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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27877
NEXT LEVEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3342408
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 584-6820
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of our common stock, par value $0.01 per share,
outstanding as of May 8, 2000 was approximately 79,941,637.
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market 20
Risk........................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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CURRENT ASSETS:
Cash and cash equivalents................................. $ 106,283 $ 128,752
Marketable securities..................................... 9,977 14,971
Trade receivables, less allowance for doubtful accounts of
$1,321 and $1,337, respectively........................ 15,379 13,879
Other receivables......................................... 1,880 1,435
Inventories............................................... 22,325 22,553
Receivable from General Instrument........................ -- 950
Receivable from Motorola.................................. 12,697 --
Prepaid expenses and other current assets................. 1,866 1,792
--------- ---------
Total current assets.............................. 170,407 184,332
MARKETABLE SECURITIES....................................... 4,952 30,151
PROPERTY AND EQUIPMENT, Net................................. 48,348 48,263
INTANGIBLES (less accumulated amortization of $3,441 and
$3,141, respectively)..................................... 4,765 5,065
--------- ---------
TOTAL............................................. $ 228,472 $ 267,811
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 18,919 $ 13,261
Other accrued liabilities................................. 13,653 11,375
Deferred revenue.......................................... 5,858 11,148
Current portion of capital lease obligations.............. 539 600
--------- ---------
Total current liabilities......................... 38,969 36,384
--------- ---------
LONG-TERM DEBT.............................................. -- 24,853
LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 256 346
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value, 200,000,000 shares
authorized, 79,942,000 shares issued and outstanding... 754 754
Additional paid-in capital................................ 412,083 412,930
Accumulated deficit....................................... (223,502) (205,072)
Unrealized loss on marketable securities.................. (88) --
Unearned compensation..................................... -- (2,384)
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Total stockholders' equity........................ 189,247 206,228
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TOTAL............................................. $ 228,472 $ 267,811
========= =========
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See notes to financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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MARCH 31, MARCH 31,
2000 1999
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REVENUES:
Equipment................................................. 29,689 7,947
Software.................................................. 790 830
-------- --------
Total revenues.................................... 30,479 8,777
-------- --------
COST OF REVENUES:
Equipment................................................. 24,891 8,331
Software.................................................. 57 74
-------- --------
Total cost of revenues............................ 24,948 8,405
-------- --------
GROSS PROFIT................................................ 5,531 372
-------- --------
OPERATING EXPENSES:
Research and development.................................. 13,844 11,253
Selling, general and administrative....................... 9,565 6,791
Noncash compensation charge............................... 2,384 --
-------- --------
Total operating expenses.......................... 25,793 18,044
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OPERATING LOSS.............................................. (20,262) (17,672)
OTHER INCOME (EXPENSE), Net................................. (5) 108
INTEREST INCOME/(EXPENSE)................................... 1,837 (1,693)
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NET LOSS.................................................... $(18,430) $(19,257)
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BASIC AND DILUTED NET LOSS PER COMMON SHARE (PRO FORMA IN
1999)..................................................... $ (0.23) $ (0.25)
======== ========
SHARES USED TO COMPUTE BASIC AND DILUTED NET LOSS PER SHARE
(PRO FORMA IN 1999)....................................... 79,766 69,967
======== ========
</TABLE>
See notes to financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
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MARCH 31, MARCH 31,
2000 1999
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OPERATING ACTIVITIES:
Net loss.................................................. $(18,430) $(19,257)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash compensation charge........................... 2,384 --
Depreciation and amortization.......................... 2,745 1,844
Changes in assets and liabilities:
Trade receivables.................................... (1,500) 2,617
Inventories.......................................... 228 (6,031)
Other current and noncurrent assets.................. (12,271) (5,682)
Accrued interest payable to General Instrument....... -- 1,645
Accounts payable..................................... 5,658 (5,851)
Accrued liabilities and deferred revenue............. (3,012) 11,474
-------- --------
Net cash used in operating activities............. (24,198) (19,243)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2,531) (1,358)
Proceeds from notes receivable............................ 5 229
Release of restrictions on long term marketable
securities............................................. 30,106 --
-------- --------
Net cash used in/provided by investing
activities...................................... 27,580 (1,129)
-------- --------
FINANCING ACTIVITIES:
Payment of IPO expenses................................... (847) --
Repayments on borrowings.................................. (24,853) --
Repayment of capital lease obligations.................... (151) --
General Instrument capital contribution................... -- 24,000
-------- --------
Net cash provided by/used in financing
activities...................................... (25,851) 24,000
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (22,469) 3,628
CASH AND CASH EQUIVALENTS, Beginning of period.............. 128,752 28,983
-------- --------
CASH AND CASH EQUIVALENTS, End of period.................... $106,283 $ 32,611
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See notes to financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these financial statements reflect all
adjustments (consisting of normal recurring items) which are, in the opinion of
management, necessary to present fairly the results of the interim period, they
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements and notes should be read in conjunction with the financial statements
and notes thereto, for the year ended December 31, 1999 contained in the
Company's Annual Report on Form 10-K. Certain prior period amounts have been
reclassified to conform to the current period presentation. The results of
operations for the three-month period ended March 31, 2000 are not necessarily
indicative of the operating results for the full year.
2. ORGANIZATION AND RECAPITALIZATION
Next Level Communications, Inc. (the "Company") 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. (the
"Partnership"), 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.
On August 24, 1999 the Partnership formed the Company as a wholly owned
subsidiary. On October 14, 1999, management of NLC effected a 1-for-3 reverse
stock split.
All share amounts in the accompanying financial statements have been
restated to give effect to the reverse stock split.
On November 9, 1999, the Company issued 9,775,000 shares of common stock at
$20.00 per share for net proceeds of $177,016,000 in an initial public offering
(the "Offering"). Prior to the completion of the Offering, the following
recapitalization transactions (the "Recapitalization") occurred:
- The note payable and accrued interest to General Instrument of $86.8
million was converted into 4,337,633 shares of the Company's common
stock.
- The Partnership and NLC (a wholly owned subsidiary of General Instrument)
were merged into the Company. As part of this merger, the General Partner
received 5,863,329 shares of the Company's common stock and General
Instrument received 55,366,091 shares of the Company's common stock in
exchange for their respective partnership interests.
- The Company issued a common stock dividend of 4,400,000 shares to General
Instrument to reflect the additional value, $88 million, that will be
received by the Company upon exercise of the warrants described below. In
accordance with the Partnership agreement. NLC was entitled to receive
$88.0 million exercise price. As a result of the Recapitalization, such
amount will be received by the Company, should these warrants be
exercised. Accordingly, General Instrument received the
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NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$88.0 million of common stock (4,400,000 shares) because it would have
received that amount under the Partnership agreement.
- The General Partner's option and the Partnership agreement to acquire up
to 11% of NLC upon an initial public offering was converted into warrants
to acquire 8,480,102 shares of the Company's common stock at $10.38 per
share.
- Options granted to employees of the Partnership to purchase shares of NLC
were converted on a one-for-one basis into options to purchase a total of
6,964,904 shares of the Company's common stock.
The Recapitalization was accounted for at historical cost. The accompanying
condensed financial statements represent those of the Company for the three
months ended March 31, 2000 and those of the Partnership for the three months
ended March 31, 1999. In January 2000, General Instrument was acquired by
Motorola, Inc.
3. LONG-TERM DEBT
In December 1999, the Company entered into a revolving bank line of credit
("Line") under which the Company may borrow up to the lesser of $50 million or
the value of pledged collateral. At December 31, 1999, the balance outstanding
was $24,853,000. Interest on the Line is at IBOR plus .7%. The Line's maturity
is October 1, 2001. On February 11, 2000, the Company paid all outstanding
principal and interest. On February 29, the Company issued a $25,00,000
performance bond in support of one of its customers that will expire on June 1,
2000. At March 31, 2000, there was $25,000,000 under the line of credit
available to the Company.
4. NET LOSS AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share for the quarter ended March 31, 2000
is computed by dividing net loss by the average shares outstanding for the
quarter. Pro forma basic and diluted net loss per share for the quarter ended
March 31, 1999 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, 1999.
The following is a reconciliation of the components of the basic and
diluted net loss per share (in thousands, except per share amounts):
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THREE MONTHS ENDED
MARCH 31
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2000 1999
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PRO FORMA
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Net loss............................................... $(18,430) $(19,257)
Less: Interest expense for converted GI note payable... 1,600
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Net loss............................................... $(18,430) $(17,657)
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Weighted average shares outstanding.................... 79,766 69,967
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Basic and diluted net loss per share................... $ (.23) $ (.25)
======== ========
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NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
For the above-mentioned periods, the Company had potentially dilutive
securities outstanding that were excluded from the computation of diluted net
loss per share in the periods presented, as their effect would have been
antidilutive. Such outstanding securities consist of the following (in
thousands):
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3/31/00 3/31/99
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General Partner's warrants................................ 8,480 8,480
Outstanding employee options.............................. 15,262 8,006
------ ------
Total........................................... 23,742 16,486
====== ======
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5. NON-CASH COMPENSATION CHARGES
At December 31, 1999, the Company had unearned compensation of $2,384,000
in connection with the unvested portion of options originally granted under the
NLC Stock Plan. The Company recognized such compensation expense of $2,384,000
in the quarter ended March 31, 2000, as a result of the vesting that occurred
upon the Motorola acquisition of General Instrument in January 2000.
6. COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires the Company to report a
new, additional measure of income on the Company's income statement or to create
a new financial statement that shows the new measure of income. "Comprehensive
Income" includes unrealized gains and losses on marketable securities that have
previously been excluded from net income and reflected instead in equity. The
following table sets forth the calculation of comprehensive income:
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FOR THE
THREE MONTHS ENDED
MARCH 31,
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2000 1999
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Net Loss................................................. (18,430) (19,257)
Unrealized gains (losses) on marketable securities....... (88) --
------- -------
Total Comprehensive Loss....................... (18,518) (19,257)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some of the statements in the following discussion and elsewhere in this
report 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 report.
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.
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. From January 1998 until November 1999, we 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. In November 1999, the business and assets of that partnership were
merged into Next Level Communications, Inc. as part of our recapitalization. In
January 2000, General Instrument was acquired by Motorola, Inc., making us an
indirect subsidiary of Motorola.
From our 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.
We generate our revenue primarily 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
84% of total revenues for the quarter ended March 31, 2000 and 67% of total
revenues for the quarter ended March 31, 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.
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
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occurred, the fees are fixed and determinable and collection is probable. The
portion of revenues from new software license agreements that 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.
RESULTS OF OPERATIONS
Revenues. Total revenues in the period ended March 31, 2000 increased to
$30.5 million from $8.8 million in the period ended March 31, 1999. The increase
was primarily due to an increase in equipment sales. Total revenues for the
first quarter of 2000 included $29.7 million of equipment sales, compared to
$7.9 million for the comparable period in 1999. U S WEST accounted for $25.5
million of equipment revenue in 2000 as compared to $5.9 million in the first
quarter of 1999. This increase was primarily attributable to U S WEST's ability
to increase its deployment in 2000. Bell Atlantic accounted for $80,000 of
equipment revenue in 2000 as compared to $1.9 million in the comparable quarter
in 1999. Sales to Bell Atlantic decreased in 2000 due to the Bell Atlantic
merger with NYNEX and the new company's shift in focus from network
rehabilitation to the entry into the long distance market. As a result, we do
not expect significant sales to NYNEX in the near term. 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. 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. Software revenue in the period ended March 31, 2000 decreased to
$790,000 in 2000 from $830,000 in 1999. We expect demand for our software to
remain relatively flat in the near term because the market for these products is
mature.
Cost of Revenues. Total cost of revenues increased to $24.9 million in the
period ended March 31, 2000 from $8.4 million in the first quarter of 1999. As a
percentage of sales, cost of revenues decreased to 82% in 2000 from 96% in the
first quarter of 1999. The increase in the cost of revenues in absolute dollars
was attributable to an increase in equipment volume and consisted primarily of
materials and costs associated with increasing production at our contract
manufacturers. The decrease in costs as a percentage of sales was primarily the
result of higher unit volumes, leading to greater efficiencies, including lower
fixed costs per unit. We currently expect 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. In the future, cost of sales as a percent of sales may fluctuate due
to a wide variety of factors, including: the customer mix, the product mix, the
timing and size of orders which are received, the availability of adequate
supplies of key components and assemblies, our ability to introduce new products
and technologies on a timely basis, the timing of new product introductions or
announcements by us or our competitors, price competition and unit volume.
Research and development. Research and development expenses increased to
$13.8 million in the quarter ended March 31, 2000 from $11.3 million in the same
period in 1999. The increase was primarily due to an increase in research and
development personnel. We believe that continued investment in research and
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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. We expense all of our research and development costs as
incurred.
Selling, general and administrative. Selling, general and administrative
expenses were $9.6 million in the quarter ended March 31, 2000 compared to $6.8
million in the same period in 1999. The increase is primarily attributable to
the increase in the scale of our operations including additional personnel in
our sales and marketing organizations, promotional expenses and other
administrative expenses. Higher sales expenses have been generated from the
hiring of new sales representatives in order to increase the number and size of
our customer accounts. 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.
Non-cash Compensation Charges. At December 31, 1999, the Company had
unearned compensation of $2,384,000 in connection with the unvested portion of
options originally granted under the NLC Stock Plan. The Company recognized such
compensation expense of $2,384,000 in the quarter ended March 31, 2000, as a
result of the vesting that occurred upon the Motorola acquisition of General
Instrument in January 2000.
Other income (expense), net. Other income (expense), net consists primarily
of interest income and income tax expense. For the quarter ended March 31, 2000,
the amount primarily represents income tax expense. For the quarter ended March
31, 1999, the amount represents interest income.
Interest income (expense). For the quarter ended March 31, 2000, the amount
represents interest income earned on proceeds from our initial public offering.
For the quarter ended March 31, 1999, the amount primarily represents interest
on a $75 million note and accrued interest thereon payable to General Instrument
contributed to us in exchange for shares of our common stock immediately prior
to our initial public offering.
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. We do not believe this
will have a material effect on our operations.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash contributions and
borrowings from General Instrument and our initial public offering of our stock
in November 1999. We will not receive additional funds from General Instrument,
which was acquired by Motorola, Inc. in January 2000.
Net cash used in operating activities was $24.2 million in the quarter
ended March 31, 2000 and $19.2 million in the quarter ended March 31, 1999. In
each case, the use of cash in operating activities was primarily due to our net
losses. During the quarter ended March 31, 2000, $12.7 million was used to pay
taxes associated with the exercise of Motorola options by Company employees.
Motorola repaid such $12.7 million to the Company in April 2000. In the quarter
ended March 31, 1999, this amount was partially offset by a $12.6 million
increase in deferred revenue.
Net cash provided by investing activities of $27.6 million in the period
ended March 31, 2000 was primarily attributable to the release of restrictions
on long term marketable securities of $30.1 million. Net cash used in investing
activities of $1.1 million in the period ended March 31, 1999 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.
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Net cash used in financing activities of $25.9 million in the period ended
March 31, 2000 was primarily attributable to the repayment of borrowings. In the
period ended March 31, 1999, net cash provided by financing activities of $24.0
million was attributable to a capital contribution by General Instrument.
At March 31, 2000, we had $106.3 million of cash and cash equivalents, and
$131.4 million of working capital. 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
$35.4 million of components through 2002.
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. 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 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.
RISK FACTORS
You should carefully consider the risk factors set forth below.
WE HAVE INCURRED NET LOSSES AND NEGATIVE CASH FLOW FOR OUR ENTIRE HISTORY, WE
EXPECT TO INCUR FUTURE LOSSES AND NEGATIVE CASH FLOW FOR THE FORESEEABLE FUTURE,
AND WE MAY NEVER ACHIEVE PROFITABILITY
We incurred net losses of $18.4 million in the quarter ended March 31,
2000, and $19.3 million in the quarter ended March 31, 1999. 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 further 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.
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<PAGE> 13
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 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 84% of our revenues in the first quarter of 2000, 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' infrastructures;
- 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
We may need to raise additional funds if our estimates of revenues or
capital requirements change or prove inaccurate. If we cannot raise these funds,
we may not be able to grow our business. We may need additional capital if we
need to respond to unforeseen technological or marketing hurdles or if we desire
to take advantage of unanticipated opportunities. In addition, we expect to
review potential acquisitions that would complement our existing product
offerings or enhance our technical capabilities that could require potentially
significant amounts of capital. Funds may not be available at the time or times
needed on terms acceptable to us, if at all. If adequate funds are not
available, or are not available on acceptable terms, we may not be able to take
advantage of market opportunities, to develop new products or to otherwise
respond to competitive pressures effectively.
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<PAGE> 14
OUR CUSTOMER BASE OF TELEPHONE COMPANIES IS EXTREMELY CONCENTRATED AND THE LOSS
OF OR REDUCTION IN BUSINESS FROM EVEN ONE OF OUR CUSTOMERS, PARTICULARLY U S
WEST, 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 84% of total revenues in the first quarter of 2000 and 67% of
total revenues in the first quarter of 1999. Our agreements with our customers
are cancelable by these customers on short notice, without penalty, do not
obligate the customers to purchase any products and are not exclusive.
Accordingly, we may lose revenue from our significant customers at any time.
A SIGNIFICANT MARKET FOR OUR PRODUCTS MAY NOT DEVELOP IF TELEPHONE COMPANIES DO
NOT SUCCESSFULLY DEPLOY BROADBAND SERVICES SUCH AS HIGH-SPEED DATA AND VIDEO
Telephone companies have just recently begun offering high-speed data
services, and most telephone companies have not offered video services at all.
Unless telephone companies make the strategic decision to enter the market for
providing broadband services, a significant market for our products may not
develop. Sales of our products depend on the increased use and widespread
adoption of broadband services and the ability of our customers to market and
sell broadband services, including video services, to their customers. Certain
critical issues concerning use of broadband services are unresolved and will
likely affect their use. These issues include security, reliability, speed and
volume, cost, government regulation and the ability to operate with existing and
new equipment.
Even if telephone companies decide to deploy broadband services, this
deployment may not be successful. Our customers have delayed deployments in the
past and may delay deployments in the future. Factors that could cause telephone
companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which our products are designed include the
following:
- industry consolidation;
- regulatory uncertainties and delays affecting telephone companies;
- varying quality of telephone companies' network infrastructure and cost
of infrastructure upgrades and maintenance;
- inexperience of telephone companies in obtaining access to video
programming content from third party providers;
- inexperience of telephone companies in providing broadband services and
the lack of sufficient technical expertise and personnel to install
products and implement services effectively;
- 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, U S WEST, which has
announced a pending merger with Qwest, and Bell Atlantic, which has announced a
pending merger with GTE, are our two largest customers. Any of these factors
relating to consolidation could impair our ability to generate revenues.
14
<PAGE> 15
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. 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, but the full text of the
FCC's decision was just recently released and the details of the FCC's
implementation are not yet known. 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.
OUR CUSTOMERS AND POTENTIAL CUSTOMERS WILL NOT PURCHASE OUR PRODUCTS IF THEY DO
NOT HAVE THE INFRASTRUCTURE NECESSARY TO USE OUR PRODUCTS
The copper wire infrastructures over which telephone companies may deliver
voice, data and video services using our products vary in quality and
reliability. As a result, some of these telephone companies may not be able to
deliver a full set of voice, data and video services to their customers, despite
their intention to do so, and this could harm our sales. Even after installation
of our products, we remain highly dependent on telephone companies to continue
to maintain their infrastructure so that our products will operate at a
consistently high performance level. Infrastructure upgrades and maintenance may
be costly, and telephone companies may not have the necessary financial
resources. This may be particularly true for our smaller customers and potential
customers such as independent 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.
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
15
<PAGE> 16
infrastructure. If any of these services are accepted by consumers, the demand
for our products may not develop and our ability to generate revenue will be
harmed.
WE FACE INTENSE COMPETITION IN PROVIDING EQUIPMENT FOR TELECOMMUNICATIONS
NETWORKS FROM LARGER AND MORE WELL-ESTABLISHED COMPANIES, AND WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY WITH THESE COMPANIES
Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than we do. These competitors
may undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products than
we are able to, which could result in the loss of current and potential
customers.
Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC (acquired by GEC Marconi),
Scientific Atlanta, Siemens and our largest stockholder, General Instrument
(which has been acquired by 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 N3 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 has acquired DSC Communications, Lucent has acquired
Ascend Communications and GEC Marconi has 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> 17
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 is bound by an employment
agreement. Many of these employees have a significant number of options to
purchase our common stock. Many of these options are currently vested 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 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
17
<PAGE> 18
States or international patents. The results of any litigation are inherently
uncertain. In the event of an adverse result in any litigation with third
parties that could arise in the future, we could be required:
- to pay substantial damages, including paying treble damages if we are
held to have willfully infringed;
- to halt the manufacture, use and sale of infringing products;
- to expend significant resources to develop non-infringing technology;
and/or
- to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail. In
addition, we indemnify our customers for patent infringement claims, and we may
be required to obtain licenses on their behalf, which could subject us to
significant additional costs.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND ANY DISRUPTION IN THEIR MANUFACTURE
OF OUR PRODUCTS WOULD HARM OUR OPERATING RESULTS
We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We rely primarily on two large contract
manufacturers: SCI Systems and CMC Industries. The efficient operation of our
business will depend, in large part, on our ability to have these and other
companies manufacture our products timely, cost-effectively and in sufficient
volumes while maintaining consistent quality. As our business grows, these
manufacturers may not have the capacity to keep up with the increased demand.
Any manufacturing disruption could impair our ability to fulfill orders and
could cause us to lose customers.
WE HAVE NO LONG-TERM CONTRACTS WITH OUR MANUFACTURERS, AND WE MAY NOT BE ABLE TO
DELIVER OUR PRODUCTS ON TIME IF ANY OF THESE MANUFACTURERS STOP MAKING OUR
PRODUCTS
We have no long-term contracts or arrangements with any of our contract
manufacturers that guarantee product availability, the continuation of
particular payment terms or the extension of credit limits. If our manufacturers
are unable or unwilling to continue manufacturing our products in required
volumes, we will have to identify acceptable alternative manufacturers, which
could take in excess of three months. For example, Flextronics International,
previously designated to be the sole manufacturer of our ETHERset product,
discontinued its relationship with us due to lack of order volume. It is
possible that a source may not be available to us when needed or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis. If we 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 our sole source suppliers or we 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.
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THE OCCURRENCE OF ANY DEFECTS, ERRORS OR FAILURES IN OUR PRODUCTS COULD RESULT
IN DELAYS IN INSTALLATION, PRODUCT RETURNS AND OTHER LOSSES TO US OR TO OUR
CUSTOMERS OR END-USERS
Our products are complex and may contain undetected defects, errors or
failures. These problems have occurred in our products in the past and
additional errors may occur in our products in the future and could result in
the loss of or delay in market acceptance of our products. In addition, we have
limited experience with commercial deployment and we expect additional defects,
errors and failures as our business expands from trials to commercial deployment
at certain customers. We will have limited experience with the problems that
could arise with any new products that we introduce. Further, our customer
agreements generally include a longer warranty for defects than our
manufacturing agreements. These defects could result in a loss of sales and
additional costs as well as damage to our reputation and the loss of our
customers.
WE 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.
MOTOROLA MAY 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
Motorola, through its ownership of General Instrument, beneficially owns
approximately 80% of the outstanding shares of our common stock. Motorola will
be able to exercise significant influence over all matters relating to our
business and affairs, including approval of significant corporate transactions,
which could delay or prevent someone from acquiring or merging with us and could
prevent you from receiving a premium for your shares.
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 THAT CONFLICT WITH THE BEST
INTERESTS OF OUR OTHER STOCKHOLDERS AND US AND MAY CAUSE US TO FORGO
OPPORTUNITIES OR TAKE ACTIONS THAT 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 our principal stockholder and us 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.
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SALES OF SHARES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY
As of May 8, 2000, we had 79,941,637 shares of common stock outstanding. As
of May 8, 2000, Motorola owned 64,103,724 shares of our common stock and Spencer
Trask owned 5,863,329 shares of our common stock and its affiliates held
warrants to purchase an additional 8,480,102 shares of our common stock. If
Motorola, 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, the market price of the common stock
could fall. In addition, any distribution of shares of our common stock by
Motorola to its stockholders could also have an adverse effect on the market
price.
Under federal securities laws, the shares beneficially owned by Motorola
and Spencer Trask, unless registered under the Securities Act, generally may be
resold in the public market only following a one-year holding period that began
to run on November 10, 1999. Motorola 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, as of May 8, 2000, there were outstanding options to purchase
17,515,286 shares of our common stock. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate fluctuation. We do
not engage in any hedging activities and we do not use derivatives or equity
investments for cash investment purposes. The marketable securities in our
portfolio are classified as available for sale and recorded at fair value on our
balance sheet. Our portfolio consists solely of corporate bonds, commercial
paper and government securities, and therefore, our market risk is deemed
relatively low.
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<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) In November 1999, we completed our initial public offering through an
underwritten public offering pursuant to a Registration Statement on Form S-1
(File No. 333-85999). These funds have been the principal source of liquidity
for us during the quarter ended March 31, 2000 and were used to fund operating
losses and make capital expenditures as described in the financial statements
included with this report and in our Annual Report on Form 10-K for the year
ended December 31, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are included as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEXT LEVEL COMMUNICATIONS, INC.
Date: May 15, 2000 By: /s/ PETER W. KEELER
------------------------------------
Peter W. Keeler
Chief Executive Officer and
President
Date: May 15, 2000 By: /s/ JAMES T. WANDREY
------------------------------------
James T. Wandrey
Chief Financial Officer and
Treasurer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 106,283
<SECURITIES> 9,977
<RECEIVABLES> 16,700
<ALLOWANCES> 1,321
<INVENTORY> 22,325
<CURRENT-ASSETS> 170,407
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0
0
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</TABLE>
