<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 2000.
REGISTRATION NO. 333-
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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)
KEITH A. ZAR
SENIOR VICE PRESIDENT, GENERAL COUNSEL,
CHIEF ADMINISTRATIVE OFFICER AND SECRETARY
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:
<TABLE>
<S> <C>
CHRISTOPHER L. KAUFMAN VINCENT J. PISANO
LATHAM & WATKINS SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
135 COMMONWEALTH DRIVE FOUR TIMES SQUARE
MENLO PARK, CALIFORNIA 94025 NEW YORK, NEW YORK 10036
(650) 328-4600 (212) 735-3500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM PROPOSED MAXIMUM
TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock ($0.01 par value)..... 1,725,000 $65.7815 $113,473,088 $29,957
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of registration
fee, based on the average ($65.7815) of the high ($67.75) and low ($63.813)
prices for the common stock as reported on The Nasdaq National Market on
June 2, 2000, in accordance with Rule 457(c) promulgated under the
Securities Act of 1933.
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 JUNE 6, 2000
1,500,000 Shares
[NEXT LEVEL COMMUNICATIONS, INC. LOGO]
Common Stock
------------------
The shares of common stock are being sold by the selling stockholders. We
will not receive any of the proceeds from the sale of the common stock.
On June 2, 2000, the last sale price of our common stock as reported on The
Nasdaq National Market (under the symbol "NXTV") was $66.375.
The underwriter has an option to purchase a maximum of 225,000 additional
shares from the selling stockholders to cover over-allotments of shares.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO THE
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS
----------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
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.
CREDIT SUISSE FIRST BOSTON
The date of the prospectus is , 2000.
<PAGE> 3
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 4
FORWARD-LOOKING STATEMENTS............. 13
USE OF PROCEEDS........................ 14
DIVIDEND POLICY........................ 14
PRICE RANGE OF COMMON STOCK............ 14
SELECTED FINANCIAL DATA................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 16
BUSINESS............................... 24
MANAGEMENT............................. 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS......................... 41
PRINCIPAL AND SELLING STOCKHOLDERS..... 45
DESCRIPTION OF CAPITAL STOCK........... 48
SHARES ELIGIBLE FOR FUTURE SALE........ 52
UNDERWRITING........................... 54
NOTICE TO CANADIAN RESIDENTS........... 55
LEGAL MATTERS.......................... 56
EXPERTS................................ 56
WHERE YOU CAN FIND ADDITIONAL
INFORMATION.......................... 56
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
i
<PAGE> 4
PROSPECTUS SUMMARY
You should read this prospectus summary together with the more detailed
information contained in this prospectus, including the risk factors, financial
statements and notes to the financial statements. This prospectus assumes no
exercise of the underwriter's over-allotment option.
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 compete
effectively 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 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.
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. 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.
1
<PAGE> 5
THE OFFERING
Common stock offered by
Spencer Trask and related
parties, the selling
stockholders................ 1,500,000 shares, to be issued upon the
exercise of warrants presently held by Spencer
Trask Holdings, Incorporated and related
parties. The exercise price of these warrants
will be paid through the surrender of
additional warrants with a value equal to such
exercise price.
Spencer Trask and its related parties currently
hold beneficial ownership of approximately
15.9% of our common stock. Upon completion of
this offering, they will hold beneficial
ownership of approximately 14.1% of our common
stock. Based on closing prices of our common
stock through June 2, 2000, we have assumed in
this prospectus that warrants to purchase
319,930 shares of our common stock will be
surrendered to satisfy the exercise price of
the warrants to purchase the 1,500,000 shares
being offered by this prospectus. The actual
number of warrants surrendered will depend upon
the closing price of our common stock for a
20-day period prior to exercise.
Common stock to be outstanding
after this offering........... 81,778,935 shares. This does not include
17,369,882 shares that are reserved for
issuance pursuant to outstanding stock options
and approximately 6,660,172 shares that are
reserved for issuance pursuant to outstanding
warrants held by Spencer Trask Holdings,
Incorporated and related parties that will not
be exercised or surrendered in connection with
this offering.
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.
Use of proceeds............... We will not receive any proceeds from the sale
and issuance of the common stock included in
this offering.
Risks of investment in our
common stock.................. An investment in our common stock is subject to
significant risks. Before making your
investment decision, you should consider
carefully the information set forth in the
"Risk Factors" section of this prospectus as
well as the other information set forth in this
prospectus, including our financial statements
and the related notes.
Nasdaq National Market
symbol........................ NXTV
------------------
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.
2
<PAGE> 6
SUMMARY FINANCIAL DATA
The summary 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,
1997, 1998 and 1999 are derived from audited financial statements included in
this prospectus. The statement of operations data for the three months ended
March 31, 1999 and March 31, 2000 and the balance sheet data as of March 31,
2000 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 results for the three months ended March 31, 2000 are not
necessarily indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $ 8,311 $ 43,830 $ 57,597 $ 8,777 $ 30,479
Gross profit (loss)............. (2,949) 397 6,040 372 5,531
Operating expenses:
Research and development...... 37,064 47,086 48,454 11,253 13,844
Selling, general and
administrative............. 26,414 26,248 30,511 6,791 9,565
Litigation.................... -- 5,000 -- -- --
Noncash compensation charge... -- -- 128,284 -- 2,384
Operating loss.................. (66,427) (77,937) (201,209) (17,672) (20,262)
Other income (expense), net..... (2) 2,241 2,175 108 (5)
Interest income (expense)....... -- (6,035) (6,038) (1,693) 1,837
----------- ----------- ----------- ----------- -----------
Net loss........................ $ (66,429) $ (81,731) $ (205,072) $ (19,257) $ (18,430)
=========== =========== =========== =========== ===========
Pro forma basic and diluted net
loss per share (actual in
2000)......................... $ (0.95) $ (1.08) $ (2.78) $ (0.25) $ (0.23)
=========== =========== =========== =========== ===========
Shares used in pro forma basic
and diluted net loss per share
(actual in 2000).............. 69,967,053 69,967,053 71,597,834 69,967,053 79,766,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
2000
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $106,283
Working capital............................................. 131,438
Total assets................................................ 228,472
Long-term obligations, net of current portion............... 256
Total stockholders' equity.................................. 189,247
</TABLE>
See note 14 of notes to the financial statements for an explanation of the
determination of pro forma net loss per share.
3
<PAGE> 7
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 FOR OUR ENTIRE HISTORY, WE EXPECT TO INCUR FUTURE
LOSSES 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, $205.1 million for the year ended December 31, 1999, $81.7 million for the
year ended December 31, 1998 and $66.4 million for the year ended December 31,
1997. 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 generate
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.
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 a 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.
4
<PAGE> 8
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 REVENUES IS
DIFFICULT TO PREDICT, AND WE MAY INCUR SALES AND MARKETING EXPENSES WITH NO
GUARANTEE OF FUTURE SALES.
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 to be made to
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 make acquisitions, 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, 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 reduced. U S
WEST accounted for 84% of total revenues in the first quarter of 2000 and 67% of
total revenues in 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
revenues from our significant customers at any time.
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, our sales to Bell Atlantic,
previously one of our largest clients, have decreased significantly as a result
of a shift in focus by Bell Atlantic resulting from its merger with NYNEX.
Additionally, our largest customer, U S WEST, has announced a pending merger
with Qwest, and we cannot predict the effect that this merger will have on our
sales to U S WEST.
5
<PAGE> 9
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 largely 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.
GOVERNMENT REGULATION OF OUR CUSTOMERS AND RELATED UNCERTAINTY COULD CAUSE OUR
CUSTOMERS TO DELAY THE PURCHASE OF OUR PRODUCTS.
The Telecommunications Act requires telephone companies, such as the
regional Bell operating companies, to offer their competitors cost-based access
to some elements of their networks. 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 Federal Communications Commission, or 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. Nevertheless, other
regulatory and judicial proceedings relating to telephone companies' obligations
to provide elements of their network to competitors are pending. 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."
6
<PAGE> 10
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.
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 products 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, and Motorola, its
parent. 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 revenues 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 customers and impair
our ability to attract 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 BAE Systems, CNI
Division, formerly GEC Marconi), Scientific Atlanta, Siemens and our principal
stockholder, General Instrument (which was 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
7
<PAGE> 11
that compete with our N(3) 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' positions in our market, cause us to lose customers and hurt
our sales. For example, Alcatel acquired DSC Communications, Lucent acquired
Ascend Communications and BAE Systems, CNI Division, formerly GEC Marconi,
acquired RELTEC. Acquisitions such as these may strengthen our competitors'
financial, technical and marketing resources and provide them 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 negatively affect our ability to increase revenues.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE.
Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:
- the increasing use of the Internet;
- the growth in remote access by telecommuters;
- the increasingly diverse distribution sources for high quality digital
video; and
- other industry and technological trends.
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost-effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall and we could lose revenues.
RISKS ASSOCIATED WITH OTHER ASPECTS OF OUR BUSINESS
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THE LOSS OF THEIR SERVICES COULD DISRUPT OUR OPERATIONS AND OUR CUSTOMER
RELATIONSHIPS.
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.
8
<PAGE> 12
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.
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 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.
9
<PAGE> 13
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 ACT Manufacturing (formerly, 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 in a timely manner,
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.
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 problems 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 and liabilities to us as well as damage to our reputation and
the loss of our customers.
10
<PAGE> 14
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. In particular, fluctuating exchange
rates may contribute to fluctuations in our results of operations.
RISKS RELATED TO THIS OFFERING
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 AND ITS PARENT 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 both of Motorola or General Instrument and of 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 operating results. Our certificate of incorporation contains
provisions intended to protect our principal stockholder and these individuals
in these situations. These provisions limit your legal remedies.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE.
The stock markets have in general, and with respect to high technology
companies, including us, in particular, recently experienced extreme stock price
and volume volatility, often unrelated to the financial performance of
particular companies. The price at which our common stock will trade in the
future is likely to also be highly volatile and may fluctuate substantially due
to factors such as:
- actual or anticipated fluctuations in our operating results;
- changes in or our failure to meet securities analysts' expectations;
- announcements of technological innovations by us or our competitors;
- introduction of new products and services by us or our competitors;
11
<PAGE> 15
- limited public float of our common stock;
- conditions and trends in the telecommunications and other technology
industries; and
- general economic and market conditions.
SALES OF SHARES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY.
As of June 2, 2000, we had 80,278,935 shares of common stock outstanding.
As of June 2, 2000, Motorola indirectly owned 64,103,724 shares of our common
stock and Spencer Trask and related persons owned 4,863,329 shares of our common
stock and held warrants to purchase an additional 8,480,102 shares of our common
stock, of which 1,500,000 will be exercised to acquire the shares of common
stock offered hereby. Based on closing prices of our common stock through June
2, 2000, we have assumed that warrants to purchase an additional 319,930 shares
of our common stock will be surrendered to satisfy the exercise price of the
warrants to purchase the 1,500,000 shares being offered by this prospectus. The
actual number of warrants surrendered will depend upon the closing price of our
common stock for a 20-day period prior to exercise. If Motorola, Spencer Trask
and persons related to Spencer Trask or any of our other stockholders sell
substantial amounts of common stock, including shares sold in this offering and
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 the persons related to 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 12, 1999. Motorola and Spencer
Trask and its related persons and their transferees are entitled to registration
rights pursuant to which they may require that we register their shares under
the Securities Act.
In addition, as of June 2, 2000, there were outstanding options to purchase
17,369,882 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.
ANTI-TAKEOVER 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 by-laws 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 by-laws.
Some of these provisions do not currently apply to Motorola and its
affiliates. For a more detailed description of these provisions, see
"Description of Capital Stock."
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<PAGE> 16
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> 17
USE OF PROCEEDS
The common stock is being sold by the selling stockholders for their own
account, and we will not receive any of the proceeds from the sale of the
selling stockholders' common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
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 our board of
directors and will depend upon, among other things, our operating results,
financial condition and capital requirements, the terms of any then-existing
indebtedness, general business and economic conditions and such other factors as
our board of directors deems relevant.
PRICE RANGE OF COMMON STOCK
During 1999, we completed our initial public offering in which we sold
9,775,000 shares of our common stock at a price of $20.00 per share. Our common
stock is listed on The Nasdaq Stock Market's National Market under the symbol
"NXTV." The following table sets forth the high and low sales prices of our
common stock for the periods indicated as reported on The Nasdaq National
Market.
<TABLE>
<CAPTION>
YEAR HIGH LOW
---- ------- ------
<S> <C> <C>
2000
First quarter............................................. $202.00 $58.75
Second quarter (through June 2)........................... $130.00 $47.00
1999
Fourth quarter............................................ $ 75.06 $46.06
</TABLE>
On June 2, 2000, the last reported sale price for our common stock on The
Nasdaq National Market was $66.375. At June 2, 2000, the number of record
holders of our common stock was 131.
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<PAGE> 18
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,
1997, 1998 and 1999, and the balance sheet data as of December 31, 1998 and
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 three months ended March 31, 1999 and March
31, 2000, and the balance sheet data as of March 31, 2000, 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 results for
the three months ended March 31, 2000 are not necessarily indicative of the
operating results to be expected in the future. The statement of operations data
for the year ended December 31, 1996, and the balance sheet data as of December
31, 1997, are derived from audited financial statements not included in this
prospectus. The statement of operations data for the periods 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, 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.
<TABLE>
<CAPTION>
PERIOD FROM
--------------------------
JANUARY 1, SEPTEMBER 1,
1995 TO 1995 TO YEARS ENDED DECEMBER 31,
AUGUST 31, DECEMBER 31, -----------------------
1995 1995 1996 1997
----------- ------------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................... -- -- -- $ 8,311
Total cost of revenues............ -- -- -- 11,260
-----------
Gross profit (loss)............... -- -- -- (2,949)
Operating Expenses:
Research and development........ $ 4,937 $ 142,249 $ 17,102 37,064
Selling, general and
administrative................ 1,646 1,016 15,850 26,414
Litigation...................... -- -- 141,000 --
Noncash compensation charge..... -- -- -- --
------- --------- --------- -----------
Total operating expenses...... 6,583 143,265 173,952 63,478
------- --------- --------- -----------
Operating loss.................... (6,583) (143,265) (173,952) (66,427)
Other income (expense), net....... -- -- 48 (2)
Interest expense.................. -- -- -- --
------- --------- --------- -----------
Net loss.......................... $(6,583) $(143,265) $(173,904) $ (66,429)
======= ========= ========= ===========
Pro forma basic and diluted net
loss per share (actual in
2000)........................... -- -- -- $ (0.95)
Shares used in pro forma basic and
diluted net loss per share
(actual in 2000)................ -- -- -- 69,967,053
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31,
------------------------- -------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................... $ 43,830 $ 57,597 $ 8,777 $ 30,479
Total cost of revenues............ 43,433 51,557 8,405 24,948
----------- ----------- ----------- -----------
Gross profit (loss)............... 397 6,040 372 5,531
Operating Expenses:
Research and development........ 47,086 48,454 11,253 13,844
Selling, general and
administrative................ 26,248 30,511 6,791 9,565
Litigation...................... 5,000 -- -- --
Noncash compensation charge..... -- 128,284 -- 2,384
----------- ----------- ----------- -----------
Total operating expenses...... 78,334 207,249 18,044 25,793
----------- ----------- ----------- -----------
Operating loss.................... (77,937) (201,209) (17,672) (20,262)
Other income (expense), net....... 2,241 2,175 108 (5)
Interest expense.................. (6,035) (6,038) (1,693) 1,837
----------- ----------- ----------- -----------
Net loss.......................... $ (81,731) $ (205,072) $ (19,257) $ (18,430)
=========== =========== =========== ===========
Pro forma basic and diluted net
loss per share (actual in
2000)........................... $ (1.08) $ (2.78) $ (0.25) $ (0.23)
Shares used in pro forma basic and
diluted net loss per share
(actual in 2000)................ 69,967,053 71,597,834 69,967,053 79,766,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------- --------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 599 $ -- $ 377 $ 28,983 $128,753 $106,283
Working capital (deficit)................................. (1,897) (143,001) (29,571) 38,564 147,948 131,438
Total assets.............................................. 3,824 17,393 52,689 97,771 267,811 228,472
Long-term obligations, net of current portion............. -- -- -- 81,275 25,199 256
Total partners' deficit/stockholders' equity (deficit).... (2,566) (172,029) (3,702) (14,769) 206,228 189,247
</TABLE>
15
<PAGE> 19
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 related notes 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. From January 1998 until November 1999, we operated through Next Level
Communications L.P., which was formed in connection with 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 revenues 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 our total revenues for the quarter ended March 31, 2000, 67% of total
revenues for the quarter ended March 31, 1999 and 67% of total revenues for the
year ended December 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 revenues 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 revenues upon shipment of
our products. Software revenues consist of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
Software license revenues are 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 that relate to our obligations to provide customer support are
deferred and recognized ratably over the maintenance period.
Cost of revenues. Cost of equipment revenues includes direct material and
labor, depreciation and amortization expense on property and equipment, warranty
expenses, license fees and manufacturing and
16
<PAGE> 20
service overhead. Cost of software revenues primarily includes the cost of the
media the software is shipped on (usually CDs) and documentation costs.
Research and development. Research and development expenses consist
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
expenses consist 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.
Litigation. 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 this litigation matter, see "Business -- Litigation."
Noncash compensation charge. We incurred noncash compensation charges of
$128.3 million in 1999 and $2.4 million in the quarter ended March 31, 2000
related to contingently exercisable stock options previously granted to
substantially all of our employees. For a more detailed description of these
charges, see the discussion under "-- Three Months Ended March 31, 2000 and
March 31, 1999" and "-- Years Ended December 31, 1999, 1998 and
1997 -- Comparison of 1999 to 1998."
Acquisition. In September 1997, General Instrument acquired all of the
outstanding capital stock of Telenetworks for $7.0 million in cash, and
subsequently contributed the business to the Next Level partnership.
Approximately $6.9 million of the purchase price was allocated to goodwill. As a
result, we amortized approximately $1.0 million of goodwill during each of 1998
and 1999 and will continue to amortize the goodwill at a rate of approximately
$1.0 million per year for each of the next five years. In conjunction with the
granting of restricted common stock of General Instrument to Telenetworks
employees, which restrictions lapsed over the nine-month period that ended May
31, 1998, we recorded compensation expense of $3.9 million in 1998 and $3.1
million in 1997.
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Revenues. Total revenues in the period ended March 31, 2000 increased to
$30.5 million from $8.8 million in the three-month 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 revenues in the first quarter of 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 revenues in the first quarter of
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 revenues 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 revenues in the period
ended March 31, 2000 decreased to $790,000 from $830,000 for the comparable
period 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 the first quarter of
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 sales volume
and consisted primarily of
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<PAGE> 21
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
development is critical to attaining our strategic product development and cost
reduction objectives and, as a result, we 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 for the comparable period in 1999. The increase was 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.
Noncash compensation charge. At December 31, 1999, we had unearned
compensation of $2,384,000 in connection with the unvested portion of options
originally granted under the NLC Stock Plan. We 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.
Interest income (expense). For the quarter ended March 31, 2000, the amount
represents interest income earned on net 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.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Comparison of 1999 to 1998
Revenues. Revenues in 1999 increased to $57.6 from $43.8 million in 1998.
The increase was primarily due to an increase in equipment sales. Total revenues
for 1999 included $54.3 million of equipment sales, compared to $39.2 million
for 1998. U S WEST accounted for $38.5 equipment revenues in 1999 as compared to
$29.9 in 1998. Bell Atlantic accounted for $5.4 million of equipment revenues in
1999 as compared to $8.6 million in 1998. Sales to Bell Atlantic decreased in
1999 due to Bell Atlantic's merger with NYNEX and its shift in focus from
network rehabilitation to the entry into the long distance market. Software
revenues decreased to $3.3 million in 1999 as compared to $4.6 million in 1998.
The decrease, however, was primarily due to a shift in demand from 1999 to 1998.
Cost of revenues. Total cost of revenues increased to $51.6 million in 1999
from $43.4 million in 1998. As a percentage of sales, cost of revenues decreased
to 90% in 1999 from 99% in 1998. The increase in the cost of revenues was
attributable to an increase in equipment sales volume and consisted primarily of
materials and costs associated with increasing production at our contract
manufacturers. The decrease in such costs as a percentage of sales was primarily
the result of higher unit volumes, leading to greater efficiencies, including
lower fixed costs per unit. Our software gross margins in each period were
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<PAGE> 22
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
$48.5 million in 1999 from $47.1 million in 1998. The increase was primarily due
to an increase in research and development personnel. We expense all of our
research and development costs as incurred.
Selling, general and administrative. Selling, general and administrative
expenses were $30.5 million in 1999 compared to $26.2 million in 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 1999. The increase in selling, general and
administrative expenses was due to the increase in scale of our operations
including additional personnel in the sales and marketing organizations,
promotional expenses and other administrative expenses.
Noncash compensation expense. Substantially all of our employees have been
granted contingently exercisable stock options that became options to purchase
our common stock upon our recapitalization in 1999. As a result, noncash
compensation expense was recognized in November 1999 upon the completion of our
initial public offering, based on the difference between the exercise price of
the options and the initial public offering price of our common stock of $20.00
per share. The noncash compensation expense related to these option grants was
$96.9 million. In addition, at December 31, 1999, we recognized noncash
compensation expense of $31.4 million related to tandem stock options granted 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.
Litigation. Litigation expenses of $5.0 million for 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), net consists primarily
of interest income. Interest income was $2.2 million in 1999 and 1998.
Interest expense. Interest expense was $6.0 million in 1999 and 1998. The
interest expense in these periods was primarily attributable to interest on a
$75.0 million note payable to General Instrument that General Instrument
contributed to us in exchange for shares of our common stock immediately prior
to our initial public offering.
Comparison of 1998 to 1997
Revenues. Total revenues increased to $43.8 million in 1998 from $8.3
million in 1997. The increase is primarily due to the fact that we recorded our
first sale in September 1997 and, therefore, the operating results for 1997
reflect only four months of revenues. Sales in 1998 were comprised of $39.2
million of equipment sales and $4.6 million in software revenues, compared with
$6 million and $2.3 million for equipment and software revenues, respectively,
for 1997. U S WEST and Bell Atlantic (formerly NYNEX) accounted for
substantially all of our sales for the two years.
Cost of revenues. Total cost of revenues increased to $43.4 million in 1998
from $11.3 million in 1997. The increase in cost of revenues in 1998 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 in 1998 from $37.1 million in 1997. 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.
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<PAGE> 23
Selling, general and administrative. Selling, general and administrative
expenses were $26.2 million in 1998, compared to $26.4 million in 1997. The
decrease in 1998 primarily 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.
Litigation. Litigation expense of $5.0 million was incurred in 1998 related
to the settlement cost of litigation with BroadBand Technologies.
Other income, net. Other income, net of $2.2 million in 1998 was due to
interest income on cash and cash equivalents. Other income, net was not
significant in 1997.
Interest expense. Interest expense was $6.0 million in 1998 due almost
entirely to interest on the $75.0 million note payable to General Instrument.
There was no interest expense in 1997.
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<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
our nine most recent quarters ended March 31, 2000. This unaudited information
has been prepared on the same basis as the annual financial statements and
includes all adjustments (consisting of normal recurring items except for the
noncash compensation charges in the three months ended December 31, 1999 and
March 31, 2000) 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
Noncash
compensation
expense.......... -- -- -- -- -- -- --
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 income
(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)
======== ======== ======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Equipment.......... $ 24,453 $ 29,689
Software........... 714 790
--------- --------
Total revenues... 25,167 30,479
Cost of revenues:
Equipment.......... 21,524 24,891
Software........... 64 57
--------- --------
Total cost of
revenues....... 21,588 24,948
--------- --------
Gross profit (loss).. 3,579 5,531
Operating expenses:
Research and
development...... 12,593 13,844
Selling, general
and
administrative... 8,291 9,565
Noncash
compensation
expense.......... 128,284 2,384
Litigation......... -- --
--------- --------
Total operating
expenses....... 149,168 25,793
--------- --------
Operating loss....... (145,589) (20,262)
Other income, net.... 1,322 (5)
Interest income
(expense).......... (857) 1,837
--------- --------
Net loss............. $(145,124) $(18,430)
========= ========
</TABLE>
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 common
stock in November 1999. We will not receive additional funds from General
Instrument, which was acquired by Motorola, Inc. in January 2000. We also have a
$50 million available line of credit with Bank of America, under which we have
no outstanding borrowings.
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 our employees.
Motorola repaid such $12.7 million to us in April 2000.
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<PAGE> 25
Net cash used in operating activities was $56.6 million in 1999, $66.6
million in 1998 and $208.5 million in 1997. In each case, the use of cash in
operating activities was primarily due to our net losses, partially offset by
$128.3 million in noncash compensation charges in 1999. Net cash used in
operating activities of $66.6 million in 1998 was primarily due to a net loss of
$81.7 million. 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 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.
Net cash used in investing activities of $78.7 million in 1999, $9.3
million in 1998 and $9.8 million in 1997 was primarily attributable to capital
expenditures to support our engineering and testing activities. Net cash used in
1999 also included purchases of $45.2 million of marketable securities with the
proceeds from our initial public offering.
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.
Net cash provided by financing activities was $235.0 million in 1999,
$104.6 million in 1998 and $218.7 million in 1997. Net cash provided by
financing in 1999 included $177.0 million net proceeds from our initial public
offering, $34.0 million contributed by General Instrument and borrowings of
$24.9 million which were repaid in February 2000. Net cash provided by financing
activities of $104.6 million in 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 in 1997 consisted of
contributions from 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.
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
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<PAGE> 26
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate fluctuations. 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> 27
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. 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 in connection with the transfer of all of the net assets, management and
workforce of a wholly owned subsidiary of General Instrument Corporation. In
November 1999, the business and assets of that partnership were merged into Next
Level Communications, Inc. as part of our recapitalization. In November 1999, we
completed an initial public offering of our common stock, raising approximately
$177.0 million in net proceeds. In January 2000, General Instrument was acquired
by Motorola, Inc., making us an indirect subsidiary of Motorola. As a result of
the transactions that occurred in connection with our recapitalization,
Motorola, through General Instrument, owns 64,103,724 shares of our common stock
constituting approximately 65% of our outstanding common stock on a fully
diluted basis. Spencer Trask and related persons own, including shares issuable
upon exercise of outstanding warrants, 13,343,431 shares of common stock in the
aggregate, constituting approximately 14% of our outstanding common stock on a
fully diluted basis.
We design our equipment to provide the following key 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, we believe telephone companies can generate significant
incremental revenues 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
facilitate 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 products, telephone
companies initially deploying
24
<PAGE> 28
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. We have also designed our products 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.
PRODUCTS
Our products include equipment located at a telephone company's central
office, in the field and at a subscriber's home or business.
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. We designed the Universal Service
Access Multiplexer to use existing copper wire to connect to a customer's home
or office. This product can be connected with fiber optic cable to the Broadband
Digital Terminal. Each Universal 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 helps to reduce
in-field trouble calls.
N(3) Residential Gateway. Our N(3) Residential Gateway product is a single
set-top box that delivers integrated data and video services. One N(3)
Residential Gateway enables multiple televisions and PCs 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
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<PAGE> 29
would have to obtain multiple modems or set-top boxes to support services to
multiple televisions or personal computers. In contrast, our N(3) 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 N(3) 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 N(3) 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 PCs can be connected to a single ETHERset.
N(3) NIC. The N(3) NIC is a card, designed to fit into a PC, 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.
CUSTOMERS
We market and sell our products through our direct sales force to service
providers. From inception through March 31, 2000, approximately 80% of our sales
were to U S WEST and Bell Atlantic. In 1999, we initiated customer relationships
in the local, independent and international telephone company markets. As of
April 30, 2000, we had 18 customers that had each purchased at least $100,000 of
our products.
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
N(3) 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 84% of our
revenues in the first quarter of 2000 and 67% in calendar 1999.
Others: Our customers also include Bell Atlantic, GTE, Hutchinson
Telephone, Paul Bunyan Rural Telephone, Chibardun Telephone, Northstar
Telephone, Wood County Telephone and Hickory Tech.
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. Application 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.
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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 can be integrated by our customers. System integration by our
customers is required on our specific access products, equipment at the
consumer's 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 and
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 April 30, 2000, we had 241 full-time employees and three 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.
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 N(3) Residential Gateway, and on developing our N(3) View-1
Element Management Systems. For the quarter ended March 31, 2000 and the years
ended December 31, 1999, 1998 and 1997, research and development expenses were
$13.8 million, $48.5 million, $47.1 million and $37.1 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
continually improve our existing products, including developing additional home
and office products and higher speed interfaces for our products.
SALES AND MARKETING
We market and sell our products primarily through a direct sales force
located in North America that consisted of 99 people as of April 30, 2000. 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
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organization to focus on these emerging customer opportunities. As of April 30,
2000, 20 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 April 30, 2000, we had 22 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 ACT Manufacturing. SCI Systems is responsible for manufacturing a
majority of our circuit board plug-in assemblies. ACT Manufacturing is
responsible for manufacturing our N(3) 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 and manufacturability and
for 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 April 30, 2000,
we had 24 technical support employees at our headquarters or in the field. 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.
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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;
- 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 (acquired by BAE
Systems, CNI Division, formerly GEC Marconi), Scientific Atlanta and Siemens, as
well as General Instrument, our principal stockholder, and its parent, Motorola.
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 N(3) 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 acquired Ascend
Communications, and BAE Systems, CNI Division, formerly GEC Marconi, 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 and
independent markets and international telephone markets. If our competitors are
successful in these markets, we will be harmed.
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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 April 30, 2000, we had 15 issued patents in the United States
and seven issued patents in foreign countries, all of which were issued in the
past several years. As of April 30, 2000, we had 32 pending U.S. patent
applications and 95 pending international patent applications. We market our
products primarily under our own name and marks. We consider our trademarks to
be valuable assets. We rely on patent, trademark, trade secret and copyright
laws both to protect our proprietary technology and to protect us against claims
from others. We believe that we have direct intellectual property rights or
rights under cross-licensing arrangements covering substantially all of our
material technologies. Given the technological complexity of our systems and
products, however, we cannot assure that claims of infringement will not be
asserted against us or against our customers in connection with their use of our
systems and products, nor can we assure the outcome of any such claims.
SOURCES AND AVAILABILITY OF MATERIALS
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 ACT Manufacturing (formerly, CMC Industries). For
a detailed discussion of these relationships and the risks associated with our
dependence upon third-party manufacturers, see "Risk Factors,"
"Business -- Manufacturing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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. 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.
ENVIRONMENTAL MATTERS
Our research and development operations are subject to certain federal,
state, local and foreign environmental protection laws and regulations. These
laws and regulations relate to the use, handling, storage, discharge and
disposal of certain hazardous materials and wastes, the pre-treatment and
discharge of process waste waters and the control of process air pollutants. We
believe that we are in compliance in all material respects with applicable
environmental regulations. If those laws and regulations become more stringent
over time, we may not be able to comply in a timely manner, or comply at all.
Compliance with new laws and regulations could create significant compliance
expenses, result in production suspension and delay, place restrictions on
expansion at present locations and require the acquisition of costly equipment.
Non-compliance with laws and regulations could result in penalties and
suspension of operations.
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 us. 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
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to certain parts of their networks to enable these competitors to provide
telecommunications services. In response to a decision by the U.S. 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. However, the FCC has stated that it will reexamine
this decision every three years and judicial appeals of the decision may follow.
The 1996 Telecommunications Act also requires incumbent carriers to offer for
resale, at wholesale rates, any retail 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 the proposed separate affiliate
requirement until the FCC issues an order. 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.
The FCC's rules prohibit incumbent carriers from providing voice or data
services along with customer premises equipment, such as our N(3) 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 we cannot
assure that rule changes will take place.
Distribution of our N(3) 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 N(3) 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 N(3) Residential Gateway separate from our entire
system. However, if these rules could be applied to our N(3) 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.
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LITIGATION
We are not currently a party to any material legal proceeding.
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. 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 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 April 30, 2000, we had a total of 428 full-time employees and five
full-time contractors. Of the total number of employees, 241 were in research
and development, 22 in marketing, 30 in operations, 77 in sales and sales
support and 58 in administration. Of the total number of contractors, three were
in research and development, one was in marketing, and one was in operations.
Our employees are not represented by any collective bargaining agreement with
respect to their employment, and we have never experienced an
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organized work stoppage. Satisfactory relations have generally prevailed between
our employees and us. 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 own land and a building consisting of approximately 135,000 square feet
and lease approximately 65,000 square feet of administrative, research and
development, engineering and prototype/test facilities in Rohnert Park,
California. We also lease three sales offices, in Braintree, Massachusetts,
Phoenix, Arizona and Denver, Colorado. In addition, we lease an office for our
technology department in Parsippany, New Jersey. We believe our current
facilities are suitable and adequate and have sufficient productive capacity to
meet our current needs.
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MANAGEMENT
OFFICERS AND DIRECTORS
Our officers and directors, and their ages, as of May 31, 2000, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Peter W. Keeler....... 45 Chairman of the Board, Chief Executive Officer and President
Thomas R. Eames....... 47 Chief Technical Officer
James T. Wandrey...... 45 Senior Vice President, Chief Financial Officer and Treasurer
Alvin L. Pachynski.... 60 Senior Vice President, Marketing
Frank P. Tuhy......... 56 Senior Vice President, Technology
T. Murat Uraz......... 45 Senior Vice President and Chief Engineering Officer
Hans L. Van Welzen.... 57 Senior Vice President, Sales
William A. Weeks...... 37 Senior Vice President and Chief Strategic Officer
Keith A. Zar.......... 45 Senior Vice President, General Counsel, Chief Administrative
Officer and Secretary
Lynn Forester......... 45 Director
Paul S. Latchford..... 45 Director
Ferdinand C. Kuznik... 55 Director
John McCartney........ 47 Director
Scott Poteracki....... 46 Director
Dennis Rheault........ 43 Director
Richard Severns....... 54 Director
</TABLE>
Peter W. Keeler is one of our co-founders 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.
Thomas R. Eames is one of our co-founders and has served as our Chief
Technical Officer since June 1999 and served as our co-President from July 1994
to June 1999. Prior to that, Mr. Eames was a founder of Optilink Corporation, a
telecommunications equipment company, 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, a
telecommunications company, in a variety of technical positions.
James T. Wandrey has served as our Senior Vice President, Chief Financial
Officer and Treasurer since June 1999 and as our Secretary from October to
December 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, a multi-media software company,
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.
Alvin L. 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, a
telecommunications equipment company.
Frank P. 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
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1984 to November 1996, Mr. Tuhy was Director of Access Systems Analysis and
Criteria at Bell Communications Research (Bellcore).
T. 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, a telecommunications
equipment company.
Hans L. 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.
William A. 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 US 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.
Keith A. Zar has served as our Senior Vice President, General Counsel and
Secretary since January 2000 and additionally as our Chief Administrative
Officer since May 2000. From February to December 1999, Mr. Zar was an outside
legal consultant to us. Mr. Zar was Senior Vice President of General Instrument
from October 1998 to February 1999, Senior Vice President and General Counsel of
General Instrument from April 1998 to October 1998, Vice President and General
Counsel of General Instrument from June 1997 to April 1998, and Assistant
General Counsel of General Instrument from July 1993 to June 1997.
Lynn Forester has been one of our directors since November 1999. From
February 1995 to January 2000, Ms. Forester was a director of General Instrument
and its predecessors. Ms. Forester has been President and Chief Executive
Officer of FirstMark Holdings, Inc., a telecommunications company, 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.
Paul S. Latchford has been one of our directors since November 1999 and has
served as the President of the Spencer Trask Media and Communications Group, a
technology investment firm, since June 1999. From February 1997 to June 1999,
Mr. Latchford served as Principal Vice President of Global Business Development
for Bechtel Group, Inc., a telecommunications network engineering and
construction company. From February 1995 to February 1997, Mr. Latchford was
Vice President of Business Development and Operations for Bell Atlantic
International, a telecommunications company, for the Asia Pacific Region and
Executive Director of Business Development from March 1994 to February 1995.
Ferdinand C. Kuznik has been one of our directors since January 2000. Mr.
Kuznik joined Motorola in 1990 and has held various positions including his
current position of Executive Vice President and President of Motorola's
operations in Europe, the Middle East and Africa.
John McCartney has been one of our directors since November 1999. Since
October 1998, Mr. McCartney has served as Deputy Chairman of Datatec, Ltd., a
networking and E-commerce Company. 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
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served in various executive capacities at U.S. Robotics Corporation, including
as president and chief operating officer from January 1987 to June 1997. Mr.
McCartney serves on the board of directors of Datatec, A.M. Castle Corp.,
Quotesmith.com and Altec Lansing Technologies.
Scott Poteracki has been one of our directors since April 2000. Mr.
Poteracki is Corporate Vice President and Director of Finance of Motorola's
Internet and Networking Group (ING). Mr. Poteracki has held various financial
positions within Motorola since 1978. Prior to his employment with Motorola, Mr.
Poteracki was in public accounting with Coopers & Lybrand.
Dennis Rheault has been one of our directors since January 2000. Mr.
Rheault has served as Vice President and Director of Strategy for the
Communications Enterprise at Motorola since July 1998. From May 1997 to July
1998, Mr. Rheault served as a Vice President and Director of Corporate Strategy
at Motorola. From December 1988 to May 1997, Mr. Rheault served as a Vice
President and Director at the Boston Consulting Group.
Richard Severns has been one of our directors since January 2000. Mr.
Severns has served as Senior Vice President and Director of Finance for the
Communications Enterprise of Motorola since July 1998. From 1991 to July 1998,
he served as Senior Vice President, Director of Finance and General Manager of
Motorola's Network Services and Strategy Group for the Land Mobile Products
Sector. Mr. Severns joined Motorola in 1971 as a senior auditor.
BOARD OF DIRECTORS
Our board of directors is divided into three classes. Class I consists of
three directors (Messrs. Kuznik, Severns and McCartney) who are serving a term
expiring at our annual meeting of stockholders to be held in 2003. Class II
consists of three directors (Ms. Forester and Messrs. Latchford and Rheault) who
are serving a term expiring at our annual meeting of stockholders to be held in
2001. Class III consists of two directors (Messrs. Keeler and Poteracki) who are
serving a term expiring at our annual meeting of stockholders to be held in
2002. In each case, a director serves for the designated term and until his or
her respective successor is duly elected and qualified.
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.
Severns. The compensation committee makes recommendations to our board of
directors regarding our stock option plans and all matters of compensation,
including determining the compensation of our executive officers, except that a
subcommittee consisting of Ms. Forester and Mr. McCartney makes 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 Motorola,
General Instrument or their respective affiliates a retainer of $20,000 per
year. In addition, we pay them a fee 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." During 1999, in accordance with the 1999 Equity
Incentive Plan and prior to the consummation of our initial public offering, Ms.
Forester, Mr. Latchford and Mr. McCartney each were granted options to purchase
20,000 shares of our common stock at an exercise price of $11.00 per share.
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<PAGE> 40
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth compensation
information for fiscal years 1998 and 1999 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 1999 exceeded $100,000 and to whom
we collectively refer as our named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Peter W. Keeler.................................. 1999 $261,077 $380,500 600,000 $5,000
Chairman of the Board, 1998 250,000 125,000 -- 5,000
Chief Executive Officer and President
James T. Wandrey(2).............................. 1999 141,346 299,471 350,000
Senior Vice President, 1998 -- -- -- 5,923
Chief Financial Officer and Treasurer
Thomas R. Eames.................................. 1999 261,077 130,538 600,000 5,000
Chief Technical Officer 1998 250,000 125,000 -- 5,000
Charles H. Seebock............................... 1999 192,870 77,148 250,000 5,114
Senior Vice President, 1998 166,910 50,074 8,334 5,000
Chief Operating Officer(3)
T. Murat Uraz.................................... 1999 182,712 73,085 190,000 4,264
Senior Vice President, 1998 148,993 79,698 33,334 4,368
Chief Engineering Officer
</TABLE>
-------------------------
(1) Represents our matching 401(k) contributions.
(2) We hired Mr. Wandrey in March 1999.
(3) Mr. Seebock resigned in May 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information for our named executive officers
with respect to grants of options to purchase our common stock made in the year
ended December 31, 1999 and the potential realizable value of all options held
by such executive officers on December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE ($) AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2)
OPTIONS DURING PRICE ($ PER EXPIRATION -----------------------
NAME GRANTED YEAR(1) SHARE) DATE 5% 10%
---- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler....................... 600,000 7.4% 66.25 12/3/09 29,943,420 66,180,800
Thomas R. Eames....................... 600,000 7.4% 66.25 12/3/09 29,943,420 66,180,800
James T. Wandrey...................... 200,000 2.5% 11.00 10/26/09 21,031,140 33,110,267
James T. Wandrey...................... 100,000 1.2% 66.25 12/3/09 4,990,570 11,030,133
James T. Wandrey...................... 50,000 0.6% 9.66 3/8/09 5,324,785 8,344,567
Charles H. Seebock.................... 225,000 2.8% 11.00 10/26/09 23,660,033 37,249,050
Charles H. Seebock.................... 25,000 0.3% 66.25 12/3/09 1,247,643 2,757,533
T. Murat Uraz......................... 165,000 2.0% 11.00 10/26/09 17,350,691 27,315,970
T. Murat Uraz......................... 25,000 0.3% 66.25 12/3/09 1,247,643 2,757,533
</TABLE>
37
<PAGE> 41
-------------------------
(1) Based on an aggregate total of 8,134,679 options granted to employees in
1999 under our option plans.
(2) Potential realizable values are reported net of the option exercise price,
but before taxes associated with the exercise, if any. These amounts
represent certain assumed rates of appreciation only, in accordance with
regulations of the Securities and Exchange Commission, or the SEC. Actual
gains, if any, on stock option exercises and common stock holdings are
dependent on the future performance of our common stock and overall market
conditions, as well as the continued employment through the vesting period
of the executives. We cannot assure that the amounts reflected will be
realized.
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
1999 and the year-end number and value of unexercised options with respect to
each of our named executive officers. No stock appreciation rights were
exercised by our named executive officers in fiscal year 1999 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, which are now options to purchase
Motorola common stock. 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 Motorola common stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE ($) OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Keeler............... -- -- 1,750,000 600,000 $129,561,250 $ 5,175,000
Thomas R. Eames............... -- -- 1,559,208 600,000 116,745,724 5,175,000
T. Murat Uraz................. -- -- 176,667 190,000 12,862,846 10,755,000
Charles H. Seebock............ -- -- 116,667 250,000 8,563,696 14,587,500
James T. Wandrey.............. -- -- 50,000 300,000 3,260,750 13,637,500
</TABLE>
-------------------------
(1) The fair market value of our common stock (as reported on The Nasdaq
National Market) at the close of business on December 31, 1999 was $74.875.
EMPLOYEE STOCK PLANS
1999 STOCK PLAN
We adopted our 1999 Stock Plan effective on October 10, 1999. Our then sole
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. As of June 2, 2000, 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 additional awards under the 1999 Stock Plan.
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 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
38
<PAGE> 42
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
We adopted our 1999 Equity Incentive Plan effective on October 10, 1999.
Our then sole stockholder also approved this plan. We have reserved 7,900,000
shares of our common stock for issuance under the 1999 Equity Incentive Plan,
and as of June 2, 2000, we have granted 5,336,100 future awards under the 1999
Equity Incentive Plan. In general, if options or shares awarded under the 1999
Equity Incentive Plan or our 1999 Stock Plan are forfeited, then those options
or shares will again become available for awards under the 1999 Equity Incentive
Plan.
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 the 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 Motorola, General
Instrument or their respective 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, which are sometimes called phantom shares.
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.
39
<PAGE> 43
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; or
- 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 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.
The non-employee members of our board of directors, with the exception of
non-employee directors who are employees of Motorola, General Instrument or
their respective affiliates, are eligible for automatic option grants under the
1999 Equity Incentive Plan. Each non-employee director who first joins our board
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 Motorola, General Instrument or their respective
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 obtain stockholder
approval of the amendment unless applicable law requires
40
<PAGE> 44
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
We adopted our 1999 Employee Stock Purchase Plan effective on October 10,
1999. Our then sole 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 is 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 started on the effective date of our initial public offering and will 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 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 at the initial public 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 obtain the
approval of our stockholders.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Next Level Communications, a subsidiary of General Instrument, was the
limited partner and Spencer Trask Investors, LLC was 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 held a $75.0 million principal
amount promissory note of Next Level Communications L.P., which, together with
accrued interest thereon, was convertible into shares of common stock of the
successor corporation to the partnership. Spencer Trask Investors also held an
option to acquire additional shares of that successor corporation, that is of
our company.
41
<PAGE> 45
Immediately prior to our initial public offering, General Instrument
contributed its $75 million note and accrued interest thereon to us, and Next
Level Communications L.P. and the General Instrument subsidiary, Next Level
Communications, merged into us. As a result, General Instrument received
64,103,724 shares of common stock and Spencer Trask and related persons received
5,863,329 shares of common stock. These shares represented, in the aggregate,
approximately 89.2% of our outstanding common stock. Also, pursuant to this
merger, the option held by Spencer Trask Investors, LLC became warrants to
acquire from us 8,480,102 shares of common stock at an exercise price of $10.38
per share, which warrants were distributed to the members of Spencer Trask
Investors, LLC. The warrants are currently exercisable 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. 1,500,000 of these warrants will be exercised to acquire the shares
of common stock offered by this prospectus. Based on closing prices of our
common stock through June 2, 2000, we have assumed that warrants to purchase an
additional 319,930 shares of our common stock will be surrendered to satisfy the
exercise price of the warrants to purchase the 1,500,000 shares being offered by
this prospectus. The actual number of warrants surrendered will depend upon the
closing price of our common stock for a 20-day period prior to exercise.
On January 5, 2000, General Instrument consummated its merger with
Motorola. Consequently, Motorola is able to exercise a majority of our total
voting power and has 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.
Although Motorola has advised us that it currently intends to hold all of
its shares, neither Motorola (through its ownership of General Instrument) or
Spencer Trask and its related persons are subject to any contractual obligation
to retain any of its shares, other than a 90-day lockup agreement in connection
with this offering. As a result, we cannot assure you as to how long Motorola or
Spencer Trask and its related persons will maintain their remaining beneficial
ownership of our common stock.
It is possible that 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.
Prior to December 31, 1999, General Instrument leased 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
were guaranteed by General Instrument. The lease provided for a purchase option.
On December 30, 1999, the Company exercised such option, paying $24.9 million to
acquire the land and building.
As a condition of our contract with Bell Atlantic, we were required to
maintain up to a $75 million performance bond or irrevocable letter of credit.
This obligation was guaranteed by General Instrument until March 2000.
CORPORATE AND INTERCOMPANY AGREEMENT
In November 1999, we entered into a corporate and intercompany agreement
with General Instrument under which we granted 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, 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
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<PAGE> 46
- shares of non-voting 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 is the fair market value 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 option expires if General Instrument
and its affiliates beneficially own less than 30% of our 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. This
agreement also provides 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 also provides 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 our initial public offering.
Under this agreement, we and our board of directors also appointed
additional directors nominated by Motorola on January 5, 2000.
This agreement also provides that we will enter into a similar agreement
for the benefit of 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 our common stock in a single transaction or a group
of related transactions.
CROSS LICENSE AGREEMENT
In November 1999, we entered into a cross license agreement with General
Instrument. Under this agreement, General Instrument granted to us a
nonexclusive, perpetual, royalty free, worldwide license under all patent
applications and patents owned by General Instrument 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 did not include patent claims covering the implementations,
methods or devices primarily used or to be used by General Instrument. Also
under this agreement, we granted to General Instrument and its affiliates,
including Motorola, a nonexclusive, perpetual, royalty free, worldwide license
under all patent applications and patents owned by us and filed prior to our
initial public 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 did not
include patent claims covering the implementations, methods or devices primarily
used or to be used by us. We and General Instrument each also licensed to the
other the right to use confidential, technical and other information in each
other's possession as of the completion of our initial public offering. These
licenses do not include the right to sublicense to any third parties. This
agreement permits General Instrument and us to transfer its or our licenses
pursuant to a sale of its 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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<PAGE> 47
REGISTRATION RIGHTS AGREEMENT
In November 1999, we entered into a registration rights agreement with
General Instrument and Spencer Trask Investors, LLC. Under this agreement, we
granted to these stockholders and their transferees the right to request that we
use our best efforts to register their shares of our common stock and the shares
of common stock underlying their warrants 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 related persons and their transferees 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
transferees 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 its related persons) and their transferees against certain liabilities
under securities laws. General Instrument and Spencer Trask and related persons
and their transferees may generally assign these registration rights to
transferees of their shares. This agreement also provides that we will enter
into a similar agreement for the benefit of any majority transferee. As defined
in the agreement, a 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.
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<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of June 2, 2000 as to:
- each person known by us to own beneficially more than five percent of our
common stock;
- each of the executive officers named in the Summary Compensation Table
beginning on page 37;
- each of our current directors;
- all of our directors and executive officers as a group; and
- the selling stockholders.
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 80,278,935 shares
of common stock outstanding as of June 2, 2000 and 81,778,935 shares of common
stock assumed to be outstanding immediately following the completion of this
offering. Beneficial ownership is determined in accordance with the rules of the
SEC. Shares of common stock subject to options or warrants that are presently
exercisable or exercisable within 60 days of June 2, 2000 are deemed outstanding
for the purpose of computing the percentage ownership of the person or entity
holding the options or warrants, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or entity.
Based on closing prices of our common stock through June 2, 2000, we have
assumed that warrants to purchase 319,930 shares of our common stock will be
surrendered to satisfy the exercise price of the warrants to purchase the
1,500,000 shares being offered by this prospectus. The actual number of warrants
surrendered will depend upon the closing price of our common stock for a 20-day
period prior to exercise.
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<PAGE> 49
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NUMBER OF NUMBER OF OWNED AFTER THIS
SHARES SHARES OFFERING
BENEFICIALLY BEING -----------------------
NAME OF BENEFICIAL OWNER OWNED PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------------ ------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Motorola, Inc.................................... 64,103,724 79.9% -- 64,103,724 78.9%
1303 East Algonquin Road
Schaumburg, IL 60196
Kevin B. Kimberlin(1)............................ 10,209,411 11.8% -- 8,813,524 10.8%
c/o 535 Madison Avenue, 18th Floor
New York, NY 10022
Oshkim NLC, Ltd.(2).............................. 6,419,437 7.4% 1,135,500 5,041,750 6.2%
c/o 535 Madison Avenue, 18th Floor
New York, NY 10022
Felix Investors, LLC(3).......................... 424,043 * 349,500 -- --
c/o 535 Madison Avenue, 18th Floor
New York, NY 10022
Spencer Trask Holdings, Inc.(4).................. 143,434 * 15,000 125,234 *
c/o 535 Madison Avenue, 18th Floor
New York, NY 10022
Peter W. Keeler(5)............................... 1,900,000 2.3% -- 1,900,000 2.3%
Thomas R. Eames(6)............................... 1,577,208 1.9% -- 1,577,208 1.9%
Lynn Forester.................................... 10,000 * -- 10,000 *
Ferdinand C. Kuznik.............................. -- -- -- -- --
Paul S. Latchford................................ -- * -- 200 *
John McCartney................................... 8,500 * -- 8,500 *
Scott Poteracki.................................. -- -- -- -- --
Dennis Rheault................................... -- -- -- -- --
Charles H. Seebock(7)............................ -- -- -- -- --
Richard Severns.................................. -- -- -- -- --
T. Murat Uraz(8)................................. 182,667 * -- 182,667 *
James T. Wandrey(9).............................. 93,000 * -- 93,000 *
All directors and executive officers as a group
(17 persons)(10)............................... 4,038,939 4.8% -- 4,038,939 4.7%
</TABLE>
-------------------------
* Less than 1%.
(1) Represents 3,646,540 shares held by Kevin Kimberlin Partners, LP, a
Delaware limited partnership, of which Mr. Kimberlin is the sole general
partner, 6,419,437 shares subject to warrants held by Oshkim NLC, Ltd., of
which Mr. Kimberlin is a general partner, and 58,633 shares and 84,801
shares subject to warrants held by Spencer Trask Holdings, Inc., of which
Mr. Kimberlin is the controlling shareholder.
(2) Represents 6,419,437 shares subject to warrants. Warrants to purchase
1,135,500 of these shares will be exercised to acquire the shares of common
stock offered hereby and warrants to purchase approximately 242,187 of
these shares will be surrendered in connection with this exercise.
(3) Represents 424,043 shares subject to warrants. Warrants to purchase 349,500
of these shares will be exercised to acquire the shares of common stock
offered hereby and warrants to purchase approximately 74,543 of these
shares will be surrendered in connection with this exercise.
(4) Includes 58,633 shares and 84,801 shares subject to warrants. Warrants to
purchase 15,000 of these shares will be exercised to acquire the shares of
common stock offered hereby and warrants to purchase approximately 3,200 of
these shares will be surrendered in connection with this exercise.
(5) Includes 1,750,000 options covering a like number of shares currently
exercisable or exercisable within 60 days of June 2, 2000.
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<PAGE> 50
(6) Includes 1,550,708 options covering a like number of shares currently
exercisable or exercisable within 60 days of June 2, 2000. Mr. Eames has
entered into an agreement with his former wife pursuant to which she
controls the exercise of these options and the disposition of the
underlying shares to the extent of 234,419 shares. Mr. Eames disclaims
beneficial ownership of such 234,419 shares.
(7) Mr. Seebock resigned in May 2000.
(8) Includes 176,667 options covering a like number of shares currently
exercisable or exercisable within 60 days of June 2, 2000.
(9) Includes 50,000 options covering a like number of shares currently
exercisable or exercisable within 60 days of June 2, 2000.
(10) Includes 3,782,039 options covering a like number of shares currently
exercisable or exercisable within 60 days of June 2, 2000.
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<PAGE> 51
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 incorporated by reference to the registration statement of which this
prospectus is a part.
AUTHORIZED SHARES
Our authorized capital stock consists of:
- 200,000,000 shares of common stock, of which 80,278,935 shares were
issued and outstanding at June 2, 2000;
- 70,000,000 shares of Class B non-voting common stock, of which no shares
were issued and outstanding at June 2, 2000; and
- 10,000,000 shares of preferred stock, of which no shares were issued and
outstanding at June 2, 2000.
No currently issued and outstanding shares of our common stock are included
in this offering.
In addition, of the shares of our common stock authorized but unissued at
June 2, 2000, on the closing date,
- 1,500,000 shares will be issued on exercise of warrants held by Spencer
Trask and its related persons and will be included in this offering;
- Warrants to purchase approximately 319,930 shares held by the selling
stockholders will be surrendered by the selling stockholders to cover the
exercise price of the warrants to purchase the 1,500,000 shares being
offered by this prospectus;
- Approximately 6,660,172 shares are reserved for issuance pursuant to
warrants held by Spencer Trask and its related persons that will not be
exercised or surrendered in connection with this offering; and
- 21,864,904 shares are reserved for issuance pursuant to our employee
benefit plans, of which options to purchase 17,369,882 shares are
outstanding.
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 at a meeting 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, except
that General Instrument and its affiliates have a right to purchase additional
shares under our corporate and intercompany agreement to the extent necessary to
maintain their ownership percentage upon future equity issuances by us. See
"Certain Relationships and Related Party Transactions -- Corporate and
Intercompany Agreement."
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<PAGE> 52
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 BY-LAW 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.
Certain provisions of our certificate of incorporation and by-laws make
special provision for "majority transferees" of General Instrument and its
affiliates (now including Motorola). For the purposes of these provisions, a
majority transferee is any person or group unaffiliated with General Instrument
to which General Instrument or its affiliates transfer more than the majority of
our outstanding shares of common stock, whether in a single transaction or in a
group of related transactions.
Board of Directors
Our certificate of incorporation provides that our board of directors is
divided into three classes of directors, with the classes to be as nearly equal
in number as possible. One class was originally elected for a term expiring at
the annual meeting of stockholders to be held in 2001, another was originally
elected for a term expiring at the annual meeting of stockholders to be held in
2002 and another class has been elected for a term expiring at the annual
meeting of stockholders to be held in 2003. Each director holds 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 are 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.
Our board of directors consists of eight 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 12 nor less
than three directors. In addition, our certificate of incorporation provides
that any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director, unless the vacancy was caused by the action of stockholders in which
event the vacancy will be filled by the stockholders and not the directors.
Under our certificate of incorporation, directors may be removed, with or
without cause, by the affirmative vote of shares representing a majority of the
votes entitled to be cast by the then outstanding shares of common stock.
However, after the first date that General Instrument or a majority transferee,
together with their respective affiliates, ceases to beneficially own at least
49% of the outstanding shares of our common stock, directors may not be removed
without cause.
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.
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<PAGE> 53
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 our 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 are not 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 the shares 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 the shares of
our outstanding common stock which are not owned by the interested
stockholder.
Under our certificate of incorporation, a business combination is defined
to include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an interested stockholder is a person who,
together with affiliates and associates, owns or, within the prior three years,
did own, 15% or more of our common stock. General Instrument and its affiliates,
including Motorola, and any majority transferee and its affiliates will be
exempt from these provisions.
Advance Notice Procedure
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.
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<PAGE> 54
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" and "-- 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, cease 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, 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
our 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.
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<PAGE> 55
As a result of General Instrument's merger with Motorola, Motorola is also
entitled to the protections of the foregoing provisions to the same extent as
General Instrument.
Any person purchasing or otherwise acquiring common stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of our
certificate of incorporation.
Limitations on Directors' Liability
Our certificate of incorporation provides that no director will be liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- in respect of certain unlawful dividend payments or stock redemptions or
repurchases; or
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and our
stockholders' rights, through stockholders' derivative suits on our behalf or
otherwise, 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.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the open market may
adversely affect the market price of our common stock. Upon completion of this
offering, we will have 81,778,935 shares of common stock outstanding. Of the
shares of common stock to be outstanding, the 1,500,000 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.
As of June 2, 2000, Motorola indirectly owned 64,103,724 shares of our
common stock and Spencer Trask and related persons owned 4,863,329 shares of our
common stock and held warrants to purchase an additional 8,480,102 shares of our
common stock, of which 1,500,000 will be exercised to acquire the shares of
common stock offered hereby. Based on closing prices of our common stock through
June 2, 2000, we have assumed that warrants to purchase an additional 319,930
shares of our common stock will be surrendered to satisfy the exercise price of
the warrants to purchase the 1,500,000 shares being offered by this prospectus.
The actual number of warrants surrendered will depend upon the closing price of
our common stock for a 20-day period prior to exercise. Under federal securities
laws, the shares beneficially owned by Motorola and the persons related to
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 12, 1999. Motorola and Spencer Trask and its related persons
and their transferees are entitled to registration rights pursuant to which they
may require that we register their shares under the Securities Act.
In addition to the legal restrictions on resale described above, General
Instrument and each of the selling stockholders have entered into a lockup
agreement with the underwriter, pursuant to which they have agreed not to
transfer or dispose of shares of common stock or securities convertible into
common stock for a period of 90 days after the date of this offering, without
the prior written consent of
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<PAGE> 56
Credit Suisse First Boston Corporation. Our executive officers have also entered
into such a lockup agreement with respect to 90% of their respective shares.
STOCK OPTIONS
As of June 2, 2000, we had outstanding employee stock options to purchase
17,369,882 shares of common stock, of which 7,114,553 were vested and
exercisable.
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 during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, the selling stockholders have agreed
to sell to Credit Suisse First Boston Corporation warrants to purchase 1,500,000
shares of common stock.
The underwriting agreement provides that the underwriter will purchase from
the selling stockholders warrants to purchase the shares of common stock offered
hereby, plus additional warrants that will be surrendered in connection with a
cashless exercise of the warrants to purchase the shares offered hereby. All of
these warrants will be purchased by the underwriter for a price equal to the
total price to public shown on the cover page of this prospectus less the total
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriter will exercise the warrants immediately upon the
purchase of the warrants. The underwriting agreement provides that the
underwriter is obligated to purchase all the warrants if any are purchased,
other than those warrants covered by the over-allotment option described below.
The selling stockholders have granted a 30-day option to the underwriter to
purchase warrants to purchase up to an aggregate of an additional 225,000 shares
of our common stock at the public offering price, less the underwriting
discounts and commissions. The option may be exercised only to cover over-
allotments of common stock.
The underwriter proposes to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The underwriter
and selling group members may allow a discount of $ per share on sales to
other broker/dealers. After the initial public offering, the public offering
price, concession and discount to broker/dealers may be changed by the
underwriter.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<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 selling stockholders.................. $ $ $ $
Expenses payable by us..................... $ $ $ $
</TABLE>
We and General Instrument have agreed that we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or, in
our case, file with the Securities and Exchange Commission, a registration
statement under the Securities Act of 1933 relating to, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares 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 90 days after the date
of this prospectus, except, in our case, for issuances pursuant to the exercise
of employee stock options or warrants outstanding on the date hereof.
Each of the selling stockholders and each of our executive officers have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the date of this prospectus except, in the case of our executive
officers, for sales or other dispositions of up to 10% of their respective share
holdings.
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We and the selling stockholders have agreed to indemnify the underwriter
against liabilities under the Securities Act, or contribute to payments which
the underwriter may be required to make in that respect.
The underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves sales in excess of the offering size, which
creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit selling concessions to be reclaimed from a syndicate
member when the common stock originally sold by the syndicate member is
purchased in a stabilizing or syndicate covering transaction to cover
syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters may, subject to limitations, make bids for or purchases of
the common stock until the time, if any, at which a stabilizing bid is
made.
These stabilizing transactions may cause the price of the common stock to be
higher than it would otherwise be in the absence of these transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by the underwriter participating in this offering. The underwriter
may allocate a number of shares for sale to online brokerage account holders.
Internet distributions will be allocated on the same basis as other allocations.
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 and the selling
stockholders 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 which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to 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, the selling stockholders, and
the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such common stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such 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
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<PAGE> 59
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 and the selling stockholders 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 such 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 such 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 such purchaser pursuant to this offering. Such 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 such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
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
The validity of the common stock we are offering pursuant to this
prospectus will be passed upon by Latham & Watkins, Menlo Park, California.
Certain legal matters will be passed upon for the underwriter by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements of Next Level Communications, Inc. as of December
31, 1998 and 1999, and for each of three years in the period ended December 31,
1999, included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein. Such financial
statements have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
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. 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
56
<PAGE> 60
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 are subject to the information and periodic reporting requirements of
the Securities Exchange Act and, accordingly, will file periodic reports, proxy
statements and other information with the SEC. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference rooms, and the web site of the SEC referred to above.
57
<PAGE> 61
NEXT LEVEL COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1999 and 1998............. F-3
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997....................................... F-4
Statements of Stockholder's Equity/Partners' Deficit for the
Years Ended December 31, 1999, 1998 and 1997.............. F-5
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Condensed Balance Sheets of March 31, 2000 and December 31,
1999...................................................... F-19
Condensed Statements of Operations for the Three Months
Ended March 31, 2000 and March 31, 1999................... F-20
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999............................. F-21
Notes to Condensed Financial Statements..................... F-22
</TABLE>
F-1
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Next Level Communications, Inc.:
We have audited the accompanying balance sheets of Next Level
Communications, Inc. (formerly Next Level Communications L.P.) as of December
31, 1999 and 1998 and the related statements of operations, stockholders'
equity/partners' deficit and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
DELOITTE & TOUCHE LLP
San Francisco, California
February 11, 2000
F-2
<PAGE> 63
NEXT LEVEL COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
ASSETS --------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 128,752 $ 28,983
Marketable securities..................................... 14,971 --
Trade receivables, less allowance for doubtful accounts of
$1,337 and $490, respectively.......................... 13,879 11,068
Other receivables......................................... 1,435 5,023
Inventories............................................... 22,553 20,670
Receivable from General Instrument........................ 950 3,350
Prepaid expenses and other current assets................. 1,792 735
--------- --------
Total current assets................................... 184,332 69,829
Marketable securities....................................... 30,151 --
Property and equipment, net................................. 48,263 21,558
Intangibles less accumulated amortization of $3,141 and
$1,940, respectively...................................... 5,065 6,266
Other assets................................................ -- 118
--------- --------
Total assets........................................... $ 267,811 $ 97,771
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY/PARTNERS' DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 13,261 $ 16,467
Other accrued liabilities................................. 11,375 10,697
Deferred revenues......................................... 11,148 3,705
Current portion of capital lease obligations.............. 600 396
--------- --------
Total current liabilities.............................. 36,384 31,265
--------- --------
Long-term debt.............................................. 24,853 --
--------- --------
Long-term capital lease obligations......................... 346 335
--------- --------
Note payable to General Instrument.......................... -- 80,940
--------- --------
Commitments and Contingencies (Note 13)
Stockholders' Equity/Partners' Deficit:
Partners' deficit......................................... -- (14,769)
Common stock -- $.01 par value, 200,000 shares authorized,
79,752 shares issued and outstanding................... 754 --
Additional paid-in capital................................ 412,930 --
Accumulated deficit....................................... (205,072) --
Unearned compensation..................................... (2,384) --
--------- --------
Total stockholders' equity/partners' deficit........... 206,228 (14,769)
--------- --------
Total liabilities and stockholders' equity/partners'
deficit............................................... $ 267,811 $ 97,771
========= ========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 64
NEXT LEVEL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Equipment......................................... $ 54,301 $ 39,243 $ 6,045
Software.......................................... 3,296 4,587 2,266
----------- ----------- -----------
Total revenues................................. 57,597 43,830 8,311
----------- ----------- -----------
Cost of Revenues:
Equipment......................................... 51,265 43,172 10,954
Software.......................................... 292 261 306
----------- ----------- -----------
Total cost of revenues......................... 51,557 43,433 11,260
----------- ----------- -----------
Gross Profit (Loss)................................. 6,040 397 (2,949)
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 48,454 47,086 37,064
Selling, general and administrative............... 30,511 26,248 26,414
Litigation........................................ -- 5,000 --
Noncash compensation charge....................... 128,284 -- --
----------- ----------- -----------
Total operating expenses....................... 207,249 78,334 63,478
----------- ----------- -----------
Operating Loss...................................... (201,209) (77,937) (66,427)
Other Income (Expense), Net......................... 2,175 2,241 (2)
Interest Expense.................................... (6,038) (6,035) --
----------- ----------- -----------
Net Loss............................................ $ (205,072) $ (81,731) $ (66,429)
=========== =========== ===========
Pro Forma Basic and Diluted Net Loss Per Share...... $ (2.78) $ (1.08) $ (0.95)
=========== =========== ===========
Shares Used to Compute Pro Forma Basic and Diluted
Net Loss Per Share................................ 71,597,834 69,967,053 69,967,053
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 65
NEXT LEVEL COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY/PARTNERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER COMMON STOCK ADDITIONAL
CAPITAL CAPITAL ------------------ PAID-IN UNEARNED ACCUMULATED
(DEFICIT) (DEFICIT) SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
--------- --------- ------ --------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997....... $ $ -- -- $ 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..... -- -- -- 379,876 -- -- (383,578) (3,702)
Conversion of predecessor
corporate into
partnership................ -- (3,702) -- (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
Recapitalization:
Conversion of note payable
into common stock........ -- -- 4,338 43 86,710 -- -- 86,753
Conversion of general
partner interest into
common stock............. (1,010) -- 5,863 59 951 -- -- --
Conversion of limited
partner interest into
common stock............. -- (18,221) 55,366 554 17,667 -- -- --
Dividend to General
Instrument............... -- -- 4,400 -- -- -- -- --
Initial public offering
proceeds................... -- -- 9,775 98 176,918 -- -- 177,016
Issuance of common stock
under stock option plan.... -- -- 10 -- 16 -- -- 16
Stock-based compensation..... -- -- -- -- 130,668 (2,384) -- 128,284
Net loss..................... -- -- -- -- -- -- (205,072) (205,072)
------- -------- ------ --------- -------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999..... $ -- $ -- 79,752 $ 754 $412,930 $(2,384) $(205,072) $ 206,228
======= ======== ====== ========= ======== ======= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 66
NEXT LEVEL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(205,072) $(81,731) $ (66,429)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash compensation charge............................. 128,284 -- --
Depreciation and amortization........................... 8,857 10,733 8,324
Loss on disposal of assets.............................. 338 1,162 385
Changes in assets and liabilities:
Trade receivables..................................... (2,811) (6,323) (3,486)
Inventories........................................... (1,883) (7,286) (11,341)
Other current and noncurrent assets................... 4,993 (4,683) (2,797)
Bank overdraft........................................ -- (785) (1,068)
Accrued interest payable to General Instrument........ 5,813 5,940 --
Accounts payable...................................... (3,206) 7,926 6,552
Accrued liabilities and deferred revenues............. 8,120 8,414 (138,667)
--------- -------- ---------
Net cash used in operating activities.............. (56,567) (66,633) (208,527)
--------- -------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (33,585) (9,612) (9,882)
Proceeds from notes receivable............................ 56 264 110
Purchase of marketable securities......................... (45,121) -- --
--------- -------- ---------
Net cash used in investing activities.............. (78,650) (9,348) (9,772)
--------- -------- ---------
FINANCING ACTIVITIES:
Initial public offering proceeds, net..................... 177,016 -- --
Issuance of common stock.................................. 16 -- --
Proceeds from borrowings.................................. 24,853 75,000 --
Repayment of capital lease obligations.................... (899) -- --
Limited Partner capital contribution...................... 34,000 19,587 141,000
General Partner capital contribution...................... -- 10,000 --
Net increase in payable to General Instrument............. -- -- 77,676
--------- -------- ---------
Net cash provided by financing activities.......... 234,986 104,587 218,676
--------- -------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 99,769 28,606 377
Cash and Cash Equivalents, Beginning of Period.............. 28,983 377 --
--------- -------- ---------
Cash and Cash Equivalents, End of Period.................... $ 128,752 $ 28,983 $ 377
========= ======== =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired from contribution of Telenetworks..... $ -- $ -- $ 14,224
Equipment acquired under capital leases................... 899 930 --
Conversion of note payable to General Instrument into
common stock............................................ 86,753 41,077 82,807
Conversion of stockholders' net deficit into partnership
deficit................................................. -- (3,702) --
Conversion of general partner interest into common
stock................................................... 1,010 -- --
Conversion of limited partner interest into common
stock................................................... 18,221 -- --
Common stock dividend (see Note 1)........................ -- -- --
</TABLE>
See notes to financial statements.
F-6
<PAGE> 67
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND RECAPITALIZATION
Next Level Communications, Inc. (the "Company") is a provider of broadband
communications equipment that enables telephone companies and other
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 Investors, LLC (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
the $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 $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 contained in 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
financial statements represent those of the Company from November 10, 1999,
those of the Partnership from January 1, 1998 to November 9, 1999, and those of
NLC for 1997. In January 2000, General Instrument was acquired by Motorola, Inc.
F-7
<PAGE> 68
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. 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 revenues and
expenses during the year. Actual results could differ from those estimates.
Revenue Recognition -- The Company recognizes revenues 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 revenues
recognized are recorded as deferred revenues. As of December 31, 1999 and 1998,
deferred revenues 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 97-02, license revenues are 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 Company'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 Company provides for the estimated costs to fulfill
customer warranty obligations upon the recognition of the related equipment
revenues. Actual warranty costs incurred are charged against the accrual when
paid.
Cash Equivalents -- The Company considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
Marketable Securities -- The Company classifies its investments as
"available-for-sale" securities based on their intended use. Gains and losses on
sales of investments are determined on a specific identification basis. At
December 31, 1999, marketable securities consisted of corporate bonds and
government agency securities. The difference between carrying value and fair
value representing unrealized holding gains and losses are recorded as a
component of stockholders' equity as accumulated other comprehensive income
(loss). As of December 31, 1999, there were no significant differences between
the fair market value and the underlying cost of these investments.
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. Management believes
that the carrying value and remaining lives of these assets are appropriate.
Long-Lived Assets -- Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles may not be recoverable, the
Company evaluates the carrying values of such assets using future undiscounted
cash flows. If the sum of the expected undiscounted future cash flows is less
F-8
<PAGE> 69
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
than the carrying amount of the asset, the Company 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 accounted for under the asset and
liability method. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes.
Pro Forma Basic and Diluted Net Loss Per Share -- Pro forma basic net loss
per share excludes dilution and is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Pro forma diluted
net loss per common share was the same as pro forma basic net loss per common
share for all periods presented since the effect of any potentially dilutive
securities is excluded as they are anti-dilutive because of the Company's
losses.
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 (Loss) -- 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 Company operates in only one reportable segment and one geographic area and,
therefore, additional information is not required to be presented. For the year
ended December 31, 1999, revenues attributable to the Company's two largest
customers were 67% and 9%, 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 Company's revenues from equipment sales in 1999, 1998
and 1997. At December 31, 1999 and 1998, 76% and 84%, respectively, of the
Company'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 Company's
operating results. Additionally, the Company 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
Company could adversely impact future results.
F-9
<PAGE> 70
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Company 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
1998.......................................... 170 320 -- 490
1999.......................................... 490 896 (49) 1,337
</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 Company is currently evaluating what impact,
if any, SFAS No. 133 may have on its financial statements.
3. ACQUISITION OF TELENETWORKS
In September 1997, General Instrument acquired all of the outstanding
capital stock of Telenetworks, a specialized data protocol communications
software company. The purchase price was approximately $7.0 million in cash. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair values as of the date of acquisition. The $6.9 million excess of
the purchase price over the net identifiable assets acquired was allocated to
goodwill. In January 1998, in conjunction with the formation of the Partnership,
the Limited Partner contributed the assets and liabilities of Telenetworks to
the Partnership at its cost. For financial statement purposes, Telenetworks'
assets, liabilities and results of operations have been included in the
accompanying financial statements since September 1, 1997.
In conjunction with the acquisition in September 1997, General Instrument
granted approximately 358,000 shares of restricted common stock of General
Instrument valued at $7.0 million in total to certain Telenetworks employees.
The restricted shares were valued at the quoted market price of $19.56 per share
of General Instrument's common stock at the date of grant. The restrictions on
the common stock of General Instrument lapsed over a 270-day period which ended
on May 31, 1998. Since this common stock was payable based solely on the
continued employment of the individuals, prepaid compensation of $7.0 million
was recorded and amortized to compensation expense over the life of the
restrictions. Compensation expense of $3.9 million and $3.1 million was recorded
in 1998 and 1997.
In June 1998, the Partnership issued approximately $2.9 million in loans to
former Telenetworks employees due to certain tax liabilities associated with the
restricted stock, $2.5 million of which was outstanding at December 31, 1998 and
recorded in other receivables. The loans were collateralized by the common stock
of General Instrument. These loans matured and were repaid in full in 1999.
F-10
<PAGE> 71
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. INVENTORIES
Inventories at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................ $ 8,175 $ 7,203
Work-in-process.......................................... 1,542 1,157
Finished goods........................................... 12,836 12,310
------- -------
Total.................................................. $22,553 $20,670
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land................................................... $ 1,889 $ --
Building............................................... 22,906 --
Machinery and equipment................................ 35,938 28,315
Leasehold improvements................................. 5,930 4,457
-------- --------
Total................................................ 66,663 32,772
Less accumulated depreciation and amortization......... (18,400) (11,214)
-------- --------
Property and equipment -- net.......................... $ 48,263 $ 21,558
======== ========
</TABLE>
Machinery and equipment includes assets acquired under capital leases of
$1,801,000 and $930,000 and related accumulated depreciation and amortization of
$858,000 and $208,000 at December 31, 1999 and 1998, respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accrued payroll and related expenses..................... $ 4,764 $ 4,767
Warranty reserve......................................... 2,841 2,095
Other accrued expenses................................... 3,770 3,835
------- -------
Total.................................................. $11,375 $10,697
======= =======
</TABLE>
7. 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% (8.5% at December 31,
1999). The Line's maturity was October 1, 2001. On February 11, 2000, the
Company paid all outstanding principal and interest. The Line was secured by
$30,151,000 of marketable securities held by a custodian.
F-11
<PAGE> 72
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 provided for the
deferral of scheduled interest payments under certain circumstances.
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. In conjunction with the Recapitalization (see Note
1) in November 1999, the outstanding principal and interest were converted into
4,337,633 shares of the Company's common stock. 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 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 $1.0 million in 1997. 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 for the year ended December 31, 1997. Since January
1, 1998, all costs to operate on a stand-alone basis were incurred by the
Partnership or the Company and have been reflected in the accompanying financial
statements. Accordingly, no costs were allocated to the Partnership or the
Company during such periods.
In connection with the tandem stock option grant described in Note 9, the
Company remits to taxing authorities taxes withheld by General Instrument ("GI")
for stock options exercised by NLC employees. The amounts due from GI for
withholding taxes at December 31, 1999 and 1998 were $950,000 and $3,350,000,
respectively.
9. STOCK OPTION PLANS AND NONCASH COMPENSATION CHARGES
NLC STOCK OPTION PLANS
Certain employees of the Partnership were 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 were
exercisable only in the event of an IPO or a change in control of NLC (the
"Event"). 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 were
exercisable only upon an 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.
F-12
<PAGE> 73
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NONCASH COMPENSATION CHARGES
In November 1999, in conjunction with the Recapitalization (see Note 1),
the outstanding options granted under the NLC stock option plan were converted
into options to purchase 6,964,904 shares of the Company's common stock with
equivalent terms and exercise prices. As a result of the Offering, compensation
expense of $96,864,000 was recognized in the fourth quarter of 1999 related to
the contingently exercisable stock options. The compensation expense was
determined based on the difference between the exercise price of the vested
portion of such options and the initial offering price for the Company's common
stock. At December 31, 1999, it was determined the NLC options granted as a
tandem stock grant were more likely to be exercised than the related GI Options.
As a result, the Company recorded $31,420,000 in compensation expense related to
the tandem stock grant. The compensation expense was calculated based on the
difference between the exercise price of the vested portion of the NLC options
and the initial offering price of the Company's common stock. 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 will recognize such compensation expense of $2,384,000 in the quarter
ended March 31, 2000, as a result of the Motorola acquisition of General
Instrument.
1999 Stock Plan
The Company adopted its 1999 Stock Plan effective October 1, 1999. Options
to purchase 5,299,594 shares of common stock were granted under the 1999 Stock
Plan and were outstanding at December 31, 1999. These options have an exercise
price equal to $11.00 per share, will vest 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 and expire in ten years. No future awards
under the 1999 Stock Plan will be made.
1999 Equity Incentive Plan
On October 10, 1999, the Company adopted the 1999 Equity Incentive Plan
under which 4,000,000 shares of our common stock were reserved for issuance. The
Company has granted 2,696,500 shares as of December 31, 1999. The exercise price
is equal to the fair market value of common stock on the option grant date with
25% vesting after 12 months of service and the remaining 75% vesting in equal
monthly installments over the next 36 months of service. Options expire not
later than ten years after the date of grant.
F-13
<PAGE> 74
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table summarizes activity relating to the NLC Stock Plan
(including those granted as part of the tandem stock option grant) and the 1999
Stock Plan and 1999 Equity Incentive Plan (the "Plans"):
<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 (none exercisable)............. 6,914 0.98
Granted..................................................... 179 5.74
Canceled.................................................... (4) 1.11
------
Balance at December 13, 1998 (none exercisable)............. 7,089 1.10
Granted (weighted average fair value of $14.98)............. 8,109 29.29
Canceled.................................................... (281) 1.28
Exercised................................................... (10) 1.61
------
Balance at December 31, 1999 (6,799 exercisable shares)..... 14,907 $16.43
======
</TABLE>
The following table summarizes information about options granted under the
Plans and outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ -------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING LIFE EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 (IN YEARS) PRICE 1999 PRICE
--------------- -------------- -------------- -------- -------------- --------
(IN (IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.84 - $ 1.53 6,640 7.2 $ 0.98 6,631 $0.98
$ 6.18 - $ 9.66 274 8.9 7.61 168 7.29
$11.00 5,296 9.7 11.00 -- --
$63.50 - $66.25 2,697 10.0 66.00 -- --
------ -----
$ 0.84 - $66.25 14,907 8.8 $16.43 6,799 $1.13
====== =====
</TABLE>
1999 Employee Stock Purchase Plan
On October 10, 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (the "Purchase Plan") under which 1,000,000 shares of common stock were
reserved for issuance. All 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 of which lasts 24 months. Overlapping
offering periods start on May 1 and November 1 of each year. However, the first
offering period was started on the effective date of the Offering and will end
on October 31, 2001. In 1999, no shares of common stock were issued under the
Purchase Plan.
Additional Stock Plan Information
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with APB No. 25.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and net loss per share had the Company adopted
the fair value method. Under SFAS No. 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models which were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting
F-14
<PAGE> 75
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
restrictions. Such options differ significantly from the Company' stock-based
awards. These models require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations for options granted after the
Offering were made using the Black-Scholes option pricing model.
The estimated fair value of an option grant is based, in part, on the
estimated term of the option. Prior to the Offering, NLC options granted under
the NLC Stock Plan were not exercisable. 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. As a result, disclosure of the
estimated grant date fair value of such NLC options and the related pro forma
compensation expense for 1997 and 1998 is not possible.
The assumptions and pro forma net loss disclosed below for 1997 relate to
the GI Options granted during 1997 which was calculated using the following
assumptions: weighted average fair value of $5.70, expected life, 4 years; risk
free interest rate, 6.4%; volatility, 35%; and no dividends during expected
term.
The following assumptions were used in the estimated fair value
calculations of 1999 stock option grants:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Expected stock price volatility............................. 70.0%
Risk fee interest rate...................................... 5.9%
Expected term (years)....................................... 4.8
</TABLE>
Under SFAS No. 123, had the Company recorded compensation expense based on
the estimated grant date fair value for awards based on grants under the Plans
and the tandem stock grant, net loss and net loss per share would have changed.
The amounts below represent the pro forma amounts for 1999, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net loss, as reported............................. $(205,072) $(81,731) $(66,429)
Pro forma net loss, as adjusted................... $(213,108) $(84,494) $(69,190)
Pro forma diluted loss per share.................. $ (2.78) $ (1.08) $ (0.95)
Pro forma diluted loss per share, as adjusted..... $ (2.98) $ (1.21) $ (0.99)
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Prior to the Offering, employees who met certain eligibility requirements
were able to participate in the General Instrument 401(k) Plan. Employees could
contribute up to 10% of their annual compensation, subject to the legal maximum.
The Company contributed an amount equal to 50% of the first 6% of the employee's
salary that the employee contributed. The Company's expense related to the
General Instrument 401(k) Plan was $589,000, $513,000 and $409,000 in 1999, 1998
and 1997, respectively. In January 2000, the Company adopted the NLC Plan to
which employees could contribute up to 12% of salary subject to the legal
maximum. The Company contributes an amount equal to 100% of the first 5% of the
employees' contribution.
Additionally, prior to the Offering, employees were eligible to participate
in the General Instrument Pension Plan. The Company expensed $232,000, $419,000
and $229,000 related to these plans for the years ended December 31, 1999, 1998
and 1997, respectively. Subsequent to the completion of the Offering,
participants in the General Instrument Pension Plan who have an accrued benefit
of less than $5,000 will be removed from the Plan and will have their accrued
benefits distributed to them. Participants with accrued benefits exceeding
$5,000 are not eligible for distribution from the Plan as their accrued benefits
are payable as an annuity at retirement.
F-15
<PAGE> 76
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. Leases expire at
various dates from 2000 to 2001 and all contain purchase options.
Future minimum lease payments at December 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
2000...................................................... $ 684
2001...................................................... 366
------
Total.................................................. 1,050
Less amounts representing interest.......................... (104)
------
Present value of net minimum lease payments................. $ 946
======
</TABLE>
12. INCOME TAXES
No income tax benefit has been recorded through December 31, 1999 because
of the net operating losses incurred and full valuation allowance provided. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company established
a 100% valuation allowance at December 31, 1999 due to the uncertainty of
realizing future tax benefits from its net operating loss carryforwards and
other deferred tax assets.
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $10,900,000 for federal and $5,500,000 for state tax purposes.
In addition, as of December 31, 1999, the Company has research and development
credit carryforwards of approximately $319,000 for federal and $246,000 for
state tax purposes. It is uncertain whether the Company will be able to utilize
the net operating losses incurred during the period November 9, 1999 through
December 31, 1999, due to the acquisition of General Instrument by Motorola.
For the period January 1, 1998 through November 9, 1999, the Company was a
limited partnership entity. For federal and state tax purposes, limited
partnership entities pass all items of income and expense through to the
respective partners of the entity. Consequently, all items of income and expense
attributable to the period in which the Company was a limited partnership were
allocated directly to the respective partners.
13. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 2000 to 2006 and certain facilities
leases have renewal options.
During 1998 the Company entered into an operating lease for one of its
buildings which expires in 2004. General Instrument had provided a residual
value guarantee to the lessor of approximately 82% of the total building cost at
inception. On December 30, 1999, the Company exercised its purchase option, and
paid $24.9 million to acquire the land and building. Rent expense recorded under
the lease was $1.4 million in 1999 and $0.8 million in 1998.
F-16
<PAGE> 77
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Future minimum lease payments at December 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
2000...................................................... $1,593
2001...................................................... 961
2002...................................................... 779
2003...................................................... 594
2004...................................................... 578
Thereafter................................................ 1,156
------
Total.................................................. $5,661
======
</TABLE>
Rent expense was $4.3 million in 1999, $3.8 million in 1998, and $1.1
million in 1997.
The Company has a commitment with a supplier to purchase approximately $1.5
million of components in each of the 12 months following the release of certain
products for sale and approximately $4.3 million in the subsequent 12 months. In
addition, the Company 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 Company has a
commitment to two other suppliers to purchase approximately $9.0 million and
$14.4 million of components prior to December 2000 and 2001, respectively. The
Company has commitments to purchase components of approximately $3.8 million
with three suppliers as of December 31, 1999.
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, Inc. paid BroadBand Technologies $5.0 million, which was
expensed in 1998, and BroadBand Technologies and Next Level Communications, Inc.
have entered into a perpetual cross-license of patents applied for or issued
currently 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, Inc., 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 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
F-17
<PAGE> 78
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 Action defendants' motion
for summary judgement and issued its final judgement permanently enjoining DSC
from prosecuting and continuing the Delaware Action.
14. PRO FORMA NET LOSS PER SHARE
Pro forma basic and diluted net loss per share, 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, 1997. Pro
forma basic and diluted net loss per share give effect to the contribution of
the note and accrued interest thereon payable to General Instrument and the
related elimination of interest expense of $5.8 million and $5.9 million in 1999
and 1998, respectively.
The following is a reconciliation of the components of the basic and
diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net loss.......................................... $(205,072) $(81,731) $(66,429)
Less: Interest expense for converted GI note
payable......................................... 5,813 5,940 --
--------- -------- --------
Pro forma net loss, basic and diluted............. $(199,259) $(75,791) $(66,429)
========= ======== ========
Pro forma weighted average shares outstanding..... 71,598 69,967 69,967
========= ======== ========
Pro forma net loss per share, basic and diluted... $ (2.78) $ (1.08) $ (0.95)
========= ======== ========
</TABLE>
For the above-mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but 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):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Warrants granted to general partner........................ 8,480 8,480 8,480
Outstanding employee stock options......................... 14,907 -- --
------ ----- -----
Total.................................................... 23,387 8,480 8,480
====== ===== =====
</TABLE>
F-18
<PAGE> 79
NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
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 revenues......................................... 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)
Total stockholders' equity............................. 189,247 206,228
-------- --------
Total.................................................. $228,472 $267,811
======== ========
</TABLE>
See notes to condensed financial statements.
F-19
<PAGE> 80
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)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
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
-------- --------
Operating Loss.............................................. (20,262) (17,672)
Other Income (Expense), Net................................. (5) 108
Interest Income/(Expense)................................... 1,837 (1,693)
-------- --------
Net Loss.................................................... $(18,430) $(19,257)
======== ========
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 condensed financial statements.
F-20
<PAGE> 81
NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
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 revenues............ (3,012) 11,474
-------- --------
Net cash used in operating activities............. (24,198) (19,241)
-------- --------
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 costs...................................... (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) 3,630
Cash and Cash Equivalents, Beginning of period.............. 128,752 28,983
-------- --------
Cash and Cash Equivalents, End of Period.................... $106,283 $ 32,613
======== ========
</TABLE>
See notes to condensed financial statements.
F-21
<PAGE> 82
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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 provider of broadband
communications equipment that enables telephone companies and other
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 Investors, LLC (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
F-22
<PAGE> 83
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
received by the Company, should these warrants be exercised. Accordingly,
General Instrument received the $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 contained in 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, 2000, the Company issued a $25,000,000
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):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
-------- ---------
PRO FORMA
<S> <C> <C>
Net loss............................................... $(18,430) $(19,257)
Less: Interest expense for converted GI note payable... -- 1,600
-------- --------
Net loss............................................... $(18,430) $(17,657)
======== ========
Weighted average shares outstanding.................... 79,766 69,967
======== ========
Basic and diluted net loss per share................... $ (.23) $ (.25)
======== ========
</TABLE>
F-23
<PAGE> 84
NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
General Partner's warrants............................. 8,480 8,480
Outstanding employee options........................... 15,262 8,006
------ ------
Total................................................ 23,742 16,486
====== ======
</TABLE>
5. NONCASH 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 loss:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss............................................... $(18,430) $(19,257)
Unrealized loss on marketable securities............... (88) --
-------- --------
Total comprehensive loss............................. $(18,518) $(19,257)
======== ========
</TABLE>
F-24
<PAGE> 85
[NEXT LEVEL COMMUNICATIONS, INC. LOGO]
<PAGE> 86
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 Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 29,957
NASD fee.................................................... 11,848
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 100,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 10,000
Miscellaneous fees and expenses............................. 18,195
--------
Total............................................. $525,000
========
</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 Registrant 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 Registrant 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 7 of the Underwriting Agreement a
form of which is attached as Exhibit 1.1 hereto, indemnifying officers and
directors of the Registrant against certain liabilities.
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.
In January 1998, Next Level Communications, a subsidiary of General
Instrument, acquired an 89% limited partnership interest in Next Level
Communications L.P. (the "Partnership") in exchange for the net assets,
management and workforce of Next Level Communications.
II-1
<PAGE> 87
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.
In January 1998, Spencer Trask Investors, LLC acquired an 11% general
partnership interest in the Partnership in exchange for a $10.0 million cash
contribution.
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.
In November 1999, General Instrument contributed its $75 million note and
accrued interest thereon to us, and General Instrument received 64,103,724
shares of common stock and related persons of Spencer Trask received 5,863,329
shares of common stock and warrants to purchase 8,480,102 shares of our common
stock at an exercise price of $10.38 per share.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities 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
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Form of Merger Agreement among General Instrument
Corporation, Spencer Trask Investors LLC, Next Level
Communications, Next Level Communications L.P. and the
Registrant (incorporated by reference to Exhibit 2.1 to our
registration statement on Form S-1 (file no. 333-85999)).
3.1* Form of Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to our registration statement on
Form S-1 (file no. 333-85999)).
3.2* Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to our registration statement on Form S-1 (file
no. 333-85999)).
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 the
Registrant (incorporated by reference to Exhibit 4.2 to our
registration statement on Form S-1 (file no. 333-85999)).
4.3* Specimen Common Stock certificate (incorporated by reference
to Exhibit 4.3 to our registration statement on Form S-1
(file no. 333-85999)).
5.1 Opinion of Latham & Watkins.
9.1* Form of Voting Trust Agreement among General Instrument
Corporation, Registrant and Chase Mellon Shareholder
Services LLC (incorporated by reference to Exhibit 9.1 to
our registration statement on Form S-1 (file no.
333-85999)).
10.1* Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.1 to our registration statement on Form S-1
(file no. 333-85999)).
10.2* Form of Corporate and Intercompany Agreement between General
Instrument Corporation and the Registrant (incorporated by
reference to Exhibit 10.2 to our registration statement on
Form S-1 (file no. 333-85999)).
10.3* 1999 Equity Incentive Plan (incorporated by reference to
Exhibit 10.3 to our registration statement on Form S-1 (file
no. 333-85999)).
</TABLE>
II-2
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4* 1999 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.4 to our registration statement on Form S-1
(file no. 333-85999)).
10.5* Patent and Technical Information Cross License Agreement
(incorporated by reference to Exhibit 10.5 to our
registration statement on Form S-1 (file no. 333-85999)).
10.8** Agreement between U S WEST Communications, Inc. and the
Registrant (incorporated by reference to Exhibit 10.8 to our
registration statement on Form S-1 (file no. 333-85999)).
10.9** Agreement by and among Telesector Resources Group, Inc.,
General Instrument Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 to our
registration statement on Form S-1 (file no. 333-85999)).
10.10** Agreement between the Registrant and SCI Technology, Inc.
(incorporated by reference to Exhibit 10.10 to our
registration statement on Form S-1 (file no. 333-85999)).
10.11** Agreement between the Registrant and CMC Mississippi, Inc.
(incorporated by reference to Exhibit 10.11 to our
registration statement on Form S-1 (file no. 333-85999)).
10.12* 1999 Stock Plan (incorporated by reference to Exhibit 10.12
to our registration statement on Form S-1 (file no.
333-85999)).
10.13* Form of Warrant (incorporated by reference to Exhibit 10.13
to our registration statement on Form S-1 (file no.
333-85999)).
10.14*** Business Loan Agreement between Bank of America, N.A. and
the Registrant dated as of December 27, 1999.
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).
</TABLE>
-------------------------
* Incorporated by reference.
** Confidential treatment has been granted as to certain portions of these
exhibits, which are incorporated by reference.
*** To be filed by amendment.
(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
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, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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 undersigned 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
II-3
<PAGE> 89
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> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Rohnert
Park, State of California, on June 5, 2000.
NEXT LEVEL COMMUNICATIONS, INC.
By /s/ JAMES T. WANDREY
------------------------------------
James T. Wandrey
Senior Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint James T. Wandrey, with full
power of substitution and full power to act without the other, his true and
lawful attorney-in-fact and agent to act for him 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 other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in order to
effectuate the same as fully, to all intents and purposes, as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY EACH OF THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C> <C>
/s/ PETER W. KEELER Chief Executive Officer, (Principal June 5, 2000
--------------------------------------------------- Executive Officer) Chairman of the
Peter W. Keeler Board and President
/s/ JAMES T. WANDREY Senior Vice President and Chief June 5, 2000
--------------------------------------------------- Financial Officer (Principal
James T. Wandrey Financial and Accounting Officer)
/s/ LYNN FORESTER Director June 5, 2000
---------------------------------------------------
Lynn Forester
/s/ PAUL S. LATCHFORD Director June 5, 2000
---------------------------------------------------
Paul S. Latchford
/s/ FERDINAND C. KUZNIK Director June 5, 2000
---------------------------------------------------
Ferdinand C. Kuznik
/s/ JOHN MCCARTNEY Director June 5, 2000
---------------------------------------------------
John McCartney
</TABLE>
II-5
<PAGE> 91
<TABLE>
<S> <C> <C>
/s/ SCOTT POTERACKI Director June 5, 2000
---------------------------------------------------
Scott Poteracki
/s/ DENNIS RHEAULT Director June 5, 2000
---------------------------------------------------
Dennis Rheault
/s/ RICHARD SEVERNS Director June 5, 2000
---------------------------------------------------
Richard Severns
</TABLE>
II-6
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
2.1* -- Form of Merger Agreement among General Instrument
Corporation, Spencer Trask Investors LLC, Next Level
Communications, Next Level Communications L.P. and the
Registrant (incorporated by reference to Exhibit 2.1 to our
registration statement on Form S-1 (file no. 333-85999)).
3.1* -- Form of Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to our registration statement on
Form S-1 (file no. 333-85999)).
3.2* -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to our registration statement on Form S-1 (file
no. 333-85999)).
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 the
Registrant (incorporated by reference to Exhibit 4.2 to our
registration statement on Form S-1 (file no. 333-85999)).
4.3* -- Specimen Common Stock certificate (incorporated by reference
to Exhibit 4.3 to our registration statement on Form S-1
(file no. 333-85999)).
5.1 -- Opinion of Latham & Watkins.
9.1* -- Form of Voting Trust Agreement among General Instrument
Corporation, the Registrant and Chase Mellon Shareholder
Services LLC (incorporated by reference to Exhibit 9.1 to
our registration statement on Form S-1 (file no.
333-85999)).
10.1* -- Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.1 to our registration statement on Form S-1
(file no. 333-85999)).
10.2* -- Form of Corporate and Intercompany Agreement between General
Instrument Corporation and the Registrant (incorporated by
reference to Exhibit 10.2 to our registration statement on
Form S-1 (file no. 333-85999)).
10.3* -- 1999 Equity Incentive Plan (incorporated by reference to
Exhibit 10.3 to our registration statement on Form S-1 (file
no. 333-85999)).
10.4* -- 1999 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.4 to our registration statement on Form S-1
(file no. 333-85999)).
10.5* -- Patent and Technical Information Cross License Agreement
(incorporated by reference to Exhibit 10.5 to our
registration statement on Form S-1 (file no. 333-85999)).
10.8** -- Agreement between US WEST Communications, Inc. and the
Registrant (incorporated by reference to Exhibit 10.8 to our
registration statement on Form S-1 (file no. 333-85999)).
10.9** -- Agreement by and among Telesector Resources Group, Inc.,
General Instrument Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 to our
registration statement on Form S-1 (file no. 333-85999)).
10.10** -- Agreement between the Registrant and SCI Technology, Inc.
(incorporated by reference to Exhibit 10.10 to our
registration statement on Form S-1 (file no. 333-85999)).
10.11** -- Agreement between the Registrant and CMC Mississippi, Inc.
(incorporated by reference to Exhibit 10.11 to our
registration statement on Form S-1 (file no. 333-85999)).
10.12* -- 1999 Stock Plan (incorporated by reference to Exhibit 10.12
to our registration statement on Form S-1 (file no.
333-85999)).
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.13* -- Form of Warrant (incorporated by reference to Exhibit 10.13
to our registration statement on Form S-1 (file no.
333-85999)).
10.14*** -- Business Loan Agreement between Bank of America, N.A. and
the Registrant dated as of December 27, 1999.
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).
</TABLE>
-------------------------
* Incorporated by reference.
** Confidential treatment has been granted as to certain portions of these
exhibits, which are incorporated by reference.
*** To be filed by amendment.
