Under our certificate of incorporation, a business combination is defined
to include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an interested stockholder is a person who,
together with affiliates and associates, owns or, within three years, did own,
15% or more of our common stock. General Instrument and its affiliates,
including Motorola upon the completion of General Instrument's pending merger
with Motorola, and the Majority Transferee and its affiliates will be exempt
from these provisions.
Advance Notice Procedures
Our by-laws provide for an advance notice procedure for the nomination,
other than by or at the direction of our board of directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, a written notice of
intent to nominate a director or raise matters at the meetings will have to be
received by us not less than 60 nor more than 90 days prior to the anniversary
of the previous year's annual meeting of stockholders. This notice must contain
information concerning the person to be nominated or the matters to be brought
before the meeting and information concerning the stockholder submitting the
proposal. So long as General Instrument or the Majority Transferee, together
with their respective affiliates, owns beneficially at least 10% of the
outstanding shares of common stock, General Instrument or the Majority
Transferee, as applicable, will be exempt from these advance notice procedures.
Amendment
Our certificate of incorporation also provides that, after the first date
that General Instrument or the Majority Transferee, together with their
respective affiliates, ceases to beneficially own at least 49% of the
outstanding shares of common stock, the affirmative vote of the holders of at
least 80% of the outstanding shares of common stock is required to amend the
provisions of our certificate of incorporation described above under "-- Board
of Directors," "-- Special Meetings of Stockholders; Actions by Written Consent
of Stockholders" or "-- Business Combinations with Interested Stockholders."
Under our certificate of incorporation and by-laws, our by-laws may only be
amended:
- at any time by the affirmative vote of directors constituting not less
than a majority of the entire board of directors;
- prior to the first date that General Instrument or the Majority
Transferee, together with their respective affiliates, ceases to
beneficially own at least 49% of the outstanding shares of common stock,
by the affirmative vote of the holders of a majority of the outstanding
shares of common stock; or
- after that date, by the affirmative vote of the holders of at least 80%
of the outstanding shares of common stock.
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,
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will be liable to us or our stockholders for breach of any fiduciary duty solely
by reason of any of these activities. If General Instrument acquires knowledge
of a potential transaction or matter which may be a corporate opportunity for
both General Instrument and us, General Instrument will have no duty to
communicate or offer this corporate opportunity to us. In addition, General
Instrument will not be liable to us or our stockholders for breach of any
fiduciary duty as a stockholder solely by reason of the fact that General
Instrument pursues or acquires this corporate opportunity for itself, directs
this corporate opportunity to another person, or does not communicate
information regarding this corporate opportunity to us.
If a director or officer of us who is also a director or officer of General
Instrument acquires knowledge of a potential transaction or matter which may be
a corporate opportunity for both us and General Instrument, this individual will
have fully satisfied and fulfilled his or her fiduciary duty to us and our
stockholders with respect to this corporate opportunity if he or she acts in a
manner consistent with the following policy:
- The corporate opportunity will belong to us if this opportunity is
expressly offered to the person in writing solely in his or her capacity
as our director or officer.
- Otherwise, this opportunity will belong to General Instrument.
These provisions will expire on the date that General Instrument and its
affiliates cease to own beneficially at least 20% of the outstanding shares of
common stock and no person who is a director or officer of us is also a director
or officer of General Instrument.
In addition to any vote of the stockholders required by our certificate of
incorporation, until the time that General Instrument and its affiliates cease
to own beneficially at least 20% of the outstanding shares of common stock, the
affirmative vote of the holders of more than 80% of the outstanding shares of
common stock will be required to alter, amend or repeal, or adopt any provision
inconsistent with, the corporate opportunity provisions described above.
Accordingly, so long as General Instrument and its affiliates beneficially own
at least 20% of the outstanding shares of common stock, it can prevent any such
alteration, amendment, repeal or adoption.
Upon the completion of General Instrument's pending merger with Motorola,
Motorola will also be entitled to the protections of the foregoing provisions to
the same extent as General Instrument.
Any person purchasing or otherwise acquiring common stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of our
certificate of incorporation.
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
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- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and our
stockholders' rights, through stockholders' derivative suits on our behalf, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services LLC.
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UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following discussion is a summary of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock to Non-United States holders. This discussion does not deal with
all aspects of United States income and estate taxation and does not deal with
foreign, state and local tax consequences that may be relevant to Non-United
States holders in light of their personal circumstances. Furthermore, this
discussion is based on the Internal Revenue Code of 1986, as amended, Treasury
Department regulations, published positions of the Internal Revenue Service and
court decisions now in effect, all of which are subject to change. YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR WITH REGARD TO THE APPLICATION OF THE FEDERAL
INCOME TAX LAWS, AS WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS TO WHICH YOU MAY BE SUBJECT.
As used in this section, a "United States holder" means a beneficial owner
of stock that is:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source;
- a trust that:
- is subject to the supervision of a court within the United States and
the control of one or more United States persons; or
- has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
A "Non-United States holder" is a holder that is not a United States
holder.
DIVIDENDS
Generally, any dividend paid to a Non-United States holder will be subject
to United States withholding tax either at a rate of 30% of the gross amount of
the dividend or at a lesser applicable treaty rate. However, dividends that are
effectively connected with the conduct of a trade or business within the United
States and, where a tax treaty applies, that are attributable to a United States
permanent establishment are not subject to the withholding tax but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates.
Certain certification and disclosure requirements must be complied with in
order to be exempt from withholding under the effectively connected income
exemption. Any effectively connected dividends received by a foreign corporation
may, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or a lower rate as may be specified by an applicable income
tax treaty.
Until January 1, 2001, dividends paid to an address outside the United
States are presumed to be paid to a resident of that country, unless the payer
has knowledge to the
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contrary, for purposes of the withholding tax discussed above and, under the
current interpretation of the United States treasury regulations, for purposes
of determining the applicability of a tax treaty rate. However, under United
States treasury regulations, if you wish to claim the benefit of an applicable
treaty rate and avoid backup withholding, as discussed below, for dividends paid
after December 31, 2000, you will be required to satisfy applicable
certification and other requirements.
If you are eligible for a reduced treaty rate of United States withholding
tax pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
If you are a Non-United States holder, you will generally not be subject to
United States federal income tax with respect to gain recognized on a sale or
other disposition of our common stock unless:
- the gain is effectively connected with a trade or business in the United
States and, where a tax treaty provides, the gain is attributable to a
United States permanent establishment;
- if you are an individual and hold our common stock as a capital asset,
you are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and certain other conditions are
met; or
- we are or have been a "United States real property holding corporation"
for United States federal income tax purposes.
We believe that we are not, and do not anticipate becoming, a "United
States real property holding corporation" for United States federal income tax
purposes. If we were to become a United States real property holding
corporation, so long as our common stock continues to be regularly traded on an
established securities market, you would be subject to federal income tax on any
gain from the sale or other disposition of the stock only if you actually or
constructively owned, during the five-year period preceding the disposition,
more than 5% of our common stock.
Special rules may apply to certain Non-United States holders, such as
"controlled foreign corporations," "passive foreign investment companies" and
"foreign personal holding companies," that are subject to special treatment
under the Code. These entities should consult their own tax advisors to
determine the United States federal, state, local and other tax consequences
that may be relevant to them.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to these
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to you at an address outside the United States, unless
the payer has knowledge that you are a United States person. Under the final
regulations effective
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December 31, 2000, however, you will be subject to backup withholding unless
applicable certification requirements are met.
Payment of the proceeds of a sale of our common stock within the United
States or conducted through certain U.S. related financial intermediaries is
subject to both backup withholding and information reporting unless you certify
under penalties of perjury that you are a Non-U.S. Holder, and the payor does
not have actual knowledge that you are a United States person, or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the Internal Revenue Service.
ESTATE TAX
Common stock held by an individual Non-United States holder at the time of
death will be included in that holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts of common stock in the open market
may adversely affect the market price of our common stock. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale, as described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have 79,437,902 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 70,937,902 shares of common stock to be outstanding will
be issued to Spencer Trask and to General Instrument in private transactions as
part of our recapitalization. Accordingly, all of these shares, as well as the
8,480,102 shares of common stock issuable upon the exercise of warrants held by
affiliates of Spencer Trask, will be "restricted securities," as that term is
defined in Rule 144. As such, these shares generally may be resold in the public
market only if registered under the Securities Act or sold in compliance with
the provisions of Rule 144, including the one-year holding period required by
Rule 144. Following the expiration of the one-year holding period, all of these
shares will be available for sale in the public market, subject to compliance
with the other provisions of Rule 144. In addition, General Instrument and
Spencer Trask will be entitled to registration rights pursuant to which they may
require that we register their shares under the Securities Act for sale in the
public market prior to or following the expiration of the one-year holding
period under Rule 144. For more information on these registration rights, see
"Certain Relationships and Related Transactions -- Registration Rights
Agreements."
In addition to the legal restrictions on resale described above, each of
General Instrument and Spencer Trask has entered into a lockup agreement with
the underwriters pursuant to which they have agreed generally not to transfer or
dispose of shares of common stock or securities convertible into common stock
for a period of 180 days after the date of this prospectus. However, these
lockups may be waived on behalf of the underwriters by Credit Suisse First
Boston Corporation. For more information on these lockup agreements and those
described below, see "Underwriting -- No Sales of Similar Securities."
STOCK OPTIONS
We have outstanding employee stock options to purchase 12,358,758 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 3,074,794 shares (of which options to purchase 2,692,140
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 9,283,964 shares (of which options to purchase
3,036,020 shares will have vested upon completion of this
78
<PAGE> 83
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.
79
<PAGE> 84
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse First
Boston Corporation, who are acting as joint book-running managers, and Lehman
Brothers Inc., Warburg Dillon Read LLC and Volpe Brown Whelan & Company, LLC are
acting as representatives of each of the underwriters named below. Subject to
the terms and conditions contained in an underwriting agreement dated
, 1999 between us and the underwriters, we have agreed to sell to
the underwriters, and each of the underwriters severally and not jointly has
agreed to purchase from us, the number of shares of our common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc.........................................
Warburg Dillon Read LLC.....................................
Volpe Brown Whelan & Company, LLC...........................
---------
Total......................................... 8,500,000
=========
</TABLE>
In the underwriting agreement, the several underwriters have agreed to
purchase all of the shares of our common stock being sold under the terms of the
agreement if any of the shares of common stock are purchased, other than those
shares covered by the over-allotment option described below. Under the
underwriting agreement, if an underwriter defaults, the commitments of
non-defaulting underwriters may be increased or the offering may be terminated.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
Lehman Brothers Inc., one of the representatives of the underwriters,
recently served as financial advisor to us and received a customary fee from us
for its services.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of our common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers at
such price less a concession not in excess of $ per share of common stock.
The underwriters may allow, and such dealers may allow, a discount not in excess
of $ per share of common stock to other dealers.
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<PAGE> 85
After the initial public offering, the public offering price and the concession
and discount may be changed.
The following table summarizes the compensation and expenses we will pay
with respect to the shares to be issued under the underwriting agreement. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us.... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $2.8 million and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 1,275,000 shares of our common stock at the initial public offering
price set forth on the cover of this prospectus, less the underwriting discount.
The underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated to
purchase a number of additional shares of our common stock proportionate to such
underwriter's initial amount reflected in the foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 925,000 of the shares offered hereby to be sold to
some of our employees, management, directors and other persons with
relationships with us. The number of shares of our common stock available for
sale to the general public will be reduced to the extent that those persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same terms as the other shares.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and all of our stockholders and
optionholders have agreed that we and they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days (or, in the case of Peter W. Keeler and Thomas R. Eames,
365 days) after the date of this prospectus, except, in our case, issuances in
connection with this offering or our recapitalization or pursuant to our
employee stock option and stock purchase plans.
81
<PAGE> 86
DETERMINATION OF OFFERING PRICE; QUALIFIED INDEPENDENT UNDERWRITER
Before this offering, there has been no market for our common stock. The
initial public offering price will be determined through negotiations between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly traded companies that
the representatives believe to be comparable to us, some of our financial
information, the history of, and the prospects for, us and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, our future revenues, the present
state of our development, the percentage interest of us being sold as compared
to our valuation and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to this offering at or above the initial public offering price.
This offering is being conducted in accordance with the applicable
provisions of Rule 2720 of the National Association of Securities Dealers, Inc.
Conduct Rules because Spencer Trask Securities, Inc., one of the selling group
members, is an affiliate of Spencer Trask Investments LLC, which beneficially
owns 10% or more of our common stock. Rule 2720 requires that the initial public
offering price of the shares of common stock not be higher than that recommended
by a "qualified independent underwriter" meeting certain standards. Accordingly,
Credit Suisse First Boston Corporation is assuming the responsibilities of
acting as the qualified independent underwriter in pricing the offering and
conducting due diligence. The initial public offering price of the shares of
common stock will be no higher than the price recommended by Credit Suisse First
Boston Corporation.
NASDAQ NATIONAL MARKET LISTING
Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "NXTV."
SALES TO DISCRETIONARY ACCOUNTS
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and selling group members to bid for
and purchase our common stock. As an exception to these rules, the underwriters
are permitted to engage in transactions that stabilize the price of our common
stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the underwriters
may reduce that short position by purchasing our common stock in the open
market. The underwriters may also elect to
82
<PAGE> 87
reduce any short position by exercising all or part of the over-allotment option
described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our common stock in the open market to reduce their short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
83
<PAGE> 88
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws. These will
vary depending on the relevant jurisdiction and may require resales to be made
in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice before any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under such securities laws; (ii) where
required by law, the purchaser is purchasing as principal and not as agent; and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or these persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
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 September 30, 1999 and for each of three years in the
period ended December 31, 1998, and for the nine months ended September 30,
1999, included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to additional funding requirements). The balance sheet of Next Level
Communications, Inc. as of August 24, 1999 included in this prospectus has been
audited by Deloitte & Touche LLP, independent auditors as stated in their report
appearing herein. Such financial statements and balance sheet have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
85
<PAGE> 90
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement, under
the Securities Act with respect to the common stock to be sold under this
prospectus. Prior to this offering we were not required to file reports with the
SEC. This prospectus does not contain all the information set forth in the
registration statement. For further information about our company and the shares
of common stock to be sold in this offering, please refer to the registration
statement. Complete exhibits have been filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement and other information filed with the
SEC are available at the web site maintained by the SEC on the worldwide web at
www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
86
<PAGE> 91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEXT LEVEL COMMUNICATIONS L.P.:
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and 1998, September
30, 1999 and Pro Forma as of September 30, 1999
(unaudited)............................................... F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended
September 30, 1998 (unaudited) and 1999................... F-4
Statements of Partners' Deficit/Stockholder's Deficit for
the Years Ended December 31, 1996, 1997 and 1998 and the
Nine Months Ended
September 30, 1999........................................ F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September
30, 1998 (unaudited) and 1999............................. F-6
Notes to Financial Statements............................... F-7
NEXT LEVEL COMMUNICATIONS, INC.:
Independent Auditors' Report................................ F-19
Balance Sheet as of August 24, 1999......................... F-20
Notes to Balance Sheet...................................... F-21
</TABLE>
F-1
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
Next Level Communications L.P.:
We have audited the accompanying balance sheets of Next Level
Communications L.P. (formerly Next Level Communications) as of December 31, 1997
and 1998 and September 30, 1999 and the related statements of operations,
partners' deficit/stockholder's deficit and cash flows for each of the three
years in the period ended December 31, 1998 and for the nine months ended
September 30, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Next Level Communications L.P. as of
December 31, 1997 and 1998 and September 30, 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 and for the nine months ended September 30, 1999 in conformity
with generally accepted accounting principles.
As discussed in Note 2, Next Level Communications L.P. has incurred
operating losses and negative cash flows and is dependent upon obtaining
additional capital to fund its operations and meet its obligations.
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
OCTOBER 15, 1999
F-2
<PAGE> 93
NEXT LEVEL COMMUNICATIONS L.P.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
----------------------- SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 3)
--------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $ 377 $ 28,983 $12,499 $12,499
Trade receivables, less allowance
for doubtful accounts of $170,
$490 and $1,237, respectively.... 4,745 11,068 14,343 14,343
Other receivables.................. 3,470 5,023 1,685 1,685
Inventories........................ 13,384 20,670 25,493 25,493
Receivable from General
Instrument....................... -- 3,350 3,575 3,575
Other current assets............... 4,844 735 1,319 1,319
--------- -------- ------- -------
Total current assets................. 26,820 69,829 58,914 58,914
Property and equipment, net.......... 18,020 21,558 22,955 22,955
Intangibles less accumulated
amortization of $739, $1,940 and
$2,841, respectively............... 7,467 6,266 5,365 5,365
Other assets......................... 382 118 -- --
--------- -------- ------- -------
Total assets......................... $ 52,689 $ 97,771 $87,234 $87,234
========= ======== ======= =======
LIABILITIES AND PARTNERS' DEFICIT/STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Payable to General Instrument...... $ 41,077 $ -- $ -- $ --
Accounts payable................... 9,326 16,467 12,145 12,145
Other accrued liabilities.......... 5,780 10,697 12,300 12,300
Deferred revenue................... 208 3,705 16,442 16,442
Current portion of capital lease
obligations...................... -- 396 668 668
--------- -------- ------- -------
Total current liabilities............ 56,391 31,265 41,555 41,555
Note payable to General Instrument... -- 80,940 85,950 --
Long-term capital lease
obligations........................ -- 335 446 446
Commitments and contingencies (Note
12)
Partners' Deficit/Stockholder's
Equity (Deficit):
Partners' deficit.................. -- (14,769) (40,717) --
Common stock -- 100 shares
authorized, 100 shares issued and
outstanding...................... 379,876 -- -- --
Accumulated deficit................ (383,578) -- -- --
Pro forma common stock -- $.01 par
value, 70,893,309 shares......... -- -- -- 709
Additional paid-in capital......... -- -- -- 44,524
--------- -------- ------- -------
Total partners'
deficit/stockholder's equity
(deficit)........................ (3,702) (14,769) (40,717) 45,233
--------- -------- ------- -------
Total liabilities and partners'
deficit/stockholder's equity
(deficit).......................... $ 52,689 $ 97,771 $87,234 $87,234
========= ======== ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 94
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment..................... $ -- $ 6,045 $ 39,243 $ 17,732 $ 29,848
Software.................... -- 2,266 4,587 3,476 2,582
--------- -------- -------- -------- --------
Total revenues................ -- 8,311 43,830 21,208 32,430
Cost of revenues:
Equipment................... -- 10,954 43,172 21,555 29,741
Software.................... -- 306 261 221 228
--------- -------- -------- -------- --------
Total cost of revenues........ -- 11,260 43,433 21,776 29,969
--------- -------- -------- -------- --------
Gross profit (loss)........... -- (2,949) 397 (568) 2,461
Operating expenses:
Research and development.... 17,102 37,064 47,086 32,493 35,861
Selling, general and
administrative........... 15,850 26,414 26,248 19,906 22,220
Litigation.................. 141,000 -- 5,000 5,000 --
--------- -------- -------- -------- --------
Total operating expenses...... 173,952 63,478 78,334 57,399 58,081
--------- -------- -------- -------- --------
Operating loss................ (173,952) (66,427) (77,937) (57,967) (55,620)
Other income (expense), net... 48 (2) 2,241 2,103 853
Interest expense.............. -- -- (6,035) (4,418) (5,181)
--------- -------- -------- -------- --------
Net loss...................... $(173,904) $(66,429) $(81,731) $(60,282) $(59,948)
========= ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 95
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF PARTNERS' DEFICIT/STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER COMMON STOCK
CAPITAL CAPITAL ------------------ UNEARNED ACCUMULATED
(DEFICIT) (DEFICIT) SHARES AMOUNT COMPENSATION DEFICIT TOTAL
--------- --------- ------ --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... $ -- $ -- 100 $ 141,845 $(1,166) $(143,245) $ (2,566)
Amortization of unearned
compensation................ -- -- -- -- 505 -- 505
Net loss.................. -- -- -- -- -- (173,904) (173,904)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1996...................... -- -- 100 141,845 (661) (317,149) (175,965)
Contribution of capital... -- -- -- 238,031 -- -- 238,031
Amortization of unearned
compensation............ -- -- -- -- 661 -- 661
Net loss.................. -- -- -- -- -- (66,429) (66,429)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1997...................... -- -- 100 379,876 -- (383,578) (3,702)
Conversion of predecessor
corporation into partnership... -- (3,702) (100) (379,876) -- 383,578 --
Partner capital
contributions........... 10,000 60,664 -- -- -- -- 70,664
Net loss.................. (8,990) (72,741) -- -- -- -- (81,731)
------- -------- ---- --------- ------- --------- ---------
Balance, December 31,
1998...................... 1,010 (15,779) -- -- -- -- (14,769)
Partner capital
contributions........... -- 34,000 -- -- -- -- 34,000
Net loss.................. (5,755) (54,193) -- -- -- -- (59,948)
------- -------- ---- --------- ------- --------- ---------
Balance, September 30,
1999...................... $(4,745) $(35,972) -- $ -- $ -- $ -- $ (40,717)
======= ======== ==== ========= ======= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 96
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $(173,904) $ (66,429) $(81,731) $(60,282) $(59,948)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 2,212 8,324 10,733 8,846 6,504
Loss on disposal of assets............. -- 385 1,162 825 300
Changes in assets and liabilities:
Trade receivables.................... -- (3,486) (6,323) (9,298) (3,275)
Inventories.......................... (2,031) (11,341) (7,286) (7,464) (4,823)
Other current assets................. (1,428) (2,797) (4,683) (4,755) 2,567
Bank overdraft....................... 1,853 (1,068) (785) (785) --
Accrued interest payable to General
Instrument........................ -- -- 5,940 4,370 5,010
Accounts payable..................... 1,298 6,552 7,926 3,083 (5,053)
Accrued liabilities and deferred
revenue........................... 139,029 (138,667) 8,414 2,443 14,340
--------- --------- -------- -------- --------
Net cash used in operating activities...... (32,971) (208,527) (66,633) (63,017) (44,378)
--------- --------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment........ (9,621) (9,882) (9,612) (7,178) (6,186)
Proceeds from notes receivable............. 306 110 264 240 80
--------- --------- -------- -------- --------
Net cash used in investing activities...... (9,315) (9,772) (9,348) (6,938) (6,106)
--------- --------- -------- -------- --------
FINANCING ACTIVITIES:
Limited Partner capital contribution....... -- 141,000 19,587 3,975 34,000
General Partner capital contribution....... -- -- 10,000 10,000 --
Net increase in payable to General
Instrument............................... 41,687 77,676 -- --
Proceeds from note payable to General
Instrument............................... -- -- 75,000 75,000 --
--------- --------- -------- -------- --------
Net cash provided by financing
activities............................... 41,687 218,676 104,587 88,975 34,000
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (599) 377 28,606 19,020 (16,484)
Cash and cash equivalents, beginning
of period................................ 599 -- 377 377 28,983
--------- --------- -------- -------- --------
Cash and cash equivalents, end of period... $ -- $ 377 $ 28,983 $ 19,397 $ 12,499
========= ========= ======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired from contribution of
Telenetworks............................. $ -- $ 14,224 $ -- $ -- --
Equipment acquired under capital leases.... -- -- 930 930 871
Conversion of payable to General Instrument
to stockholder's equity.................. -- 82,807 41,077 41,077 --
Conversion of stockholder's net deficit to
partnership deficit...................... -- -- (3,702) (3,702) --
</TABLE>
See notes to financial statements.
F-6
<PAGE> 97
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Next Level Communications L.P. (the "Partnership") is a leading provider of
broadband communications systems that enable telephone companies and other
emerging communications service providers to cost effectively deliver voice,
data and video services over the existing copper wire telephone infrastructure.
Next Level Communications ("NLC" or the "Limited Partner") was incorporated
as a California corporation on June 22, 1994 and commenced operations in July
1994. In September 1995, NLC was acquired by General Instrument Corporation
("General Instrument").
In January 1998, NLC transferred its net assets, management and workforce
to a newly formed limited partnership, Next Level Communications L.P., in
exchange for an 89% limited partnership interest. The Partnership recorded the
net assets transferred at their historical cost. At the same time, Spencer Trask
(the "General Partner") acquired an 11% general partner interest in the
Partnership in exchange for a $10.0 million cash contribution.
Net losses have been allocated to the partners based on their respective
partnership percentages. Upon the Partnership's conversion to a corporation (the
"Successor Corporation") in conjunction with an initial public offering, each
partner will receive voting common stock of the Successor Corporation based on
their respective partnership percentages. The General Partner has an option,
which expires on January 13, 2003, to acquire from the Limited Partner, up to
11% of the Successor Corporation common stock. This option is exercisable after
an IPO or in connection with a merger or sale of the Successor Corporation. Upon
dissolution of the Partnership, the assets would be used to pay all liabilities
of the Partnership and any remaining assets, after establishment of reserves,
would be distributed to the partners in accordance with their respective
partnership percentages.
On August 24, 1999 the Partnership formed a wholly owned subsidiary, Next
Level Communications, Inc., a Delaware corporation.
In anticipation of the Recapitalization (see note 3), management of NLC
effected a 1-for-3 reverse stock split on October 14, 1999. All share amounts in
the accompanying financial statements have been restated to give effect to the
reverse stock split.
The accompanying financial statements represent those of the Partnership
for 1998 and the nine months ended September 30, 1998 (unaudited) and 1999 and
those of NLC for 1997 and 1996. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of the results expected
for the full year.
2. RESULTS OF OPERATIONS FOR 1999, 1998, 1997 AND 1996 AND MANAGEMENT PLANS FOR
2000 AND 1999
The Partnership incurred net losses of $59.9 million, $81.7 million, $66.4
million, and $173.9 million in the nine months ended September 30, 1999 and the
fiscal years ended December 31, 1998, 1997 and 1996, respectively, as a result
of substantial research and
F-7
<PAGE> 98
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
development expenditures and litigation expenses. Net cash used in operating
activities was $44.4 million, $66.6 million, $208.5 million and $33.0 million in
the nine months ended September 30, 1999 and the fiscal years ended December 31,
1998, 1997 and 1996, respectively. At September 30, 1999, partners' deficit was
$40.7 million.
The Partnership has prepared cash flow projections for 1999 that indicate
additional capital will be required during the latter part of 1999 to fund its
operations and meet its obligations. The Partnership believes that it has
several alternatives available to it to obtain the required capital, including
additional equity contributions from its partners, private placement financing
and/or an IPO. Management of the Partnership believes that cash and cash
equivalents at September 30, 1999 and additional capital from the sources noted
above will enable the Partnership to fund its operations and meet its
obligations through at least September 30, 2000.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of the accompanying financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the year. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION (UNAUDITED) -- The financial statements for
the nine months ended September 30, 1998 are unaudited, and in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such period.
PRO FORMA INFORMATION (UNAUDITED) -- The unaudited pro forma balance sheet
as of September 30, 1999 presents the Partnership's balance sheet as if the
following (the "Recapitalization") had occurred on September 30, 1999:
(i) the $75.0 million note and accrued interest thereon payable to General
Instrument was contributed by General Instrument to Next Level
Communications, Inc., a newly formed Delaware corporation ("NLC
Delaware"); and
(ii) the Partnership and NLC were merged into NLC Delaware.
(iii) in conjunction with the transactions described in (i) and (ii) above
and based upon an assumed initial public offering price of $18.00 per
share, the General Partner received 5,863,329 shares of common stock
and the Limited Partner received 65,029,980 shares of common stock.
Pro forma basic and diluted net loss per share, discussed below, is
computed by dividing the pro forma net loss by the pro forma shares outstanding
for the period giving effect to the Recapitalization as if it had occurred on
January 1, 1998. The pro forma shares outstanding exclude warrants held by
affiliates of the General Partner to purchase approximately 8,480,102 shares of
common stock, employee stock options to purchase 6,964,904 shares of common
stock as of September 30, 1999 and options to purchase
F-8
<PAGE> 99
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5,393,854 shares of common stock granted in October and November 1999. Shares
under these options and warrants were not included in the computation of pro
forma diluted net loss per common share since the inclusion of these shares
would be antidilutive.
Pro forma basic and diluted net loss per share of $1.07 and $0.77 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 70,893,309 for the pro forma periods presented.
REVENUE RECOGNITION -- The Partnership recognizes revenue from equipment
sales when the product has been shipped. Sales contracts do not permit the right
of return of product by the customer. Amounts received in excess of revenue
recognized are recorded as deferred revenue. As of September 30, 1999 deferred
revenue primarily relates to advance payments received on equipment sales.
Software license revenues are recognized when software revenue recognition
criteria have been met, pursuant to Statement of Position ("SOP") 97-2, Software
Revenue Recognition. Under SOP 97-2, license revenue is recognized when a
noncancelable license agreement has been signed, delivery has occurred, the fees
are fixed and determinable and collection is probable. The portion of revenues
from new license agreements which relate to the Partnership's obligations to
provide customer support are deferred, based upon the price charged for customer
support when it is sold separately, and recognized ratably over the maintenance
period.
PRODUCT WARRANTY -- The Partnership provides for the estimated costs to
fulfill customer warranty obligations upon the recognition of the related
equipment revenue. Actual warranty costs incurred are charged against the
accrual when paid.
CASH EQUIVALENTS -- The Partnership considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Provisions for depreciation are based on estimated useful lives of the assets
using the straight-line method. Useful lives range from the shorter of five to
ten years or the lease term for leasehold improvements and two to seven years
for machinery and equipment.
INTANGIBLE ASSETS -- Intangible assets consist principally of goodwill,
which is being amortized on a straight-line basis over seven years. Management
continually reassesses the appropriateness of both the carrying value and
remaining life of the intangible assets by assessing recoverability based on
forecasted operating cash flows, on an undiscounted basis, and other factors.
Management believes that the carrying value and remaining lives of these assets
are appropriate.
F-9
<PAGE> 100
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS -- Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles may not be recoverable, the
Partnership evaluates the carrying values of such assets using future
undiscounted cash flows. If the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset, the Partnership will
recognize an impairment loss equal to the difference between the fair value and
carrying value of such asset.
OTHER INCOME (EXPENSE), NET -- Other income (expense), net consists
primarily of interest income.
INCOME TAXES -- Income taxes are not included in the 1998 or 1999 financial
statements since income taxes on the Partnership's income are the responsibility
of the partners.
For the years ended December 31, 1996 and 1997, NLC accounted for income
taxes using the asset and liability method. Deferred income taxes reflect the
future tax consequences of differences between the financial reporting and tax
basis of assets and liabilities. The accompanying financial statements for 1996
and 1997 present NLC's income taxes on a separate company basis. In 1996 and
1997, the results of NLC were included in the consolidated tax returns of
General Instrument, and NLC's net operating losses were utilized by General
Instrument in its tax returns. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. At December 31, 1997, and 1996 there was a 100% valuation allowance
provided for these deferred tax assets due to the uncertainty of realizing
future tax benefits from these deferred tax assets on a stand-alone NLC basis.
At December 31, 1997, NLC had no amounts due to or from General Instrument
related to income taxes. For the years ended December 31, 1996 and 1997, there
was no current or deferred tax expense or benefit recorded by NLC.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value because of the short-term nature of these instruments. The fair value of
long-term debt is based upon current interest rates for debt instruments with
comparable maturities and characteristics.
COMPREHENSIVE INCOME -- Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. There were no items of other
comprehensive income (loss) and therefore comprehensive loss was the same as net
loss for all periods presented.
SEGMENT REPORTING -- SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information establishes standards for the reporting of
information about operating segments, including related disclosures about
products and services, geographic areas and major customers, and requires
selected information about operating segments in interim financial statements.
The Partnership operates in only one reportable segment and one geographic area
and therefore additional information is not required to be presented. For the
nine months ended September 30, 1999, revenues attributable to the Partnership's
F-10
<PAGE> 101
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
two largest customers were 61% and 14%, respectively, of total revenues. In 1998
these same customers accounted for 68% and 20%, respectively, of total revenues.
In 1997 these same customers accounted for 17% and 55%, respectively, of total
revenues.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- Two customers comprised
substantially all of the Partnership's revenue from equipment sales in 1997 and
1998. As of September 30, 1999 and December 31, 1998, 80% and 84%, respectively,
of the Partnership's trade accounts receivable were derived from these two
customers. The loss of either of these customers or any substantial reduction in
orders by either of these customers could have a material adverse affect on the
Partnership's operating results. Additionally, the Partnership relies on certain
contract manufacturers to perform substantially all of its manufacturing
activities. The inability of its contract manufacturers to fulfill their
obligations to the Partnership could adversely impact future results.
The Partnership performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Partnership
maintains allowances for potential losses, and has not incurred any significant
losses to date. Allowance for doubtful accounts activity consisted of (in
thousands):
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year-Ended December 31, 1997........... $ -- $170 -- $ 170
Year-Ended December 31, 1998........... $170 $320 -- $ 490
Nine Months Ended September 30, 1999... $490 $797 $(50) $1,237
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT -- SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be measured at fair value and recognized in the balance sheet as
either assets or liabilities. The Partnership is currently evaluating what
impact, if any, SFAS No. 133 may have on its financial statements.
4. ACQUISITION OF TELENETWORKS
In September 1997, General Instrument acquired all of the outstanding
capital stock of Telenetworks, a specialized data protocol communications
software company. The purchase price was approximately $7.0 million in cash. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair values as of the date of acquisition. The $6.9 million excess of
the purchase price over the net identifiable assets acquired was allocated to
goodwill. In January 1998, in conjunction with the formation of the Partnership,
the Limited Partner contributed the assets and liabilities of Telenetworks to
the Partnership at its cost. For financial statement purposes, Telenetworks'
assets, liabilities and results of operations have been included in the
accompanying financial statements since September 1, 1997.
F-11
<PAGE> 102
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the acquisition in September 1997, General Instrument
granted approximately 358,000 shares of restricted common stock of General
Instrument valued at $7.0 million in total to certain Telenetworks employees.
The restricted shares were valued at the quoted market price of $19.56 per share
of General Instrument's common stock at the date of grant. The restrictions on
the common stock of General Instrument lapsed over a 270-day period which ended
on May 31, 1998. Since this common stock was payable based solely on the
continued employment of the individuals, prepaid compensation of $7.0 million
was recorded and amortized to compensation expense over the life of the
restrictions. Compensation expense of $3.9 million and $3.1 million was recorded
in 1998 and 1997.
In June 1998, the Partnership issued approximately $2.9 million in loans to
former Telenetworks employees due to certain tax liabilities associated with the
restricted stock, $2.5 million of which was outstanding at December 31, 1998 and
recorded in other receivables. The loans were due in April 1999, and were
collateralized by the common stock of General Instrument held by such employees.
As of September 30, 1999 such loans were fully repaid.
5. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Raw materials.................................... $ 7,152 $ 7,203 $ 7,323
Work-in-process.................................. 1,453 1,157 563
Finished goods................................... 4,779 12,310 17,607
------- ------- -------
Total....................................... $13,384 $20,670 $25,493
======= ======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Machinery and equipment......................... $20,030 $ 28,315 $ 34,439
Leasehold improvements.......................... 3,817 4,457 5,068
------- -------- --------
Total...................................... 23,847 32,772 39,507
Less accumulated depreciation and
amortization.................................. (5,827) (11,214) (16,552)
------- -------- --------
Property and equipment -- net................... $18,020 $ 21,558 $ 22,955
======= ======== ========
</TABLE>
Machinery and equipment includes assets acquired under capital leases of
$930,000 and $1,801,000 and related accumulated depreciation and amortization of
$208,000 and $668,000 at December 31, 1998 and September 30, 1999, respectively.
F-12
<PAGE> 103
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Accrued payroll and related expenses.............. $4,346 $ 4,767 $ 6,320
Other accrued expenses............................ 1,434 5,930 5,980
------ ------- -------
Total........................................ $5,780 $10,697 $12,300
====== ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS WITH GENERAL INSTRUMENT
In January 1998, in conjunction with the formation of the Partnership,
General Instrument advanced $75.0 million to the Partnership in exchange for a
note (the "Note") bearing interest at a rate of 8%. The Note includes certain
covenants including limitations on borrowings, and is due in 2005. The Note
provides for the deferral of scheduled interest payments under certain
circumstances. Deferred interest payments bear interest at 10% and are not
payable until certain earnings levels, as defined, are met. The Partnership or
the Successor Corporation has an option, upon an IPO of the Successor
Corporation, to repay the Note, together with accrued interest, in shares of
stock of the Successor Corporation. At December 31, 1998, the Partnership owed
General Instrument $80.9 million under this Note, including accrued interest of
$5.9 million. The fair value of the Note, computed based upon current interest
rates for debt instruments with comparable maturities and characteristics, as at
December 31, 1998 was approximately $62.5 million. At September 30, 1999, the
Partnership owed General Instrument $86.0 million under this note, including
accrued interest of $11.0 million.
At December 31, 1997 NLC had a payable to General Instrument of $41.1
million representing net advances to it during 1997. This amount was contributed
to the Partnership in 1998. During 1998, an additional $19.6 million was
contributed to the Partnership by the Limited Partner.
In 1999, the Limited Partner provided an additional $34.0 million of
capital contributions and increased its Partnership interest to 90.4%.
In 1996 and 1997, General Instrument allocated the cost of certain
corporate general and administrative services and shared services (primarily
certain legal and other costs related to the litigation discussed in Note 12) to
NLC. Such allocations were based upon General Instrument's estimates of the
incremental costs of providing such services. Management believes that the
method used by General Instrument to determine the allocated expenses was
reasonable. The allocated expenses were $3.0 million and $1.0 million in 1996
and 1997, respectively. It is not practicable to determine the actual costs that
would have been incurred if NLC operated on a stand-alone basis; accordingly
such allocations may not necessarily be indicative of the level of expenses
which would have been incurred had it been operating as a separate stand-alone
entity through December 31, 1997. Since January 1, 1998, all costs to operate on
a stand-alone basis were incurred by the Partnership and have been reflected in
the accompanying financial statements. Accordingly, no costs were allocated to
the Partnership during such periods.
F-13
<PAGE> 104
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS
Certain employees of the Partnership have been granted contingently
exercisable stock options (included in the table which follows) in NLC which
vest over a period of two to three years and which expire in ten years. Such
options are exercisable only in the event of an IPO or a change in control of
NLC (the "Event"). Compensation expense will be recognized on the date of the
Event based on the difference between the exercise price of the options and the
fair value of the common stock of a successor corporation on the date of the
Event. Management believes that the compensation expense will be material.
In addition, in January 1997, as part of a tandem stock option grant,
certain employees of NLC were granted options at $1.11 per share for a total of
1.9 million shares of common stock of NLC, or options at $15.75 per share for a
total of 1.5 million shares of General Instrument common stock (the "GI
Options"). Under the terms of the grant, the exercise of options on either NLC
or General Instrument common stock results in the cancellation of options in the
other company's common stock at a ratio of approximately 1.4 shares of NLC
common stock to 1 share of General Instrument common stock. The NLC options are
exercisable only upon the Event. The options have a ten-year life and vest over
three years. If the GI options are more likely to be exercised no compensation
expense will be recognized. If it becomes more likely that the NLC options will
be exercised, compensation expense will be recognized at such time, based upon
the difference between the exercise price of the NLC options and the fair market
value of the NLC common stock on the date of the Event. Management believes that
such compensation expense, if the NLC options are more likely to be exercised,
will be material.
The following table summarizes stock option activity relating to NLC's
stock option plan (including those granted as part of the tandem stock option
grant):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1996............. -- --
Granted.................................. 6,914 $0.98
------
Balance at December 31, 1997............. 6,914 0.98
Granted.................................. 179 5.74
Canceled................................. (4) 1.11
------
Balance at December 31, 1998 (none
exercisable)........................... 7,089 1.10
======
</TABLE>
In the nine months ended September 30, 1999, options to purchase 112,750
shares were granted at an exercise price of $9.66 per share and options to
purchase 237,000 shares were canceled.
F-14
<PAGE> 105
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about NLC stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, REMAINING LIFE AVERAGE DECEMBER 31, AVERAGE
PRICES 1998 (IN YEARS) EXERCISE PRICE 1998 EXERCISE PRICE
- ----------- --------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.84-$1.53 6,927 8.8 $0.98 -- $ --
$6.18 162 9.8 6.18 -- --
------
7,089
======
</TABLE>
Stock-based awards granted to employees are accounted for using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS No. 123,
Accounting For Stock Based Compensation, requires the disclosure of pro forma
net income (loss) using the fair value method.
The estimated fair value of an option grant is based, in part, on the
estimated term of the option. NLC options granted under the NLC Plan are not
exercisable unless an Event occurs. As a result, it is not practicable to
determine the expected term of NLC options and therefore it is not possible to
estimate the fair value of such options. The weighted average fair value of the
GI options granted during 1997 was $5.70.
Had compensation cost been determined under SFAS 123 for the GI Options
under the tandem stock option grant, the Partnership's net loss would have been
changed to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Net loss:
As reported............................ $(66,429) $(81,731) $(59,948)
Pro forma............................ (69,190) (84,494) (62,020)
</TABLE>
The fair value of the GI options granted under the tandem stock option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<S> <C>
Dividend yield........................... 0.0%
Volatility............................... 35.0%
Risk free interest....................... 6.4%
Expected terms (years)................... 4.0
</TABLE>
F-15
<PAGE> 106
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Employees of the Partnership, who meet certain eligibility requirements are
able to participate in the General Instrument 401(k) Plan. Employees may
contribute up to 10% of their annual compensation, subject to the legal maximum.
The Partnership, contributes an amount equal to 50% of the first 6% of the
employee's salary that the employee contributes. The Partnership's expense
related to the 401(k) Plan was $430,000, $513,000, $409,000 and $213,000 for the
nine months ended September 30, 1999 and the years ended December 31, 1998, 1997
and 1996, respectively.
The Partnership employees participate in the General Instrument Pension
Plan. The Partnership expensed $360,000, $419,000, $229,000 and $210,000 related
to these plans for the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, respectively.
11. CAPITAL LEASE OBLIGATIONS
The Partnership leases certain equipment under capital leases. Leases
expire at various dates from 1999 to 2001 and all contain purchase options.
Future minimum lease payments at September 30, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999........................................... $ 378
2000......................................... 684
2001......................................... 367
------
Total................................ 1,429
Less amounts representing interest............. (315)
------
Present value of net minimum lease payments.... $1,114
======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Partnership leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 1999 to 2006 and certain facilities
leases have renewal options.
During 1998 the Partnership entered into an operating lease for one of its
buildings which expires in 2004. The lease provides for a purchase option but
does not allow for renewal options. General Instrument has provided a residual
value guarantee to the lessor of approximately 82% of the total building cost at
inception. The table of future minimum operating lease payments below excludes
any payments related to the residual guarantee. Rent expense recorded under the
lease was $0.8 million in 1998 and $1.0 million in the nine months ended
September 30, 1999.
F-16
<PAGE> 107
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999.................................. $ 3,154
2000................................ 2,943
2001................................ 2,357
2002................................ 2,181
2003................................ 2,098
Thereafter.......................... 2,548
-------
Total....................... $15,281
=======
</TABLE>
Rent expense was $0.4 million in 1996, $1.1 million in 1997, $3.8 million
in 1998, and $3.2 million in the nine months ended September 30, 1999.
The Partnership has a commitment with a supplier to purchase approximately
$2.1 million of components in the 12 months following the release of certain
products for sale and approximately $4.3 million in the subsequent 12 months. In
addition, the Partnership has a commitment to purchase $2.4 million of
components prior to September 2002 with a minimum purchase of $0.5 million each
12-month period following the release of the certain products for sale. The
Partnership has a commitment to another supplier to purchase approximately $14.7
million of components prior to December 2001.
In May 1998, actions by BroadBand Technologies, Inc. against General
Instrument and by Next Level Communications against BroadBand Technologies,
pending in the United States District Court for the Eastern District of North
Carolina, were dismissed with prejudice. The action brought by BroadBand related
to fiber optic communications systems for delivering television signals and a
patent held by BroadBand. The action brought by Next Level Communications
involved contentions that BroadBand infringed two patents held by Next Level
Communications relating to video compression and signal processing and that
BroadBand had violated antitrust laws. These dismissals were entered pursuant to
a settlement agreement under which, among other things, Next Level
Communications L.P. paid BroadBand Technologies $5.0 million, which was expensed
in 1998, and BroadBand Technologies and Next Level Communications L.P. have
entered into a perpetual cross-license of patents applied for or issued
currently or through May 2003.
In April 1995, DSC Communications Corporation and DSC Technologies
Corporation (collectively, "DSC") brought suit against NLC and the founders of
NLC. In June 1996, a final judgement against NLC and the individual defendants
was entered in favor of DSC, and an expense for the expected final award of
$141.0 million was recorded. General Instrument paid the $141.0 million
judgement in 1997 as required by the 1995 agreement for the acquisition of NLC;
accordingly, the $141.0 million has been shown as a capital contribution in
1997.
On March 5, 1998, an action entitled DSC Communications Corporation and DSC
Technologies Corporation v. Next Level Communications, L.P., Spencer Trask
Investors LLC, General Instrument Corporation and Spencer Trask & Co., Inc. was
filed in the Superior Court of the State of Delaware in and for New Castle
County (the "Delaware Action"). In that action, DSC alleged that in connection
with the formation of the
F-17
<PAGE> 108
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Partnership and the transfer of the switched digital video technology, the
Partnership and Spencer Trask Investors LLC misappropriated DSC's trade secrets;
that General Instrument improperly disclosed trade secrets when it conveyed such
technology to the Partnership; and that Spencer Trask conspired to
misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the
defendants' purported unjust enrichment, disgorgement of consideration,
exemplary damages and attorney's fees, all in unspecified amounts. In April
1998, General Instrument and the other defendants filed an action in the United
District Court for the Eastern District of Texas, requesting that the federal
court preliminarily and permanently enjoin DSC from prosecuting the Delaware
Action because by pursuing such action, DSC effectively was trying to circumvent
and relitigate the Texas federal court's November 1997 judgment in a previous
lawsuit involving DSC. On May 14, 1998, the United States District Court for the
Eastern District of Texas granted a preliminary injunction preventing DSC from
proceeding with the Delaware Action. On July 6, 1998, the defendants filed a
motion for summary judgement with the Texas Court requesting a permanent
injunction preventing DSC from proceeding with this litigation. In June 1999 the
United States Court of Appeals for the Fifth Circuit affirmed the judgment of
the Texas court. On July 15, 1999, the Texas federal court granted the Delaware
defendants' motion for summary judgement and issued its final judgement
permanently enjoining DSC from prosecuting and continuing the Delaware action.
F-18
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
Next Level Communications, Inc.:
We have audited the accompanying balance sheet of Next Level
Communications, Inc. as of August 24, 1999 (date of incorporation). This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Next Level Communications, Inc. as of August
24, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
AUGUST 25, 1999 (NOVEMBER 8, 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 4,775,000
shares based upon $86.0 million owed as of September 30, 1999 and an
assumed initial offering price of $18.00 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 4,888,889 shares based upon an assumed initial
offering price of $18.00 per share). General Instrument will receive
such additional $88.0 million of common stock as a result of the
following:
- The Next Level Communications L.P. partnership agreement
contemplated that Next Level Communications L.P. would be
converted into a corporation (the "Successor Corporation") in
connection with an initial public offering. Under the partnership
agreement, affiliates of Spencer Trask (the general partner),
have an option to acquire from Next Level Communications (the
limited partner), a wholly owned subsidiary of General
Instrument, 11% of the Successor Corporation common stock to be
issued in such conversion. By operation of the mergers
contemplated herein, the option held by affiliates of Spencer
Trask to purchase 11% of Next Level Communications, Inc. (the
Successor Corporation) common stock from Next Level
Communications will become warrants to purchase 11% of Next Level
Communications, Inc. common stock from Next Level Communications,
Inc. with the same terms;
F-21
<PAGE> 112
- Should the warrants be exercised by affiliates of Spencer Trask,
Next Level Communications, Inc., rather than Next Level
Communications, will receive $88.0 million. Therefore, General
Instrument will receive $88.0 million of common stock upon the
conversion of Next Level Communications L.P. into Next Level
Communications, Inc. to make up for the exercise price, that
would have been received by General Instrument (through Next
Level Communications, the limited partner) upon exercise of the
warrants by affiliates of Spencer Trask under the partnership
agreement;
- options granted to employees of the partnership to purchase shares of
Next Level Communications will become options to purchase a total of
6,964,904 shares of common stock on a one for one basis; and
- the option currently held by affiliates of Spencer Trask to purchase
shares of the partnership's successor under the partnership agreement
will become warrants to purchase from the Company 8,480,102 shares of
common stock at an exercise price of $10.38 per share.
The recapitalization will be accounted for at historical cost.
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. We have granted options covering 5,393,854
shares of our common stock under the 1999 Stock Plan. These options 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
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<PAGE> 113
shares awarded under the 1999 Stock Plan or the 1999 Equity Incentive Plan are
forfeited, then those options or shares will again become available for awards
under the 1999 Equity Incentive Plan. We have not yet granted any options under
the 1999 Equity Incentive Plan, and none will be granted until after this
offering.
The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. Options
expire not later than 10 years after the date of grant.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
October 10, 1999. Our stockholder also approved this plan. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. We have reserved 1,000,000 shares of our common stock for issuance
under the plan. On November 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically be increased by 1,000,000
shares or 1% of the shares then outstanding, whichever is less.
All of our employees are eligible to participate. Eligible employees may
begin participating in the 1999 Employee Stock Purchase Plan at the start of any
offering period. 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.
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<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.
10.13*** -- Form of Warrant.
23.1** -- Independent Auditors' Consent.
23.2*** -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule.
99.1** -- Consent of Lynn Forester filed pursuant to Rule 438 under
the Securities Act.
99.2** -- Consent of John McCartney filed pursuant to Rule 438 under
the Securities Act.
99.3** -- Consent of Paul S. Latchford filed pursuant to Rule 438
under the Securities Act.
</TABLE>
- ---------------
* To be supplied by amendment.
** Previously filed.
*** Filed herewith.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is
II-3
<PAGE> 118
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 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. 6 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 9th day of November, 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, November 9, 1999
- ------------------------------------------ (Principal Executive
Peter W. Keeler Officer) Chairman of the
Board
and President
/s/ JAMES T. WANDREY Senior Vice President and November 9, 1999
- ------------------------------------------ Chief Financial Officer
James T. Wandrey (Principal Financial and
Accounting Officer)
/s/ RICHARD C. SMITH* Director November 9, 1999
- ------------------------------------------
Richard C. Smith
*By: /s/ JAMES T. WANDREY
------------------------------------
James T. Wandrey
Attorney-in-fact
</TABLE>
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 November 9, 1999
- ---------------------------------------
Lynn Forester
/s/ JOHN MCCARTNEY Director November 9, 1999
- ---------------------------------------
John McCartney
/s/ PAUL S. LATCHFORD Director November 9, 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.
10.13*** -- Form of Warrant.
23.1*** -- Independent Auditors' Consent.
23.2** -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule.
99.1** -- Consent of Lynn Forester filed pursuant to Rule 438 under
the Securities Act.
99.2** -- Consent of John McCartney filed pursuant to Rule 438 under
the Securities Act.
99.3** -- Consent of Paul S. Latchford filed pursuant to Rule 438
under the Securities Act.
</TABLE>
- ---------------
* To be supplied by amendment.
** Previously filed.
*** Filed herewith.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 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 100 shares of common
stock, 33 1/3 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 consummation of the transactions
contemplated by this Agreement, General Instrument and NLC DE will be entering
into a Voting Trust Agreement in the form of Exhibit B (the "Voting Trust
Agreement") with ChaseMellon
<PAGE> 2
Shareholder Services, LLC, as voting trustee (the "Voting Trustee").
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
<PAGE> 3
name of Spencer Trask or its designees or transferees in the denominations
requested by Spencer Trask.
(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. Prior to the Effective Time of the NLC Merger (as
defined below), 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, 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.
<PAGE> 4
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:
(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.
(b) 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.
<PAGE> 5
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 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.
1.14. No Fractional Shares. The number of shares of Common Stock
issuable to General Instrument pursuant to the transactions contemplated by this
Article I shall be rounded to the nearest full share (so that no fractional
shares are issued).
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.
<PAGE> 6
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 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.
<PAGE> 7
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:
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.
(Incorporated on August 24, 1999)
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 480,000,000 of which (i)
400,000,000 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 November 9, 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-
<PAGE> 2
2
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 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 five 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
<PAGE> 3
3
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
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 cease 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 (unaffiliated with General Instrument) 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.
<PAGE> 4
4
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.
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.
<PAGE> 5
5
(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 (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
<PAGE> 6
6
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
(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
<PAGE> 7
7
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 the 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 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
<PAGE> 8
8
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 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
<PAGE> 9
9
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 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
<PAGE> 10
10
(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
(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 clause (b) 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
<PAGE> 11
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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 for any breach of the
director's duty of loyalty to the Corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, under Section 174 of the GCL or for any transaction from which
the director derived an improper personal benefit. If the GCL is amended after
approval 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
<PAGE> 12
12
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 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.
<PAGE> 13
13
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 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
14
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 November,
1999.
NEXT LEVEL COMMUNICATIONS,
INC.
By: ______________________________
Name: James T. Wandrey
Title: Chief Financial Officer and
Treasurer
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
November __, 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.
"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.
<PAGE> 2
2
"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 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
<PAGE> 3
3
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.
"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
<PAGE> 4
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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 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
<PAGE> 5
5
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 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
<PAGE> 6
6
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 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
<PAGE> 7
7
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:
(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
<PAGE> 8
8
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);
(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.
<PAGE> 9
9
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;
(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
<PAGE> 10
10
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 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
<PAGE> 11
11
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 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
<PAGE> 12
12
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 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 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
<PAGE> 13
13
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 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 and 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
<PAGE> 14
14
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 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.
<PAGE> 15
15
(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 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); provided that, if
an indemnified party and an indemnifying party shall have conflicting claims or
defenses, the indemnifying party shall not have control of such conflicting
claims or defenses and the indemnified party shall be entitled to appoint
separate counsel for such claims and defenses at the cost and expense of 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, 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
<PAGE> 16
16
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 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
<PAGE> 17
17
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.
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.
<PAGE> 18
18
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 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
<PAGE> 19
19
to the fullest extent permitted by law and shall not be affected thereby, unless
such a construction would be unreasonable.
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: Chief Financial Officer
Telecopy No.: (707) 584-6859
(b) If to General Instrument, to:
General Instrument Corporation
101 Tournament Drive
Horsham, PA 19044
Attention: General Counsel
Telecopy No.: (215) 323-1293
(c) If to Spencer Trask, to:
Spencer Trask Investors LLC
535 Madison Avenue
New York, NY 10022
Attention: Kevin Kimberlin
Telecopy No.: (212) 751-3483
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 instrument, but all of
which together shall constitute but one and the same agreement.
<PAGE> 20
20
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
addition to any other remedy to which they may be entitled at law or equity.
<PAGE> 21
21
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 4.3
COMMON STOCK COMMON STOCK
SEE REVERSE FOR STATEMENTS RELATING
TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
-----------------------
[NLC LOGO] CUSIP 65333U 10 4
-----------------------
NLC
NEXT LEVEL COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.01 PAR VALUE PER SHARE OF
======================= NEXT LEVEL COMMUNICATIONS, INC. ========================
[CERTIFICATE OF STOCK]
transferable on the books of the Corporation by the holder(s) thereof, in person
or by duly authorized attorney upon surrender of the Certificates properly
endorsed. This Certificate is not valid unless signed and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
/s/ JAMES T. WANDREY /s/ PETER W. KEELER
- --------------------- -------------------------
SECRETARY [SEAL] CHAIRMAN OF THE BOARD
<PAGE> 2
NEXT LEVEL COMMUNICATIONS
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER UPON WRITTEN REQUEST TO
ITS PRINCIPAL OFFICE, AND WITHOUT CHARGE, A FULL STATEMENT OF THE DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF
AUTHORIZED, AND OF THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN
THE SHARES OF EACH PREFERRED OR SPECIAL CLASS IN SERIES, SO FAR AS THE SAME HAVE
BEEN FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX
AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed a though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
UNIF TRF MIN ACT - __________________ Custodian (until age _______)
(Cust)
__________________ under Uniform Transfers
(Minor)
to Minors Act _________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ______________, _____ X ____________________________________
X ____________________________________
<PAGE> 3
Notice: The signature(s) to this assignment must correspond with the name(s)
written upon the face of this Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signature(s) Guaranteed
By
-------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 9.1
VOTING TRUST AGREEMENT (this "Agreement"), dated as of November __,
1999, by and among GENERAL INSTRUMENT CORPORATION, a Delaware corporation
("Holder"), NEXT LEVEL COMMUNICATIONS, INC., a Delaware corporation ("NLC"), and
CHASEMELLON 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
occurring on the date hereof (not including the initial public offering of
shares of Voting Stock to be consummated on or about the business day following
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;
<PAGE> 2
2
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:
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. 2, 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 33
1/3 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. 4 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.
<PAGE> 3
3
1.2 Power of Trustee to Vote Trust Stock. (a) 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
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
<PAGE> 4
4
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 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
<PAGE> 5
5
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
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. ChaseMellon 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, as
determined by a court of competent jurisdiction, 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
<PAGE> 6
6
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.
(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, as determined by a court of competent jurisdiction.
<PAGE> 7
7
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 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 November __, 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
<PAGE> 8
8
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.
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
<PAGE> 9
9
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
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
<PAGE> 10
10
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 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:
CHASEMELLON SHAREHOLDER SERVICES LLC
By ___________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 10.2
CORPORATE AND INTERCOMPANY AGREEMENT
CORPORATE AND INTERCOMPANY AGREEMENT (this "Agreement") dated as of
November __, 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 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
3
"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 number of shares of the Applicable Stock and whose
denominator is the aggregate number 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.
"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
4
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 (i) in connection with the Initial Public
Offering, including the full exercise of all underwriters' over-allotment
options granted in connection therewith, (ii) issuances of Common Stock to any
<PAGE> 5
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General Instrument Entity and (iii) pursuant to any stock option or 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; provided that, within
five business days after the end of each fiscal quarter, Next Level will notify
General Instrument in writing of the number of shares issued in such quarter
pursuant to any stock option or other executive or employee benefit or
compensation plan maintained by Next Level (the "Quarterly Plan Notice"). 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 date of exercise of the Common Stock Option (with
respect to which the Common Stock Option has not been previously exercised). 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
<PAGE> 6
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an applicable Option Notice and prior to the applicable Issuance Event Date (or
within 20 business days after the delivery of the Quarterly Plan Notice) by the
delivery to Next Level of a written notice to such effect (an "Exercise Notice")
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 will, prior to the
applicable Issuance Event Date or, in the case of an exercise following a
Quarterly Plan Notice, within 10 business days after delivery to Next Level of
an Exercise Notice, 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.
<PAGE> 7
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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 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.
<PAGE> 8
8
(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.
(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
<PAGE> 9
9
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.
(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 or as otherwise directed by General Instrument. 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
<PAGE> 10
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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 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 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,
<PAGE> 11
11
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 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
<PAGE> 12
12
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 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: Chief Financial Officer
Telecopy No.: (707) 584-6859
<PAGE> 13
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(b) If to General Instrument, to:
General Instrument Corporation
101 Tournament Drive
Horsham, PA 19044
Attention: General Counsel
Telecopy No.: (215) 323-1293
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 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.
<PAGE> 14
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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 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
THIS PATENT AND TECHNICAL INFORMATION CROSS-LICENSE AGREEMENT is entered into by
Next Level Communications, Inc. ("NLC") and General Instrument Corporation
("GI"), dated this ____ day of November, 1999, and effective as of the Effective
Date (as defined below).
SECTION 1. DEFINITIONS. The following terms have the meaning specified:
1.1 "Agreement" means this Patent and Technical Information Cross-License
Agreement, including all Appendices to this Agreement, as amended from time to
time.
1.2 "Affiliate" means, with respect to any entity, any other person or
entity that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such entity.
1.2 "Effective Date" means the date both parties have signed this
Agreement.
1.3 "End User" means a third-party system operator or such system
operator's customers.
1.4 "GI Digital and HFC Telephony Products" means digitable cable
subscriber terminals (for example, without limitation, DCT 1000, DCT 2000, DCT
5000, etc.), satellite and wireless subscriber terminals, cable modems, and
related headend, uplink, transmission or other network equipment and software.
GI Digital and HFC Telephony Products also include devices to provide telephony
and data services via HFC networks (for example, without limitation, IP
telephony over HFC networks and selling, monitoring or provisioning BTIs).
1.5 "GI Licensed Patents" means all patent applications and patents owned
by GI and filed before the Effective Date, and any future patents to issue from
same worldwide; but does not include claims covering only HFC, wireless or
satellite implementations. GI Licensed Patents do not include claims covering
conditional access or security methods or devices. Further, GI Licensed Patents
do not include patents and patent applications included, or which come to be
included, in open publicly available licensing programs listed in Appendix A.
1.6 "NLC Licensed Patents" means all patent applications and patents owned
by NLC and filed before the Effective Date, and any future patents to issue from
same, worldwide; but do not include claims covering embodiments basely solely on
DSL, DLC or fiber-to-the-curb or fiber-to-the-home implementations. Further, the
term does not include patents and patent applications included, or which come to
be included, in open publicly available licensing programs listed in Appendix B,
or individually listed in Appendix B.
1.7 "NLC Products" means the NLevel3 product or related switched digital
access (SDA) network equipment and software for providing voice, video and data
services.
1.8 "Technical Information" means the technical data and other
confidential information of one party rightfully in the possession of the other
party as of the Effective Date and which is reasonably required to design, make
or use products of the party rightfully possessing such information.
<PAGE> 2
SECTION 2. LICENSE GRANTS AND RIGHTS
2.1 Grant of License Rights in Patents. Subject to the terms of this
Agreement, NLC grants to GI and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license under its NLC Licensed Patents:
(1) to make and have made GI Digital and HFC Telephony Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import GI Digital and HFC Telephony Products.
2.2 Grant of License Rights in Technical Information. Subject to the terms
of this Agreement, NLC grants to GI and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license to use NLC's Technical Information:
(1) to make and have made GI Digital and HFC Technology Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import GI Digital and HFC Telephony Products.
2.3 Grant of License Rights in Patents. Subject to the terms of this
Agreement, GI grants to NLC and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license under GI Licensed Patents:
(1) to make and have made NLC Products; and
(2) to use (including for all End User uses), offer for sale, sell,
maintain and import NLC Products.
2.4 Grant of License Rights in Technical Information. Subject to the terms
of this Agreement, GI grants to NLC and its Affiliates a worldwide, perpetual,
nonexclusive, royalty-free license to use GI's Technical Information:
(1) to make and have made NLC Products; and
(2) to use (including for all End User uses), offer for sale,
maintain, sell and import NLC Products.
2.5 Reservation of Rights. Each party reserves all rights not expressly
granted to the other party under this Agreement and no other rights are granted
by implication, estoppel or otherwise.
2.6 Rights to Sublicense. The licenses granted do not include the right to
sublicense, except to End Users as provided in the foregoing license grants.
-2-
<PAGE> 3
SECTION 3. WARRANTIES
3.1 WARRANTIES. THE NLC LICENSED PATENTS AND THE GI LICENSED PATENTS AND
EACH PARTIES' RESPECTIVE TECHNICAL INFORMATION ARE PROVIDED "AS IS" AND EACH
PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, OR OTHERWISE. NOTHING IN THIS AGREEMENT SHALL BE
DEEMED TO BE A REPRESENTATION OR WARRANTY THAT ANYTHING MADE, USED, SOLD OR
OTHERWISE DISPOSED OF UNDER ANY LICENSE GRANTED IN THIS AGREEMENT IS OR WILL BE
FREE FROM INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. EACH
PARTY ASSUMES NO LIABILITY ARISING OUT OF THE SUPPLYING OF TECHNICAL INFORMATION
UNDER, IN CONNECTION WITH, OR AS A RESULT OF THIS AGREEMENT, WHETHER THE SAME
SHALL BE ALLEGED TO ARISE IN WARRANTY, CONTRACT, NEGLIGENCE, OR OTHERWISE,
EXCEPT AS MAY ARISE AS A RESULT OF A BREACH OF THE SPECIFIC PROVISIONS OF THIS
AGREEMENT.
SECTION 4. CONFIDENTIALITY
4.1 Confidentiality. Each party acknowledges that the Technical
Information of the other and the terms and conditions of this Agreement are
confidential information and agrees that it shall abide by the restrictions on
the use of such confidential information as stated in certain non-disclosure
agreements which have been signed by the parties from time to time.
Notwithstanding anything to the contrary in this or any other agreement,
however, each party agrees to protect the confidential information of the other
party with the same standard of care that such party uses with respect to its
own confidential information, provided that in no case shall such standard of
care be less than a reasonable standard of care.
SECTION 5. RELEASE AND COVENANT NOT TO SUE
5.1 Releases.
(1) Release by GI. GI, for itself and all its Affiliates, and their
successors, assigns, customers or any of their respective directors, officers or
employees and all others who may take any interest in the matters herein
released, hereby fully and forever releases, acquits and discharges NLC and its
Affiliates, and their successors, assigns, customers or any of their respective
directors, officers or employees from any and all claims, demands, damages,
losses, rights and causes of action known or unknown to GI that GI may have
against NLC that arise from (a) the use of the GI Patents, (b) the use of GI
Technical Information or (c) any other intellectual property rights of GI in
connection with the design, manufacture, sale or use of any NLC Products as of
or prior to the Effective Date of this Agreement.
(2) Release by NLC. NLC, for itself and all its Affiliates, and their
successors, assigns, customers or any of their respective directors, officers or
employees and all others who may take any interest in the matters herein
released, hereby fully and forever releases, acquits and discharges GI and its
Affiliates, and their successors, assigns, customers or any of their
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<PAGE> 4
respective directors, officers or employees, from any and all claims, demands,
damages, losses, rights and causes of action known or unknown to NLC that NLC
may have against GI that arise from (a) the use of the NLC Patents, (b) the use
of NLC Technical Information or (c) the use of any other intellectual property
rights of NLC in connection with the design, manufacture, sale or use of any GI
Products as of or prior to the Effective Date of this Agreement.
5.2 Covenant Not to Sue
(1) GI Covenant Not to Sue. GI will not prosecute or assist in the
prosecution of any claim, demand, action or cause of action (other than
responding to court orders or subpoenas) against NLC or its Affiliates, and
their successors, assigns, customers or any of their respective directors,
officers or employees, for, on account of, or arising out of any claim of
misappropriation of GI trade secrets, infringement of GI copyrights,
infringement of any GI Licensed Patents, use of any GI Technical Information or
any other GI intellectual property rights in connection with the design,
manufacture, sale or use of any NLC Products arising as of or prior to the
Effective Date.
(2) NLC Covenant Not to Sue. NLC will not prosecute or assist in the
prosecution of any claim, demand, action or cause of action (other than
responding to court orders or subpoenas) against GI, or its Affiliates and their
successors, assigns, customers or any of their respective directors, officers or
employees, for, on account of, or arising out of any claim of misappropriation
of NLC trade secrets, infringement of NLC copyrights, infringement of any NLC
Licensed Patents , use of any NLC Technical Information or any other NLC
intellectual property rights in connection with the design, manufacture, sale or
use of GI Digital or HFC Telephony Products arising as of or prior to the
Effective Date.
SECTION 6. PROSECUTION AND MAINTENANCE OF PATENTS; CLAIMS AGAINST THIRD PARTY
INFRINGERS
6.1 Rights to Prosecute and Maintain Patents. NLC has sole right to file,
prosecute and maintain all of the NLC Licensed Patents. GI has sole right to
file, prosecute and maintain all of GI Licensed Patents. Subject to the
obligations of confidentiality hereunder, each party has the sole and exclusive
right to determine whether or not, and where, to file a patent application, to
abandon the prosecution of any patent or patent application, or to discontinue
the maintenance of its respective patent or patent applications.
6.2 Notification of Adverse Claims and Actions. Each party will promptly
notify the other party in writing of any claims by third parties of infringement
of third party rights by the other party's products of which it receives written
notice. Each party will also promptly notify the other party in writing of any
suspected infringement of the other party's patents licensed hereunder or other
such activity that could adversely affect the rights of such other party with
respect thereto during the term of this Agreement, and will inform such other
party of any evidence of such infringement or unlawful activity in its
possession and the identity of any parties responsible for the infringement.
6.3 Cooperation. Each party will cooperate with the other party upon
request, at the other party's expense, in all matters relating to litigation
brought to enforce such party's patent
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<PAGE> 5
rights licensed to the other party hereunder, including providing information,
documents and other assistance necessary to the settlement or prosecution
thereof.
SECTION 7. TERM AND TERMINATION
7.1 Term. This Agreement will remain in effect perpetually, except with
respect to the licenses granted under the GI Licensed Patents or NLC Licensed
Patents, in which case this Agreement shall remain in effect until the last to
expire of such patents.
SECTION 8. MISCELLANEOUS
8.1 Amendment and Modification. This Agreement and its Appendices may be
amended, modified or supplemented only by a written agreement of the parties
referring expressly to this Agreement.
8.2 Waiver of Compliance; Consents. Any failure of a party to comply with
any obligation, covenant, agreement or condition in this Agreement may be waived
by the other party; provided that any such waiver may be made only by a written
instrument signed by the party granting such waiver. Any such waiver or failure
to insist upon strict compliance with such obligation, covenant, agreement or
condition will not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party, such consent must be given in writing in a manner
consistent with the requirements for a waiver of compliance as described above,
with appropriate notice provided in accordance with this Agreement.
8.3 Further Assurances. Each party will execute and deliver such other
documents and take such other action as the other party may reasonably request
in order to consummate more effectively the purpose of this Agreement and the
relationship between the parties as contemplated by this Agreement, including,
without limitation, the execution of documents in recordable form confirming the
existence of the grant of rights provided for under this Agreement, at the
expense of the requesting party.
8.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
principles of conflicts of law thereof. Except for injunctive relief which may
be sought immediately in any court of competent jurisdiction, and subject to the
provisions of Section 9.5, all actions, claims or legal proceedings in any way
pertaining to this Agreement shall be commenced and maintained in the courts of
New York, New York or in a federal court of the United States located in New
York, New York.
8.5 Obligation to Discuss. If either party believes the other party has
breached this Agreement, then a senior level executive with responsibilities in
the appropriate area (the "Senior Executive") of the party claiming breach shall
provide written notice of such alleged breach to the Senior Executive of the
party allegedly in breach. Within fifteen (15) days of receipt of such notice,
the Senior Executive of GI and Senior Executive of NLC shall meet in person or
by telephone to seek to resolve the situation in a mutually agreeable manner. If
the Senior Executives are unable to resolve the problem in good faith within
forty-five (45) days after the Senior Executive of the party allegedly in breach
has received the forgoing notice, then
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<PAGE> 6
the party claiming breach may commence any actions to which it is entitled under
the terms of this Agreement.
8.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will constitute an original, but all of which
together constitute one and the same instrument and will become a binding
agreement when one or more of the counterparts have been signed by each of the
parties and delivered to the other party.
8.7 Publicity. Neither party will make any media or press release
concerning this Agreement or the relationship of the parties, without the prior
written consent of the other party. The preceding sentence will not apply to any
disclosure required to be made by law or by the regulations of any stock
exchange(s), as reasonably determined by counsel to the party determining that
such disclosure is required, except that such party, whenever practicable, must
consult with the other party concerning the timing and content of such
disclosure before making it.
Nothing in this Agreement should be construed to confer upon either party
any right to include in its advertising, packaging or other commercial
activities related to a product any reference to the trademarks or service marks
of the other party.
8.8 Compliance with Laws. Each party will be responsible for obtaining all
consents and permits required by any law or regulation for the performance of
its obligations under this Agreement, including compliance with restrictions
imposed by the United States of America governing the export of technical data
(including encryption software). Each party will take all steps necessary, at
its sole expense, for its performance of obligations under this Agreement.
8.9 Assignment. This Agreement and all rights and obligations hereunder
may not be assigned in whole or in part by either party without the prior
written consent of the other party except as a part of the sale, transfer or
conveyance (including a conveyance by virtue of a merger, consolidation or
reorganization) of substantially all of NLC's or GI's business or a substantial
part of its business segment which exploits this rights granted under this
Agreement. Either party may assign its rights under this Agreement to an
Affiliate of that party, but such assignment will not relieve the assignor of
any of its obligations under this Agreement. In the event of an assignment or
other conveyance from GI to Motorola, Inc. in connection with a merger between
GI and Motorola, Inc., Sections 2.3, 2.4, 5.1(1) and 5.2(1) of this Agreement
shall not be interpreted post-merger to include any Motorola originated
intellectual property rights or technical information, or an obligation upon
Motorola, Inc. with respect to any Motorola originated intellectual property
rights or technical information.
8.10 Severability. If any of the provisions of this Agreement are held by a
court or other tribunal of competent jurisdiction to be invalid or
unenforceable, the remaining portions of this Agreement will remain in full
force and effect and construed so as to best effect the intention of the
parties.
8.11 Survival of Terms. Notwithstanding the termination of this Agreement,
those provisions that by their express terms are to survive termination will do
so as so expressly
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<PAGE> 7
provided; in all other cases such provisions will survive as necessary to effect
their essential purposes.
8.12 Notices under this Agreement. All notices and other communications
under this Agreement must be in writing and will be duly given if (1) delivered
by hand; (2) deposited in registered or certified mail (return receipt
requested), in which case such notice will be deemed given three (3) days
following deposit; or (3) sent via facsimile transmission (and confirmed by copy
sent via registered or certified mail (return receipt requested), to the parties
at the following addresses (or at such other address for a party as may be
specified by like notice):
NLC: Next Level Communications, Inc.
6085 State Farm Drive
Rohnert Park, CA 94928
Attention: Chief Financial Officer
and
GI: General Instrument Corporation
Attn: General Counsel
101 Tournament Drive
Horsham, PA 19044
[REST OF PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE> 8
IN WITNESS WHEREOF, NLC and GI have caused this Agreement to be executed by
their duly authorized officers as of the date below.
NEXT LEVEL COMMUNICATIONS, GENERAL INSTRUMENT
INC. ("NLC") CORPORATION ("GI")
x
By: By:
---------------------------------- ----------------------------------
Title: Title:
------------------------------- -------------------------------
Date: Date:
-------------------------------- --------------------------------
-8-
<PAGE> 9
Appendix A
Excluded GI Patents
Several GI Patents, excluded from this Agreement, are or may come to be included
in the following publicly available licensing programs:
DOCSIS
MPEG2
MPEG4
PacketCable
-9-
<PAGE> 10
APPENDIX B
EXCLUDED NLC PATENTS
None
-10-
<PAGE> 1
EXHIBIT 10.9
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 1 OF 77
SWITCHED DIGITAL VIDEO TECHNOLOGY AGREEMENT: TERMS AND CONDITIONS
TABLE OF CONTENTS
1. REQUIREMENTS
2. DEFINITIONS
2.1 ACCEPTANCE DATE
2.2. AFFILIATE
2.3. DOCUMENTATION
2.4. MATERIAL
2.5. PRODUCT
2.6. SERVICES
2.7. SOFTWARE
2.7.A. "RELATED DOCUMENTATION"
2.7.B. "LICENSED MATERIALS"
2.8. "SOURCE CODE"
2.9. "OPERATIONS SUPPORT SYSTEM"
2.10. SYSTEM
2.11. WORK
3. AGREEMENT TO PURCHASE
3.1. SCOPE OF AGREEMENT
3.2. TERM OF AGREEMENT
3.3. INTERRELATIONSHIP WITH ORDERS
3.4. GOVERNMENT CONTRACT PROVISIONS
3.5. NON-EXCLUSIVE MARKET RIGHTS
4. ASSIGNMENT
4.1. ASSIGNMENT BY NYNEX
4.2. ASSIGNMENT BY SUPPLIER
5. SOFTWARE
5.1. RIGHTS IN SOFTWARE
5.2. CUSTOM DEVELOPMENT OR MODIFICATION
5.2.1. INVENTIONS
5.2.2. WORK PRODUCT AND DEVELOPED INFORMATION
5.2.3. AUTHORSHIP AND COPYRIGHT
5.2.4. ACCESS TO WORK IN PROGRESS
5.3. EXPORT LICENSE
6. DOCUMENTATION AND SPECIFICATIONS
6.1. DOCUMENTATION
6.2. SPECIFICATIONS AND DRAWINGS
7. TERMINATION
7.1. TERMINATION FOR CAUSE
7.2. TERMINATION FOR CONVENIENCE
7.3 TERMINATION FOR INSOLVENCY, BANKRUPTCY, ASSIGNMENT, EXPROPRIATION,
AND/OR LIQUIDATION
7.4. TRANSFER OF CONTROL
7.5. TERMINATION BY SUPPLIER
7.6.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 2
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 2 OF 77
8. PRICES AND TERMS OF PAYMENT
8.1. PRICES
8.2. [ * ]
8.3. TERMS OF PAYMENT
8.4. BILLING VERIFICATION AND AUTHORIZATION FOR PAYMENT PROCESS
9. TITLE AND RISK OF LOSS
9.1. TITLE AND RISK OF LOSS
9.2. QUIET ENJOYMENT
10. DELIVERY AND SHIPPING
10.1. FOB POINT
10.2. COSTS AND ROUTING
10.3. SCHEDULES
10.4. SHIPPING AND BILLING
10.5. SHIPPING SCHEDULE
10.6. INEXCUSABLE DELAY
10.7. PERFORMANCE COMPENSATION PAYMENTS
10.8. PERFORMANCE COMPENSATION CURE PERIOD
10.9. NOTICE OF DELAY
11. ORDERS
11.1. ORDERS
11.2. VARIATION IN QUANTITY
11.3. TERMINATION OF ORDER
11.4. CHANGE ORDER
11.5. STOP WORK ORDER
11.6. NYNEX ADVICE
12. QUALITY ASSURANCE
12.1. QUALITY SYSTEM
12.2. QUALITY PERFORMANCE REPORTING
12.3. SOURCE INSPECTION
12.4. PACKING
12.5. MARKING
12.6. TECHNICAL SUPPORT
12.7. ENGINEERING COMPLAINTS
12.8. CHANGE TO MATERIAL OR SOFTWARE/PRODUCT CHANGE NOTICES
12.9. REPAIRS AND REPLACEMENT
12.9.A. FOA REPAIR AND REPLACEMENT PROCEDURES
12.9.B. IN WARRANTY
12.9.C. OUT OF WARRANTY
12.9.D. EMERGENCY "OUT OF SERVICE" CONDITIONS
12.10. DETAIL ENGINEERING, OFFICE RECORDS
12.11. INSTALLATION BY SUPPLIER
12.12. INSTALLATION BY NYNEX
12.13. ACCEPTANCE
12.13.1. FIRST OFFICE APPLICATION ("FOA") ACCEPTANCE
12.13.2. FOA PHASE II ACCEPTANCE
12.13.3. FOA CORRECTIVE ACTION PLAN
12.13.4. GENERALLY AVAILABLE PRODUCT ACCEPTANCE
12.13.5. GA CORRECTIVE ACTION PLAN
12.14. INFORMATION KEPT CURRENT
12.15. CONTINUOUS IMPROVEMENT PLAN ("SQIP")
13. WARRANTIES
13.1. WARRANTY OF TITLE
13.2. BASIC WARRANTY
13.3. SYSTEM COMPATIBILITY WARRANTY
13.4. CONFIGURATION WARRANTY
13.5. ADDITIONAL COMMITMENTS AND WARRANTIES
13.6. GOODWILL WARRANTY
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 3
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 3 OF 77
13.7. WARRANTY PERIOD
13.8. SOFTWARE
13.9. ESCROW
13.10. ILLICIT CODE
13.11. SERVICES
13.12 EMPLOYEES AND SUBCONTRACTORS BOUND
13.13 DISCLOSURE
14. COMPLIANCE WITH FEDERAL RULES
14.1. RADIO FREQUENCY ENERGY STANDARDS
14.2. REGISTRATION
15. CONTINUING AVAILABILITY
16. EXTRAORDINARY SUPPORT
17. WORKAROUND
18. SUPPLIER COMPREHENSIVE RESPONSIBILITY FOR OVERALL PERFORMANCE
19. REPORT RATE
20. PERFORMANCE STANDARDS
21. DEFAULT
22. WORK PERFORMED ON NYNEX PREMISES
22.1. CLEAN-UP
22.2. HARMONY
22.3. PLANT AND WORK RULES
22.4. RIGHT OF ACCESS
22.5. TOOLS AND EQUIPMENT
22.6. WORK HEREUNDER
23. LIABILITY AND INSURANCE
23.1. LIABILITY
23.2. INSURANCE
24. IMPLEADER AND LIMITED LIABILITY OF NYNEX
25. DOCUMENTATION AND RECORD KEEPING
25.1. PERIODIC REPORTS
25.2. RECORDS AND AUDITS
26. INTELLECTUAL PROPERTY - GENERAL OBLIGATIONS
26.1. INFRINGEMENT OF PATENTS, COPYRIGHTS, AND TRADEMARKS
26.2. PERFORMANCE BOND OR LETTER OF CREDIT
26.3. INTELLECTUAL PROPERTY RIGHTS
26.4. RIGHTS TO INNOVATIONS
26.5. LICENSES
26.6. IDENTIFICATION
26.7. INSIGNIA
26.8. PUBLICITY
26.9. USE OF INFORMATION
26.10. SUPPLIER'S INFORMATION
26.11. WAIVER OF CONFIDENTIALITY
27. ENVIRONMENTAL AND SAFETY
27.1. ENVIRONMENTAL COMPLIANCE
27.2. HAZARDOUS CHEMICAL INFORMATION
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NMEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 4
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 4 OF 77
27.3. OCCUPATIONAL SAFETY AND HEALTH ACT (O.S.H.A.)
28. TRAINING
29. CONSULTING
30. GENERAL PROVISIONS
30.1. SEVERABILITY
30.2. CHOICE OF LAW
30.3. COMPLIANCE WITH LAWS
30.4 MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISES
30.5. EXPORT CONTROL
30.6. TAXES
30.7. REGULATORY ASSISTANCE
30.8. SURVIVAL
30.9. NON-WAIVER
30.10. NOTICES
30.11. FORCE MAJEURE
30.12. DISASTER RECOVERY
30.13. RELEASES VOID
30.14. SECTION HEADINGS
31. ALTERNATE DISPUTE RESOLUTION
31.1. REFERRAL
31.2. MEDIATION
31.3. INDEPENDENT OBLIGATION OF SUPPLIER TO CONTINUE PERFORMANCE
32. ENTIRE AGREEMENT
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 5
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 5 OF 77
THIS AGREEMENT ("Agreement") is entered into this 16th day of October 1996 by
and between Telesector Resources Group, Inc., a Delaware corporation with
offices at 240 E. 38th Street, New York, N.Y. 10016, on behalf of itself and for
the benefit of its AFFILIATES, (hereinafter referred to as "NYNEX") and General
Instrument Corporation of Delaware and its subsidiary corporation Next Level
Communications, a California corporation with offices respectfully at 8770 West
Bryn Mawr Avenue, Chicago, IL. 60631 and 6153 State Farm Drive, Rohnert Park,
Ca. 94928(hereinafter referred to as "SUPPLIER"). Under the Agreement, NYNEX
agrees to purchase and SUPPLIER agrees to sell SYSTEMS, Material, Services and
Documentation and to license SOFTWARE and related Documentation when Ordered by
NYNEX in accordance with the terms and conditions stated in this Agreement.
Whereas, NYNEX has issued to Supplier a Request For Proposal dated October 19,
1995 and a Request for Revised Proposal dated April 2, 1996 (hereinafter
collectively the "RFP"), setting forth certain requirements and other
information incident to the purchase and deployment of a Switch Digital Video
System as referenced in Article 1.
Whereas, Supplier has reviewed and analyzed the RFP and has developed and
submitted to NYNEX its Proposal dated December 4, 1995 and its Response to the
Request For Revised Proposal dated April 30, 1996 (hereinafter collectively the
"Proposal") as referenced in Article 1.
Whereas, said Proposal sets forth Supplier's offer and representations
including, without limitation, conclusions, recommendations, and benefits
incident to the appropriate facilities, hardware, system, software, and
services, required to provide NYNEX with the functional and operational
performance capabilities and capacities specified in the RFP; and
Whereas, based on the representations contained in Supplier's Proposal,
presentations, other printed material, correspondence, discussions, and in
reliance upon the expertise of Supplier in developing, designing and delivering
systems, NYNEX desires to buy products and services from Supplier and Supplier
desires to supply products and services to NYNEX under the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and conditions set forth
herein, and intending to be legally bound, the parties agree as follows:
ARTICLE I
REQUIREMENTS
Specific sections of the Request for Proposal and Request for Revised
Proposal No. 95-7058SRH (together the "RFP") and specific sections of the
Supplier's Responses to the RFP are incorporated into this Article as if fully
set forth herein. Specific sections of the Appendices A through H supplement,
amend or modify the specific sections of the RFP and the Responses to which they
relate. Supplier and NYNEX understand and acknowledge that Appendices A through
H, together with the incorporated sections of the RFP and the Responses together
with the text of this Agreement constitute the specific requirements and
detailed specifications, and that they are agreed to by the parties, except to
the extent specifically supplemented, clarified, amended or modified by
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 6
Contract No. X134094D
October 16, 1996 Page 6 of 77
Appendix X hereof, entitled Modifications to Appendices; provided, however,
that, as and for an inducement to NYNEX to enter into this Agreement prior to
the full consolidation of all the requirement documents, in the event of any
conflict, dispute or disagreement between Supplier and NYNEX as to the meaning,
interpretation, effect or implication of any item or issue contained in Appendix
X hereof, entitled Modifications to Appendices, Supplier agrees that the
interpretation, meaning, effect or implication advocated by NYNEX, for all
purposes, shall govern, control and be determinative of the item or issue,
unless contradictory documentation is provided to NYNEX and/or its AFFILIATES
which substantiates SUPPLIER's position.
APPENDICES The following appendices are attached hereto and are hereby
made a part of this AGREEMENT:
Section Title
- ------- -----
A Scope of Work - The scope of work includes NYNEX
requirements for the Residential Broadband Loop Access
Transport Infrastructure Hardware, Software, Power,
Interfaces, Development Schedule, and Elements for future
functionality. The appendix documents below formulate the
statement of work.
1. Nynex Request for Proposal No. 95-7058SRH: Broadband
Loop Access Transport Infrastructure, dated October
19, 1995, Section 2.0 - Scope of Work and Section 4.0
Technical Questions
2. Nynex Request for Proposal No. 95-7058-SRH: Broadband
Loop Access Transport Infrastructure Addendum, dated
October 25, 1995, Replacement Section 2.0 - Scope Of
Work and Section 4.0 Technical Questions Additions
and Revisions.
3. Nynex Request for Proposal No. 95-7058-SRH: Broadband
Loop Access Transport Infrastructure Addendum 2,
dated November 8, 1995, Section 4.0 Vendor one-on-one
Sessions, Technical Questions Responses
4. Technical Mailing: Including 1) Video Dialtone
Service Requirements, dated September 1995, 2) Video
Services Platform System Requirement Specifications,
dated October 13, 1995.
5. Next Level Communications / General Instruments
Corporation, NYNEX RFP No. 95-7058SRH, December 4,
1995, Section 2.0 Scope of Work and Section 4.0
Technical Questions.
6. Broadband Loop Access Transport Infrastructure - RRP
95-7058SRH (Request for Revised Proposals, dated
April 2, 1996, Exhibit 3 - Technical Requirements,
Exhibit 12 - Operations Requirements, Exhibit 13 -
Testing and Acceptance Support Requirements, Exhibit
14 - Software Requirements, Exhibit 16 - Supplier
Quality Specifications.
7. Next Level Communications/General Instruments
Corporation, NYNEX RFP No. 95-7058SRH, Revised
Response, dated April 30, 1996, , Exhibit 3
-Technical Requirements, Exhibit 12 - Operations
Requirements, Exhibit 13 - Testing and Acceptance
Support Requirements, Exhibit 14 - Software
Requirements, Exhibit 16 - Supplier Quality
Specifications.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 7
Contract No. X134094D
October 16,1996 Page 7 of 77
8. Negotiation document # 5, Executive response
regarding GI issues, dated 8/7/96
9. Negotiation document # 9, Engineering and Operations
Package, dated 8/7/96
10. Negotiation document # 13, Broadband OSS/VSP Review,
dated 8/8/96
11. Negotiation document # 14, NYNEX Exhibit 6 RRP
Requirement and GI Proposal / OSS and VSP Schedule,
dated 8/8/96
12. Negotiation document # 16, NYNEX/GI Document trail,
dated 8/8/96 including Residential Broadband
Operations Support Systems Requirements
Specifications for Switched Digital Video
(TM96-0029), dated 7/9/96
13. Negotiation document # 17, GI / SDV Software Issues,
dated 8/8/96
14. Negotiation document # 19, OSS Functional
Requirements on the Access Sub-system EMS, dated
8/8/96
15. Negotiation document # 20, Modified Work Process Flow
description with Process Flow Diagram, dated 8/8/96
16. Negotiation document # 23, Response to Negotiation
document # 19, "OSS Functional Requirements of the
Access Sub-System EMS", dated 8/8/96
17. Negotiation document # 27, EMS Stand - Alone
Capability, dated 8/9/96
18. Negotiation document # 42, Description of 8/20/96
Documentation Meeting, dated 8/14/96
19. Negotiation Document # 50, Reference List of
Technical Documents for the SDV Project, dated
8/16/96
20. Negotiation Document # 61, Technical, Engineering and
Field Support, dated 8/22/96
21. Negotiation Document # 62, Updated List of NIM
Issues, dated 8/22/96
22. Negotiation Document # 63, Licensing VSP GW, Terms to
GI Subcontractors, Broadnet Decision date impact, and
Payment Terms for EMS, dated 8/22/96
23. Negotiation Document # 69, EMS Interface Issues, EMS
Interface to VIP GW, IP Addressing, dated 8/23/96
24. Negotiation Document # 71, ASC Development, dated
8/23/96
25. Negotiation Document # 97, Acceptance Criteria, dated
10/11/96
B. Project Implementation - Includes NYNEX requirements for schedule
deployment, Risk Management, GI/NLC Key Individuals, Testing and
Acceptance, and Report Rate. The appendix documents below represent the
requirements for Project Implementation
1. NYNEX Request for Proposal No. 95-7058SRH: Broadband Loop
Access Transport Infrastructure, dated October 19, 1995,
Section 3.0 Forecasted Requirements and Section 6.0 Milestone
Schedules
2. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum, dated October 25,
1995, Section 3.0 Forecasted Requirements and Section 6.0
Milestone Schedules
3. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum 2, dated November 8,
1995, Section 3.0 Forecasted Requirements
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 8
Contract No. X134094D
October 16, 1996 Page 8 of 77
4. Next Level Communications/General Instruments Corporation,
NYNEX RFP No. 95-7058SRH December 4, 1995, Section 3.0
Forecasted Requirements and Section 6.0 Milestone Schedules
5. Broadband Loop Access Transport Infrastructure -
RRP 95-7058SRH (Request for Revised Proposals, dated April 2,
1996, Exhibit 4 - Deployment Schedule, Exhibit 5-Supplier
Hardware and Software Schedule, Exhibit 6-NYNEX Broadband OSS
and VSP Schedule, Exhibit 13-Testing and Acceptance Support
Requirements.
6. Next Level Communications / General Instruments Corporation,
NYNEX RFP No. 95-7058SRH, Revised Response, dated April 30,
1996, Exhibit 4 - Deployment Schedule, Exhibit 5 - Supplier
Hardware and Software Schedule, Exhibit 6 - NYNEX Broadband
OSS and VSP Schedule, Exhibit 13 - Testing and Acceptance
Support Requirements.
7. Negotiation document # 4, Initial GI/SDV Equipment
Requirements for NYNEX's Lab, dated August 7, 1996
8. Negotiation document # 7, NYNEX Lab Trial Availability Dates,
dated 8/7/96
9. Negotiation document # 10, Broadband Deployment Risk
Management Strategy, dated 8/7/96
10 Negotiation document # 11, 18 Month Production Cycle Broadband
Implementation, dated 8/7/96
11. Negotiation document # 21, GI/NLC Negotiations Section VI,
Project Management Team, GI/NLC Organization Charts, Dated
August 8, 1996
12. Negotiation document # 22, GI Organization Personnel chart,
(Key Personnel), dated 8/8/96
13. Negotiation document # 26, GI/NLC Negotiations, Section III,
Report Rate Performance Criteria, dated 8/9/96
14. Negotiation document # 30, GI Response to: Deployment
Flexibility, Goodwill, VSP integration Lab in BA, dated 8/9/96
15. Negotiation document # 34, SDV Reports, dated 8/14/96
16. Negotiation Document # 67, NYNEX Broadband Build Schedule,
dated 8/23/96
17. Definition of Report Rate Criteria, dated 10/11/96
C Pricing - Includes NYNEX Loop Electronics Pricing Model, Detailed
Component Price List and GI's hourly, daily and monthly rate schedule
1. NYNEX Request for Proposal No. 95-7058SRH: Broadband Loop
Access Transport Infrastructure, dated October 19, 1995,
Section 5.2 Total Cost
2. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum, dated October 25,
1995, Section 5.2. Total Cost
3. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum 2, dated November 8,
1995, Section 5.0
4. Next Level Communications / General Instruments Corporation,
NYNEX RFP No. 95-7058SRH, December 4, 1995, Section 5.0
Business Issues and Requirements, Section 5.2 Total Cost
5. Broadband Loop Access Transport Infrastructure - RRP 95 -
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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Contract No. X134094D
October 16, 1996 Page 9 of 77
7058SRH (Request for Revised Proposals, dated April 2, 1996,
Exhibit 1 Pricing
6. Next Level Communications / General Instruments Corporation,
NYNEX RFP No. 95-7058SRH, Revised Response, dated April 30,
1996, Exhibit 1 Pricing, Worksheet 2, Loop Electronics Pricing
Model
7. NYNEX RFP 95-7058SRH - Detailed Component Price List
8. Residential Broadband System Component Price List, dated
10/11/96
D Changes in Scope - Includes the documents relating to a structure to
define and cost out changes in scope for hardware, software and
outsourcing requirements. The appendix documents will define their
contents as they relate to Structures for Change Orders.
1. Negotiation document # 37, Changes to NYNEX Exhibit 14 -
Software Requirements, dated 8/14/96
2. Negotiation Document # 44 & #58, Changes In Scope of Work,
dated 8/14/96
3. Negotiation Document # 47, Addition to "Changes Exhibit" dated
8/15/96
4. Compensation for Services for Changes in Scope, dated 10/11/96
E. Terms and Conditions - Intentionally left blank; See Switched Digital
Technology Agreement: Terms and Conditions.
F. Business Issues - Includes NYNEX requirements as they relate to
specific business aspects of this contract including Hardware and
Software Warranty, Training, Asset inventory Management, Most Favored
Nation, Volume Incentive, Transportation, Spares and M/WBE
Subcontracting Efforts
1. NYNEX Request for Proposal No. 95-7058SRH: Broadband Loop
Access Transport Infrastructure, dated October 19, 1995,
Section 5.0 Business Issues and Requirements
2. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum, dated October 25,
1995, Section 5.0 Business Issues and Requirements
3. NYNEX Request for Proposal No. 95-7058-SRH: Broadband Loop
Access Transport Infrastructure Addendum 2, dated November 8,
1995, Section 5.0
4. Next Level Communications / General Instruments Corporation,
NYNEX RFP No. 95-7058SRH, December 4, 1995, Section 5.0
Business Issues and Requirements
5. Broadband Loop Access Transport Infrastructure - RRP 95 -
7058SRH (Request for Revised Proposals, dated April 2, 1996,
Exhibit 17 - Warranty, Exhibit 18 Training, Exhibit 19 - Asset
Inventory Management, Exhibit 20 - Transportation, M/WBE
Subcontracting Initiatives
6. Next Level Communications / General Instruments Corporation,
NYNEX RFP No. 95-7058SRH, Revised Response, dated April 30,
1996, Exhibit 17 - Warranty, Exhibit 18
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 10
Contract No. X134094D
October 16, 1996 Page 10 of 77
Training, Exhibit 19 - Asset Inventory Management, Exhibit 20
- Transportation, M/WBE Subcontracting Initiatives
7. Negotiation document # 35, Elements for Strategic
Relationship, dated 8/14/96
8. Negotiation document # 36, Recommended Contract Language
Regarding Utilization of Diversified Supplier (Minority
Businesses Enterprises) , dated 8/14/96
9. Negotiation document # 38, Training, dated 8/14/96
10. Negotiation Document # 68, Software Escrow, Framework on
Acceptance, EMS Cost Clarification, dated 8/23/96
11. Negotiation Document # 72, Financial Stewardship & Termination
for Insolvency, dated 8/23/96
12. Negotiation Document # 76, Updated Training Information, dated
8/23/96
13. Elements for a Strategic Partnership, dated 9/27/96
14. Financial Accountability Requirements, dated 10/14/96
G. Negotiation Session Issues - Includes Negotiation Minutes and Action
Items, Summary of Negotiation Action Items, Negotiation Document
Exchange, and Negotiation Open Items. The appendix documents will
define their contents as they relate to the Negotiation Session.
1. Negotiation Minutes and Action Items, Version 8.0 dated 9/3/96
2. Negotiation Document Exchange dated 10/14/96
3. Summary of Negotiation Actions Items, dated 8/28/96
H. Additional Correspondence:
1. General Instruments letter, dated May 3, 1996, Subject: DA
Maps, To J. Greer from M. McClintic
2. General Instruments letter, dated May 7, 1996, Subject: NYNEX
RRP Clarification Questions, To: John Greer/Charlie Seibold
from M. McClintic
3. General Instruments letter, dated May 9, 1996, Subject $238
for additional business, To: Alan Polonsky from D. Genin.
4. General Instruments letter dated May 9, 1996, Subject EMS
Release and Maintenance Information, To: Eric Angione from S.
Klein
5. General Instruments letter, dated May 10, 1996, Subject GI/NLC
training response, To: D. McCloud from: S. Klein
6. General Instruments letter dated May 20, 1996, Subject GI/NLC
Executive Summary/Bios, To: J. Gross from Sandra Fulton
7. General Instruments presentation to NYNEX Officers dated May
29, 1996
8. General Instruments letter dated June 4, 1996, Subject: DSC
litigation, to J. Gross from K. Zar
9. NYNEX and General Instrument SDV Letter of Intent dated
September 6, 1996
10. General Instruments letter dated October 7, 1996, Subject:
NYNEX Functional and Interface Requirements for
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 11
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 11 OF 77
the Video Services Platform (VSP) , to C. Carey from M. Nguyen
11. General Instruments letter dated October 1, 1996, Subject
Narrowband/Broadband Engineering Guideline Coordination, to C.
Carey from B. Weeks
12. NYNEX letter to General Instrument letter dated August 2,
1996, Subject: Preliminary EDI Requirements, To: D. Genin from
J. Greer
X Modifications to Appendices: - This document supplements previously
exchanged documentation; in the event of conflict between the Terms
of this document and previously exchanged documentation, this
document shall control and take precedence.
1. Modifications to Appendices, Version 1.0 dated October 14,
1996
ARTICLE 2
DEFINITIONS
2.1 ACCEPTANCE DATE For any hardware or SOFTWARE provided hereunder,
ACCEPTANCE DATE is the first day after the applicable PRODUCT successfully
completes all Acceptance requirements provided for in this Agreement and any
applicable Order.
2.2 AFFILIATE means, at any time, and with respect to any corporation,
person or other entity (a) any other corporation that at such time, directly or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, such first corporation, person or other entity;
or (b) any other corporation, person or other entity beneficially owning or
holding, directly or indirectly, 25% or more of any class of voting or equity
interests of the first corporation or any subsidiary or any corporation of which
the first corporation and its subsidiaries beneficially own or hold, in the
aggregate, directly or indirectly, 25% or more of any class of voting or equity
interests. As used in this definition, "Control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a corporation, person or other entity whether through the
ownership of voting securities, or by contract or otherwise.
2.3 DOCUMENTATION shall mean any and all necessary written materials,
drawings, and specifications, that include but are not limited to, full
descriptions of planning, installation, engineering, use, test, maintenance,
analysis, repair, operation, and acceptance testing of the SYSTEM, together with
any and all modifications, revisions, additions, improvements or enhancements.
2.4 MATERIAL shall mean-the SUPPLIER's hardware, firmware, additions,
extensions, components, supplies, test equipment, apparatus and parts, as
specified in this AGREEMENT or in an Order, or which are integral to, or
associated with the acceptable functioning and performance of SUPPLIER's SYSTEM,
including, without limitation, those
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<PAGE> 12
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 12 of 77
set forth or otherwise identified in Appendix A hereto, entitled SCOPE OF WORK
and all other Appendices to this Agreement.
2.5 PRODUCT shall mean any or all SYSTEM(s), MATERIAL, or SOFTWARE or
Licensed Materials provided or furnished by SUPPLIER, including, without
limitation, those set forth or otherwise identified in Appendix A hereto,
entitled SCOPE OF WORK and all other Appendices to this Agreement.
2.6 SERVICES shall mean the SUPPLIER's SYSTEM engineering, installation,
installation support, technical support, emergency technical assistance,
training, and other related SERVICES which may be ordered hereunder, including,
without limitation, those set forth or otherwise identified in Appendix A
hereto, entitled SCOPE OF WORK and all other Appendices to this Agreement.
2.7 SOFTWARE shall mean a program, or programs, consisting of machine
readable logical instructions and tables of information, including, without
limitation, those set forth or otherwise identified in Appendix A hereto,
entitled SCOPE OF WORK and all other Appendices to this Agreement, which guide
the functioning of a processor and which are required to provide NYNEX with the
functional and operational performance capabilities and capacities specified in
the RFP or as may be identified in any order, associated Appendices or other
document or attachments associated with the Order. Such programs include, but
are not limited to, control programs, application programs, operating SYSTEM
programs, base-feature programs, optional-feature programs, and other programs
related to the operation, administration and/or support of MATERIAL.
2.7.A RELATED DOCUMENTATION shall mean DOCUMENTATION, useful in
connection with the SOFTWARE, such as but not limited to, flow charts, logic
diagrams, program listing, program descriptions and specifications; program
listings and program descriptions shall incorporate high-level language, SOURCE
CODE and programmer's comments.
2.7.B LICENSED MATERIALS shall mean the SOFTWARE and RELATED
DOCUMENTATION defined in Section 2.7 and 2.7.A and the firmware or internal code
fixed in, or otherwise incident to, the MATERIAL and for which licenses are
granted by SUPPLIER under this AGREEMENT.
2.8 SOURCE CODE shall mean a computer program in the form of high-level
language that generally is not directly executable by a processor.
2.9 OPERATIONS SUPPORT SYSTEM ("OSS") shall mean an Operations Support
System (SOFTWARE, interface hardware and processor) that interfaces with
SOFTWARE and/or MATERIAL in the SYSTEM and which is required for the 'operation,
administration and/or support (including but not limited to testing,
surveillance, billing, provisioning and inventory) of the SYSTEM.
2.10 SYSTEM shall mean the PRODUCT(S), MATERIAL and SOFTWARE of, and
associated with, SUPPLIER's System, functioning together, performing and
interoperating as a fully integrated and efficient whole with itself and with
all other switching, transport and transmission elements and other facilities
and equipment in the NYNEX network in accordance with the requirements and
specifications incident to this Agreement or any Order(s) issued pursuant to
this Agreement, including, without limitation, those set forth or otherwise
identified in Appendix A
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 13 OF 77
hereto, entitled SCOPE OF WORK and all other Appendices to this Agreement.
2.11 WORK shall mean the provision of Systems, Product, Material,
Software, and Documentation and the performance of Services incident to this
Agreement or any Order(s) issued pursuant to this Agreement, including, without
limitation, those set forth or otherwise identified in Appendix A hereto,
entitled SCOPE OF WORK and all other Appendices to this Agreement.
ARTICLE 3
AGREEMENT TO PURCHASE
3.1 SCOPE OF AGREEMENT NYNEX agrees to purchase and SUPPLIER agrees to
sell, SYSTEM(S), PRODUCT(S), MATERIAL, SERVICES and DOCUMENTATION and to license
SOFTWARE and RELATED DOCUMENTATION, when ordered by NYNEX in accordance with
Appendix A hereto, entitled SCOPE OF WORK and the terms and conditions stated in
this AGREEMENT at the prices identified in Appendix C hereto, entitled Pricing.
3.2 TERM OF AGREEMENT This Agreement shall commence on the date first
above written and, unless otherwise terminated pursuant to the provisions of
this Agreement, shall continue for an initial term of fifteen (15) years.
Thereafter, this Agreement shall continue in effect for successive terms of up
to one year, unless terminated by either party giving written notice to the
other party at least one hundred eighty (180) days prior to the anniversary
date, which shall be the effective date of termination, or unless otherwise
terminated as provided herein. This AGREEMENT shall be effective for SYSTEMS,
PRODUCTS, MATERIAL, SOFTWARE, SERVICES, DOCUMENTATION and Licensed Materials
ordered by NYNEX during the term and any extension thereof.
3.3 INTERRELATIONSHIP WITH ORDERS Whenever the provisions of an Order
conflict with the provisions of this Agreement, the typewritten provisions of
the Order which have been mutually agreed upon by the parties in writing and
which are not pre-printed as part of a form shall control and take precedence
over the conflicting provisions of this Agreement, but only for purposes of such
Order and, except for the conflicting provisions of such Order, the terms and
conditions of this Agreement shall not be deemed to be amended, modified,
canceled, or waived. Conflicting pre-printed provisions on the reverse or front
of the forms belonging to either party shall be deemed deleted.
3.4 GOVERNMENT CONTRACT PROVISIONS Orders placed pursuant to this
AGREEMENT containing a notation that the MATERIAL is intended for use under
government contracts shall, upon acceptance by SUPPLIER, be subject to the then
current government provisions referenced thereon or in attachments thereto.
3.5 NON-EXCLUSIVE MARKET RIGHTS It is expressly understood and agreed that
this AGREEMENT neither grants to SUPPLIER an exclusive privilege to sell or
provide to NYNEX or its AFFILIATES any or all PRODUCTS or services of the type
described in this AGREEMENT which NYNEX or its AFFILIATES may require, nor does
it require the purchase of any SYSTEM, PRODUCTS, MATERIAL, SOFTWARE,
DOCUMENTATION, licensed materials, or SERVICES from SUPPLIER by NYNEX or its
AFFILIATES. Supplier understands and agrees that NYNEX and its AFFILIATES are
free to and may contract with other manufacturers and Suppliers for the
procurement of
- --------------------------------------------------------------------------------
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 14
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 14 OF 77
comparable SYSTEMS, MATERIAL, SOFTWARE, DOCUMENTATION, licensed materials or
SERVICES.
ARTICLE 4
ASSIGNMENT
4.1 ASSIGNMENT BY NYNEX NYNEX shall have the right to assign this
AGREEMENT or to assign its rights and delegate its duties, obligations or
commitments under this AGREEMENT, either in whole or in part, to any of its
AFFILIATES, parent, and/or subsidiaries upon notice to SUPPLIER.
Any assignment pursuant to this clause shall neither affect nor diminish
any rights or duties that NYNEX may then have as to MATERIAL ordered by, or
SOFTWARE licensed to, NYNEX or delivered by SUPPLIER prior to the effective date
of the assignment or as to MATERIAL or SOFTWARE which is beyond the scope of the
assignment. Upon the acceptance of the assignment and the assumption of the
duties under this AGREEMENT by the assignee, the assignor shall be released and
discharged, to the extent of the assignment, from all further duties under this
AGREEMENT.
4.2 ASSIGNMENT BY SUPPLIER SUPPLIER shall not assign any right or interest
under this AGREEMENT, or Orders issued pursuant to this AGREEMENT (excepting
monies due or to become due), nor delegate any work or other obligation to be
performed or owed by SUPPLIER under this AGREEMENT, or Orders issued pursuant to
this AGREEMENT, without the prior written consent of NYNEX. Any attempted
assignment or delegation in contravention of the above provision shall be void
and ineffective. Any assignment of monies shall be void and ineffective to the
extent that (1) SUPPLIER shall not have given NYNEX at least sixty (60) days
prior written notice of such assignment and (2) such assignment attempts to
impose upon NYNEX obligations to the assignee additional to the payment of such
monies, or which are in excess of or differ from its obligations hereunder, or
to preclude NYNEX from dealing solely and directly with SUPPLIER in all matters
pertaining to this AGREEMENT including the negotiation of amendments or
settlements of charges due.
ARTICLE 5
SOFTWARE
5.1 RIGHTS IN SOFTWARE Unless otherwise specified in an Order, Supplier
hereby grants to NYNEX and its Affiliates, as to any Licensed Materials, in any
form known or unknown, a perpetual, irrevocable, royalty-free, world-wide,
non-exclusive, unrestricted, except as provided herein, right and license, under
any intellectual property or license rights now or hereafter acquired by
Supplier or its affiliates:
(i) to use, execute and operate the Licensed Materials, in whole or in
part, on any computer system or processor on which the Licensed
Materials will function, and an any number of computer systems or
processors, provided the use, execution or operation is in the
normal course of business; notwithstanding anything to the contrary
in the Agreement, use by or for NYNEX's direct or lower tier
customers, as incident to, arising out of, or as reasonably
necessary to comply with, the Telecommunications Act of 1996 or any
FCC orders implementing same, or any similar unbundling or
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 15
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 15 OF 77
interconnection requirements imposed by any state or local public
service authority shall be deemed to be use, execution or operation
in the normal course of business and shall be included, without
additional charge, within the scope of the license granted under
this Agreement.
(ii) to perform, display, transmit, reproduce, modify, enhance,
integrate, and create derivative works from, the Licensed Materials,
subject to the limitations in Section 5.1;
(iii) to sublicense, distribute, and market the Licensed Materials upon
execution of a separate re-seller or other marketing agreement
subject to terms for royalty fees and conditions for sublicense as
agreed upon by Supplier
(iv) to authorize any third party to exercise any of the foregoing rights
and licenses, subject to prior written approval from Supplier, which
shall not be unreasonably withheld.
NYNEX acknowledges SUPPLIER's representation that Licensed Materials are
the property of Supplier or its suppliers and that NYNEX shall not have any
ownership interest in Licensed Materials
Any modifications, enhancements, interfaces, or compilations created by or
on behalf of NYNEX by a third party or solely for NYNEX by Supplier,
("Changes"), as well as all intellectual property rights, including copyright,
to and in such Changes, shall be owned by NYNEX. All applications so developed
through use of the Licensed Products ("Applications") as well as all
intellectual property rights to and in such Applications shall be owned by
NYNEX. NYNEX or its AFFILIATES may add to, delete from, enhance or modify the
LICENSED MATERIALS, but no such changes, however extensive, shall alter
SUPPLIER's title to the original LICENSED MATERIALS. At no additional charge,
Supplier shall execute such documents as may be reasonably required to effect
the purposes of this provision.
NYNEX and/or its AFFILIATES shall hold LICENSED MATERIALS as they treat
their own confidential information. NYNEX' or its AFFILIATES' obligations
hereunder shall not extend to any information or data relating to LICENSED
MATERIALS which are now available to the public or become available by reason of
acts or omissions not attributable to NYNEX or its AFFILIATES.
NYNEX and/or its AFFILIATES shall have the right, at no additional charge,
to have the Software at any site used at any other location by means of remote
electronic access.
The license term for Software shall commence on the date of Phase I
acceptance of such Software and shall continue perpetually, unless terminated by
NYNEX and/or its AFFILIATES by giving SUPPLIER sixty (60) days prior written
notice. Termination of such license term shall also automatically terminate any
maintenance services for such Software.
Except to an Affiliate, or as set forth in Subsection 5.1.(i) hereof,
NYNEX or its AFFILIATES may not transfer the right to use SUPPLIER's Licensed
Material without prior written approval of Supplier, and subject to prior
agreement on terms for payment of any applicable royalties or license fees by
and to the party being transferred to. The Warranty terms in Article 13 of this
Agreement shall not be transferred by Supplier. Transfer of the right to use
Supplier's Licensed Material and related Documentation or technical information
to any of Supplier's
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 16
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 16 of 77
competitors is prohibited, and at no time shall such transfer be made to any
foreign Company, governmental body, or agency which is not subject to the U.S.
laws and enforcement pertaining to patents and copyrights protection.
With each license of Software ordered hereunder, SUPPLIER shall provide
NYNEX and/or its AFFILIATES with and documentation identified in Article 6
hereof, entitled DOCUMENTATION AND SPECIFICATIONS together with documentation
which either is provided by SUPPLIER to any of its other customers for the
Software or is reasonably necessary to enable NYNEX and/or its AFFILIATES to
adequately use such Software. Documentation shall comply with commonly accepted
industry standards with respect to content, size, legibility and
reproducibility.
SOURCE CODE shall be provided to NYNEX and/or its AFFILIATES' Electronics
SYSTEMS Assistance Centers (ESAC) organizations and ESAC field locations for use
in case of any emergency or out of service condition in accordance with the
escrow provisions of Section 13.9 of this AGREEMENT and then only for the
purpose of placing the SYSTEM back into operation. SOURCE CODE shall be provided
at the time of SOFTWARE delivery, and thereafter upon the performance of any
upgrades, changes, updates or other improvements thereto, all at no charge to
NYNEX or its AFFILIATES.
5.2 CUSTOM DEVELOPMENT OR MODIFICATION From time to time, NYNEX may issue
an Order to SUPPLIER to develop custom MATERIAL or SOFTWARE not generally
offered by SUPPLIER, or create modifications or enhancements to existing
SOFTWARE exclusively for NYNEX or for which NYNEX is charged substantially all
of the development cost. Subject to acceptance of an Order and agreement on the
scope of effort for which NYNEX retains title and rights to license of the
developed product, title to such custom developed MATERIAL or SOFTWARE shall
vest in NYNEX upon creation, unless such developments and/or modifications are
covered by a separate Feature Development Agreement between the parties, which
otherwise allocates, title or ownership rights to the developments and/or
modifications, defines the scope of work, schedules, license fees, and payments
as shall be appropriate to the project. SUPPLIER agrees that the cost to NYNEX
of such custom development services shall be determined in accordance with the
terms of Appendix D hereof, entitled CHANGES IN SCOPE. SUPPLIER shall warrant
any such custom developed product pursuant to the terms in Article 13,
Subsection 13.2.
5.2.1 INVENTIONS Supplier agrees that if any inventions, discoveries
or improvements are conceived or first reduced to practice in the course of
performance under this Section 5.2 and related in any way to the Work as defined
in Section 2.11 hereof, entitled Work, but not to inventions, discoveries or
improvements which are unrelated to the Work or the provision of
telecommunications services, Supplier will assign to NYNEX, SUPPLIER's entire
rights, title and interest in and to such inventions, discoveries and
improvements, and any patents that may be granted thereon in any country of the
world. Supplier further agrees that, without charge to NYNEX, SUPPLIER will sign
all papers and do all acts which may be necessary, desirable or convenient to
enable NYNEX, at NYNEX's expense, to file and prosecute applications for patents
on such inventions, discoveries and improvements, and to maintain patents
granted thereon.
5.2.2 WORK PRODUCT AND DEVELOPED INFORMATION For the purposes of
this Agreement, the term "Work Product" shall mean all material and information,
in any form now or hereafter known, including without limitation, concepts,
compilations, programs, specifications,
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 17
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 17 OF 77
records, documentation, and data, developed, created or prepared by or on behalf
of SUPPLIER, its employees, its agents, or its subcontractors, alone or jointly
with NYNEX employees or other persons, in connection with the SUPPLIER's
performance under Section 5.2. SUPPLIER agrees that SUPPLIER will disclose and
furnish promptly to NYNEX all such Work Product. SUPPLIER further agrees that
all such Work Product shall be NYNEX property, shall be treated as NYNEX
Information and kept in confidence by SUPPLIER, and may not be used for other
purposes except upon such terms as agreed to by NYNEX in writing.
5.2.3 AUTHORSHIP AND COPYRIGHT The entire right, title and interest,
including without limitation, copyright and moral rights, in all original works
of authorship fixed in any tangible medium of expression created or prepared by
SUPPLIER, or on SUPPLIER's behalf, alone or jointly with others, in the course
of performance under Section, 5.2 shall be vested in NYNEX. The parties
expressly agree to consider all such works as "works made for hire," to be owned
by NYNEX, to the extent permitted under applicable copyright laws. For all such
works, whether or not deemed a "work made for hire," SUPPLIER agrees, at no
additional charge, to assign, transfer and convey title to NYNEX of all such
right, title and interest, and to provide documentation satisfactory to NYNEX of
compliance with the foregoing.
5.2.4 ACCESS TO WORK IN PROGRESS All work in progress, including but
not limited to, design, test data and documentation generated through SUPPLIER's
effort or efforts of its permitted subcontractors, is subject to continuous
examination and evaluation by NYNEX on the SUPPLIER's or its subcontractor's
premises at any reasonable hour during and up to the completion of the Work or
termination of this Agreement. In addition, SUPPLIER agrees to render, on
reasonable request, status reports of the Work in progress, as quickly as
possible, containing the information required by NYNEX.
5.3 EXPORT LICENSE NYNEX shall not export or re-export the Software
License Materials, Documentation or other technical data without the appropriate
U.S. government approvals necessary for such export or re-export. NYNEX shall,
at its own expense, obtain all necessary customs, import, or other governmental
authorizations and Approvals.
ARTICLE 6
DOCUMENTATION AND SPECIFICATIONS
6.1 DOCUMENTATION SUPPLIER agrees to furnish DOCUMENTATION, as set forth
or otherwise identified in Appendix A hereof, entitled SCOPE OF WORK and the
terms and conditions stated within this AGREEMENT, for the SYSTEM hereunder, and
any succeeding changes thereto, at no additional charge. The cost of
DOCUMENTATION shall be included at no additional cost to NYNEX and/or its
AFFILIATES.
For each Order placed under this AGREEMENT, SUPPLIER shall furnish to
NYNEX or its AFFILIATES appropriate DOCUMENTATION including, but not limited to,
items of installation, engineering, planning, acceptance testing, operation and
maintenance of MATERIAL and SOFTWARE.
SUPPLIER shall be responsible for updating the DOCUMENTATION for any
subsequent updates and changes to DOCUMENTATION. SUPPLIER shall maintain a list
of persons and organizations of NYNEX and its AFFILIATES, to whom the updates
shall be provided. The updates and any
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 18
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 18 OF 77
subsequent changes shall contain a SUPPLIER identification reference number and
date of issue to facilitate administration. Such subsequent changes and updates
shall be provided within a reasonable time, at no charge to NYNEX and its
AFFILIATES.
SUPPLIER grants NYNEX and its AFFILIATES the right to make copies of any
documents furnished under this AGREEMENT for the exclusive internal use of NYNEX
and its AFFILIATES. If any document that is to be copied bears a copyright or
proprietary notice, NYNEX and its AFFILIATE shall reproduce the copyright or
proprietary notice on all copies. Notwithstanding the preceding reference to
proprietary markings, SUPPLIER shall not provide NYNEX or its AFFILIATES with
any proprietary information unless previously agreed to in writing.
6.2 SPECIFICATIONS AND DRAWINGS SUPPLIER's standard commercial and/or
technical specifications (including drawings) or other applicable documentation
("SPECIFICATIONS"), approved by NYNEX and its AFFILIATES relating to the SYSTEM,
MATERIAL, SERVICES, DOCUMENTATION and LICENSED MATERIALS provided hereunder and
listed in Appendix A hereof, entitled SCOPE OF WORK, shall be considered a part
of this AGREEMENT. SUPPLIER agrees to provide NYNEX, at no charge, a total of 20
copies of all such SPECIFICATIONS and approved amendments thereto, as issued.
ARTICLE 7
TERMINATION
7.1 TERMINATION FOR CAUSE In the event Supplier is in Default as defined
in Article 21 hereof, entitled Default, and has failed to remedy the default
within the Cure Period specified therein, NYNEX may, in addition to any other
remedy that may be available under this Agreement, at law or in equity,
terminate this Agreement upon giving at least [ * ] written Notice in
accordance with Section 30.10 hereof entitled NOTICES. However, the first time
that Notice is given to Supplier under this paragraph it may, by curing the
breach within [ * ] of receipt of the Notice, prevent the termination
for cause. In the case of SUPPLIER's Default resulting from a violation of law,
or an action which could or does endanger the health or safety of a person or
the environment, NYNEX may terminate this Agreement immediately, by giving
SUPPLIER Notice, without giving SUPPLIER any opportunity to cure.
7.2 TERMINATION FOR CONVENIENCE Notwithstanding any other provisions of
this Article 7, NYNEX may terminate this Agreement or cancel any Order(s) issued
hereunder for convenience upon [ * ] Notice to Supplier in accordance
with Section 30.10 hereof, entitled. NOTICES. Upon termination or cancellation
pursuant to this Section 7.2, NYNEX shall make payments to Supplier as set forth
in Appendix X hereto, entitled MODIFICATIONS TO APPENDICES unless more
specifically set forth in an applicable Order(s).
7.2.1 The effect of the termination of this Agreement shall be to
cancel any and all Order(s) under this Agreement; however the cancellation of
any individual Order(s) shall not affect the obligations of either party to the
other under any other existing Order(s). This Agreement shall continue in full
force and effect with respect to each Order(s) then in effect and not canceled,
until the expiration of each such Order(s) pursuant to the terms of that
Order(s).
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
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CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 19 of 77
7.2.2 Unless otherwise specified herein, NYNEX's liability to
Supplier with respect to such termination or cancellation shall be limited to
those set forth in Appendix X hereto, entitled MODIFICATIONS TO APPENDICES. Such
payment will constitute a full and complete discharge of NYNEX's obligations
under this Agreement, in the event of termination of the Agreement, or under the
specific Order(s), in the event of cancellation of an Order(s).
7.3 TERMINATION FOR INSOLVENCY, BANKRUPTCY, ASSIGNMENT, EXPROPRIATION,
AND/OR LIQUIDATION NYNEX may terminate this Agreement immediately by giving
written Notice in accordance with Section 30.10 hereof, without liability to the
Supplier, except for such MATERIAL, SOFTWARE, LICENSED MATERIALS and SERVICES
already delivered, installed and accepted together with such other MATERIALS
purchased for and identified to this Agreement which Supplier, even through the
application of its best efforts, cannot utilize with any of its other customers,
in the event the Supplier:
1. fails to meet and maintain the financial performance criteria defined in
the Financial Accountability Requirement Appendix F hereof, entitled
Business Issues;
2. is declared insolvent or bankrupt, or makes an assignment or other
arrangement for the benefit of its creditors;
3. has all or any substantial portion of its capital stock or assets
expropriated by government authority; or
4. is dissolved or liquidated (except as a consequence of a merger,
consolidation, or other corporate reorganization not involving the
insolvency or expropriation of that party).
If Supplier is involved in any of the events described in subsections
(1.), (2.), (3.) or (4.) it shall promptly notify NYNEX in accordance with
Section 30.10 hereof.
7.4 TRANSFER OF CONTROL In the event of the direct or indirect sale or
transfer of control of Supplier or substantially all of its assets to any third
party (other than a third party approved by NYNEX, which approval shall not be
unreasonably withheld), NYNEX shall have the [ * ] this Agreement at [ * ]
thereafter upon giving [ * ] thereof to Supplier or its successor in
interest and upon the giving of [ * ] in accordance with Section [ * ]
hereof, this Agreement [ * ] and NYNEX shall have [ * ] to Supplier
[ * ] for Material and licensed Materials [ * ] .
7.5 TERMINATION BY SUPPLIER Supplier may not terminate this Agreement, or
cancel an Order(s) or intellectual property rights granted or created hereunder,
except for non-payment of the purchase price or other charges and fees and then
only if after sixty (60) days of receipt of written Notice of Non-payment in
accordance with Section 30.10 hereof, NYNEX fails to pay such purchase price or
other charges and fees and thereupon Supplier issues its written Notice of
Default and NYNEX fails to pay such purchase price or other charges and fees
within ten (10) business days of receipt of such Notice of Default.
7.6 In the event of any termination or non-renewal of this Agreement,
Supplier shall assist and cooperate in all reasonable ways with NYNEX and any
replacement provider in the transition to a replacement provider. Such
assistance shall include, but not be limited
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* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
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CONTRACT No. X134094D
OCTOBER 16, 1996 PAGE 20 OF 77
to, the delivery to NYNEX [ * ] subject to the limitations of this
Agreement. [ * ] and [ * ] and shall be provided in accordance with the
provisions of Section [ * ] hereof entitled [ * ] , including provisions
for the payment of additional fees for any additional Work.
ARTICLE 8
PRICES AND TERMS OF PAYMENT
8.1 PRICES
A. SYSTEMS, PRODUCTS, MATERIAL, SOFTWARE, SERVICES, DOCUMENTATION and
LICENSED MATERIALS will be furnished by SUPPLIER in accordance with the
prices stated in APPENDIX C hereof, entitled PRICING. All costs and prices
identified are inclusive of Appendices A through H and X as well as all
terms and conditions of this AGREEMENT. Such prices shall be applicable to
Orders issued to SUPPLIER by NYNEX or its Affiliate(s) at the location and
by the method agreed to by the parties (hereinafter "placed") for up to
and including [ * ] households passed. SUPPLIER"s price
list for or SOFTWARE in APPENDIX C hereto, entitled PRICING must
differentiate between operating system SOFTWARE and applications SOFTWARE
according to the FCC mandated Uniform System of Accounts, Part 32 of the
FCC Rules and Regulations. SUPPLIER shall strive during the Term to reduce
prices for all Material, SOFTWARE and Services. in accordance with the
goal of Continuous Improvement.
B. SUPPLIER shall not, during the effective term of this Agreement,
[ * ] for any Product [ * ] for such PRODUCT
specified in Appendix C hereto, entitled PRICING.
C. Price reductions may be initiated by SUPPLIER at any time.
D. Continuous Improvement. SUPPLIER and NYNEX shall identify areas for
SUPPLIER's continuous improvement in cost, quality, and service over the
term of this Agreement. SUPPLIER shall afford NYNEX the ability to realize
such improvement including price reductions. SUPPLIER and NYNEX will meet
at least once every three months to assess SUPPLIER's progress towards
implementation of continuous improvement.
E. New Technology Replacement. NYNEX and SUPPLIER recognize that SUPPLIER
may develop and market new PRODUCTS ("New Technology") that are designed
to enhance or replace the PRODUCTS provided for in this Agreement.
SUPPLIER agrees to include THE NEW Technology as part of its PRODUCT
offerings within the terms provided for in this Agreement, and at a price
for comparable, successor, or substitute features and functionality,
[ * ] for PRODUCT or Purchase volumes stated within this Agreement
subject to the following:
1. SUPPLIER shall strive during the Term to reduce prices for all
Material, SOFTWARE, and Services in accordance with the goal of
Continuous Improvement.
2. New Technology shall only be furnished to NYNEX pursuant to a
written amendment hereto and in accordance with the Changes to
Material and SOFTWARE provisions of this Agreement including the
notice requirements therein.
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 21
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 21 OF 77
3. [ * ] shall be priced at the [ * ] for comparable, or successor,
substitute features and functionality, as the replaced Material or
SOFTWARE in accordance with the mutual goal of Continuous
Improvement.
4. SUPPLIER shall ensure continued availability of the current
PRODUCTS during the Term at the [ * ] as stated in Appendix C
hereto, entitled PRICING unless otherwise agreed to pursuant to a
written amendment to this Agreement.
5. All such proposed changes to Appendix C hereto, entitled PRICING
shall be subject to NYNEX's written agreement evidenced by a written
amendment to this Agreement.
F. New Technology Additions - SUPPLIER may propose the addition of New
Technology to Appendix A hereto, entitled SCOPE OF WORK which is not
intended to replace or upgrade current Material ("New Technology
Addition"). SUPPLIER shall provide a detailed written explanation of how
such New Technology Addition will meet the joint goal of Continuous
Improvement. All proposed New Technology Additions shall only be furnished
to NYNEX pursuant to a written Amendment to this Agreement or pursuant to
a separate written agreement between the parties.
8.2 [ * ] SUPPLIER represents that all of the prices, warranties,
benefits, terms and conditions granted to NYNEX or its Affiliate(s) by SUPPLIER
hereunder will be [ * ] than the equivalent prices, warranties, benefits, terms
and conditions [ * ] to SUPPLIER's [ * ] under [ * ] or [ * ] circumstances.
If at any time during the term of this AGREEMENT, SUPPLIER shall [ * ]
prices, warranties, benefits, terms or conditions for substantially the same or
similar MATERIAL or SERVICES or DOCUMENTATION or LICENSED MATERIALS as those
provided hereunder, then:
A. SUPPLIER shall, within [ * ] calendar days after the effective date of
such offering, [ * ] NYNEX to its Affiliate(s) of such fact in
accordance with Section 30.10 hereof, and [ * ] NYNEX or its
Affiliate(s) [ * ] offering and [ * ] any additional differentiating
factors; and
B. this AGREEMENT and all applicable Orders shall be deemed to be
automatically amended, effective retroactively to the effective date of
the [ * ] , and SUPPLIER shall provide [ * ] prices, warranties,
benefits, terms and conditions [ * ]; and
C. NYNEX shall have the right to decline to accept [ * ] , in which
event such automatic amendment shall be deemed to be void.
Supplier's compliance with this clause shall be subject, at NYNEX's option,
to independent verification in accordance with the clause hereof entitled
"REPORTS AND AUDIT."
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 22
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 22 OF 77
8.3 TERMS OF PAYMENT
A. FIRST OFFICE APPLICATION ("FOA") PHASE I [ * ] shall be issued by
Supplier and [ * ] shall be made by NYNEX until [ * ] which means
that a sufficient number of tracking units to constitute
approximately [ * ]. Upon FOA Phase I Acceptance, SUPPLIER shall
issue its invoice for SYSTEM, PRODUCT, MATERIAL, SOFTWARE and
associated SERVICE which shall be paid [ * ] from Phase I Acceptance
of the FOA in accordance with the terms of this AGREEMENT.
B. FOA PHASE II Subsequent to FOA Phase I Acceptance, Supplier shall
furnish, deliver and install the System(s), Product, Material,
Software and Service required to complete the installation of the
remainder of the FOA which shall include a sufficient number of
tracking units in order to determine whether or not SUPPLIER'S
SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICES is fully
operational, loaded with sufficient traffic and functioning and
operating in a fully compatible mode as a SYSTEM in accordance with
the requirements and SPECIFICATIONS of this AGREEMENT or any
Order(s) issued pursuant to this AGREEMENT ("FOA Phase II").
SUPPLIER's invoice for the FOA Phase II SYSTEM(S), PRODUCT,
MATERIAL, SOFTWARE and associated SERVICES shall be paid [ * ] from
receipt of invoice, but in no event shall invoice be dated or issued
prior to shipment. Payment by NYNEX of such invoices does not mean
or imply that the Product has been accepted and does not impair or
limit in any way NYNEX's full rights and remedies of acceptance
which shall be and remain as set in Article 12 hereof, entitled
QUALITY ASSURANCE.
C. GENERAL AVAILABILITY Subsequent to FOA Phase I and Phase II
Acceptance, SUPPLIER's invoice for all other and additional SYSTEM,
PRODUCT, MATERIAL, SOFTWARE and associated SERVICES shall be paid
[ * ] from receipt of invoice, but in no event shall invoice be
dated or issued prior to shipment. Payment by NYNEX of such
invoices does not mean or imply that the Product has been accepted
and does not impair or limit in any way NYNEX's full rights and
remedies of acceptance which shall be and remain as set forth in
Article 12 hereof, entitled QUALITY ASSURANCE.
8.4 BILLING VERIFICATION AND AUTHORIZATION FOR PAYMENT PROCESS ("BVAPP")
whenever NYNEX issues an Order, the identification number of which is prefaced
by the letter "B," the provisions of this clause "BVAPP" shall apply. Whenever
the provisions of this clause conflict with any other clause in this AGREEMENT,
the provisions of this clause shall prevail.
SUPPLIER shall code central office equipment and render billing as
directed by NYNEX.
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 23
Contract No. X134094D
October 16,1996 PAGE 23 of 77
ARTICLE 9
TITLE AND RISK OF LOSS
9.1 TITLE AND RISK OF LOSS In the event SUPPLIER does not have an Order to
install MATERIAL and the installation is to be performed by NYNEX, Title and
Risk of Loss or damage to MATERIAL purchased by NYNEX or its AFFILIATE under
this AGREEMENT, or an Order issued pursuant to this AGREEMENT, shall vest in
NYNEX or its AFFILIATE when the delivery of the MATERIAL has been completed to
the location specified in the Order.
When the Order(s) is placed by an Affiliate(s), title to direct ship
MATERIAL shall pass from SUPPLIER directly to the applicable AFFILIATE(s) and
the receiving company shall be entitled to all of the rights otherwise afforded
to NYNEX under this AGREEMENT.
If an Order requires additional services, such as unloading, hoisting and
rigging, installation or acceptance testing to be performed by SUPPLIER,
SUPPLIER shall be responsible for loss or damage to the MATERIAL while the
MATERIAL is in the custody, control or possession of SUPPLIER until such
services have been performed. Responsibility for such loss or damage shall be
governed by the clause hereof entitled "LIABILITY AND INSURANCE."
SUPPLIER shall retain risk of loss or damage for all MATERIAL until NYNEX
and/or its AFFILIATES shall have inspected the shipping container(s) and
verified that the MATERIAL received complies with the order with respect to
quantity and condition of the shipping container in which the MATERIAL is
received. In the event that the shipment does not comply NYNEX shall note any
shortage and/or visible transportation damages on the shipping document and
notify SUPPLIER of same within (7) days of receipt of MATERIAL; and cooperate
with SUPPLIER in the prosecution of loss or damage and resulting claim.
9.2 QUIET ENJOYMENT With respect to any PRODUCT or Service furnished
hereunder, SUPPLIER agrees that NYNEX, or its Affiliate(s), shall be entitled to
possess and use such PRODUCT or Service during the Initial term, including any
extensions or renewals thereof, without interruption by SUPPLIER or any person
claiming by or through SUPPLIER, provided only that NYNEX shall duly perform its
obligations pursuant to this Agreement and the applicable Order.
ARTICLE 10
DELIVERY AND SHIPPING
10.1 FOB POINT MATERIAL and SOFTWARE shall be delivered FOB Rohnert Park,
Ca., or a point geographically closer and within the continental United States,
Destination collect in accordance with instructions provided on the Order. The
NYNEX, or its Affiliate(s), designated location to which the MATERIAL and
SOFTWARE are to be delivered shall be indicated on the order.
10.2 COSTS AND ROUTING. For all OC shipments, SUPPLIER shall ship all
MATERIAL and SOFTWARE Freight Collect (OC) according to NYNEX's instructions,
which will be given to SUPPLIER by Freight Traffic Services at the 800 number
below, and have bills sent to the following address (which address NYNEX may
change upon providing SUPPLIER with written Notice in accordance with Section
30.10 hereof).
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<PAGE> 24
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 24 OF 77
Telesector Resources Group
c/o Freight Traffic Services (FTS)
P.O. Box 1259
Somerville, New Jersey 08876
1-800-891-6218
If SUPPLIER fails to follow NYNEX's shipping instructions, or if SUPPLIER
fails to request instructions when directed to in an Order, then SUPPLIER
shall be solely responsible for the associated freight bill and freight
costs in excess of NYNEX's contract rates that are incurred due to
SUPPLIER's nonconformance. If the freight bill is paid by NYNEX, SUPPLIER
shall be required to reimburse NYNEX accordingly within 30 days.
10.3 SCHEDULES In order to facilitate acquisition planning for SYSTEM(S),
MATERIAL, SOFTWARE and SERVICES, SUPPLIER shall establish standard delivery
schedules based upon mutually agreed upon forecasts provided by NYNEX or its
Affiliates and/or annual commitment levels for the SYSTEM(S), MATERIAL, SOFTWARE
and SERVICES to be furnished under this AGREEMENT.
A. These schedules will be from receipt of NYNEX's or its Affiliates'
Order until delivery to NYNEX's or its Affiliates' specified
location. Such schedules, as shall be provided to NYNEX by SUPPLIER,
shall be mutually agreed upon and shall apply to all routine orders
placed under this AGREEMENT.
B. In the event that an accelerated delivery schedule is required by
NYNEX, SUPPLIER shall utilize its best efforts to comply with such
requirements.
C. SUPPLIER shall give written or electronically transmitted notice as
Order Acknowledgment at least fifteen (15) days prior to the
scheduled delivery date.
D. If the possibility exists that the scheduled date of delivery will
not be met, or if Supplier notifies NYNEX that an error or
discrepancy exists on an Order, SUPPLIER shall immediately notify
NYNEX as stated herein in the clause entitled "NOTICES."
10.4 SHIPPING AND BILLING Unless instructed otherwise by NYNEX, SUPPLIER
shall, for Orders placed hereunder: (1) deliver entire quantity of items
ordered; (2) ship to the destination designated in the Order in accordance with
specific shipping instructions; (3) ensure that all subordinate documents bear
NYNEX's Order number; (4) enclose a packing memorandum with each shipment and
when more than one package is shipped, identify the one containing the
memorandum; (5) mark NYNEX's Order number on all packages and shipping papers;
(6) render itemized invoices in duplicate, or as otherwise specified, showing
Order number; (7) render separate invoices for each shipment or Order; (8)
invoice NYNEX by mailing or otherwise transmitting invoices, bills and notices
to the billing address on the Order after shipment of MATERIAL. Shipping and
routing instructions may be altered in writing, as mutually agreed by SUPPLIER
and NYNEX.
SUPPLIER's invoicing for SOFTWARE must reflect a differentiation between
operating system SOFTWARE and applications SOFTWARE, according
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<PAGE> 25
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 25 OF 77
to the FCC mandated Uniform System of Accounts; Part 32 of the FCC Rules and
Regulations.
In addition, SUPPLIER agrees to provide invoices that include priced units
of MATERIAL for use in the Continuing Property Record, the requirements of which
shall be specified by NYNEX.
10.5 SHIPPING SCHEDULE The shipping schedule applicable to each Order will
be that set forth in the Order or any Change Order, if applicable. SUPPLIER
agrees not to ship MATERIAL or SOFTWARE prior to the agreed-upon shipping
schedule. Any variation from the foregoing must be agreed upon by the parties in
writing.
10.6 INEXCUSABLE DELAY In the event SUPPLIER fails to meet the agreed-upon
delivery date of MATERIAL or SOFTWARE or the agreed-upon completion date for
SERVICES and fails [ * ] within [ * ] set forth in Section [ * ] hereof for
reasons other than Force Majeure or delays caused by NYNEX's or its AFFILIATES'
material failure to meet its obligations to SUPPLIER, then SUPPLIER shall be
considered in breach of contract and shall be [ * ] to compensate [ * ] for
[ * ] in accordance with Section [ * ] hereof entitled [ * ].
10.7 PERFORMANCE COMPENSATION PAYMENTS Supplier shall pay NYNEX, at NYNEX's
election, either i) an amount equal to [ * ] Supplier fails to make delivery or
otherwise perform or comply with the terms and conditions of this Agreement; or
ii) an amount equal to [ * ]. The payment of compensatory damages by Supplier
shall be deemed made under and subject to Article 20 hereof, entitled
PERFORMANCE STANDARDS.
10.8 PERFORMANCE COMPENSATION CURE PERIOD In the event of any Supplier
breach, default or other failure to perform under (i) Section 10.6 hereof,
entitled INEXCUSABLE DELAY, or (ii) Section 12.7 hereof, entitled ENGINEERING
COMPLAINTS, or (iii) Section 12.13.3 hereof, entitled FOA CORRECTIVE ACTION
PLAN, or (iv) 12.12.5 hereof, entitled GA CORRECTIVE ACTION PLAN, or v) Article
17 hereof, entitled WORKAROUND, and NYNEX elects to proceed under Article 20
hereof, entitled PERFORMANCE STANDARDS in order to receive compensation for such
Breach pursuant to Section 10.7 hereof, entitled PERFORMANCE COMPENSATION
PAYMENTS, NYNEX shall provide Supplier with written Notice thereof in accordance
with Section 30.10 hereof, and Supplier shall have [ * ] from the mailing, or
other issuance, of said notice to cure the Performance Failure ("Performance
Failure Cure Period"). If at the end of the Performance Failure Cure Period, the
Performance Failure(s) has not been remedied to the reasonable satisfaction of
NYNEX, then NYNEX shall assess Performance Compensation Payments and Supplier
shall make such Performance Compensation Payments to NYNEX in accordance with
Section 10.7 hereof, entitled PERFORMANCE COMPENSATION PAYMENTS.
10.9 NOTICE OF DELAY SUPPLIER, having agreed to the delivery date and/or
completion date, whichever is applicable, for any combination of MATERIAL,
SOFTWARE or SERVICES incorporated into NYNEX' Order, further agrees to notify
NYNEX in accordance with Section 30.10 hereof, as soon as any foreseeable delay
in that date becomes known to SUPPLIER.
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NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 26
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 26 OF 77
ARTICLE 11
ORDERS
11.1 ORDERS Any written order or statement of work ("Order") issued by
NYNEX or its Affiliate(s) for a SYSTEM, PRODUCT, MATERIAL, SOFTWARE, and
SERVICES, DOCUMENTATION, and LICENSED MATERIALS specified herein, or which
reference this Agreement, shall be deemed to be placed under and incorporate the
terms and conditions of this AGREEMENT.
An Order for the purchase of a SYSTEM, PRODUCT, MATERIAL, SOFTWARE, and
SERVICES shall be written on a NYNEX or its Affiliate's purchase order form and
shall contain the following:
A. The incorporation by reference of this AGREEMENT;
B. A complete list of the SYSTEM, PRODUCT, MATERIAL, SOFTWARE, and
SERVICES to be purchased specifying quantity, type, model, feature,
description and purchase price;
C. The locations at which the SYSTEM, PRODUCT, MATERIAL, SOFTWARE, and
SERVICES will be delivered or installed and to which invoices shall
be forwarded;
D. The dates by which the SYSTEM, MATERIAL, SOFTWARE and SERVICES are
(a) to be shipped or performed and (b) installed or completed and
ready for use;
E. Any other special terms and conditions agreed upon by the parties.
Orders placed for SYSTEM(S), MATERIAL, PRODUCT, SERVICES, DOCUMENTATION,
SOFTWARE and RELATED DOCUMENTATION which are consistent with the terms and
conditions of this AGREEMENT, shall be deemed accepted by SUPPLIER unless
written notice to the contrary is received by NYNEX or its Affiliate(s) within
ten (10) business days of SUPPLIER's receipt of Order.
NYNEX and its AFFILIATES shall have the right to change the locations at
which the SYSTEM, PRODUCT, MATERIAL, SOFTWARE, and SERVICES will be delivered or
installed and/or to which invoices shall be forwarded at least 3 days prior to
shipment at no additional cost to NYNEX and/or its AFFILIATES. SUPPLIER shall
accept such changes and forward a written acknowledgment of such changes to
NYNEX or its AFFILIATE.
11.2 VARIATION IN QUANTITY NYNEX assumes no liability for any MATERIAL or
SOFTWARE produced or processed in excess of the amount specified in an Order
issued pursuant to this AGREEMENT.
11.3 TERMINATION OF ORDER NYNEX may, upon written notice to SUPPLIER, at
any time prior to shipment, terminate any or all Orders, or portions thereof,
placed by NYNEX hereunder, except with respect to SYSTEM(S), PRODUCT, MATERIAL
and/or SOFTWARE which has already been delivered or SERVICES which have already
been completed. Unless otherwise specified herein, NYNEX' liability to SUPPLIER
with respect to such terminated Order(s) shall be limited to SUPPLIER's purchase
price of all components which are not usable in SUPPLIER's other operations or
marketable to SUPPLIER's other customers.
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<PAGE> 27
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 27 OF 77
11.4 CHANGE ORDER
11.4.1 NYNEX may at any time upon fifteen (15) days written notice
to Supplier, by written order, make any change within the scope of this
Agreement or any Order(s), including, without limitation, the addition or
deletion of System(s), Product, Material, Software covered, the Service(s) to be
performed, the time and/or place of performance, delivery or installation
thereof. Any such order shall be specifically identified as a Change Order
pursuant to this Article. In the event NYNEX desires to make a change, NYNEX
shall request Supplier to provide a written proposal stating the additional
requirements or reduction of existing requirements and the cost and schedule
implications incident thereto. SUPPLIER agrees that the cost to NYNEX of the
change shall be determined in accordance with the terms of Appendix D hereof,
entitled CHANGES IN SCOPE. If NYNEX is in agreement with the terms, conditions
and charges specified in the proposal, NYNEX will issue a Change Order pursuant
to this Agreement. In the event that the Change Order is issued at least fifteen
(15) days prior to the scheduled delivery date, the change(s) shall be
accomplished without affecting the original delivery date; unless otherwise
specified in the terms of an agreed upon Change Order if the Change Order is
issued less than fifteenth (15) days from the scheduled delivery date, the
delivery date may be subject to change and Supplier will identify, upon receipt
of the Change Order, whether, and to what extent, any change in delivery date
will occur. All Services and Materials covered hereunder shall be performed in
accordance with this Agreement and such changes thereto as are subsequently
authorized by a written Change Order issued by NYNEX. Nothing in this clause
shall excuse the Supplier from proceeding with the Agreement as changed.
11.4.2 Before the issuance of a Change Order under this Agreement,
NYNEX may request SUPPLIER's written agreement as to the maximum (in case of an
increase) or minimum (in case of a decrease) adjustments to be made in the price
and/or in the time of performance, by reason of the change. NYNEX may also
request an agreement limiting the adjustments to any other provisions of the
Agreement which may be subject to equitable adjustment by reason of the change.
Any such written agreement shall then be cited in the Change Order, and upon its
issuance shall be deemed to become part of this Agreement. In making equitable
adjustments pursuant to this clause, in no event shall the definitive adjustment
exceed the maximum or be less than the minimum price and/or time of performance
adjustments so established, nor otherwise be inconsistent with other adjustment
limitations so established. Except with respect to such limitations, nothing
contained in this paragraph (2) shall affect the SUPPLIER's rights to equitable
adjustment by reason of the change pursuant to this clause.
11.4.3 Unless expressly stipulated elsewhere in this Agreement as
being excepted from this provision, wherever this Agreement provides for
submittal of designs, data including Software, elements, procedures, or other
items for approval of NYNEX, such approvals shall not be construed as a complete
check as to the adequacy of said design, procedure, practice or item, nor as a
agreement that the design, procedure, practice or items will meet the
requirements of the Order or Change Order. Such approvals are for the purpose of
ensuring NYNEX's knowledge of the SUPPLIER's plans and progress and will
indicate only that the SUPPLIER's general approach toward meeting contractual
requirements is satisfactory. Such approvals shall in no way relieve the
Supplier of the responsibility for any error or deficiency which may exist in
the submitted design, procedure, or other items, as the
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<PAGE> 28
CONTRACT NO. X134094D
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Supplier shall be responsible for meeting all the requirements for the
Agreement.
11.4.4 NYNEX's engineering, technical, and administrative personnel
may from time to time render assistance or give technical advice to, or effect
an exchange of information with, SUPPLIER's personnel in a liaison effort
concerning the System, Products, Material, Software or Services to be furnished
hereunder. However, such exchange of information or advise shall not vest
Supplier with the authority to change the Material, Software or Service(s)
hereunder or the provisions of the Agreement, and no change in the Material or
Service(s) or the provisions of the Agreement shall be binding upon NYNEX unless
incorporated as a change in accordance with Section 11.4 hereof. Only NYNEX, is
authorized to make a change to the Agreement.
11.4.5 Requests for information related to Change Orders shall be
directed to both Jim Henderson, Sourcing Process Leader, NYNEX, Corporate
Sourcing, 240 East 38th Street, 14th Floor, New York, N.Y. 10016; (212) 338-1088
and to Charlie Andrianopoulos, Director/Design Build Broadband, NYNEX, 251 Locke
Drive, Marlboro, Ma. 01750, (508) 624-1100 or to their successor(s) as
designated by NYNEX.
11.5 STOP WORK ORDER
11.5.1 NYNEX may, at any time, by written order to the Supplier,
delivered in accordance with the notice provisions of Section 30.10 hereof,
require the Supplier to stop all or any part of the Work called for by this
Agreement or applicable Order(s) for a period of up to [ * ] after the Stop Work
Order is delivered to the Supplier, and for any further period to which the
parties may agree not to exceed [ * ]. Any such order shall be specifically
identified as a Stop Work Order issued pursuant to this clause and shall
automatically extend the time of performance or the delivery date of such Work
for a period equal to the period of the Stop Work Order.
11.5.2 Upon receipt of such an order, the Supplier shall forthwith
comply with its terms and take all reasonable steps to minimize the incurrence
of costs allocable to the Work covered by the order during the period of work
stoppage. Within a period of [ * ] after a Stop Work Order is delivered to the
Supplier, or within any extension of that period to which the parties shall have
agreed, NYNEX shall either: (i) cancel the Stop Work Order, or (ii) terminate
the Work covered by such order as provided in Article 7 hereof, entitled
TERMINATION.
11.5.3 If a Stop Work Order issued under this clause is canceled or
the period of the order or any extension thereof expires, the Supplier shall
resume Work. An equitable adjustment shall be made in delivery schedule or the
period of performance and in any other provisions of the Agreement that may be
affected, and the Agreement shall be modified in writing accordingly, if,
(i) the Stop Work Order results in an increase in the time required
for, or in the SUPPLIER's cost properly allocable to the performance of any part
of this Agreement, and
(ii) the Supplier asserts a claim for such adjustment within [ * ],
provided that, if NYNEX decides the facts justify such action, it may
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
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CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 29 OF 77
receive and act upon any such claim asserted at any time prior to final payment
under this Agreement.
11.5.4 If a Stop Work Order is not canceled, the Work covered by
such order shall be deemed terminated pursuant to the TERMINATION clause of this
contract.
11.6 NYNEX ADVICE
In the course of performing the Work and providing the Services, Supplier
may receive advice from NYNEX concerning results to be achieved and requirements
to be met in the performance of the Work. Supplier shall make every reasonable
effort to comply to any advise consistent with the terms of this Agreement but
it shall be the responsibility of SUPPLIER's representatives and supervisors to
give such instructions and directions as may be necessary or appropriate to
ensure that the work assignments of SUPPLIER's employees are properly carried
out in conformity with such advice.
ARTICLE 12
QUALITY ASSURANCE
12.1 QUALITY SYSTEM The SUPPLIER shall maintain a quality system which
assures that the SYSTEM(s), MATERIAL, SOFTWARE or PRODUCTS/SERVICES provided to
NYNEX meet all performance standards and requirements, and perform as intended,
including without limitation those identified in Appendix A hereof, entitled
SCOPE OF WORK, together with the following: the SUPPLIER'S quality system shall
satisfy the requirements in TR-NWT-001252, Bell Communications Research
Technical Reference, "Quality System Generic Requirements", Issue 1, December
1992 for hardware design and manufacturing; and TR-TSY-000179, Bell
Communications Research Technical Reference, "Quality System Generic
Requirements for SOFTWARE", Issue 2, June 1993 for SOFTWARE design and
development. SUPPLIER shall remain updated on all such performance standards and
requirements and shall, at the discretion of NYNEX and/or its AFFILIATES, meet
those updated standards and requirements.
In addition to the standards, specifications and requirements set forth or
otherwise identified in Appendix A hereof, entitled SCOPE OF WORK, the SUPPLIER
shall also adhere to the following standards and requirements throughout the
life of this agreement:
1. TR-TSY-000078, Bell Communications Research Technical Reference, "Physical
Design and Test Requirements for Telecommunications PRODUCTS and Equipment",
Issue 3, December 1991.
2. FR-NWT-000796, Bell Communications Research Framework, "Reliability and
Quality Generic Requirements (RQGR)", Issue 3, June 1993.
3. TR-NWT-000870, Bell Communications Research Technical Reference,
"Electrostatic Discharge Control in the Manufacture of Telecommunication
Equipment", Issue 1, February 1991.
4. TR-NWT-001037, Bell Communications Research Technical Reference, "Statistical
Process Control Program Generic Requirements", Issue 1l, November 1990.
For SOFTWARE design, development and delivery the SUPPLIER shall adhere to
the following requirements:
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 30
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 30 OF 77
1. GR-282-CORE, Bell Communications Research Generic Requirements, "SOFTWARE
Reliability and Quality Acceptance Criteria (SRQAC)", Issue 1, December 1994.
2. GR-1315-CORE, Bell Communications Research Generic Requirements, "In Process
Quality Metrics (IPQM)", Issue 1, September 1995.
3. QPS 88.010, Bell Communications Research Quality Program Specification,
"Quality Assurance Surveillance Program for SOFTWARE General", Issue 6,
November 1991.
12.2 QUALITY PERFORMANCE REPORTING The SUPPLIER agrees to provide, at no
cost to NYNEX, regular data reports which demonstrate the performance of the
SUPPLIER'S PRODUCT while in development, manufacture and service, and the
adherence of the SUPPLIER'S PRODUCT to stated requirements. The following
requirements for collecting, calculating and reporting data shall be followed:
1. TR-TSY-000389, Bell Communications Research Technical Reference, "SUPPLIER
Data Program Analysis", Issue 1, August 1987.
2. GR-929-CORE, Bell Communications Research Generic Requirements, "Reliability
and Quality Measurements for Telecommunications SYSTEMS(RQMS", Issue 1 -
Revision 1, December 1995. Note: the Conditional Requirements of Sections
3.4.5, 3.4.9.1, 3.4.9.2, 3.4.9.3, shall be required.
3. TR-NWT-001323, Bell Communications Research Technical Reference, "SUPPLIER
Data - Comprehensive Generic Requirements", Issue 1 November 1993.
4. TR-NWT-001359, Bell Communications Research Technical Reference, "SUPPLIER
Data - Basic Generic Requirements", Issue 1 , June 1993.
All required reports and data shall be delivered to NYNEX's SUPPLIER
Quality Organization at:
SUPPLIER Quality Leader
240 E 38 ST., 14th floor
New York, NY 10016
SUPPLIER agrees to render other periodic reports for service affecting
conditions or other conditions that affect the operations and administrative
procedures of NYNEX of its AFFILIATES, or as otherwise requested by NYNEX of its
AFFILIATES. ALL PROVIDED INFORMATION SHALL BE CLASSIFIED AS PROPRIETY TO NYNEX
AND SUPPLIER.
12.3 SOURCE INSPECTION Source Inspection means that NYNEX shall have the
right to conduct due diligence inspection and testing at the Supplier's, and any
of its subcontractors, facilities at any point(s) or on a continuing basis as
NYNEX may deem appropriate. Source Inspection applies to all MATERIAL and/or
SOFTWARE. Source Inspection will be performed upon Material and/or SOFTWARE by a
NYNEX representative. When requested, SUPPLIER will furnish NYNEX full access to
its facilities and those of its subcontractors and with the appropriate
documentation proving that the PRODUCT does conform to all contractual
specifications, and the SUPPLIER'S projected failure rate, along with the test
data that substantiates the conformance of MATERIAL and/or SOFTWARE prior to
shipment. NYNEX does reserve the right to perform confirmation of data at the
SUPPLIER's facility. SUPPLIER shall provide, without charge, any production
testing facilities and personnel required to inspect and test the MATERIAL
and/or SOFTWARE as described in QPS 70.001-N, NYNEX Quality Program
Specification, "Quality Assurance Procedures Applicable to Material as Specified
on the Order", Issue 2, June 1993, to determine
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<PAGE> 31
Contract No. X134094D
OCTOBER 16, 1996 Page 31 OF 77
that the MATERIAL and/or SOFTWARE meets the requirements of the specification
and/or Order.
Where NYNEX SUPPLIER Quality Management finds received PRODUCTS do not
meet contractual requirements, the cost of inspection and testing, replacement
and shipping shall be incurred by the SUPPLIER.
NYNEX reserves the right to have the SUPPLIER inspect 100% of their
PRODUCT at their cost in cases where PRODUCT does not meet contractual
specifications.
12.4 PACKING Adequate protective packing and any special packing required
by law or governmental regulation for domestic shipment shall be furnished by
SUPPLIER at no additional charge for MATERIAL purchased, repaired, replaced or
refurbished hereunder.
The SUPPLIER shall adhere to the following requirements for packaging of
MATERIALS and or SOFTWARE:
1. ME-000047NX, NYNEX Specification, "Packing, Packaging and Palletization",
Issue 7, November 1991.
2. GR-1421-CORE, Bell Communications Research Generic Requirements,
"ESD-Protective Circuit Pack Containers", Issue 2, June 1995. *Note that
Conditional/Objective Requirements CR4-33, 04-34, 04-41, 04-42, 04-54,
CR4-56, and 04-57 shall be required.
12.5 MARKING All MATERIAL and/or related packaging furnished hereunder
shall be marked for identification purposes with part number, or Comcode number,
and/or SUPPLIER's Model/Serial number as applicable.
In addition SUPPLIER agrees to adhere to the following:
1. NX-00008TRG, NYNEX Specification, "Marking Specification", Issue 7, September
1993.
2. NX-00138TRG, NYNEX Specification, "PRODUCT Marking Specification", Issue 1,
September 1993.
3. ST-STS-000124, Bell Communications Research Technical Reference, "Common
Language Codes for Frame Identification", Issue 1, February 1989.
4. TR-STS-000383, Bell Communications Research Technical Reference,
"Generic Requirements for Common Language Bar Code Labels", Issue 5,
January 1991.
5. GR-485-CORE, Bell Communications Research Generic Requirements, "Common
Language Equipment Coding Processes and Guidelines", Issue 2, October 1995.
6. QPS 94.890, Bell Communications Research Quality Program Specification,
"Common Language Equipment Identification (CLEI)/Bar Code Labels", Issue 4,
February 1990.
12.6 TECHNICAL SUPPORT Technical Support shall be provided in accordance
with Appendix A hereof, entitled SCOPE OF WORK; and except to the extent more
specifically set forth in Appendix A hereof, entitled SCOPE OF WORK, shall
include at least the following: field service and assistance, replacement and
repair parts and/or repair SERVICES or MATERIAL, SERVICES and SOFTWARE, PROVIDED
HOWEVER, THAT THE AVAILABILITY or performance of this technical support SERVICE
shall not be construed as reducing SUPPLIER's obligations as set forth in the
clause entitled "WARRANTIES" or elsewhere provided for in this AGREEMENT.
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NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 32
Exhibit 22
Contract No. X134094D
Page 32 of 77
October 16, 1996
SUPPLIER's technical support SERVICES for MATERIAL, SERVICES and
SOFTWARE shall include telephone and emergency (service affecting) onsite
twenty-four (24) hours, seven (7) days assistance.
During the warranty period, SUPPLIER shall provide technical support to
NYNEX and/or its AFFILIATE without charge to correct warranty defects.
During any SYSTEM installations identified by NYNEX or its AFFILIATES,
SUPPLIER shall provide, on an as requested basis and as mutually agreed upon and
at no additional charge to NYNEX or its AFFILIATES, on-site technical advisors
at each of the wire center sites to assist NYNEX or its AFFILIATE during the
installation and Acceptance periods to ensure SYSTEM performance in accordance
with SPECIFICATIONS. Non-Emergency requests for acceptance assistance, as
required, must be made at least 5 days prior to the scheduled date.
A. Full Customer Support During Engineering, Installation and Conversion
Periods
Prior to installation and during installation, testing and acceptance
periods, NYNEX, its AFFILIATE and/or AFFILIATE's agent shall be provided
installation and technical support SERVICES, DOCUMENTATION and RELATED
DOCUMENTATION as specified below:
1. Twenty-four (24) hours per day, seven (7) days per week, SUPPLIER
shall provide telephonic technical support SERVICES from its Technical
Assistance Center (TAC) utilizing SUPPLIER's technical information for
installation, testing, operation, maintenance, use, and analysis, all
at no charge to NYNEX or its AFFILIATE(S). SUPPLIER shall provide, upon
request, on-site technical personnel during cutover/in-service weekend
(46 hours post cutover/in-service), and for three (3) weeks thereafter
to ensure SYSTEM performance at no charge to NYNEX or its AFFILIATES.
2. SUPPLIER agrees that in the event MATERIAL and/or SOFTWARE does not
perform in accordance with the SPECIFICATIONS or is otherwise
defective, then SUPPLIER will provide on-site technical support, at no
charge to NYNEX or its AFFILIATE.
B. Customer Support Post Acceptance
After Acceptance by NYNEX or its AFFILIATE, SUPPLIER shall provide
on-going, in-service technical support SERVICES and DOCUMENTATION as specified
below:
1. In Warranty
a. SUPPLIER shall make available telephonic Technical Assistance
Center (TAC) SERVICE, twenty-four (24) hours per day, seven
(7) days per week, utilizing SUPPLIER's technical information
for installation, testing, operation, maintenance, use, and
analysis, all at the no charge to NYNEX or its AFFILIATE.
b. In the event of an emergency or service-affecting condition
involving the SYSTEM, SUPPLIER shall provide immediate
technical support and shall work continuously until such
emergency and/or service-affecting condition is remedied.
On-site technical support within twelve (12) hours shall be
provided by SUPPLIER upon request of
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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Contract No. X134094D
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October 16,1996
NYNEX or its AFFILIATE. It is mutually agreed that if on-site
assistance is required to correct a problem or defect under
warranty, such on-site assistance shall be at no charge to
NYNEX or its AFFILIATES.
2. Out of Warranty
a. SUPPLIER shall make available telephonic Technical
Assistance Center (TAC) SERVICE, twenty-four (24) hours per
day, seven (7) days per week, utilizing SUPPLIER's technical
information for installation, testing, operation, maintenance,
use, and analysis, at the rates and charges mutually agreed to
as set forth in Appendix D hereto, entitled CHANGES IN SCOPE.
b. Non-warranty technical support SERVICE charges shall be as
shown in Appendix D hereto, entitled CHANGES IN SCOPE. On site
technical assistance within twelve (12) hours shall be
provided by SUPPLIER upon request by NYNEX or its AFFILIATES
as shown in Appendix A hereto, entitled SCOPE OF WORK.
c. In the event of an emergency or service-affecting condition
involving the SYSTEM, SUPPLIER shall provide immediate
technical support and shall work continuously until such
emergency and/or servicing-affecting condition is remedied. If
the emergency is determined to be a result of a failure or
occurrence not related to the performance of SUPPLIER's
Materials or Software, or not directly related to the work or
actions of the Supplier, then Supplier may, at its option,
charge NYNEX for the on site technical support as set forth in
Appendix D hereto, entitled CHANGES IN SCOPE, including all
pre-approved travel and reasonable and necessary expenses.
NYNEX or its AFFILIATE may call the following telephone number(s) for
emergency technical assistance or TAC Support, or to escalate any problem at any
time interval: 1-888-653-8353. In furtherance of this procedure, SUPPLIER shall
provide NYNEX with an escalation procedure and list within thirty (30) days of
execution of this AGREEMENT by NYNEX and SUPPLIER, that is agreed upon and
satisfactory, as well as keep NYNEX updated as to all changes to such procedure
and list. For additional technical information, NYNEX or its AFFILIATE may
contact SUPPLIER's technical assistance Services on 1-888-653-8353.
In addition to SUPPLIER's obligations under Article 13 hereof, entitled
"WARRANTIES," NYNEX and its AFFILIATES shall be entitled to technical
maintenance and support for a period of twenty (20) years after expiration or
termination of this AGREEMENT.
12.7 ENGINEERING COMPLAINTS The SUPPLIER shall handle all Engineering
Complaints (ECs) submitted by NYNEX in accordance with Bell Communications
Research Generic Requirements, GR-230-CORE, "Generic Requirements for
Engineering Complaints", Issue 1, September 1994 together with such further and
additional requirements set forth in Appendix A hereof, entitled SCOPE OF WORK.
In addition the following requirements shall be adhered to:
Upon receipt of an Engineering Complaint ("EC") identified as a fire or
safety hazard, SUPPLIER agrees to acknowledge receipt of such EC and to respond
within twenty-four (24) hours. This response shall
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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Contract No. X134094D
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October 16,1996
include the implementation and execution of the accepted remedy or corrective
action to resolve the stated problem, or the date when the accepted solution
will be completed.
In the event that a NYNEX EC is marked "SERVICE EMERGENCY," then
SUPPLIER agrees to exert effort which goes beyond that which is customarily
provided to resolve the EC. Such effort will be consistent with the level of
effort SUPPLIER will furnish to support NYNEX and its AFFILIATES under the
clauses hereof entitled "REPAIRS AND REPLACEMENT" and "EXTRAORDINARY SUPPORT."
In the event the SUPPLIER anticipates that the solution to the EC will
exceed thirty (30) days, then SUPPLIER shall issue bi-weekly EC Interim Reports
to NYNEX, reporting actions taken and progress made during the reporting period.
In addition, such reports will indicate the date by which SUPPLIER anticipates
that the ongoing EC study will be successfully concluded. This requirement
modifies GR-230-CORE, Section 2.3.2.2.
SUPPLIER shall create and maintain a tracking system that records and
summarizes all events surrounding all ECs submitted by NYNEX. SUPPLIER shall
also provide NYNEX with on-going reports at monthly intervals as to what
manifested the EC, what remedial actions were made by SUPPLIER as a result of
the EC and what was the result of those remedial actions. The overall progress
and performance results shall be reviewed by NYNEX and SUPPLIER to evaluate the
overall quality of the process.
Upon acceptance of SUPPLIER's resolution by NYNEX, SUPPLIER shall
implement necessary changes within thirty (30) days.
SUPPLIER shall be responsible for reimbursement or credit to NYNEX
and/or its AFFILIATE for any mutually agreed to substantiated claim resulting
from an EC, and such agreement shall not be unreasonably withheld or delayed by
either party. Any such claim shall be resolved within thirty (30) days after
resolution of the EC upon which it is based in accordance with Section 10.7
hereof, entitled PERFORMANCE COMPENSATION PAYMENTS.
If NYNEX or its AFFILIATE disagree with SUPPLIER on the implementation
schedule and/or resolution of an EC, NYNEX or its AFFILIATE shall have the right
to escalate the matter for review on the implementation schedule, validity of
the complaint, and/or resolution to higher management in accordance with Article
31 hereof, entitled ALTERNATE DISPUTE RESOLUTION.
NYNEX's point of contact for all EC information and correspondence
shall be:
SUPPLIER Quality Leader
NYNEX
240 East 38th Street, 14th Floor
New York, New York 10016
12.8 CHANGES TO MATERIAL OR SOFTWARE/PRODUCT CHANGE NOTICES ("PCNs")
SUPPLIER shall notify NYNEX in writing of any changes to MATERIAL and/or
SOFTWARE in accordance with Bell Communications Research, GR-209-CORE, "Generic
Requirements for PRODUCT Change Notices", Issue 2, January 1996. In addition the
following provisions shall apply:
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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CONTRACT NO. X134094D
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OCTOBER 16, 1996
SUPPLIER shall propose a schedule for the application of these changes
at all MATERIAL or SOFTWARE locations, which schedule shall be mutually agreed
upon with NYNEX and its AFFILIATE prior to implementation.
If SUPPLIER develops a Method Of Procedure (MOP) for the change, the
MOP shall be provided to NYNEX with the PCN.
Any related Engineering Complaint Number shall be included on the PCN
form.
If NYNEX or its AFFILIATE disagrees with the nature of, or with the
classification which SUPPLIER assigns to, a change in MATERIAL or SOFTWARE,
NYNEX or its AFFILIATES shall have the right to escalate the matter for review,
reclassification, and resolution to higher levels of management in accordance
with the Alternate Dispute Resolution clause of this AGREEMENT.
SUPPLIER shall provide all changed MATERIAL, SOFTWARE, and
DOCUMENTATION for Class A and AC changes for a period of twenty (20) years from
the date of last shipment of the affected MATERIAL or SOFTWARE, at no charge to
NYNEX or its AFFILIATES. Where SUPPLIER installed the MATERIAL or SOFTWARE
subject to the Class A and AC change, SUPPLIER will supply such change MATERIAL,
SOFTWARE, and installation labor without charge. Where NYNEX, its AFFILIATE
and/or AFFILIATE's agent has installed MATERIAL or SOFTWARE, SUPPLIER will
supply such change to MATERIAL and/or SOFTWARE without charge and will reimburse
or credit NYNEX or its AFFILIATE for its labor to implement or execute
corrective action for a change during a period of twenty (20) years from the
date of last shipment of the MATERIAL or SOFTWARE. SUPPLIER shall supply
relevant DOCUMENTATION to NYNEX for all Class A and AC changes.
DOCUMENTATION changes, required to satisfy SUPPLIER's obligations to
provide Class A and AC changes to MATERIAL or SOFTWARE as specified herein,
shall be provided by SUPPLIER at no charge to NYNEX or its AFFILIATES.
For those changes classified as "B" or "D", SUPPLIER shall notify NYNEX
in writing one hundred and twenty (120) days prior to the effective date of such
change to be made in the MATERIAL or SOFTWARE furnished under an order.
For Class B changes, SUPPLIER shall first notify NYNEX of the exact
nature of the change. Details of the proposed implementation procedure for
MATERIAL or SOFTWARE which is being or will be manufactured shall be discussed
with NYNEX or its AFFILIATES within the notification time periods stated in the
first section above. NYNEX or its AFFILIATE shall, at its option, determine if
MATERIAL or SOFTWARE previously shipped shall be replaced or modified. Should
such replacement or modifications be deemed necessary, SUPPLIER shall make
arrangements for the necessary MATERIAL, SOFTWARE, DOCUMENTATION or RELATED
DOCUMENTATION replacement or modification at prices and schedules to be mutually
agreed upon with NYNEX or its AFFILIATES prior to implementation.
In the event that NYNEX does not desire any such change, NYNEX shall
notify SUPPLIER in writing within sixty (60) days from the date of receipt of
notification and SUPPLIER shall not furnish any such changed MATERIAL or
SOFTWARE to NYNEX pursuant to any Orders. NYNEX may extend the sixty (60) day
period if NYNEX is unable to respond within such period.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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CONTRACT NO. X134094D
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OCTOBER 16, 1996
SUPPLIER shall notify NYNEX and its AFFILIATES in writing when
implementation of each field change has been completed at all affected
locations.
SUPPLIER shall reimburse NYNEX for all costs incurred by NYNEX due to
insufficient or incorrect instructions and/or DOCUMENTATION provided in
connection with Changes to MATERIAL and/or SOFTWARE hereunder.
All correspondence relating to changes to MATERIAL or SOFTWARE shall be
sent to the following individual or his successor(s) as appointed by NYNEX or
its AFFILIATES:
Jim Henderson, Sourcing Process Leader
NYNEX
240 East 38th St., 14th. Floor
New York, N.Y. 10016
12.9 REPAIRS AND REPLACEMENT Replacement and repaired MATERIAL and
SOFTWARE shall be warranted as set forth in the clause entitled "WARRANTIES."
SUPPLIER acknowledges that this AGREEMENT does not grant SUPPLIER an
exclusive privilege to repair any or all of the MATERIAL or SOFTWARE purchased
and/or licensed hereunder for which NYNEX or its AFFILIATES may require repair.
12.9.A FOA REPAIR AND REPLACEMENT PROCEDURES During the
installation of MATERIAL and SOFTWARE during the FOA Acceptance Periods,
defective MATERIAL or SOFTWARE will be replaced with new MATERIAL or SOFTWARE,
at no charge to NYNEX or its AFFILIATES. SUPPLIER shall ship such new MATERIAL
or SOFTWARE to a location specified by NYNEX or its AFFILIATES within
twenty-four (24) hours of notice to SUPPLIER. For purposes of this AGREEMENT,
"new MATERIAL or SOFTWARE" shall mean MATERIAL or SOFTWARE directly from the
manufacturing assembly line or from SUPPLIER's finished goods inventory,
provided that said MATERIAL has not been previously repaired or reconditioned.
All transportation charges for, and risk of in-transit loss or damage
to, MATERIAL or SOFTWARE returned to SUPPLIER for repair/replacement under this
clause shall be borne by SUPPLIER.
SUPPLIER shall adhere to QPS 82.061, Bell Communications Research
Quality Program Specification, "Repair and Return Operations of
Telecommunications PRODUCTS - General", Issue 2, March 1985, or the most current
issue of Bell Communications Research Quality Program Specification relating
thereto, when repairing MATERIAL and/or SOFTWARE.
NYNEX or its AFFILIATES shall furnish the following information with
MATERIAL returned to SUPPLIER for repair:
(1) NYNEX' or its AFFILIATE's name and complete address;
(2) name(s) and telephone number(s) of NYNEX' or its AFFILIATE's
employee(s) to contact in case of questions about the MATERIAL
or SOFTWARE to be repaired;
(3) reference to NYNEX' order number, if applicable;
(4) ship to address for return of repaired or replacement MATERIAL
or SOFTWARE if different from (1);
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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CONTRACT NO. X134094D
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OCTOBER 16, 1996
(5) a complete list of MATERIAL or SOFTWARE returned;
(6) the nature of the defect or failure, if known.
MATERIAL or SOFTWARE repaired by SUPPLIER shall have the repair
completion date stenciled or otherwise identified in a permanent manner at a
readily visible location on the MATERIAL or SOFTWARE to the extent practicable;
otherwise it shall be indicated in documentation accompanying the MATERIAL
and/or SOFTWARE. The repaired MATERIAL and/or SOFTWARE shall be returned with a
tag or other documentation describing the repairs or affirming that the required
repairs have been made.
SUPPLIER shall maintain a record of all No Trouble Founds ("NTFs")
which permits tracking of NTFs to assure that any MATERIAL or SOFTWARE that has
been categorized as an NTF for the third time is not returned to NYNEX of its
AFFILIATES for future deployment. SUPPLIER shall also publish these results in a
monthly summary report and forward such report to Jim Henderson, Sourcing
Process Leader, NYNEX, 240 East 38th. Street, New York, N.Y. 10016 or his
successor(s) as appointed by NYNEX.
SUPPLIER shall provide NYNEX SUPPLIER Quality Management a monthly
report of MATERIAL or SOFTWARE repaired and returned by PRODUCT line and CLEI
code with projected Failure in Time ("FIT") rate of MATERIAL or SOFTWARE.
When requested in the Order, SUPPLIER shall hold replaced parts for
inspection or return to NYNEX at prices and terms to be agreed upon.
12.9.B IN WARRANTY The following provisions define the
obligations of the parties in the event, under normal and proper use, a defect
or non-conformity appears in MATERIAL or SOFTWARE during the applicable warranty
period, as set forth in Article 13 hereof, entitled WARRANTIES.
(1) NYNEX or its AFFILIATE must notify SUPPLIER in writing of the
claimed defect or non-conformity not later than thirty (30)
days after the expiration of the applicable warranty period.
(2) SUPPLIER shall provide written instructions covering return of
MATERIAL or SOFTWARE.
(3) SUPPLIER shall:
a. at NYNEX' or its AFFILIATE's option either repair,
replace or correct the MATERIAL or SOFTWARE without
charge at its manufacturing or repair facility within
five (5) working days. Where defective or
nonconforming MATERIAL or SOFTWARE is readily
returnable, it shall be removed and sent to SUPPLIER
by NYNEX or its AFFILIATE in accordance with
instructions for return of MATERIAL or SOFTWARE
provided by SUPPLIER in (B) (2) above, at SUPPLIER's
expense and SUPPLIER's risk of loss or damage.
Thereafter the provisions set forth in this Section
shall apply and, if repaired or replaced, SUPPLIER
shall return the MATERIAL or SOFTWARE to NYNEX or its
AFFILIATE at a destination designated by NYNEX or its
AFFILIATE at SUPPLIER's expense; or
b. if the MATERIAL or SOFTWARE is not repairable or
replaceable, or is not corrected, at the option of
NYNEX
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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or NYNEX' AFFILIATE provide a refund or credit of the
original purchase price of the MATERIAL, or the
license fee and any non-recurring charges for
SOFTWARE, engineering SERVICES charges, and, if
installed by SUPPLIER, also a refund or credit of the
original price for associated installation SERVICES
provided, or if installed by NYNEX the installation
cost and expense of, the defective or non-conforming
MATERIAL or SOFTWARE, and the incremental costs
required to implement and execute corrective action,
including reprocurement. SUPPLIER shall remove the
MATERIAL and SOFTWARE, and shall at its own expense,
restore the premises as nearly to their original
condition as is reasonably possible, unless otherwise
instructed by NYNEX or its AFFILIATES in writing, at
SUPPLIER's expense.
c. Notwithstanding the provisions of (b) above, if the
MATERIAL and SOFTWARE subject to defect or
non-conformity is determined to be repairable but not
readily returnable for repair, SUPPLIER shall, at
NYNEX' option, either repair the MATERIAL or SOFTWARE
at NYNEX' or its AFFILIATE's site without charge, or
remove the MATERIAL or SOFTWARE from NYNEX' or its
AFFILIATE's site and replace and install the
replacement MATERIAL or SOFTWARE at no charge to
NYNEX or its AFFILIATE.
d. If requested, SUPPLIER shall ship to NYNEX or its
AFFILIATE replacement MATERIAL or SOFTWARE within
five (5) days of such request to NYNEX or its
AFFILIATE's designated location. NYNEX or its
AFFILIATE shall return defective MATERIAL or SOFTWARE
within thirty (30) days after receipt of replacement
MATERIAL or SOFTWARE.
12.9.C OUT OF WARRANTY SUPPLIER agrees to provide repair or
replacement SERVICES and replacement parts for all MATERIAL and SOFTWARE ordered
hereunder at the prices in Appendix C hereto, entitled PRICING, for the
effective period of the AGREEMENT and thereafter at SUPPLIER's current list
prices, as long as SUPPLIER is still furnishing such MATERIAL and SOFTWARE; or
repair parts therefor, but in no event for less than the minimum support periods
set forth in the clause hereof entitled "CONTINUING AVAILABILITY OF MAINTENANCE
REPLACEMENT AND REPAIR PARTS."
MATERIAL or to be repaired under this clause will be shipped by NYNEX
or its AFFILIATE to a location designated by SUPPLIER, and unless otherwise
agreed, SUPPLIER shall return ship the repaired or replacement MATERIAL within
five (5) days of receipt of the defective MATERIAL or pursuant to a mutually
agreed upon schedule. If requested by either party, repairs may be made on-site
pursuant to mutually agreed upon schedules. Repaired MATERIAL or SOFTWARE shall
meet established performance specifications.
Notwithstanding the provisions above, if the MATERIAL and SOFTWARE
subject to defect or non-conformity is determined to be repairable but not
readily returnable for repair, SUPPLIER shall either repair the MATERIAL or
SOFTWARE at NYNEX' or its AFFILIATE's site as specified by NYNEX for the on-site
repair SERVICE, or remove the MATERIAL or SOFTWARE from NYNEX's or its
AFFILIATE's site and replace and install the replacement MATERIAL or SOFTWARE at
no charge to NYNEX or its AFFILIATE.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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Where defective or non-conforming MATERIAL or SOFTWARE is readily
returnable, it shall be removed and sent to SUPPLIER by NYNEX or its AFFILIATES
in accordance with instructions for return of MATERIAL or SOFTWARE provided by
SUPPLIER, at NYNEX's or its AFFILIATE's expense and NYNEX's or its AFFILIATE's
risk of loss or damage. Thereafter the provisions set forth in section C of this
clause shall apply and, if repaired or replaced, SUPPLIER shall return the
MATERIAL or SOFTWARE to NYNEX or its AFFILIATE at a destination within the
contiguous fortyeight United States at SUPPLIER's expense.
If MATERIAL or SOFTWARE is returned to SUPPLIER for repair as provided
for in this clause, and is determined to be beyond repair, or repair costs are
expected to exceed fifty percent (50%) of the cost of replacement, SUPPLIER
shall so notify NYNEX and/or its AFFILIATES prior to making the repair.
Invoices originated by SUPPLIER for repair SERVICES for MATERIAL or
SOFTWARE out of warranty must be clearly identified as such, and must contain:
(1) a reference to NYNEX' Order for these repair SERVICES;
(2) a description of services rendered by SUPPLIER; and
(3) an itemized listing of parts and labor charges, when repairs
are done on a time and material basis.
If requested by NYNEX, SUPPLIER shall dispose of unrepairable MATERIAL
or SOFTWARE, consistent with sound commercial practices, and remit to NYNEX the
net salvage value, if any.
12.9.D EMERGENCY "OUT OF SERVICE" CONDITIONS So long as
SUPPLIER is providing regular repair service as set forth in (B) and (C) above,
SUPPLIER shall provide emergency replacement service and on-site repairs, in the
event of an emergency out of service condition caused by defective MATERIAL or
SOFTWARE. SUPPLIER will start repairs or ship a new, or functionally equivalent
replacement, within twelve (12) hours or as soon as is reasonably possible after
receipt of verbal notification. If NYNEX or its AFFILIATE is not satisfied with
the emergency replacement service and/or on site repairs, NYNEX or its AFFILIATE
shall have the right to escalate the matter for review and expeditious
resolution to higher levels of management pursuant to the Alternate Dispute
Resolution clause of this AGREEMENT.
12.10 DETAIL ENGINEERING, OFFICE RECORDS (Detail engineering by
SUPPLIER) The SUPPLIER shall provide full detail engineering services, upon
request of NYNEX and/or its AFFILIATES, consisting of writing a detailed
specification, creating and/or updating central office drawings and records,
including the Equipment Inventory Update (("EIU")) form and the ordering of all
materials and equipment needed to complete the job in compliance to NYNEX
requirements, methods, procedures and standards. When detail engineering is
performed by the SUPPLIER, the SUPPLIER shall be responsible for all detail
engineering and agrees to use a NYNEX certified or approved detail engineering
sub-contractor to provide full detail engineering services.
12.11 INSTALLATION BY SUPPLIER SUPPLIER shall provide such installation
services as are identified in Appendix A hereto, entitled SCOPE OF WORK, or as
would be carried out under Article 11.4 of this AGREEMENT, entitled CHANGE
ORDER, and which are consistent with NYNEX's
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 40
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labor agreements either utilizing its own personnel or a third party supplier,
approved by NYNEX, as a sub-contractor.
12.11.1 During installation, NYNEX and/or its AFFILIATES shall
be given the opportunity to observe, witness and review the tests performed by
SUPPLIER's installation forces, and review all test results and trouble reports
to ensure conformity to SPECIFICATIONS. NYNEX and/or its AFFILIATES shall have
early access to the SYSTEM to perform joint testing with SUPPLIER, as well as
NYNEX' and/or its AFFILIATES' own independent testing of work completed by
SUPPLIER.
During the installation and Acceptance periods, NYNEX and/or its
AFFILIATES shall be provided installation support SERVICES and technical support
SERVICES at no additional charge by SUPPLIER. Installation and technical support
SERVICES provided by SUPPLIER shall be as follows:
1. SUPPLIER shall provide at no charge to NYNEX and/or its
AFFILIATES telephonic Technical Assistance Center (TAC)
SERVICE, which shall be available twenty-four (24) hours per
day, seven (7) days per week; and
2. SUPPLIER shall provide at no charge, as requested by NYNEX
and/or its AFFILIATES, a project manager to represent SUPPLIER
on all matters; and
3. SUPPLIER shall provide, as requested by NYNEX and/or its
AFFILIATES technical personnel during cutover/in-service
weekend (48 hours post cutover/in-service) to ensure SYSTEM
performance, at no charge to NYNEX and its AFFILIATES.
12.11.2 Prior to cutover and field installation, SUPPLIER
shall perform heat and load testing approved by NYNEX and/or its AFFILIATES.
Load testing shall demonstrate to NYNEX and/or its AFFILIATE that the SYSTEM
meets the traffic capacity for which the SYSTEM was specified and to particular
service application engineering specific to the SYSTEM. This traffic carrying
capacity is specified by the Planning Engineer by Originating and Terminating
(O+T), CCS per main station, call attempts, number of main stations, and service
arrangements including non-switch requirements. SUPPLIER shall meet with NYNEX
and/or its AFFILIATE (Early Job Conferences, contact meetings, test and analysis
meetings) to collect all essential information needed and to jointly prepare a
Method of Procedure (MOP). SUPPLIER and NYNEX and/or its AFFILIATE shall plan
all aspects of the job and a sequence of performance to complete the job on
schedule, which is understood and mutually agreeable to both parties. All job
requirements shall be discussed, resolved and approved by NYNEX and/or its
AFFILIATE at these preliminary meetings, including schedules (Ordering,
installation start, in-progress job status, completion, etc.), quality,
technical and performance issues, workmanship, load testing, and acceptance
testing. Heat testing on the job or the waiver of such heat testing due to heat
testing performed during manufacture, or the waiver of such heat testing due to
statistical analysis shall be determined in the Method of Procedure (MOP).
Additionally, prior to service cutover, load testing shall demonstrate to NYNEX
and/or its AFFILIATE that the SYSTEM meets the parameters for which the SYSTEM
was specified, including but not limited to traffic capacity, failure rates,
SYSTEM functionality and performance objectives.
When SUPPLIER completes installation SERVICES hereunder, SUPPLIER shall
provide to NYNEX and/or its AFFILIATES a Notice of Installation
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 41
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Completion, in writing, which may include electronic transmission or similar
communications.
On a continuing basis SUPPLIER shall provide, at no charge to NYNEX
and/or its AFFILIATES, Installation Alerts and Broadcast Warnings, PRODUCTS
Change Notices, Engineering Change Notices, and documentation for changes to
MATERIAL, SOFTWARE, non-conformance to SPECIFICATION, service affecting items,
acceptance failures, and installation issues. SUPPLIER shall establish and
maintain a list of NYNEX and its AFFILIATES and/or AFFILIATES' agent's personnel
and organizations responsible for each SYSTEM installation and shall promptly
provide Installation Alerts and Broadcast Warnings necessary to support MATERIAL
and SOFTWARE supplied by SUPPLIER during acceptance and thereafter for a period
of twenty (20) years at no charge to NYNEX or its AFFILIATES.
12.12 INSTALLATION BY NYNEX Except for those installation services
which are to be performed by Supplier as identified in Appendix A hereto,
entitled SCOPE OF WORK or as would be performed under Article 11.4 of this
AGREEMENT, entitled CHANGE ORDER, all Installation will be performed by NYNEX or
a certified SUPPLIER contracted by NYNEX.
12.12.1 Prior to installation and during the installation and
Acceptance periods, NYNEX and/or its AFFILIATE shall be provided installation
support SERVICES and technical support SERVICES at no additional charge by
SUPPLIER. Installation and technical support SERVICES and DOCUMENTATION provided
by SUPPLIER shall be as follows:
1. SUPPLIER shall provide, at no charge to NYNEX and/or its
AFFILIATES, telephonic Technical Assistance Center (TAC)
SERVICE, which shall be available twenty-four (24) hours per
day, seven (7) days per week; and
2. SUPPLIER shall provide at no charge, as required by NYNEX
and/or its AFFILIATES, a project manager to represent SUPPLIER
on all matters; and
3. SUPPLIER shall provide, upon request, technical personnel
during cutover/in service including weekends, (48 hours post
cutover/in-service) to ensure SYSTEM performance, at no charge
to NYNEX and/or its AFFILIATES.
4. SUPPLIER shall provide on-site technical support during the
installation and Acceptance periods, to be dispatched within
24 hours of request by NYNEX and/or its AFFILIATES, at no
charge.
5. SUPPLIER shall replace defective MATERIAL and/or SOFTWARE with
new MATERIAL and/or SOFTWARE, as set forth in the clause
hereof entitled "REPAIRS AND REPLACEMENT," which shall be
shipped to the location specified by NYNEX and/or its
AFFILIATE within twenty-four (24) hours of notice to SUPPLIER.
6. SUPPLIER agrees that in the event MATERIAL and/or SOFTWARE
does not perform in accordance with the SPECIFICATION, or is
defective, then SUPPLIER shall provide on-site technical
assistance, at no charge to NYNEX and/or its AFFILIATE.
7. SUPPLIER shall furnish at no charge to NYNEX and/or its
AFFILIATES current, updated relevant and complete
DOCUMENTATION to support NYNEX, its AFFILIATE's and/or agent's
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 42
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October 16, 1996
installation, heat testing, load testing, acceptance, turnover,
cutover/in-service, and maintenance.
12.12.2 SUPPLIER shall meet with NYNEX and/or its AFFILIATE
(Early Job Conferences, contact meetings, test and analysis meetings) to collect
all essential information needed and to jointly prepare a Method of Procedure
(MOP). SUPPLIER, NYNEX and/or its AFFILIATE and/or AFFILIATE's agent shall plan
all aspects of the job and a sequence of performance to complete the job on
schedule, which is understood and mutually agreeable to both parties. All job
requirements should be discussed, resolved and approved by NYNEX and/or its
AFFILIATE at these preliminary meetings, including schedules (ordering,
installation start, in-progress job status, completion, etc.), quality,
technical and performance issues, workmanship, load testing, and acceptance
testing. Heat testing on the job or the waiver of such heat testing due to heat
testing performed during manufacture, or the waiver of such heat testing due to
statistical analysis, shall be determined in the MOP. Load testing shall
demonstrate to NYNEX and/or its AFFILIATE that the SYSTEM meets the parameters
for which the SYSTEM was specified, including but not limited to traffic
capacity, failure rates, SYSTEM functionality and performance objectives.
12.13 ACCEPTANCE The SYSTEM(s), PRODUCT, MATERIAL, SOFTWARE and
SERVICES to be furnished or delivered pursuant to Order(s) issued under this
Agreement shall be subject to acceptance as follows:
12.13.1 FIRST OFFICE APPLICATION ("FOA") ACCEPTANCE First
Office Application ("FOA") Acceptance shall occur in two phases, denoted as
Phase I and Phase II. Upon completion of installation of such tracking units, as
constitutes a minimum of two thousand (2000) households passed, NYNEX and/or its
AFFILIATES shall have a sixty (60) day period (FOA Phase I Acceptance Period) to
determine whether or not the System, Product, Material, Software or Service
initially meets the parameters for which the System, Product, Material, Software
or Service was specified including but not limited to traffic carrying capacity,
failure and report rate, functionality, including System functionality,
operational definitions and performance objectives in conformance with
SPECIFICATIONS utilizing SUPPLIER's standard acceptance test procedures and
NYNEX' and/or its AFFILIATE's own independent requirements, standards and
testing procedures. Upon successful completion of such testing, NYNEX and/or its
AFFILIATE will issue a Notice of Initial Acceptance to SUPPLIER; or if the
Product fails Acceptance, a Notice of Defect.
12.13.2 FOA PHASE II ACCEPTANCE Phase II Acceptance shall
commence upon the completion of installation of a sufficient number of tracking
units such that in NYNEX's sole but reasonable judgment the SYSTEM, PRODUCT,
MATERIAL, SOFTWARE or SERVICE is fully operational and loaded with sufficient
traffic in order to determine whether or not the SYSTEM, PRODUCT, MATERIAL,
SOFTWARE or SERVICE operates and functions in a fully compatible mode as a
System, functioning together, performing and interoperating as a fully
integrated and efficient whole with itself and with all other switching,
transport and transmission elements and other facilities and equipment in the
NYNEX network on an uninterrupted and trouble free basis for a continuous sixty
(60) day period (Phase II Acceptance Period), in accordance with the
requirements and specifications incident to this Agreement or any Order(s)
issued pursuant to this Agreement. Upon successful completion of FOA Phase II
Acceptance, NYNEX and/or its Affiliate(s) will issue a Notice of FOA Acceptance
signifying that full and final acceptance of the FOA portion
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
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of the SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE has occurred; or in the
event the FOA fails acceptance, a Notice of Rejection.
12.13.3 FOA CORRECTIVE ACTION PLAN In the event that the
SUPPLIER's SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE does not meet the
specifications or requirements established by NYNEX, for Phase I or Phase 11 of
the First Office Application ("FDA"), the SUPPLIER shall respond with a
documented FOA Corrective Action plan. The plan shall address the unacceptable
condition with a root cause analysis of the problem, the proposed solution, the
process modification to prevent reoccurrence, the time frame for the changes,
and the person(s) responsible for SUPPLIER's implementation of the plan.
The FOA Corrective Action plan shall be presented to the NYNEX
Representative for concurrence prior to implementation. Upon completion of the
Corrective Action Plan by Supplier, NYNEX shall reinitiate its Acceptance
procedures and the applicable Acceptance Period shall start anew. In the event
that the SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE in the First Office
Application ("FOA") fails Phase I or Phase II Acceptance NYNEX may reject, in
whole or in part, the SYSTEM(s), PRODUCT, MATERIAL, SOFTWARE or SERVICE and
without reference, recourse, resort or referral to Alternate Dispute Resolution,
cancel the Agreement without liability or obligation of any type or character to
Supplier and Supplier shall promptly refund any payment which NYNEX may have
made for the rejected System(s), Product(s), Material Software, or Service(s),
and NYNEX may procure through third parties or other sources substitute
functionally similar or comparable System(s), Product(s), Materials, Software or
Service(s) as may be deemed necessary to replace that which has been rejected in
such a manner and under such terms as NYNEX may deem appropriate. Supplier shall
be liable for any excess costs for such reprocurement incurred by NYNEX, as well
as any direct costs associated with the installation and de-installation and
removal of rejected equipment and installation of that being substituted.
Supplier shall also be liable for any other costs associated with the FDA which
NYNEX may substantiate; provided that any such claims for compensatory or
consequential damages shall be subject to those terms as specified in Articles
21 and 26 of this Agreement as they apply.
12.13.4 GENERALLY AVAILABLE PRODUCT ACCEPTANCE Upon successful
completion of FOA Phase I and Phase II Acceptance, SUPPLIER shall furnish,
deliver and, if required, install SYSTEM(s), PRODUCT, MATERIAL, SOFTWARE and
SERVICE ordered by NYNEX on a generally available basis and NYNEX or its
Affiliate(s) shall have the following rights in acceptance.
Upon completion of the installation for each component initially built
for each tracking unit, NYNEX and/or its AFFILIATES shall test and determine
readiness for turnover i.e., accept for service. This routine procedure will be
normally conducted as part of the acceptance procedure to determine whether or
not the SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE meets the parameters for
which the SYSTEMS, PRODUCT, MATERIAL, SOFTWARE or SERVICE was specified,
including but not limited to the traffic carrying capacity, functionality,
including System functionality, and performance objectives in conformance with
SPECIFICATIONS utilizing SUPPLIER's standard acceptance test, standards and
procedures and NYNEX and/or its AFFILIATES' own independent requirements,
standards and testing procedures. Upon successful completion of such tests,
NYNEX and/or its AFFILIATES shall issue a Notice of GA Acceptance; or if the
Product fails acceptance, a Notice of Defect. In the event a Notice of Defect
has been issued by NYNEX and/or its AFFILIATES, SUPPLIER shall start to correct
defects within twenty-
NOTICE: Not for use/disclosure outside NYNEX except by written agreement
<PAGE> 44
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October 16, 1996
four (24) hours of such Notice, and as set forth in Section 12.9 hereof,
entitled "REPAIRS AND REPLACEMENT." Upon completion of such corrective actions
by SUPPLIER, NYNEX and/or its AFFILIATES shall retest the MATERIAL and/or
SOFTWARE ("Retest Period") for turnover i.e., accept for service. SUPPLIER shall
be responsible to make payments under Section 10.7 hereof, entitled PERFORMANCE
COMPENSATION PAYMENTS from the date of initial Acceptance failure until the
failure is cured to NYNEX's satisfaction.
12.13.5 GA CORRECTIVE ACTION PLAN If during the Retest Period,
the SUPPLIER's SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE does not meet the
specifications or expectations established by NYNEX, or otherwise fails
acceptance, the SUPPLIER shall respond with a documented GA Corrective Action
plan established by NYNEX and Supplier jointly. The plan which shall be mutually
agreed upon shall address the unacceptable condition with a root cause analysis
of the problem, the proposed solution, the process modification to prevent
reoccurrence, the time frame for the changes, and the person(s) responsible for
SUPPLIER's implementation of the plan.
The Corrective Action plan shall be presented to the NYNEX
Representative for concurrence prior to implementation. Upon completion of the
Corrective Action Plan by Supplier, NYNEX shall re-initiate its Acceptance
procedures and the applicable Acceptance Period shall start anew. In the event
that the SYSTEM, PRODUCT, MATERIAL, SOFTWARE or SERVICE again fails Acceptance,
NYNEX shall have the right to declare a breach and proceed in accordance with
Article 21 hereof, entitled DEFAULT.
12.14 INFORMATION KEPT CURRENT On a continuing basis SUPPLIER shall
provide, at no charge to NYNEX and/or its AFFILIATES, Installation Alerts and
Broadcast Warnings, PRODUCT Change Notices, Engineering Change Notices, and
documentation for changes to MATERIAL, SOFTWARE, non-conformance to
SPECIFICATION, service affecting items, acceptance failures, and installation
issues. SUPPLIER shall establish and maintain a list of NYNEX' and/or its
AFFILIATES and/or AFFILIATE's agent's personnel and organizations responsible
for each SYSTEM installation and shall promptly provide Installation Alerts and
Broadcast Warnings necessary to support MATERIAL and SOFTWARE supplied by
SUPPLIER during the Acceptance Period and thereafter for a period of twenty (20)
years at no charge to NYNEX and/or its AFFILIATES.
For each Order placed, SUPPLIER shall be accountable to NYNEX and/or
its AFFILIATES to advise them of the shipping and delivery status of each Order
placed, to maintain shipping intervals, and to provide repairs and replacement
for MATERIAL and/or SOFTWARE, as set forth in this AGREEMENT. If NYNEX and/or
its AFFILIATE is not satisfied with such shipping and delivery status and/or
on-site repairs, NYNEX and/or its AFFILIATE shall have the right to escalate the
matter for review and expeditious resolution to higher levels of management in
accordance with the Alternate Dispute Resolution provision of this AGREEMENT.
12.15 CONTINUOUS IMPROVEMENT PLAN [SOFTWARE Quality Improvement Plan
("SQIP")] SUPPLIER shall have a documented plan for continuously assessing and
improving the price, quality and reliability of MATERIAL and SOFTWARE used in
network applications. SUPPLIER's SOFTWARE Quality Improvement Plan (SQIP) shall
incorporate a well defined set of metrics, acceptable to NYNEX, that will assess
internal development data and field performance data in order to improve
SUPPLIER's on-line performance for PRODUCTS deployed in NYNEX.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 45
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SUPPLIER's Quality Improvement Plan (SQIP) should include the use of a
documented set of metrics. Metric collection, analysis and reporting should be
conducted on a continual basis. Both field performance and in-process data shall
be utilized.
All information in SUPPLIER's SQIP shall be made available for
semi-annual review by NYNEX. This includes, but is not limited to, plans,
procedures and results.
ARTICLE 13
WARRANTIES
WARRANTIES SUPPLIER represents, warrants and agrees that it has the
full and entire responsibility, duty and obligation to provide the SYSTEM,
PRODUCTS, MATERIAL, SERVICES AND SOFTWARE and perform, deliver and manage the
Services, ancillary services, facilities, equipment and personnel optimally
useful to perform the Work set forth in this Agreement or any Order(s) issued by
NYNEX and accepted by SUPPLIER pursuant to this Agreement, including, without
limitation, the responsibility, duty and obligation to ensure the full,
adequate, complete and timely performance of SUPPLIER's other subcontractors,
agents and independent contractors of whatever tier, type or character.
13.1 WARRANTY OF TITLE SUPPLIER warrants that it shall have, as of the
date of each Order, and as of the ACCEPTANCE DATE of each PRODUCT thereunder,
and throughout any applicable license term thereunder, including any renewals or
extensions thereof, free and clear title to, and the right to possess, use,
sell, transfer, assign, license, or sub license, any and all SYSTEM(S), MATERIAL
and SOFTWARE PRODUCTS that are sold, licensed or otherwise provided to NYNEX by
SUPPLIER pursuant to such Order. SUPPLIER shall not create or permit the
creation of any lien, encumbrance, or security interest in any PRODUCT licensed
to NYNEX, or sold to NYNEX and for which title has not yet passed to NYNEX,
without the prior written consent of NYNEX. Title to any PRODUCT licensed by
NYNEX hereunder shall remain with SUPPLIER through the applicable license term,
unless otherwise specified in this Agreement or related Order(s). For all
PRODUCTS after the FOA Acceptance Periods, title to and risk of loss for any
PRODUCT purchased by NYNEX hereunder shall pass to NYNEX, in accordance with
Article 9 of this AGREEMENT, entitled TITLE AND RISK OF LOSS. Passing title to
any PRODUCT shall not constitute acceptance on the part of NYNEX.
13.2 BASIC WARRANTY SUPPLIER represents and warrants that all SYSTEMS,
PRODUCTS, MATERIAL, SOFTWARE and components will be free from defects in
material or workmanship and will conform to, comply, function and perform in
accordance with the requirements and specifications stated in the RFP, RRP or
addenda thereto and as stated in Article 13.7 of this AGREEMENT as modified by
Appendix A hereto, entitled SCOPE OF WORK, the applicable Proposal, this
Agreement and all Order(s), associated appendices or other attachments incident
to the Order(s), and that SUPPLIER will make all necessary adjustments, repairs
and replacements to maintain all SYSTEMS, PRODUCTS, MATERIAL, SOFTWARE and
Components in such condition during the term of the applicable warranty, in
accordance with the terms and conditions hereof. SUPPLIER further warrants that
each of the SYSTEMS, PRODUCTS, MATERIAL, SOFTWARE and Components furnished under
this Agreement will perform such general and specific operations and have such
general and specific characteristics as described and claimed for them in any of
SUPPLIER's published literature, descriptions and specifications whether or not
such
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 46
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literature, descriptions and specifications are included in or referenced by an
Order or this Agreement.
13.3 SYSTEM COMPATIBILITY WARRANTY Unless the applicable Order
specifically indicates otherwise, SUPPLIER warrants that all PRODUCTS acquired
pursuant to such Order and to any related Order shall operate and function in a
fully compatible mode as a System, functioning together, performing and
interoperating as a fully integrated and efficient whole with itself and with
all other switching, transport and transmission elements and other facilities
and equipment in the NYNEX network in accordance with the requirements and
specifications incident to this Agreement or any Order(s) issued pursuant to
this Agreement which meet the interface standards and requirements specifically
referenced by NYNEX and provided to Supplier as a requirement and/or those
standards which are contained in industry publications by recognized standards
bodies. SUPPLIER will review each NYNEX Order for completeness and accuracy with
respect to components, materials and part numbers and, prior to submitting the
Order to a sub-contractor, will notify NYNEX as to any inaccuracies or know
deficiencies or incompatibility with any related Order.
13.4 CONFIGURATION WARRANTY Unless the applicable Order specifically
indicates otherwise, SUPPLIER warrants that the PRODUCT list for such Order for
a SYSTEM hereunder, or for such Order for a component that includes one (1) or
more separately listed PRODUCTS, shall be deemed to include, at no additional
cost to NYNEX, any and all parts, items, and other PRODUCTS necessary for the
respective SYSTEM or Component to operate according to the standards and
SPECIFICATIONS set forth and referenced in this Agreement and the applicable
Order, regardless of whether such parts, items, or other PRODUCTS are specified
or listed in the applicable Order.
13.5 ADDITIONAL COMMITMENTS AND WARRANTIES Any written commitment by
SUPPLIER under the terms of any Order or of this Agreement shall be binding upon
SUPPLIER whether or not incorporated into said Order or this Agreement. For
purposes of this Agreement, a commitment by SUPPLIER shall include: (i) prices
and options committed by SUPPLIER or its agent to remain in force during the
term of this Agreement; (ii) any warranty or representation made by SUPPLIER or
its agent in a written proposal to NYNEX as to PRODUCT performance, total
System's performance, or any other physical, design, or functional
characteristics of any Equipment, SOFTWARE, SYSTEM, or other PRODUCT; (iii) any
warranty or representation made by SUPPLIER or its agent concerning the
characteristics or items described in above, made in any literature,
descriptions, drawings or specifications accompanying or referred to in a
proposal or presentation to NYNEX; and (iv) any modification of or affirmation
or representation as to any of the above which is made by SUPPLIER or its agent
in the course of negotiations or during the term of this Agreement whether or
not incorporated into a formal amendment to the proposal; and (v) any
representation by SUPPLIER or its agent in a written proposal, in supporting
documents or in negotiations subsequent thereto as to training to be provided,
services to be performed, prices and options committed to remain in force over a
fixed period of time, or any other similar matter regardless of the fact that
the duration of such commitment may exceed the duration of this Agreement. All
warranties shall survive inspection, acceptance and payment.
13.6 GOODWILL WARRANTY For the term of the contract, Supplier will
provide NYNEX a limited warranty beyond the standard [ * ] covering
the environmental integrity of the BNU
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 47
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October 16,1996
enclosures pertaining to specific damage, wear, or degradation resulting from
natural causes and under normal use, defined as NYNEX's performance and
conformance to the routing maintenance and operations practices and procedures
contained in SUPPLIER Documentation timely provided to and accepted by NYNEX.
During the extended warranty period, SUPPLIER shall either replace, provide
replacement parts, or make repairs to affected materials at their option and at
their expense. Extended warranty is limited to:
1. Corrosion on or in the BNU assembly.
2. Rust or corrosion on hinges, latches, cable feeds, and mounting
brackets connected to the BNU assembly.
3. Excessive wear or breakage of door hinges, mounting brackets
connected to the BNU assembly.
4. Cracks, fractures, or metal fatigue causing loss of integrity to the
BNU casting and doors.
During the project period, SUPPLIER will track and monitor failures and
defects of BNU's reported by NYNEX through customer support. In the event that
records indicate a significant increase in failures or notification of repeated
defect or failures of a specific nature exceeding the norm, SUPPLIER will
cooperate with NYNEX to determine the cause of the problem and implement
mutually agreed upon fixes including repairs, modifications, or replacements
which are mutually agreed upon.
13.7 WARRANTY PERIOD
a) The warranty period for System(s), Product, Material(s),
Software or Services furnished for, or during, the First
Office Application ("FOA") shall begin on the day following
the issuance by NYNEX of the Notice of Final Acceptance of the
FOA and shall continue for a minimum period of [ * ].
b) Once the FOA has passed Phase I and Phase II Acceptance and in
order to facilitate the tracking and administration of the
warranty for record keeping purposes, the warranty period on
all subsequently furnished System(s), Product, material,
Software or Service shall begin upon shipment of the
System(s), Product, Material, Software or Service and shall
continue thereafter for a minimum period of [ * ] provided,
however, the parties agree that the initiation of and coverage
by the warranty is entirely independent of acceptance,
including NYNEX's rights and remedies in acceptance, and is
not intended to nor shall it be construed as in any way
precluding, limiting or otherwise affecting NYNEX's acceptance
rights which shall be and remain as set forth in Section 12.13
hereof, entitled ACCEPTANCE.
c) In all instances where the repair or replacement of System(s),
Product, Material, Software is not completed within [ * ] of
Supplier's receipt of notification of the defect, the warranty
period shall be extended for a period equivalent to the time
required by Supplier to complete the repair or replacement.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 48
Contract No. X134094D
October 16, 1996 Page 48 of 77
13.8. SOFTWARE
(A) In addition to the foregoing Sections 13.1 through 13.5 and 13.7,
SUPPLIER warrants to NYNEX and its AFFILIATES that it has the right
to grant the licenses for SOFTWARE ordered hereunder, and that
SOFTWARE ordered under this AGREEMENT shall properly function in the
SYSTEM environment, and shall conform, function and perform in
accordance with all of SUPPLIER's published software specifications
and with the SPECIFICATIONS set forth in Appendix A hereof, entitled
SCOPE OF WORK including all subsequent changes and modifications
thereto, in all respects, including, but not limited to, operating
performance, memory requirements, response and run times and timing
characteristics, documentation, compatibility, and modularity.
(B) The warranty shall apply to all software releases, upgrades,
enhancements, fixes, modifications and the like as well as third
party software and SUPPLIER's firmware.
(C) In the event the SOFTWARE fails to perform as described in
Subsection (A) of this Section 13.8, SUPPLIER shall promptly correct
or replace the SOFTWARE.
(D) The transportation expense associated with returning SOFTWARE to and
from SUPPLIER shall be borne by SUPPLIER.
(E) SUPPLIER shall notify NYNEX and its AFFILIATES of defects in
SUPPLIER's SOFTWARE of which SUPPLIER becomes aware and SUPPLIER
shall immediately initiate corrective actions and make its best
commercial efforts to correct all defects. Where the defect is
service affecting the warranty period shall be temporarily suspended
during the period needed to correct the defect and upon correction
shall restart for the remaining warranty period or [ * ] whichever
is greater.
(F) SOFTWARE Release Warranty. SUPPLIER hereby represents and warrants
to NYNEX that, for a period of [ * ] following the ACCEPTANCE DATE
for such any SYSTEM: (i) No release by SUPPLIER of any operating
SOFTWARE for any SYSTEM purchased by or provided to NYNEX pursuant
to this Agreement shall eliminate, reduce, or degrade the
performance capabilities of the SYSTEM from the corresponding level
of performance at the ACCEPTANCE DATE for the SYSTEM; and (ii)
Applications SOFTWARE will function on such SYSTEM purchased by or
otherwise provided to NYNEX pursuant to this Agreement, unless
specifically noted in the appropriate Order; (iii) SUPPLIER shall
maintain the previous two (2) release levels of any SOFTWARE, or all
levels released over the previous [ * ], whichever is longer.
(G) SUPPLIER also shall perform a Post Mortem analysis after each major
SOFTWARE release. Such analysis should determine which development
stage activities were accomplished smoothly and which activities
contributed to problems that effected quality or scheduling. Results
of the analysis should yield documented process improvement plans
which will be implemented before development of the next release
begins.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 49
I
Contract No. X134094D
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(H) Year 2000 - Representation and Warranty (SOFTWARE) SUPPLIER
represents and warrants that all SOFTWARE Deliverables delivered
hereunder shall record, store, process, and present calendar dates
falling on or after January 1, 2000, in the same manner, and with
the same functionality, as such SOFTWARE record, store, process and
present calendar dates falling on or before December 31, 1999.
SUPPLIER further represents and warrants that in all other respects
such SOFTWARE shall not in any way lose functionality or degrade in
performance as a consequence of such SOFTWARE operating at a date
later than December 31, 1999. Without limitation of the foregoing,
SUPPLIER's representative will consult with NYNEX' or AFFILIATE's
designated representative for century date change requirements, to
ensure that such SOFTWARE Deliverables will lose no functionality
with respect to the introduction of records containing dates falling
on or after January 1, 2000, and to use its best efforts to ensure
that such SOFTWARE Deliverable will be interoperable with other
SOFTWARE used by NYNEX or AFFILIATE which may deliver records to
such SOFTWARE Deliverable, receive records from such SOFTWARE
Deliverable, or interact with such SOFTWARE Deliverable in the
course of processing data.
(SYSTEMS) SUPPLIER represents and warrants that all SYSTEMS
delivered hereunder will record, store, process, and present
calendar dates falling on or after January 1, 2000, and with the
same functionality, as such SYSTEMS record, store, process and
present calendar dates falling on or before December 31, 1999.
SUPPLIER further represents and warrants that in all other respects
such SYSTEMS shall not in any way lose functionality or degrade in
performance as a consequence of such SYSTEMS operating at a date
later than December 31, 1999. Without limitation of the foregoing,
SUPPLIER's representative will consult with NYNEX' or AFFILIATE's
designated representative for century date change requirements, to
ensure that such SYSTEMS will lose no functionality nor will they
degrade in performance with respect to the introduction of records
containing dates falling on or after January 1, 2000, and to use its
best efforts to ensure that such SYSTEMS will be interoperable with
other SYSTEMS used by NYNEX or its AFFILIATE which may deliver
records to such SYSTEMS, receive records from such SYSTEMS, or
interact with such SYSTEMS, in the course of processing data.
Notwithstanding the foregoing, Supplier shall have no responsibility
for any loss of functionality or degradation or failure to record,
store, process or present calendar dates falling on or after January
1, 2000 caused by the failure to so perform of any software or
systems, other than Supplier's, used by NYNEX or any of its
Affiliates or any other supplier.
13.9 ESCROW In order to protect the rights of NYNEX, SUPPLIER shall keep
and maintain current a copy of the SOURCE CODE and Related Documentation for any
SOFTWARE licensed by SUPPLIER to NYNEX in escrow with a commercial escrow agent
selected by NYNEX, pursuant to an escrow agreement by and among SUPPLIER, NYNEX,
and such agent. Such escrow agreement shall authorize the escrow agent to
release such SOURCE CODE
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 50
Contract No. X134094D
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and Related Documentation to NYNEX if and when NYNEX shall have a right thereto
pursuant to this Agreement or if SUPPLIER fails to maintain the escrow as agreed
herein.
The Source Code Escrow agreement shall include, but not be limited to,
conditions defined as "Escrow Release Events" upon which source code shall be
released to NYNEX, temporarily or permanently if one or more of, the following
events occur:
a. permanently, if SUPPLIER becomes insolvent or admits insolvency or admits
a general inability to pay debts as they become due;
b. permanently, if SUPPLIER files a petition for protection under the
Bankruptcy code of the United States, or an involuntary petition is filed
against the SUPPLIER and is not dismissed within sixty (60) days;
c. permanently, if control of SUPPLIER is acquired by a competitor of NYNEX
and it is determined by NYNEX that there is a threat to its interest or
inadequate safeguards exist resulting from the transfer of control;
d. temporarily, if SUPPLIER fails to provide technical support during any
emergency or out-of-service condition. NYNEX shall only use source code
released during this event for the purpose of placing the SYSTEM back into
operation.
[ * ] shall pay all costs of providing and maintaining the SOURCE CODE in
escrow, including the fees of the escrow agent. NYNEX shall have the right at
any time to verify that the copy of the SOURCE CODE placed in escrow shall be
reproduced and maintained on machine readable media compatible with SUPPLIER's
Equipment and shall be accompanied by full documentation thereof. When a change
is made to the SOURCE CODE by or on behalf of SUPPLIER during the term of the
escrow agreement, the revised SOURCE CODE, including the change, shall be
delivered to the escrow agent not later than [ * ] business days after the
change is affected by or on behalf of SUPPLIER. Copies of the revised SOURCE
CODE and the SOURCE CODE prior to the then-latest revision shall be maintained
in escrow as provided hereunder.
13.10 ILLICIT CODE SUPPLIER warrants (a) unless authorized in writing by
NYNEX or (b) necessary to perform valid duties under this Agreement, any
SOFTWARE provided to NYNEX by SUPPLIER for use by SUPPLIER or NYNEX shall: (a)
contain no hidden files; (b) not replicate, transmit, or activate itself without
control of a person operating computing equipment on which it resides; (c) not
alter, damage, or erase any data or computer programs without control of a
person operating the computing equipment on which it resides; (d) contain no
encrypted imbedded key unknown to NYNEX, node lock, time-out or other function,
whether implemented by electronic, mechanical or other means, which restricts or
may restrict use or access to any programs or data developed under this
Agreement, based on residency on a specific hardware configuration, frequency of
duration of use, or other limiting criteria ("Illicit Code") except, and to the
extent, required by NYNEX as set forth in "Revised Section 14 Document". Should
any program have any of the foregoing attributes, and notwithstanding anything
elsewhere in this Agreement to the contrary, SUPPLIER shall be in default of
this Agreement, and no cure period shall apply. In addition to any other
remedies available to it under this Agreement, NYNEX reserves the right to
pursue any civil and/or criminal penalties available to it against the SUPPLIER.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 51
Contract No. X134094D
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13.11 SERVICES SUPPLIER warrants to NYNEX and NYNEX AFFILIATES that
SERVICES provided hereunder shall be expertly performed in a manner which meets
or exceeds the highest prevailing standards in the industry, and in accordance
with applicable SPECIFICATIONS. All warranties shall survive inspection,
acceptance and payment.
13.12 EMPLOYEES AND SUBCONTRACTORS BOUND Supplier represents that it has
and will maintain an appropriate agreement(s) with its employees, or (without
altering the restrictions against subcontracting set forth elsewhere in this
Agreement) others whose services Supplier may require, sufficient to enable it
to comply with all provisions of this Agreement, including, without limitation,
the provisions relating to intellectual property. Upon request by NYNEX,
Supplier shall make such agreements available for inspection by NYNEX. Supplier
shall be in all aspects liable for any acts or omissions of its employees and
subcontractors as well as any breaches of this Agreement arising from such acts
or omissions.
13.13 DISCLOSURE SUPPLIER represents that it has made its best efforts to
disclose, and will continue to disclose, any issue, element, factor, cause of
action, claim or event incident to its Proposal and the technology upon which
the Proposal is based, which if disclosed would be likely to have a significant
adverse impact upon NYNEX's decision to accept such Proposal or the technology
upon which the Proposal is based.
ARTICLE 14
COMPLIANCE WITH FEDERAL RULES
14.1 RADIO FREQUENCY ENERGY STANDARDS MATERIAL furnished hereunder shall,
at time of shipment, comply to the extent applicable with the requirements of
Subpart J of Part 15 of the Federal Communications Commission's Rules and
Regulations, as they may be amended from time to time, including those Sections
concerning the labeling of such MATERIAL and the suppression of radio frequency
and electro-magnetic radiation to the specified levels. Should the MATERIAL
during use fail to meet relevant parts of the FCC Rules and Regulations for
spurious emission and interference to radio communications, SUPPLIER shall
provide to NYNEX information relating to methods of suppressing such
interference. In the event such interference cannot reasonably be suppressed,
then all remedies as provided by the clause entitled "WARRANTIES" shall apply.
14.2 REGISTRATION When MATERIAL furnished under this AGREEMENT is subject
to registration under Part 68 of the Federal Communications Commission's Rules
and Regulations as they may be amended from time to time ("Part 68"), SUPPLIER
warrants that such MATERIAL furnished under this AGREEMENT is registered under
and complies with Part 68 including, but not limited to, all labeling and
customer instruction requirements unless such MATERIAL is furnished as part of a
technical field trial or unless the MATERIAL is provided for services not
covered or exempt under Part 68. SUPPLIER agrees to defend and hold NYNEX and
its AFFILIATES harmless from any liability, claim or demand (including the
costs, expenses and reasonable attorney's fees on account thereof) that may
arise out of SUPPLIER's non-compliance with Part 68. NYNEX agrees to promptly
notify SUPPLIER of any liability, claim or demand against NYNEX or its
AFFILIATES for which SUPPLIER is responsible under this clause and gives
SUPPLIER full opportunity and authority to assume the defense, including
appeals, and to settle such liability, claims and demands,
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 52
Contract No. X134094D
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provided that if NYNEX reasonably believes that SUPPLIER is not adequately
handling such defense or settlement, NYNEX reserves the right to assume the
defense or settlement.
ARTICLE 15
CONTINUING AVAILABILITY
SUPPLIER agrees to offer for sale functionally equivalent or superior
maintenance, support, replacement and repair parts for MATERIAL ordered pursuant
to this AGREEMENT for [ * ] commencing from SUPPLIER's last shipment
of such MATERIAL to NYNEX or its AFFILIATES. In addition to SUPPLIER's
obligation to offer MATERIAL support for [ * ] from SUPPLIER's last shipment of
MATERIAL, SUPPLIER agrees to provide SOFTWARE support for maintenance,
replacement or updates for [ * ] from SUPPLIER's last shipment of SOFTWARE
listed in Appendix B hereof, as applicable. SUPPLIER agrees to support MATERIALS
and/or SOFTWARE for [ * ] from SUPPLIER's last shipment. Under this Paragraph,
SUPPLIER shall also give NYNEX [ * ] prior written notice of the discontinuance
of the sale of maintenance, replacement and repair parts for MATERIAL. Charges
for support SERVICES provided pursuant to this paragraph shall be mutually
agreed upon at time of discontinuance notice.
When SUPPLIER has given NYNEX such discontinuance notice, or if for any
other reason SUPPLIER is unable to provide such MATERIAL, or SOFTWARE, SUPPLIER
shall, if requested by NYNEX, endeavor to arrange for a third party to continue
to furnish the discontinued maintenance, replacement and repair parts to NYNEX.
In the event SUPPLIER is not requested or, if requested, is unable to find a
third party to furnish such parts to NYNEX, SUPPLIER shall, upon request by
NYNEX, to the extent SUPPLIER has such rights, provide NYNEX with existing
technical information and rights, including SOURCE CODE and documentation, at no
additional charge, sufficient for NYNEX to manufacture, or have manufactured,
the discontinued parts. In no event shall the provision of such rights and
technical information to a third party or to NYNEX be delayed beyond six (6)
months after SUPPLIER's date of notice of discontinuance.
SUPPLIER shall protect against the loss or damage of the existing
technical information required for the manufacture of the discontinued parts
with the same degree of care that SUPPLIER uses to protect its own valuable
technical information. In addition, SUPPLIER shall advise NYNEX in writing at
least six (6) months in advance of its decision to discontinue maintenance of
any technical information, so that NYNEX may acquire such technical information
in accordance with the provisions of this clause.
The technical information includes, by example and not by way of
limitation: (a) manufacturing drawings and specifications of raw materials and
components comprising such parts; (b) manufacturing drawings and specifications
covering special tooling and the operation thereof; and (c) a detailed list of
all commercially available parts and components purchased by the SUPPLIER on the
open market disclosing the part number, name, and location of the SUPPLIER and
price lists for the purchase thereof, including SOURCE CODE and documentation.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 53
Contract No. X134094D
October 16, 1996 Page 53 of 77
ARTICLE 16
EXTRAORDINARY SUPPORT
In addition to the provisions for repair or replacement or MATERIAL and/or
SOFTWARE set forth in Article 13 hereof, entitled "WARRANTIES" and Section 12.9
hereof, entitled "REPAIRS AND REPLACEMENT," SUPPLIER agrees, in any event, if
any natural or other disaster or emergency causes an out of service condition,
SUPPLIER shall use extraordinary effort to locate or provide (i.e. procure or
manufacture) and ship to NYNEX replacement MATERIAL or SOFTWARE, and make
available necessary manpower within twenty four (24) hours of verbal
notification by NYNEX or its AFFILIATES.
Such emergency support shall be available twenty four (24) hours a day,
seven (7) days a week during the term of this Agreement and for a period of
twenty (20) years after the expiration of this Agreement.
Charges for replacement MATERIAL, SOFTWARE, AND SERVICES shall be at the
prices contained in Appendix C hereof, entitled PRICING, or Appendix D hereof,
entitled CHANGES IN SCOPE, as applicable, for the term of this Agreement. This
clause shall not be construed to required SUPPLIER to maintain any inventories
whatsoever nor maintain any position of readiness to perform in the future nor
require breach of SUPPLIER's contractual obligations to third parties.
ARTICLE 17
WORKAROUND
In the event SUPPLIER fails to furnish any SYSTEM, PRODUCT, MATERIAL,
SOFTWARE or SERVICES, or any combination thereof, that conform to approved
SPECIFICATIONS by the agreed upon original delivery date, or an amended delivery
or completion date, for reasons other than FORCE MAJEURE, or delays caused
solely, directly and independently of all other causes by NYNEX or its
AFFILIATES' failure to meet their obligations to SUPPLIER, and NYNEX determines
that SUPPLIER's failure to meet its obligations will cause NYNEX or its
AFFILIATES to incur additional costs to meet commitments to their customers,
then NYNEX may notify SUPPLIER in writing, in accordance with Section 30.10
hereof, that a WORKAROUND condition exists. SUPPLIER shall then be granted a
cure period as set forth in Section 10.8 hereof, entitled Performance
Compensation Cure Period. In the event that the failure is not remedied to
NYNEX's reasonable satisfaction prior to the expiration of the cure period,
NYNEX may invoke SUPPLIER's liability under Section 10.7 hereof, entitled
PERFORMANCE COMPENSATION PAYMENTS.
In addition, SUPPLIER and NYNEX shall promptly participate in the joint
preparation of a WORKAROUND plan to resolve the problem. NYNEX, however, shall
have final approval of the WORKAROUND plan to be performed.
ARTICLE 18
SUPPLIER COMPREHENSIVE RESPONSIBILITIES FOR OVERALL PERFORMANCE
18.1 Supplier represents, warrants and agrees that it has the full and
final responsibility, duty and obligation to provide, perform, deliver and
install, to the extent set forth in Appendix A hereof, entitled SCOPE OF WORK,
the System, Products, Material, Software and
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
<PAGE> 54
Contract No. X134094D
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Services as well as any ancillary services, facilities, and equipment, set forth
any Order(s) issued by NYNEX and accepted by Supplier pursuant to this Agreement
and further Supplier agrees and acknowledges:
(i) that it recognizes that the System(s), Products, Material, Software
or Services which are to be provided under this Agreement are vital
to NYNEX and must be delivered and installed without interruption,
delay, cessation or limitation and in full compliance with the
scheduled developmental dates, specifications and requirements set
forth in the Order(s) and this Agreement; and that in the event of
any conflict or contention of whatever type or character between a
NYNEX or its Affiliate's Order(s) within the commitment schedule of
agreed upon forecast for SYSTEM, PRODUCT, MATERIAL, SOFTWARE or
SERVICES and any order by a third party, Supplier shall satisfy and
fulfill, and shall take any lawful action necessary, to satisfy and
fulfill, the NYNEX or its Affiliate's Order(s) before it satisfies
such third party Order(s).
(ii) that Supplier has and will maintain an organization staffed by
optimally useful number(s) of qualified personnel, including "key
personnel", with the knowledge, skill and resources optimally useful
to perform and complete the work and that there are and will be, no
impediments to, or commitments legal, contractual or otherwise which
impede SUPPLIER's timely performance and completion of the work or
its capacity or capability to do so;
(iii) that should Supplier fail in its performance beyond the cures and
remedies in this Agreement, the cost, and expense required to
reprocure the System(s), and the time lost and the revenues income
and profit jeopardized could be substantial and material;
(iv) that any such failure in [ * ] under this Agreement may under the
circumstances set forth in this Agreement constitute a Default by
Supplier and give rise to an obligation to pay money damages and
such other and additional relief or remedy as may be set forth in
this Agreement or permitted at law or in equity, should any of the
foregoing events occur.
ARTICLE 19
REPORT RATE
Supplier, as and for an inducement to NYNEX to enter into this Agreement,
agrees i) that in the event of any failure to achieve or maintain a [ * ] in
accordance with, or otherwise fails to comply or perform in accordance with, the
requirements set forth in Appendix B hereof, entitled PROJECT MANAGEMENT the
amounts set forth therein constitute a fair and reasonable determination of the
actual damages NYNEX would sustain as a result of a Supplier breach or default
under this Article; and ii) that Supplier shall, as Principal therein,
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 55
Contract No. X134094D
October 16, 1996 Page 55 of 77
[ * ] of such damages, together with such other and additional damages set forth
in Article 26 hereof, entitled INTELLECTUAL PROPERTY - GENERAL OBLIGATIONS,
including without limitation those set forth in Section 26.1(D).
NYNEX shall be entitled to damages pursuant to this Article whether or not
NYNEX terminates the Agreement or cancels the applicable Order(s). The receipt
of damages under this Article shall not preclude NYNEX or its AFFILIATE from any
other rights and remedies to which they are entitled under the terms and
conditions of this AGREEMENT at law or in equity. A breach under Article 19
shall be deemed to be cured on the date that remedial action is completed which
results in performance in accordance with the requirements of this Agreement.
ARTICLE 20
PERFORMANCE STANDARDS
20.1 Performance Standards are set forth in Article 12 hereof, entitled
Quality Assurance, together with those as shall be set forth in the applicable
Order(s). Supplier shall meet or exceed such performance standards in all work
performed or Material or Software provided under this Agreement or any Order(s).
The utilization of such minimum performance standards and the identification of
those damage elements which will be reimbursed as compensation for failure to
satisfy the requirements of the minimum performance standards is not intended
and should not be construed as sanctioning performance at or below such
standards. The sole purpose of such compensation is to provide a mechanism
within the context of the ongoing performance of the Agreement under which NYNEX
would determine and receive compensation, should SUPPLIER fail in its
performance, without immediate resort to Article 21 hereof, entitled DEFAULT.
Accordingly, under normal circumstances resort to and utilization of the
Performance Compensation Payments shall preclude the subsequent exercise of the
Default provision for those specific performance events for which compensatory
damages have been assessed and reimbursed. However, said specific performance
events shall be counted in determining the cumulative failure of Supplier to
meet the material performance requirements of this Agreement or any Order(s).
Failure to meet material performance requirements shall occur, if Supplier
performs below the minimum performance requirements consistently over a [ * ]
coincides with a calendar year. NYNEX shall have the option to invoke Default,
should Supplier fail to meet the material performance requirements of this
Agreement or any Order(s) issued pursuant to this Agreement.
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 56
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 56 OF 77
ARTICLE 21
DEFAULT
21.1 Supplier shall be in default as defined in this Article, if Supplier
fails to:
(i) individually, or in the aggregate over time, in any material
respect, make delivery of any Material or Software or to perform any
Service(s) within the time specified herein or in any applicable
Order(s), including without limitation development dates, or any
extension thereof by change order or amendment; or
(ii) individually, or in the aggregate over time, in any material
respect, replace or correct defective Material or Software or other
deliverable(s) or Service(s) in accordance with the provisions of
Article 12 hereof, entitled QUALITY ASSURANCE, Article 13 hereof,
entitled WARRANTIES, Article 18 hereof, entitled SUPPLIER
COMPREHENSIVE RESPONSIBILITIES FOR OVERALL PERFORMANCE, Article 20
hereof, entitled PERFORMANCE STANDARDS, or Article 17 hereof,
entitled WORKAROUND.
(iii) perform any of its other material obligations under this Agreement;
or
(iv) make progress so as to endanger performance of this Agreement or any
Order(s) in accordance with its terms; and, in any of the
circumstances specified in this Article, Supplier cannot demonstrate
that the Material, Software or other deliverable(s) or service(s)
will conform to this Agreement or any Order(s) and satisfy the
Acceptance Criteria, or that the SUPPLIER's employees as a group
assigned to the work are not capable of producing Material or
Software which will conform to this Agreement or any Order(s) and
satisfy the Acceptance Criteria; NYNEX may give Supplier written
notice citing the areas believed to be inadequate or deficient.
21.2 In the event of any Supplier Default under Section 21.1 or other
failure to perform any duty or obligation under this Agreement or any Order(s)
issued pursuant to this Agreement ("Default"), NYNEX shall provide Supplier with
written Notice thereof, in accordance with Section 30.10 hereof, and Supplier
shall have [ * ] from the mailing, or other issuance, of said
notice by NYNEX to cure the Default ("Cure Period"). Should an occasion(s) of
Default arise which the parties agree is of such a nature that it cannot be
remedied within the Cure Period through the application of Supplier's best
efforts, Supplier shall present within such Cure Period a plan of action to
remedy same, which plan shall have, in NYNEX's judgment, a reasonable
opportunity for success. If, at the end of the [ * ] period the
Default has not been remedied to the reasonable satisfaction of NYNEX, or a plan
to remedy reasonably acceptable to NYNEX is not presented, as the case may be,
then NYNEX may cause Supplier to be in Default
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 57
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 57 of 77
hereunder by giving Supplier at least ten (10) business days prior written
notice of the effective date of such Default.
21.3 In the event of Default, then in addition to and independent of all
other rights and remedies at law or in equity or as provided in this Agreement,
NYNEX shall have the right to, and at its option may, terminate this Agreement
or cancel any such Order(s) placed by NYNEX without any charge, obligation or
liability whatsoever, except as to the payment for Material already installed
and accepted in those instances where an Order(s) only is canceled, provided
such Material was not the subject matter of the Default nor was its
effectiveness affected by such Default. The effect of such termination shall be
to terminate NYNEX's continuing obligation to make payments hereunder and to
cause NYNEX's right, title, and interest to the Material, Software, Service(s)
or other deliverable(s) including license rights under Article 5, to fully vest
in NYNEX and Supplier hereby agrees to and does grant all such right, title, and
interest to NYNEX, agrees to deliver such items to NYNEX, and agrees to take all
steps necessary to cause such right, title and interest to vest in NYNEX
including execution and filing of documents with the United States Patent
Office, United States Copyright Office and other relevant governmental agencies;
and
21.4 If this Agreement, or any Order(s), is terminated pursuant to this Article,
NYNEX, in addition to any other rights provided in this Article, may require the
Supplier to transfer title and deliver to NYNEX, in the manner and to the extent
directed by NYNEX, (i) any completed Material or Software, and (ii) such
partially completed Material or Software and developed Materials or Software as
specified in this Agreement or any Order(s) (hereinafter called "Developed
Materials") as the Supplier has specifically produced or acquired for the
performance of such part of this Agreement as has been terminated; and Supplier
shall, upon direction of NYNEX, protect and preserve such property, as
enumerated in the paragraph, in the possession of the Supplier. Payment for
completed contract Material delivered to and accepted by NYNEX shall be at the
Agreement or Order price. Payment for developed materials delivered to and
accepted by NYNEX and for the protection and preservation of property shall be
in the amount agreed upon by the Supplier and NYNEX; however, SUPPLIER's
obligation hereunder to carry out NYNEX's direction as to such shipment,
protection and preservation shall not be contingent upon prior agreement of the
parties as to such amount. NYNEX may withhold from amounts otherwise due the
Supplier for such completed contract Work or developed materials, such sums as
NYNEX determines to be necessary to protect NYNEX against loss. NYNEX shall
continue to hold a perpetual, worldwide, royalty-free license to all Software
previously delivered hereunder by Supplier, GI Information in accordance with
and subject to the limitations of Section 26.3 hereof, entitled INTELLECTUAL
PROPERTY RIGHTS, in accordance with Section 26.4 hereof, entitled RIGHTS TO
INNOVATIONS pursuant to the terms of such license as set forth herein, and
Supplier shall use its best commercial efforts to support such license as set
forth herein; and
21.5 NYNEX and Supplier will negotiate in good faith and in accordance
with Article 31 hereof, entitled ALTERNATE DISPUTE RESOLUTION any appropriate
and reasonable refunds due to, and other damages
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 58
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 58 OF 77
incurred by, NYNEX as a result of, or arising out of, such Default; such refunds
and damages to be based upon, among other things, the nature of the Default
resulting in such termination, the useful life to NYNEX of any Materials or
Software which are the subject matter of such Default, initial installation
costs, the excess costs of reprocurement and incremental costs, including
installation. In the event that Supplier and NYNEX fail to arrive at a mutual
agreement on the amount of refund and other damages to be received by NYNEX
within the steps and time periods set forth in Article 31, NYNEX shall have the
right to pursue such remedies as may be available at law or in equity or under
this Agreement. Failure of NYNEX to enforce any right under this Article
shall not be deemed a waiver of any right hereunder. The rights and remedies of
NYNEX under this Article shall not be exclusive and are in addition to any other
rights and remedies provided by law or under this Agreement.
ARTICLE 22
WORK PERFORMED ON NYNEX PREMISES
22.1 CLEAN UP Upon completion of any work performed under this AGREEMENT
or pursuant to Orders placed hereunder, SUPPLIER shall promptly remove all
implements, surplus materials and debris.
22.2 HARMONY SUPPLIER shall be entirely responsible for all persons
furnished by it working in harmony with all others working on NYNEX premises or
those of NYNEX's AFFILIATE.
22.3 PLANT AND WORK RULES SUPPLIER's employees, agents and contractors
shall, while on NYNEX or its AFFILIATES' premises, comply with all plant rules
and regulations, including, where required by government regulations, submission
of satisfactory clearance from the U.S. Department of Defense and other Federal
authorities concerned.
22.4 RIGHT OF ACCESS Each party shall permit access to the other's
respective facilities as reasonably required in connection with work hereunder.
No charge shall be made for such access. It is agreed that reasonable advance
notice will be given when access is required.
22.5 TOOLS AND EQUIPMENT Unless otherwise specifically provided in this
AGREEMENT, SUPPLIER shall provide labor, tools and equipment necessary for
performance pursuant to an Order under this AGREEMENT.
22.6 WORK HEREUNDER It is understood that visits by SUPPLIER's
representatives or SUPPLIER's contractor's representatives to perform SUPPLIER's
obligations under this AGREEMENT shall for all purposes be deemed "work
hereunder" and shall be at no charge to NYNEX and/or its AFFILIATES unless
otherwise specifically provided in this AGREEMENT or in another writing signed
or duly acknowledged by authorized representatives of both parties.
SUPPLIER's employees, contractors, and/or agents shall all be considered
SUPPLIER's employees, and SUPPLIER shall be solely responsible for work
performed by its employees, agents, and/or contractors. SUPPLIER shall, upon
notification from NYNEX of completion of work performed by others, upon whose
completion SUPPLIER's own work depends, promptly inspect and advise NYNEX of any
impediment that prevents the SUPPLIER's proper performance. SUPPLIER's silence
shall
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 59
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 59 OF 77
constitute approval of such other work as fit, proper, and suitable for
SUPPLIER's performance of work.
ARTICLE 23
LIABILITY AND INSURANCE
23.1 LIABILITY All work or SERVICES furnished by SUPPLIER or by persons
furnished by SUPPLIER, including its subcontractors (if any) pursuant to this
CONTRACT shall be performed in a proper and workmanlike manner and as an
Independent Contractor and not as the agent of NYNEX. All persons furnished by
SUPPLIER and its subcontractors (if any) shall be considered solely SUPPLIER's
and its subcontractors' (if any) employees or agents, and SUPPLIER and its
subcontractors (if any) shall be responsible for compliance with all laws,
rules, and regulations including, but not limited to employment of labor, hours
of labor, working conditions, worker's compensation payment of wages, and
payment of taxes, such as unemployment, social security and other payroll taxes,
including applicable contributions from such persons when required by law.
SUPPLIER and its subcontractors (if any) shall indemnify, hold harmless, and
defend NYNEX and its AFFILIATES from and against any claim or lawsuits arising
out of SUPPLIER's and its subcontractors' (if any) failure to comply with any
such laws, rules or regulations.
SUPPLIER shall indemnify, hold harmless and defend NYNEX and its
AFFILIATES from and against any loss, cost, liabilities, claims or demands
(including the costs, expenses and attorney's fees) that may be made: (a) by
anyone for injuries including death to persons or damage to property including
theft, resulting from its acts or omissions or those of persons furnished by
SUPPLIER; (b) by persons furnished by SUPPLIER and its subcontractors (if any)
under Worker's Compensation or similar acts; (c) by anyone in connection with
work, MATERIAL, SOFTWARE DOCUMENTATION, RELATED DOCUMENTATION or SERVICES
provided by Supplier or contemplated by this AGREEMENT; and (d) under any
federal securities laws or under any other statute, at common law or otherwise
arising out of or in connection with the performance by Supplier contemplated by
this AGREEMENT or any information obtained in connection with such performance;
except, in each case, to the extent such losses are caused by the negligence or
willful misconduct of NYNEX or its Affiliates; and SUPPLIER further agrees to
bind its subcontractors (if any) to' similarly indemnify, hold harmless and
defend NYNEX. Supplier shall not implead or bring any action against NYNEX and
its NYNEX Affiliates, their respective directors, officers, employees, agents in
connection with any action by any of SUPPLIER's employees for any personal
injury (including death) or property damage that occurs in the course or scope
of employment of such person except to the extent such personal injury or
property damage is directly caused by the negligence of NYNEX and/or its
Affiliates or their employees or agents. NYNEX and its AFFILIATES will notify
SUPPLIER of any written claims or demands against it for which SUPPLIER is
responsible hereunder.
23.2 INSURANCE SUPPLIER and its subcontractors (if any) agree to purchase
and maintain during the term hereof all insurance and/or bonds required by law
or this AGREEMENT including without limitation: (a) Workers' Compensation and
related insurance as prescribed by the law of the State in which the work is
performed; (b) Employers Liability insurance with limits of not less than
$2,000,000 per occurrence and the aggregate; (c) Commercial General Liability
insurance, including PRODUCTS Liability and Completed Operation endorsements for
a combine single limit of not less than $5,000,000 per occurrence and in the
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 60
CONTRACT NO. X134094D
October 16, 1996 PAGE 60 OF 77
aggregate; and (d) if the use of a motor vehicle is required, Automobile
liability coverage for a combined single limit of $2,000,000. SUPPLIER shall
furnish certificates of insurance evidencing placement of such insurance. NYNEX
and NYNEX Corporation shall be named as Additional Insureds in the policies
referred to in (c) above.
Certificates furnished by SUPPLIER shall provide that NYNEX is to be
notified in writing, in accordance with Section 30.10 hereof, at least twenty
(20) days prior to cancellation of, or any material change in the policy.
SUPPLIER and its subcontractors (if any) shall assume responsibility for such
notification being given to:
Manager, Customer Support
NYNEX
240 East 38th Street, 15th Floor
New York, New York 10016
ARTICLE 24
IMPLEADER AND LIMITED LIABILITY OF NYNEX
SUPPLIER shall not implead or bring any action against NYNEX or its
AFFILIATES or the employees of either based on any claim by any person for
personal injury or death that occurs in the course or scope of employment of
such person by NYNEX or its AFFILIATE for which a claim may be filed under the
Worker's Compensation Act and that arises out of the business contemplated under
this AGREEMENT except if such personal injury or death is caused by the gross
negligence or willful misconduct of NYNEX. SUPPLIER also agrees that neither
NYNEX nor its AFFILIATES shall be liable for any special, punitive or exemplary
damages for any acts or failure to act under this AGREEMENT unless such act or
failure to act is intentional or willful.
ARTICLE 25
DOCUMENTATION AND RECORD KEEPING
25.1 PERIODIC REPORTS SUPPLIER agrees to render at no charge to NYNEX on a
monthly basis, unless otherwise mutually agreed upon, and in formats acceptable
to NYNEX, the following reports (by way of-example and not limitation):
a. Material Back Order Report
b. Repair and Return Report
c. Outstanding Engineering Complaints Report
d. Outstanding Order Report
e. Volume Report
f. Monthly Product Development Reports
9. Monthly Production Schedule Reports
h. Monthly Billing Reports
i. Software Development Tracking Reports
j. Quarterly reports listing sub-contractors and products/services
provided under this Agreement.
k. Organization charts
l. Status reports for engineering and design documents
m. Monthly Change Reports detailing Engineering and Design Statement of
Work changes.
n. Weekly Impact/Issues Report
o. Monthly Quality Reports
p. M/WBE (second tier) Reports identifying diversified sub-contractors
used by SUPPLIER.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 61
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 61 OF 77
q. Warranty Reports
r. NTF Summary Reports
SUPPLIER agrees to render other periodic reports for service affecting
conditions or other conditions that affect the operational and administrative
procedures of NYNEX or its AFFILIATES, or as otherwise requested by NYNEX or its
AFFILIATES.
25.2 RECORDS AND AUDIT SUPPLIER shall maintain, in accordance with
standard recognized accounting practices, accurate and complete records as are
necessary to enable SUPPLIER to demonstrate full compliance with all of the
Terms and Conditions of this AGREEMENT. SUPPLIER shall maintain such records for
a period of ten (10) years from the date of termination of this AGREEMENT.
SUPPLIER agrees to provide reasonable supporting documentation concerning
any disputed amount(s) within twenty (20) days after NYNEX or its AFFILIATES
provides written notification of the dispute to SUPPLIER.
NYNEX and SUPPLIER shall mutually agree upon an independent auditor who,
at NYNEX' option, shall audit SUPPLIER's records of SUPPLIER's transactions with
its other commercial customers for verification of comparable pricing and other
commercial elements in accordance with the clause hereof entitled "MOST FAVORED
NATION"; provided that the identity of such other commercial customers shall not
be disclosed to NYNEX. SUPPLIER shall be responsible for all audit/ verification
expenses should the audit reveal or determine that there is a deficiency or
violation of Section 8.2 hereof, entitled MOST FAVORED NATION. At NYNEX'
request, the independent auditor shall have access to the SUPPLIER's records,
for purposes of audit during normal business hours during the term of this
AGREEMENT and during the respective periods in which SUPPLIER is required to
maintain such records. The accuracy of SUPPLIER's billing shall be determined
from the results of such audits.
ARTICLE 26
INTELLECTUAL PROPERTY - GENERAL OBLIGATIONS
26.1 INFRINGEMENT OF PATENTS, COPYRIGHTS, AND TRADEMARKS The following
terms apply to any infringement, claim of infringement or other misappropriation
of any patent, trademark, copyright, trade secret or other proprietary interest,
breach of fiduciary relationship or breach of contract related to the existence
of a fiduciary or employee relationship ("Claim") based on or arising out of the
disclosure, development, manufacture, use, reproduction, possession,
distribution, sale, transfer, resale, misuse or misappropriation of any SYSTEM,
PRODUCT, MATERIAL, SOFTWARE or DOCUMENTATION, or part thereof, or SERVICES
furnished, or the use of any Licensed Materials within the scope of the licenses
granted to NYNEX under this AGREEMENT and provided such Licensed Materials are
not being used in violation of an expressed restriction in such licenses.
SUPPLIER shall indemnify, hold harmless and defend, NYNEX and its
AFFILIATES, ("Indemnitees") from and against any loss, cost, damage, claim,
expense, including without limitation court costs and reasonable attorney fees,
or liability that may arise out of, or result by reason of, any such
infringement or claim, including without limitation any claim or cause of action
of whatever type or nature arising out of any
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 62
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 62 OF 77
claim, cause of action or litigation, between Supplier, any of its subsidiaries,
affiliates or successors in interest and DSC Communications Corporation or DSC
Technologies Corporation or any of its subsidiaries, affiliates or successors in
interest ("DSC Litigation") whether currently pending or during the term of this
Agreement. SUPPLIER shall defend or settle, at its own expense, any action, suit
or proceeding against any Indemnitees arising in connection with a Claim, and
shall pay any damages, costs or expenses awarded therein or payable in
settlement; provided, however, that no such settlement shall compromise, impede
or limit in any manner NYNEX's possession, use or distribution of the System,
Product, Material, Software or other item subject to the Claim. NYNEX shall
notify the SUPPLIER promptly, in accordance with Section 30.10 hereof, of any
claim of infringement for which SUPPLIER is responsible, and shall cooperate
with SUPPLIER in every reasonable way to facilitate the defense of any such
claim.
Without limitation of the foregoing, should NYNEX's or its AFFILIATES' use
of, or full benefit from, the SYSTEM, PRODUCT, MATERIAL, SOFTWARE, DOCUMENTATION
or Licensed Materials and/or SERVICES be impeded, prevented or limited by
injunction or other court order arising out of any such infringement or other
cause of action for which SUPPLIER is responsible, SUPPLIER shall, in addition
to the above indemnity, at no expense, loss or damage to NYNEX or its AFFILIATES
and, at SUPPLIER's option:
A. replace such PRODUCT, SYSTEM, MATERIAL, DOCUMENTATION, LICENSED
MATERIALS and/or SERVICES which SUPPLIER can demonstrate to NYNEX's
reasonable satisfaction are equally suitable MATERIAL, DOCUMENTATION
and LICENSED MATERIALS and/or SERVICES and which are free of any
infringement; or
B. modify such MATERIAL, DOCUMENTATION, LICENSED MATERIALS and/or
SERVICES without reduction or loss of functionality so that it or
they will be free of infringement; or
C. by license or other release from claim of infringement, procure for
NYNEX' or its AFFILIATES' benefit the right to use, install, sell,
or resell such MATERIAL, DOCUMENTATION, LICENSED MATERIALS and/or
SERVICES; or
D. i) if none of the foregoing can be rapidly and effectively
accomplished such that the NYNEX implementation schedules will be
delayed by more than one hundred and twenty (120) days or such
longer period as may be agreed to by the Parties; or ii) should an
effect of the DSC litigation be to materially limit SUPPLIER's
ability to sell the SYSTEM, PRODUCTS, MATERIAL or SOFTWARE, such
that SUPPLIER fails to complete the sale of such Material or
Products, on a generally available basis and in quantities
comparable to the NYNEX sale, to at least two additional purchasers
within twenty four (24) months of the date of the completion of
Phase I of FOA by NYNEX; or iii) should SUPPLIER fail to use its
best efforts to develop, support or market the Material or Products
in a commercially reasonable manner; or iv) if SUPPLIER discontinues
the development or manufacture, or otherwise exits the business of
providing the SYSTEM, PRODUCT, MATERIAL, or SOFTWARE, or acts in
such a way as to support a determination by NYNEX that SUPPLIER
plans to so discontinue manufacture or exit the business, (provided,
however, that the terms "discontinue" and "exit," as used in this
Article 26.1D(iii) shall not include (a) advances by
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 63
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 63 OF 77
SUPPLIER in the technology of the SYSTEM, PRODUCT, MATERIAL, or
SOFTWARE so long as such advances in technology are backward
compatible with, and so long as SUPPLIER continues to support, the
SYSTEM, PRODUCT, MATERIAL, and SOFTWARE; and (b) the sale or
transfer of that part of SUPPLIER's business that includes the
subject matter of this Agreement to a third party approved by NYNEX
[which approval shall not be unreasonably withheld] who agrees to
assume the obligations of this Agreement; and provided, further,
that SUPPLIER's obligations under this Article 26.1D(iii) shall
terminate (except for SUPPLIER's obligations to support the SYSTEM,
PRODUCT, MATERIAL and SOFTWARE)(c) at such time that NYNEX
discontinues ordering MATERIAL in accordance with its commitments
under the Agreement, other than replacement parts for MATERIAL
already installed; SUPPLIER shall, if directed by NYNEX, (1) remove
the MATERIAL from the premises of NYNEX or its AFFILIATES, or such
other location, and refund to NYNEX or its AFFILIATES the full
SYSTEM, PRODUCT, MATERIAL purchase price and any non-recurring
reasonable amount paid for the use of any associated SOFTWARE and
the reasonable costs associated with removal thereof, and shall, at
its own expense, restore the premises as nearly to their original
condition as is reasonably possible, unless otherwise directed in
writing by NYNEX or its AFFILIATE; (2) [ * ] an amount equal
to [ * ] similar generally available SYSTEMS, PRODUCTS,
MATERIAL, SOFTWARE and SERVICES from a [ * ] on an [ * ]
, it being understood that [ * ] such systems, products,
material, software and services will be net of the [ * ] ,
(ii) to retrofit the NYNEX network and its infrastructure, including
substantiated installation costs, whether any of the foregoing
damages in items (i) and (ii) are general or special in nature; and
NYNEX may terminate the Agreement without liability of any type or
character to SUPPLER.
If either NYNEX or SUPPLIER is directed by a court of competent
jurisdiction, after all permissible appeals have been taken, to cease further
use or deployment of, or remove the MATERIAL from the premises of NYNEX or its
AFFILIATES, or such other location, then SUPPLIER shall (1) remove the MATERIAL
from the premises of NYNEX or its AFFILIATES, or such other location, and refund
to NYNEX or its AFFILIATES the full SYSTEM, PRODUCT, MATERIAL purchase price
paid to date and any nonrecurring reasonable amount paid for the use of any
associated SOFTWARE and the reasonable costs associated with removal thereof,
and shall, at its own expense, restore the premises as nearly to their original
condition as is reasonably possible, unless otherwise directed in writing by
NYNEX or its AFFILIATE; (2) pay to NYNEX an amount equal to all reasonable
charges, costs and expenses (i) to reprocure similar commercially available
SYSTEMS, PRODUCTS, MATERIAL, SOFTWARE and SERVICES from a third party on an
expedited basis, it being understood that any such costs associated with such
SYSTEMS, PRODUCTS, MATERIAL, SOFTWARE and SERVICES will be net of the refund of
the purchase price referred to above, (ii) to retrofit the NYNEX network and its
infrastructure, including substantiated installation costs, and (iii) any
assessments or penalties imposed by regulatory agencies as a consequence of such
removal of MATERIAL, whether any of the foregoing damages in items (i) through
(iii) are general or special in nature; and NYNEX may terminate the Agreement
without liability of any type or character to Supplier.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 64
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 64 OF 77
26.2 Performance Bond or Irrevocable Letter of Credit SUPPLIER shall
obtain and maintain, during the terms of this Agreement or any Order(s) issued
pursuant to the Agreement and any extensions thereof, a Performance Bond
("Bond") or Irrevocable Letter of Credit ("LC") in the penal sum of One Hundred
and Thirty Five Million Dollars ($135,000,000.00). SUPPLIER shall secure and
procure the Bond(s) or LC(s) according to the following schedule:
A) Within sixty (60) days of the execution of this Agreement by both
parties, a Bond or LC in an initial amount of Fifty Million Dollars
($50,000,000);
B) Commencing no later than January 31, 1998, the Bond or LC shall be
increased by an additional Fifty Million Dollars ($50,000,000);
C) Commencing no later than January 31, 1999, the Bond or LC shall be
increased by an additional Thirty Five Million Dollars ($35,000,000)
bringing the total value of the Bond or LC to One Hundred and Thirty
Five Million Dollars ($135,000,000). The Bond or LC in the amount of
One Hundred and Thirty Five Million Dollars ($135,000,000) shall
remain in effect until i) the infrastructure implementation to the
commitment level of eight hundred thousand (800,000) households
passed is completed and achieved in accordance with the requirements
of this Agreement; and ii) all DSC Litigation has been concluded and
SUPPLIER has satisfied any and all obligations arising out of such
DSC Litigation. Thereafter, and only upon satisfaction of conditions
i) and ii) of this paragraph, SUPPLIER may be permitted to reduce
the amount of the Bond or LC during the term of this Agreement, but
only in the amounts listed herein and then only under the following
conditions:
1) by an amount of Sixty Five Million Dollars ($65,000,000), upon
completion of the infrastructure implementation to the
commitment level of eight hundred thousand (800,000)
households passed in accordance with the requirements of this
Agreement and provided that no default has occurred and no
Performance Compensation Payments have been assessed by NYNEX
against SUPPLIER; or
2) by the amount of One Million Dollars ($1,000,000.00) for each
one percent (1%) that NYNEX fails to meet the commitment level
of households passed by the conclusion of the scheduled
infrastructure implementation period, provided such failure is
caused solely, directly and independently of all other causes
by NYNEX; or
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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CONTRACT NO. X134094D
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3) by an amount which reduces the Bond to the level of dollars
actually paid by NYNEX to SUPPLIER or Twenty Five Million
Dollars ($25,000,000), whichever is greater, should NYNEX
terminate for convenience, except that no reduction shall
occur in the event of a termination for convenience related
to, based on, or arising out of the DSC Litigation; or
4) the Bond or LC may be canceled in its entirety if, and only
if, at the completion of the infrastructure implementation to
the commitment level of eight hundred thousand
(800,000)households passed in accordance with the requirements
of this Agreement, i) no default has occurred and no
Performance Compensation Payments have been assessed by NYNEX
against SUPPLIER; and ii) Supplier provides proof
satisfactory to NYNEX, in the form of financial statements,
D&B ratings, and such other means identified by NYNEX in the
Financial Accountability Requirement, that SUPPLIER's
financial ability and assets adequately back and provide
sufficient security against any further contingencies arising
out of Article 19 hereof entitled REPORT RATE, Article 21
hereof, entitled DEFAULT and Article 26 hereof, entitled
INTELLECTUAL PROPERTY - GENERAL OBLIGATIONS.
Under said Bond or LC, the Principal and the Surety(ies) shall be firmly
bound to NYNEX in the foregoing penal sum and shall promptly pay NYNEX in
accordance with and pursuant to Article 19 hereof, entitled REPORT RATE, or
Article 21 hereof, entitled DEFAULT or, Article 26, entitled INTELLECTUAL
PROPERTY - GENERAL OBLIGATIONS or Article 31 hereof, entitled ALTERNATE DISPUTE
RESOLUTION, if it is determined, by the Mediator under Article 31 or by the
Supreme Court of the State of New York or any United States District Court, that
SUPPLIER has failed to perform or fulfill any of the undertakings, covenants,
terms, conditions or requirements of this Agreement or any Order(s) issued
pursuant to this Agreement or any extension or modification thereof; provided
however, that any penal sums assessed in accordance with the terms of the
Agreement shall be, in the first instance, the responsibility of General
Instrument, acting as Principle, and it shall be at General Instrument's initial
discretion as to whether such penal sums are paid to NYNEX through its own
assets or from the Bond or LC; provided however that if such penal sums are not
paid by General Instrument within 90 days of their assessment, NYNEX shall have
the right to directly claim against the Bond or LC and invoke its right to
prompt payment under the Bond or LC.
In the event that liabilities occur and damage sums are assessed, those
sums shall be limited only to the actual amounts arising out of the claim, and
shall not be construed as a forfeiture of the entire
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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amount of the Bond or LC. Furthermore, prior to any claim by NYNEX against the
Bond, the claim must have been submitted to General Instrument and all due
process including those contained in Article 31 of this Agreement shall have
been acted upon.
The Surety(ies) for said Bond shall be a major insurance corporation or
other major financial institution licensed to do business in the State of New
York and with a Bests Rating of A10 or better, whose principal assets are
located in the United States of America or shall appear on the Department of
Treasury's list of approved sureties and must act within the limitations listed
therein. The commercial bank providing an Irrevocable Letter of Credit shall be
chartered or licensed by either the United States, or by New York State, shall
be rated A- or better by Standard & Poor's, and shall have capital in excess of
one billion dollars ($1,000,000,000.).
26.3 INTELLECTUAL PROPERTY RIGHTS Supplier pursuant to this Agreement and
the relationship created herein will provide Material, Software, and Services,
including without limitation previously developed hardware and software,
firmware, internal code, materials and services based upon or utilizing
inventions, discoveries, know-how, techniques, data, reports, records, research,
information, software, including source code and documentation developed,
acquired or owned by Supplier, or to which Supplier holds a license, prior to
and independent of this Agreement ("GI Information"); and furthermore Supplier
may develop, acquire or obtain a license for additional material, data, records,
research, information, software, firmware, including source code and
documentation ("GI Information") which will be used or useful in the provision
of Material, Software or Services pursuant to this Agreement, but which GI
Information was not initially developed, acquired or licensed in order to
perform or satisfy the requirements of this Agreement, a Work Order(s) or
Statement(s) of Work issued under this Agreement. Supplier shall retain its
right, title and ownership interest in all such GI Information; provided,
however, that if, and to the extent that, such GI Information is conveyed to
NYNEX or is fixed, imbedded, used or useful in, or incident to the use,
execution, operation, maintenance or support of Material, Software or Services
provided pursuant to this Agreement, Supplier hereby grants to NYNEX and its
Affiliate(s) a perpetual, paid-up, non-cancelable, license and right ("License")
to use execute, copy, reproduce, display, translate, perform, modify, correct,
enhance, and create derivative works of or based upon, in whole or in part, the
GI Information and the right to authorize others to do the same, provided such
use by such non-affiliated third parties is solely for NYNEX or its Affiliated
Company(s) use in the normal course of business.
Supplier recognizes that NYNEX possesses superior knowledge and
experience, incident to the construction, operation and management of a complex
local exchange network, cable systems and other telecommunications networks
("NYNEX Networks") and that NYNEX has made substantial investments of time,
personnel and money in the development of a broad range of technical information
and expertise relating to the NYNEX Networks, and the hardware, equipment,
facilities, and software used and useful in the construction, provision,
operation and management of telecommunications services, including without
limitation inventions, discoveries, know-how, techniques, data, reports,
records, research, information, software, including source code and
documentation developed, acquired or owned by NYNEX, or to which NYNEX holds a
license, prior to and independent of this Agreement ("NYNEX
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
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Information"); and furthermore NYNEX may develop, acquire or obtain a license
for additional data, records, research, information, software, including source
code and documentation ("NYNEX Information") which will be used or useful in the
provision of telecommunications services, including without limitation Switched
Digital Video services. NYNEX shall retain its right, title and ownership
interest in all such NYNEX Information.
26.4 RIGHTS TO INNOVATIONS Supplier and NYNEX acknowledge that new or
proprietary or trade secret concepts, methods, techniques, processes, know-how,
adaptations, ideas, inventions, discoveries, improvements, including without
limitation patented or patentable concepts ("Innovations") may be conceived,
first reduced to practice, made or developed, in the course of, or as a result
of, or in preparation for, performance under this Agreement.
Supplier and NYNEX agree that all such Innovations developed, or otherwise
made, during the course of this Agreement by Supplier personnel or jointly by
Supplier and NYNEX personnel can be used by either party in any way it may deem
appropriate. Each Innovation shall be treated as follows: (a) if made by NYNEX
personnel, it shall be the property of NYNEX, (b) if made by Supplier personnel,
it shall be the property of Supplier and Supplier grants, and agrees to grant,
to NYNEX a non-exclusive, irrevocable, unrestricted and royalty-free license
throughout the world, including the right to grant sublicenses to its
subsidiaries and, to its affiliated companies; (c) if made jointly by personnel
of Supplier and NYNEX, it shall be jointly owned without accounting,
distribution or sharing of revenues of any kind between Supplier and NYNEX.
Except as expressly provided in this Article, nothing herein shall be construed
as granting any license or rights under any statutory forms of protection. This
Agreement shall not preclude Supplier or NYNEX from developing materials which
are competitive, irrespective of their similarity, to materials which might be
delivered to NYNEX pursuant to this Agreement.
26.4.1 SUPPLIER and NYNEX further agrees that, each will sign and cause to
be signed all papers and do and cause to be done all acts which may be
necessary, desirable or convenient to enable the other, at the other's expense,
to file and prosecute applications for jointly owned patents on such inventions,
discoveries and improvements, and to maintain patents granted thereon. SUPPLIER
shall have and acquire from SUPPLIER's and any subcontractor's employees, agents
and contractors who perform services under this Agreement, such assignment and
rights as to assure that NYNEX shall receive all of the rights provided for in
this Agreement. SUPPLIER shall provide a copy of all documents to show that all
Work PRODUCT and intellectual property developed by its and its subcontractor's
employees, agents and contractors have been transferred to SUPPLIER.
26.5 LICENSES except as set forth in Sections 26.3 and 26.4 no licenses,
express or implied, under any patents, copyrights, trade secrets, trademarks or
otherwise are granted by NYNEX or its AFFILIATES to SUPPLIER hereunder.
26.6 IDENTIFICATION No NYNEX or its AFFILIATE's (including but not limited
to NYT and NET), identification or simulation thereof, references to NYNEX or
its AFFILIATE or references to their respective trademarks, service marks,
codes, drawings, or specifications will be used in any of SUPPLIER's advertising
or promotional efforts in reference to activities undertaken by SUPPLIER under
this AGREEMENT without NYNEX' prior written permission. SUPPLIER shall remove
any
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 68
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identification, trade names, trademarks, insignia, symbols or evidences of NYNEX
inspection prior to any sale, use or disposition of material or equipment
rejected or not purchased by NYNEX or its AFFILIATE. SUPPLIER agrees to
indemnify NYNEX and its AFFILIATE against any claim arising out of SUPPLIER's
failure to do so. This clause does not modify the USE OF INFORMATION clause.
26.7 INSIGNIA Upon NYNEX' written request SUPPLIER shall, at mutually
agreed to charges, properly affix to MATERIAL certain of NYNEX' or NYNEX'
AFFILIATES' trademarks, trade names, insignia, symbols, decorative designs,
(hereafter "Insignia") provided such insignia do not adversely affect the
operation of the MATERIAL. MATERIAL rejected or not purchased by NYNEX which has
been identified or marked with NYNEX' or its AFFILIATES' insignia or evidences
of NYNEX inspection, shall have all such insignia and evidences of NYNEX
inspection removed, mutilated, destroyed or disposed of or as otherwise agreed
upon, prior to any sale, use or dispositions thereof. SUPPLIER agrees to
indemnify and hold NYNEX and NYNEX' AFFILIATES harmless and if requested defend
NYNEX and/or its AFFILIATES, from and against any claim, loss, damage or lawsuit
arising out of SUPPLIER's failure to do so. This clause shall in no way modify
the provisions hereof related to Use of Information.
26.8 PUBLICITY Supplier agrees to submit to NYNEX all advertising, sales,
and promotional materials, press releases and other publicity materials relating
to the SYSTEM, MATERIAL, SOFTWARE to be furnished, or the SERVICES performed, by
the SUPPLIER under this AGREEMENT wherein the name, marks, or the name or mark
of the other is mentioned or containing language from which the connection of
said names or marks may be inferred or implied; and the parties further agree
not to publish or use such advertising, sales and promotional materials, press
releases, or other publicity materials before receiving the prior written
approval from the other party. Such approval shall not be unreasonably withheld.
26.9 USE OF INFORMATION Any specifications, drawings, sketches, models,
samples, tools, computer or other apparatus programs, technical or business
information or data, written, oral or otherwise (all hereinafter designated
"Information") which NYNEX furnished, or shall furnish, to SUPPLIER under this
AGREEMENT or in contemplation of this AGREEMENT shall remain NYNEX' or its
AFFILIATE's property. All copies of such Information in written, graphic or
other tangible form shall be returned to NYNEX or its AFFILIATE upon request.
Unless such Information was previously known to SUPPLIER free of any obligation
to keep it confidential, or has been or is subsequently made public by NYNEX or
a third party, it shall be kept confidential by SUPPLIER, shall be used only in
performing under this AGREEMENT, and may not be used for other purposes except
upon such terms as may be agreed upon in writing by NYNEX.
26.10 SUPPLIER'S INFORMATION except as mutually agreed upon in writing and
in advance of such information being provided by Supplier no specifications,
drawings, sketches, models, samples, tools, computer or other apparatus
programs, technical or business information or data, written, oral or otherwise,
furnished by SUPPLIER to NYNEX or NYNEX' AFFILIATES under this AGREEMENT shall
be considered by SUPPLIER to be confidential or proprietary.
26.11 WAIVER OF CONFIDENTIALITY SUPPLIER hereby waives confidentiality in
regard to specific technical information related to troubles and design defects
in the SYSTEM, MATERIAL, and/or SOFTWARE
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 69
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 69 OF 77
purchased hereunder. The information as to which confidentiality is waived is
specifically:
A. Operational Trouble Reports (OTR) and Summaries;
B. Engineering Complaints, Final Reports, Maintenance Requests and
Summaries;
C. Call/Trouble Reports (including failure reports, maintenance
requests and internal memorandum reports);
D. Circuit Pack Failure Rates and Failure Mode Data;
E. Outage/Downtime Data;
F. Equipment Failure Reports (EFR);
This waiver shall permit NYNEX and its AFFILIATES to share the specified
technical records, documents and information with other operating telephone
companies, Bell Communications Research, and vendors performing services for
NYNEX and its AFFILIATES.
ARTICLE 27
ENVIRONMENTAL AND SAFETY
27.1 ENVIRONMENTAL COMPLIANCE
(A) SUPPLIER hereby warrants, represents and certifies that SUPPLIER's
performance of this AGREEMENT, SUPPLIER's PRODUCTS and the result of
SUPPLIER's SERVICES rendered hereunder conform to and shall conform
and comply with all climatic, weather and environmental factors and
requirements identified in Appendix A, entitled SCOPE OF WORK and
shall comply in all material respects with all applicable Federal,
State, County and Municipal laws, statutes, regulations, and codes
which relate to environmental protection and employee protection
including, but not limited to, the Atomic Energy Act, Clean Air Act,
Clean Water Act, Comprehensive Environmental Response, Compensation
and Liability Act, Federal Insecticide, Fungicide and Rodenticide
Act, Hazardous Materials Transportation Act, Marine Protection,
Research and Sanctuaries Act, National Environmental Policy Act,
Noise Control Act, Occupational Safety and Health Act, Safe Drinking
Water Act, Solid Waste Disposal Act, Toxic Substances Control Act,
and any equivalent or similar state, county, or local law,
regulation, statute, code, or ordinance.
(B) "State" refers to the State of New York, the state where, or in
which, SUPPLIER's Performance occurs and any other state or
subdivision of a state asserting jurisdiction over SUPPLIER's
performance hereunder.
(C) "Performance" as used herein refers to SUPPLIER's installation,
dismantling, segregation, staging, loading, removal, processing,
transportation, disposal, treatment, reclamation or other handling
methods used in performing under this AGREEMENT.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 70
CONTRACT NO. X134094D
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(D) SUPPLIER further agrees to recertify compliance herewith at NYNEX's
request. SUPPLIER will indemnify and save NYNEX and its CUSTOMER
harmless from any violation or breach of this clause entitled
"ENVIRONMENTAL COMPLIANCE."
(E) SUPPLIER certifies that it shall obtain all licenses, permits, and
authorizations necessary to perform this AGREEMENT from the
appropriate State, Federal and Local governments and agencies prior
to commencement (performance) of WORK hereunder.
(F) SUPPLIER shall use its best efforts to exercise every reasonable
safety precaution and best management practice, whether or not
required by law, in dealing with the MATERIAL.
(G) SUPPLIER shall notify NYNEX immediately if any permit, license,
certificate or identification number required for working on the
MATERIAL shall have been revoked, not been renewed, expired or been
suspended.
27.2 HAZARDOUS CHEMICAL INFORMATION SUPPLIER shall provide Material Safety
Data Sheet(s) in the event that the MATERIAL, equipment, or PRODUCT (including
electronic components) to be provided is or contains any substance designated:
A. as a toxic/hazardous substance, as defined by the Occupational
Safety and Health Administration, Environmental Protection Agency,
and/or all state "Right to Know" laws; and/or
B. as a carcinogen or potential carcinogen by the National Toxicology
Program or the International Agency for Research on cancer; and/or
C. a hazardous material as defined in the Hazardous Material
Transportation Act; and/or
D. a regulated PRODUCT under the Federal Insecticide, Fungicide and
Rodenticide Act; and/or
E. as a hazardous waste in the Resource Conservation and Recovery Act
or the Superfund Amendment Reauthorization Act; and/or
F. as radioactive; and/or
G. under the Clean Air Act or Clean Water Act.
A Material Safety Data Sheet must also be provided if the MATERIAL,
equipment or PRODUCT (including components) could be a hazard to human health
and/or the environment in a fire/combustion or spill situation.
27.3 OCCUPATIONAL SAFETY AND HEALTH ACT (O.S.H.A.) SUPPLIER in performing
work under this AGREEMENT will fully comply with the provisions of the Federal
Occupational Safety and Health Act of 1970 and with any and all applicable rules
and regulations issued pursuant to the Act.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 71
CONTRACT NO. X134094D
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ARTICLE 28
TRAINING
If requested by NYNEX and/or its AFFILIATES, SUPPLIER agrees to provide
training in the courses referenced in APPENDICES F and X hereto, respectively
entitled BUSINESS ISSUES and MODIFICATIONS TO APPENDICES and any changes
thereto, training in any courses subsequently developed by SUPPLIER, and any
training equipment and instructional documentation required in support of
MATERIAL, SOFTWARE, and/or SERVICES to be furnished by SUPPLIER under this
AGREEMENT.
The training, training equipment and instructional documentation to be
furnished by SUPPLIER under this AGREEMENT shall be suitable to train NYNEX
and/or its AFFILIATES' personnel in the area of SYSTEMS planning, application
engineering, practices, operation, installation, maintenance and repair, as well
as marketing of SYSTEM features as required.
Such training, training equipment and instructional documentation shall be
configured to provide at NYNEX and/or its AFFILIATE's option, either/or both of
the following:
A. Instructors, training equipment and instructional DOCUMENTATION
suitable to train NYNEX' and/or its AFFILIATE's personnel at either
SUPPLIER's or NYNEX' and/or its AFFILIATE's location.
B. Provide instructor training, training equipment and instructional
DOCUMENTATION suitable to sufficiently train NYNEX' and/or its
AFFILIATE's training staff, so that they, in turn, may conduct
training programs related to the SYSTEM and qualify other NYNEX
and/or its AFFILIATE personnel in the appropriate use, or
application of the SYSTEM.
The training, training equipment and instructional documentation furnished
by SUPPLIER under this AGREEMENT, shall be developed and furnished in accordance
with the requirements, formats and procedures set forth in APPENDICES F and X
hereto this AGREEMENT, respectively entitled BUSINESS ISSUES and MODIFICATIONS
TO APPENDICES.
ARTICLE 29
CONSULTING
ENGAGEMENT NYNEX shall have the option to contract for specialized
consulting assistance from SUPPLIER on a project basis to be described in
documents specifying the consulting services and deliverables to be provided by
SUPPLIER ("Statement(s) of Work"). Statements of Work will be executed from time
to time, and upon acceptance by both parties will be incorporated into this
Agreement by reference thus describing the specifications for each engagement
("Engagement"). If there are any terms or conditions specified in a Statement of
Work that conflict with this Agreement, the terms and conditions of this
Agreement will prevail unless those terms are expressly noted as overriding the
terms and conditions of the Agreement and then only for that specific Statement
of Work. SUPPLIER understands that time is of the essence and will endeavor to
place the appropriate personnel on a timely basis.
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 72
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 72 OF 77
ARTICLE 30
GENERAL PROVISIONS
30.1 SEVERABILITY If any of the provisions of this AGREEMENT shall be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate or render unenforceable the entire AGREEMENT, but rather the entire
AGREEMENT shall be construed as if not containing the particular invalid or
unenforceable provision or provisions. If the invalid or unenforceable provision
or provisions shall be considered an essential element of this AGREEMENT, the
parties shall promptly attempt to negotiate a substitute therefor.
30.2 CHOICE OF LAW The construction, interpretation and performance of
this AGREEMENT shall be governed by and construed in accordance with the
domestic laws of the State of New York, and all actions under this AGREEMENT
shall be brought in a court of competent subject matter jurisdiction of the
State of New York and both parties agree to accept and submit to the personal
jurisdiction of such court. SUPPLIER also agrees to submit to the jurisdiction
of any court in the United States wherein an action is commenced against NYNEX
or its AFFILIATES based on a claim for which SUPPLIER has indemnified NYNEX and
its AFFILIATES hereunder.
30.3 COMPLIANCE WITH LAWS SUPPLIER and all persons furnished by SUPPLIER
shall comply with the applicable EEO, Fair Labor Standards Act and all other
federal, state, county and local laws, ordinances, regulations and codes
(including procurement of required permits or certificates) in its or their
performance under this AGREEMENT or an Order issued pursuant hereto.
This AGREEMENT is subject to applicable laws and executive orders relating
to equal opportunity and nondiscrimination in employment. SUPPLIER and all
persons furnished by SUPPLIER shall not unlawfully discriminate in its
employment practices against any person by reason of race, religion, color, sex,
disability or national origin and agrees to comply with the provisions of said
laws and orders to the extent applicable in the performance of this AGREEMENT
and as set forth in the attached Non-Discrimination Compliance Undertaking.
SUPPLIER agrees to indemnify and hold harmless NYNEX and/or its AFFILIATES
for, from and against and defend NYNEX and/or its AFFILIATES against, any loss
or damage sustained because of SUPPLIER'S noncompliance hereunder.
30.4 MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISES SUPPLIER agrees to
provide equal opportunity to Minority and Women-Owned Business Enterprises
(M/WBE) in accordance to requirements set forth in Appendix F hereto, entitled
BUSINESS ISSUES.
SUPPLIER's compliance with this clause shall be subject, at NYNEX's option
to independent verification in accordance with the clause hereof entitled
"Records and Audit."
30.5 EXPORT CONTROL
A. SUPPLIER hereby certifies to NYNEX that unless SUPPLIER has received
the prior written authorization of the Office of Export Licensing of
the U.S. Department of Commerce, Washington, D.C., SUPPLIER will not
transmit, by any means,
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 73
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OCTOBER 16, 1996 PAGE 73 OF 77
either directly or indirectly, any technical data or information
in any form whatsoever (whether written, oral or otherwise)
acquired from NYNEX, or any direct PRODUCT of such data or
information, to any "Q," "S," "T," "V," "W," "Y" or "Z" country
enumerated in the Export Control Regulations of the U.S.
Department of Commerce or to Afghanistan or the People's Republic
of China including Inner Mongolia, the provinces of Tsinghsi and
Sikang, Sinkiang, Tibet and Manchuria (includes the former
Kwantung Leased Territory, the present Port Arthur Naval Base
Area, and Lianong Province), but excluding the Republic of China
(Taiwan, also known as Formosa).
B. SUPPLIER further covenants and agrees with NYNEX that in performing
under this AGREEMENT SUPPLIER will, at all times, comply with The
Export Administration Amendments Act of 1985 (P.L. 99-64); The
Department of Defense Authorizations Act of 1984 (P.L. 98-94); The
Arms Export Control Act (22 USC 1234 Sections 2751 et seq.); The
Department of State International Traffic in Arms Regulations
(22 CFR Sections 121 et seq.); The Department of Commerce
Technical Data Regulations (15 CFR Pt. 179) and all Regulations
promulgated under any of the foregoing Acts.
30.6 TAXES NYNEX shall be liable for and shall reimburse SUPPLIER only
for the following tax payments, including related charges, except for any
related charges that may be imposed as a result of SUPPLIER's failure to timely
file an accurate tax return required to be filed by it, with respect to
transactions under this AGREEMENT: Federal manufacturers and retailers excise
and New York state and local sales or use taxes, including any privilege or
excise taxes in the nature of sales or use taxes, as applicable. Such taxes
shall be billed to NYNEX as separate items on SUPPLIER's invoices, unless a
valid exemption certificate is furnished by NYNEX to SUPPLIER. NYNEX shall have
the right to have SUPPLIER cooperate with NYNEX in contesting with the imposing
jurisdiction, at NYNEX' expense, any such taxes that NYNEX deems are improperly
levied.
30.7 REGULATORY ASSISTANCE If requested by NYNEX or its AFFILIATE,
SUPPLIER shall, to the best of its ability, provide assistance by supplying an
expert witness, if required, with regard to regulatory matters in connection
with SYSTEMS, MATERIAL, SOFTWARE and/or SERVICES provided hereunder, provided
that NYNEX or its AFFILIATE shall pay SUPPLIER for such assistance at a
reasonable rate to be specified and shall reimburse SUPPLIER for all travel and
per-diem living expenses reasonably incurred by the expert witness.
30.8 SURVIVAL All Right and obligations hereunder granted or incurred
prior to and which by their nature would continue beyond the cancellation,
termination, or expiration of this AGREEMENT or any Order placed hereunder by
NYNEX shall survive such cancellation, termination, or expiration.
30.9 NON-WAIVER No course of dealing or failure of either party to
strictly enforce any term, right or condition of this AGREEMENT shall be
construed as a waiver of such term, right or condition.
30.10 NOTICES Any Notice or demand which under the terms of this
Agreement or under any statute shall be made by SUPPLIER or NYNEX in writing
which may take the form of facsimile, electronic transfer, overnight courier or
certified or registered mail, with return receipt
NOTICE: NOT FOR USE/DISCLOSURE OUTSIDE NYNEX EXCEPT BY WRITTEN AGREEMENT.
<PAGE> 74
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 74 of 77
requested, addressed to the respective parties. A Notice shall be deemed
delivered upon record of transmission receipt or return receipt, as applicable,
or one (1) day after shipment via overnight courier or three (3) days after
mailing by certified or registered mail.
Notices to NYNEX shall be addressed to the following (unless this AGREEMENT
provides otherwise):
NYNEX
240 East 38th Street, 14th Floor
New York, New York 10016
Attn.: James Henderson
Sourcing Process Leader
Telecopier No.: 212-476-5245
with a copy to:
NYNEX
1095 Avenue of the Americas, 38th Floor
New York, New York 10016
Attn.: Legal Department
Telecopier No.: 212-840-1110
Notices to SUPPLIER shall be addressed to:
Next Level Communications
6153 State Farm Drive
Rohnert Park, CA 94928
Attn.: Steve Klein
Telephone No.: (707) 585-6550
Telecopier No.: (707) 588-1338
with a copy to:
General Instrument Corporation
8770 West Bryn Mawr Avenue
Chicago, IL 60631
Attn.: General Counsel
Telephone No.: (773) 695-1000
Telecopier No.: (773) 695-1021
30.11 FORCE MAJEURE Neither party shall be held responsible for any
delay or failure in performance of this AGREEMENT caused by fires, strikes,
embargoes, requirements imposed by government regulations, civil or military
authorities, acts of God, beyond the control of SUPPLIER or NYNEX and which
could not have been avoided through the application of reasonable foresight or
diligent effort, but excluding the effects of environmental factors identified
in Appendix A, SCOPE OF WORK, on the performance or durability of Systems,
Products, Material, Software or Services. If such contingency occurs, the party
delayed or unable to perform shall provide notice to the other party and if the
delaying causes continue for a period of fifteen (15) days, the party injured by
the other's inability to perform may elect to:
(a) terminate such order or part thereof as to MATERIAL and/or SOFTWARE
not already shipped or SERVICES not already performed;
(b) suspend such order for the duration of the delaying causes, buy or
sell elsewhere MATERIAL and/or SOFTWARE to be bought or sold hereunder
and deduct from any order commitment the
NOTICE. Not For Use/Disclosure outside NYNEX except by written agreement
242721
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 75
Contract No. X134094D
October 16, 1996 Page 75 of 77
quantity bought or sold or for which such commitments have been made
elsewhere; or
(c) resume performance under such order once the delaying cause ceases
with an option in the injured party to extend the delivery or
performance date up to the length of time the contingency endures.
Unless written notice is given no later than fifteen (15) days from when
the injured party is notified, (b) shall be deemed selected.
30.12 DISASTER RECOVERY If any SYSTEM or Component acquired hereunder is
rendered inoperative as a result of a natural or other disaster or emergency
(including major PRODUCT failure or breakdown and peak load conditions),
SUPPLIER will make all reasonable efforts to supply or help locate back-up or
replacement SYSTEMS, Components, and facilities for NYNEX's use, In such event,
SUPPLIER agrees to waive any delivery schedule priorities, to the extent
permitted by law, and to make the replacement SYSTEM or Component available from
the manufacturing facility currently producing such equipment or from inventory.
Subject to this Agreement, the price for any replacement PRODUCT provided by
SUPPLIER will be in compliance with this Agreement, plus shipment costs;
provided, however, that if the non-operation is due to the negligence or fault
of SUPPLIER, replacement equipment will be provided and delivered at no cost to
NYNEX. NYNEX shall retain the right to accept or reject any offer by SUPPLIER to
supply any emergency or back-up PRODUCT or other equipment or service.
30.13 RELEASES VOID Neither party shall require waivers or releases of
any personal rights from representatives of the other in connection with visits
to their respective premises and no such releases or waivers shall be pleaded by
SUPPLIER or NYNEX or its AFFILIATES in any action or proceeding.
30.14 SECTION HEADINGS The headings of the sections herein are inserted
for convenience only and are not intended to affect the meaning or
interpretation of this AGREEMENT.
ARTICLE 31
ALTERNATE DISPUTE RESOLUTION
31.1 REFERRAL Should any disagreement, dispute, disputed claim of
breach, nonperformance, or repudiation arising from, related to or connected
with this AGREEMENT or any of the terms or conditions hereof, or any
transactions hereunder ("Dispute"), arise between NYNEX and SUPPLIER either
during this AGREEMENT or after termination or expiration of this AGREEMENT,
either party may give to the other notice of the Dispute, specifically
referencing this provision and request resolution of the Dispute. At the
expiration of ten (10) business days, unless it shall have been settled, either
party may refer such Dispute to Alan Polansky, Director/Sourcing Process - NYNEX
and Chuck Seebock SUPPLIER for resolution. If within an additional ten (10)
business days such Dispute shall not have been settled, then either party may
refer it to Leonard J. Garrambone, Vice-President/Corporate Sourcing -NYNEX and
Charlie Dickson, CFO - SUPPLIER for resolution. The parties agree to exchange
relevant information and cooperate in good faith to resolve the Dispute under
this provision. If within an additional ten (10) business days, such dispute
shall not have been settled, the parties agree to resort to the dispute
mediation remedies set forth below. The parties
NOTICE: Not for use/disclosure outside NYNEX except by written agreement
242721
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portion.
<PAGE> 76
CONTRACT NO. X134094D
OCTOBER 16,1996 PAGE 76 of 77
will not be prohibited from seeking injunctive relief to preserve the status quo
while the mediation is pending.
31.2 MEDIATION A formal mediation procedure may be commenced by either
party under the then current Public Resources ("CPR") Model Procedure for
Mediation of Business Disputes by notice to CPR to select an experienced neutral
mediator and a proposed time and date for mediation. All mediators shall be
selected from the CPR Panel of Neutrals unless the parties mutually agree to a
difference neutral mediator. All mediator fees shall be equally shared by the
parties. Each party will pay its own costs and other expenses associated with
the mediation, except that the reasonable travel expenses, as outlined in the
NYNEX Travel Guidelines, incurred by the party, which is more distant from the
site of the mediation, shall be shared equally by SUPPLIER and NYNEX. The
parties shall participate in good faith in the mediation and if the parties
reach a resolution of the Dispute, it shall be reduced to writing and shall be
enforceable in accordance with its terms.
If the procedures set forth above do not result in a resolution of the
dispute satisfactory to both parties within thirty-one (31) calendar days of
the first notice to CPR to select a mediator, either party may give notice in
writing to the other party that the mediation procedure is terminated. Upon the
issuance of such notice, either party shall have the right to pursue such
remedies as may be available at law or in equity or under this Agreement.
ALL DISCUSSIONS AND DOCUMENTS PREPARED PURSUANT TO ANY ATTEMPT TO RESOLVE A
DISPUTE UNDER THIS PROVISION ARE CONFIDENTIAL AND FOR SETTLEMENT PURPOSES ONLY
AND SHALL NOT BE ADMITTED IN ANY COURT OR OTHER FORUM AS AN ADMISSION OR
OTHERWISE AGAINST A PARTY FOR ANY PURPOSE INCLUDING THE APPLICABILITY OF FEDERAL
AND STATE COURT RULES.]
31.3 INDEPENDENT OBLIGATION OF SUPPLIER TO CONTINUE PERFORMANCE Because
of the critical importance of the obligations undertaken by SUPPLIER hereunder
to the operations of NYNEX and the substantial expertise and manufacturing
capability and capacity (not otherwise possessed by NYNEX) which SUPPLIER has
represented it will utilize in connection with the fulfillment of its
obligations and the reliance of NYNEX on such expertise, capability and
capacity, SUPPLIER assumes an independent obligation to continue performance of
its obligations hereunder in all respects regardless of any dispute which may
arise between NYNEX and SUPPLIER in connection with any claims by SUPPLIER that
NYNEX has materially breached its obligations hereunder. Such independent
obligation shall continue for ninety (90) days from the date upon which NYNEX
receives written notice of such alleged breach from SUPPLIER. SUPPLIER
undertakes this independent obligation without prejudice to any rights or
remedies it may otherwise have in connection with any dispute between SUPPLIER
and NYNEX.
ARTICLE 32
ENTIRE AGREEMENT
This instrument, the Appendices and Schedules attached and the Order(s)
attached hereto, or hereafter issued under this Agreement, constitute and embody
the entire Agreement by and between the parties hereto and supersede all prior
oral or written agreements or understandings, if any, between them with respect
to the subject matter of this Agreement. In the event of a direct conflict
between a specific term or condition of this Agreement and a specific term or
condition in
NOTICE: Not for use/disclosure outside NYNEX except by written agreement
242721
<PAGE> 77
CONTRACT NO. X134094D
OCTOBER 16, 1996 PAGE 77 OF 77
an Order, issued and accepted by the parties, the specific term or condition in
the Order shall take precedence and control, but only for purposes of that
individual Order. All Orders placed by NYNEX shall be deemed to incorporate the
terms and conditions of this AGREEMENT as well as any supplemental terms and
conditions agreed to by the parties in writing. No provisions or data in
subordinated documents (such as shipping releases) or on any document
unilaterally originated by either party shall be incorporated in this AGREEMENT
unless the provisions or data merely supply information contemplated by this
AGREEMENT.
This AGREEMENT shall not be modified or amended except by a writing signed
by authorized representatives of both parties.
IN WITNESS WHEREOF, the parties have set their hand and seal intending to
be legally bound this 16th day of October 1996.
GENERAL INSTRUMENT CORPORATION TELESECTOR RESOURCES GROUP, INC.
OF DELAWARE (A NYNEX COMPANY)
By /S/ Richard S. Friedland By /S/ Richard A. Jalkut
------------------------- -------------------------
Typed Name Richard S. Friedland Typed Name
-------------------- --------------------
Title Chairman and CEO Title
---------------------- -----------------------
Date October 16, 1996 Date
---------------------- -----------------------
NEXT LEVEL COMMUNICATION
By /S/ Peter W. Keeler
------------------------
Typed Name Peter W. Keeler
-----------------
Title President
----------------------
Date October 16, 1996
----------------------
NOTICE: Not for use/disclosure outside NYNEX except by written agreement.
242721
<PAGE> 78
Agreement No. X-134094D
Amendment No. 1
Page 1 of 3
This Amendment No. 1 to Contract X-134094D dated October 6, 1996 ("Amendment")
is entered into between Telesector Resources Group, Inc. d/b/a Bell Atlantic
Network Services, a Delaware Corporation, having an office located at 240 East
38th Street, New York, New York 10016 (hereinafter "Bell Atlantic") on behalf of
itself and for the benefit of its Affiliates, and General Instrument Corporation
of Delaware, representing its financial interests in Next Level Communications
in Contract X-134094D, and Next Level Communications, a Delaware Limited
Partnership, having an office at 6085 State Farm Drive, Rohnert Park, CA 94928,
(hereinafter collectively referred to as "Supplier").
NOW THEREFORE, the parties agree as follows:
1 . SCOPE OF AMENDMENT
Under this Amendment, Bell Atlantic and Supplier agree to modify the dollar
amount of the Performance Bond or Irrevocable Letter of Credit and set SSU-2
hardware and functionality pricing.
2. PERFORMANCE BOND OR IRREVOCABLE LETTER OF CREDIT
Section 26.2 of the Agreement, entitled "Performance Bond or Irrevocable Letter
of Credit," is hereby deleted in its entirety and replaced with the following:
SUPPLIER shall obtain and maintain, during the terms of this Agreement or any
Order(s) issued pursuant to the Agreement and any extensions thereof, a
performance bond ("Bond") or Irrevocable Letter of Credit ("LC") in the penal
sum of Twenty Five Million Dollars ($25,000,000.00). SUPPLIER shall maintain the
Bond(s) or LC(s) according to the following schedule:
A) Upon completion of the infrastructure implementation to the level of
one hundred thousand (100,000) households passed, SUPPLIER shall
increase the Bond or LC to an amount of Fifty Million Dollars
($50,000,000).
A) Upon completion of the infrastructure implementation to the level of
one hundred and fifty thousand (150,000) households passed, SUPPLIER
shall increase the Bond or LC to an amount of Seventy Five Million
Dollars ($75,000,000).
The Bond or LC may be canceled in its entirety if, and only if the following
conditions have been satisfied: i) no default has occurred and no Performance
Compensation Payments have been assessed by Bell Atlantic against SUPPLIER; and
ii) Supplier provides proof satisfactory to Bell Atlantic, in the form of
financial statements, D&B ratings, and such other means identified by Bell
Atlantic in the Financial Accountability Requirement, that SUPPLIER's financial
ability and assets adequately back and provide sufficient security against any
further contingencies arising out of Article 19 hereof entitled REPORT RATE,
Article 21 hereof, entitled DEFAULT and Article 26 hereof, entitled INTELLECTUAL
PROPERTY - GENERAL OBLIGATIONS.
Under said Bond or LC, the Principal and the Surety(ies) shall be firmly bound
to Bell Atlantic in the foregoing penal sum and shall promptly pay Bell Atlantic
in accordance with and pursuant to Article 19 hereof, entitled REPORT RATE, or
Article 21 hereof, entitled DEFAULT or Article 26, entitled INTELLECTUAL
PROPERTY - GENERAL OBLIGATIONS or Article 31
<PAGE> 79
Agreement No. X-134094D
Amendment No. 1
Page 2 of 3
hereof, entitled ALTERNATE DISPUTE RESOLUTION, if it is determined, by the
Mediator under Article 31 or by the Supreme Court of the State of New York or
any United States District Court, that SUPPLIER has failed to perform or fulfill
any of the undertakings covenants, terms, conditions or requirements of this
Agreement or any extension or modification thereof; provided however, that any
penal sums assessed in accordance with the terms of the Agreement shall be, in
the first instance, the responsibility of General Instrument, acting as
Principle, and it shall be at General Instrument's initial discretion as to
whether such penal sums are paid to Bell Atlantic through its own assets or from
the Bond or LC; provided however that if such penal sums are not paid by General
Instrument within 90 days of their assessment, Bell Atlantic shall have the
right to directly claim against the Bond or LC and invoke its right to prompt
payment under the Bond or LC.
In the event that liabilities occur and damage sums are assessed, those sums
shall be limited only to the actual amounts arising out of the claim, and shall
not be construed as a forfeiture of the entire amount of the Bond or LC.
Furthermore, prior to any claim by Bell Atlantic against the Bond, the claim
must have been submitted to General Instrument and all due process including
those contained in Article 31 of the Agreement shall have been acted upon.
The Surety(ies) for said Bond shall be a major insurance corporation or other
major financial institution licensed to do business in the State of New York and
with a Bests Rating of A10 or better, whose principal assets are located in the
United States of America or shall appear on the Departments of Treasury's list
of approved sureties and must act within the limitations listed therein. The
commercial bank providing the Irrevocable Letter of Credit shall be chartered or
licensed by either the United States, or by New York State, shall be rated A- or
better by Standard & Poor's, and shall have capital in excess of one billion
dollars ($1,000,000,000.).
3. SSU HARDWARE AND FUNCTIONALITY
To ensure an economic, efficient and timely method of providing special
services, Next Level Communications has agreed to provide to Bell Atlantic SSU-2
hardware and functionality at a price equal to that of the current FXTIU.
4. OTHER TERMS UNCHANGED
All other terms and conditions of the Agreement shall remain unchanged.
5. ENTIRE AMENDMENT
This Amendment constitutes and embodies the entire agreement by and between the
parties hereto and supersede all prior oral or written agreements or
understandings, if any, between them with respect to the subject matter of this
Amendment.
<PAGE> 80
Agreement No. X-134094D
Amendment No. 1
Page 3 of 3
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on the
date indicated.
NEXT LEVEL COMMUNICATIONS, LP TELESECTOR RESOURCES GROUP,
INC.
/s/ James T. Wandrey
- --------------------- ---------------------
Signature Signature
James T. Wandrey
- --------------------- ---------------------
Name Name
Sr. VP & CFO
- --------------------- ---------------------
Title Title
8/19/99
- --------------------- ---------------------
Date Date
GENERAL INSTRUMENT
CORPORATION
/s/ Richard C. Smith
- ---------------------
Signature
Richard C. Smith
- ---------------------
Name
Exec Vice President
- ---------------------
Title
8/19/99
- ---------------------
Date
<PAGE> 81
APPENDIX X: MODIFICATIONS TO
APPENDICES
This document supplements previously exchanged documentation; in the event of
conflict between the Terms of this document and previously exchanged
documentation, this document shall control and take precedence.
1. ATM & SONET
SUPPLIER specifically represents and warrants that all SYSTEMS,
PRODUCTS, MATERIAL, and SOFTWARE and to be supplied hereunder shall be fully
compatible with all ATM and SONET related SYSTEMS, PRODUCTS, MATERIAL, and
SOFTWARE and obtained by NYNEX and/or its AFFILIATES, irrespective of the
manufacturer of such aforementioned ATM and SONET related items. SUPPLIER shall
have the opportunity to review and comment upon NYNEX's and/or its AFFILIATES'
Sonet and ATM technical requirement specifications contained in current and
future NYNEX RFPs. SUPPLIER shall within ninety (90) days of notification by
NYNEX and/or its AFFILIATES of the manufacturer selected by NYNEX, verify, test
and perform such work as shall be necessary to ensure and guarantee that all
SYSTEMS, PRODUCTS, MATERIAL, and SOFTWARE furnished under this Agreement shall
be compatible with any and all ATM and SONET related SYSTEMS, PRODUCTS,
MATERIAL, and SOFTWARE of the manufacturer identified by NYNEX and/or its
AFFILIATES, SUPPLIER shall be responsible for any necessary changes to SYSTEMS,
PRODUCTS, MATERIAL, and SOFTWARE that are ATM or SONET related or supplied
hereunder due to inoperability resulting from a lack of compatibility. NYNEX
and/or its AFFILIATES shall use its best effort to assist SUPPLIER in its
efforts to secure the necessary cooperation from NYNEX's and/or its AFFILIATES'
ATM and SONET related suppliers, provided, however, it is understood and agreed
that NYNEX and/or its AFFILIATES shall act only as a mediator and to establish
priorities in reference to issues of inoperability between such SONET suppliers,
ATM suppliers and SUPPLIER hereunder. All SUPPLIER activity under this Article
shall be included in the [ * ] to NYNEX and/or its AFFILIATES.
2. SPECIAL SERVICES
SUPPLIER shall provide to NYNEX an economical, efficient and timely
method of providing special services as outlined in section 4 of the RFP and
Section 3 of the RRP. SUPPLIER'S special service solution shall not result in
any degradation to NYNEX's and/or its AFFILIATES' customers' existing service(s)
nor necessitate re-wiring of the such customers' internal premises. NYNEX and
SUPPLIER shall mutually agree upon a schedule which identifies the
service/functionality and the service delivery architecture which shall be
jointly developed by NYNEX and SUPPLIER. The costs for providing a special
service over the SUPPLIER's architecture shall not necessitate an increase in
the tariff pice for the service (as compared to current DLC/ODLC serving
architectures). NYNEX shall, if requested by SUPPLIER, assist SUPPLIER in the
identification of and the prioritizing of all special services as necessary.
NYNEX shall continue to hold formal meetings to address the
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
1
<PAGE> 82
APPENDIX X: MODIFICATIONS TO
APPENDICES
schedule, deployment and performance of all special services. NYNEX and SUPPLIER
shall work jointly to define the customer interface for all special services.
SUPPLIER and NYNEX and/or its AFFILIATES shall work on a joint task force to
investigate, establish and resolve, in a cost effective manner, issues including
those of technical and regulatory aspects and which are related to special
services. SUPPLIER and NYNEX acknowledge that the first action of such joint
task force is the determination of NYNEX's feature priority. As a result of the
special services task force, SUPPLIER commits to provide special services in
accordance with the "Next Level Communications Laboratory Trial 1.2 Feature
Content Special Services" and the "Table of Services Available with N/Level3",
stated below:
NEXT LEVEL COMMUNICATIONS
LABORATORY TRIAL 1.2 FEATURE CONTENT
SPECIAL SERVICES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LAB. F.O.A. G.A.
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BNU Pots ISDN Hybrid [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
BNU Pots Coin Hybrid [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANID:
- --------------------------------------------------------------------------------
Pots (Single) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
Pots (Dual) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
Coin [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
ISDN [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sets: (a.k.a. PID)
- --------------------------------------------------------------------------------
Pots (Single) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
Pots (Dual) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
ISDN [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BNU/SSU-8 [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
BNU/SSU-16 [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BIU (single) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
BIU (dual) [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(End of month convention used)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Channel
Unit/ GI/NLC F.O.
Service Description Code Supplier Lab A. G.A.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Single Party SPOTS (2W Loop or GI/NLC [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------
</TABLE>
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of its
subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
2
<PAGE> 83
APPENDIX X: MODIFICATIONS TO
APPENDICES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Ground Start) Dual developing [ * ]
POTS PID Q4
1996
- --------------------------------------------------------------------------------------------
Coin Dial Tone Coin First ANID GI to develop 1Q [ * ] [ * ] [ * ]
- --------------------------------------------------------------------------------------------
2W UVG DID DPO SSU- Teltrend/NLC [ * ] [ * ] [ * ]
(Loop AUA5 developing
Reverse 6
Battery)
- --------------------------------------------------------------------------------------------
ISDN BRI Basic Rate ISDN SSU Teltrend/NLC [ * ] [ * ] [ * ]
developing
- --------------------------------------------------------------------------------------------
Derived Versus Alarm @ BNU/ GI/NLC POTS [ * ] [ * ] [ * ]
trademark by TTU interface will
Pulsenet alarm have alarm
service. Supports capability
Derived Channel
Multiplex Technology.
Inband signaling
plus 30Hz tone
- --------------------------------------------------------------------------------------------
Lottery New England SSU- Teltrend/AT&T [ * ] [ * ] [ * ]
Circuit lottery INC's UVDM AUA2 /NLC
linecard. Is a 32+
proprietary TCM in AUA1
10KHz-112KHz 58
similar to 56KHz
DDS
- --------------------------------------------------------------------------------------------
Lottery New York Lottery SSU- Teltrend/AT&T [ * ] [ * ] [ * ]
Circuit Seiscor's Data Over AUA2 /NLC
Voice Linecard. 32+
74KHz-200KHz FSK AUA1
58
- --------------------------------------------------------------------------------------------
DDS OCU 2,4,4,8,9,6,19,2,38,4,5 SSU- Teltrend/NLC [ * ] [ * ] [ * ]
Dataport 6,64 & switched AUA5
56Kbs 2
- --------------------------------------------------------------------------------------------
DDS DSO SSU- Teltrend/NLC [ * ] [ * ] [ * ]
Dataport AUA
34
- --------------------------------------------------------------------------------------------
DS1 GI/NLC to [ * ] [ * ] [ * ]
Develop Set &
USAM
- --------------------------------------------------------------------------------------------
2 Wire Non SSU- Teltrend/NLC [ * ] [ * ] [ * ]
Switched AUA
Special) 43
- --------------------------------------------------------------------------------------------
</TABLE>
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
2996 NYNEX Corporation, All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3
<PAGE> 84
APPENDIX X: MODIFICATIONS TO
APPENDICES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
4 Wire Non SSU- Teltrend/NLC [ * ] [ * ] [ * ]
Switched AUA
Special) 44
- --------------------------------------------------------------------------------------------
2w FXO SSU- Teltrend/NLC [ * ] [ * ] [ * ]
AUA
42
- --------------------------------------------------------------------------------------------
2W FXS SSU- Teltrend/NLC [ * ] [ * ] [ * ]
AUA
43
- --------------------------------------------------------------------------------------------
4W SSU- Teltrend/NLC [ * ] [ * ] [ * ]
(Switched AUA
Special 43
- --------------------------------------------------------------------------------------------
2W SSU- Teltrend/NLC [ * ] [ * ] [ * ]
RD/PLAR AUA
45
- --------------------------------------------------------------------------------------------
4W
RD/PLAR
- --------------------------------------------------------------------------------------------
ISND PRI GI/NLC to [ * ] [ * ] [ * ]
develop
SET/USAM
- --------------------------------------------------------------------------------------------
Direct Dual DID Card SSU- Teltrend [ * ] [ * ] [ * ]
Inward AUA Channel/NLC
(DID) 56
- --------------------------------------------------------------------------------------------
Switched 2W 56 (Datapath) SSU Teltrend [ * ] [ * ] [ * ]
56Kbs Interfaces to Nortern Channel/NLC
Telecom DMS 100
One Circuit/card
- --------------------------------------------------------------------------------------------
P-Phone EBS being evaluated
- --------------------------------------------------------------------------------------------
Pots/ISDN BNU-TIU e/w 5 GI/NLC [ * ] [ * ] [ * ]
Hybrid Pots & 1 ISDN
- --------------------------------------------------------------------------------------------
Pots/Coin BNU-TIU e/w 4 GI/NLC [ * ] [ * ] [ * ]
Hybrid Pots & 1 Coin
- --------------------------------------------------------------------------------------------
ANID, GI/NLC NPM1 GI/NLC [ * ] [ * ] [ * ]
Single
POTS/UVG
- --------------------------------------------------------------------------------------------
ANID, Dual GI/NLC NPM2 GI/NLC [ * ] [ * ] [ * ]
POTS/UVG
- --------------------------------------------------------------------------------------------
ANID, GI/NLC NBM1 GI/NLC [ * ] [ * ] [ * ]
Single iSDN
U BRI
- --------------------------------------------------------------------------------------------
ANID, GI/NLC NCM1 GI/NLC [ * ] [ * ] [ * ]
Single Coin
- --------------------------------------------------------------------------------------------
PID, Single GI/NLC PPM1 GI/NLC [ * ] [ * ] [ * ]
POTS/UVG
- --------------------------------------------------------------------------------------------
</TABLE>
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
4
<PAGE> 85
APPENDIX X: MODIFICATIONS TO
APPENDICES
<TABLE>
<CAPTION>
Channel Description Code CI/NLC Lab P.O.A. G.A.
Unit Supplier
Service
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PID, DUAL GI/NLC PPM2 GI/NLC [ * ] [ * ] [ * ]
POTS/UVG
- ----------------------------------------------------------------------------------------------
PID, ISDN GI/NLC PBM1 GI/NLC [ * ] [ * ] [ * ]
U BRI
- ----------------------------------------------------------------------------------------------
SSU - 8-16 Teltrend [ * ] [ * ] [ * ]
- ----------------------------------------------------------------------------------------------
PC ISDN ISDN-NIC PCBA [ * ] [ * ] [ * ]
Card
- ----------------------------------------------------------------------------------------------
PC Card 256 Kb/s PCMA [ * ] [ * ] [ * ]
Multirate
Adapter
- ----------------------------------------------------------------------------------------------
MPEG-2 [ * ] [ * ] [ * ]
Set-Top
(DET)
includes
NIM
- ----------------------------------------------------------------------------------------------
BIU Single RF Modem At BNU [ * ] [ * ] [ * ]
- ----------------------------------------------------------------------------------------------
BIU Dual RF Modem At BNU [ * ] [ * ] [ * ]
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
3. General System Document (GSD)
SUPPLIER shall furnish NYNEX, within fourteen (14) days of execution of
this AGREEMENT by both parties, a General System Document (GSD), which shall be
defined as an integrated system design specification that reflects all system
specifications which SUPPLIER has proposed to NYNEX throughout SUPPLIER's
proposal to NYNEX's LRFP and RFP, as well as respective addendums thereto. All
SUPPLIER activity under this Article shall be included in the [ * ]to NYNEX
and/or its AFFILIATES.
4. Documentation Repository
SUPPLIER and NYNEX shall jointly establish and maintain an electronic
document depository and communications mechanism between each other.
Furthermore; SUPPLIER and NYNEX shall each identify respective single points of
contact in furtherance of such electronic document depository and communications
mechanism. All SUPPLIER activity
Notice: Not for use or disclosure outside of the NYNEX Corporation or
any of its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
5
<PAGE> 86
APPENDIX X: MODIFICATIONS TO
APPENDICES
under this Article shall be included in the [ * ] to NYNEX and/or its
AFFILIATES.
5. Hi-Rise
NYNEX and/or its AFFILIATES and SUPPLIER shall continue to work toward an
economical and efficient method of delivering telephony and broadband services
in Hi-Rise environments where NYNEX and/or its affiliates have no access to
coaxial riser facilities. This method may or may not use the architecture
proposed in the RFP and RRP. SUPPLIER shall provide NYNEX and/or its AFFILIATES
a mutually agreed upon Hi-Rise solution at the prices stated in RRP worksheet 2
under the following conditions: that the cable characteristics of the twisted
pair meet the minimum industry specification. All alternatives shall be explored
jointly by NYNEX and/or its AFFILIATES and SUPPLIER using technically feasible
solutions available in the marketplace. SUPPLIER shall provide the mutually
agreed to Hi-Rise solution at price equivalent to or less than those stated in
the RRP worksheet 2 as follows:
- -----------------------------------------------------------
Total Telephony and Video 1 Million HHP'd - [ * ] = [ * ]
- -----------------------------------------------------------
@800,000 HHP'd Dense Urban and 200,000 HHP'd High
Rise
- --------------------------------------------------
SUPPLIER shall offer to NYNEX and/or its AFFILIATES both an active and passive
NT solution. The choice by NYNEX and/or its AFFILIATES between pursuing either
an active or passive NT solution shall be based upon the characteristics of the
wiring. All SUPPLIER activity under this Article shall be included in the [ * ]
to NYNEX and/or its AFFILIATES, unless wiring characteristics require an active
NT at a price that will be mutually negotiated.
6. Power
Supplier shall provide, at the prices included in this Agreement, a Remote Power
supply (RPS) to NYNEX and its AFFILIATES which complies with the technical
requirements and specifications of NYNEX and its AFFILIATES or exceeds those
requirements which shall be designed for use with SUPPLIER platform. SUPPLIER
may provide, upon acceptance by NYNEX and/or its AFFILIATES, a power system as
substitute to the one originally proposed which shall meet the requirements and
specifications of the RFP/RRP at the price quoted, as well as other options
which offer a cost per line, ONU or home passed which is equal to or less than
the costs of the originally proposed system, subject to acceptance of such
alternative solutions by NYNEX and/or its AFFILIATES through the joint task
force and in accordance with the terms for Change Order Management under this
Agreement. SUPPLIER
Notice: Not for use or disclosure outside of the NYNEX Corporation or
any of its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
6
<PAGE> 87
APPENDIX X: MODIFICATIONS TO
APPENDICES
further agrees to provide any such alternative power systems to NYNEX and/or its
AFFILIATES under the terms of this Agreement for lab evaluation and FOA.
SUPPLIER shall, at the request of NYNEX and/or its AFFILIATES, jointly work to
evaluate proposed and other alternative power product line manufacturers to
ensue compatibility with the SYSTEMS, PRODUCTS, MATERIALS, SOFTWARE, and
COMPONENTS of those alternative power product line manufacturers to the extent
indicated in the RFP/RRP specifications, and to the extend indicated in Article
12 (TR-909) requirements. SUPPLIES and NYNEX and/or its AFFILIATES agree that
compatible manufacturers may be substituted at the discretion of NYNEX and/or
its AFFILIATES under the terms for change order management under this Agreement,
and such substitution shall not increase either a) the prices of the power
system as provided by SUPPLIER in the RFP/RRP, or b) the cost for power as
contained in the RFP/RRP responses in the cost allocation worksheets. SUPPLIER
shall work with NYNEX and/or its AFFILIATES, as well as any third parties
mutually agreed upon identified by NYNEX and/or its AFFILIATES, to develop
alternative compatible power architectures for SUPPLIERS platform. SUPPLIER
further agrees that, if an alternative power architecture is chosen by NYNEX
and/or its AFFILIATES for a particular build, the power component shall not
increase the prices for SUPPLIERS platform. Batteries supplied by SUPPLIER as a
part of the remote power supplies (RPS) shall be based upon mutual agreement and
acceptance by NYNEX and/or its AFFILIATES. The RPS furnished by SUPPLIER shall
include all subsystems required to meet the specifications outlined in the
original RFP.
SUPPLIER shall work with NYNEX and/or its AFFILIATES to provide RPS ancillary
products or services that may be required to meet a variety of field conditions.
This shall include, but not be limited to, pole mounting apparatus and
underground battery burial compartments. SUPPLIER shall provide to NYNEX and/or
its AFFILIATES adequate copies of the software needed for remote interfacing
with the RPS, SUPPLIER shall provide to NYNEX a fully functional RPS (either
[ * ] or [ * ]) for use in NYNEX's lab simulation. SUPPLIER and its RPS
supplier(s) shall provide setup and check-out assistance to NYNEX personnel on
the RPS at the NYNEX selected lab. Should NYNEX decide to use the proposed [ * ]
RPS, SUPPLIER shall make [ * ] and [ * ] style power supply cabinets available
for locations requiring more than [ * ]. Furthermore, power specifications of,
but not limited to, the BDTs, BNUs and active NIDs shall not deviate from
specifications previously presented to NYNEX. All SUPPLIER activity under this
Article shall be included in the [ * ] to NYNEX and/or its AFFILIATES.
7. Laboratory
During the Laboratory evaluation, SUPPLIER shall provide NYNEX with full
test documentation, results, third party testing methodology, and all pertinent
compliance information. Detailed schedules shall be provided by SUPPLIER to
NYNEX for all new equipment, equipment changes, and system configurations,
including but not limited to,
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of its
subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
7
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APPENDIX X:
MODIFICATIONS TO APPENDICES
software, hardware, functionality, methods and procedures and documentation.
These schedules shall include dates for pre-production, laboratory, production,
and general availability versions. All software upgrades, hardware upgrades and
system upgrades shall be made available by SUPPLIER for testing at a designated
NYNEX location with suitable lead-time to insure functionality prior to release
into the NYNEX network. SUPPLIER shall have personnel on-site for a mutually
agreeable specified time. If directed by NYNEX, SUPPLIER shall perform the
installation and pre-packaging of the laboratory related equipment at no cost to
NYNEX. SUPPLIER shall furnish NYNEX training for the laboratory personnel and
associated documentation. SUPPLIER shall provide 3 laboratory systems for
component, pair-wise, and integration testing. The respective systems are for
OSP & Telephony, VSP integration testbed and a transportable. Supplier shall
work to mutually define the configuration and functionality of the portable test
unit.
During the term of the lab evaluation, all equipment, Software, and
materials provided by SUPPLIER to NYNEX shall remain SUPPLIER property and title
will not pass to NYNEX and/or its AFFILIATES. The equipment, Software, and
materials provided by SUPPLIER during the course of the evaluation period may be
pre-production, prototype, or experimental in nature. Since title resides with
SUPPLIER at all times, no warranties, expressed or implied, exist for trial
equipment. During the course of the evaluation, NYNEX shall be responsible to
insure that: a) access to SUPPLIER equipment is restricted to its employees or
contractors who have need to access the equipment, b) NYNEX will take reasonable
precautions to protect SUPPLIER equipment in its facility from access by other
suppliers or personnel not employed by NYNEX, and c) NYNEX provides the same
degree of security and protection to SUPPLIER equipment as it does its own
equipment while in NYNEX possession. NYNEX agrees that NYNEX and its employees
shall not directly, in reference to SUPPLIER equipment, Software and materials
provided to NYNEX during the course of the evaluation, (i) sell, lease,
sublicense or otherwise transfer, and furthermore, shall not (ii) decompile,
dissemble, or otherwise analyze for reverse engineering purposes, including all
trade secrets and confidential information therein. SUPPLIER shall periodically
inform NYNEX of new enhancements, features, or product levels available for
evaluation and, furthermore, shall request from NYNEX permission to perform any
necessary upgrades or changes. NYNEX shall cooperate with SUPPLIER in scheduling
and facilitating such activities. NYNEX shall assume responsibility for any
damages, thefts, or other losses while SUPPLIER equipment is in their facility
during the evaluation period. SUPPLIER shall provide adequate on-site, as well
as remote (telephone "hotline") technical support, for the evaluation period.
SUPPLIER shall, upon request to NYNEX, be provided reasonable access to the lab
and its equipment, and a dial-in modem line may be provided, upon mutual
agreement, for remote diagnostic and trouble shooting support directly into
SUPPLIER equipment. During the evaluation period, all Software License Programs,
as well as third party licenses, are offered on loan, with no grant of license.
NYNEX may not adapt, modify, copy or convert any Software License Programs or
sub-license programs at any time. NYNEX shall install and use Software License
Programs only on those workstations and operating systems provided by SUPPLIERS
or identified in SUPPLIER specifications and such Software License Programs
shall be operated by NYNEX with reasonable network security from external
access. Upon expiration of the evaluation period, all Software License
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
8
<PAGE> 89
APPENDIX X: MODIFICATIONS TO APPENDICES
Programs shall promptly be returned intact and in their original format, with
all records or copies deleted by NYNEX from NYNEX databases. Property loaned to
NYNEX by SUPPLIER under this AGREEMENT shall be returned to SUPPLIER within ten
(10) days of expiration of the Evaluation Period and termination of the Lab
Evaluation. Property shall be returned in its original carton and packaging, or
in carton and packaging provided by or specified by SUPPLIER. Either party to
this AGREEMENT may, with thirty (30) days written notice, terminate the Lab
Evaluation without obligation or penalty, provided the terms of this AGREEMENT
are fulfilled. All SUPPLIER activity under this Article shall be included in the
[ * ] to NYNEX and/or its AFFILIATES.
8. Training
SUPPLIER shall furnish three (3) training systems to NYNEX. SUPPLIER shall
train thirty (30) NYNEX trainers. Each of these trainers shall be trained to
teach all four (4) parts of SUPPLIER's complete training package (estimated to
be a seven to ten day training effort). Each trainer trained shall be Certified
by SUPPLIER. Furthermore, SUPPLIER agrees that additional personnel of NYNEX
and/or its AFFILIATES shall have the opportunity to attend the thirty (30) two
week "train-the-trainer" classes for the thirty (30) identified trainers at no
cost to NYNEX and/or its AFFILIATES. The number of personnel of NYNEX and/or its
AFFILIATES to attend each class is at NYNEX's and/or its AFFILIATES' discretion.
NYNEX understands that SUPPLIER will not guarantee or supply any Certification
for those additional NYNEX and/or its AFFILIATES personnel or the trainer in a
session if: a) an individual attends for less than the entire
"train-the-trainer" course (SUPPLIER will not track or speak for their
competence) or if: b) more than nine individuals are designated by NYNEX and/or
its AFFILIATES to attend the "train-the-trainer" class. NYNEX shall receive from
SUPPLIER a minimum of thirty (30) original sets of documentation for the NYNEX
trainers and NYNEX shall have unlimited rights to duplicate such documentation.
The additional personnel that attend the "train-the-trainer" class shall each
receive a complete set of original training documentation. SUPPLIER shall train
fifty (50) people, to be designated by NYNEX, for the FOA within the areas of
engineering and operations and shall also supply corresponding training
documentation for each trainee. SUPPLIER shall furnish training for the
laboratory personnel along with associated training documentation. SUPPLIER
shall hire one additional "floating" trainer to act at the discretion of NYNEX
and/or its AFFILIATES. If NYNEX and/or its AFFILIATES identify or require
additional training, up to and beyond what was negotiated, SUPPLIER shall adhere
to the following guidelines:
A) Hire additional personnel for training to meet NYNEX's and/or its
AFFILIATES' additional requirements;
B) Submit travel and expense costs to NYNEX and/or its AFFILIATES for up to,
but not exceeding, thirty (30) trips for which NYNEX and/or its AFFILIATES
shall reimburse SUPPLIER; and
C) SUPPLIER shall prorate these costs.
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
9
<PAGE> 90
APPENDIX X: MODIFICATIONS TO
APPENDICES
NYNEX and SUPPLIER shall, at the appropriate time, jointly produce and fully
develop the remaining training details.
All SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES up to the amount negotiated.
9. NIM
SUPPLIER shall provide interface specifications sufficient for CPE vendors,
identified by NYNEX, to design and build CPE compatible with SUPPLIER system and
having the capability to work with SUPPLIER system on the NYNEX network. Within
thirty (30) days following SUPPLIER execution of this AGREEMENT, formal
specifications shall be made available by SUPPLIER, upon request, to such CPE
vendors. Any subsequent changes applicable to SUPPLIER specifications shall be
incorporated by SUPPLIER into the specifications and SUPPLIER shall retransmit
the then modified specifications to previously requesting CPE vendors. Due to
SUPPLIER integration effort with NYNEX identified CPE vendors, SUPPLIER AND
NYNEX shall mutually agree upon a reasonable license fee/royalty that is based
on the rates commercially available in the market place. SUPPLIER shall provide
timely technical assistance, which shall consist of the integration effort and
which would be provided under the license fee to such CPE vendors, as would be
helpful in the design and manufacture of CPE.
10. OSS
SUPPLIER shall provide to NYNEX, if so directed by NYNEX, a DCE/RPC
interface from the EMS to the VIP Gateway, for a cost to NYNEX which shall be
mutually agreed upon and not to exceed [ * ].
11. Asset Inventory Management
SUPPLIER shall, during the First Office Application (FOA), maintain
sufficient provisions of spares so as to supply NYNEX for unforeseen failures
within twenty four (24) hours from the request of NYNEX SUPPLIER agrees that,
during such FOA period, it shall maintain at [ * ] spare levels all inventory
supplied to NYNEX. Furthermore, within ninety (90) days of the completion of
negotiations between SUPPLIER and NYNEX, SUPPLIER and NYNEX shall mutually agree
upon an appropriate level of spares so as to allow NYNEX a reasonable response,
that being within twenty four (24) hours, to an unforeseen service related
failure of the NYNEX SDV network deployed at any given time. NYNEX reserves the
right to review and recommend adjustments to the level of appropriate spares at
any point in time, based on the actual performance of the NYNEX SDV network. All
SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES.
Notice: Not for use or disclosure outside of the NYNEX Corporation or
any of its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
10
<PAGE> 91
APPENDIX X: MODIFICATIONS TO
APPENDICES
12. Supplier Key Personnel
Rick Freidland, or his successor(s), shall be the designated individual
appointed by SUPPLIER to possess full oversight responsibilities as to SUPPLIER
for purposes of this AGREEMENT.
Bill Weeks, or his successor(s) in that position or responsibility, shall
be [ * ] to the project hereunder this AGREEMENT.
SUPPLIER, subject to NYNEX's right of review, approval and change, shall
appoint for purposes of this AGREEMENT, a Vice-President of Technology, an
Overall Program Director, a New England District Director and a New York
District Director.
All SUPPLIER activity under this Article shall be included in the [ * ] per HHP
cost structure to NYNEX and/or its AFFILIATES.
13. Schedule & Deployment
The terms and conditions of the contract are scaleable up to 5 million
households passed (HHP).
SUPPLIER and NYNEX shall jointly establish a mutually agreeable 12 month rolling
and a multi-year forecast window for the implementation of the backbone.
NYNEX and SUPPLIER agree to the following two options for deployment of the
infrastructure hereunder.
Option 1: A four year time frame to deploy the infrastructure with that time
frame commencing at the acceptance of the FOA telephony.
The project is defined to be:
Infrastructure of 800,000 HHP
832,000 pots lines over the life (12 years)
60,160 video lines over the life (12 years)
Year-to-year Infrastructure deployment:
1997 numbers include FOA numbers.
1997: 50,000 HHP with 10% flexibility
1998: 250,000 HHP with 10% flexibility
1999: 250,000 HHP with 10% flexibility
2000: 250,000 HHP
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of its
subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
11
<PAGE> 92
APPENDIX X: MODIFICATIONS TO APPENDICES
Telephony Lines:
1997: 3,000 lines with 10% flexibility
1998: 54,400 lines with 10% flexibility
1999: 102,200 lines with 10% flexibility
2000: 88,000 lines with 10% flexibility
2001: 73,500 lines with 10% flexibility
2002: 73,500 lines with 10% flexibility
2003: 73,500 lines with 10% flexibility
2004: 73,500 lines with 10% flexibility
2005: 73,500 lines with 10% flexibility
2006: 73,500 lines with 10% flexibility
2007: 73,500 lines with 10% flexibility
2008: 56,200 lines with 10% flexibility
2009: 14,500 lines
Video Lines:
1997: 0 lines
1998: 1,680 lines with 10% flexibility
1999: 4,880 lines with 10% flexibility
2000: 7,440 lines with 10% flexibility
2001: 5,520 lines with 10% flexibility
2002: 6,480 lines with 10% flexibility
2003: 4,880 lines with 10% flexibility
2004: 6,480 lines with 10% flexibility
2005: 4,880 lines with 10% flexibility
2006: 4,880 lines with 10% flexibility
2007: 4,880 lines with 10% flexibility
2008: 4,880 lines with 10% flexibility
2009: 3,280 lines
Option 2: A five year time frame to deploy the infrastructure with that time
frame commencing at the acceptance of the FOA telephony.
The project is defined to be:
Infrastructure of 800,000 HHP
893,000 pots lines over the life (12 years)
Year-to-year Infrastructure deployment:
1997: 30,000 HHP (numbers include FOA numbers)
1998: 100,000 HHP
1999: 250,000 HHP
2000: 250,000 HHP
2001: 170,000 HHP
Notice: Note for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
12
<PAGE> 93
APPENDIX X: MODIFICATIONS TO
APPENDICES
TELEPHONE LINES:
1997: 20,000 lines
1998: 80,000 lines
1999: 200,000 lines
2000: 200,000 lines
2001: 200,000 lines
2002: 50,000 lines
2003: 50,000 lines
2004: 50,000 lines
2005: 25,000 lines
2006: 25,000 lines
2007: 20,000 lines
2008: 13,000 lines
2009: 10,000 lines
On July 1, 1997, SUPPLER shall request a response from NYNEX as to which of
the above options NYNEX shall pursue.
All SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES.
14. Options.
SUPPLIER shall submit a proposal to NYNEX in reference to the purchase of
the OSP Design Tool by NYNEX. NYNEX shall make a decision on whether to
purchase the OSP Design Tool after the ability to evaluate several
alternatives. Such an evaluation and purchase is purely an option to NYNEX and
no obligation exists on NYNEX to execute that option to any degree.
SUPPLIER and NYNEX shall negotiate a mutual agreeable business arrangement
regarding NYNEX's Level 1 Gateway.
15. VSP Architecture & Control
15.1 Requirements and Architecture Documents
The documents listed below are the complete set of requirements,
architecture and specification documents relevant to the NYNEX Video Services
Platform for Release 1. These supersede any VSP related documents which may
have previously been delivered to SUPPLIER, or may have been referred to in the
Letter of Intent.
1. VDT Service Requirements, Version 2.1 (Annotated) TM95-0027, March
1996
2. VSP System Requirement Specifications, Version 1.4, TM95-0034, October
13, 1995
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
13
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APPENDIX X: MODIFICATIONS TO
APPENDICES
3. Addendum to VSP SRS v1.4, TM96-0054, Version 1.0 - Draft, June 6, 1996
4. VSP Access Subsystem Controller (ASC) Generic External Interface and
Core to SDV Implementation Document, Version 1.0, TM96-0049, May 15,
1996
5. VSP System Design Specifications for SDV Based Platforms, Version 2.1
- Draft, TM95-076, October 2, 1996
6. Full Service Network High Speed Data Requirements, Version 1.0,
January 1996
7. BSP System Requirements Specification, Version 1.7 - Draft, TM96-0066,
August 1, 1996
Any changes to these requirements shall be communicated to SUPPLIER by NYNEX
through appropriate updates to these documents, using the change management
process indicated in this AGREEMENT. SUPPLIER has indicated in writing that
SUPPLIER system is in compliance with these documents except as indicated in a
letter (contained in Appendix H) dated October 7, 1996 from Matthew Nguyen of
SUPPLIER to Christopher J. Carey NYNEX.
15.2 Schedule for Software Development by SUPPLIER
The following schedule defines SUPPLIER's delivery obligations for
developing the Access Specific Part of the Access Subsystem Controller (ASC).
This schedule leads to the ASC being available, for QA & integration testing,
seven months after the development starts.
<TABLE>
<CAPTION>
============================================================================================
ITEM PROJECT PLAN ASSUMPTION RESPONSIBILITY DUE DATE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Approval of GI/NLC software development NYNEX start
project
- --------------------------------------------------------------------------------------------
2 Agree on internal (core to GI/SDV Message NYNEX & start + 1 month
set) interfaces TM95-0049 v2.0 GI/NLC
(modification of current document v1.0)
- --------------------------------------------------------------------------------------------
3 GI/SDV Broadcast and Interactive component GI/NLC start + 6 months
available for ASC Component Development
Testing
- --------------------------------------------------------------------------------------------
4 Test Plans for the GI/SDV component delivered GI/NLC start + 6 months
- --------------------------------------------------------------------------------------------
5 Design Specification for the GI/SDV component GI/NLC start + 6 months
delivered
- --------------------------------------------------------------------------------------------
6 GI on site, at the Work Location specified in GI 7th month
testing section of SOW, during ASC Component
Development Testing
- --------------------------------------------------------------------------------------------
7 ASC available for QA & integration with rest NYNEX start + 7 months
of VSP
============================================================================================
</TABLE>
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of its
subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
14
<PAGE> 95
APPENDIX X:
MODIFICATIONS TO APPENDICES
15.3. Plan to Address Bandwidth Limitations of BDT
SUPPLIER and NYNEX acknowledge that the current design of SUPPLIER
system specifies two OC-12c interfaces at the HDT for Broadcast Services and one
OC-12c interface for Interactive Services as well as that NYNEX marketing
requirements (as indicated in the RFP and RRP) exceed these capacities. SUPPLIER
shall pursue and propose to NYNEX viable cost effective capacity upgrade
strategies that shall, at a minimum, provide one additional OC-12c interface for
NYNEX Broadband Services. This upgrade on the part of SUPPLIER shall be
accomplished without excessive down time for existing system retrofits
(backwards compatibility). The cost to NYNEX for this additional capacity shall
not exceed the cost for the initial OC-12c capability on a per bandwidth unit
basis. The upgrade requirements, specifications and costs shall be negotiated
between SUPPLIER and NYNEX within the parameters of the change of scope section
of this AGREEMENT. SUPPLIER shall provide NYNEX, by March 1, 1997, a proposal
outlining the technical approach to such capacity upgrade, the implications on
service to perform the upgrade, and budgetary pricing for development. SUPPLIER
shall simultaneously provide to NYNEX a development schedule with an intent of a
trial unit being available by [ * ].
15.4. Independence of Telephony and Video Engineering Guidelines
SUPPLIER asserts that if NYNEX chooses to design a telephony first
network, there will be no re-engineering necessary to incorporate video at a
future date as SUPPLIER system shall be video capable.
ALL SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES.
16. EMS
The EMS cost to NYNEX shall be [ * ] for one million households passed
(HHP). NYNEX shall pay a fixed incremental portion of this for every BHDT
deployed. Upon attaining the [ * ] threshold, this cost shall be removed from
the BHDT cost. Beyond one million HHP, SUPPLIER shall grant a perpetual RTU to
NYNEX and/or its AFFILIATES without limitation or restriction to quantity of
HHP. This is a single fee of [ * ]. This fee shall also entitle NYNEX to all
upgrade and new generic releases for the life of this AGREEMENT.
17. Travel & Expenses
NYNEX's and/or its AFFILIATES' travel and expense guidelines may apply,
at the discretion of NYNEX and/or its AFFILIATES, to SUPPLIER personnel during
and only for
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
15
<PAGE> 96
APPENDIX X: MODIFICATIONS TO
APPENDICES
their active support this AGREEMENT. Furthermore, SUPPLIER personnel shall be
required, at the discretion of NYNEX and/or its AFFILIATES, to complete and
submit a written report of such travels and expenses, in a mode and deliverable
to a location, as indicated by and acceptable to NYNEX and/or its AFFILIATES.
SUPPLIER shall not disclose any NYNEX proprietary information to which SUPPLIER
gains knowledge of within its compliance with this Article.
18. Payment for termination for convenience
In the event of termination for convenience by NYNEX, NYNEX shall purchase
and SUPPLIER shall furnish an equivalent number of telephony cards so as to
outfit/service the respective HHP infrastructure that was complete at the time
of termination and not yet equipped for telephony service.
For the period of October 17, 1996 through February 1, 1997, NYNEX shall be
limited, in accordance with Article 7, Section 7.2 (entitled Termination for
Convenience) of this AGREEMENT to a maximum of [ * ] for Orders placed for the
FOA Project and for any other obligation or liability arising out of this
AGREEMENT. SUPPLIER shall not be liable to make delivery of any Orders placed by
NYNEX in excess of [ * ] until such time as this limit has been removed or
amended by NYNEX and SUPPLIER and NYNEX have established a mutually agreeable
twelve (12) month rolling and a multi-year forecast window for the
implementation of the backbone.
All SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES.
19. Material & Apparatus
SUPPLIER shall include third party lab testing to Bellcore Specifications
for ONU cabinets including certification to: TA-NWT-000487, Generic Requirements
for Electronic Equipment Cabinets and GR-1089-CORE, Electronmagnetic
Compatibility and Electrical Safety - Generic Criteria for Network
Telecommunication Equipment, Section 3 Electromagnetic Interference (EMI). All
SUPPLIER activity under this Article shall be included in the [ * ] to NYNEX
and/or its AFFILIATES.
20. Software Related Documentation
In addition to what is also stated within this AGREEMENT, related
documentation shall mean DOCUMENTATION as to SOFTWARE hereunder this AGREEMENT
pertaining to, but not limited to, the manufacturer, type/model, configuration
and engineering change level of the specific development processor used to
code/develop and compile/interpret the
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
16
<PAGE> 97
APPENDIX X: MODIFICATIONS TO
APPENDICES
source code. Additionally all host/server/workstation environment information
shall include, but not be limited to, specific operating system
versions/releases, all corrective service applied, all system
configurations/generations and parameters/information, all compiler information
and specific parameters used at the time of source code development and
subsequent object code generation. Furthermore, all such information shall
include relevant file management/relational database management systems and all
other application programs, application program modules, LOADABLE MODULES,
OBJECT CODE, DLLs' and file management systems that the source code and
subsequent object code reference and link/bind in order to produce the
executable code delivered to NYNEX and/or its AFFILIATES. All SUPPLIER activity
under this Article shall be included in the [ * ] to NYNEX and/or its
AFFILIATES.
21. Source Code
OBJECT CODE/DYNAMIC LINK LIBRARIES (DLLs') shall mean a computer program in
the form of machine language that has been generated as the output of processing
SOURCE CODE through a compiler/interpreter transforming the SOURCE CODE
instructions into lower level machine language instructions suitable for
execution when all internal references have been resolved relative to all file
management/relational database pointers and all control system/operating
system/network management/requisite application program pointers. A LOADABLE
MODULE shall mean output of a process that has input OBJECT CODE into a linking/
binding process which has resolved/established all internal pointers such that
the output code, once loaded into a system, can be executed without further
processing. All SUPPLIER activity under this Article shall be included in the
[ * ] to NYNEX and/or its AFFILIATES.
22. Custom Development or Modification
In the event NYNEX and/or its AFFILIATES submits to the SUPPLIER a
specification for custom development or for changes in existing SOFTWARE,
SUPPLIER shall provide, upon request from NYNEX and/or its AFFILIATES, in a
timely and appropriate manner and within a format mutually agreed upon and
acceptable to NYNEX and/or its AFFILIATES or its designated third party, the
interface specification to relevant SUPPLIER furnished systems. If applicable,
SUPPLIER and NYNEX shall negotiate and mutually agree upon appropriate license
fees or royalties. SUPPLIER shall provide interface information related to those
interfaces to NYNEX systems or other network elements operating with and to the
SOFTWARE in a form such that NYNEX or a NYNEX designated third party shall be
able to design and code such custom development or changes. Such information
shall include, at a minimum, file layouts, message codes, processing flows,
alarm criteria/error handling routines and all relevant DOCUMENTATION. All
custom development efforts or modifications to existing SUPPLIER SOFTWARE,
requested by NYNEX and/or its
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of its
subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
17
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APPENDIX X: MODIFICATIONS TO
APPENDICES
AFFILIATES and performed by SUPPLIER, shall be priced by SUPPLIER in accordance
with the pricing guidelines established by this AGREEMENT and shall be
submitted with a detailed project implementation plan for the custom
development/modification. The project plan shall include, at a minimum, the
identification of all personnel to be assigned to the project, their specific
functions relative to the project, their resumes, and a complete cost rollup of
each project members' costs within an appropriate and reasonable time interval
(day/week/month/year) period and such shall be a reimbursable expense to the
project. NYNEX reserves the right to approve all such project plans and costs.
NYNEX and SUPPLIER shall jointly review and agree to any proposed staff
assigned to such projects. SUPPLIER agrees to make a best effort to
accommodate NYNEX as to its requested response date for any and all such
project plans and, if applicable, implementation/deliverable dates. SUPPLIER
shall fully cooperate and support the testing and integration of all such
custom developments/modifications even if done by a third party in order to
achieve the objectives of NYNEX and/or its AFFILIATES in undertaking such
custom development/modification project(s). Any costs associated with required
changes to SUPPLIER SOFTWARE and SUPPLIER provided system/electronic interfaces
which were precipitated by omissions to the interface specifications provided
by SUPPLIER, and subsequently used to cost out the project, shall be borne by
SUPPLIER. SUPPLIER agrees that once such a project is undertaken by NYNEX
and/or its AFFILIATES to implement such custom development/modification, any
interface specifications and subsequent enablement of such an interface shall
not be altered by SUPPLIER unless specifically approved in writing by NYNEX.
23. Illicit Code
SUPPLIER shall possess and institute an auditable quality control and
inspection procedure in order to verify that all machine readable medium is free
of ILLICIT CODE prior to being used to transfer code to NYNEX and/or its
AFFILIATES. In addition, SUPPLIER shall possess and institute a secure process
to assure that all code transmitted to and received by NYNEX and/or its
AFFILIATES via EDI methods is free of ILLICIT CODE. All SUPPLIER activity under
this Article shall be included in the [ * ] to NYNEX and/or its AFFILIATES
24. ASC Pricing
SUPPLIER and NYNEX shall jointly develop the access interface portion of
the Access System Controller (ASC) subject to acceptance by SUPPLIER of the
NYNEX specification and a mutually agreed upon scope of work. Such joint
development by SUPPLIER and NYNEX shall be governed by the following terms:
A.) SUPPLIER licensed product or NYNEX licensed product with grant back
license to SUPPLIER:
Notice: Not for use or disclosure outside of the NYNEX Corporation or
any of its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
18
<PAGE> 99
APPENDIX X: MODIFICATIONS TO
APPENDICES
A one-time Non-Recurring Engineering fee (NRE) of [ * ] payable by NYNEX to
SUPPLIER, upon NYNEX'S acceptance of the scope of work and issuance by NYNEX of
an Order and either, at the option of NYNEX, a payment by NYNEX to SUPPLIER of
an unlimited license fee of [ * ] . For licenses required by NYNEX and/or its
AFFILIATES beyond one million HHP, a fee of [ * ] shall be payable by NYNEX
and/or its AFFILIATES to SUPPLIER and shall entitle NYNEX and/or its AFFILIATES
to a perpetual and unlimited use license for ASC. The warranty provided by
SUPPLIER to NYNEX and/or its AFFILIATES shall be for a term of [ * ] as provided
under Article 13 of this AGREEMENT.
B.) NYNEX owned license (Work made for hire)
A Non-Recurring Engineering fee (NRE) of [ * ] shall be paid by NYNEX to
SUPPLIER upon acceptance by NYNEX of the scope of work and issuance of an Order.
Upon acceptance by NYNEX of Software hereunder, NYNEX shall pay to SUPPLIER a
lump sum fee of [ * ] in exchange for which SUPPLIER shall transfer to NYNEX
license, title and ownership of said Software and all rights therein, including
all related Source Code and technical documentation. Upon transfer of license,
title and ownership to Software, all obligations of warranty and technical
support by SUPPLIER under Article 13, section 13.2 of this AGREEMENT shall be
deemed fulfilled. SUPPLIER shall in no way be prevented or precluded in its
subsequent development of similar or comparable or functionally equivalent
interfaces based upon published or recognized industry standards as may be
contained in the ASC.
25. Future Features Development Payment Methodology
SUPPLIER shall price future changes in scope of work (custom, feature,
enhancements to SOFTWARE) to NYNEX and/or its AFFILIATES as follows:
A.) A one-time payment upon acceptance by NYNEX and/or its AFFILIATES if total
cost for the scope of work is less than [ * ].
B.) If total cost for the scope of work is [ * ] or greater, a price mutually
agreed upon by SUPPLIER and NYNEX and/or its AFFILIATES shall be allocated on a
per BDT basis. The price allocated shall be based upon the total cost of the
number of BDTs committed in the [ * ] passed (HHP) or one thousand (1000) BDTs,
NYNEX agrees that, depending on the timing involved, this allocation shall
include both BDTs installed and those remaining within the commitment.
C.) SUPPLIER shall offer NYNEX a one-time unlimited perpetual license beyond
[ * ] passed (HHP).
Notice: Not for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
2996 NYNEX Corporation. All rights reserved.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
19
<PAGE> 100
APPENDIX X: MODIFICATIONS TO APPENDICES
In the event NYNEX elects to own license and title to a SUPPLIER developed
Software product as work made for hire, payment to SUPPLIER by NYNEX shall be
required upon NYNEX acceptance of said Software. SUPPLIER and NYNEX shall have
the ability to negotiate interim payments, such as, but not limited to,
progressive payments, in the event the work effort is a.) of a large volume,
and b.) over an extended development and test period.
SUPPLIER and NYNEX agree to negotiate any and all reasonable payment
methodology so as to provide NYNEX a "pay as you go" method over the project
term within the restriction that such a methodology shall have the ability to
be tracked by SUPPLIER's customer support database for warranty, possesses the
ability to be tied to an identifiable "trigger" and meets the requirements of
both SUPPLIER and NYNEX and/or its AFFILIATES for purchase order/invoice
administration.
26. ONU Production
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
27. Methods & Procedures
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
28. Engineering & Design
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
29. Engineering Guidelines
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
30. FOA Schedule & Delivery
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
Notice: Note for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
20
<PAGE> 101
APPENDIX X: MODIFICATIONS TO APPENDICES
31. TECHNICAL AND PRODUCT SUPPORT
General Instrument will work with NYNEX to develop a plan to address this issue
that is satisfactory to NYNEX.
Notice: Note for use or disclosure outside of the NYNEX Corporation or any of
its subsidiaries except under written agreement.
1996 NYNEX Corporation. All rights reserved.
21
<PAGE> 1
EXHIBIT 10.13
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
NEXT LEVEL COMMUNICATIONS, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for good and valuable consideration, Next Level
Communications, Inc., a Delaware corporation (the "Company"), grants
to__________________________ (the "Warrantholder") the right to subscribe for
and purchase from the Company_____________________ validly issued, fully paid
and nonassessable shares (the "Warrant Shares") of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), at the purchase price per share
of $10.38 (the "Exercise Price"), at any time prior to 5:00 p.m., New York City
time on January 13, 2003 (the "Expiration Date"), all subject to the terms,
conditions and adjustments herein set forth. As used herein, "Business Day"
means any day other than a Saturday, Sunday or a day on which national banks are
authorized by law to close in the State of New York or California.
1. Exercise of Warrant.
1.1 Duration and Exercise of Warrant. Subject to the terms and
conditions set forth herein, this Warrant may be exercised, in whole or in part,
by the Warrantholder by:
(a) the surrender of this Warrant to the Company, with a duly
executed Exercise Form (in the form attached hereto as Exhibit A) specifying the
number of Warrant Shares to be purchased, during normal business hours on any
Business Day prior to the Expiration Date; and
(b) the delivery of payment to the Company, for the account of
the Company, in immediately available funds, of
<PAGE> 2
2
the Exercise Price for the number of Warrant Shares specified in the Exercise
Form in lawful money of the United States of America.
1.2 Conversion Right.
(a) In lieu of exercising this Warrant by the payment of the
Exercise Price in cash, the Warrantholder shall have the right (but not the
obligation), to require the Company to convert this Warrant, in whole or in
part, into shares of Common Stock (the "Conversion Right") as provided for in
this Section 1.2. Upon exercise of the Conversion Right, the Company shall
deliver to the Warrantholder (without payment by the Warrantholder of any of the
Exercise Price) in accordance with Section 1.1 that number of shares of Common
Stock equal to the quotient obtained by dividing (x) the value of the Warrant
(or the portion thereof being exercised) at the time the Conversion Right is
exercised (determined by subtracting the aggregate Exercise Price (or the
applicable portion thereof) in effect as of the close of business on the
Business Day immediately preceding the exercise of the Conversion Right from the
aggregate Fair Market Value (as defined herein) for the shares of Common Stock
issuable upon exercise of the Warrant (or the portion thereof being exercised)
as of the close of business on the Business Day immediately preceding the
exercise of the Conversion Right) by (y) the Fair Market Value of one share of
Common Stock as of the close of business on the Business Day immediately
preceding the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Warrantholder on
any Business Day prior to the Expiration Date by delivering the Warrant
Certificate, with a duly executed Exercise Form with the conversion section
completed, to the Company, exercising the Conversion Right and specifying the
total number of shares of Common Stock that the Warrantholder will be issued
pursuant to such conversion.
(c) "Fair Market Value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean the average of the "daily
sales prices" of the Common Stock on the Nasdaq National Market on the last 20
Business Days prior to the Determination Date. The "daily sales price" shall be
the closing price for bona fide transactions of the Common Stock at the end of
each day or, if no such transaction takes place that day, the average of the
closing bid and asked prices for such day.
1.3 Warrant Shares Certificate. A stock certificate or certificates
for the Warrant Shares specified in the Exercise Form shall be delivered to the
Warrantholder promptly after receipt of the Exercise Form by the Company and, if
the Conversion Right is not exercised, payment of the Exercise Price. If this
Warrant shall have been exercised only in part, the Company shall, at the time
of delivery of the stock certificate or certificates, deliver to the
Warrantholder a new Warrant
<PAGE> 3
3
evidencing the rights to purchase the remaining Warrant Shares, which new
Warrant shall in all other respects be identical with this Warrant.
1.4 Payment of Taxes. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereto; provided, however, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. Restrictions on Transfer;
Restrictive Legends.
(a) This Warrant may not be offered, sold, transferred, pledged or
otherwise disposed of (other than to an affiliate of the Warrantholder), in
whole or in part, without the prior written consent of the Company (which shall
not be unreasonably withheld).
(b) Except as otherwise permitted by this Section 2, each Warrant
(and each Warrant issued in substitution for any Warrant pursuant to Section 4)
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH
LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS
AVAILABLE.
Except as otherwise permitted by this Section 2, each stock certificate for
Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH
<PAGE> 4
4
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS
CORPORATION, IS AVAILABLE.
Notwithstanding the foregoing, the Warrantholder may require the
Company to issue a stock certificate for Warrant Shares without such legend if
such Warrant Shares have been registered for resale under the Securities Act.
3. Reservation and Registration of Shares, Etc.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens, security interests, charges, and other
encumbrances imposed by or through the Company with respect to the issuance
thereof, other than taxes in respect of any transfer occurring contemporaneously
with such issue.
(b) During the period within which this Warrant may be exercised,
the Company will at all times have authorized and reserved a sufficient number
of shares of Common Stock to provide for the exercise of the rights represented
by this Warrant.
4. Loss or Destruction of Warrant.
Subject to the terms and conditions hereof, upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require, and, in the case of such mutilation, upon surrender and cancellation of
this Warrant, the Company will execute and deliver a new Warrant of like tenor.
5. Ownership of Warrant.
The Company may deem and treat the person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. Certain Adjustments.
6.1 The number of Warrant Shares purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment after the
date hereof as follows:
(a) Stock Dividends. If at any time (i) the Company shall pay a
stock dividend payable in shares of Common Stock or (ii) the number of shares of
Common Stock shall have been
<PAGE> 5
5
increased by a subdivision or split-up of shares of Common Stock, then, on the
date of the payment of such dividend or immediately after the effective date of
subdivision or split up, as the case may be, the number of shares to be
delivered upon exercise of this Warrant will be increased so that the
Warrantholder will be entitled to receive the number of shares of Common Stock
that such Warrantholder would have owned immediately following such action had
this Warrant been exercised immediately prior thereto, and the Exercise Price
will be adjusted as provided below in paragraph (g).
(b) Combination of Stock. If the number of shares of Common Stock
outstanding shall have been decreased by a combination of the outstanding shares
of Common Stock (including a reverse stock-split), then, immediately after the
effective date of such combination, the number of shares of Common Stock to be
delivered upon exercise of this Warrant will be decreased so that the
Warrantholder thereafter will be entitled to receive the number of shares of
Common Stock that such Warrantholder would have owned immediately following such
action had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph (g).
(c) Reorganization, etc. If any capital reorganization of the
Company, or any reclassification of the Common Stock, or any consolidation of
the Company with or merger of the Company with or into any other person, shall
be effected in such a way that the holders of Common Stock shall be entitled to
receive stock, other securities or assets (whether such stock, other securities
or assets are issued or distributed by the Company or another person) with
respect to or in exchange for Common Stock, then, upon exercise of this Warrant
the Warrantholder shall have the right to receive the kind and amount of stock,
other securities or assets receivable upon such reorganization,
reclassification, consolidation or merger by a holder of the number of shares of
Common Stock that such Warrantholder would have been entitled to receive upon
exercise of this Warrant had this Warrant been exercised immediately before such
reorganization, reclassification, consolidation or merger.
(d) Stock and Rights Offering at Less than Fair Market Value.
(i) If at any time the Company shall issue to all holders of
its Common Stock or sell or fix a record date for the issuance to all
holders of its Common Stock of Common Stock at a price per share that is
less than Fair Market Value per share of Common Stock (as defined in
Section 1.2(c) hereof) on the date of such issuance or such record date
then, immediately after the date of such issuance or sale or on such
record date, the number of
<PAGE> 6
6
shares of Common Stock to be delivered upon exercise of this Warrant shall
be increased so that the Warrantholder thereafter will be entitled to
receive the number of shares of Common Stock determined by multiplying the
number of shares of Common Stock such Warrantholder would have been
entitled to receive immediately before the date of such issuance or sale
or such record date by a fraction, the denominator of which will be the
number of shares of Common Stock outstanding on such date plus the number
of shares of Common Stock that the aggregate offering price of the total
number of shares so offered for subscription or purchase would purchase at
such Fair Market Value, and the numerator of which will be the number of
shares of Common Stock outstanding on such date plus the number of
additional shares of Common Stock offered for subscription or purchase,
and the Exercise Price shall be adjusted as provided below in paragraph
(g).
(ii) If the Company shall at any time distribute to all
holders of its Common Stock any shares of capital stock of the Company
(other than Common Stock) or evidences of its indebtedness or assets
(excluding cash dividends or distributions paid from retained earnings of
the Company) or rights or warrants to subscribe for or purchase any of its
securities (any of the foregoing being hereinafter in this paragraph
(d)(ii) called the "Securities"), other than pursuant to a reorganization,
reclassification, consolidation or merger described in paragraph (c), then
in each such case, unless the Company elects to reserve shares or other
units of such Securities for distribution to the Warrantholder upon
exercise of the Warrants of such Warrantholder so that, in addition to the
shares of the Common Stock to which such Warrantholder is entitled, such
Warrantholder will receive upon such exercise the amount and kind of such
Securities that such Warrantholder would have received if the
Warrantholder had, immediately prior to the record date for the
distribution of the Securities, exercised the Warrant, then the number of
shares of Common Stock to be delivered to such Warrantholder upon exercise
of this Warrant shall be increased so that the Warrantholder thereafter
shall be entitled to receive the number of shares of Common Stock
determined by multiplying the number of shares such Warrantholder would
have been entitled to receive immediately before such record date, had the
Warrantholder exercised the Warrant immediately prior thereto by a
fraction, the denominator of which shall be the Fair Market Value per
share of Common Stock on such record date minus the then fair market value
(as reasonably determined by the Board of Directors of the Company), of
the portion of the capital stock or assets or evidences of indebtedness so
distributed or of such rights or warrants applicable to one share of
Common Stock and the numerator of which shall be the Fair Market Value per
share of the Common
<PAGE> 7
7
Stock, and the Exercise Price shall be adjusted as provided below in
paragraph (g).
(iii) For the purpose of making any adjustment required under
this Section 6.1(d), the consideration received by the Company for any
issue or sale of securities shall (a) to the extent it consists of cash be
computed as the gross amount of cash received by the Company before
deduction of any expenses payable by the Company and any underwriting or
similar commissions, discounts, compensation or concessions paid or
allowed by the Company in connection with such issue or sale, (b) to the
extent it consists of property other than cash, be computed at the fair
value of that property as reasonably determined in good faith by the Board
of Directors and (c) if additional shares of Common Stock, securities
convertible into Common Stock or rights or options to purchase either
additional shares of Common Stock or such convertible securities or are
issued or sold together with other stock or securities or other assets of
the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined
in good faith by the Board of Directors to be allocable to such additional
shares of Common Stock, such convertible securities or rights or options.
(e) Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued to any Warrantholder in connection with the exercise of this
Warrant. Instead of any fractional shares of Common Stock that would otherwise
be issuable to such Warrantholder, the Company will pay to such Warrantholder a
cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the Fair Market Value per share of Common Stock as
of the close of business on the Business Day immediately preceding the exercise
of the Warrant.
(f) Carryover. Notwithstanding any other provision of this Section
6.1, no adjustment shall be made to the number of shares of Common Stock to be
delivered to the Warrantholder (or to the Exercise Price) if such adjustment
represents less than 1% of the number of shares to be so delivered, but any
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment that together with any adjustments
so carried forward shall amount to 1% or more of the number of shares to be so
delivered.
(g) Exercise Price Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant is adjusted as provided pursuant to
this Section 6.1, the Exercise Price payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of Warrant
Shares purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the
<PAGE> 8
8
denominator shall be the number of Warrant Shares purchasable immediately
thereafter; provided, however, that the Exercise Price for each Warrant Share
shall in no event be less than the par value of such Warrant Share.
6.2 Notice of Adjustment. Whenever the number of Warrant Shares or
the Exercise Price of such Warrant Shares is adjusted, as herein provided, the
Company shall promptly mail by first class, postage prepaid, to the
Warrantholder, a notice of such adjustment or adjustments setting forth the
number of Warrant Shares and the Exercise Price such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
7. Miscellaneous.
7.1 Binding Effect; Benefits. This Warrant shall inure to the
benefit of and shall be binding upon the Company and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.
7.2 Amendments. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of the Company and the
Warrantholder.
7.3 Section and Other Headings. The section and other headings
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
7.4 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally, telecopied
or sent by certified, registered or express mail, as follows:
(a) if to the Company at 6085 State Farm Drive, Rohnert
Park, CA 94928, Attention: Chief Financial Officer (with a copy
to General Instrument Corporation, 101 Tournament Drive, Horsham,
PA 19044, Attention: General Counsel); or
(b) if to the Warrantholder at c/o Spencer Trask
Investors LLC, 535 Madison Avenue, New York, NY 10022,
Attention: Kevin Kimberlin.
Any party may by notice given in accordance with this Section designate another
address or person for receipt of notices hereunder.
<PAGE> 9
9
7.5 Severability. Any term or provision of this Warrant which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
7.6 Governing Law. This Warrant shall be deemed to be a contract
made under the laws of the State of New York.
7.7 No Rights or Liabilities as Stockholder. Nothing contained in
this Warrant shall be determined as conferring upon the Warrantholder any rights
as a stockholder of the Company or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are asserted
by the Company or by creditors or stockholders of the Company or otherwise.
7.8 Partnership Agreement. The Warrantholder agrees and acknowledges
that all of the obligations to the Warrantholder under Section 10.2 of the
Agreement of Limited Partnership dated as of January 13, 1998 of Next Level
Communications L.P. have been fully satisfied and that the Warrantholder has no
further rights thereunder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer.
NEXT LEVEL COMMUNICATIONS, INC.
By: _______________________________
Name:
Title:
Acknowledged and Agreed:
___________________________
Name:
Dated: , 1999
<PAGE> 10
Exhibit A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
[herewith tender payment for such Warrant Shares to the order of Next Level
Communications, Inc. in the amount of $__________] [hereby exercises its
Conversion Right] in accordance with the terms of this Warrant. The undersigned
requests that a certificate for [such Warrant Shares] [that number of Warrant
Shares to which the undersigned is entitled as calculated pursuant to Section
1.2] be registered in the name of the undersigned and that such certificates be
delivered to the undersigned's address below.
The undersigned represents that it is acquiring such Warrant Shares
for its own account for investment and not with a view to or for sale in
connection with any distribution thereof (subject, however, to any requirement
of law that the disposition thereof shall at all times be within its control).
Dated:____________________
Signature________________________________
_________________________________________
(Print Name)
_________________________________________
(Street Address)
_________________________________________
(City) (State) (Zip Code)
____________________________
Signed in the presence of:
<PAGE> 1
Exhibit 23.1
Independent Auditors' Consent
We consent to the use in this Amendment No. 6 to Registration Statement No.
333-85999 of Next Level Communications, Inc. on Form S-1 of our reports dated
October 15, 1999 (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to additional funding requirements) relating to
the financial statements of Next Level Communications L.P. and August 25, 1999
(November 8, 1999 as to Notes 2 and 3), related to the balance sheet of Next
Level Communications, Inc. appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
November 8, 1999
