As filed with the Securities and Exchange Commission
on September 6, 1995
Registration No. 33-___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________
GENERAL INSTRUMENT CORPORATION
(Exact name of registrant as specified in its charter)
_________________
Delaware 3621 13-3575653
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification No.)
organization) Code Number)
181 West Madison Street
Chicago, IL 60602
(312) 541-5000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Thomas A. Dumit, Esq.
General Counsel
General Instrument Corporation
181 West Madison Street
Chicago, IL 60602
(312) 541-5000
(Name, address, including zip code, and telephone number,
including
area code, of agent for service)
_________________
Copies to:
Stephen Fraidin, P.C. Kenneth L. Guernsey, Esq.
Fried, Frank, Harris, Cooley Godward Castro
Shriver & Jacobson Huddleson & Tatum
One New York Plaza One Maritime Plaza, 20th Floor
New York, New York 10004 San Francisco, CA 94111
(212) 859-8000 (415) 693-2000
_______________
Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable after the effective date of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
_________________
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Maximum Amount of
Class of Securities Aggregate Registration
to be Registered Offering Price(1) Fee(1)
Common Stock, $.01 par value $7,646,762 $2,636.81
(1) Estimated solely for purposes of calculating the
registration fee in accordance with Rule 457(f)(2) under the
Securities Act of 1933, as amended. The book value of the
securities to be received by the Registrant as of June 30,
1995 was $7,646,762. One twenty-ninth of 1% of $7,646,762
is $2,636.81.
______________
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 which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
GENERAL INSTRUMENT CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NUMBER AND LOCATION IN
CAPTION OF FORM S-4 PROSPECTUS
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus................... Inside Front Cover Page
3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information........ Summary; Risk Factors;
Market Price Data and
Dividends; Selected
Consolidated Financial
Data of GI; Selected
Financial Data of Next
Level; The Merger and
Related Transactions;
Terms of the Merger;
Index to Financial
Statements; Annexes D,
E, F & G
4. Terms of the Transaction..... Summary; The Merger and
Related Transactions;
Terms of the Merger;
Description of GI
Capital Stock;
Comparison of Rights of
Holders of GI Common
Stock and Holders of
Next Level Stock;
Annexes A, B and C
5. Pro Forma Financial
Information.................. *
6. Material Contacts with the
Company Being Acquired....... The Merger and Related
Transactions
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to Be Underwriters........... *
8. Interests of Named Experts
and Counsel.................. Experts; Legal Matters
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to
S-3 Registrants............. *
11. Incorporation of Certain
Information by Reference.... *
12. Information with Respect
to S-2 or S-3 Registrants... *
13. Incorporation of Certain
Information by Reference.... *
14. Information with Respect
to Registrants Other
Than S-3 or S-2
Registrants................. Summary; Market Price
Data and Dividends;
Selected Consolidated
Financial Data of GI;
Information Concerning
GI; Annexes D, E, F & G
<PAGE>
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect
to S-3 Companies............ *
16. Information with Respect
to S-2 or S-3 Companies..... *
17. Information with Respect to
Companies Other Than
S-3 or S-2 Companies...... Summary; Selected
Financial Data of Next
Level; Information
Concerning Next Level;
Index to Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies,
Consents or Authorizations
are to be Solicited......... Outside Front Cover
Page; Summary; Consent
of Shareholders of Next
Level; The Merger and
Related Transactions;
Terms of the Merger;
Information Concerning
GI; Information
Concerning Next Level
19. Information if Proxies,
Consents or Authorizations
are not to be Solicited
or in an Exchange Offer..... *
* Not applicable
<PAGE>
NEXT LEVEL COMMUNICATIONS
6153 STATE FARM DRIVE
ROHNERT PARK, CA 94928
(707) 588-5820
Dear Next Level Communications Shareholder:
You are being asked to approve an Agreement and Plan of Merger (the
"Merger Agreement") providing for the merger (the "Merger") of NLC
Acquisition Corp., a wholly-owned subsidiary of General Instrument
Corporation, a Delaware corporation ("GI"), with and into Next Level
Communications, a California corporation ("Next Level"). As a result of
the Merger, all shares of Series A Preferred Stock and Common Stock of Next
Level (other than shares of Next Level Common Stock held by
the two founders of Next Level, Thomas R. Eames and Peter W. Keeler (the
"Founders"), and their transferees and shares held by holders who perfect
dissenters' rights pursuant to California law) will be converted into the
right to receive $7.00 per share, payable in shares of Common Stock of GI
("GI Common Stock"), which will be valued based on its market price during a
specified time period prior to the Merger, as provided in the Merger
Agreement. Shares of Next Level Common Stock held by the Founders and their
transferees will be converted into the right to receive $4.75 per share, also
payable in shares of GI Common Stock. Shares of GI Common Stock issued in
the Merger in exchange for shares of Next Level Common Stock that are subject
to vesting restrictions (other than shares held by the Founders and their
transferees) will be subject to similar restrictions after the Merger. As a
condition to consummation of the Merger, GI will grant to Next Level
employees certain options to purchase GI Common Stock.
NEXT LEVEL'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND HAS DETERMINED THAT THE
MERGER IS FAIR TO AND IN THE BEST INTERESTS OF NEXT LEVEL AND ITS
SHAREHOLDERS. NEXT LEVEL'S BOARD OF DIRECTORS RECOMMENDS THAT YOU CONSENT TO
THE MERGER FOLLOWING CAREFUL CONSIDERATION OF THE TERMS THEREOF.
In the materials accompanying this letter, you will find a Notice of
Solicitation of Written Consent of Shareholders, a Prospectus/Consent
Solicitation Statement relating to the actions to be taken by Next Level
shareholders and a form of Written Consent. The Prospectus/Consent
Solicitation Statement provides more detailed information with respect to the
Merger and includes information about GI and Next Level.
PLEASE COMPLETE, SIGN AND DATE YOUR WRITTEN CONSENT AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE.
Sincerely,
/s/ Peter W. Keeler
Peter W. Keeler
President and Chairman of the Board
September __, 1995
<PAGE>
NEXT LEVEL COMMUNICATIONS
6153 STATE FARM DRIVE
ROHNERT PARK, CA 94928
(707) 588-5820
NOTICE OF SOLICITATION OF WRITTEN CONSENT OF SHAREHOLDERS
To the Shareholders of Next Level Communications:
Notice Is Hereby Given that the written consent of shareholders of Next
Level Communications, a California corporation ("Next Level"), is being
solicited to approve and adopt an Agreement and Plan of Merger dated as of
August 30, 1995 (the "Merger Agreement") among Next Level, General Instrument
Corporation, a Delaware corporation ("GI"), and NLC Acquisition Corp., a
California corporation and a wholly-owned subsidiary of GI ("Newco"),
pursuant to which, among other things, Newco will be merged with and into
Next Level (the "Merger"), with Next Level surviving the Merger as a
wholly-owned subsidiary of GI. As a result of the
Merger, all shares of Series A Preferred Stock and Common Stock of Next Level
(other than shares of Next Level Common Stock held by the two founders of Next
Level, Thomas R. Eames and Peter W. Keeler (the "Founders"), and their
transferees and shares held by holders who perfect dissenters' rights under
California law)
will be converted into the right to receive $7.00 per share, payable in
shares of
Common Stock of GI ("GI Common Stock"), which will be valued based on its
market
price during a specified time period prior to the Merger, as provided in the
Merger Agreement. Shares of Next Level Common Stock held by the Founders and
their transferees will be converted into the right to receive $4.75 per share,
also payable in shares of GI Common Stock. Shares of GI Common Stock issued in
the Merger in exchange for shares of Next Level Common Stock that are subject
to vesting restrictions (other than shares held by the Founders and their
transferees) will be subject to similar restrictions after the Merger. As a
condition to consummation of the Merger, GI will grant to Next Level employees
certain options with respect to GI Common Stock.
The Merger is more fully described in the Prospectus/Consent Solicitation
Statement accompanying this Notice. Based on the market price per share of GI
Common Stock on September 1, 1995 ($36.25), and assuming that all outstanding
options and warrants to purchase shares of Next Level Common Stock and Series A
Preferred Stock are exercised in full prior to the Merger and that no
shareholders of Next Level exercise dissenters' rights, 2,056,481 shares of
GI Common Stock
would be issued in the Merger (excluding shares issuable to a subsidiary of
GI), which would represent approximately 1.7% of the outstanding shares of
GI Common Stock.
Only shareholders of record at the close of business on September __, 1995
(the "Record Date") are entitled to execute a written consent with respect to
approval of the Merger.
If the Merger is consummated, shareholders of Next Level as of the Record
Date who do not execute written consents in favor of the Merger and who
otherwise
comply with Section 1300 et seq. of the California Corporations Code will be
entitled to statutory dissenters' rights. See "Terms of the Merger --
Dissenters'
Rights" in the accompanying Prospectus/Consent Solicitation Statement for a
description of the procedures required to be followed to perfect dissenters'
rights and for a summary of Section 1300 et seq. of the California Corporations
Code.
<PAGE>
Your written consent is important, regardless of the number of shares you
own. In order to ensure that your written consent will be counted, please
complete, date and sign the enclosed form of written consent and return it
without
delay in the enclosed envelope.
Sincerely,
/s/ Peter W. Keeler
Peter W. Keeler
President and Chairman of the Board
September __, 1995
<PAGE>
GENERAL INSTRUMENT CORPORATION PROSPECTUS/
NEXT LEVEL COMMUNICATIONS
CONSENT SOLICITATION STATEMENT
General Instrument Corporation, a Delaware corporation ("GI"), has filed a
Registration Statement on Form S-4 with the Securities and Exchange Commission
(the "SEC") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), covering shares of its Common Stock, par value $.01 per share ("GI
Common Stock"), to be issued in connection with the proposed merger (the
"Merger") of NLC
Acquisition Corp., a California corporation and a wholly-owned subsidiary of GI
("Newco"), with and into Next Level Communications, a California corporation
("Next Level"), pursuant to the terms set forth in the Agreement and Plan of
Merger entered into by and among GI, Newco and Next Level dated as of
August 30, 1995 (the "Merger Agreement").
Pursuant to the Merger Agreement, upon the consummation of the Merger,
Next Level will become a wholly-owned subsidiary of GI, and each share of
Next Level
Stock (as defined below) other than shares of Founders Common Stock (as defined
below) will be converted into the right to receive that number of shares of GI
Common Stock determined by dividing $7.00 by a price (the "GI Average Price")
equal to the average closing price of GI Common Stock on the New York Stock
Exchange (the "NYSE") (as reported in the NYSE Composite Transactions reporting
system as published in The Wall Street Journal or, if not published therein, in
another authoritative source) for the 10 consecutive trading days ending with
the third trading day immediately preceding the day on which the Merger becomes
effective pursuant to the California Corporations Code (the "CCC"). As used
herein, "Next Level Stock" includes all shares of issued and outstanding Common
Stock, no par value, of Next Level ("Next Level Common Stock") and all shares
of issued and outstanding Series A Preferred Stock, no par value, of Next Level
("Series A Preferred Stock"), other than shares held by holders who perfect
dissenters' rights under the CCC (the "Dissenting Shares"). Pursuant to the
Merger Agreement, each share of Next Level Common Stock owned by Peter W.
Keeler or Thomas R. Eames (the "Founders") or by any other holder who
received such
shares directly or indirectly by transfer from either of the Founders (all of
such shares collectively, the "Founders Common Stock") will be converted
into the right
to receive that number of shares of GI Common Stock determined by dividing
$4.75 by the GI Average Price. See "Terms of the Merger -- Manner and Basis
of Converting Shares." Holders of shares of Next Level Common Stock that
are subject
to vesting restrictions (other than holders of Founders Common Stock) will be
asked to enter into Restricted Stock Agreements with Next Level as the
surviving
corporation of the Merger (the "Surviving Corporation") with respect to
shares of GI Common Stock issued in the Merger in exchange for such
restricted shares. See
"Terms of the Merger -- Restricted Stock Agreements." As a condition to the
consummation of the Merger, employees of Next Level (including the Founders)
will be granted certain options to purchase shares of GI Common Stock.
See "Terms of
the Merger -- Founders Option Agreements" and "-- Employee Option Agreements."
Based on the market price per share of GI Common Stock on
September 1, 1995
($36.25), and assuming that all outstanding options and warrants to purchase
shares of Next Level Common Stock and Series A Preferred Stock are exercised in
full prior to the Merger and that no shareholders of Next Level exercise
dissenters' rights, 2,056,481 shares of GI Common Stock would be issued in the
Merger (excluding shares issuable to a subsidiary of GI), which would represent
approximately 1.7% of the total outstanding shares of GI Common Stock.
This General Instrument Corporation Prospectus/Next Level Communications
Consent Solicitation Statement (the "Prospectus/Consent Solicitation
Statement") constitutes (a) the Prospectus for GI filed as part of the
Registration Statement,
and (b) the Consent Solicitation Statement of Next Level relating to the
solicitation of Consents (as defined herein) of the shareholders of Next
Level.
This Prospectus/Consent Solicitation Statement is first being mailed to
shareholders of Next Level on or about September __, 1995.
<PAGE>
SEE "RISK FACTORS" AT PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
RELATING TO
GI OR THE MERGER THAT SHOULD BE CONSIDERED BY NEXT LEVEL SHAREHOLDERS BEFORE
CONSENTING TO THE MERGER.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF GI OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Consent Solicitation Statement is
September __, 1995.
2
<PAGE>
AVAILABLE INFORMATION
GI has filed with the SEC a Registration Statement on Form S-4 (of which
this Prospectus/Consent Solicitation Statement is a part and which term
shall encompass
any amendments or supplements thereto) pursuant to the Securities Act, with
respect to the securities offered hereby (the "Registration Statement"). This
Prospectus/Consent Solicitation Statement does not contain all the
information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the SEC. Statements made in this Prospectus/Consent
Solicitation Statement as to the content of any contract, agreement or
other document referred to are not necessarily complete; with respect to
each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
For further information about GI and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits filed a
s a part thereto.
GI is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information may be
inspected and copied at the public
reference facility maintained by the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York,
New York 10048. Copies of such material may be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed
rates. GI Common Stock is quoted on the NYSE, and certain proxy statements,
reports and other information concerning GI can also be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY GI OR NEXT LEVEL. NEITHER THE DELIVERY HEREOF NOR ANY
DISTRIBUTION OF SECURITIES
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE
HEREOF. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT OR A SOLICITATION OF A CONSENT IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION.
The information set forth in this Prospectus/Consent Solicitation
Statement concerning GI and Newco has been furnished by GI and has not
been independently
investigated or verified by Next Level, and the information set forth in this
Prospectus/Consent Solicitation Statement concerning Next Level has been
furnished by Next Level and has not been independently investigated or
verified by GI or Newco.
3
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..........................................3
SUMMARY........................................................6
Parties to the Merger.....................................6
Solicitation of Written Consent of Shareholders of
Next Level...........................................7
The Merger................................................7
Restricted Stock Agreements...............................8
Grant of Options to Next Level Employees..................9
Recommendation of Next Level's Board of Directors.........9
Financial Advisors........................................9
Certain Federal Income Tax Considerations.................9
Dissenters' Rights........................................10
Comparison of Shareholders' Rights........................10
RISK FACTORS...................................................11
Dependence on the Cable Television Industry
and Cable Television Capital Spending................11
Certain Restrictions Under the Credit Agreement
of GI Delaware.......................................11
Signal Piracy.............................................12
Competition...............................................12
New Technologies..........................................12
International Operations; Foreign Currency Risks..........12
Shares Eligible for Sale..................................12
Environment...............................................13
Income Tax Risks..........................................13
MARKET PRICE DATA AND DIVIDENDS................................14
SELECTED CONSOLIDATED FINANCIAL DATA OF GI.....................15
SELECTED FINANCIAL DATA OF NEXT LEVEL..........................16
CONSENT OF SHAREHOLDERS OF NEXT LEVEL..........................17
General...................................................17
Record Date and Outstanding Shares........................17
Consent Required..........................................17
Procedure.................................................17
Revocation of Consents....................................17
Expenses..................................................18
THE MERGER AND RELATED TRANSACTIONS............................19
Background of the Merger..................................19
GI Reasons for the Merger.................................20
Next Level Reasons for the Merger.........................20
TERMS OF THE MERGER............................................21
Effective Time of the Merger..............................21
Manner and Basis of Converting Shares.....................21
Outstanding Options and Warrants to Purchase
Next Level Stock.....................................22
Effect of the Merger......................................22
Conduct of Next Level's Business Prior to the
Effective Time.......................................23
Covenants of GI...........................................24
Conditions to the Merger..................................24
Termination or Amendment of Merger Agreement..............25
Indemnification...........................................26
Restricted Stock Agreements...............................26
Founders Option Agreements................................27
Employee Option Agreements................................28
Resales of GI Common Stock................................29
4
<PAGE>
Certain Federal Income Tax Considerations.................30
Regulatory Approvals......................................34
Accounting Treatment......................................34
Dissenters' Rights........................................34
INFORMATION CONCERNING GI......................................37
Business; Properties; Legal Proceedings...................37
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................37
Security Ownership of Certain Beneficial Owners
and Management.......................................37
Management; Executive Compensation; Certain Transactions..39
INFORMATION CONCERNING NEXT LEVEL..............................40
Business..................................................40
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........42
Security Ownership of Certain Beneficial Owners
and Management.......................................44
DESCRIPTION OF GI CAPITAL STOCK................................47
General...................................................47
Common Stock..............................................47
Preferred Stock...........................................47
Limitation of Liability and Indemnification Matters.......47
Delaware Law and Limitations on Changes in Control........47
Transfer Agent............................................48
COMPARISON OF RIGHTS OF HOLDERS OF GI COMMON STOCK AND
HOLDERS OF NEXT LEVEL STOCK...............................49
Capital Stock.............................................49
Cumulative Voting.........................................49
Derivative Actions........................................49
Terms of Directors........................................50
Removal of Directors......................................50
Bylaws....................................................50
Rights of Inspection......................................50
Dividend Declarations.....................................50
Special Meetings of Shareholders..........................51
Voting Requirements.......................................51
Business Combinations with Interested Shareholders........52
Transactions Involving Officers or Directors..............52
Monetary Liability of Directors...........................53
Indemnification...........................................53
Preferred Stock...........................................54
EXPERTS........................................................55
LEGAL MATTERS..................................................55
INDEX TO FINANCIAL STATEMENTS..................................F-1
Annex A Agreement and Plan of Merger
Annex B Form of Employee Restricted Stock Agreement
Annex C Form of Optionee Restricted Stock Agreement
Annex D General Instrument Corporation Annual Report on
Form 10-K for the fiscal year ended December 31, 1994
Annex E Excerpts from General Instrument Corporation 1994 Annual
Report to Stockholders
Annex F General Instrument Corporation Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995
Annex G Excerpts from General Instrument Corporation 1995 Proxy
Statement
Annex H Section 1300 et seq. of the California Corporations Code
5
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT. THIS SUMMARY
IS NOT INTENDED
TO INCLUDE ALL MATERIAL INFORMATION RELATING TO MATTERS DISCUSSED HEREIN AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT,
INCLUDING THE ANNEXES HERETO WHICH ARE INCORPORATED HEREIN BY REFERENCE.
SHAREHOLDERS OF NEXT LEVEL ARE
URGED TO CAREFULLY REVIEW THE ENTIRE PROSPECTUS/CONSENT SOLICITATION STATEMENT,
INCLUDING THE ANNEXES HERETO.
PARTIES TO THE MERGER
GENERAL INSTRUMENT CORPORATION. GI is a leading worldwide supplier of
broadband communications systems and equipment. Through its two Broadband
Communications segment divisions, GI Communications and CommScope (which
together
contributed approximately 84% of GI's consolidated sales in the year ended
December 31, 1994), GI is the world's largest manufacturer of addressable
systems and subscriber equipment and is a leading manufacturer of fiber optic
and RF (radio frequency) distribution electronics for the cable television
industry. The GI Communications Division is also the world's largest
manufacturer and supplier of access control, scrambling and descrambling
equipment used by television programmers for the satellite delivery of their
programming. In addition, GI is the largest supplier of coaxial cable for
the U.S. cable television industry. Through its Power Semiconductor Division,
GI is also a leading manufacturer of discrete power rectifying and transient
voltage suppression components used in telecommunications, automotive and
consumer electronics products.
GI was incorporated in Delaware on June 28, 1990 in connection with the
acquisition of a predecessor entity. The principal executive offices of GI are
located at 181 West Madison Street, Chicago, Illinois 60602, and the telephone
number at that address is (312) 541-5000.
NEXT LEVEL COMMUNICATIONS. Next Level was formed in June 1994 to design,
manufacture and market a next generation telecommunications broadband access
system for the delivery of telephony, video and data from a telephone company
central office or cable television headend to the home. Next Level's product,
NLevel3, is designed to permit the cost-effective delivery of a suite of
standard telephony and advanced services such as work-at-home,
distance-learning, video-on-demand and video-telephony to the home from a
single access platform. NLevel3 is
designed to work with and enhance existing telephony and cable television
networks. Next Level currently is engaged in design and development and has
not completed development of or manufactured any products to date.
Next Level was incorporated in California on June 22, 1994. Next Level's
executive offices are located at 6153 State Farm Drive, Rohnert Park,
California 94928. Its telephone number at that address is (707) 588-5820.
NEWCO. Newco, a California corporation, was recently organized by GI
solely for the purpose of effecting the Merger. It has no material assets
and has not engaged in any activities except in connection with the Merger
Agreement. Its executive offices are located at 181 West Madison Street,
Chicago, Illinois 60602, and the telephone number at that address is
(312) 541-5000.
As used in this Prospectus/Consent Solicitation Statement, unless the
context requires otherwise, "Next Level" means Next Level Communications,
its predecessors
and its subsidiaries and "GI" means General Instrument Corporation, its
predecessors and its subsidiaries.
6
<PAGE>
Solicitation of Written Consent of Shareholders of Next Level
PURPOSE. The purpose of the solicitation of written consent of the
shareholders of Next Level is to request approval of (i) the Merger Agreement,
pursuant to which Newco will be merged with and into Next Level, resulting
in Next Level becoming a wholly-owned subsidiary of GI, and (ii) the related
Agreement of Merger to be filed with the California Secretary of State in
order to effect the Merger (the "Agreement of Merger").
Record Date and Required Vote. Pursuant to the CCC, any action that
may be taken at an annual or special meeting of shareholders of a California
corporation may be taken without a meeting if written consent setting forth
the action to be taken is received from the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. If the consents of all shareholders
entitled to vote are solicited in writing, such action may be taken
immediately upon approval, without further notice.
Next Level is soliciting the written consent (the "Consent") of all
shareholders of Next Level as of September __, 1995 (the "Record Date"),
and, therefore, may consummate the Merger as soon as it has received Consents
from shareholders holding a sufficient number of shares of Next Level Stock
to approve the Merger.
The CCC and Next Level's Articles of Incorporation require the Merger to be
approved by the affirmative vote of the holders of a majority of (i) the
outstanding shares of Next Level Common Stock and Series A Preferred Stock,
considered together as a single class, and (ii) the outstanding shares of
Series A Preferred Stock, considered separately as a class. In addition,
because shares of Founders Common Stock will be treated differently in the
Merger from other shares of Next Level Common Stock (see "Terms of the
Merger -- Manner and Basis of Converting Shares"), Sections 1101 and 1101.1
of the CCC require that the Merger be approved unanimously by the holders of
Next Level Common Stock unless the California Commissioner of Corporations
approves the Merger following a fairness hearing (a "Fairness Hearing")
pursuant to Section 25142 of the CCC. The management of Next Level has
requested a Fairness Hearing to be held with respect to the Merger and
intends to complete such Fairness Hearing unless the Merger is unanimously
approved by the holders of shares of Next Level Common Stock. See "Consent
of Shareholders of Next Level -- Consent Required."
As of the Record Date, 6,727,000 shares of Next Level Common Stock and
6,032,000 shares of Series A Preferred Stock were outstanding. Directors and
executive officers of Next Level, together with their affiliates,
beneficially own 4,140,000 shares of Next Level Common Stock (61.5% of
the total outstanding shares of Next Level Common Stock) and 3,432,000 shares
of Series A Preferred Stock (56.9% of the total outstanding shares of Series
A Preferred Stock). Of these shares, 1,032,000 shares of Series A Preferred
Stock (17.1% of the total outstanding shares of Series A Preferred Stock) are
held by a subsidiary of GI.
Pursuant to the CCC, a Next Level shareholder who executes a Consent
approving the Merger may revoke the Consent by a writing received by Next Level
prior to the time that Consents representing the number of shares required to
authorize the Merger have been received by Next Level. See "Consent of
Shareholders of Next Level -- Revocation of Consents."
THE MERGER
CONVERSION OF SHARES. Pursuant to the Merger Agreement, upon
consummation of the Merger, Next Level will become a wholly-owned
subsidiary of GI, and each share of Next Level Stock, other than shares of
Founders Common Stock, will be converted into the right to receive that
number of shares of GI Common Stock determined by dividing $7.00 by the
GI Average Price, rounded to three decimal places. Shares of Founders Common
Stock will be converted into the right to receive that number of shares of
GI Common Stock (a portion of which will not be immediately freely
transferable, as hereinafter described) determined by dividing $4.75 by
the GI Average Price, rounded to three decimal places. See "Terms of the
Merger -- Manner and Basis of Converting Shares." Shares of GI Common Stock
issued in the Merger in exchange for shares of Next Level Common Stock (other
than Founders Common Stock) that
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<PAGE>
are subject to vesting restrictions will be subject to similar vesting
restrictions after the Merger. See "-- Restricted Stock Agreements" below and
"Terms of the Merger -- Restricted Stock Agreements."
No fractional shares of GI Common Stock will be issued in connection
with the Merger. Holders of Next Level Stock who would otherwise be
entitled to receive a fraction of a share of GI Common Stock will receive
from GI, upon compliance with
the procedures for surrendering certificates representing shares of Next Level
Stock hereinafter described, an amount of cash equal to the GI Average Price
multiplied by the fraction of a share of GI Common Stock to which such holder
would otherwise be entitled.
EXERCISE OF OPTIONS AND WARRANTS. Pursuant to the Merger Agreement,
shares of Next Level Stock issued upon the exercise of options and warrants
and outstanding as of the Effective Time will be converted into the right to
receive shares of GI Common Stock and/or cash in lieu of fractional shares
as described above. See "Terms of the Merger -- Outstanding Options and
Warrants to Purchase Next Level Stock."
CLOSING; EFFECTIVE TIME OF THE MERGER. The closing in respect of the
Merger (the "Closing") will occur as soon as possible (but in no event later
than the third business day) following the satisfaction or waiver of all
conditions set forth in the Merger Agreement unless another date
is mutually selected by GI and Next Level (the "Closing Date"). See
"Terms of the Merger -- Conditions to the
Merger." Simultaneously with the Closing, the Agreement of Merger,
together with all required officers' certificates, will be filed with the
office of the Secretary of State of the State of California. The Merger
will become effective immediately upon such filing (the "Effective Time").
Assuming all other conditions to the Merger are met or waived prior thereto,
it is anticipated that the Effective Time will occur immediately following
approval of the Merger by Next Level shareholders. See "Terms of the
Merger -- Effective Time of the Merger."
EXCHANGE OF NEXT LEVEL STOCK CERTIFICATES. After the Effective Time, upon
surrender to Chemical Bank (the "Exchange Agent") of certificates representing
shares of Next Level Stock, holders thereof will be entitled to receive
certificates representing the whole shares of GI Common Stock issued in
exchange therefor and cash in lieu of any fractional share. Next Level
shareholders who execute Restricted Stock Agreements (as defined below) will
be required to deliver to the Surviving Corporation certificates representing
unvested GI Common Stock received in the Merger, together with a duly signed
stock power with respect thereto. In addition, the Surviving Corporation will
hold as pledgee any shares of GI Common Stock issued in exchange for shares of
Next Level Common Stock that have been pledged to Next Level as collateral for
any outstanding loan from Next Level to any employee of Next Level (a "Next
Level Employee"). See "Terms of the Merger -- Manner and Basis of Converting
Shares."
Conditions to the Merger; Termination and Amendment. Consummation of the
Merger is subject to the satisfaction of various conditions. The Merger
Agreement may be terminated prior to the Closing by the mutual written
consent of GI and Next Level, unilaterally by GI or Next Level upon certain
breaches by the other party or by GI or Next Level (if such party is not in
material breach) if the Closing has not occurred by December 31, 1995 or such
later date as the parties may agree to in writing. See "Terms of the Merger
- -- Conditions to the Merger" and "-- Termination or Amendment of Merger
Agreement."
RESTRICTED STOCK AGREEMENTS
Holders of Next Level Common Stock (other than the holders of Founders
Common Stock) whose shares are subject to repurchase rights of Next Level
will be asked to enter into restricted stock agreements with the Surviving
Corporation (each, a "Restricted Stock Agreement"), pursuant to which the
Surviving Corporation will be granted repurchase rights with respect to
shares of GI Common Stock issued to such Next Level shareholders in the
Merger, on the same terms and conditions as Next Level's repurchase rights
existing prior to the Merger, except that the Restricted Stock
Agreements will provide, in the case of Next Level Employees, for full vesting
upon death, disability or termination of employment without Cause (as
defined in the Restricted Stock Agreement) and, in the case of certain
other individuals, for accelerated vesting of a portion of the shares of GI
Common Stock subject to such Restricted Stock
8
<PAGE>
Agreements. GI believes that, in the absence of a Restricted Stock Agreement,
Next Level's repurchase rights would continue to apply to GI Common Stock
issued in the Merger in exchange for shares of Next Level Common Stock
subject to such repurchase rights. See "Terms of the Merger -- Restricted
Stock Agreements."
GRANT OF OPTIONS TO NEXT LEVEL EMPLOYEES
As a condition to the consummation of the Merger, GI is required to
issue to each Next Level Employee who holds Next Level Common Stock
(other than the Founders) an option to purchase one share of GI Common
Stock for each four shares of Next Level Common Stock held by such employee.
Each option will have an exercise price equal to the fair market value of GI
Common Stock on the Closing Date and will become exercisable based upon sales
of Next Level through March 31, 2000, provided that the Next Level Employee
holding the option executes a Restricted Stock Agreement, as described above.
As a condition to the consummation of the Merger, GI is required to grant
each Founder an option to purchase 1,000,000 shares of GI Common Stock which
will become exercisable based on sales of Next Level through March 31, 2000,
and an option to purchase 225,000 additional shares of GI Common Stock which
will become exercisable 18 months after the Effective Time. See "Terms of the
Merger -- Founders Option Agreements" and "-- Employee Option Agreements."
RECOMMENDATION OF NEXT LEVEL'S BOARD OF DIRECTORS
Next Level's Board of Directors (the "Next Level Board") has authorized
and approved the Merger Agreement and believes that the Merger is fair and
in the best interests of Next Level and its shareholders. The Next Level
Board recommends that shareholders of Next Level consent to the Merger
Agreement, the related Agreement of Merger, and the Merger. For a discussion
of the background of the Merger and the factors considered by the Next Level
Board in reaching its decision to approve the Merger Agreement, see "The
Merger and Related Transactions -- Background of the Merger" and "-- Next
Level Reasons for the Merger."
FINANCIAL ADVISORS
GI retained Volpe, Welty & Company to act as its financial advisor in
connection with the Merger. Next Level retained Montgomery Securities to
act as its financial advisor in connection with the Merger. No fairness
opinion was requested by or delivered to the Next Level Board by Montgomery
Securities prior to the Next Level Board's approval of the Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Next Level has received an opinion from its counsel that the Merger will
constitute a "reorganization" under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Such opinion is subject to certain
significant qualifications and assumptions and all of such assumptions are
not entirely free from doubt. In addition, there is a risk that Next Level
shareholders will be required to recognize significant income even if the
Merger qualifies as a "reorganization." Accordingly, each Next Level
shareholder should consult with his or her personal tax advisor regarding,
among other things, the applicable federal, state and local income tax
consequences of the Merger to such shareholder. See "Terms of the
Merger -- Certain Federal Income Tax Considerations."
DISSENTERS' RIGHTS
Holders of Next Level Stock as of the Record Date who do not execute a
Consent approving the Merger may, under certain circumstances and by following
procedures prescribed by the CCC, exercise dissenters' rights and receive
cash for their shares of Next Level Stock in an amount equal to the fair
value of such shares as determined pursuant to such procedures. The
failure of a dissenting shareholder to follow the appropriate procedures
may result in the termination or waiver of such rights. A Next Level
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<PAGE>
shareholder who attempts to exercise dissenters' rights but fails to make a
proper demand for payment or otherwise loses his or her status as a dissenting
shareholder will be entitled to receive the same number of shares of GI Common
Stock and/or cash payment in lieu of a fractional share that such shareholder
would have received in the Merger if he or she had not attempted to exercise
dissenters' rights. See "Terms of the Merger -- Dissenters' Rights."
COMPARISON OF SHAREHOLDERS' RIGHTS
The rights of shareholders of Next Level currently are governed by Next
Level's Articles of Incorporation and Bylaws and by the CCC. At the Effective
Time, the shareholders of Next Level (other than shareholders who validly
exercise dissenters' rights) will become shareholders of GI, and their
rights will be determined by GI's Certificate of Incorporation and Bylaws
and by the Delaware General Corporation Law (the "DGCL"). See "Comparison
of Rights of Holders of GI Common Stock and Holders of Next Level Stock."
PRO FORMA INFORMATION
No pro forma information is presented herein since earnings per share and
book value per common share of GI will not be materially affected as a
result of the Merger. Next Level shareholders as of and for the year ended
June 30, 1995 had a loss per share of $.63 and book value per common share
of $1.20. Following the exchange of shares, a Next Level shareholder will
have one GI share for approximately five shares it currently has of Next
Level. As of and for the year ended December 31, 1994, book value per
common share and earnings per share of GI was $5.54 and $2.01 (on a
primary basis), respectively.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION REGARDING GI, NEXT LEVEL AND THE
MERGER CONTAINED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT, THE
FOLLOWING FACTORS
RELATING TO GI OR THE MERGER SHOULD BE CONSIDERED CAREFULLY BY HOLDERS OF NEXT
LEVEL STOCK BEFORE CONSENTING TO THE AUTHORIZATION AND APPROVAL OF THE MERGER.
DEPENDENCE ON THE CABLE TELEVISION INDUSTRY AND CABLE TELEVISION CAPITAL
SPENDING
Approximately 58% of GI's consolidated sales and approximately 69% of its
operating income for the year ended December 31, 1994 came from sales of
systems and equipment to the cable television industry. Demand for these
products depends primarily on capital spending by cable television operators
for constructing, rebuilding or upgrading their systems. The amount of this
capital spending and, therefore, a majority of GI's sales and profitability,
are affected by a variety of factors, including general economic conditions,
access by cable television operators to financing, regulation of cable
television operators and technological developments in the broadband
communications industry. Capital spending in the cable television industry
fell sharply in the middle of 1990 compared to 1989 and remained at a low
level until it began to recover in mid-1992. Although GI believes that the
constraining pressures on cable television capital spending have eased and
that cable television capital spending has since increased, there can be no
assurance that such increases will continue or that such increased level of
cable television capital spending will be maintained. In addition, during
1993 and 1994, the Federal Communications Commission (the "FCC") adopted
rules under the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), regulating rates that cable television operators
may charge for lower tiers of service and generally not regulating the rates
for higher tiers of service. Recently, the U.S. Senate and House of
Representatives each passed legislation which may, over time, deregulate the
cable television industry and allow for direct competition between traditional
cable television operators and local telephone companies. Before such
legislation can be enacted, the Senate and the House of Representatives
must agree on a unified version, and it is uncertain when or if such version
will be agreed upon. GI believes that the cable television industry continues
to evaluate its capital spending plans based on these regulations and the
potential new legislation. Accordingly, the economic impact of regulation
on the cable television industry and GI is still uncertain.
Although the domestic cable television industry is comprised of more than
11,200 cable systems, a small number of cable television operators own a
majority of cable television systems and account for a majority of the capital
expenditures made by cable television operators. Ten cable television
operators accounted for approximately 34% of GI's consolidated sales for
the year ended December 31, 1994. The loss of some or all of these cable
television operators as customers could have a material adverse effect on
the business of GI.
CERTAIN RESTRICTIONS UNDER THE CREDIT AGREEMENT OF GI DELAWARE
The Credit Agreement (the "Credit Agreement") governing the outstanding
bank indebtedness of General Instrument Corporation of Delaware, a Delaware
corporation and GI's principal operating subsidiary ("GI Delaware"), contains
restrictive financial and operating covenants, including restrictions on
incurring indebtedness and liens, entering into any transaction to acquire or
merge with any entity, making certain other fundamental changes, selling
property, and paying dividends, and contains requirements that GI
Delaware maintain certain financial ratios and meet certain tests with
respect to, among other things, minimum current ratio, net worth, leverage
and interest coverage. GI has guaranteed the indebtedness of GI Delaware
under the Credit Agreement.
GI is a holding company with no operations or significant assets other
than its investment in GI Delaware. As a result, GI's ability to pay
dividends on GI Common Stock is dependent upon the ability of GI Delaware
to pay cash dividends or make other distributions to GI. The Credit
Agreement contains provisions which limit GI Delaware's ability to pay
cash dividends or make other distributions to GI.
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SIGNAL PIRACY
The satellite television industry, in which the GI Communications
Division is engaged, experienced illegal modification of the first generation
VideoCipher II descrambling modules (which were sold until March 1991) for
purposes of theft of programming (or "signal piracy"). In 1993, GI and
several providers of premium programming completed a security upgrade
program which GI believes has restored an acceptable level of security to
the backyard satellite dish industry. However, there can be no assurance
that there will not be unauthorized modification of descrambling modules or
other methods of signal piracy in the future, which could have a material
adverse effect on the business of GI.
COMPETITION
GI's products and services compete with those of a substantial number of
foreign and domestic companies, some with greater resources, financial or
otherwise, than GI, and the rapid technological change occurring in GI's
markets is expected to lead to the entry of new competitors. GI's ability
to anticipate such changes and introduce enhanced products on a timely
basis will be a significant factor in GI's ability to expand and remain
competitive. Existing competitors' actions and new entrants may have
an adverse impact on GI's operations. GI believes that it enjoys a strong
competitive position due to its large installed cable television
equipment base, its strong relationships with the
major cable television operators, its technology leadership and new product
development capabilities, and the likely need for compatibility of new
technologies with currently installed systems. There can be no assurance,
however, that competitors will not be able to develop systems compatible
with, or that are alternatives to, GI's proprietary technology or systems.
NEW TECHNOLOGIES
GI is entering a new competitive environment in which its success will be
dependent upon numerous factors, including its ability to continue to develop
appropriate technologies and successfully implement applications based on those
technologies. There can be no assurance that technologies and applications
will be successfully developed, or, if they are successfully developed,
that they will be implemented by GI's traditional customers or that GI
will otherwise be able to successfully exploit these technologies
and applications.
INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS
U.S. broadband system designs and equipment are increasingly being
employed in international markets, where cable television penetration is
low. However, there can be no assurance that international markets will
continue to develop or that GI will receive additional contracts to supply
its systems and equipment in international markets.
A significant portion of GI's products are manufactured or assembled in
Mexico, Taiwan (Republic of China), Ireland and other countries outside the
United States. In addition, GI's sales of its equipment into international
markets have grown. These foreign operations are subject to the usual
risks inherent in situating operations abroad, including risks with respect
to currency exchange rates, economic and political destabilization,
restrictive actions by foreign governments, nationalization, the laws and
policies of the United States affecting trade, foreign investment and
loans, and foreign tax laws. GI's cost-competitive
status relative to other competitors could be adversely affected if the Mexican
peso, the New Taiwan dollar or other relevant currencies appreciate relative to
the United States dollar.
SHARES ELIGIBLE FOR SALE
Sales of substantial amounts of GI Common Stock in the public market under
Rule 144 under the Securities Act or otherwise, or the perception that such
sales could occur, may adversely affect prevailing market prices of GI
Common Stock. Sales by GI's principal stockholders in the future
could adversely
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<PAGE>
affect the market price of GI Common Stock and could impair GI's future
ability to raise capital through an offering of its equity securities.
ENVIRONMENT
GI is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous materials.
GI's manufacturing facilities are believed to be in substantial compliance with
current laws and regulations. Compliance with current laws and regulations has
not had, and is not expected to have, a material adverse effect on GI's
financial condition. GI is also involved in remediation programs,
principally with respect to former manufacturing sites, which are
proceeding in conjunction with federal and state regulatory oversight.
In addition, GI is currently named as a "potentially responsible party"
with respect to the disposal of hazardous wastes
at seven hazardous waste sites located in four states.
GI engages independent consultants to assist management in evaluating
potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to GI in its effort to continually monitor these potential
liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where GI has been named a
potentially responsible party. Such assessments include GI's share of
remediation costs, information known to GI concerning the size of
the hazardous waste sites, their years of operation and the number of past
users and their financial viability. Although GI estimates, based on
assessments and evaluations made by management, that its exposure with
respect to these environmental matters could be as high as $64 million,
GI believes that the reserve for environmental matters of $45 million at
December 31, 1994 is reasonable and adequate. However, there can be no
assurance that the ultimate resolution of these matters will approximate
the amount reserved.
Based on the factors discussed above, capital expenditures and expenses
for GI's remediation programs, and the proportionate share of the cost of the
necessary investigation and eventual remedial work that may be needed to be
performed at the sites for which GI has been named as a "potentially
responsible party," are not expected to have a material adverse effect on
GI's financial condition. GI's present and past facilities have been in
operation for many years. Over that time in the course of those operations,
GI's facilities have used substances which are or might be considered
hazardous, and GI has generated and disposed of wastes which are or might
be considered hazardous. Therefore, it is possible that additional
environmental issues may arise in the future which GI cannot now predict.
INCOME TAX RISKS
For federal income tax risks in connection with the Merger, see "Terms
of the Merger -- Certain Federal Income Tax Considerations." Shareholders
of Next Level are also urged to consult their own tax advisors as to the
specific tax consequences to them as a result of the Merger.
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MARKET PRICE DATA AND DIVIDENDS
Neither Next Level Common Stock nor Series A Preferred Stock is traded
on an established public market.
GI Common Stock has been listed on the NYSE since June 10, 1992 under the
symbol "GIC." The following table sets forth on a per share basis, as
adjusted to give effect to a two-for-one stock split effected in the third
quarter of 1994, the high and low sale prices for GI Common Stock as
reported on the NYSE Composite Tape for the periods indicated.
<TABLE>
<CAPTION>
Common Stock
Price Range
--------------------------
High Low
-------- -------
<S> <C> <C>
1993
First Quarter..................... $18.125 $11.625
Second Quarter.................... 20.563 12.813
Third Quarter..................... 28.125 18.750
Fourth Quarter.................... 30.125 25.250
1994
First Quarter..................... 30.875 21.500
Second Quarter.................... 31.625 21.250
Third Quarter..................... 33.000 28.250
Fourth Quarter.................... 34.625 26.750
1995
First Quarter..................... 36.250 25.625
Second Quarter.................... 39.250 30.500
Third Quarter (through
September 5, 1995).............. 41.625 32.500
</TABLE>
On September 5, 1995 (the date immediately preceding announcement of the
Merger), the closing price of GI Common Stock as reported on the NYSE Composite
Tape was $36.25. Shareholders of Next Level are urged to obtain a current
market quotation for GI Common Stock.
Since its organization in 1990, GI has not paid dividends on GI Common
Stock, and it does not anticipate paying dividends in the future. As a
holding company, the ability of GI to pay dividends will depend upon the
receipt of dividends or other payments from GI Delaware. The Credit
Agreement generally prohibits GI Delaware from declaring and paying
dividends to GI, except that GI Delaware may
pay dividends in an aggregate amount equal to the excess of the
Consolidated Net Worth (as defined in the Credit Agreement) of GI and its
subsidiaries at a specified date over the Consolidated Net Worth required
to be maintained under the Credit Agreement as of such date, but in no
event may the aggregate amount of dividends paid by GI Delaware (i) the
proceeds of which are used by GI to pay dividends on GI Common Stock exceed
$50 million in any fiscal year, or (ii) the proceeds of which are used by
GI to purchase outstanding GI Common Stock exceed $150 million in any
fiscal year. Any determination to pay cash dividends in the future will be
at the discretion of GI's Board of Directors (the "GI Board") and
will be dependent upon GI's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time
by the GI Board.
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SELECTED CONSOLIDATED FINANCIAL DATA OF GI
(in millions except per share data)
The following table presents selected consolidated financial data derived
from the unaudited financial statements of GI as of and for the six months
ended June 30, 1995 and 1994. For Selected Consolidated Financial Data for
periods through December 31, 1994, see page 19 of GI's 1994 Annual Report to
Stockholders attached hereto as Annex E. Selected Consolidated Financial
Data should be read in conjunction with GI's consolidated financial
statements and the related notes thereto, which are included in the
portions of GI's 1994 Annual Report to Stockholders attached hereto as
Annex E and in GI's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 attached hereto as Annex F, and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" included therein.
Six Months Ended June 30,
--------------------------
Statement of Operations Data: 1995 1994
Net sales $1,220 $941
Cost of sales 834 637
Selling, general and administrative 123 85
Research and development 71 53
Operating income 180 154
Interest expense, net 25 27
Income before cumulative effect of a
change in accounting principle 111 105
Net income 111 103(A)
Weighted average shares outstanding 123 123
Primary earnings per share
before cumulative effect of a
change in accounting principle (B) $0.90 $0.85
Fully diluted earnings per share
before cumulative effect of a
change in accounting principle (B) 0.82 0.81
As of June 30,
--------------------------
Balance Sheet Data: 1995 1994
Working capital $292 $136
Property, plant and equipment, net 378 295
Total assets 2,202 1,945
Long-term debt, including current maturities 738 850
Other non-current liabilities 191 219
Stockholders' equity 800 495
___________________
(A) Includes a cumulative effect charge of approximately $2
($.01 per share) to reflect the adoption of Financial
Accounting Standards Board Statement No. 112, "Employers'
Accounting for Postemployment Benefits."
(B) On July 6, 1994, the GI Board declared a two-for-one split
of GI's Common Stock, which was effected in the form of a
100% stock dividend on August 8, 1994. All share and per
share data have been restated for all periods presented to
reflect the stock split.
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SELECTED FINANCIAL DATA OF NEXT LEVEL
(in thousands except per share data)
The selected financial data presented below as of and for the year
ended June 30, 1995 was derived from the audited financial statements of
Next Level included elsewhere herein, which have been audited by Deloitte &
Touche llp, independent auditors, whose report expresses an unqualified
opinion and includes an emphasis paragraph relating to Next Level's
development stage and an explanatory paragraph relating to a litigation
uncertainty.
Next Level is a development stage company which commenced operations
on July 1, 1994. Since inception, substantially all of the resources of
Next Level have been devoted to the development and testing of systems
and the establishment of infrastructures that will permit the future
marketing of products. See Note 1 of
Notes to Financial Statements of Next Level concerning factors related to the
development stage of operations and Note 2 of Notes to Financial Statements of
Next Level concerning the proposed acquisition of Next Level.
Statement of Operations Data: Year Ended June 30, 1995
- ----------------------------- ------------------------
Net sales $ -
Operating expenses 4,311
Loss from operations (4,311)
Interest income 274
Net loss (4,037)
Net loss per share of common stock ($ .63)
Balance Sheet Data: As of June 30, 1995
- ------------------- -------------------
Working capital $5,690
Furniture, fixtures, equipment and improvements, net 1,956
Total assets 8,261
Convertible preferred stock 11,433
Common stock 2,140
Accumulated deficit (4,037)
Shareholders' equity (A) 7,647
____________________
(A) Includes a reduction of $1,565 related to unearned
compensation and $323 related to shareholders' notes
receivable issued in return for Next Level Common Stock.
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CONSENT OF SHAREHOLDERS OF NEXT LEVEL
GENERAL
This Prospectus/Consent Solicitation Statement is being furnished to
holders of Next Level Stock in connection with the solicitation by Next
Level of Consents to the authorization and approval of the Merger.
This Prospectus/Consent Solicitation Statement contains certain
information set forth more fully in the Merger Agreement and the related
forms of Employee Restricted Stock Agreement and form of Optionee
Restricted Stock Agreement attached hereto as Annexes A, B and C,
respectively, and is qualified in its entirety by reference to such
documents. The information contained in the Annexes to this
Prospectus/Consent Solicitation Statement should be read carefully by each
Next Level shareholder in formulating his or her decision with respect to the
Merger.
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record of Next Level Stock at the close of business on the
Record Date are entitled to authorize and approve the Merger Agreement and the
Agreement of Merger. The Record Date is September __, 1995. On the Record
Date, there were 100 Next Level shareholders of record and 6,727,000
shares of Next Level Common Stock and 6,032,000 shares of Series A
Preferred Stock issued and outstanding. Except for the shareholders
identified herein under "Information Concerning Next Level -- Security
Ownership of Certain Beneficial Owners and Management," on the Record Date
there was no person known to the management of Next Level to be the
beneficial owner of 5% or more of the outstanding shares of
any outstanding class of Next Level Stock.
CONSENT REQUIRED
The CCC and Next Level's Articles of Incorporation require that the
Merger be approved by the affirmative vote of holders of a majority of (i)
the outstanding shares of Next Level Common Stock and Series A Preferred
Stock, considered together as a single class, and (ii) the outstanding
shares of Series A Preferred Stock, considered separately as a class. In
addition, because shares of Founders Common Stock will be treated
differently in the Merger than other shares of Next Level Common Stock
(see "Terms of the Merger -- Manner and Basis of Converting
Shares"), Sections 1101 and 1101.1 of the CCC require that the Merger be
approved unanimously by the holders of Next Level Common Stock unless the
California Commissioner of Corporations approves the Merger following a
Fairness Hearing pursuant to Section 25142 of the CCC. The management of
Next Level has requested a Fairness Hearing to be held with respect to the
Merger and intends to complete such Fairness Hearing unless the Merger is
unanimously approved by the holders of shares of Next Level Common Stock.
PROCEDURE
Shareholders of Next Level who wish to approve the Merger should
complete and sign a Consent and return it in the envelope provided to
Cooley Godward Castro Huddleson & Tatum, counsel to Next Level, at One
Maritime Plaza, 20th Floor, San Francisco, California 94111, Attn: Jodie M.
Bourdet, Esq. as soon as possible, but in no event later than
_________, 1995. Shareholders may also return Consents by facsimile to
Cooley Godward et al., Attn: Jodie M. Bourdet, Esq., at (415) 951-3699.
REVOCATION OF CONSENTS
Pursuant to the CCC, a Next Level shareholder who has executed a Consent
approving the Merger or the shareholder's proxyholder, transferee or personal
representative or the proxyholder of such transferee or personal
representative, may revoke the Consent by a writing received by Next Level
or Next Level's counsel at the address or facsimile number indicated above,
prior to the time that Consents representing the number of shares required
to authorize the Merger have been filed with the Secretary of
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Next Level. Consents may not be revoked thereafter. Such revocation will
become effective upon its receipt by the Secretary of Next Level or counsel
to Next Level at the address or facsimile number indicated above.
EXPENSES
GI and Next Level will pay their own costs and expenses incurred
incident to the negotiation, execution and delivery of the Merger Agreement
and the consummation of the transactions contemplated thereby.
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THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
On February 27, 1995, Next Level and GI Delaware entered into (i) a Stock
Purchase Agreement (the "GI Stock Purchase Agreement") pursuant to which GI
Delaware purchased 1,032,000 shares of Series A Preferred Stock at
approximately $6.30 per share, for a total purchase price of $6,500,000,
and (ii) a Technical Cooperation Agreement (the "Technical Cooperation
Agreement") providing for Next Level and GI Delaware to work cooperatively
to develop technology to provide the network interfaces necessary for Next
Level's NLevel3 product to deliver video signals. The Technical
Cooperation Agreement provides that it may be terminated
by Next Level if the GI Purchase Option (as defined below) is terminated or
expires unexercised.
Under the GI Stock Purchase Agreement, GI Delaware had the right, but
not the obligation, to purchase an additional 1,318,000 shares of Series A
Preferred Stock (the "Second Round Shares") at a price of $6.50 per share,
for a total purchase price of $8,567,000, during a specified time period
commencing upon the satisfaction of certain conditions, including Next
Level's completion of certain technical testing with respect to the NLevel3
product. In addition, upon the completion of the purchase of the Second
Round Shares and the satisfaction of certain other conditions, GI Delaware
had the right, but not the obligation, to initiate a process leading to the
acquisition of Next Level by GI Delaware or another wholly-owned
subsidiary of GI at a price to be agreed upon or determined
by an appraisal process if no agreement could be reached (but in no event less
than $7.00 per share) during the period from October 1, 1995 through March 31,
1996 (the "GI Purchase Option").
On June 15, 1995, as contemplated by the GI Stock Purchase Agreement, Next
Level performed a technical demonstration of certain capabilities of the
NLevel3 product. On June 30, 1995, Next Level and GI Delaware entered into
an amendment to the GI Stock Purchase Agreement in which they agreed, among
other things, that (a) Next Level had satisfied all of the conditions
precedent to GI Delaware's obligation to make an election whether or not to
purchase the Second Round Shares, (b) GI Delaware would not have any right
or obligation to purchase the Second Round Shares, (c) notwithstanding the
applicable provisions of the GI Stock Purchase Agreement and the Technical
Cooperation Agreement prior to the amendment, the parties' decision not to
consummate the purchase of the Second Round Shares would not terminate the
GI Purchase Option or entitle Next Level to terminate the Technical
Cooperation Agreement, and (d) the deadline for exercise by GI Delaware
of the GI Purchase Option would be July 21, 1995. On July 21, 1995, Next Level
and GI Delaware entered into a letter agreement extending the deadline for
exercise of the GI Purchase Option to July 24, 1995.
On July 24, 1995, Next Level and GI Delaware entered into a letter of
intent in which GI Delaware stated its intention to acquire all of the
capital stock of Next Level on substantially the terms set forth in the
Merger Agreement, the parties stated their intentions to negotiate in good
faith to enable the execution of a definitive agreement on or before
August 24, 1995, and Next Level agreed that
it would not, prior to August 24, 1995 (later extended to September 1, 1995),
enter into any agreement relating to the sale or other disposition to any third
party of its stock or assets (subject to limited exceptions) or conduct
negotiations or discussions with respect thereto. The parties then began
negotiations with respect to the Merger Agreement and related documents. On
August 30, 1995, GI, Newco and Next Level entered into the Merger Agreement.
GI has agreed to reimburse Next Level for certain costs and expenses in
connection with certain legal proceedings described in "Information Concerning
Next Level -- Business" below (collectively, the "DSC Litigation"). As of July
31, 1995, GI had paid directly, or reimbursed Next Level for, costs and
expenses of the DSC Litigation in the approximate amount of $465,400. GI
has also agreed to enter into the Founders Indemnification Agreements (as
defined in "Terms of the Merger -- Indemnification").
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GI REASONS FOR THE MERGER
The GI Board approved the terms of the Merger Agreement at a meeting
held on August 30, 1995. The GI Board believes that the consummation of
the Merger is in the best interests of GI.
In arriving at its decision to approve the Merger Agreement, the GI Board
considered a number of factors, including: the sales potential of the products
being developed by Next Level; the potential for Next Level's business to
provide access for GI to new markets in which GI has not previously been
engaged; the potential for Next Level's products to enable GI to respond
to its customers' needs for switched digital video solutions; and the
extent to which Next Level's business provides synergies with GI's
existing lines of business.
NEXT LEVEL REASONS FOR THE MERGER
The Next Level Board approved the terms of the Merger Agreement at a
meeting held on August 30, 1995. The vote was unanimous, except that Richard
S. Friedland, a director of Next Level who is the Chief Executive Officer
of GI, abstained from such vote. The Next Level Board believes that the
terms of the Merger are fair to and in the best interests of Next Level's
shareholders and recommends that Next Level's shareholders vote for
approval and adoption of the Merger Agreement and the related matters
set forth in the Consent.
In arriving at its decision to approve the Merger Agreement, the
Next Level Board considered a number of factors, including: the leveraging
of Next Level's expertise in the design of broadband access
systems by its combination with GI's
experience and capabilities in the design and manufacture of products in the
broadband communications systems and equipment market; the enhanced ability of
Next Level to compete in the worldwide broadband communications systems and
equipment market; the significant increase in financial, marketing and
development resources for Next Level; and the increased liquidity and
attractive return on investment to Next Level's shareholders.
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TERMS OF THE MERGER
The following summary description of certain provisions of the Merger
Agreement does not purport to be complete and is qualified by reference to the
Merger Agreement, which is attached hereto as Annex A.
Effective Time of the Merger
Pursuant to the Merger Agreement, the Closing will occur on a date as soon as
practicable (but in any event no later than the third business day) after the
satisfaction or waiver of the conditions to the Closing set forth in the Merger
Agreement, unless another date is mutually selected by GI and Next Level.
Concurrently with the Closing, the Agreement of Merger, together with all
required officers' certificates, will be filed with the office of the
Secretary of State of the State of California. The Merger will become
effective immediately upon such filing. It is anticipated that if all the
other conditions to the Closing have been satisifed or waived, the
Effective Time will occur immediately following approval of the Merger by
the shareholders of Next Level.
Manner and Basis of Converting Shares
Pursuant to the Merger Agreement, at the Effective Time, Next Level will
become a wholly-owned subsidiary of GI and shares of Next Level Stock
outstanding at the Effective Time will be converted into the right to
receive shares of GI Common Stock. Each share of Next Level Stock, other
than shares of Founders Common Stock, will as a result of the Merger be
converted into the right to receive that number of shares of GI Common Stock
determined by dividing $7.00 by the GI Average Price, rounded to three
decimal places. GI Delaware currently owns
1,032,000 shares of Series A Preferred Stock, which will be exchanged for GI
Common Stock in the Merger. Shares of GI Common Stock issued in the Merger in
exchange for shares of Next Level Common Stock (other than Founders Common
Stock) that are subject to vesting restrictions will be subject to similar
vesting restrictions following the Merger. See "-- Restricted Stock
Agreements." Each share of Founders Common Stock will as a result of the
Merger be converted at the Effective Time into the right to receive that
number of shares of GI Common Stock determined by dividing $4.75
by the GI Average Price, rounded to three decimal places. Approximately
21% of the shares received in exchange for shares of Founders Common Stock
will be subject to vesting restrictions that provide that such shares will
become freely transferable by the holders thereof automatically, and without
any condition other than the passage of time, on the date that is the 18-month
anniversary of the Effective Time.
Each share of Common Stock, no par value, of Newco will as a result of the
Merger be converted at the Effective Time into one share of Common Stock,
no par value, of Next Level as the Surviving Corporation.
No fractional shares of GI Common Stock will be issued in connection with the
Merger; in lieu thereof, holders of Next Level Stock who would otherwise be
entitled to receive a fraction of a share of GI Common Stock will receive
from GI an amount in cash equal to the GI Average Price multiplied by the
fraction of a share of GI Common Stock to which such holder would otherwise
be entitled.
In lieu of receiving shares of GI Common Stock upon conversion of shares of
Next Level Stock, Next Level shareholders may elect to exercise dissenters'
rights and to receive cash for their shares of Next Level Stock in an amount
equal to the fair value of such stock as determined pursuant to procedures
prescribed by the CCC. Shares of Next Level Stock which are held by a
shareholder of Next Level as of the Record Date who has complied with the
procedures for the exercise of dissenters' rights as set forth in the CCC
will not be converted into or be exchangeable for the right to receive GI
Common Stock unless and until such shareholder has failed to perfect, or
has effectively withdrawn or lost the right to exercise,
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dissenters' rights under the CCC. If such shareholder fails to perfect or
effectively withdraws or loses the right to exercise dissenters' rights, such
shareholder's shares of Next Level Stock will thereupon be deemed to have been
converted into and to have become exchangeable for the right to receive as
of the Effective Time the number of shares of GI Common Stock and/or cash
payment in lieu of any fractional share that such Next Level shareholder
would have received in the Merger if he or she had not attempted to
exercise dissenters' rights. See "-- Dissenters' Rights."
As soon as practicable after the Effective Time, each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of Next Level Stock (the "Certificates") may
surrender such Certificates with appropriate letters of transmittal to the
Exchange Agent. Upon the surrender of a Certificate, together with a duly
executed letter of transmittal, the holder of such Certificate will be
entitled to receive a certificate for the number of shares of GI Common
Stock and/or cash in lieu of a fractional share to which such holder is
entitled pursuant to the provisions of the Merger Agreement and the
Certificate so surrendered will be canceled.
Until a Certificate has been surrendered to the Exchange Agent, such
Certificate will be deemed at any time after the Effective Time to represent
the right to receive upon such surrender a certificate for the number of
shares of GI Common Stock and/or cash in lieu of a fractional share to which
such holder is entitled under the Merger Agreement. No interest will be
paid or will accrue on any cash amount payable upon surrender of any
Certificate.
All GI Common Stock delivered upon the surrender for exchange of shares of
Next Level Stock will be deemed to have been delivered in full satisfaction
of all rights pertaining to such shares of Next Level Stock. At the
Effective Time, there will be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Next
Level Stock that were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they will be canceled and exchanged for shares
of GI Common Stock and/or cash in lieu of a fractional share as provided
in the Merger Agreement.
Next Level Employees who execute Restricted Stock Agreements will be required
to deliver certificates representing unvested GI Common Stock to the Surviving
Corporation, together with a duly executed stock power with respect thereto,
and the Secretary of the Surviving Corporation, as escrow agent, will
hold all such certificates and stock powers so long as such shares remain
unvested. In addition, the Surviving Corporation will hold as pledgee any
shares of GI Common Stock issued in exchange for shares of Next Level
Common Stock that have been pledged to Next Level as collateral for any
outstanding loan from Next Level to a Next Level Employee.
Outstanding Options and Warrants to Purchase Next Level Stock
Pursuant to the Merger Agreement, shares of Next Level Stock received upon
the exercise of options and warrants and outstanding as of the Effective
Time will be converted into the right to receive shares of GI Common Stock
and/or cash in lieu of fractional shares as described in the preceding
section. As the date of this Prospectus/Consent Solicitation Statement,
there were outstanding options to purchase 150,000 shares of Next Level
Common Stock and warrants to purchase 240,000 shares of Series A Preferred
Stock.
Effect of the Merger
Upon consummation of the Merger, Newco will cease to exist as a corporation
and all of the business, assets and liabilities of Newco will be merged
into Next Level as the Surviving Corporation.
At the Effective Time, (a) the Merger will have the effects specified by
applicable law, including, without limitation, the CCC; (b) the Surviving
Corporation will amend and restate its Articles of Incorporation so that they
are identical to the Articles of Incorporation of Newco immediately prior
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Effective Time (except that the name of the Surviving Corporation will be
"Next Level Communications"); (c) the Surviving Corporation will adopt Bylaws
identical to the Bylaws of Newco immediately prior to the Effective Time
(except that the name of the Surviving Corporation will be "Next Level
Communications"); (d) the directors of Newco immediately prior to the
Effective Time will be the directors of the Surviving Corporation; and (e)
the officers of Newco immediately prior to the Effective Time will be the
officers of the Surviving Corporation. Additional directors will be appointed
to the Surviving Corporation's Board of Directors effective as of the
Effective Time.
Conduct of Next Level's Business Prior to the Effective Time
Pursuant to the Merger Agreement, Next Level has agreed that it will use its
best efforts to satisfy or cause to be satisfied all conditions precedent set
forth in Section 8 of the Merger Agreement, to cause the Merger and the other
transactions contemplated by the Merger Agreement to be consummated, to
obtain all consents and regulatory approvals necessary for the consummation
of the Merger and such other transactions and to allow the Surviving
Corporation to carry on Next Level's business after the Effective Time.
Next Level has agreed to advise GI promptly in writing of any event
occurring subsequent to the date of the Merger Agreement and prior to the
Effective Time that would render any representation or warranty of Next
Level contained in the Merger Agreement, if made on or as of the
date of such event or the Closing Date, untrue or inaccurate in any material
respect and of any material breach by Next Level of any of its covenants or
agreements contained in the Merger Agreement. Next Level has agreed to
provide GI with an unaudited balance sheet, statement of operations and
statement of cash flows for each monthly accounting period from the date of
the Merger Agreement until the Effective Time. In addition, Next Level has
agreed to allow GI and its agents full access to its files, books, records,
offices and properties during such time period.
Next Level has also agreed that, until the Effective Time, it will continue
to conduct its business and maintain its business relationships in the ordinary
course. Among other limitations relating to the conduct of its business, Next
Level has agreed that it will not, without the prior written consent of GI:
(a) issue any note, bond, or other debt security or create, incur, assume or
guarantee any indebtedness or other obligation for borrowed money; (b) enter
into any material transaction not in the ordinary course of business; (c)
encumber or permit to be encumbered any of its assets except for mechanics'
liens, rights of lessors of equipment and similar types of encumbrances in the
ordinary course of business; (d) dispose of any material portion of its
assets except for sales to customers in the ordinary course of business;
(e) enter into any material lease or material contract for the purchase or
sale or license of any property, real or personal, except in the ordinary
course of business; (f) fail to maintain its equipment and other assets in
good working condition and repair according to the standards it has
maintained prior to the date of the Merger Agreement, subject only to
ordinary wear and tear; (g) enter into, adopt, modify or amend any written
employment agreement or pay or commit to pay any bonus, increased salary or
special remuneration to any officer, employee or consultant, except for (i)
bonuses paid with respect to 1995 performance to Next Level Employees or
consultants other than the Founders, in amounts determined in good faith by the
Next Level Board, consistent with past practice and previously disclosed to GI
in writing and approved by GI and (ii) compensation pursuant to existing
arrangements previously disclosed in writing to GI; (h) take any action with
respect to the grant of any severance or termination pay to any employees or
with respect to any increase of benefits payable under its severance or
termination pay policies or agreements in effect on the date of the Merger
Agreement and applicable to Next Level Employees; (i) except as required by
generally accepted accounting principles, change its accounting methods;
(j) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital stock, or redeem or
otherwise acquire any of its capital stock, except for repurchases of unvested
stock from terminated employees or consultants pursuant to existing repurchase
rights; (k) amend or terminate any material contract, agreement or license to
which it is a party; (l) lend any amount to any person or entity, other than
reasonable advances for relocation, travel and expenses that are incurred in
the ordinary course of business and do not exceed $150,000 in the aggregate;
(m) waive or release any right or claim except for the waiver or release of
non-material claims in the ordinary course of business; (n) issue or sell
any shares of its capital stock of any class (except upon exercise of
warrants to purchase shares of Series
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A Preferred Stock, conversion of Series A Preferred Stock into Next Level
Common Stock or the exercise of options to purchase shares of Next Level Common
Stock outstanding on the date of the Merger Agreement), or any other of its
securities, or issue or create any warrants, obligations, subscriptions,
options, convertible securities or other commitments to issue shares of
capital stock, or accelerate the vesting of any outstanding option or other
security (other than as contemplated by the Merger Agreement); (o) split or
combine the outstanding shares of its capital stock of any class or enter
into any recapitalization or agreement affecting the number or rights of
outstanding shares of its capital stock of any class or affecting any other
of its securities; (p) merge, consolidate or reorganize with, or acquire
the securities or assets of, any entity; (q) amend its Articles of
Incorporation or Bylaws; (r) license any of its intellectual property
rights to any affiliated or unaffiliated third party; (s) agree to any audit
assessment by any tax authority; (t) change any insurance coverage or issue any
certificates of insurance; or (u) commit to do any of the foregoing.
Next Level has also agreed that, from the date of the Merger Agreement until
the termination thereof, Next Level and its officers, directors, employees and
other agents will not, directly or indirectly, take any action to solicit or
initiate any offer or proposal for, or any indication of interest in, a
merger or other business combination involving Next Level or the acquisition
of any equity interest in, or a substantial portion of the assets of, Next
Level (an "Acquisition Proposal"). In addition, during the same time period,
Next Level and its officers, directors, employees or other agents will not
directly or indirectly engage in negotiations with or disclose any nonpublic
information relating to Next
Level or afford access to the properties, books or records of Next Level to any
person that Next Level has reasonable grounds to believe may be considering
making, or has made, an Acquisition Proposal, unless otherwise required in
accordance with the fiduciary duties of the Next Level Board under applicable
law as advised in writing by special counsel to Next Level.
Prior to the Effective Time, Next Level will terminate certain information,
inspection, registration and other rights granted to holders of Series A
Preferred Stock and will terminate certain stock agreements with the Founders.
Covenants of GI
GI has agreed that it will use its best efforts to satisfy or cause to be
satisfied all conditions precedent set forth in Section 7 of the Merger
Agreement and to cause the Merger and the other transactions contemplated
by the Merger Agreement to be consummated. GI has also agreed to use its
best efforts to obtain all consents and regulatory approvals necessary to
allow the consummation of the Merger and such other transactions and to
cause the shares of GI Common Stock to be issued pursuant to the Merger to
be authorized for listing on the NYSE.
In addition, GI has agreed that it will promptly notify Next Level in writing
of any event occurring subsequent to the date of the Merger Agreement that
would render any representation or warranty of GI contained in the Merger
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and of any material breach by
GI of any of its covenants or agreements contained in the Merger Agreement.
GI has also agreed, after the Effective Time, not to take any action that
would cause the Merger to no longer be treated as a "reorganization"
pursuant to Section 368(a)(2)(E) of the Code.
Conditions to the Merger
The respective obligations of Next Level and GI to effect the Merger are
subject to the following conditions: (a) that the principal terms of the
Merger Agreement and the Merger shall have been approved by the shareholders
of Next Level in accordance with Next Level's Articles of Incorporation and
Bylaws and the CCC; (b) that no temporary restraining order, preliminary
injunction, permanent injunction or other order preventing the consummation
of the Merger shall have been issued by any federal or state
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court or other governmental entity; and (c) that the Registration Statement
shall have become effective under the Securities Act and that no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and remain in effect and no proceeding for such purpose shall have
been commenced.
The obligations of Next Level to consummate the Merger are additionally
subject to the following conditions: (a) that GI shall have executed and
delivered the Founders Indemnification Agreements (as defined below); (b)
that GI shall have executed and delivered the Founders Option Agreements and
the Employee Option Agreements (as defined below) and there shall be in
effect a registration statement on Form S-8 under the Securities Act
covering the shares of GI Common
Stock issuable upon the exercise of the stock options granted pursuant to such
agreements; and (c) that holders of less than 1% of the total number of
outstanding shares of Next Level Stock will be eligible to perfect dissenters'
rights under the CCC.
The obligations of GI to consummate the Merger are additionally subject to
the following conditions: (a) that the number of shares of Next Level Common
Stock and Series A Preferred Stock outstanding immediately prior to the Merger
shall be no greater than 6,877,000 and 6,272,000, respectively; (b) that all
outstanding options and warrants to purchase shares of Next Level Stock
have been exercised; and (c) that GI shall have received consent to the
Merger of the banks that are parties to the Credit Agreement.
Termination or Amendment of Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective
Time by the mutual written consent of GI and Next Level. The Merger
Agreement may also be terminated (a) by Next Level if there has been a
breach by GI of any of its representations or warranties or covenants set
forth in the Merger Agreement which has or can reasonably be expected to
have a material adverse effect on the business, properties or prospects of
GI and which has not been cured within 30 days of the date on which notice
of such breach is first given to GI or which is not capable of being cured
prior to the Closing Date; (b) by Next Level if all of the conditions
precedent to Next Level's obligations pursuant to Section 7 of the
Merger Agreement have not been satisfied or waived on or before December 31,
1995 other than as a result of a breach of the Merger Agreement by Next
Level; (c) by GI if there has been a breach by Next Level of any of its
representations or warranties or covenants set forth in the Merger
Agreement which has or can reasonably be expected to have a material
adverse effect on the business, properties or prospects of Next Level and
which has not been cured within 30 days of the date on which notice of such
breach is first given to Next Level or which is not capable of being cured
prior to the Closing Date; (d) by GI if all of the conditions precedent to
GI's obligations pursuant to Section 8 of the Merger have
not been satisfied or waived on or prior to December 31, 1995 other than as a
result of a breach of the Merger Agreement by GI; or (e) by either GI or Next
Level if a permanent injunction or other order by any federal or state court or
governmental entity that would make illegal or otherwise restrain or prohibit
the consummation of the Merger has been issued and has become final and
nonappealable.
In the event that the Merger Agreement is terminated by either Next Level or
GI pursuant to the provisions described above, neither party will have any
further obligation or liability to the other party other than the
obligations contained in a mutual non-disclosure agreement between the
parties and any liability resulting from any breach of the Merger Agreement.
Any term or provision of the Merger Agreement may be amended, and the
observance of any term of the Merger Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only by a writing signed by the party to be bound thereby.
Notwithstanding any rights that may be created in any third party under the
terms of the Merger Agreement, no such amendment or waiver will require the
consent of such third party to be effective.
The Merger Agreement may be amended by GI and Next Level at any time before or
after it is approved by the shareholders of
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Next Level, but, after such approval, no amendment shall be made that under
applicable law requires the further approval of the shareholders of Next Level
without such further approval being obtained.
Indemnification
The Merger Agreement provides that GI will cause the Surviving Corporation to
keep in effect provisions in its Articles of Incorporation and Bylaws providing
for the exculpation of director and officer liability and indemnification
of each person who was entitled to the benefit of the indemnification
provisions set forth in Next Level's Articles of Incorporation and Bylaws
as of the date of the Merger Agreement (the "Indemnified Parties") and will
not amend such provisions except as required by applicable law or to make
changes permitted by law that would enlarge the Indemnified Parties' right
of indemnification.
GI has also agreed, pursuant to the Merger Agreement, to enter into an
indemnification agreement with each of the Founders (each, a "Founders
Indemnification Agreement"), pursuant to which GI will indemnify each of the
Founders with respect to their activities relating to Next Level and the
Surviving Corporation, including with respect to the DSC Litigation.
Restricted Stock Agreements
The following summary description of certain provisions of the Restricted
Stock Agreements does not purport to be complete and is qualified by
reference to the forms of Restricted Stock Agreements, which are attached
hereto as Annexes B and C.
Repurchase Rights. Each Next Level shareholder (other than holders of
Founders Common Stock) who holds Next Level Common Stock that is subject to
repurchase rights of Next Level pursuant to certain Stock Purchase Agreements
between Next Level and such shareholders (the "Next Level Stock Purchase
Agreements") will be asked to enter into a Restricted Stock Agreement with the
Surviving Corporation, pursuant to which such shareholder will grant to the
Surviving Corporation, with respect to shares of GI Common Stock issued in the
Merger in exchange for such shares of Next Level Common Stock, repurchase
rights (the "Repurchase Rights") on the same terms and conditions as those
set forth in the Next Level Stock Purchase Agreements, subject to certain
modifications described below. The Repurchase Rights generally will permit
the repurchase of shares of GI Common Stock by the Surviving Corporation at
the price paid for the shares by the Next Level shareholder upon a termination
of employment (or, in the case of consultants, when a consultant ceases to
render periodic services to the Surviving Corporation).
Shares of GI Common Stock issued in the Merger in exchange for shares of Next
Level Common Stock that have ceased to be subject to the Repurchase Rights
(i.e., have fully vested) prior to the Effective Time under the terms of the
Next Level Stock Purchase Agreements will not be subject to the Surviving
Corporation's Repurchase Rights under the Restricted Stock Agreements. In the
case of Next Level Employees, the remaining shares of GI Common Stock issued
in the Merger in exchange for shares of Next Level Common Stock subject to the
Next Level Stock Purchase Agreements will cease to be subject to the Repurchase
Rights in accordance with the same schedule that would have been applicable to
the shares of Next Level Common Stock for which such shares of GI Common Stock
were exchanged had the Merger not occurred, except that (a) the Restricted
Stock Agreements with the Surviving Corporation, unlike the Next Level Stock
Purchase Agreements, will provide that all shares held by Next Level Employees
will cease to be subject to the Surviving Corporation's Repurchase Rights upon
death, disability or termination of employment without Cause (as defined in the
Restricted Stock Agreements) and (b) in the case of certain Next Level
Employees, the vesting of a portion of the shares of GI Common Stock subject
to the Surviving Corporation's Repurchase Rights will be accelerated.
In the case of Next Level shareholders who acquired shares of Next Level
Common Stock upon exercise of stock options, the Restricted Stock Agreements
with the Surviving Corporation will provide that 40% of the shares of GI Common
Stock received by such shareholders will cease to be subject to the
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Surviving Corporation's Repurchase Rights immediately at the Effective Time.
The remaining 60% of such shares will cease to be subject to the Repurchase
Rights in accordance with the schedule set forth in the Next Level Stock
Purchase Agreements (with no additional shares ceasing to be subject to the
Repurchase Rights until such time as the 40% of such shares that were not
subject to the Repurchase Rights at the Effective Time would otherwise have
ceased to be subject to the Repurchase Rights).
GI believes that, if any Next Level shareholder who is party to a Next Level
Stock Purchase Agreement does not enter into a Restricted Stock Agreement with
the Surviving Corporation, upon the consummation of the Merger, the terms of
the Next Level Stock Purchase Agreement, including the Repurchase Rights
granted thereunder, will remain in full force and effect with respect to shares
of GI Common Stock issued in the Merger in exchange for shares of Next Level
Common Stock subject to such rights. Such Repurchase Rights would not be
subject to full or accelerated vesting in certain circumstances.
Restrictions on Transfer. Next Level shareholders may not transfer, assign,
encumber or otherwise dispose of any of the shares of GI Common Stock which are
subject to the Surviving Corporation's Repurchase Rights under the Restricted
Stock Agreements. Upon issuance, the certificates for such shares of GI Common
Stock issued in the Merger will be held by the Surviving Corporation until the
shares cease to be subject to the Repurchase Rights. Next Level shareholders
will be required to execute and deliver a stock power with respect to such
deposited certificate.
Continuation of Pledge. The Surviving Corporation will hold as pledgee any
shares of GI Common Stock issued in exchange for shares of Next Level Common
Stock that have been pledged to Next Level as collateral for any outstanding
loan from Next Level to a Next Level Employee, regardless of whether such
shares are vested or unvested pursuant to a Restricted Stock Agreement.
Founders Option Agreements
The following summary description of certain provisions of the Founders
Option Agreement does not purport to be complete and is qualified by reference
to the form of Founders Option Agreement, which is attached hereto as Exhibit
7.4(a) to the Merger Agreement in Annex A.
Grant of Founders Options. As a condition to the consummation of the Merger,
GI is required to enter into a Founders Option Agreement with each Founder
(each, a "Founders Option Agreement") pursuant to the GI 1993 Long-Term
Incentive Plan. Under the Founders Option Agreements, GI will grant to each
Founder the option (each, a "Founders Option") to purchase up to 1,225,000
shares of GI Common Stock, 225,000 shares of which are referred to as "Fixed
Shares" and 1,000,000 shares of which are referred to as "Contingent Shares."
Exercise Price and Duration. The exercise price per share at which each
Founders Option will be exercisable will be the Fair Market Value (as defined
in the GI 1993 Long-Term Incentive Plan) of GI Common Stock on the Closing
Date. The Founders Options will be exercisable for a period of ten years
from the Closing Date (the "Exercise Term"), unless they are earlier terminated
as described below.
Exercisability of Founders Options. Each Founders Option will become
exercisable to purchase all 225,000 of the Fixed Shares on the 18-month
anniversary of the Closing Date. A portion of each Founders Option will
become exercisable with respect to the Contingent Shares quarterly based on
sales of Next Level for that quarter. The Founders Option would be fully
exercisable with respect to the Contingent Shares if Next Level's sales were
to reach $450 million on or before March 31, 2000. The Founders Options will
not become exercisable with respect to any additional Contingent Shares based
on Next Level's sales after March 31, 2000. Each Founders Option will become
exercisable, with respect to any Contingent Shares as to which it is not yet
exercisable, 30 days prior to the end of the Exercise Term, provided that the
Founder remains an employee of GI or a subsidiary of GI at that time.
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Termination of Employment. If a Founder voluntarily terminates his
employment with GI or any subsidiary of GI prior to the 18-month anniversary of
the Closing Date, the Founders Option will terminate and expire with respect to
the Fixed Shares. If a Founder voluntarily terminates his employment with GI
or any subsidiary of GI after the 18-month anniversary of the Closing Date, the
Founders Option will remain exercisable with respect to the Fixed Shares for 30
days after termination. If a Founder's employment with GI or any subsidiary of
GI terminates for any other reason, including, without limitation, by reason of
death, disability, retirement or termination by GI with or without Cause (as
defined in the Founders Option Agreement), the Founders Option will vest with
respect to the Fixed Shares and will be exercisable until the expiration of the
Exercise Term, except that if GI or a subsidiary of GI terminates such
Founder's employment for Cause, the Founders Option will be exercisable with
respect to the Fixed Shares until the later of 30 days after the 18-month
anniversary of the Closing Date or 30 days after such termination for Cause.
With respect to the Contingent Shares, if a Founder voluntarily terminates
his employment with GI or any subsidiary of GI, or if GI or any subsidiary of
GI terminates a Founder's employment for Cause, the Founder may exercise the
Founders Option within 30 days after such termination with respect to only
those Contingent Shares as to which the Founders Option was then exercisable.
At the end of such 30-day period, the Founders Option will terminate and expire
with respect to all Contingent Shares. If a Founder's employment terminates
for any reason other than a voluntary termination or a termination for Cause,
including, without limitation, by reason of death, disability, retirement or
termination by GI without Cause, the Founders Option will continue to become
exercisable based on sales of Next Level as described above. However, if GI
or a subsidiary of GI terminates the Founder's employment without Cause, the
Founders Option will become exercisable immediately upon such termination with
respect to an aggregate of 500,000 Contingent Shares.
Special Provision Regarding Voluntary Termination. If a Founder voluntarily
terminates his employment with GI or any subsidiary of GI after the 18-month
anniversary of the Closing Date, such Founder may enter into an agreement (a
"Consulting and Noncompetition Agreement") with GI or a subsidiary of GI, which
shall provide for (i) nominal services consistent with those performed by the
Founder during his employment, (ii) a reasonable covenant not to compete, (iii)
a term coterminous with the Exercise Term, (iv) earlier termination by the
Founder at any time, and (v) earlier termination by GI only upon a breach of
the agreement by the Founder. Solely for the purposes of determining the
vesting schedule of the Founders Options, the effective date of a Founder's
termination of employment will be deemed to be the date of termination of the
Consulting and Noncompetition Agreement.
Change of Control. In the event of a Change of Control (as defined in the
Founders Option Agreement) the Founders Options will become immediately and
fully exercisable.
Employee Option Agreements
The following summary description of certain provisions of the Employee
Option Agreements does not purport to be complete and is qualified by reference
to the form of Employee Option Agreement, which is attached hereto as Exhibit
7.4(b) to the Merger Agreement in Annex A.
Grant of Employee Options. As a condition to the consummation of the Merger,
GI is required to enter into stock option agreements with certain Next Level
Employees (each, an "Employee Option Agreement") pursuant to the GI 1993
Long-Term Incentive Plan. GI will grant to each such employee (each, an
"Employee Grantee") an option (the "Employee Option") to purchase a number of
shares of GI Common Stock specified in the Merger Agreement, which, in the case
of Employee Grantees holding Next Level Common Stock, will be one share of GI
Common Stock for each four shares of Next Level Common Stock held by the
Employee Grantee.
Exercise Price and Duration. The exercise price per share at which the
Employee Options will be exercisable will be the Fair Market Value (as defined
in the GI 1993 Long-Term Incentive Plan) of the GI
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Common Stock on the Closing Date. The Employee Options will be exercisable
for the Exercise Term, unless they are terminated earlier as described below.
Exercisability of Employee Options. A portion of each Employee Option will
become exercisable based on sales of Next Level through March 31, 2000. The
Employee Options will become exercisable quarterly based on sales of Next Level
for that quarter. The Employee Option would be fully exercisable if Next
Level's sales were to reach $450 million on or before March 31, 2000. Employee
Options will not become exercisable with respect to any additional shares of GI
Common Stock based on Next Level's sales after March 31, 2000. Each Employee
Option will become exercisable, with respect to any shares as to which it is
not yet exercisable, 30 days prior to the end of the Exercise Term, provided
that the Employee Grantee remains an employee of GI or a subsidiary of GI at
that time. No Employee Option granted to an Employee Grantee holding shares
of Next Level Common Stock will become exercisable, regardless of the level of
sales of Next Level, unless the Employee Grantee holding such option enters
into a Restricted Stock Agreement with the Surviving Corporation as described
above.
Termination of Employment. If an Employee Grantee voluntarily terminates his
or her employment with GI or any subsidiary of GI or if GI or any subsidiary of
GI terminates an Employee Grantee's employment for Cause (as defined in the
Employee Option Agreement), the Employee Grantee may exercise the Employee
Option for 30 days after such termination only with respect to those shares
as to which the Employee Option was then exercisable. If the Employee
Grantee's employment terminates for any reason other than a voluntary
termination or a termination for Cause, including, without limitation, by
reason of death, disability, retirement or termination by GI without Cause, the
Employee Option will become exercisable according to the vesting schedule
described above.
Change of Control. In the event of a Change of Control (as defined in the
Employee Option Agreement) the Employee Options will become immediately and
fully exercisable.
Resales of GI Common Stock
The shares of GI Common Stock issuable to shareholders of Next Level pursuant
to the Merger have been registered under the Securities Act pursuant to the
Registration Statement. It is anticipated, and it is a condition to each of
the parties' obligations to effect the Merger, that such shares will be
approved for listing, upon official notice of issuance, on the NYSE. Such
shares may be traded freely by those shareholders not deemed to be
"affiliates" of Next Level pursuant to Rule 145 under the Securities Act
("Rule 145") or "affiliates" of GI pursuant to Rule 144 under the Securities
Act ("Rule 144"). The term "affiliate" will generally include each person
who controls, is controlled by or is under common control with, or is a
member of a group that controls, is controlled by or is under common control
with, Next Level immediately prior to the Effective Time or GI after the
Effective Time, as the case may be. Executive officers, directors and 10%
shareholders of Next Level may be considered affiliates of Next Level.
Rule 145 will restrict the sale of GI Common Stock received in the Merger and
beneficially owned by those shareholders who are deemed to be affiliates of
Next Level and certain of their family members and other related parties. Such
affiliates, provided they are not affiliates of GI at or following the
Effective Time, may publicly resell GI Common Stock received by them in the
Merger subject to certain limitations, principally as to, among other things,
the number of shares and the manner of sale, during the two years following the
Effective Time. Generally, sales of such shares will be limited during any
three-month period to the greater of 1% of the number of shares of GI Common
Stock outstanding or the average weekly trading volume of GI Common Stock over
the four-week period prior to the filing of the required notice of sale. After
this two-year period, affiliates may resell their shares without restriction
so long as there is adequate current public information with respect to GI as
required by Rule 145. Persons who become affiliates of GI prior to, at or
after the Effective Time may publicly resell the GI Common Stock received by
them in the Merger subject to similar limitations and subject to certain filing
requirements specified in Rule 144. Affiliates also would be permitted to
resell GI Common Stock received in the Merger pursuant to an effective
registration statement under the Securities Act or another available exemption
from the
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Securities Act registration requirements. This Prospectus/Consent
Solicitation Statement does not cover any resales of GI Common Stock received
in the Merger by persons who may be deemed to be affiliates of GI or Next
Level.
Certain Federal Income Tax Considerations
The following discussion summarizes the material federal income tax
considerations associated with the Merger that are applicable to holders of
Next Level Stock. This discussion reflects the opinion of counsel attached as
Exhibit 8 to the Registration Statement of which this Prospectus/Consent
Solicitation Statement is a part (the "Opinion"). The Opinion includes an
opinion to the effect that the Merger will constitute a "reorganization" within
the meaning of Section 368 of the Code (a "Reorganization"). The Opinion,
which is based on certain assumptions as noted in the Opinion, was delivered by
Cooley Godward Castro Huddleson & Tatum ("Cooley Godward"), counsel to Next
Level.
Next Level shareholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Next Level shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, who are subject to the Code's
alternative minimum tax provisions, who are foreign persons or who acquired
their Next Level capital stock through stock option or stock purchase programs
or in other compensatory transactions. In addition, the following discussion
does not address the tax consequences of transactions effectuated prior to or
after the Merger (whether or not such transactions are in connection with the
Merger) including, without limitation, the grant of employee options in
connection with the Merger or the exercise of options or rights to purchase
Next Level capital stock in anticipation of the Merger. Finally, no foreign,
state or local tax considerations are addressed herein. Accordingly, NEXT
LEVEL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER. IN
PARTICULAR, NEXT LEVEL SHAREHOLDERS WHOSE NEXT LEVEL STOCK IS SUBJECT TO
FORFEITURE RESTRICTIONS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE
TAX CONSEQUENCES UNDER SECTION 83 OF THE CODE OF ACQUIRING AND OWNING THE GI
COMMON STOCK TO BE RECEIVED BY THEM IN THE MERGER.
This discussion is based on Cooley Godward's interpretation of currently
existing provisions of the Code, applicable Treasury Regulations, judicial
authority and administrative rulings and practice all as of the date hereof.
The Internal Revenue Service (the "IRS") is not precluded from adopting a
contrary position. In addition, there can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively
and could affect the tax consequences of the Merger to GI, Next Level and
their respective shareholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, Cooley Godward is of the
opinion that:
(a) No gain or loss will be recognized by the holders of Next
Level Stock upon the receipt of GI Common Stock solely in exchange for such
Next Level Stock pursuant to the Merger (except to the extent of cash received
in lieu of fractional shares).
(b) The aggregate tax basis of the GI Common Stock so received
by Next Level shareholders in the Merger (including any fractional share of GI
Common Stock not actually received) will be the same as the aggregate tax basis
of the Next Level Stock surrendered in exchange therefor.
(c) The holding period of the GI Common Stock so received by
each Next Level shareholder in the Merger will include the period for which the
Next Level Stock surrendered in exchange
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therefor was considered to be held, provided that the Next Level
Stock so surrendered is held as a capital asset at the time of the Merger.
(d) Cash payments received by holders of Next Level Stock in
lieu of a fractional share will be treated as if such fractional share of GI
Common Stock had been issued in the Merger and then redeemed by GI. A Next
Level shareholder receiving such cash will recognize gain or loss, upon such
payment, measured by the difference (if any) between the amount of cash
received and the basis in such fractional share.
(e) A holder of shares of Next Level Stock who exercises
dissenters' rights with respect to such shares and receives payment for such
shares in cash ordinarily will recognize gain or loss measured by the
difference between the amount of cash received and such holder's basis in such
shares. However, different tax consequences, including treatment of the
payment as the equivalent of a dividend distribution, could apply depending
upon the shareholder's particular circumstances, such as whether he exercises
his dissenters' rights with respect to all or only a portion of his Next Level
Stock and whether he is deemed under applicable attribution rules to own Next
Level Stock held by related parties. A sale of Next Level Stock pursuant to
an exercise of dissenters' rights will generally not be treated as the
equivalent of a dividend distribution if, as a result of such exercise, the
shareholder exercising dissenters' rights owns no shares of GI Common Stock
(either actually or constructively within the meaning of Section 318 of the
Code). If, however, a shareholder's sale for cash of Next Level Stock pursuant
to an exercise of dissenter's rights is treated as the equivalent of a dividend
distribution, then such shareholder will generally recognize income for federal
income tax purposes in an amount up to the entire amount of cash so received.
Accordingly, Next Level shareholders should consult their tax advisors as to
the income tax consequences of exercising dissenters' rights under their
particular circumstances.
Neither GI nor Next Level has requested a ruling from the IRS in connection
with the Merger. The Opinion neither binds the IRS nor precludes the IRS from
adopting a contrary position. The Opinion will be subject to certain
assumptions and qualifications and will be based on the truth and accuracy of
certain representations of GI, Next Level and Newco, including representations
in certain certificates to be delivered to counsel by the respective
managements of GI, Next Level, Newco and certain shareholders of Next Level.
Of particular importance will be certain assumptions and representations
relating to the "continuity of interest" requirement and certain assumptions
and representations relating to the "control" requirement.
To satisfy the continuity of interest requirement, Next Level shareholders
must not, pursuant to a plan or intent existing at or prior to the Merger,
dispose of or transfer so much of either (i) Next Level Stock in anticipation
of the Merger or (ii) the GI Common Stock to be received in the Merger
(collectively, "Planned Dispositions"), such that the Next Level shareholders,
as a group, would no longer have a significant equity interest in the Next
Level business being conducted by GI after the Merger. Planned Dispositions
include, among other things, shares disposed of pursuant to the exercise of
dissenters' rights. Next Level shareholders will generally be regarded as
having a significant equity interest as long as GI Common Stock received in the
Merger (after taking into account Planned Dispositions), in the aggregate,
represents a substantial portion of the entire consideration received by the
Next Level shareholders in the Merger. While the law is unclear as to what
constitutes a "significant equity interest" or a "substantial portion," the
IRS ruling guidelines require 50% continuity (although such guidelines do not
purport to represent the applicable substantive law). The case law appears to
be more liberal, however, and in one early case, the Supreme Court ruled that
approximately 40% continuity was sufficient. No assurance can be made that the
continuity of interest requirement will be satisfied, and if such requirement
is not satisfied, the Merger would not be treated as a Reorganization.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
GI Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely Next Level Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that a
Next Level shareholder was treated
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as receiving (directly or indirectly) consideration other than GI Common
Stock in exchange for the shareholder's Next Level Stock.
Under the Merger Agreement each share of Founders Common Stock will be
converted into a lesser amount of per share consideration than each share of
Next Level Stock which is not Founders Common Stock. However, the IRS may take
the position that, for federal income tax purposes, each share of Next Level
Stock should be considered to have been exchanged for consideration of equal
value. In that regard the IRS may assert that, for federal income tax purposes
either (i) the excess of the per share amount of GI Common Stock received in
exchange for Next Level Stock (other than Founders Common Stock) over that
received for the Founders Common Stock should be considered as received as
compensation for services or otherwise not in exchange for Next Level Stock in
the Reorganization, or (ii) the GI Common Stock received with respect to Next
Level Stock should be viewed as initially distributed on an equal per share
basis and with a portion of the consideration distributed with respect to the
Founders Common Stock then paid over either to the other holders of Next level
Common Stock or to all other Next Level shareholders. In the first instance,
the Next Level shareholder would generally recognize income to the extent of
such portion of the GI Common Stock received by him as is considered received
as compensation for services or otherwise not in exchange for Next Level Stock
in the Reorganization. Any such income would generally be taxable as ordinary
income. In the second instance, in the event any portion of the GI Common
Stock received with respect to shares other than Founders Common Stock is
viewed as initially distributed with respect to Founders Common Stock and
then paid over to the other shareholders, the holders of Founders Common
Stock may be required to recognize gain to the extent of the excess of the
fair market value of the GI Common Stock considered paid over to the other
shareholders over their tax basis for such shares, and the holders of Next
Level Stock (other than Founders Common Stock) would recognize a
corresponding aggregate amount of income. The income recognized by the
non-Founder Next Level shareholders would generally be taxable as ordinary
income. In addition, such deemed transfer by the Founders to the other Next
Level shareholders would constitute a Planned Disposition for continuity of
interest purposes.
Finally, the IRS may assert that some consideration in addition to GI Common
Stock should be considered as received for the Founders Common Stock in the
Reorganization. In such a case, the holders of Founder Common Stock would
generally be required to recognize gain (all or a portion of which may be taxed
as ordinary income) in an amount equal to the fair market value of such other
consideration. In the opinion of counsel, such position, if sustained, would
not cause the Merger to fail to qualify as a Reorganization for federal income
tax purposes, so long as at least 80% of the outstanding Next Level Stock is
exchanged in the Merger for GI Common Stock. This is sometimes referred to as
the "control" requirement.
Several items must be aggregated in determining whether or not this 80%
control requirement is met. These items include (i) the fair market value of
Merger consideration received by the Next Level shareholders in other than GI
Common Stock, if any, and (ii) any shares of Next Level Stock held by GI prior
to the Merger. With respect to the first item, the shareholder-employees of
Next Level, including the Founders, are receiving certain options to acquire GI
Common Stock which become exercisable in the future based in part upon the
sales of the Surviving Corporation. Additionally, the Founders are receiving
certain options to acquire GI Common Stock which become exercisable based upon
the Founders' continuing employment after the Merger by the Surviving
Corporation. The Merger Agreement provides that such options are granted as
compensation for services, and the parties to the Merger intend to report the
options as such. However, the IRS may assert that either or both of these
types of options are consideration for the Next Level Stock rather than being
compensation for services rendered and/or to be rendered to the Surviving
Corporation. If the fair market value of any such options determined to be
consideration for Next Level Stock were found, either alone or in combination
with the other items described below, to exceed 20% of the total Merger
consideration, then the Merger would fail to qualify as a Reorganization.
The parties to the Merger have not obtained and do not intend to obtain any
appraisal of the fair market value of any of the options. With respect
to the second item, GI Delaware, which is a wholly-owned subsidiary of GI, owns
1,032,000 shares of Series A Preferred Stock. The IRS could assert
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that the Next Level Stock held by GI Delaware should be attributed to GI. In
Rev. Rul. 56-613, the IRS ruled that shares held by a wholly-owned subsidiary
of an acquiring corporation in a "B" reorganization were not attributed to the
parent for purposes of the control requirement in the reorganization because
the parent and subsidiary were different corporations whose separate legal
existence could not be ignored. However, there is no direct authority on
attribution in the context of a Reorganization in a form such as the Merger.
In addition to the above, the percentage calculation under the control
requirement could be adversely affected if some of the outstanding shares of
Next Level Stock were deemed not to be outstanding for tax purposes or if some
of the shares of GI Common Stock issued in the Merger were deemed not to be
transferred for tax purposes at the time of the Merger. Certain of the
existing shares of Next Level Stock held by shareholder-employees are subject
to "forfeiture restrictions" tied to continued employment. While Next Level
has reviewed copies of elections under Section 83(b) of the Code believed to
have been timely filed by shareholder-employees who purchased Next Level Stock
subject to such "forfeiture restrictions" and such elections report the fair
market values of such stock as determined at the time by the Next Level Board,
Next Level cannot be certain that all shareholder-employees purchasing such
stock have taken and will take in the future all actions necessary to cause
such elections to be properly filed or that the IRS will not successfully
challenge the validity of such elections based on a challenge to the Next
Level Board's determination of fair market value or on other grounds. Next
Level Stock subject to forfeiture restrictions and not covered by a valid
Section 83(b) election may be deemed not to be outstanding for tax purposes,
and the GI Common Stock issued in exchange therefor may be considered to be
received as compensation for services or otherwise not in exchange for Next
Level Stock in the Merger. Next, the holders of certain warrants issued in
August 1994 and options granted in February 1995 are expected to exercise such
warrants and options to acquire Next Level Stock immediately prior to the
Merger. The IRS could assert that these recently acquired shares should not
be considered to be part of the outstanding stock of Next Level in making the
calculations under the control requirement if their issuance were viewed as a
manipulative device for the purpose of satisfying the percentage test under the
requirement. Additionally, Section 83(g) of the Code provides that exchanges
of shares subject to Section 83 "forfeiture restrictions" in a Reorganization
are disregarded for purposes of Section 83(a) of the Code if the shares
received in the exchange are subject to restrictions and conditions
"substantially similar" to those to which the shares exchanged were subject.
In connection with the grant of options in connection with the Merger, the
shareholder-employees of Next Level will be asked to execute new Restricted
Stock Agreements which, unlike their existing agreements, provide for
acceleration of vesting in the case of death, disability and certain
terminations of employment by the Surviving Corporation without "cause" and
which, in certain cases, provide for a modified vesting schedule. The IRS
could assert that such restrictions and conditions are not "substantially
similar" to the existing restrictions and conditions within the meaning of
Section 83(g) of the Code and, accordingly, that existing Section 83(b)
elections do not carry over. Next Level plans to recommend that new protective
Section 83(b) elections be filed by the shareholder-employees within 30 days
after the Merger exchange. However, there can be no assurance that the
shareholder-employees will in fact properly file such elections. If such
elections were found to be required and were in fact not properly filed, then
the affected shares of GI Common Stock may be considered not to have been
transferred at the time of the Merger for tax purposes in calculating the
relevant percentages under the control requirement.
Finally, any cash received in lieu of fractional shares or by dissenting
shareholders would be consideration other than GI Common Stock in calculating
the relevant percentages under the control requirement. In order to mitigate
the effect of this factor, the Merger Agreement provides that Next Level is not
obligated to consummate the Merger if the holders of 1% or more of the
outstanding shares of Next Level Stock are eligible to perfect dissenters'
rights.
Accordingly, counsel's opinion that the Merger will qualify as a
Reorganization is subject to assumptions that (i) no Next Level shareholders
(other than the holders of Founders Common Stock) will receive any
consideration for their shares other than GI Common Stock, (ii) none of the GI
Common Stock to be received by shareholder-employees of Next Level in the
Merger will be separate consideration for, or
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allocable to, services rendered or to be rendered by such shareholder-
employees, (iii) the dollar value of all non-qualifying consideration, if any,
received in the Merger by the holders of Founders Common Stock will not exceed
$2.25 per share, (iv) effective Section 83(b) elections have been and will be
made with respect to all Next Level Stock currently held by
shareholder-employees which were subject to forfeiture restrictions when issued
and all GI Common Stock to be received in the Merger by shareholder-employees
which will be subject to forfeiture restrictions, (v) all outstanding options
and warrants to acquire Next Level Stock will be exercised prior to the Merger
and the shares of Next Level Stock issued upon such exercises will be treated
as outstanding stock for tax purposes, and (vi) holders of fewer than 1% of the
outstanding shares of Next Level Stock will perfect dissenters' rights. The
failure of any one or more of these assumptions to be true would not cause the
Merger to fail to qualify as a Reorganization for federal income tax purposes,
so long as at least 80% of the outstanding Next Level Stock (excluding any
shares deemed held by GI for tax purposes) is exchanged in the Merger for GI
Common Stock.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or the
"control" requirement or otherwise) would result in a Next Level shareholder
recognizing, at the Effective Time of the Merger, gain or loss with respect to
each share of Next Level Stock surrendered equal to the difference between the
shareholder's basis in such share and the fair market value, as of the
Effective Time, of the GI Common Stock received in exchange therefor. In such
event, a shareholder's aggregate basis in the GI Common Stock so received would
equal its fair market value, and the shareholder's holding period for such
stock would begin the day after the Merger.
Moreover, in view of the discussion in the preceding paragraphs, there is a
risk that Next Level shareholders will be required to recognize significant
income even if the Merger qualifies as a Reorganization and such shareholders
receive solely GI Common Stock in the Merger.
None of GI, GI's stockholders, Next Level or Newco will recognize gain solely
as a result of the Merger.
Regulatory Approvals
GI and Next Level are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than registration pursuant to
the Securities Act of the shares of GI Common Stock that are issuable in the
Merger and compliance with applicable securities and "blue sky" laws of the
various states.
Accounting Treatment
The Merger will be accounted for by GI under the "purchase" method of
accounting, in accordance with generally accepted accounting principles, and
the assets and liabilities of Next Level will be reflected at their fair value
at the date of the Merger. Further, Next Level is a development stage company,
and all of its activities have been devoted to the development of new
technology. Accordingly, a significant portion of the purchase price is
expected to be allocated to purchased research and development and charged to
expense at the date of the Merger. The assets and liabilities and results of
operations of Next Level will be included in the assets and liabilities and
results of operations of GI only for periods subsequent to the date of the
Merger.
Dissenters' Rights
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE,
THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS ANNEX H.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN SECTION 1300 ET SEQ.
OF THE CALIFORNIA CORPORATIONS CODE MAY RESULT IN THE LOSS, TERMINATION OR
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WAIVER OF DISSENTERS' RIGHTS. A NEXT LEVEL SHAREHOLDER WHO SIGNS A CONSENT
APPROVING AND AUTHORIZING THE MERGER AGREEMENT WILL NOT HAVE A RIGHT TO DISSENT
FROM THE MERGER AGREEMENT.
Under the CCC, each Next Level shareholder as of the Record Date is entitled
to demand and receive payment of the fair value of all or any portion of such
holder's shares of Next Level Stock if the Merger is consummated pursuant to
Section 1300 et seq. of the CCC. The fair value of such shares is determined
as of September 5, 1995, the last business day before the first announcement
of the terms of the Merger. Any Next Level shareholder who elects to perfect
such holder's dissenters' rights and demands payment of the fair value of such
holder's shares of Next Level Stock must strictly comply with Section 1300 et
seq. of the CCC. The following summary does not purport to be complete and is
qualified in its entirety by reference to Section 1300 et seq. of the CCC, the
text of which is attached as Annex H and is incorporated herein by reference.
Any holder of shares of Next Level Stock considering exercising dissenters'
rights is advised to consult legal counsel. Dissenters' rights will not be
available unless and until the Merger (or a similar business combination) is
consummated. To perfect the right to dissent and receive the fair value of
such holder's shares, a shareholder must not execute a Consent approving the
Merger and must not otherwise vote in favor of the Merger. Within 10 days
after the date of approval of the Merger, Next Level will mail to each Next
Level shareholder who did not execute a Consent approving the Merger
notice (the "Notice") of the approval of the Merger by the Next Level
shareholders, accompanied by a copy of Section 1300 et seq. of the CCC. The
Notice shall also state the price determined by Next Level to be the fair
market value of the Dissenting Shares and a brief description of the procedure
to be followed by a shareholder who elects to exercise dissenters' rights.
Any dissenting shareholder who desires that Next Level purchase his shares of
Next Level Stock must make written demand upon Next Level for the purchase of
such shares. The demand must be made no later than 30 days after the Notice
was mailed to the shareholder. The shareholder's demand must state the number
and class of shares held of record by the shareholder which the shareholder
demands that Next Level purchase, and include a statement by the shareholder as
to what such holder believes the fair market value of such shares was as of the
day prior to the announcement of the Merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
Neither failing to execute a Consent approving the Merger, voting against the
Merger, abstaining from voting nor failing to vote on the Merger constitutes
such written demand.
Within the same 30-day period following the mailing of the Notice, the
dissenting shareholder must submit to Next Level for endorsement certificates
for any shares which the shareholder demands Next Level purchase. If Next
Level and the shareholder agree upon the price of the Dissenting Shares, the
dissenting shareholder is entitled to the agreed price with interest at the
legal rate on judgments from the date of such agreement. Payment must be made
within 30 days of the later of the date of the agreement between the
shareholder and Next Level or the date the contractual conditions to the Merger
are satisfied.
If Next Level and the dissenting shareholder cannot agree as to the fair
market value of, or as to the fact that such shares are, Dissenting Shares,
such shareholder may file within six months of the date of mailing of the
Notice a complaint with the proper California Superior Court demanding judicial
determination of such matters. Next Level will then be required to make any
payments in accordance with such judicial determination. If the complaint is
not filed within the specified six-month period, the shareholder's rights as a
dissenter will be lost.
Dissenting Shares will lose their status as such if (i) Next Level abandons
the Merger; (ii) the shares are transferred or are surrendered for conversion
into shares of another class; (iii) the dissenting shareholder and Next Level
do not agree as to the fair market value of such shares and a complaint is not
filed within six months of the date the Notice was mailed; or (iv) the
dissenting shareholder withdraws, with the consent of Next Level, his demand
for purchase of the Dissenting Shares.
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<PAGE>
At the Effective Time, the shares of Next Level Stock held by a Next Level
shareholder exercising dissenters' rights will be canceled, and such
shareholder will be entitled to no further rights except the right to receive
payment of the fair value of such holder's shares of Next Level Stock.
However, if such shareholder fails to perfect or withdraws or loses his rights
as a dissenter with respect to such holder's shares of Next Level Stock, such
holder's shares of Next Level Stock will be exchanged for GI Common Stock as
provided in the Merger Agreement.
Next Level has agreed pursuant to the Merger Agreement to give GI prompt
notice of any exercise of dissenters' rights by holders of Next Level Stock
pursuant to the CCC, attempted withdrawals of such exercise, and any other
instruments served pursuant to the CCC and received by Next Level relating to
shareholders' rights to dissent. Next Level has also agreed to provide GI with
the opportunity to direct all negotiations and proceedings with respect to such
dissenters' rights and not to voluntarily make any payment with respect to any
dissenters' rights, offer to settle or settle any such rights or approve any
withdrawal of any such exercise without the prior written consent of GI.
36
<PAGE>
INFORMATION CONCERNING GI
Business; Properties; Legal Proceedings
For a description of GI's Business, Properties and Legal Proceedings, see the
corresponding headings beginning on page 2 of GI's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, attached hereto as Annex D.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For GI Management's Discussion and Analysis of Financial Condition and
Results of Operations, see pages 20-25 of GI's 1994 Annual Report to
Stockholders, attached hereto as Annex E, and pages 9-11 of GI's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, attached hereto as
Annex F. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known by GI regarding
the beneficial ownership of GI Common Stock, as of August 31, 1995, by each
beneficial owner of more than five percent of the outstanding shares of GI
Common Stock, by each of GI's directors, by each of the current executives
named in the Summary Compensation Table on page 9 of GI's 1995 Proxy Statement,
attached hereto as Annex G, and by all current directors and officers of GI as
a group.
Name Number of Shares Beneficially Owned (1)
Percentage
of Class (1)
MBO-IV (2) 10,161,657 8.2
Instrument Partners (2) 11,547,008 9.4
AXA/Equitable (3) 20,968,634 17.0
Daniel F. Akerson (2)(4)(7) 760,668 *
John Seely Brown (5) 18,333 *
Frank M. Drendel (6) 288,420 *
Thomas A. Dumit (7)(8) 70,566 *
Lynn Forester 1,000 *
Nicholas C. Forstmann (2) 21,708,665 17.6
Theodore J. Forstmann (2) 21,708,665 17.6
Richard S. Friedland (7)(9) 181,338 *
Winston W. Hutchins 21,708,665 17.6
Steven B. Klinsky (2) 21,708,665 17.6
Wm. Brian Little (2) 11,547,008 9.4
Morton H. Meyerson (10) 57,333 *
J. Tracy O'Rourke (11) 22,210 *
Felix G. Rohatyn (12) 28,666 *
John A. Sprague (2) 11,547,008 9.4
Paul G. Stern (12) 26,666 *
Robert S. Strauss (13) 32,605 *
All current directors and officers
of GI as a group (20 persons) (2)(8 )(14) 23,339,642 18.8
* Less than 1%.
37
<PAGE>
(1) For purposes of this table, a person or group of persons is deemed
to have "beneficial ownership" of any shares of GI Common Stock which
such person has the right to acquire with in 60 days following
August 31, 1995. For purposes of computing the percentage of
outstanding shares of GI Common Stock held by each person or group of
persons named above, any security which such person or persons has or
have the right to acquire within 60 days following August 31, 1995 is
deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(2) The general partner of Instrument Partners, a New York limited
partnership ("Instrument Partners"), is FLC XXII Partnership, a general
partnership of which Messrs. Wm. Brian Little, Nicholas C. Forstmann, John
A. Sprague, Steven B. Klinsky and Winston W. Hutchins, and TJ/JA L.P., a
Delaware limited partnership ("TJ/JA L.P."), are general partners. The general
partner of TJ/JA L.P. is Theodore J. Forstmann. The general partner of
Forstmann Little & Co. Subordinated Debt and Equity Management Buyout
Partnership-IV, a New York limited partnership ("MBO-IV"), is FLC
Partnership, L.P., a limited partnership of which Messrs. Theodore J.
Forstmann, Nicholas C. Forstmann, Steven B. Klinsky, Winston W. Hutchins
and Daniel F. Akerson and Ms. Sandra J. Horbach are general partners.
Accordingly, each of such individuals and partnerships (other than Mr.
Akerson and Ms. Horbach, for the reasons described below) may be deemed the
beneficial owners of shares owned by MBO-IV and Instrument Partners in
which such individual or partnership is a general partner and for purposes
of this table, such beneficial ownership is included. Neither Mr. Akerson
nor Ms. Horbach has any voting or investment power with respect to, or any
economic interest in, the shares of GI Common Stock held by MBO-IV; and,
accordingly, Mr. Akerson and Ms. Horbach are not deemed to be the
beneficial owners thereof. Theodore J. Forstmann and Nicholas C. Forstmann
are brothers. Mr. Little is a special limited partner in FLC Partnership,
L.P. and each of FLC Partnership L.P. and FLC XXII Partnership is a limited
partner of Instrument Partners. None of the other limited partners in each
of MBO-IV and Instrument Partners is otherwise affiliated with GI, GI
Delaware or Forstmann Little & Co. The address of MBO-IV and Instrument
Partners is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New
York 10153.
(3) This information is obtained from Schedule 13G filed with the SEC,
dated February 10, 1995, jointly by AXA Assurances I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha
Assurances Vie Mutuelle and Uni Europe Assurances Mutuelle as a group
(collectively, the "Mutuelles AXA"), AXA, and The Equitable Companies
Incorporated ("Equitable"). Equitable and its subsidiaries beneficially
own 20,946,634 shares of GI Common Stock as follows: 16,588,665 shares and
4,357,969 shares issuable upon conversion of 5% Convertible Junior
Subordinated Notes of GI. Equitable and its subsidiaries have sole voting
power with respect to 18,010,486 shares, shared voting power with respect
to 410,622 shares and sole disposition power with respect to 20,946,634
shares. The Mutuelles AXA and AXA report ownership of 20,968,634 shares,
including all the shares beneficially owned by Equitable, and claim sole
voting and dispositive power with respect to 22,000 shares in addition to
the shares reported by Equitable. The addresses of the principal business
offices of each of the Mutuelles AXA, AXA and Equitable are as follows:
Alpha Assurances I.A.R.D. Mutuelle and Alpha Assurances Vie Mutuelle, 101-
100 Terrase Boieldieu, 92042 Paris La Defense, France; AXA Assurances
I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle, La Grand Arche, Pardi
Nord, 92044 Paris La Defense, France; Uni-Europe Assurance Mutuelle, 24 rue
Drouot, 75009 Paris, France; AXA, 23, Avenue Matignon, 75008 Paris, France;
The Equitable Companies Incorporated, 787 Seventh Avenue, New York, NY
10019.
(4) Includes 745,668 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(5) Includes 17,333 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
38
<PAGE>
(6) Includes 32,500 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995. Includes 382 shares which
were held by the trustee of the CommScope, Inc. Employees Profit Sharing and
Savings Plan (the "CommScope Savings Plan") and were allocated to Frank M.
Drendel's account under the CommScope Savings Plan as of the date of the
most recent plan year-end statement.
(7) Includes the number of shares which were held by the trustee of the
General Instrument Corporation Savings Plan (the "Savings Plan") and were
allocated to the individual's respective account under the Savings Plan as of
the date of the most recent plan year-end statement as follows: Daniel F.
Akerson, 241 shares; Thomas A. Dumit, 1,438 shares; and Richard S.
Friedland, 3,876 shares.
(8) Includes 10,212 shares held by the Thomas A. Dumit Charitable Remainder
Trust, dated April 27, 1994, of which Mr. Dumit is the trustee and a
beneficiary. Also includes 28,096 shares held by Barbara K. Dumit, the
spouse of Thomas A. Dumit, as to which shares Mr. Dumit disclaims
beneficial ownership. Includes 31,000 shares subject to options which are
exercisable currently or within 60 days of August 31, 1995.
(9) Includes 108,000 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(10) Includes 53,333 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(11) Includes 20,210 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(12) Includes 26,666 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(13) Includes 22,605 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995.
(14) Includes 926,979 shares subject to options which are exercisable
currently or within 60 days of August 31, 1995. Includes an aggregate of
16,451 shares which were held by the trustees of the Savings Plan and the
CommScope Savings Plan and were allocated to the officers' respective
accounts under the Savings Plan or the CommScope Savings Plan as of the
date of the most recent respective plan year-end statement.
Management; Executive Compensation; Certain Transactions
For information concerning GI's directors and executive officers, executive
compensation, and certain relationships and related transactions, see
"Executive Officers of the Registrant" on page 10 of GI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, attached hereto as
Annex D, and "Election of Directors," "Further Information Concerning the Board
of Directors and Committees," "Compensation of Executive Officers" and "Other
Related Party Transactions" on pages 2-5, 9-12 and 18-20, respectively, of GI's
1995 Proxy Statement, attached hereto as Annex G.
On August 1, 1995, Richard S. Friedland, who had previously been President
and Chief Operating Officer of GI, was also named Chief Executive Officer.
Daniel F. Akerson, who had previously been Chairman of the Board and Chief
Executive Officer of GI, remains Chairman of the Board.
39
<PAGE>
INFORMATION CONCERNING NEXT LEVEL
Business
Next Level was formed to design, manufacture and market a next generation
telecommunications broadband access system for the delivery of telephony, video
and data from a telephone company central office or cable television headend to
the home. NLevel3 is designed to permit the cost-effective delivery of a suite
of standard telephony and advanced services such as work-at-home,
distance-learning, video-on-demand and video-telephony to the home from a
single access platform. NLevel3 is designed to work with and enhance existing
telephony and cable television networks.
Background. Broadband services, such as movies-on-demand, home shopping and
banking, distance-learning, time-shifted television and interactive video
games, have been targeted by telephone and cable television companies and
other network providers as a key aspect of future communications and
information transmission networks. Currently, however, these services cannot
be delivered effectively to subscribers over existing telephone and cable
television networks. Broadband services require networks that are capable of
transmitting large amounts of information in both directions, to and from the
subscriber. Current telephony networks provide two-way transmission but are
limited in the amount of information that can be transmitted. Cable television
networks are capable of transmitting large amounts of information, but
generally only in one direction without major upgrades. In order to offer
both broadband and existing telephony services cost-effectively, Next Level
believes a new access network is needed.
Strategy. Next Level's strategy is to be early to the market with an
integrated broadband access system that combines the disparate features of the
telephone and cable television networks, which it believes will make its
product a valuable platform for the construction of the information highway.
Next Level's commercialization plan is to develop a product that offers a
telephony-first set of features at a competitive price and that is also
broadband ready. In this way, Next Level plans to tap into the current large
local access equipment market driven by the demand for existing services while
providing an upgrade path for future broadband services. Next Level intends
to focus its efforts on communications companies that serve metropolitan and
suburban areas and encompass large numbers of subscribers. Next Level believes
this market segment will provide the largest amount of new and upgraded outside
plant construction and the greatest number of customers that would be receptive
to advanced services, thus providing an appropriate climate for the product's
broad deployment. Next Level's goal is to design a product initially for the
United States marketplace with the capability to efficiently migrate the system
and interface to meet worldwide standards.
The NLevel3 Product. Next Level's product is the NLevel3 broadband access
system, which is currently in development. Development plans call for
demonstration of the architecture in 1995, with customer laboratory and field
trials and limited product deployment occurring in 1996.
NLevel3 will support existing telephony services and be compatible with the
major operational support systems in use today. The system can drive a direct
Bellcore TR-008 or TR-303 switch interface for narrowband telephony, such as
conventional "plain old telephone services" ("POTS") or higher-speed Integrated
Services Digital Network ("ISDN") and Primary Rate services, to be delivered to
a digital Class-5 switch in a telephone company switching office or to an
inter-office facility.
The principal components of the architecture are a Broadband Digital Terminal
("BDT") and a Broadband Network Unit ("BNU"). When the BDT is installed in a
telephone company central office and a BNU is installed near a customer's
residence, the system will enable the two-way transmission of large amounts of
telephony, video and data between the central office and the residence.
Next Level's design philosophy is to make maximum use of the standards
promulgated by Bellcore, ANSI, Asynchronous Transfer Mode ("ATM") Forum and
international standards bodies in the design of
40
<PAGE>
NLevel3. This promotes interoperability and eases deployment by Next Level's
customers within the public network.
NLevel3 is an optical system designed to work with current telephony core
switching networks and cable television systems. The product delivers a wide
range of existing services, while offering a platform from which to migrate to
more advanced services using the latest ATM and digital video technology. In
doing so, NLevel3 is expected to offer current telephony and television
services economically while at the same time providing a cost-effective path
for advanced services.
The NLevel3 architecture is designed to meet a variety of industry standards,
including Bellcore Technical Reference TR-909 for Fiber in the Loop Systems,
many Bellcore ATM-related technical references and the ATM Forum
specifications. NLevel3 can be installed as a telephony-only system or a
telephony and digital broadband system. In combination with a cable television
system, NLevel3 can be installed as a full telephony, digital and analog
broadband system. This approach utilizes standard telephony architecture for
digital services and cable television broadcast technology to deliver those
services that are inherently broadcast in nature. Placing all digital services
on NLevel3 and restricting the cable television network to the delivery of
analog television means that a low bandwidth (300-400 Mhz) one-way cable
television system can be used.
NLevel3 brings digital signals from a BDT at the switching office to a BNU
near the residence via an optical fiber. The signals are based on the
Synchronous Optical Network ("SONET") transmission and ATM multiplexing
standards. The signals destined for a home can be delivered to one home
selectively, using ATM multiplexing and switching, thereby reducing the need
for encryption while maintaining security.
NLevel3 combines with a cable television network at a tap where the
connection to the cable television system is unique to the home. By isolating
each individual home with the BNU, Next Level believes that the maintenance and
monitoring of the network will be enhanced, because homes cannot interface with
one another and problems can more readily be isolated to a single dwelling.
The NLevel3 BNU will allow monitoring of the transmission to the BNU and into
the home independently, enabling early detection and isolation of problems with
minimal intervention.
Prospective Customers; Marketing and Sales. Next Level believes the U.S.
companies most likely to be purchasing broadband access system equipment in the
foreseeable future include the seven regional bell operating companies, other
large independent telephone companies such as GTE Corporation, and large cable
television companies such as TeleCommunications Inc., Time-Warner and Viacom.
Next Level's initial product is still in development and has not begun the
significant laboratory and field testing that will be required to qualify it
for purchase by prospective customers. Successful market introduction and
commercialization of the NLevel3 product and any future Next Level products
will require a substantial increase in the number of people, capital, and other
resources devoted to marketing and sales functions.
Competition. Competition in the broadband access system equipment market is
expected to involve many large and well established companies with extensive
experience selling electronic equipment to telephone and cable television
companies, as well as emerging technology companies. The market for local loop
electronic products has been dominated by AT&T, although other
telecommunications companies have made significant inroads into this market in
recent years. GI and Scientific-Atlanta, Inc. have been the preeminent
suppliers of headend and distribution systems and television set-top boxes to
the cable television industry, and Broadband Technologies, Inc. is an example
of a growing company recognized for switched digital video technology.
Manufacturing. Commercialization of the NLevel3 product and any future
products will require a substantial investment in manufacturing capacity,
negotiation of significant third-party manufacturing arrangements or a
combination of the two. Because of the significant time remaining before Next
Level
41
<PAGE>
will be in a position to introduce the NLevel3 product for sale to the
commercial market, Next Level has not to date made any significant investment
in manufacturing resources or sought to negotiate any third-party manufacturing
arrangements. In the event the Merger is not consummated, Next Level plans to
acquire sufficient manufacturing capacity and relationships in addition to its
existing development resources to enable it to manufacture the small quantities
of products that will be required to complete laboratory trials of the NLevel3
product.
Employees. As of August 31, 1995, Next Level had 68 employees, of whom 56
were engaged in engineering, research and development and 12 were in
administration, sales and marketing. Next Level's employees are not
represented by any collective bargaining organization, and Next Level has not
experienced any work stoppages. Next Level believes its relations with its
employees are good.
Facilities. Next Level's principal facility, located in Rohnert Park,
California, consists of approximately 20,000 square feet of research and
development and office space occupied under leases that expire in April 2000.
This space houses all of Next Level's product development and administrative
functions. Next Level also leases small sales offices in New York and
Michigan. Next Level believes its existing facilities are adequate to meet
current and foreseeable requirements and that suitable additional or
alternative space will be available as needed on reasonable terms.
Litigation. In April 1995, DSC Communications Corporation and DSC
Technologies Corporation (collectively, "DSC") brought suit in Texas state
court against Next Level, the Founders and two other employees of Next Level.
DSC's allegations included, among others, causes of action for breach of
contract, theft of trade secrets and unfair competition. Next Level and the
individual defendants subsequently removed the case to the Federal District
Court for the Eastern District of Texas. In May 1995, the federal court
dismissed the other two employees from the action for lack of personal
jurisdiction. In June 1995, the court issued a preliminary injunction
prohibiting the remaining defendants from using any ideas contained in any
written material transmitted by two identified DSC employees to one of the
Founders pertaining to switched digital video that was or is not in the public
domain, and from soliciting DSC employees for employment at Next Level. The
parties are currently engaged in discovery. The court has advised the parties
that trial will be set for a date on or after February 12, 1996.
In April 1995, Next Level filed suit in California state court against DSC
and two employees of DSC's Access Products Division. Next Level seeks recovery
in this action based on allegations of unlawful and anti-competitive conduct
violating the California Business and Professions Code, intentional
interference with contractual relations and interference with prospective
economic advantage. The court has granted a motion staying this action until
resolution of the Federal District Court action, but will retain jurisdiction
over the case. After resolution of the Federal District Court action, the
court will entertain a motion by Next Level, if appropriate, to reopen the
California proceedings.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview. Since the inception of Next Level's activities in July 1994, Next
Level has devoted its resources primarily to the design and development of its
initial product, NLevel3. Next Level has been unprofitable since inception and
has not received any revenues from the sale of products. At June 30, 1995, the
Company's accumulated deficit was approximately $4.0 million.
Results of Operations for the Fiscal Year Ended June 30, 1995. Since its
inception, Next Level has not had any revenues other than interest income, and
it does not anticipate revenues from product sales before the end of 1996.
Results of operations for the nine days from incorporation to June 30, 1994
were not meaningful.
Next Level incurred operating expenses of approximately $4.3 million in the
fiscal year ended June 30, 1995. These expenses included salaries, consulting
fees, facilities, depreciation of purchased equipment and leasehold
improvements, travel expenses and other expenditures relating to research and
42
<PAGE>
product development. Next Level expects operating expenses to increase in
future periods as it expands its research and product development efforts.
Operating expenses also included general and administrative expenses for
salaries, legal and accounting services, depreciation, amortization of unearned
compensation, facilities and supplies. Next Level expects general and
administrative expenses to increase as its operations increase and it prepares
to manufacture and market its products.
Interest income for the fiscal year ended June 30, 1995 was approximately
$274,000, primarily from interest earned on short-term investments from the
proceeds from the sale of Series A Preferred Stock in August 1994 and February
1995.
Liquidity and Capital Resources. Next Level has financed its operations
since inception primarily through private sales of Series A Preferred Stock.
Through June 30, 1995, Next Level had received approximately $11.4 million in
net proceeds from sales of Series A Preferred Stock.
From inception through June 30, 1995, Next Level acquired capital equipment
of approximately $2.1 million, primarily through cash purchases.
From inception through June 30, 1995, Next Level used approximately $5.3
million of cash in operating activities and purchases of furniture, fixtures,
equipment and improvements. Next Level expects its cash requirements to
increase in future periods as its research and development program expands and
it prepares to manufacture and market its products. Next Level has not
established any credit facilities with banks or other financial institutions.
At June 30, 1995, Next Level had cash, cash equivalents and short-term
investments of approximately $6.3 million. Next Level will require substantial
additional financing in order to continue operating at its present level. If
the Merger is not consummated within the anticipated time period, Next Level
intends to seek additional private equity financing.
Pending Litigation. Next Level is a defendant in certain litigation brought
by the previous employer of the Founders. See "Information Concerning Next
Level -- Business -- Litigation" and Note 9 of Notes to financial statements of
Next Level.
43
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following sets forth certain information as to the number of shares
of Next Level Common Stock and Series A Preferred Stock beneficially owned as
of August 31, 1995 and the number of shares of GI Common Stock to be
beneficially owned immediately upon consummation of the Merger by (i) each
person who is known to Next Level beneficially to own 5% or more of the
outstanding shares of any class of Next Level Stock, (ii) each director of Next
Level, (iii) each executive officer of Next Level and (iv) all directors and
executive officers of Next Level as a group:
TABLE DEFINED W/OUT LINES -- WP
<TABLE>
<CAPTION>
Shares of GI Common
Stock Beneficially
Name and Address Shares of Next Level Stock Owned After
of Beneficial Owner Beneficially Owned the Merger(1)
Percent
of All
Next
Title of Number Percent Level Number
Class of Shares of Class Stock of Shares Percent
<S> <C> <C> <C> <C> <C> <C>
Entities and individuals Series A
affiliated with Preferred 2,440,000(2) 38.9% 18.8% 470,920 *
BKP Partners
One Sansome Street,
Suite 3900
San Francisco, CA 94104
Stuart Zimmerman Series A
c/o BKP Partners Preferred 2,220,000(3) 36.1 17.4 428,460 *
One Sansome Street,
Suite 3900
San Francisco, CA 94104
Thomas R. Eames Series A 100,000 1.7 *
c/o Next Level Communications Preferred 17.0 291,121
6153 State Farm Drive
Rohnert Park, CA 94928 Common 2,075,000 30.8
Peter W. Keeler Series A 100,000 1.7 *
c/o Next Level Communications Preferred 17.0 289,811
6153 State Farm Drive
Rohnert Park, CA 94928 Common 2,065,000 30.7
General Instrument Corporation Series A
181 West Madison Street, Preferred 1,032,000(4) 17.1 8.1 199,176 *
49th Floor
Chicago, IL 60602
44
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Richard S. Friedland Series A 1,032,000(5) 17.1 8.1 199,176
c/o General Instrument Preferred
Corporation
181 West Madison Street,
49th Floor
Chicago, IL 60602
Charles N. Mathewson Series A
Trust dated 7/22/92 Preferred 1,000,000 16.6 7.8 193,000 *
c/o International Game
Technology
5270 Neil Road
Reno, NV 89502
Entities affiliated with Series A
Prism Partners Preferred 500,000(6) 8.3 3.9 96,500 *
c/o Weintraub Capital
Management
909 Montgomery Street #406
San Francisco, CA 94133
All directors and executive Series A
officers as a group Preferred 3,672,000(5) 58.5
60.1 1,251,028
Common 4,140,000 61.5
<FN>
____________________________
* Less than 1%.
1. Based on the closing price of GI Common Stock on September 1, 1995 ($36.25 per share). The
actual number of shares to be issued pursuant to the Merger will be determined as provided in the Merger
Agreement. See "Terms of the Merger -- Manner and Basis of Converting Shares."
2. Includes 2,000,000 shares held by BKP Partners, L.P., 100,000 shares held by BKP Capital
Management 401(k) and Pension Plan FBO Bob K. Pryt, 25,000 shares held by BKP Capital Management 401(k)
Profit Sharing and Money Purchase Pension Plan and Trust FBO I. Lew and S. Zimmerman, 120,000 shares
subject to a warrant held by Bob K. Pryt, and 75,000 shares and a warrant to purchase 120,000 shares held
by Stuart Zimmerman. Mr. Pryt is a general partner of BKP Partners.
3. Includes 25,000 shares held by BKP Capital Management 401(k) Profit Sharing Plan and Money
Purchase Pension Plan and trust FBO I. Lew and S. Zimmerman, 2,000,000 shares held by BKP Partners, L.P.
and 75,000 shares and a warant to purchase 120,000 shares held by Mr. Zimmerman. Mr. Zimmerman is a
director of Next Level and a partner of BKP Partners. Mr. Zimmerman disclaims beneficial ownership of
all shares held by entities and individuals affiliated with BKP Partners, except to the extent of his
pecuniary interest therein.
4. Consists of shares owned by General Instrument Corporation of Delaware, a wholly-owned subsidiary
of General Instrument Corporation.
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<PAGE>
5. Consists of shares owned by a wholly-owned subsidiary of General Instrument Corporation, of which
Mr. Friedland disclaims beneficial ownership. Mr. Friedland is President and Chief Executive Officer of
General Instrument Corporation.
6. Includes 420,000 shares held by Prism Partners I, 50,000 shares held by Prism Partners II and
30,000 shares held by Common Sense Partners.
</FN>
</TABLE>
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<PAGE>
DESCRIPTION OF GI CAPITAL STOCK
General
Pursuant to GI's Certificate of Incorporation (the "GI Certificate"), GI's
authorized capital stock currently consists of (i) 20,000,000 shares of
preferred stock, par value $.01 per share ("GI Preferred Stock"), and (ii)
400,000,000 shares of GI Common Stock, par value $.01 per share. As of
August 1, 1995, 123,276,737 shares of GI Common Stock were issued and
outstanding. All outstanding shares of GI Common Stock are fully paid and
nonassessable. No shares of GI Preferred Stock are issued and outstanding.
Common Stock
Each holder of GI Common Stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
voting for the election of directors can elect all the directors if they
choose to do so, subject to any voting rights of holders of GI Preferred
Stock to elect directors. Subject to the preferential rights of any
outstanding series of GI Preferred Stock and to the restrictions on
payments of dividends imposed by the Credit Agreement, the holders of GI
Common Stock will be entitled to such dividends as may be declared from time to
time by the GI Board from funds legally available therefor, and will be
entitled, after payment of all prior claims, to receive pro rata all assets of
GI upon the liquidation, dissolution or winding up of GI. Holders of GI Common
Stock have no redemption rights, conversion rights or preemptive rights to
purchase or subscribe for securities of GI.
The GI Common Stock is listed on the NYSE under the symbol "GIC."
Preferred Stock
No shares of GI Preferred Stock are currently issued or outstanding. The
GI Board is authorized to divide the GI Preferred Stock into series and,
with respect to each series, to determine the preferences and rights and
the qualifications, limitations or restrictions thereof, including the
dividend rights, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series and the designation of such series. The GI Board
could, without stockholder approval, issue GI Preferred Stock with voting and
other rights that could adversely affect the voting power of the holders of GI
Common Stock and could have certain anti-takeover effects. GI has no present
plans to issue any shares of GI Preferred Stock.
Limitation of Liability and Indemnification Matters
The GI Certificate provides that a director of GI will not be personally
liable to GI or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except in certain cases where liability is
mandated by the DGCL. The provision has no effect on any non-monetary
remedies that may be available to GI or its stockholders, nor does it
relieve GI or its directors from compliance with federal or state
securities laws. The GI Certificate and GI's Bylaws (the "GI
Bylaws") provide for indemnification, to the fullest extent permitted by the
DGCL, of any person who is or was involved in any manner in any
investigation, claim or other proceeding by reason of the fact that such
person is or was a director or officer of GI, or is or was serving at the
request of GI as director or officer of another corporation, against all
expenses and liabilities actually and reasonable incurred by such person
in connection with the investigation, claim or other proceeding.
Delaware Law and Limitations on Changes in Control
Section 203 of the DGCL ("Section 203") prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from
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<PAGE>
engaging in a "business combination" (as defined in Section 203) with a
publicly-held Delaware corporation (or its majority-owned subsidiaries) for
three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also
officers of the corporation and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) following the transaction in which such person
became an interested stockholder, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66-2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
The GI Certificate provides for a classified board of directors consisting of
three classes. Each class consists, as nearly as may be possible, of
one-third of the total number of directors constituting the entire GI
Board. At each annual meeting of stockholders, successors to the class of
directors whose term expires at that annual meeting will be elected for a
three-year term and until their respective successors are elected and qualified.
The classified GI Board, the provisions authorizing the GI Board to issue GI
Preferred Stock without stockholder approval, and the provisions of Section 203
could have the effect of delaying, deferring or preventing a change in
control of the Company or the removal of existing management.
Transfer Agent
The transfer agent for the GI Common Stock is Chemical Bank.
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<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF
GI COMMON STOCK AND HOLDERS OF
NEXT LEVEL STOCK
Upon consummation of the Merger, the shareholders of Next Level will become
shareholders of GI whose rights will cease to be defined and governed by the
CCC, the Restated Articles of Incorporation of Next Level (the "Next Level
Articles") and the Bylaws of Next Level (the "Next Level Bylaws") and will
instead be defined and governed by the DGCL, the GI Certificate and the GI
Bylaws. The DGCL, the GI Certificate and the GI Bylaws provide for
different rights of shareholders from those that Next Level shareholders
presently have. Certain of these differences are summarized below. This
summary is qualified in its entirety by reference to the GI Certificate,
the GI Bylaws, the Next Level Articles, the Next Level Bylaws
and applicable law. GI may at any time implement other changes in addition to
those described below by amending the GI Certificate or the GI Bylaws.
Capital Stock
The Next Level Articles currently authorize 50,000,000 shares of Next Level
Common Stock and 20,000,000 shares of preferred stock. See "Description of
GI Capital Stock" for information concerning the capital stock of GI.
Cumulative Voting
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the
number of directors to be elected. A shareholder may then cast all such
votes for a single candidate or may allocate them among as many candidates
as the shareholder may choose. Without cumulative voting, the holders of a
majority of the shares present at an annual meeting or any special meeting
held to elect directors would have the power to elect all the directors to
be elected at that meeting, and no person could be elected without the
support of holders of a majority of the shares voting at such meeting.
Under the CCC, subject to certain exceptions, cumulative voting in the
election of directors is a right available to all shareholders of a
California corporation if a shareholder gives notice at a meeting prior to
the voting for election of directors of the shareholder's intention to
cumulate his or her votes. The Next Level Bylaws provide that Next Level
shareholders have cumulative voting rights.
Under the DGCL, stockholders may cumulate their votes for directors only if so
provided in the corporation's certificate of incorporation. The GI
Certificate and GI Bylaws do not provide for cumulative voting and,
therefore, the shareholders of Next Level will no longer have cumulative
voting rights following the Merger. The lack of cumulative voting rights
may limit the ability of minority shareholders to obtain representation on
the GI Board.
Derivative Actions
Under the CCC, a shareholder may bring a derivative action if he or she was a
shareholder at the time of the alleged wrongdoing and has made a demand on the
board of directors for relief. Under the CCC, a shareholder who was not a
shareholder at the time of the alleged wrongdoing may bring an action, at the
court's discretion, if he or she acquired shares before disclosure of the
alleged wrongdoing. Under the DGCL, a stockholder may bring a derivative
action if she or he was a stockholder at the time of the alleged wrongdoing
or if he or she became a stockholder through transfer by operation of law
from one who was a shareholder at the time of the alleged wrongdoing.
Additionally, the shareholder must make a demand on the board of directors
for relief.
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Terms of Directors
The Next Level Board is not divided into classes and all directors are
elected at each annual meeting. The GI Board is divided into three classes,
and each director is elected for a three-year term. A classified board has
the effect of making it more difficult for stockholders to change the
composition of the board. The classified GI Board may, therefore, have
the effect of discouraging a third party from attempting to gain control of GI.
Removal of Directors
Under the CCC and the Next Level Bylaws, any director or the entire board of
directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote. However, no director
may be removed if the number of shares voted against the removal would be
sufficient to elect the director under cumulative voting (unless the entire
board of directors is removed).
The GI Certificate provides that any or all of the directors of GI may be
removed from office, with or without cause, at any time by the affirmative
vote of the holders of a majority of the outstanding shares of GI then
entitled to vote generally in the election of directors, considered as
one class.
Bylaws
Under the CCC, bylaws may be adopted, amended or repealed either by approval
of a majority of shares entitled to vote or, excepting the case of a bylaw
specifying the number of directors, by the board of directors. Under the
DGCL and the GI Certificate, the GI Bylaws may be adopted, amended or repealed
by the GI Board or by the affirmative vote of a majority of the outstanding
stock entitled to vote thereon.
Rights of Inspection
Under the CCC, the books, records and the shareholders' list of a corporation
are open to inspection by a shareholder for any purpose reasonably related
to such holder's interests as a shareholder upon written demand. A
shareholder or shareholders who hold at least five percent of the
outstanding voting shares of a corporation, or who hold at least one percent
of such shares and have made the
proper filings with the SEC, have an absolute right to inspect and copy the
corporation's shareholders' list upon written demand. Under the DGCL, the
books, records and the stockholders' list of a corporation are open to
examination during regular business hours for any purpose reasonably related
to a person's interest as a stockholder by any stockholder who in good
faith gives the corporation written notice describing the stockholder's
purpose. Additionally, the stockholders' list is available for examination
before and at any stockholders' meeting. Since the DGCL does not provide an
absolute right of inspection for specified shareholders (in contrast to
the CCC), certain Next Level shareholders who become GI stockholders will no
longer have access to the stockholders' list for purposes unrelated to their
interest as a stockholder.
Dividend Declarations
Under the CCC, a corporation may declare and pay dividends (i) if the amount of
its retained earnings immediately prior thereto is at least equal to the
amount of the dividend to be paid, or (ii) if, after distributing the
dividend, the assets of the corporation would be at least equal to one and
one-quarter times its liabilities, and its current assets would be at least
equal to its current liabilities or one and one-quarter times its current
liabilities in the case of a corporation with large interest expenses. In
no case may a California corporation declare a dividend if it is, or as a
result thereof would be likely to be, unable to meet its liabilities as they
mature. Neither the Next Level Articles nor the Next Level Bylaws contains
restrictions on the declaration or payment of dividends.
50
<PAGE>
The DGCL permits a corporation to declare and pay dividends out of statutory
surplus, or if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long
as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the
capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. In addition, the DGCL
generally provides that a corporation may redeem or repurchase its shares
only if such redemption or repurchase would not impair the capital of the
corporation. The GI Bylaws provide that the GI Board may declare dividends
at any regular or special meeting. Before payment of any dividend, the GI
Board may set aside such amount as the GI Board thinks proper as a reserve
to meet contingencies, equalize dividends, repair or maintain GI's property
or for any other purpose the GI Board thinks conducive to GI's interests.
The Credit Agreement restricts GI's ability to pay dividends.
See "Market Price Data and Dividends."
Special Meetings of Shareholders
Under the CCC, special meetings of shareholders may be called by the board of
directors, the chairman of the board of directors, the president of the
corporation, the holders of shares entitled to cast not less than 10% of the
votes at such a meeting or such additional persons as may be provided in the
articles or bylaws. Under the DGCL and the GI Bylaws, special meetings may
be called at any time by the GI Board, the Chairman, if any, or the
President. In addition, the Secretary shall call a special meeting upon the
written request of stockholders holding of record at least 50% of the voting
power of the issued and outstanding shares of stock entitled to vote at such
meeting.
Voting Requirements
Under the CCC, with certain exceptions, an amendment to the articles of
incorporation requires the approval of the board and the affirmative vote of a
majority of the outstanding shares entitled to vote thereon. Under the CCC,
the holders of the outstanding shares of a class are entitled to vote as a
class if the proposed amendment would (i) increase or decrease the aggregate
number of authorized shares of such class, (ii) effect an exchange,
reclassification or cancellation of all or part of the shares of such class,
other than a stock split, (iii) effect an exchange, or create a right of
exchange, of all or part of the shares of another class into the shares of
such class, (iv) change the rights, preferences, privileges or restrictions
of the shares of such class, (v) create a new class of shares having rights,
preferences or privileges prior to the shares of such class or increase the
rights, preferences, or privileges or the number of authorized shares having
rights, preferences or privileges prior to the shares of such class, (vi) in
the case of preferred shares, divide the shares of any class into series having
different rights, preferences, privileges or restrictions or authorize the
board of directors to do so, or (vii) cancel or otherwise affect dividends on
shares of such class which have accrued but have not been paid.
In contrast, the DGCL generally does not require class voting except for
amendments to the certificate of incorporation that change the number of
authorized shares or the par value of shares of a specific class or that
adversely affect such class of shares. Under the CCC, with certain exceptions,
any merger, consolidation or sale of all or substantially all of a
corporation's assets must be approved by the corporation's board of directors
and a majority of the outstanding shares entitled to vote. In addition, the
CCC requires such transactions, among other things, to be approved by a
majority of the outstanding shares of each class of stock (without regard to
limitations on voting rights).
The DGCL generally requires that a majority of the stockholders of a
corporation approve a merger. However, the DGCL does not require a
stockholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if (a)
the merger agreement does not amend the existing certificate of
incorporation, (b) each share of stock of the surviving corporation
outstanding before the merger is an identical outstanding or treasury
share after the merger, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the
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<PAGE>
shares outstanding immediately prior to the merger. The DGCL also generally
requires that a sale of all or substantially all of the assets of a
corporation be approved by a majority of the voting shares of the
corporation transferring such assets.
Business Combinations with Interested Shareholders
Except in a merger of a corporation into its subsidiary in which it owns at
least 90% of the outstanding shares of each class or where the fairness of
the terms and conditions of the transaction has been approved by the
California Commissioner of Corporations, the CCC requires that holders of
nonredeemable common stock receive nonredeemable common stock of the
surviving corporation or a parent party in a merger of the corporation where
one of the constituent corporations or its parent owns more than 50% of the
voting power of the other constituent corporation, unless all of the holders of
such common stock consent to the transaction. The CCC also provides that, if a
party directly or indirectly controlling the corporation or involved in the
management of the corporation makes a proposal to acquire the corporation or
its assets, such proposal must be accompanied by the report of an independent
appraiser attesting that the value of the proposal is just and reasonable to
the shareholders of the corporation.
Other than Section 203 (as discussed below), neither the DGCL nor the GI
Certificate contains a provision comparable to the CCC provisions described
above. Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "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 is approved
by (i) the board of directors prior to the date the interested stockholder
obtained such status or (ii) the board of directors and the holders of
two-thirds of the outstanding shares of stock entitled to vote generally, not
including those shares owned by the interested stockholder, voting at an
annual or special meeting of stockholders on or after the date the interested
stockholder obtained such status. For purposes of Section 203, a "business
combination" includes a merger, asset sale or other transaction resulting in
a financial benefit to the interested stockholder, and an "interested
stockholder" is a person who owns (or is an affiliate or associate of the
corporation and within three years prior did own) 15% or more of the
corporation's stock entitled to vote.
Transactions Involving Officers or Directors
Under the CCC, any loan or guaranty to or for the benefit of a director or
officer of the corporation or its subsidiaries requires approval of the
shareholders, unless such loan or guaranty is provided for under a plan
approved by shareholders owning a majority of the outstanding shares of the
corporation. The CCC states that contracts or transactions between a
corporation and (i) any of its directors or (ii) a second corporation in
which a director of the corporation has a material financial interest, are
not void or voidable if the material facts as to the transaction and as to the
directors' intent are fully disclosed and the disinterested directors or a
majority of the disinterested shareholders represented and voting at a duly
held meeting approve or ratify the transaction in good faith, or the person
asserting the validity of the contract or transactions sustains the burden of
proving that the contract or transaction was just and reasonable as to the
corporation at the time it was authorized, approved or ratified.
Under the DGCL, a corporation may make loans or guarantee the obligations of or
otherwise assist its officers or other employees and those of its subsidiaries
(including directors who are also officers or employees) when such action,
in the judgment of the directors, may reasonably be expected to benefit the
corporation. In addition, transactions in which a director of a corporation
has a direct or indirect interest are not voidable by the corporation if (i)
the material facts of the transaction and the director's interest are fully
disclosed and either the board of directors or a majority of the outstanding
shares entitled to vote authorized, approved or ratified the transaction or
(ii) the transaction was fair to the corporation.
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Monetary Liability of Directors
The CCC and the DGCL permit corporations to adopt a provision in their
articles of incorporation eliminating, with certain exceptions, the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the director's fiduciary duty as a director. The CCC
does not permit the elimination of monetary liability where such liability
is based on: (a) intentional misconduct or knowing and culpable violation
of law; (b) acts or omissions that a director believes to be contrary to the
best interests of the corporation or its shareholders, or that involve the
absence of good faith on the part of the director; (c) receipt of an
improper personal benefit; (d) acts or omissions that show reckless
disregard for the director's duty to the corporation or its shareholders,
where the director in the ordinary course of performing a
director's duties should have been aware of a risk of serious injury to the
corporation or its shareholders; (e) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders; (f) interested
transactions between the corporation and a director in which a director has
a material financial interest; and (g) liability for improper distributions,
loans or guarantees.
Under the DGCL, a corporation may not eliminate or limit director monetary
liability for (a) breaches of the director's duty of loyalty to the
corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law; (c) unlawful
dividends, stock repurchases or redemptions; or (d) transactions from which
the director received an improper personal benefit. Such limitation of
liability provision also may not limit a director's liability for violation
of, or otherwise relieve a corporation or its directors from the necessity of
complying with the federal or state securities laws, or affect the
availability of non-monetary remedies such as injunctive relief or rescission.
The Next Level Articles and the GI Certificate each provide for the
elimination of personal monetary liability of directors to the fullest
extent permissible under the laws of each corporation's respective state of
incorporation. The GI Certificate incorporates future amendments to the
DGCL with respect to the elimination of such liability.
Indemnification
Under the CCC, (i) a corporation has the power to indemnify a director against
expenses, judgments, fines and settlements if that person acted in good
faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had
no reasonable cause to believe the conduct of the person was unlawful, and
(ii) a corporation has the power to indemnify, with certain exceptions, any
person who is a party to any action by or in the right of the corporation,
against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of the action if the person acted
in good faith and in a manner he or she believed to be in the best interest
of the corporation and its shareholders.
The indemnification authorized by the CCC is not exclusive, and a corporation
may grant its directors certain additional rights to indemnification. The
Next Level Bylaws provide for indemnification of Next Level's agents (as
defined under the CCC) in excess of the indemnification otherwise permitted
by Section 317 of the CCC, to the fullest extent permissible under the CCC.
Next Level has indemnification agreements with its directors and officers,
which will remain in effect after the Effective Time.
The DGCL generally permits, and the GI Certificate provides, indemnification of
expenses incurred in the defense or settlement of a derivative or third-party
action, provided there is a determination (i) by a majority vote of the
directors who are not parties to such action, even if less than a quorum,
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders,
that the person seeking indemnification acted in good faith and in a manner
reasonably believed to be in or (in contrast to the CCC) not opposed to the
best interests of the corporation and, with respect to a criminal proceeding,
that such person had no reasonable cause to believe his conduct was unlawful.
Without court approval, however, no indemnification may be made in respect
of any derivative
53
<PAGE>
action in which such person is adjudged liable to the corporation. The DGCL
requires indemnification of expenses when the individual being indemnified has
successfully defended the action on the merits or otherwise.
The DGCL states that the indemnification provided by statute shall not be
deemed exclusive of any other rights under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise.
Preferred Stock
Each share of Series A Preferred Stock will be exchanged for GI Common Stock in
the Merger. The Series A Preferred Stock will, therefore, as a result of the
Merger, lose certain rights, preferences and privileges as set forth in the
Next Level Articles, including a preference upon liquidation in an amount
equal to $1.00 per share plus declared and unpaid dividends thereon to the
date fixed for distribution and preferred dividends in an amount per share
of up to $.05 annually.
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EXPERTS
The consolidated balance sheets of GI as of December 31, 1993 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994,
and the financial statement schedules thereto included in this
Prospectus/Consent Solicitation Statement and in the Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their reports included herein.
The balance sheet of Next Level as of June 30, 1995 and the related
statements of operations, shareholders' equity and cash flows for the year
then ended included in this Prospectus/Consent Solicitation Statement and in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report included herein, which report
expresses an unqualified opinion and includes an emphasis paragraph relating
to Next Level's development stage and an explanatory paragraph relating to a
litigation uncertainty.
The financial statements and financial statement schedules of GI and Next Level
for the periods referred to above are included herein in reliance upon the
reports of Deloitte & Touche LLP, given upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of GI Common Stock issuable pursuant to the
Merger will be passed upon by Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), New York, New York.
Cooley Godward Castro Huddleson & Tatum, San Francisco, California, is
acting as counsel for Next Level in connection with certain legal matters
relating to the Merger and related transactions.
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INDEX TO FINANCIAL STATEMENTS
Next Level Communications
Independent Auditors' Report............................................F-2
Balance Sheet at June 30, 1995..........................................F-3
Statement of Operations for the Year Ended June 30, 1995................F-4
Statement of Shareholders' Equity for the Year Ended June 30, 1995......F-5
Statement of Cash Flows for the Year Ended June 30, 1995................F-6
Notes to Financial Statements...........................................F-7
General Instrument Corporation
For consolidated financial statements of GI for the three years ended
December 31, 1994 and the six months ended June 30, 1995, see pages 26-45 of
GI's 1994 Annual Report to Stockholders attached hereto as Annex E and pages
2-8 of GI's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995 attached hereto as Annex F.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Next Level Communications:
We have audited the accompanying balance sheet of Next Level Communications
(the "Company") (a development stage company) as of June 30, 1995 and the
related statements of operations, shareholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit
provides 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 at June 30,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 1995. As discussed
in Note 1 to the financial statements, successful completion of the Company's
development program and, ultimately, the attainment of profitable operations
is dependent upon future events, including successful product development,
sales and installation of its products and achieving a level of sales
adequate to support the Company's cost structure. Until the Company has
achieved an adequate level of sales, it will be dependent on the funding
provided by outside investors for its operational requirements.
As discussed in Note 9 to the financial statements, the Company is a
defendant in litigation brought by its founders' previous employer. The
ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of
this matter has been made in the accompanying financial statements.
DELOITTE & TOUCHE LLP
San Francisco, California
September 1, 1995
F-2
<PAGE>
NEXT LEVEL COMMUNICATIONS
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 824,063
Short-term investments held to maturity 5,462,002
Prepaid expenses and other 18,682
Total current assets 6,304,747
FURNITURE, FIXTURES, EQUIPMENT AND IMPROVEMENTS, NET 1,956,321
TOTAL ASSETS $ 8,261,068
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 446,482
Accrued liabilities 167,824
Total current liabilities 614,306
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 6 and 9)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value:
20,000,000 shares authorized (8,100,000 designated as Series A);
6,032,000 Series A shares issued and outstanding 11,432,512
Common Stock, no par value: 50,000,000 shares authorized;
6,398,500 shares issued and outstanding 2,139,995
Shareholders' notes receivable (323,445)
Unearned compensation (1,565,000)
Deficit accumulated during the development stage (4,037,300)
Total shareholders' equity 7,646,762
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,261,068
See notes to financial statements.
F-3
<PAGE>
NEXT LEVEL COMMUNICATIONS
(A Development Stage Company)
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
OPERATING EXPENSES:
Salaries and related expenses $ 2,275,278
Outside services 215,115
Office equipment 247,758
Travel and entertainment 212,489
Depreciation 123,272
Amortization of unearned compensation 247,000
Legal expenses 230,279
Other general and administrative costs 759,719
Total operating expenses (4,310,910)
LOSS FROM OPERATIONS (4,310,910)
INTEREST INCOME 273,610
NET LOSS $(4,037,300)
NET LOSS PER COMMON SHARE $ (0.63)
NUMBER OF SHARES USED IN CALCULATION OF
NET LOSS PER COMMON SHARE 6,365,500
See notes to financial statements.
F-4
<PAGE>
NEXT LEVEL COMMUNICATIONS
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Series A Deficit
Convertible Accumulated
Preferred Stock Common Stock Shareholders' During the
Notes Unearned Development
Shares Amount Shares Amount Receivable Compensation Stage Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994 - - - - - - - -
ISSUANCE OF COMMON STOCK
FOR CASH ($.001 per share) 4,550,000 $ 4,550 $ 4,550
ISSUANCE OF SERIES A
CONVERTIBLE PREFERRED
STOCK FOR CASH - Net:
($1.00 per share) 5,000,000 $ 4,932,512 4,932,512
($6.2984 per share) 1,032,000 6,500,000 6,500,000
ISSUANCE OF COMMON STOCK
FOR SHAREHOLDERS'
NOTES RECEIVABLE 1,848,500 1,835,445 $(323,445) $(1,512,000)
STOCK OPTION GRANT
COMPENSATION 300,000 (300,000)
AMORTIZATION OF UNEARNED
COMPENSATION 247,000 247,000
NET LOSS $(4,037,300) (4,037,300)
BALANCE, JUNE 30, 1995 6,032,000 $11,432,512 6,398,500 $2,139,995 $(323,445) $(1,565,000) $(4,037,300) $7,646,762
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
NEXT LEVEL COMMUNICATIONS
(A Development Stage Company)
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1995
OPERATING ACTIVITIES:
Net loss $(4,037,300)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of unearned compensation 247,000
Depreciation and amortization 123,272
Accretion of discount on short-term investments (182,324)
Changes in assets and liabilities:
Prepaid expenses and other (18,682)
Accounts payable and accrued liabilities 614,306
Net cash used in operating activities (3,253,728)
INVESTING ACTIVITIES:
Purchases of furniture, fixtures, equipment and improvements (2,079,593)
Purchases of short-term investments (5,279,678)
Net cash used in investing activities (7,359,271)
FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred stock 11,432,512
Proceeds from issuance of common stock 4,550
Net cash provided by financing activities 11,437,062
INCREASE IN CASH AND CASH EQUIVALENTS 824,063
CASH AND CASH EQUIVALENTS:
Beginning of year -
End of year $ 824,063
NONCASH FINANCING AND INVESTING ACTIVITIES:
Issuance of common stock for shareholders' notes receivable $ 323,445
See notes to financial statements.
F-6
<PAGE>
NEXT LEVEL COMMUNICATIONS
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
General - Next Level Communications (the "Company"), a development stage
company, was incorporated under the laws of the State of California on June
22, 1994 but operations did not commence until July 1, 1994. Accordingly,
July 1, 1994 is considered the date of inception for financial statement
purposes. The Company was formed to design, manufacture and market a next
generation broadband access system capable of transmitting telephony, video
and data to homes from telephone company central offices and cable television
headends. Among other services, the Company expects broadband services to
include movies-on-demand, bank and shop-at-home, distance learning,
time-shifted television and interactive video games.
Since inception, substantially all of the resources of the Company have been
devoted to the development and testing of the broadband access system and to
establishing the infrastructure that will permit the marketing of its products.
Development Stage Presentation - The financial statements of the Company have
been prepared in conformity with Statement of Financial Accounting Standards
No. 7, Accounting and Reporting by Development Stage Enterprises. As a
development stage company with no commercial operating history, the Company
is subject to all of the risks and expenses inherent in the establishment of
a new business enterprise. To address these risks and expenses, the Company
must, among other things, complete the development of the Company's products,
respond to competitive developments, attract, retain and motivate qualified
personnel and obtain substantial additional capital to support the expense of
marketing new products based upon innovative technology. In addition, for
the Company to achieve commercial success, it must successfully launch the
commercial production and distribution of its products and the Company's
products must be marketed successfully to potential customers. The Company
has not recognized any revenues to date and does not expect to recognize
any revenues for the foreseeable future. As a result of incurring expenses in
these development activities without generating revenues, the Company has
incurred significant losses and negative cash flow from operating activities,
and as of June 30, 1995, the Company had an accumulated deficit of
$4,037,300. The Company expects to incur substantial losses and substantial
negative cash flows from operating activities in the foreseeable future
until such time as it achieves revenues offsetting its continuing operating
expenses. There can be no assurance, however, that the Company will be able
to achieve revenues in excess of such expenses.
Cash and Cash Equivalents - The Company considers cash investments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Investments - The Company holds investments in U.S. Treasury backed securities
with maximum maturities of less than one year. The Company's short-term
investments are classified on the accompanying balance sheet as held to
maturity and reported at amortized cost.
Furniture, Fixtures, Equipment and Improvements - The Company records
furniture, fixtures, equipment and improvements at cost. Depreciation is
computed on the straight-line method over estimated useful lives ranging
from five to seven years.
F-7
<PAGE>
Capitalized Software - The Company capitalizes software costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of such costs begins upon the establishment of technological
feasibility for the product. Amortization of such costs will begin when the
product is available for general release to customers.
Net Loss Per Share - The net loss per share for the year ended June 30, 1995 is
based upon the weighted average number of shares of common stock outstanding
during the year. No effect has been given to convertible preferred stock and
stock warrants because the effect would be antidilutive. For the year ended
June 30, 1995 all common stock and stock options issued at less than fair
market value within one year prior to the Company's proposed acquisiton by
General instrument Corporation ("GI") (See Note 2) have been treated as
outstanding for the entire year in accordance with the rules of the
Securities and Exchange Commission.
Unearned Compensation - Unearned compensation related to the Company's Stock
Plan (see Note 6) was calculated based on the difference between the
estimated fair value of the common stock at the date of issuance or option
grant and the stock issuance price or option exercise price at the date of
issuance or grant.
2. PROPOSED ACQUISITION OF THE COMPANY
On February 28, 1995, pursuant to the Stock Purchase Agreement (the
"Agreement"), dated February 27, 1995, the Company issued 1,032,000 shares
of Series A convertible preferred stock to GI for $6,500,000 in cash (see
Note 6). Under the terms of the Agreement, GI had an option to purchase an
additional 1,318,000 shares of Series A convertible preferred stock at $6.50
per share, subject to certain terms and conditions as set forth in the
Agreement. In addition, GI had the option to acquire the Company, subject to
certain terms and conditions as set forth in the Agreement (the "Purchase
Option"). On June 30, 1995, the Company and GI amended the Agreement to
eliminate the additional purchase of Series A convertible preferred stock and
to provide that the Purchase Option would be
exercisable until July 21, 1995 (later extended to July 24, 1995).
On August 30, 1995, pursuant to a letter of intent signed on July 24, 1995, the
Company and GI signed a definitive agreement to exchange all of the outstanding
capital stock of the Company for approximately $83 million payable in GI common
stock in a transaction that is intended to be a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986. The consummation of the
proposed acquisition of the Company by GI is subject to, among other things,
the approval of the Company's shareholders.
GI has agreed to reimburse the Company for certain costs and expenses in
connection with legal proceedings described in Note 9. Such legal expenses
totaled $230,279 through June 30, 1995 and have been included as an expense
in the accompanying statement of operations. GI's reimbursement will be
shown as a capital contribution when received by the Company.
3. SHORT-TERM INVESTMENTS
Short-term investments held to maturity at June 30, 1995 are summarized as
follows:
Gross
Amortized Unrealized Fair
Cost Gains Value
Short-term investments -
debt instruments
issued by Federal Agency $5,462,002 $163 $5,462,165
F-8
<PAGE>
4. FURNITURE, FIXTURES, EQUIPMENT AND IMPROVEMENTS
Furniture, fixtures, equipment and improvements consist of the following at
June 30, 1995:
Furniture and fixtures $ 176,984
Office equipment 156,132
Computer equipment 784,403
Software 816,090
Leasehold improvements 145,984
Total furniture, fixtures, equipment and improvements 2,079,593
Less: accumulated depreciation and amortization (123,272)
Furniture, fixtures, equipment and improvements, net $1,956,321
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. At June 30, 1995, the deferred tax balance
consisted of the following:
Deferred tax assets (liabilities):
Federal and state operating loss carryforwards $1,490,000
Research and development credit carryforwards 160,000
Excess tax over book depreciation and amortization (46,000)
Total deferred tax assets 1,604,000
Valuation allowance (1,604,000)
Net deferred tax assets $ -
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a 100% valuation allowance of $1,604,000 that fully offsets its
gross deferred tax assets due to the uncertainty of realizing future tax
benefits from its net operating loss carryforwards and other deferred tax
assets.
As of June 30, 1995, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $4,000,000 and a net operating
loss carryforward for state tax purposes of approximately $2,000,000 which
expire in 2009. The difference between the net operating loss carryforward
for federal income tax purposes and for California income tax purposes results
primarily from the 50% limitation on the California loss carryforward.
6. SHAREHOLDERS' EQUITY
Common Stock - In August 1994, pursuant to an understanding reached in July
1994, the Company issued 4,550,000 shares of common stock to its two founders
for $.001 per share or $4,550.
Series A Convertible Preferred Stock - In August 1994, the Company completed a
private placement of 5,000,000 shares of Series A convertible preferred stock
for $4,932,512, net of issuance costs of $67,488. In February 1995, the
Company issued 1,032,000 shares of Series A convertible preferred stock to GI
for $6,500,000 (see Note 2).
F-9
<PAGE>
The shares of Series A convertible preferred stock have noncumulative dividend
preferences of $.05 per share per annum, when and as declared. Until
declared by the Company's Board of Directors, no rights to dividends accrue to
the holders of the Series A convertible preferred stock. The Company has
never declared or paid cash dividends on its capital stock, and currently
intends to retain any future earnings for use in the development and
operations of its business. Accordingly, the Company does not expect to pay
cash dividends in the foreseeable future.
The Series A convertible preferred stock is convertible at any time into such
number of fully paid and nonassessable shares of common stock as is
determined by dividing $1.00 by the conversion price, as defined. In the
event of a public offering satisfying certain criteria, each share of Series
A convertible preferred stock automatically converts into shares of common
stock at the conversion price. At June 30, 1995 the conversion price was
$1.00. The Series A convertible preferred stock votes equally with common
stock on an "if converted" basis. The Series A convertible preferred stock
has a liquidation preference of $1.00 per share plus all declared but unpaid
dividends. At June 30, 1995, the liquidation preference for Series A
convertible preferred stock was $1.00 per share. The
Series A convertible preferred stock is subject to redemption on or after
August 1, 1999, at the option of the Company, at $3.00 per share plus all
declared but unpaid dividends.
Stock Warrants - In connection with the August 1994 private placement of Series
A convertible preferred stock, in lieu of finders' fees the Company granted
warrants to certain individuals to purchase 240,000 shares of Series A
convertible preferred stock. At the election of the warrant holders, the
holders may purchase Series A convertible preferred stock at an exercise price
of $1.00 per share. The warrants expire on July 31, 1999.
Stock Options - In July 1994, the Company's Employee Stock Option/Stock
Issuance Plan (the "Stock Plan") was adopted by the Board of Directors and
approved by the Company's shareholders. The maximum number of shares available
for grant by the Company under the Stock Plan is 2,450,000 shares of common
stock. The Stock Plan is divided into two separate components: the Option
Grant Program (the "OGP"), an incentive and nonstatutory stock option plan,
and the Stock Issuance Program (the "SIP"), which provides for the direct
issuance of the Company's common stock.
Under the OGP, stock options become exercisable pursuant to individual written
agreements between the Company and participants in the plan. In fiscal 1995,
the Company granted options to certain individuals to purchase 150,000 shares
of common stock at an exercise price of $0.10 per share. The Company estimates
the fair market value of its common stock to have been $2.10 per share at the
grant date and, accordingly, has recorded unearned compensation of $300,000.
There were no options exercised or canceled during fiscal 1995. Generally, as
long as the participant is employed or in the service of the Company, stock
options vest 20% immediately and the balance in four equal installments every
six months after grant. Participants may exercise their options prior to
vesting; however, such unvested shares are subject to repurchase by the
Company. At June 30, 1995, 150,000 shares of common stock were exercisable
(30,000 of which were vested) under the OGP at $0.10 per share.
Under the SIP, the participant has all of the rights of a common stock
shareholder at the time of issuance, without regard to vesting. Generally, as
long as the participant is employed by or in the service of the Company, stock
issued under the SIP vests 25% one year after the commencement of employment
or, for subsequent issuances, the date of issuance and the balance ratably over
the next 36 months. Unvested shares are subject to repurchase by the Company.
The purchase price is determined by the plan administrator (as defined) at the
time of grant. During fiscal year 1995, employees of the Company purchased
1,848,500 shares of common stock for $323,445 (1,023,000 shares in December
1994 at $0.10 per share, 563,500 shares in February 1995 at $0.10 per share and
262,000 shares in May 1995 at $0.63 per share) in exchange for notes receivable
of $323,445, bearing interest at rates ranging from 6% to 8% and due on various
dates through 2000. The Company estimates the fair market value of such
shares to
F-10
<PAGE>
have been $0.10 to $2.10 per share at the time of issuance and, accordingly,
has recorded unearned compensation of $1,512,000.
There were 451,500 shares available for granting of options under the OGP or
issuance under the SIP at June 30, 1995. Subsequent to June 30, 1995,
employees of the Company purchased an additional 328,500 shares of common
stock for $278,705 in exchange for notes receivable of $278,705 bearing
interest at 6% and due on various dates through 2000. Such shares were issued
as follows: 303,500 shares on July 18, 1995 at $0.63 per share and 25,000
shares on August 9, 1995 at $3.50 per share. Unearned compensation related to
issuances subsequent to June 30, 1995 will be approximately $450,000 based upon
$2.10 per share but could differ based upon the final determination of fair
value.
7. LEASES
The Company leases office space under an operating lease which is subject to
certain rent escalations for inflation and include renewal provisions at the
option of the Company.
Future minimum payments under the operating lease as of June 30, 1995 are as
follows:
1996 $ 133,200
1997 152,300
1998 164,400
1999 177,600
2000 157,700
Thereafter -
Total $ 785,200
Rent expense in fiscal 1995 was $77,000.
Under the terms of the Company's lease agreement, the Company has a standby
letter of credit (the "L/C") with the lessor for $65,000 which expires on
May 1, 1996. The L/C is secured against the Company's cash and investment
accounts with the issuing bank.
8. 401(K) PLAN
The Company maintains a salary deferral 401(k) plan covering all employees who
have met certain eligibility requirements. Employees may elect to contribute
up to $9,240 of their eligible compensation to the 401(k) plan, which is the
dollar limit set by law. Under the 401(k) plan, the Company may, at its
discretion, make matching contributions to the plan. The Company has not made
any contributions to the 401(k) plan through June 30, 1995.
9. LITIGATION
On April 10, 1995, the Company founders' previous employer, DSC Communications
Corporation, and DSC Technologies Corporation (together "DSC") brought suit in
a Texas District Court against the Company and the founders (together the
"defendants"). DSC's allegations included causes of action for breach of
contract, tortious interference with contractual relations, breach of fiduciary
duty, usurpation of corporate opportunity, theft of trade secrets, civil
conspiracy and unfair competition. DSC sought a declaratory judgment,
injunctive relief, compensatory damages of an unspecified amount, punitive
damages and attorneys' fees. The Texas District Court entered a temporary
restraining order against the Company on April 10, 1995. The defendants
removed the case to the Federal District Court on April 17, 1995. On
June 1, 1995, the defendants filed their answer and counterclaim for damages
and injunctive relief, including counterclaims for unfair competition under
F-11
<PAGE>
the Lanham Act, unfair competition, interference with prospective economic
advantage and intentional interference with contractual relations. On June 7,
1995, the court issued a preliminary injunction prohibiting the defendants from
using any ideas contained in any written material transmitted to one of the
founders pertaining to switched digital video that was or is not in the public
domain, from soliciting DSC employees for employment at the Company and from
destroying any pertinent documents which were created during the founders'
employment with DSC. The parties are currently engaged in discovery.
On April 25, 1995, the Company filed suit in the Superior Court of the State of
California, in the County of Sonoma, against DSC and two employees of DSC. The
Company seeks recovery in this action based on allegations of unlawful and anti-
competitive conduct violating the California Business and Professions Code,
intentional interference with contractual relations and interference with
prospective economic advantage. The court has granted a motion staying this
action until resolution of the Federal District Court action, but will retain
jurisdiction over the case. After resolution of the Federal District Court
action, the court will entertain a motion by the Company, if appropriate, to
reopen the California proceedings.
The ultimate outcome of the litigation described above cannot presently be
determined. Accordingly, no provision for any loss that may result upon
resolution of this matter has been made in the accompanying financial
statements.
******
F-12
<PAGE>
ANNEX A
Agreement and Plan of Merger
<PAGE>
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
dated as of
August 30, 1995
among
GENERAL INSTRUMENT CORPORATION,
NLC ACQUISITION CORP.
AND
NEXT LEVEL COMMUNICATIONS
<PAGE>
TABLE OF CONTENTS
PAGE
1 PLAN OF MERGER.............................................1
1.1 The Merger........................................1
1.2 Conversion of Shares..............................2
1.3 NLC Options.......................................3
1.4 Adjustments for Capital Changes...................3
1.5 Fractional Shares.................................3
1.6 Surrender of Certificates.........................4
1.8 Effects of the Merger.............................5
1.9 Reorganization....................................5
1.10 FIRPTA Compliance.................................5
2 REPRESENTATIONS AND WARRANTIES OF NLC......................5
2.1 Organization, Good Standing and Qualification.....6
2.2 Capitalization....................................6
2.3 Subsidiaries, etc.................................7
2.4 Authorization.....................................7
2.5 Governmental Consents.............................7
2.6 Compliance with Other Instruments.................7
2.7 Registration Rights...............................8
2.8 Corporate Documents...............................8
2.9 Taxes.............................................8
2.10 Minute Books......................................8
2.11 Board Approval....................................8
2.12 Vote Required.....................................8
2.13 Disclosure........................................9
3 REPRESENTATIONS AND WARRANTIES OF THE FOUNDERS.............9
3.1 Financial Statements..............................9
3.2 Litigation.......................................10
3.3 Patents and Trademarks...........................10
3.4 Employees........................................10
3.5 Title to Property and Assets.....................11
3.6 Agreements, Action...............................11
3.7 Changes..........................................11
3.8 Insurance........................................12
4 REPRESENTATIONS AND WARRANTIES OF GIC.....................12
4.1 Authority........................................12
<PAGE>
4.2 Disclosure.......................................13
4.3 Interim Operations of Newco......................13
5 NLC COVENANTS.............................................13
5.1 Advice of Changes................................13
5.2 Maintenance of Business..........................14
5.3 Conduct of Business..............................14
5.4 Shareholder Approval.............................16
5.5 FIRPTA Compliance................................16
5.6 Regulatory Approvals.............................16
5.7 Necessary Consents...............................16
5.8 Access to Information............................16
5.9 Other Offers.....................................16
5.10 Information for Use in Registration Statement...17
5.11 Termination of Certain Agreements...............17
5.12 Satisfaction of Conditions Precedent............17
6 GIC COVENANTS.............................................17
6.1 Advice of Changes................................17
6.2 Regulatory Approvals.............................17
6.3 Form S-4 Registration Statement..................18
6.4 Necessary Consents...............................18
6.5 Satisfaction of Conditions Precedent.............18
6.6 Indemnification..................................18
6.7 NYSE Listing.....................................19
6.8 Blue Sky Permits.................................19
6.9 Tax Covenants....................................19
7 CONDITIONS PRECEDENT TO OBLIGATIONS OF NLC................20
7.1 NLC Shareholder Approval.........................20
7.2 No Legal Action..................................20
7.3 Registration Statement...........................20
7.4 Indemnification and Stock Option Agreements......20
7.5 Dissenters.......................................20
8 CONDITIONS PRECEDENT TO OBLIGATIONS OF GIC................20
8.1 NLC Shareholder Approvals........................20
8.2 No Legal Action..................................21
8.3 Registration Statement...........................21
8.4 Outstanding Shares...............................21
8.5 Consents.........................................21
9 TERMINATION OF AGREEMENT..................................21
9.1 Termination......................................21
<PAGE>
9.2 Notice of Termination............................22
9.3 No Liability.....................................22
10 MISCELLANEOUS............................................23
10.1 Indemnification Regarding the
Registration Statement....................23
10.2 Governing Law...................................23
10.3 Assignment; Binding Upon Successors and Assigns.23
10.4 Severability....................................23
10.5 Counterparts....................................23
10.6 Other Remedies..................................23
10.7 Amendment and Waivers...........................24
10.8 Expenses........................................24
10.9 Attorneys' Fees.................................24
10.10 Notices.........................................24
10.11 Construction of Agreement.......................25
10.12 Further Assurances..............................25
10.13 Absence of Third Party Beneficiary Rights.......25
10.14 Public Announcement.............................26
10.15 Entire Agreement................................26
10.16 Survival of Representations and Warranties......26
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is
entered into as of this 30th day of August, 1995, among GENERAL
INSTRUMENT CORPORATION, a Delaware corporation ("GIC"), NLC
ACQUISITION CORP., a California corporation and a wholly-owned
subsidiary of GIC ("NEWCO"), and NEXT LEVEL COMMUNICATIONS, a
California corporation ("NLC").
RECITALS
A. The Boards of Directors of GIC, Newco and NLC deem it
advisable and in the best interests of their respective
shareholders to consummate, and have approved, the business
combination provided for herein in which Newco will merge with and
into NLC in a reverse triangular merger with NLC as the surviving
corporation of the Merger.
B. The Merger is intended to be treated as a
reorganization pursuant to the provisions of Section 368(a)(2)(E)
of the Internal Revenue Code of 1986, as amended (the "Code").
Now, therefore, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements
set forth herein, the parties hereto hereby agree as follows:
1. PLAN OF MERGER
1.1. THE MERGER.
(A) Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in
Section 1.1(b)), Newco shall be merged with and into NLC (the
"MERGER") pursuant to this Agreement and an Agreement of Merger
substantially in the form of EXHIBIT A (the "AGREEMENT OF MERGER")
and in accordance with applicable provisions of the California
Corporations Code (the "CCC"). As a result of the Merger, the
separate existence of Newco shall cease and NLC shall be the
surviving corporation (the "SURVIVING CORPORATION").
(B) Upon the terms and subject to the
conditions of this Agreement, the Closing of the transactions
contemplated by this Agreement (the "CLOSING") will take place at
the offices of Cooley Godward Castro Huddleson & Tatum, on a date
(the "CLOSING DATE") and at a time to be mutually agreed upon by
the parties, which date shall be as soon as practicable (but in
any event no later than the third business day) after all
conditions to the Closing set forth herein shall have been
satisfied or waived, unless another place, time and date is
mutually selected by NLC and GIC. Concurrently with the Closing,
the Agreement of Merger shall be duly filed in the office of the
Secretary of State of the State of California. The Merger shall
become effective (the "EFFECTIVE TIME") upon such filing of the
Agreement of Merger with the Secretary of State of the State of
California.
<PAGE>
1.2. CONVERSION OF SHARES.
(A) Each share of common stock, no par value,
of NLC ("NLC COMMON STOCK") (including shares of NLC Common Stock
acquired at or prior to the Effective Time upon the exercise of
outstanding stock options), other than Founders Common Stock (as
defined in Section 1.2(c)), that is issued and outstanding
immediately prior to the Effective Time shall, except as provided
in Section 1.2(d) and Section 1.5, be converted at the Effective
Time into the right to receive that number of validly issued,
fully paid and nonassessable shares of common stock, par value
$.01 per share, of GIC ("GIC COMMON STOCK") equal to the
Conversion Number (as defined below). The "CONVERSION NUMBER"
shall be determined by dividing $7.00 by the GIC Average Price (as
defined below), rounded to three decimal places. The "GIC AVERAGE
PRICE" means the average closing price on the New York Stock
Exchange (the "NYSE") of GIC Common Stock (as reported in the New
York Stock Exchange Composite Transactions reporting system as
published in THE WALL STREET JOURNAL or, if not published therein,
in another authoritative source) for the 10 consecutive trading
days ending with the third trading day immediately preceding the
Effective Time.
(B) Each share of Series A Preferred Stock, no
par value, of NLC ("NLC SERIES A PREFERRED STOCK") that is issued
and outstanding immediately prior to the Effective Time (including
shares of NLC Series A Preferred Stock acquired at or prior to the
Effective Time upon the exercise of the two warrants dated
September 14, 1994 (the "SERIES A WARRANTS"), which permit the
holders thereof to purchase an aggregate of 240,000 shares of NLC
Series A Preferred Stock at a purchase price of $1.00 per share)
shall, except as provided in Section 1.2(d) and Section 1.5, be
converted at the Effective Time into the right to receive that
number of validly issued, fully paid and nonassessable shares of
GIC Common Stock equal to the Conversion Number.
(C) Each share of NLC Common Stock owned
immediately prior to the Effective Time by Peter W. Keeler or
Thomas R. Eames (the "FOUNDERS") or by any other holder who
received such shares directly or indirectly by transfer from
either of the Founders (all of such shares collectively, "FOUNDERS
COMMON STOCK") shall be converted at the Effective Time into the
right to receive that number of validly issued, fully paid and
nonassessable shares of GIC Common Stock determined by dividing
$4.75 by the GIC Average Price, rounded to three decimal places.
Twenty-one percent (21%) of such shares shall be restricted shares
and shall become freely transferable by the holder thereof
automatically, and without being subject to any condition other
than the passage of time, on the date that is the 18-month
anniversary of the Effective Time.
(D) Each outstanding share of NLC Common Stock
and NLC Series A Preferred Stock held by NLC as treasury stock
immediately prior to the Effective Time shall be canceled at the
Effective Time and no payment shall be made with respect thereto.
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(E) Each share of common stock, no par value,
of Newco shall be converted at the Effective Time into one share
of common stock, no par value, of the Surviving Corporation.
(F) DISSENTING SHARES.
(i) Notwithstanding anything in this
Agreement to the contrary, shares of NLC Common Stock or NLC
Series A Preferred Stock (collectively, "NLC Stock") which are
issued and outstanding immediately prior to the Effective Time and
which are held by a shareholder of NLC who has complied with the
procedures for the exercise of dissenters' rights set forth in the
CCC shall not be converted into or be exchangeable for the right
to receive GIC Common Stock unless and until such shareholder
shall have failed to perfect or shall have effectively withdrawn
or lost the right to the exercise of dissenters' rights under the
CCC. If such shareholder shall have failed to perfect or shall
have effectively withdrawn or lost such right, such shareholder's
shares of NLC Stock shall thereupon be deemed to have been
converted into and to have become exchangeable for the right to
receive, as of the Effective Time, the number of shares of GIC
Common Stock determined in accordance with Section 1.2.
(ii) NLC shall give GIC (X) prompt
notice of any exercise of dissenters' rights by any holder of any
shares of NLC Stock pursuant to the CCC, attempted withdrawals of
such exercise, and any other instruments served pursuant to the
CCC and received by NLC relating to shareholders' rights to
dissent and (Y) the opportunity to direct all negotiations and
proceedings with respect to such rights. NLC shall not, without
the prior written consent of GIC, voluntarily make any payment
with respect to any dissenters' rights, offer to settle or settle
any such rights or approve any withdrawal of any such exercise.
1.3. NLC OPTIONS. No payment shall be made in
respect of any shares of NLC Common Stock subject to outstanding
options that are not exercised at or prior to the Effective Time.
1.4. ADJUSTMENTS FOR CAPITAL CHANGES. If, prior to
the Effective Time, GIC recapitalizes through a subdivision of its
outstanding shares into a greater number of shares, or a
combination of its outstanding shares into a lesser number of
shares, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares
of other classes, or declares a dividend on its outstanding shares
payable in shares of its capital stock or securities convertible
into shares of its capital stock, then the number of shares of GIC
Common Stock issuable pursuant to Section 1.2 shall be adjusted
appropriately.
1.5. FRACTIONAL SHARES. No fractional shares of GIC
Common Stock shall be issued in the Merger and fractional share
interests shall not entitle the owner thereof to vote or to any
rights of a shareholder of GIC. All fractional shares of GIC
Common Stock that a holder of NLC Stock would otherwise be
entitled to receive as a
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result of the Merger shall be aggregated and if a fractional share
results from such aggregation, such holder shall be entitled to
receive, in lieu thereof, an amount in cash determined by
multiplying the GIC Average Price by the fraction of a share of
GIC Common Stock to which such holder would otherwise have been
entitled.
1.6. SURRENDER OF CERTIFICATES.
(A) EXCHANGE PROCEDURES. As soon as
practicable after the Effective Time, each holder of record of a
certificate or certificates that immediately prior to the
Effective Time represented NLC Stock (collectively, the
"CERTIFICATES") shall surrender such Certificate or Certificates
with appropriate letters of transmittal to an Exchange Agent to be
designated by GIC (the "EXCHANGE AGENT"). Upon surrender of a
Certificate for cancellation to the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor
a certificate representing the number of whole shares of GIC
Common Stock and/or cash in lieu of a fractional share that such
holder has the right to receive pursuant to the provisions of this
Agreement (the "MERGER CONSIDERATION"), and the Certificate so
surrendered shall forthwith be canceled. Until surrendered as
contemplated by this Section 1.6, each Certificate shall be
deemed, on and after the Effective Time, to represent the Merger
Consideration. No interest will be paid or will accrue on any
cash amount payable upon the surrender of any such Certificate.
(B) DIVIDEND AND DISTRIBUTIONS. Dividends or
other distributions declared or made after the Effective Time with
respect to GIC Common Stock with a record date after the Effective
Time shall not be paid by GIC with respect to any unsurrendered
Certificates unless and until such Certificates are surrendered.
Subject to the effect of applicable laws, following surrender of
any such Certificate the record holder of the Certificates
representing whole shares of GIC Common Stock issued in exchange
therefor shall be considered a stockholder of record for purposes
of dividends or other distributions paid (or declared but not yet
paid) to holders of GIC Common Stock as of a record date after the
Effective Time but before the date of surrender. Any amounts of
such dividends or other distributions paid to stockholders of GIC
prior to the date of surrender of Certificates shall be paid upon
such surrender without interest.
(C) STOCK TRANSFER BOOKS OF NLC. At and after
the Effective Time, there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation
of the shares of NLC Stock that were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Certificates
are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 1.6.
(D) UNSURRENDERED CERTIFICATES. One year
after the Effective Time, all certificates representing GIC Common
Stock and all cash held by the Exchange Agent for delivery to
holders of Certificates shall be delivered to GIC, and any former
shareholders of NLC who have not theretofore complied with this
Section 1.6 and the
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Agreement of Merger shall thereafter look only to GIC, as general
creditors thereof, for payment of the Merger Consideration and any
subsequent dividends and other distributions thereon. If
outstanding Certificates are not surrendered prior to six years
after the Effective Time (or, in any particular case, prior to
such earlier date on which the Merger Consideration or the
dividends and other distributions thereon, if any, would otherwise
escheat to or become property of any governmental unit or agency),
the Merger Consideration and the amount of dividends and other
distributions thereon, if any, shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation
(and, to the extent not in its possession, shall be paid over to
it by GIC), free and clear of all claims or interest of any person
previously entitled thereto.
(E) NO LIABILITY. Neither the Exchange Agent,
GIC nor the Surviving Corporation shall be liable to any holder of
shares of NLC Stock or for any amount paid, or shares of GIC
Common Stock, cash or dividends delivered, to a public official
pursuant to any applicable abandoned property, escheat or similar
law.
1.7. EFFECTS OF THE MERGER. At the Effective Time:
(A) the Merger shall have the effects provided by applicable law,
including, without limitation, the CCC; (B) the Surviving
Corporation shall adopt Articles of Incorporation identical to the
Articles of Incorporation of Newco immediately prior to the
Effective Time (except that the name of the Surviving Corporation
will remain unchanged); (C) the Surviving Corporation shall adopt
Bylaws identical to the Bylaws of Newco immediately prior to the
Effective Time (except that the name of the Surviving Corporation
will remain unchanged); (D) the directors of Newco immediately
prior to the Effective Time will be the directors of the Surviving
Corporation; and (E) the officers of Newco immediately prior to
the Effective Time will be the officers of the Surviving
Corporation.
1.8. REORGANIZATION. The parties intend to adopt
this Agreement and the Merger as a plan of reorganization under
Section 368(a)(2)(E) of the Code. The parties shall not take a
position on any tax return inconsistent with this Section 1.8.
1.9. FIRPTA COMPLIANCE. In the event that NLC shall
have failed to deliver to GIC at the Closing the statement
referred to in Section 5.5, GIC may withhold from shares of GIC
Common Stock otherwise deliverable at the Closing such number of
shares as may be required to satisfy any withholding obligations
of GIC as a result of such failure.
2. REPRESENTATIONS AND WARRANTIES OF NLC
Except as set forth in a letter dated the date of this
Agreement, delivered by NLC to GIC concurrently herewith, and
certified by NLC to be true, accurate and complete to the best
knowledge of the executive officers of NLC (the "NLC DISCLOSURE
LETTER"), NLC hereby represents and warrants to GIC that:
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2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION.
NLC is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all
requisite corporate power and authority to carry on its business
as presently conducted and carry out the transactions contemplated
hereunder. NLC is duly qualified to transact business and is in
good standing in each jurisdiction of the United States in which
the failure so to qualify would presently have a material adverse
effect on the business, properties or prospects of NLC (an "NLC
MATERIAL ADVERSE EFFECT").
2.2. CAPITALIZATION. (A) The authorized capital of
NLC consists of: 50,000,000 shares of NLC Common Stock, of which
6,727,000 shares are issued and outstanding, and an additional
150,000 of which are issuable upon the exercise of outstanding
stock options that have an exercise price of $0.10 per share; and
20,000,000 shares of Preferred Stock, of which 8,100,000 shares
have been designated NLC Series A Preferred Stock, 6,032,000
shares of which are issued and outstanding, and an additional
240,000 shares of which are issuable upon the exercise of the
Series A Warrants, which have an exercise price of $1.00 per
share. The rights, preferences and privileges of the NLC Series A
Preferred Stock are as set forth in NLC's Articles of
Incorporation. All outstanding shares of NLC Series A Preferred
Stock are presently convertible into an equivalent number of
shares of NLC Common Stock, which conversion ratio is subject to
adjustment as provided in NLC's Articles of Incorporation.
(B) All outstanding shares of NLC Common Stock
and NLC Series A Preferred Stock, including shares of such stock
issuable upon exercise of the above-described outstanding warrants
and options, have been duly authorized and are, or in the case of
shares issuable upon exercise of warrants or options, will be upon
payment of the required exercise price, validly issued, fully paid
and nonassessable, and were or will be issued in compliance with
all applicable federal and state securities laws.
(C) Except for (1) the shares subject to
repurchase and the warrants and options specified above in this
Section 2.2; (2) the repurchase rights, rights of first refusal
and co-sale rights described in each of the Agreements between NLC
and Peter W. Keeler and Thomas R. Eames, respectively, each dated
August 19, 1994 (the "FOUNDERS STOCK AGREEMENTS"), true and
complete copies of which have been provided by NLC to GIC, and (3)
the conversion privileges of the NLC Series A Preferred Stock,
there are no outstanding options, warrants, conversion rights,
rights of first refusal, preemptive rights or other rights or
agreements for the purchase or acquisition from NLC of any of the
securities of NLC or rights thereto.
(D) Attached hereto as EXHIBIT 2.2(e) is a
true, complete and correct list of the names and holdings of each
current record owner of outstanding shares of NLC Common Stock,
NLC Series A Preferred Stock, NLC Options, and the Series A
Warrants, including any vesting schedules with respect thereto.
NLC has delivered to GIC a true and complete copy of the NLC 1994
Stock Option/Stock Issuance Plan,
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including certain standard related agreements and forms, and true
and complete copies of all existing agreements thereunder.
2.3. SUBSIDIARIES, ETC. NLC does not presently own
or control, directly or indirectly, any interest in any other
corporation, partnership, association, joint venture or other
business entity or enterprise.
2.4. AUTHORIZATION. NLC has all requisite corporate
power and authority to enter into this Agreement and, subject to
approval of this Agreement and the Merger by the shareholders of
NLC, to perform its obligations hereunder and to consummate the
Merger and the other transactions contemplated by this Agreement.
The execution and delivery of this Agreement by NLC and, subject
to approval of this Agreement and the Merger by the shareholders
of NLC, the consummation by NLC of the Merger and the other
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of NLC. This Agreement has
been duly executed and delivered by NLC and this Agreement is the
valid and binding obligation of NLC, enforceable in accordance
with its terms except as such enforceability may be limited by
bankruptcy, insolvency or similar laws or by limitations on the
availability of equitable remedies.
2.5. GOVERNMENTAL CONSENTS. No consent, approval,
order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign
(each a "GOVERNMENTAL ENTITY"), is required to be obtained by NLC
in connection with the execution and delivery of this Agreement or
the Agreement of Merger or the consummation of the transactions
contemplated hereby or thereby, except for:
(a) the filing of the Agreement of Merger with
the Secretary of State of the State of California and appropriate
documents with the relevant authorities of any other states in
which NLC is qualified to do business; and
(b) such filings, authorizations, orders and
approvals as may be required under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), or under any state securities or
"blue sky" or other similar statutes and regulations
(collectively, "STATE BLUE SKY LAWS").
2.6. COMPLIANCE WITH OTHER INSTRUMENTS. NLC is not
in violation or default of any provisions of its Articles of
Incorporation or Bylaws, or of any material contract, agreement or
instrument to which it is a party or by which it is bound or, to
the extent that such a violation or default would have a material
adverse effect on NLC or its business, of any provision of any
federal, state or local judgment, writ, decree, order, statute,
rule or governmental regulation applicable to NLC. The execution,
delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such
violation or contravene or constitute, with or without the passage
of time and giving of notice, either a default under any such
provision or
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result in the creation or imposition of any lien, charge or
encumbrance upon any assets of NLC.
2.7. REGISTRATION RIGHTS. Except as provided for in
Section 7 of the Stock Purchase Agreement between General
Instrument Corporation of Delaware and NLC dated as of February
27, 1995, as amended, and in section 7 of each Stock Purchase
Agreement pursuant to which NLC issued all outstanding shares of
NLC Series A Preferred Stock (the "ORIGINAL SERIES A STOCK
PURCHASE AGREEMENT"), NLC has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or
entity.
2.8. CORPORATE DOCUMENTS. NLC's Articles of
Incorporation and Bylaws are in the form previously provided to
GIC.
2.9. TAXES. NLC has filed or caused to be filed all
federal, state and local tax returns which are required to be
filed by it, and, to the best of NLC's knowledge, all such returns
are true, correct and complete. NLC has paid or caused to be paid
all taxes pursuant to such returns or pursuant to any assessments
received by it or which it is obligated to withhold from amounts
owing to any employee, creditor or third party. The income tax
returns of NLC have never been audited by any federal, state, or
local authorities.
2.10. MINUTE BOOKS. The minute books of NLC made
available to GIC contain a complete summary of all meetings of
directors and shareholders, or actions taken by written consent of
the directors and shareholders, since the time of incorporation
and reflect all transactions referred to in such minutes and
consents accurately in all material respects.
2.11. BOARD APPROVAL. The board of directors of NLC
has unanimously (I) approved this Agreement and the Merger and
(II) determined that the Merger is in the best interests of the
shareholders of NLC and is on terms that are fair to such
shareholders.
2.12. VOTE REQUIRED. Neither the execution, delivery
and performance of this Agreement or the Agreement of Merger, nor
the consummation of the transactions contemplated hereby or
thereby nor compliance with the provisions hereof or thereof will
require the affirmative vote of the holders of any outstanding
class or series of NLC capital stock other than the affirmative
vote of the holders of (I) a majority of the outstanding shares of
NLC Common Stock and NLC Series A Preferred Stock, voting together
as a single class (on an as-converted basis, in the case of the
NLC Series A Preferred Stock), (II) a majority of the outstanding
shares of the NLC Series A Preferred Stock, voting as a class, and
(III) all outstanding shares of NLC Common Stock, unless the
California Commissioner of Corporations approves the Merger
following a hearing on the fairness thereof.
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2.13. DISCLOSURE. None of the information supplied
or to be supplied by NLC for inclusion or incorporation by
reference in the Registration Statement (as defined in Section
6.3) to be filed with the Securities and Exchange Commission (the
"SEC") by GIC in connection with the issuance of GIC Common Shares
pursuant to the Merger, in the Prospectus included in the
Registration Statement (the "PROSPECTUS") or in any other
documents to be filed with the SEC in connection with the
transactions contemplated hereby will, at the respective times
such documents are filed, and, in the case of the Registration
Statement, when it becomes effective and at all times necessary to
comply with the Securities Act, and, with respect to the
Prospectus, when mailed and at all times through the Closing Date
contain any untrue statement of material fact or omit to state any
material fact necessary in order to make the statements therein,
in light of the circumstances in which they are made, not
misleading. NLC shall promptly advise GIC if it becomes aware of
any event or set of facts relating to any information that NLC has
furnished that should be set forth in an amendment of, or
supplement to, the Registration Statement. For purposes of this
representation and Section 9.1(c), any untrue statement made by
NLC in a certificate relied upon by tax counsel in rendering its
opinion as described in the Prospectus shall be deemed an untrue
statement of material fact in the Prospectus in breach of this
representation, and such breach shall be deemed to constitute an
NLC Material Adverse Effect, unless such tax counsel reissues such
opinion (on a basis, including disclosure thereof in the
Prospectus, reasonably satisfactory to GIC) taking into account
such untrue statement.
3. REPRESENTATIONS AND WARRANTIES OF THE FOUNDERS
Peter W. Keeler and Thomas R. Eames hereby
jointly and severally, to their actual knowledge, without any
inquiry or investigation with respect thereto, and without regard
to whether the nature and extent of each such individual's
position, activities or other involvement with NLC would
ordinarily result in such individual having more extensive
knowledge about the subject matter of any such representation, (A)
make the representations and warranties regarding NLC set forth in
Section 2 (as qualified by the NLC Disclosure Letter) (without
giving effect to any qualification relating to the knowledge of
NLC set forth therein); and (B) except as set forth in a letter
dated the date of this Agreement delivered to GIC currently
herewith (the "FOUNDERS DISCLOSURE LETTER"), represent and warrant
to GIC that:
3.1. FINANCIAL STATEMENTS. NLC has delivered to GIC
its audited financial statements (balance sheets and statements of
operations, statements of shareholders' equity and statements of
cash flows) as at June 30, 1995, and for the fiscal year ended
June 30, 1995 (the "FINANCIAL STATEMENTS"). The Financial
Statements have been prepared in accordance with generally
accepted accounting principles. The Financial Statements fairly
present the financial condition and operating results of NLC as of
the dates, and for the periods, indicated therein. NLC maintains
and will continue to maintain a standard system of accounting
established and administered in accordance
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with generally accepted accounting principles. NLC has no
liabilities or obligations of any nature (matured or unmatured,
fixed or contingent) that are material to NLC, except for such
liabilities or obligations as (I) were accrued or fully reserved
against in the balance sheet of NLC at June 30, 1995 or referred
to in the notes to the Financial Statements; (II) are of a
normally recurring nature and were incurred after June 30, 1995,
in the ordinary course of business consistent with past practice;
or (iii) were incurred in the ordinary course of business and are
not required under generally accepted accounting principles to be
reflected in the Financial Statements. The liabilities referred
to in clauses (ii) and (iii) are not, individually or in the
aggregate, material to the financial condition or results of
operations of NLC.
3.2. LITIGATION. There is no action, suit,
proceeding or investigation pending or overtly threatened against
NLC which questions the validity of this Agreement or the right of
NLC to enter into it, or to consummate the transactions
contemplated hereby, or which might result, either individually or
in the aggregate, in an NLC Material Adverse Effect, nor is NLC
aware that there is any basis for the foregoing. NLC is not
subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality
which names NLC as a party.
3.3. PATENTS AND TRADEMARKS. NLC (A) has sufficient
right, title and ownership of all patents, trademarks, service
marks, trade names, copyrights, licenses, information and
proprietary rights, or adequate licenses, rights or purchase
options with respect to the foregoing, necessary for its business
as presently conducted; or (B) can obtain, on terms which will not
materially adversely affect its business, all necessary permits,
licenses and other authority with respect thereto without any
known conflict with or infringement of the rights of others. NLC
has not received any communications alleging that NLC has violated
or, by conducting its business as proposed, would violate any of
the patents, trademarks, service marks, trade names, copyrights or
trade secrets or other proprietary rights of any other person or
entity, and there is no basis for the foregoing. None of NLC's
employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of NLC or that would
conflict with NLC's business as proposed to be conducted. Neither
the execution nor delivery of this Agreement, nor the carrying on
of NLC's business by the employees of NLC, nor the conduct of
NLC's business as proposed, will conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which
any of such employees is now obligated.
3.4. EMPLOYEES. Each employee and officer of NLC has
executed a Proprietary Information and Inventions Agreement in the
form attached hereto as EXHIBIT 3.4. None of NLC's employees or
officers is in violation thereof, and NLC will use its best
efforts to prevent any such violation. No officer or key employee
of NLC, or any
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group of key employees, intends to terminate their employment with
NLC, and NLC does not have a present intention to terminate the
employment of any such person. The employment of each officer and
each employee of NLC is terminable at the will of NLC (subject to
certain consequences specified in the Founders Stock Agreements,
in the case of Peter W. Keeler and Thomas R. Eames).
3.5. TITLE TO PROPERTY AND ASSETS. NLC owns its
property and assets free and clear of all mortgages, liens, loans
and encumbrances, except such encumbrances and liens which do not
materially impair NLC's ownership or use of such property or
assets. With respect to the property and assets it leases, NLC is
in compliance with such leases and holds a valid leasehold
interest free of any liens, claims and encumbrances.
3.6. AGREEMENTS, ACTION.
(A) There are no employment or other
agreements, understandings or proposed transactions between NLC
and any of its officers, directors, affiliates, or any affiliate
thereof.
(B) There are no agreements, understandings,
instruments, contracts or proposed transactions to which NLC is a
party or by which it is bound which involve obligations of, or
payments to NLC of, amounts which, individually or in the
aggregate, exceed Fifty Thousand Dollars ($50,000).
(C) NLC is not a party to and is not bound by
any contract, agreement or instrument, or subject to any
restriction under NLC's Articles of Incorporation or Bylaws, which
materially and adversely affects its business as now conducted,
its properties or its financial condition.
3.7. CHANGES. Since June 30, 1995, there has not
been (1) an NLC Material Adverse Effect; (2) any liability or
obligation of any nature whatsoever (contingent or otherwise)
incurred by NLC, other than (a) liabilities incurred in the
ordinary course of business and (b) obligations under contracts
and commitments incurred in the ordinary course of business which,
individually or in the aggregate, are not material to the
financial condition or operating results of NLC; (3) any material
asset or property of NLC made subject to a lien of any kind; (4)
any waiver of any material valuable right of NLC, or any
cancellation of any material debt or claim held by NLC, except in
the ordinary course of business; (5) any payment of dividends on,
other distributions with respect to, or any direct or indirect
redemption or acquisition of, any shares of the capital stock of
NLC, or any agreement or commitment therefor; (6) any issuance of
any capital stock, or the grant of options to purchase NLC Common
Stock; (7) any sale, assignment or transfer of any tangible or
intangible material assets of NLC, except for sales, assignments
or transfers in the ordinary course of business; (8) any loan by
NLC to any officer, director, employee, consultant or shareholder
of NLC, or any agreement or commitment therefor other than routine
travel or relocation advances, or loans made in the ordinary
course of business; (9) any material damage, destruction or
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loss (whether or not covered by insurance) affecting the assets,
property, business or prospects of NLC; (10) a material loss of
intellectual property or key employees; or (11) any change in the
accounting methods, practices or policies followed by NLC,
including any change in depreciation or amortization policies or
rates.
3.8. INSURANCE. NLC presently maintains such types
and amounts of insurance with respect to its business and
properties, on both a per occurrence and an aggregate basis, as
are customarily carried by persons or entities which are engaged
in the same or similar business as NLC and which are at the same
stage of development as NLC.
4. REPRESENTATIONS AND WARRANTIES OF GIC
Except as set forth in a letter dated the date of this
Agreement, delivered by GIC to NLC concurrently herewith, and
certified by GIC to be true, accurate and complete to the best
knowledge of the executive officers of GIC (the "GIC DISCLOSURE
LETTER"), GIC hereby represents and warrants to NLC that:
4.1. AUTHORITY.
(A) CORPORATE ACTION. GIC and Newco have all
requisite corporate power and authority to enter into this
Agreement and to perform their obligations hereunder and to
consummate the Merger and the other transactions contemplated by
this Agreement and the Agreement of Merger. The execution and
delivery of this Agreement by GIC and Newco and the Agreement of
Merger by Newco and the consummation by GIC and Newco of the
Merger and the other transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the
part of GIC and Newco. This Agreement has been duly executed and
delivered by GIC and Newco, and this Agreement is the valid and
binding obligation of GIC and Newco, enforceable in accordance
with its terms except as such enforceability may be limited by
bankruptcy, insolvency or similar laws or by limitations on the
availability of equitable remedies.
(B) NO CONFLICT. Neither the execution,
delivery and performance of this Agreement or the Agreement of
Merger, nor the consummation of the transactions contemplated
hereby or thereby nor compliance with the provisions hereof or
thereof will conflict with, or result in any violations of, or
cause a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in, or
the loss of any material benefit under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of
the material properties or assets of GIC or Newco under, any term,
condition or provision of (I) the Certificate of Incorporation or
Bylaws of GIC or Newco or (II) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other material agreement,
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to GIC or Newco or their respective
properties or assets, except
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where the conflict, violation, default, right of termination,
amendment, cancellation acceleration, loss, lien, security
interest, change or encumbrance would not have a material adverse
effect on GIC or the ability of GIC, Newco or NLC to consummate
the transactions contemplated by this Agreement.
(C) GOVERNMENTAL CONSENTS. No consent,
approval, order or authorization of, or registration, declaration
or filing with, any Governmental Entity is required to be obtained
by GIC or Newco in connection with the execution and delivery of
this Agreement or the Agreement of Merger or the consummation of
the transactions contemplated hereby or thereby other than the
filing of the Agreement of Merger with the Secretary of State of
the State of California, and other than in connection with the
provisions of the CCC, the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), the Securities Act, State Blue Sky
Laws and the requirements of the NYSE, except where the failure to
obtain any consent, approval, order or authorization or to make
any declaration, registration or filing would not have a material
adverse effect on the ability of GIC, Newco or NLC to consummate
the transactions contemplated by this Agreement.
4.2. DISCLOSURE. None of the information supplied or
to be supplied by GIC for inclusion or incorporation by reference
in the Registration Statement, in the Prospectus or in any other
documents to be filed with the SEC in connection with the
transactions contemplated hereby will, at the respective times
such documents are filed, and, in the case of the Registration
Statement, when it becomes effective and at all times necessary to
comply with the Securities Act, and, with respect to the
Prospectus, when mailed and at all times through the Closing Date
contain any untrue statement of material fact or omit to state any
material fact necessary in order to make the statements therein,
in light of the circumstances in which they are made, not
misleading. GIC shall promptly advise NLC if it becomes aware of
any event or set of facts relating to any information that GIC has
furnished that should be set forth in an amendment of, or
supplement to, the Registration Statement.
4.3. INTERIM OPERATIONS OF NEWCO. Newco has been
formed for the purpose of engaging in the transactions
contemplated hereby, will engage in no other business activities
and will conduct its operations only as contemplated hereby.
5. NLC COVENANTS
5.1. ADVICE OF CHANGES. During the period from the
date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement in accordance with its terms
(the "WAITING PERIOD"), NLC will promptly advise GIC in writing
(A) of any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of NLC
contained in this Agreement, if made on or as of the date of such
event or the Closing Date, untrue or inaccurate in any material
respect, or (B) of any material breach by NLC of any covenant or
agreement contained in this Agreement. No disclosure by NLC
pursuant to this Section 5.1, however, shall be
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deemed to amend or supplement the NLC Disclosure Letter or to
prevent or cure any misrepresentation, breach of warranty or
breach of covenant.
To ensure compliance with this Section 5.1, NLC shall
deliver to GIC as soon as practicable, but in any event within
thirty days after the end of each monthly accounting period ending
during the Waiting Period, an unaudited balance sheet, statement
of operations and statement of cash flows for NLC, which financial
statements shall be prepared in the ordinary course of business,
in accordance with NLC's books and records and GAAP and shall
fairly present the financial position of NLC as of their
respective dates and the results of NLC's operations for the
periods then ended.
5.2. MAINTENANCE OF BUSINESS. During the Waiting
Period, NLC shall conduct its business in the ordinary course
consistent with past practice and shall use its best efforts to
preserve its business and its relationships with customers,
suppliers, employees and others in substantially the same manner
as it has prior to the date hereof.
5.3. CONDUCT OF BUSINESS. During the Waiting Period,
NLC will not, without the prior written consent of GIC:
(A) issue any note, bond, or other debt
security or create, incur, assume or guarantee any indebtedness or
other obligation for borrowed money;
(B) enter into any material transaction not in
the ordinary course of its business;
(C) encumber or permit to be encumbered any of
its assets except for mechanic's liens, rights of lessors of
equipment and similar types of encumbrances in the ordinary course
of business;
(D) dispose of any material portion of its
assets except for sales to customers in the ordinary course of
business;
(E) enter into any material lease or material
contract for the purchase or sale or license of any property, real
or personal, except in the ordinary course of business;
(F) fail to maintain its equipment and other
assets in good working condition and repair according to the
standards it has maintained prior to the date of this Agreement,
subject only to ordinary wear and tear;
(G) enter into, adopt, modify or amend any
written employment agreement or pay or commit to pay any bonus,
increased salary or special remuneration to any officer, employee
or consultant, except for (I) bonuses paid with respect to 1995
performance to NLC employees or consultants other than Peter W.
Keeler or Thomas R. Eames, in amounts determined in good faith by
NLC's board of directors, consistent with past practice and
previously disclosed to GIC in writing and approved by GIC and
(II) compensation pursuant to existing arrangements previously
disclosed in writing to GIC;
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(H) take any action with respect to the grant
of any severance or termination pay to any employees or with
respect to any increase of benefits payable under its severance or
termination pay policies or agreements in effect on the date
hereof and applicable to employees;
(I) except as required by GAAP, change
accounting methods;
(J) declare, set aside or pay any cash or
stock dividend or other distribution in respect of capital stock,
or redeem or otherwise acquire any of its capital stock, except
for repurchases of unvested stock from terminated employees or
consultants pursuant to existing repurchase rights;
(K) amend or terminate any material contract,
agreement or license to which it is a party;
(L) lend any amount to any person or entity,
other than reasonable advances for relocation, travel and expenses
that are incurred in the ordinary course of business and not to
exceed $150,000 in the aggregate;
(M) waive or release any right or claim except
for the waiver or release of non-material claims in the ordinary
course of business;
(N) issue or sell any shares of its capital
stock of any class (except upon exercise of the Series A Warrants,
upon conversion of NLC Series A Preferred Stock or upon the
exercise of an option outstanding on the date hereof), or any
other of its securities, or issue or create any warrants,
obligations, subscriptions, options (including under the NLC
Plan), convertible securities or other commitments to issue shares
of capital stock, or accelerate the vesting of any outstanding
option or other security (other than as contemplated by this
Agreement);
(O) split or combine the outstanding shares of
its capital stock of any class or enter into any recapitalization
or agreement affecting the number or rights of outstanding shares
of its capital stock of any class or affecting any other of its
securities;
(P) merge, consolidate or reorganize with, or
acquire the securities or assets of any entity;
(Q) amend its Articles of Incorporation or
Bylaws;
(R) license any NLC intellectual property
rights to any affiliated or unaffiliated third party;
(S) agree to any audit assessment by any tax
authority;
(T) change any insurance coverage or issue any
certificates of insurance; or
(U) commit to do any of the foregoing.
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5.4. SHAREHOLDER APPROVAL. NLC will submit this
Agreement, the Merger and related matters for the consideration
and approval of the NLC shareholders by written consent as
permitted by the CCC. Subject to the fiduciary obligations of its
directors, NLC's board of directors shall recommend that NLC
shareholders approve the Merger. NLC will mail the Prospectus to
its shareholders in a timely manner.
5.5. FIRPTA COMPLIANCE. NLC shall deliver to GIC at
the Closing a statement in such form as may be reasonably
requested by counsel for GIC, conforming to the requirements of
Treasury Regulation Section 1.897-2(h)(1)(i) and shall deliver to
the Internal Revenue Service the notification required under
Treasury Regulation Section 1.897-2(h)(2).
5.6. REGULATORY APPROVALS. NLC will promptly execute
and file, or join in the execution and filing of, any application
or other document that may be necessary in order to obtain the
authorization, approval or consent of any governmental body,
federal, state, local or foreign, that may be reasonably required
in connection with the consummation of the transactions
contemplated by this Agreement. NLC will use its best efforts to
promptly obtain all such authorizations, approvals and consents.
5.7. NECESSARY CONSENTS. NLC will use its best
efforts to obtain such written consents from third parties and
take such other actions as may be necessary or appropriate in
addition to those set forth in Section 5.6 to allow the
consummation of the transactions contemplated hereby and to allow
the Surviving Corporation to carry on NLC's business after the
Effective Time.
5.8. ACCESS TO INFORMATION. NLC will allow GIC and
its agents full access to the files, books, records, offices and
properties of NLC, including, without limitation, any and all
information relating to NLC's taxes, commitments, contracts,
leases, licenses and real, personal and intangible property and
financial condition and will make available to GIC all financial
information reasonably requested by GIC or its agents, including,
without limitation, working papers pertaining to all tax returns
and financial statements prepared or reviewed by NLC or its
accountants. NLC shall instruct its employees, counsel and
financial advisors to cooperate with GIC and its agents in their
investigation of the business of NLC. No investigation pursuant
to this Section 5.8 shall affect any representation or warranty
given by NLC or the Founders to GIC hereunder.
5.9. OTHER OFFERS. From the date hereof until the
termination of this Agreement, NLC and the officers, directors,
employees or other agents of NLC will not, directly or indirectly,
(I) take any action to solicit or initiate any Acquisition
Proposal (as defined below) or (II) unless otherwise required in
accordance with the fiduciary duties of the Board of Directors of
NLC under applicable law as advised in writing by special counsel
to NLC, engage in negotiations with, or disclose any nonpublic
information relating to NLC or afford access to the properties,
books or records of NLC to, any person that NLC has reasonable
grounds to believe may be considering making, or has made, an
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Acquisition Proposal. NLC will promptly notify GIC after receipt
of any Acquisition Proposal or any indication that any person is
considering making an Acquisition Proposal or any request for
nonpublic information relating to NLC or for access to the
properties, books or records of NLC by any person that NLC has
reasonable grounds to believe may be considering making, or has
made, an Acquisition Proposal. For purposes of this Agreement,
"ACQUISITION PROPOSAL" means any offer or proposal for, or any
indication of interest in, a merger or other business combination
involving NLC or the acquisition of any equity interest in, or a
substantial portion of the assets of, NLC, other than the
transactions contemplated by this Agreement.
5.10. INFORMATION FOR USE IN REGISTRATION STATEMENT.
In connection with the preparation of the Registration Statement,
NLC will prepare and provide to GIC all information relating to
NLC that is required to be included in the Registration Statement
or other filings under applicable rules and regulations of the
SEC, including, without limitation, an opinion of counsel to NLC
with respect to the principal federal income tax consequences of
the Merger and a description of the principal federal income tax
consequences of the Merger, which opinion and description shall be
reasonably satisfactory to GIC. In connection with such tax
opinion, NLC shall provide its counsel with representations in the
form attached hereto as Exhibit 5.10.
5.11. TERMINATION OF CERTAIN AGREEMENTS. Prior to
the Effective Time, NLC shall deliver to GIC evidence satisfactory
to GIC and its counsel that (i) the information, inspection and
other rights granted in Section 6.1 and the registration rights
granted in Section 7 of the Original Series A Stock Purchase
Agreements and (ii) the Founders Stock Agreements have in each
case been terminated, effective as of the Effective Time.
5.12. SATISFACTION OF CONDITIONS PRECEDENT. NLC will
use its best efforts to satisfy or cause to be satisfied all the
conditions precedent that are set forth in Section 8, and NLC will
use its best efforts to cause the Merger and the other
transactions contemplated by this Agreement to be consummated.
6. GIC COVENANTS
6.1. ADVICE OF CHANGES. During the Waiting Period,
GIC will promptly advise NLC in writing (A) of any event occurring
subsequent to the date of this Agreement that would render any
representation or warranty of GIC contained in this Agreement, if
made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect, and (B) of any
material breach by GIC of any covenant or agreement contained in
this Agreement. No disclosure by GIC pursuant to this Section
6.1, however, shall be deemed to amend or supplement the GIC
Disclosure Letter or to prevent or cause any misrepresentation,
breach of warranty or breach of covenant.
6.2. REGULATORY APPROVALS. GIC will promptly execute
and file, or join in the execution and filing of, any application
or other document that may be necessary in
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order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign that may be
reasonably required, or which NLC may reasonably request, in
connection with the consummation of the transactions contemplated
by this Agreement. GIC will use its best efforts to promptly
obtain all such authorizations, approvals and consents.
6.3. FORM S-4 REGISTRATION STATEMENT. GIC shall
prepare and file with the SEC as soon as practicable after the
date hereof, and shall use its reasonable best efforts to cause to
become effective at the earliest practicable date, a registration
statement on Form S-4 (the "REGISTRATION STATEMENT") under the
Securities Act for the purpose of registering the shares of GIC
Common Stock into which the outstanding shares of NLC Stock will
be converted in accordance with the Merger. GIC shall provide NLC
with the necessary copies of the Prospectus to be included in the
Registration Statement for mailing to the shareholders of NLC at
the earliest practicable date after the effective date of the
Registration Statement. GIC shall file any amendments to the
Registration Statement as shall be necessary to keep it current
and effective until the Merger shall have been consummated.
6.4. NECESSARY CONSENTS. GIC will use its best
efforts to obtain such written consent from third parties and take
such other actions as may be necessary or appropriate in addition
to those set forth in Section 6.2 to allow the consummation of the
transactions contemplated hereby.
6.5. SATISFACTION OF CONDITIONS PRECEDENT. GIC will
use its best efforts to satisfy or cause to be satisfied all the
conditions precedent that are set forth in Section 7, and GIC will
use its best efforts to cause the Merger and the other
transactions contemplated by this Agreement to be consummated.
6.6. INDEMNIFICATION.
(A) GIC shall cause the Surviving Corporation
to keep in effect provisions in the Surviving Corporation's
Articles of Incorporation and Bylaws providing for exculpation of
director and officer liability and indemnification of each person
who is entitled to the benefit of the indemnification provisions
set forth in NLC's Articles of Incorporation or Bylaws as of the
date hereof (the "INDEMNIFIED PARTIES"), and shall not amend such
provisions except as required by applicable law or except to make
changes permitted by law that would enlarge the Indemnified
Parties' right of indemnification.
(B) The Surviving Corporation shall pay all
expenses, including attorneys' fees, that may be incurred by any
Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 6.6.
(C) The rights of each Indemnified Party
hereunder shall be in addition to any other rights such
Indemnified Party may have under any agreement (whether with NLC,
the Surviving Corporation, GIC or any other person), under the CCC
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or otherwise. The provisions of this Section shall survive the
consummation of the Merger and are expressly intended to benefit
each of the Indemnified Parties.
(D) Without limiting any indemnification or
other protections described in other paragraphs of this Section
6.6, the Surviving Corporation shall comply with all obligations
of NLC under the indemnity agreements existing on the date hereof
between NLC and its directors and executive officers (which
agreements cover Peter W. Keeler, Thomas R. Eames and Stuart H.
Zimmerman - each an "INDEMNIFIED NLC DIRECTOR" and have been
previously delivered to GIC). Such Agreements shall remain in
effect after the Effective Time.
(E) Effective at the Effective Time, GIC
shall, and shall cause General Instrument Corporation of Delaware
to, enter into a written indemnification agreement with each
Founder in form and substance mutually satisfactory to GIC and the
Founders (the "NEW INDEMNIFICATION AGREEMENTS").
6.7. NYSE LISTING. GIC shall cause to be prepared
and submitted to the NYSE a listing application covering the
shares of GIC Common Stock issuable in connection with the Merger
and will use its reasonable best efforts to obtain, prior to the
Effective Time, approval for the listing of such shares upon
official notice of issuance.
6.8. BLUE SKY PERMITS. GIC will use its reasonable
best efforts to obtain, prior to the effective date of the
Registration Statement, all necessary permits and approvals
required to carry out the transactions contemplated by this
Agreement pursuant to State Blue Sky Laws.
6.9. TAX COVENANTS.
(A) After the Effective Time, GIC shall not
take any action that would cause the Merger to no longer be
treated as a reorganization pursuant to the provisions of Section
368(a)(2)(E) of the Code, it being understood that the
contribution by GIC of the outstanding stock of the Surviving
Corporation to a wholly-owned subsidiary of GIC following the
Merger shall be permitted.
(B) GIC shall provide to NLC or its counsel
certification as to (i) such factual matters relative to the
business, operations, assets and liabilities of GIC, General
Instrument of Delaware Corporation and Newco, and (ii) such
matters relating to the intentions of GIC and its subsidiaries and
Newco after the Effective Time, in each case, as may be reasonably
requested by NLC or its counsel in connection with such counsel
furnishing to NLC an opinion as to the Merger being treated as a
reorganization pursuant to Section 368(a)(2)(E) of the Code and in
each case as set forth on Exhibit 6.9(b) hereto.
(C) GIC shall treat options granted to
employees of NLC at the Effective Time as being employee options
without ascertainable fair market values
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granted in connection with the performance of services for
purposes of Section 83 of the Code.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NLC
The obligations of NLC hereunder are subject to the
fulfillment or satisfaction, on or before the Closing, of each of
the following conditions (any one or more of which may be waived
by NLC, but only in a writing signed by NLC):
7.1. NLC SHAREHOLDER APPROVAL. The principal terms
of this Agreement and the Merger shall have been approved and
adopted by the NLC shareholders in accordance with applicable law
and NLC's Articles of Incorporation or Bylaws.
7.2. NO LEGAL ACTION. No temporary restraining
order, preliminary injunction or permanent injunction or other
order preventing the consummation of the Merger shall have been
issued by any Federal or state court or Governmental Entity and
remain in effect.
7.3. REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective under the Securities
Act and no "stop order" suspending the effectiveness of the
Registration Statement shall have been issued and remain in effect
and no proceeding for such purpose shall have been commenced.
7.4. INDEMNIFICATION AND STOCK OPTION AGREEMENTS.
GIC shall have executed and delivered the New Indemnification
Agreements and stock option agreements (A) with Peter W. Keeler
and Thomas R. Eames substantially in the form of EXHIBIT 7.4(a)
(the "FOUNDERS STOCK OPTION AGREEMENTS") and (B) with the persons
listed on SCHEDULE 7.4(b) who are employees of NLC at the
Effective Time, substantially in the form of EXHIBIT 7.4(b) and
there shall be in effect a registration statement on Form S-8
under the Securities Act covering the shares of GIC Common Stock
issuable upon exercise of all such stock options.
7.5. DISSENTERS. Holders of less than 1% of the
total number of shares of NLC Stock shall be eligible to perfect
dissenters' rights.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF GIC
The obligations of GIC hereunder are subject to the
fulfillment or satisfaction on or before the Closing, of each of
the following conditions (any one or more of which may be waived
by GIC, but only in a writing signed by GIC):
8.1. NLC SHAREHOLDER APPROVALS. The principal terms
of this Agreement and the Merger shall have been approved and
adopted by the NLC shareholders in accordance with applicable law
and NLC's Articles of Incorporation or Bylaws.
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8.2. NO LEGAL ACTION. No temporary restraining
order, preliminary injunction or permanent injunction or other
order preventing the consummation of the Merger shall have been
issued by any Federal or state court or Governmental Entity and
remain in effect.
8.3. REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective under the Securities
Act and no "stop order" suspending the effectiveness of the
Registration Statement shall have been issued and remain in effect
and no proceeding for such purpose shall have been commenced.
8.4. OUTSTANDING SHARES. The number of shares of NLC
stock issued and outstanding or subject to outstanding options or
warrants shall not be greater than as set forth in Section 2.2.
All outstanding warrants and options shall have been exercised.
8.5. CONSENTS. GIC shall have received the consent
of the banks under the Credit Agreement of General Instrument
Corporation of Delaware with respect to the Merger.
9. TERMINATION OF AGREEMENT
9.1. TERMINATION. This Agreement may be terminated
at any time prior to the Effective Time, whether before or after
approval of the Merger by the shareholders of NLC:
(A) by mutual agreement of NLC and GIC;
(B) by NLC, if there has been a breach by GIC
of any representation or warranty or covenant set forth in this
Agreement on the part of GIC, which has or can reasonably be
expected to have a material adverse effect on the business,
properties or prospects of GIC (a "GIC MATERIAL ADVERSE EFFECT")
and which has not been cured (i.e., remedied to the extent that it
no longer can reasonably be expected to have a GIC Material
Adverse Effect) within 30 days of the date on which written notice
of such breach was first given to GIC or which is not capable of
being cured prior to the Closing Date;
(C) by GIC, if there has been a breach by NLC
of any representation or warranty or covenant set forth in this
Agreement on the part of NLC, which breach has or can reasonably
be expected to have an NLC Material Adverse Effect and which has
not been cured (i.e., remedied to the extent that it no longer can
reasonably be expected to have an NLC Material Adverse Effect)
within 30 days of the date on which written notice of such breach
was first given to NLC or which is not capable of being cured
prior to the Closing Date;
(D) by NLC, if the conditions for Closing the
Merger set forth in Section 7 above shall not all have been
satisfied or waived on or before the Final Date (as defined below)
other than as a result of a breach of this Agreement by NLC;
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(E) by GIC, if the conditions for Closing the
Merger set forth in Section 8 above shall not all have been
satisfied or waived on or before the Final Date other than as a
result of a breach of this Agreement by GIC; or
(F) by either party, if a permanent injunction
or other order by any Federal or state court or Governmental
Entity that would make illegal or otherwise restrain or prohibit
the consummation of the Merger shall have been issued and shall
have become final and nonappealable.
In light of GIC's familiarity with and participation in the
litigation described in paragraph 3.2 of the Founders Disclosure
Letter, GIC and NLC have agreed that, with the exception of
disclosure in such litigation of additional material facts
evidencing a breach by NLC or the Founders of any representation
or warranty or covenant set forth in this Agreement, which breach
has or can reasonably be expected to have an NLC Material Adverse
Effect, no occurrence or development in such litigation will
constitute an NLC Material Adverse Effect; provided, however, that
the foregoing will have no effect on Section 8.2 or Section
9.1(f). For purposes of the foregoing, it is understood that the
disclosure of such additional material facts shall not be
precluded from constituting a breach of representation solely by
reason of the disclosure of the existence of such litigation (but
not such additional material facts) in the Founders Disclosure
Letter.
As used herein, the "FINAL DATE" shall be December 31, 1995
except that if a temporary, preliminary or permanent injunction or
other order by any Federal or state court that would prohibit or
otherwise restrain consummation of the Merger shall have been
issued and shall remain in effect on such date, and such
injunction shall not have become final and nonappealable, either
party, by giving the other written notice thereof on or prior to
such date, may extend the time for consummation of the Merger up
to and including the earlier of the date such injunction shall
become final and non-appealable or March 31, 1996, so long as such
party shall, at its own expense, use its best efforts to have such
injunction dissolved.
9.2. NOTICE OF TERMINATION. Any termination of this
Agreement under Section 9.1 above will be effective by the
delivery of a written notice by the terminating party to the other
party hereto.
9.3. NO LIABILITY. Any termination of this Agreement
in accordance with this Section 9 will be without further
obligation or liability upon any party in favor of the other party
hereto other than the obligations contained in the mutual non-
disclosure agreement between the parties dated February 9, 1995
(the "NON-DISCLOSURE AGREEMENT"); provided, however, that nothing
herein will relieve any party from liability for any breach of
this Agreement.
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10. MISCELLANEOUS
10.1. INDEMNIFICATION REGARDING THE REGISTRATION
STATEMENT. Each of NLC and GIC hereby agrees to indemnify the
other and its respective directors, officers, agents, employees
and each person who may be controlled by it or be under common
control with GIC or NLC within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act, and to hold
each of them harmless from and against any losses, claims, damages
or liabilities, joint or several, to which they, or any of them,
may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon claims by any NLC Shareholder of any alleged untrue
statement of any material fact contained in information pertaining
to it and its subsidiaries which was provided by it and is
contained or incorporated by reference in the Registration
Statement (as confirmed in writing) or upon claims by any NLC
Shareholder of any alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
10.2. GOVERNING LAW. The internal laws of the State
of California (irrespective of its choice of law principles) shall
govern the validity of this Agreement, the construction of its
terms and the interpretation and enforcement of the rights and
duties of the parties hereto.
10.3. ASSIGNMENT; BINDING UPON SUCCESSORS AND
ASSIGNS. No party hereto may assign any of its rights or
obligations hereunder without the prior written consent of the
other party hereto. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective
successors and permitted assigns.
10.4. SEVERABILITY. If any provision of this
Agreement, or the application thereof, is for any reason and to
any extent be invalid or unenforceable, the remainder of this
Agreement and application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the
greatest extent possible, the economic, business and other
purposes of the void or unenforceable provision.
10.5. COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which will be an original
as regards any party whose signature appears thereon and all of
which together will constitute one and the same instrument. This
Agreement will become binding when one or more counterparts
hereof, individually or taken together, bear the signatures of all
the parties reflected hereon as signatories.
10.6. OTHER REMEDIES. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a
party will be deemed cumulative with and not exclusive of any
other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any
other.
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10.7. AMENDMENT AND WAIVERS. Any term or provision
of this Agreement may be amended, and the observance of any term
of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby.
Notwithstanding any rights that may be created in any third party
under the terms of this Agreement, no such amendment or waiver
will require the consent of such third party to be effective. The
waiver by a party of any breach hereof or default in the
performance hereof will not be deemed to constitute a waiver of
any other default or any succeeding breach or default. This
Agreement may be amended by the parties hereto at any time before
or after approval of the NLC shareholders, but, after such
approval, no amendment shall be made that under applicable law
requires the further approval of the NLC shareholders without
obtaining such further approval.
10.8. EXPENSES. Each party will bear its respective
expenses and legal fees incurred with respect to this Agreement,
and the transactions contemplated hereby.
10.9. ATTORNEYS' FEES. Should suit be brought to
enforce or interpret any part of this Agreement, the prevailing
party will be entitled to recover, as an element of the costs of
suit and not as damages, reasonable attorneys' fees to be fixed by
the court (including, without limitation, costs, expenses and fees
on any appeal). The prevailing party will be entitled to recover
its costs of suit, regardless of whether such suit proceeds to
final judgment.
10.10. NOTICES. All notices and other communications
pursuant to this Agreement shall be in writing and deemed to be
sufficient if contained in a written instrument and shall be
deemed given if delivered personally, faxed, sent by nationally-
recognized overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties
at the following address (or at such other address for a party as
shall be specified by like notice):
IF TO GIC TO:
General Instrument Corporation
181 West Madison Street
Chicago, Illinois 60602
Attention: General Counsel
Fax: (312) 541-5049
WITH A COPY TO:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Attention: Robert Schwenkel, Esq.
Fax: (212) 859-8587
24
<PAGE>
AND IF TO NLC TO:
Next Level Communications
6153 State Farm Drive
Rohnert Park, California 94928
Attention: Peter W. Keeler
Fax: (707) 588-5836
WITH COPIES TO:
Cooley Godward Castro Huddleson & Tatum
One Maritime Plaza
San Francisco, California 94111
Attention: Kenneth L. Guernsey, Esq.
Fax: (415) 951-3699
All such notices and other communications shall be deemed to
have been received (A) in the case of personal delivery, on the
date of such delivery, (B) in the case of a fax, when the party
receiving such copy shall have confirmed receipt of the
communication, (C) in the case of delivery by nationally-
recognized overnight courier, on the business day following
dispatch, and (d) in the case of mailing, on the third business
day following such mailing.
10.11. CONSTRUCTION OF AGREEMENT. This Agreement has
been negotiated by the respective parties hereto and their
attorneys and the language hereof will not be construed for or
against either party. A reference to a Section or an exhibit will
mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for
reference purposes only and will not in any manner limit the
construction of this Agreement, which will be considered as a
whole.
10.12. FURTHER ASSURANCES. Each party agrees to
cooperate fully with the other parties and to execute such further
instruments, documents and agreements and to give such further
written assurances as may be reasonably requested by any other
party to evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and
purposes of this Agreement.
10.13. ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS.
Except for (i) the covenants regarding indemnification in Section
6.6, and (ii) the covenants regarding indemnification set forth in
Section 10.1, no provisions of this Agreement are intended, nor
will be interpreted, to provide or create any third party
beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner or any party hereto or
any other person or entity unless specifically provided otherwise
herein, and, except as so provided, all provisions hereof will be
personal solely between the parties to this Agreement.
25
<PAGE>
10.14. PUBLIC ANNOUNCEMENT. Upon execution of this
Agreement, GIC and NLC promptly will issue a joint press release
approved by both parties announcing the Merger. Thereafter, GIC
or NLC may issue such press releases, and make such other
disclosures regarding the Merger, as it determines (after
consultation with legal counsel) are required under applicable
securities laws or NYSE rules; provided, however, that a draft of
any such press release shall be provided to the other party and
its counsel as far as practicable in advance of its release and
the comments of such other party shall be taken into
consideration.
10.15. ENTIRE AGREEMENT. This Agreement and the
exhibits hereto constitute the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof
and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto other
than the Non-Disclosure Agreement, which shall remain in full
force and effect. The express terms hereof control and supersede
any course of performance or usage of the trade inconsistent with
any of the terms hereof.
10.16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
None of the representations and warranties stated in this
Agreement shall survive the Closing or termination of this
Agreement; provided, however, that such non-survival shall not
release any party from liability for any breach of this Agreement
(other than a breach of a representation or warranty following the
Closing).
26
<PAGE>
In witness whereof, the parties hereto have executed this
Agreement and Plan of Merger as of the date first above written.
GENERAL INSTRUMENT CORPORATION
By: /s/ Richard S. Friedland
----------------------------------------------
Print Name: Richard S. Friedland
----------------------------------------------
Title: President and Chief Executive Officer
----------------------------------------------
NLC Acquisition Corp.
By: /s/ Richard S. Friedland
----------------------------------------------
Print Name: Richard S. Friedland
----------------------------------------------
Title: President
----------------------------------------------
Next Level Communications
By: /s/ Peter W. Keeler
----------------------------------------------
Print Name: Peter W. Keeler
----------------------------------------------
Title: President and Chairman
----------------------------------------------
By: /s/ Thomas R. Eames
----------------------------------------------
Print Name: Thomas R. Eames
----------------------------------------------
Title: Chief Executive Officer and Vice Chairman
----------------------------------------------
For the purposes of Article 3:
/s/ Peter W. Keeler
--------------------------------------
Peter W. Keeler
/s/ Thomas R. Eames
--------------------------------------
Thomas R. Eames
27
<PAGE>
EXHIBIT 7.4(a) TO THE MERGER AGREEMENT
Form of Founder Option Agreement
<PAGE>
Exhibit 7.4 (a) to
Merger Agreement
[Form of NLC Founder Option Agreement]
GENERAL INSTRUMENT CORPORATION
1993 LONG-TERM INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made as of the __ day of [ ],
1995 (the "Grant Date"), between General Instrument Corporation, a
Delaware corporation (the "Company"), and __________ (the
"Grantee").
WHEREAS, the Company has adopted the General Instrument
1993 Long-Term Incentive Plan (the "Plan") in order to provide an
additional incentive to certain employees and directors of the
Company and its Subsidiaries;
WHEREAS, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of August __, 1995 among the
Company, NLC Acquisition Corp. and Next Level Communications, a
California corporation ("Next Level"), Next Level became a
Subsidiary of the Company as of the date hereof for the purposes
of the Plan;
WHEREAS, the Grantee is an employee of Next Level; and
WHEREAS, the Committee responsible for administration of
the Plan has determined to grant an Option to the Grantee as
provided herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. GRANT OF OPTION.
1.1 The Company hereby grants to the Grantee
the right and option (the "Option") to purchase all or any part of
an aggregate of 1,225,000 whole shares of Stock subject to, and in
accordance with, the terms and conditions set forth in this
Agreement. Of such 1,225,000 shares, 225,000 shares are referred
to herein as the "Fixed Shares" and 1,000,000 shares are referred
to herein as the "Contingent Shares".
1.2 The Option is not intended to qualify as an
Incentive Stock Option within the meaning of Section 422 of the
Internal Revenue Code.
<PAGE>
1.3 This Agreement shall be construed in
accordance and consistent with, and subject to, the provisions of
the Plan (the provisions of which are incorporated herein by
reference); and, except as otherwise expressly set forth herein,
the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. PURCHASE PRICE.
The price per share at which the Option shall be
exercisable shall be the Fair Market Value of Stock on the date
hereof (the "Option Price").
3. Duration of Option.
The Option shall be exercisable to the extent and in the
manner provided herein for a period of ten (10) years from the
Grant Date (the "Exercise Term"); PROVIDED, HOWEVER, that the
Option may be earlier terminated as provided in Section 6 hereof.
4. EXERCISABILITY OF OPTION.
4.1 (a) Subject to Section 6, the Option
shall become exercisable to purchase all 225,000 of the Fixed
Shares on the date that is the 18-month anniversary of the date
hereof (the "Fixed Share Exercise Date").
(b) The Option shall become exercisable
with respect to all 1,000,000 of the Contingent Shares on the date
that is 30 days prior to the end of the Exercise Term, PROVIDED,
that the Grantee remains an employee of the Company or any
Subsidiary as of such date. The Option may become exercisable
earlier with respect to all or a portion of the Contingent Shares
to the extent provided in Section 4.4, and notwithstanding the
preceding sentence, such earlier exercisability may occur, to the
extent provided in Section 6, after termination of the Grantee's
employment.
4.2 (a) As soon as practicable after the
end of each fiscal quarter of the Company through and including
the fiscal quarter ending March 31, 2000, the Company shall
determine the amount of Next Level Sales during such fiscal
quarter. "Next Level Sales" shall mean net revenues (I.E., gross
revenues less returns, discounts, reserves for bad debts and any
other reductions to gross revenues called for by the regular
accounting principles and policies of the Company), excluding
interest income and investment income, recorded by Next Level on a
consolidated basis with Next Level's subsidiaries, if any.
2
<PAGE>
(b) All sales of products and licenses
of intellectual property by Next Level to third parties shall be
made on an arm's-length basis, and the prices and royalty rates of
such transactions shall be determined without regard to any
benefit the Company or any Subsidiary (other than Next Level) may
receive as a result thereof. If royalties from licenses of
intellectual property by Next Level to third parties shall
constitute more than 10% of Next Level Sales for any fiscal year
of Next Level, then the Company and the holders of a majority in
interest of the then outstanding options granted by the Company as
contemplated by the Merger Agreement (collectively, the "Next
Level Options") shall agree on an equitable adjustment to the
treatment of such royalties for purposes of the Option in order to
reflect the lower revenues generally attributable to royalties on
sales by third parties, as compared to direct sales of products.
Any such adjustment shall be effective with respect to any fiscal
year in which royalty revenues exceed such 10% threshold.
(c) The Company shall not enter into
any sale or disposition of all or a portion of the stock or assets
of Next Level that would have the effect of materially decreasing
Next Level Sales for purposes of the Option, unless, prior
thereto, the Company and holders of a majority of the then
outstanding Next Level Options shall have agreed upon an equitable
exchange of that portion of the Next Level Options that relates to
Contingent Shares as to which the Next Level Options shall not yet
have become exercisable, for substantially similar options with
respect to the common stock of the successor-in-interest to the
business of Next Level (or a portion of Next Level's net revenues,
as the case may be) or the parent company of such successor-in-
interest. Without limiting any other provision hereof governing
termination of the Option, upon the consummation of any such
transaction, the Option shall terminate with respect to the
portion thereof subject to such equitable exchange.
(d) Any sales agreement providing for
sales in excess of $25,000,000 shall not be included in the
calculation of Next Level Sales unless the pricing of such
agreement has been approved in advance of signing by the Company.
4.3 No later than 45 days after the end of each
fiscal quarter through and including the quarter ending March 31,
2000, the Company shall mail to the Grantee at his address as set
forth herein or as otherwise set forth in the Company's stock
option records, a notice setting forth (i) Next Level Sales for
such fiscal quarter, (ii) aggregate Next Level Sales to date,
(iii) the number of Contingent Shares as to which the Option is to
become exercisable, as determined pursuant to Section 4.4, and
(iv) the aggregate number of Contingent Shares as to which the
Option is then exercisable and the number of Contingent Shares, if
any, as to which the Option has theretofore been exercised.
3
<PAGE>
4.4 Subject to Section 6, on the date of
mailing of the notice referred to in Section 4.3, the Option shall
become exercisable with respect to such number of Contingent
Shares (in addition to any Contingent Shares as to which the
Option has previously become exercisable pursuant to this
Section 4.4) as is equal to 1,000,000 multiplied by a fraction,
the numerator of which is Next Level Sales for such fiscal quarter
as set forth in such notice, and the denominator of which is
450,000,000. Such number of Contingent Shares shall be rounded
down to the nearest whole share. Fractional Contingent Shares as
to which the Option would have become exercisable but for such
rounding shall be added to the Contingent Shares as to which the
Option becomes exercisable for the following fiscal quarter. No
further calculations of Next Level Sales shall be made hereunder
and, except as provided in Section 4.1(b), the Option shall not
become exercisable with respect to any additional Contingent
Shares upon the earlier to occur of (x) such time as aggregate
Next Level Sales equal $450,000,000 (at which time the Option
shall be fully exercisable with respect to Contingent Shares
pursuant to the above formula) and (y) March 31, 2000 (other than
Contingent Shares, if any, as to which the Option shall become
exercisable with respect to the fiscal quarter then ended).
5. Manner of Exercise and Payment.
5.1 On the terms and subject to the conditions
of this Agreement and the Plan, the Option may be exercised by
delivery of written notice to the Company, at its principal
executive office. Such notice shall state that the Grantee is
electing to exercise the Option and the number of shares in
respect of which the Option is being exercised and shall be signed
by the person or persons exercising the Option. If requested by
the Committee, such person or persons shall (i) deliver this
Agreement to the Secretary of the Company who shall endorse on
this Agreement a notation of such exercise and (ii) provide
satisfactory proof as to the right of such person or persons to
exercise the Option.
5.2 The notice of exercise described in Section
5.1 shall be accompanied by the full purchase price for the shares
in respect of which the Option is being exercised, in cash or by
check or, if indicated in the notice, such payment shall follow by
check from a registered broker acting as agent on behalf of the
Grantee. However, at the discretion of the Committee appointed to
administer the Plan, the Grantee may pay the exercise price in
part or in full by transferring to the Company shares of
restricted or unrestricted Stock owned by the Grantee prior to the
exercise of the Option having a Fair Market Value on the day
preceding the date of exercise equal to the cash amount for which
such shares are substituted.
5.3 Upon receipt of notice of exercise and full
payment for the shares of Stock in respect of which the Option is
being exercised, the Company shall, subject to Sections 11 and 12
of the Plan, take such action as may be necessary to effect the
transfer to the Grantee of the number of shares of Stock as to
which such exercise was effective.
4
<PAGE>
5.4 The Grantee shall not be deemed to be the
holder of, or to have any of the rights of a holder with respect
to, any shares of Stock subject to the Option until (i) the Option
shall have been exercised pursuant to the terms of this Agreement
and the Grantee shall have paid the full purchase price for the
number of shares in respect of which the Option was exercised,
(ii) the Company shall have issued and delivered the shares to the
Grantee, and (iii) the Grantee's name shall have been entered as a
stockholder of record on the books of the Company, whereupon the
Grantee shall have full voting and other ownership rights with
respect to such shares.
6. Termination of Employment.
6.1 Fixed Shares -- Voluntary Termination. In
the event the Grantee voluntarily terminates his employment with
the Company or any Subsidiary (other than a voluntary termination
following a deemed termination by the Company without Cause, as
provided below) prior to the Fixed Share Exercise Date, then the
Option shall terminate and expire with respect to the Fixed
Shares. In the event the Grantee voluntarily terminates his
employment with the Company or any Subsidiary on or after the
Fixed Share Exercise Date (other than a voluntary termination
following a deemed termination by the Company without Cause, as
provided below), the Grantee may, at any time within thirty (30)
days after such termination (subject to Section 6.7), exercise the
Option with respect to the Fixed Shares, and at the end of such
30-day period the Option shall terminate and expire with respect
to the Fixed Shares.
6.2 Fixed Shares -- Other Termination. In the
event that the Grantee's employment terminates for any reason
other than as set forth in Section 6.1, including, without
limitation, by reason of death, Disability, retirement on or after
attainment of age 65 (or, with the consent of the Committee, age
55), or termination by the Company or a Subsidiary with or without
Cause (as defined in Section 6.5), then the Option shall vest with
respect to the Fixed Shares as provided in Section 4.1(a) and
shall remain exercisable with respect to the Fixed Shares until
the expiration of the term hereof as set forth in Section 3;
provided, that in the case of termination by the Company or a
Subsidiary for Cause, the Option shall remain exercisable with
respect to the Fixed Shares only until the later of (x) 30 days
after the Fixed Share Exercise Date and (y) 30 days after such
termination for Cause.
6.3 Contingent Shares -- Voluntary Termination,
Termination for Cause. In the event that the Grantee voluntarily
terminates his employment with the Company or any Subsidiary
(other than a voluntary termination following a deemed termination
by the Company or a Subsidiary without Cause, as provided below)
or the Company or any Subsidiary terminates the Grantee's
employment for Cause, then the Grantee may, at any time within
thirty (30) days from the date of such termination (subject to
Section 6.7), exercise the Option with respect to the Contingent
Shares to the extent, but only to the extent, that the Option or
portion thereof was exercisable with respect to the Contingent
Shares as of the date 45 days after the fiscal quarter-end
immediately preceding the date of termination, and at the end of
such 30-day period (or the end of 45 days after the immediately
preceding fiscal quarter-end, if later) the Option shall terminate
and expire with respect to all Contingent Shares.
5
<PAGE>
6.4 Contingent Shares -- Death, Disability,
Retirement or Termination Without Cause. In the event that the
Grantee's employment terminates for any reason other than as set
forth in Section 6.3, including, without limitation, by reason of
death, Disability, retirement on or after attainment of age 65
(or, with the consent of the Committee, age 55), or termination by
the Company or a Subsidiary without Cause, then the Option granted
hereunder shall continue to become exercisable with respect to
Contingent Shares in accordance with Section 4.4; provided, that
if the Company or any Subsidiary terminates or is deemed to
terminate the Grantee's employment without Cause, then the Option
shall become exercisable immediately upon such termination with
respect to 500,000 Contingent Shares (including any Contingent
Shares as to which the Option was already exercisable at the time
of such termination), and no additional Contingent Shares shall
become exercisable pursuant to Section 4.4 until after such time
as the Option would have become exercisable to purchase such
500,000 Contingent Shares in the absence of this proviso.
6.5 Definitions. For purposes of this
Section 6, "Cause" shall mean: (i) willful misconduct or gross
negligence in connection with the performance of material job
duties after a demand for correction is delivered to the Grantee
which identifies in reasonable detail the alleged willful
misconduct or gross negligence and such alleged willful misconduct
or gross negligence has not been cured after a 60-day time period
has elapsed; (ii) conviction for any felony or other similarly
serious crime that (a) carries a maximum penalty of more than five
years in prison and (b) materially affects the property or
business relationships of Next Level or the Company; or (iii)
substantial and repeated failure to perform reasonable, customary
and appropriate job duties (other than any such failure resulting
from physical or mental illness or due solely to poor job
performance) after a demand for substantial performance is
delivered to the Grantee which identifies in reasonable detail the
manner in which the Grantee has not substantially performed his or
her duties and such failure has not been cured after a 60-day time
period has elapsed. For purposes of this Section and without
limitation, the following shall be deemed termination by the
Company or a Subsidiary without Cause: (i) any refusal by the
Grantee to relocate his principal place of employment to a
location that is more than 65 miles from the Grantee's current
principal place of employment; (ii) a material adverse change in
compensation, position, job responsibilities or reporting lines;
or (iii) any activity by the Company or any Subsidiary that
constitutes constructive termination under applicable law.
6
<PAGE>
6.6. No Extension of Exercise Term.
Notwithstanding any other term hereof, in no event may the Option
be exercised by anyone after the expiration of the Exercise Term.
6.7 Special Provision Regarding Voluntary
Termination. In the event that the Grantee voluntarily terminates
his employment with the Company or any subsidiary after the Fixed
Share Exercise Date, the Grantee may, at his option, enter into a
Consulting and Noncompetition Agreement with the Company or a
Subsidiary on terms to be mutually agreed upon by the Company and
the Grantee, but which shall provide for (i) nominal services
consistent with those performed by the Grantee during his
employment, (ii) a reasonable covenant not to compete, (iii) a
term coterminous with the Exercise Term, (iv) earlier termination
by the Grantee at any time, and (v) earlier termination by the
Company only upon a breach of the agreement by the Grantee. If a
Consulting and Noncompetition Agreement is entered into, solely
for the purposes of Sections 6.1 and 6.3 of this Agreement (but
not for purposes of Section 4.1(b)), the effective date of the
Grantee's termination of employment shall be the date of
termination of the Consulting and Noncompetition Agreement.
7. Effect of Change of Control.
Notwithstanding anything contained in this Agreement to
the contrary, in the event of a Change of Control the Option shall
become immediately and fully exercisable, except, in the case of a
Change in Control after March 31, 2000, with respect to any
Contingent Shares as to which the Option had not become
exercisable pursuant to Section 4.4 by the date 45 days after
March 31, 2000.
8. Nontransferability.
The Option shall not be transferable other than by will
or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Internal Revenue Code
or by such other means as explicitly permitted pursuant to
Rule 16b-3 under the 1934 Act. During the lifetime of the
Grantee, the Option shall be exercisable only by the Grantee.
9. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be
interpreted or construed to confer upon the Grantee any right with
respect to continuance of employment by the Company or any
Subsidiary, nor shall this Agreement or the Plan interfere in any
way with the right of the Company or any Subsidiary to terminate
the Grantee's employment at any time.
7
<PAGE>
10. Adjustments.
In the event of a Change in Capitalization, the
Committee may make appropriate adjustments to the number and class
of shares of Stock or other stock or securities subject to the
Option and the purchase price for such shares or other stock or
securities. The Committee's adjustment shall be made in
accordance with the provisions of Section 18 of the Plan and shall
be final, binding and conclusive for all purposes of the Plan and
this Agreement.
11. Terminating Events.
Subject to Section 7 hereof, upon the effective date of
(i) the liquidation or dissolution of the Company or (ii) a merger
or consolidation of the Company (a "Transaction"), the Option
shall continue in effect in accordance with its terms and the
Grantee shall be entitled to receive in respect of all shares of
Stock subject to the Option, upon exercise of the Option, the same
number and kind of stock, securities, cash, property or other
consideration that each holder of shares of Stock was entitled to
receive in the Transaction.
12. Withholding of Taxes.
The Company shall have the right to deduct from any
distribution of cash to any Grantee, an amount equal to the
federal, state and local income taxes and other amounts as may be
required by law to be withheld (the "Withholding Taxes") with
respect to any Option. If a Grantee is entitled to receive shares
of Stock upon exercise of an Option, the Grantee shall pay the
Withholding Taxes to the Company prior to the issuance of such
shares of Stock. Payment of the applicable Withholding Taxes may
be made, as determined by the Committee in its discretion, in any
one or any combination of (i) cash, (ii) shares of Stock owned by
the Grantee prior to the exercise of the Option and valued at its
Fair Market Value on the business day immediately preceding the
date of exercise, or (iii) by making a Tax Election (as described
below). For purposes of this Article 12, a Grantee may make a
written election (the "Tax Election"), which may be accepted or
rejected at the discretion of the Committee, to have withheld a
portion of the shares of Stock issuable to him or her upon
exercise of the Option and valued at its Fair Market Value on the
date preceding the date of exercise, provided that in respect of a
Grantee who may be subject to liability under Section 16(b) of the
1934 Act either (i) (A) the Grantee makes the Tax Election at
least six (6) months after the date the Option was granted,
(B) the Option is exercised during the ten day period beginning on
the third business day and ending on the twelfth business day
following the release for publication of the Company's quarterly
or annual statements of earnings (a "Window Period") and (C) the
Tax Election is made during the Window Period in which the Option
is exercised or prior to such Window Period and subsequent to the
immediately preceding Window Period or (ii) (A) the Tax Election
is made at least six months prior to the date the Option is
exercised and (B) the Tax Election is irrevocable with respect to
the exercise of all Options which are exercised prior to the
expiration of six months following an election to revoke the Tax
Election.
8
<PAGE>
13. Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the
Plan and agrees to be bound by all the terms and provisions
thereof.
14. Modification of Agreement.
This Agreement may be modified, amended, suspended or
terminated, and any terms or conditions may be waived, but only by
a written instrument executed by the parties hereto.
15. Severability.
Should any provision of this Agreement be held by a
court of competent jurisdiction to be unenforceable or invalid for
any reason, the remaining provisions of this Agreement shall not
be affected by such holding and shall continue in full force in
accordance with their terms.
16. Governing Law.
The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
State of Delaware without giving effect to the conflicts of laws
principles thereof.
17. Successors in Interest.
This Agreement shall inure to the benefit of and be
binding upon any successor to the Company. This Agreement shall
inure to the benefit of the Grantee's legal representatives. All
obligations imposed upon the Grantee and all rights granted to the
Company under this Agreement shall be final, binding and
conclusive upon the Grantee's heirs, executors, administrators and
successors.
9
<PAGE>
18. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as
a result of, or in any way relate to, the interpretation,
construction or application of this Agreement shall be determined
by the Committee. Any determination made hereunder shall be
final, binding and conclusive on the Grantee and Company for all
purposes. The foregoing shall not, however, apply to any dispute
or disagreement with respect to the provisions of Article 4 or 6.
GENERAL INSTRUMENT CORPORATION
By:________________________________
Title:_____________________________
Name of Grantee:___________________
10
<PAGE>
EXHIBIT 7.4(b) TO THE MERGER AGREEMENT
Form of Employee Option Agreement
<PAGE>
Exhibit 7.4 (b) to
Merger Agreement
[Form of NLC Employee Option Agreement]
GENERAL INSTRUMENT CORPORATION
1993 LONG-TERM INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made as of the __ day of [ ],
1995 (the "Grant Date"), between General Instrument Corporation, a
Delaware corporation (the "Company"), and __________ (the
"Grantee").
WHEREAS, the Company has adopted the General Instrument
1993 Long-Term Incentive Plan (the "Plan") in order to provide an
additional incentive to certain employees and directors of the
Company and its Subsidiaries;
WHEREAS, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of August __, 1995 among the
Company, NLC Acquisition Corp. and Next Level Communications, a
California corporation ("Next Level"), Next Level became a
Subsidiary of the Company as of the date hereof for the purposes
of the Plan;
WHEREAS, the Grantee is an employee of Next Level; and
WHEREAS, the Committee responsible for administration of
the Plan has determined to grant an Option to the Grantee as
provided herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. GRANT OF OPTION.
1.1 The Company hereby grants to the Grantee
the right and option (the "Option") to purchase all or any part of
an aggregate of [ ] whole shares of Stock subject
to, and in accordance with, the terms and conditions set forth in
this Agreement.
1.2 The Option is not intended to qualify as an
Incentive Stock Option within the meaning of Section 422 of the
Internal Revenue Code.
<PAGE>
1.3 This Agreement shall be construed in
accordance and consistent with, and subject to, the provisions of
the Plan (the provisions of which are incorporated herein by
reference); and, except as otherwise expressly set forth herein,
the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. Purchase Price.
The price per share at which the Option shall be
exercisable shall be the Fair Market Value of Stock on the date
hereof (the "Option Price").
3. Duration of Option.
The Option shall be exercisable to the extent and in the
manner provided herein for a period of ten (10) years from the
Grant Date (the "Exercise Term"); provided, however, that the
Option may be earlier terminated as provided in Section 6 hereof.
4. Exercisability of Option.
4.1 The Option shall become exercisable with
respect to all of the shares on the date that is 30 days prior to
the end of the Exercise Term, provided, that the Grantee remains
an employee of the Company or any Subsidiary as of such date. The
Option may become exercisable earlier with respect to all or a
portion of the shares to the extent provided in Section 4.4, and
notwithstanding the preceding sentence, such earlier
exercisability may occur, to the extent provided in Section 6,
after termination of the Grantee's employment.
4.2 (a) As soon as practicable after the
end of each fiscal quarter of the Company through and including
the fiscal quarter ending March 31, 2000, the Company shall
determine the amount of Next Level Sales during such fiscal
quarter. "Next Level Sales" shall mean net revenues (i.e., gross
revenues less returns, discounts, reserves for bad debts and any
other reductions to gross revenues called for by the regular
accounting principles and policies of the Company), excluding
interest income and investment income, recorded by Next Level on a
consolidated basis with Next Level's subsidiaries, if any.
(b) All sales of products and licenses of
intellectual property by Next Level to third parties shall be made
on an arm's-length basis, and the prices and royalty rates of such
transactions shall be determined without regard to any benefit the
Company or any Subsidiary (other than Next Level) may receive as a
result thereof. If royalties from licenses of intellectual
property by Next Level to third parties shall constitute more than
10% of Next Level Sales for any fiscal year of Next Level, then
the Company and the holders of a majority in interest of the then
outstanding options granted by the Company as contemplated by the
Merger Agreement (collectively, the "Next Level Options") shall
agree on an equitable adjustment to the treatment of such
royalties for purposes of the Option in order to reflect the lower
revenues generally attributable to royalties on sales by third
parties, as compared to direct sales of products. Any such
adjustment shall be effective with respect to any fiscal year in
which royalty revenues exceed such 10% threshold.
2
<PAGE>
(c) The Company shall not enter into any
sale or disposition of all or a portion of the stock or assets of
Next Level that would have the effect of materially decreasing
Next Level Sales for purposes of the Option, unless, prior
thereto, the Company and holders of a majority of the then
outstanding Next Level Options shall have agreed upon an equitable
exchange of that portion of the Next Level Options as to which the
Next Level Options shall not yet have become exercisable, for
substantially similar options with respect to the common stock of
the successor-in-interest to the business of Next Level (or a
portion of Next Level's net revenues, as the case may be) or the
parent company of such successor-in-interest. Without limiting
any other provision hereof governing termination of the Option,
upon the consummation of any such transaction, the Option shall
terminate with respect to the portion thereof subject to such
equitable exchange.
(d) Any sales agreement providing for
sales in excess of $25,000,000 shall not be included in the
calculation of Next Level Sales unless the pricing of such
agreement has been approved in advance of signing by the Company.
4.3 No later than 45 days after the end of each
fiscal quarter through and including the quarter ending March 31,
2000, the Company shall mail to the Grantee at his or her address
as set forth herein or as otherwise set forth in the Company's
stock option records, a notice setting forth (i) Next Level Sales
for such fiscal quarter, (ii) aggregate Next Level Sales to date,
(iii) the number of shares as to which the Option is to become
exercisable, as determined pursuant to Section 4.4 and (iv) the
aggregate number of shares as to which the Option is then
exercisable and the number of shares, if any, as to which the
Option has theretofore been exercised.
4.4 Subject to Section 6, on the date of
mailing of the notice referred to in Section 4.2, the Option shall
become exercisable with respect to such number of shares (in
addition to any shares as to which the Option has previously
become exercisable pursuant to this Section 4.4) as is equal to
the total number of shares originally subject to the Option
multiplied by a fraction, the numerator of which is Next Level
Sales for such fiscal quarter as set forth in such notice, and the
denominator of which is 450,000,000. Such number of shares shall
be rounded down to the nearest whole share. Fractional shares as
to which the Option would have become exercisable but for such
rounding shall be added to the Contingent Shares as to which the
Option becomes exercisable for the following fiscal quarter. No
further calculations of Next Level Sales shall be made hereunder
and, except as provided in Section 4.1, the Option shall not
become exercisable with respect to any additional shares upon the
earlier to occur of (x) such time as aggregate Next Level Sales
equal $450,000,000 (at which time the Option shall be fully
exercisable pursuant to the above formula) and (y) March 31, 2000
(other than shares, if any, as to which the Option shall become
exercisable with respect to the fiscal quarter then ended).
3
<PAGE>
4.5 Notwithstanding anything herein to the
contrary, the Option shall not become exercisable unless and until
the Grantee shall have executed a Restricted Stock Agreement in
the form attached hereto as Exhibit A.
5. Manner of Exercise and Payment.
5.1 On the terms and subject to the conditions
of this Agreement and the Plan, the Option may be exercised by
delivery of written notice to the Company, at its principal
executive office. Such notice shall state that the Grantee is
electing to exercise the Option and the number of shares in
respect of which the Option is being exercised and shall be signed
by the person or persons exercising the Option. If requested by
the Committee, such person or persons shall (i) deliver this
Agreement to the Secretary of the Company who shall endorse on
this Agreement a notation of such exercise and (ii) provide
satisfactory proof as to the right of such person or persons to
exercise the Option.
5.2 The notice of exercise described in Section
5.1 shall be accompanied by the full purchase price for the shares
in respect of which the Option is being exercised, in cash or by
check or, if indicated in the notice, such payment shall follow by
check from a registered broker acting as agent on behalf of the
Grantee. However, at the discretion of the Committee appointed to
administer the Plan, the Grantee may pay the exercise price in
part or in full by transferring to the Company shares of
restricted or unrestricted Stock owned by the Grantee prior to the
exercise of the Option having a Fair Market Value on the day
preceding the date of exercise equal to the cash amount for which
such shares are substituted.
5.3 Upon receipt of notice of exercise and full
payment for the shares of Stock in respect of which the Option is
being exercised, the Company shall, subject to Sections 11 and 12
of the Plan, take such action as may be necessary to effect the
transfer to the Grantee of the number of shares of Stock as to
which such exercise was effective.
5.4 The Grantee shall not be deemed to be the
holder of, or to have any of the rights of a holder with respect
to, any shares of Stock subject to the Option until (i) the Option
shall have been exercised pursuant to the terms of this Agreement
and the Grantee shall have paid the full purchase price for the
number of shares in respect of which the Option was exercised,
(ii) the Company shall have issued and delivered the shares to the
Grantee, and (iii) the Grantee's name shall have been entered as a
stockholder of record on the books of the Company, whereupon the
Grantee shall have full voting and other ownership rights with
respect to such shares.
4
<PAGE>
6. Termination of Employment.
6.1 Voluntary Termination, Termination for
Cause. In the event that the Grantee voluntarily terminates his
or her employment with the Company or any Subsidiary (other than a
voluntary termination following a deemed termination by the
Company or a Subsidiary without Cause, as provided below) or the
Company or any Subsidiary terminates the Grantee's employment for
Cause (as defined in Section 6.3), then the Grantee may, at any
time within thirty (30) days from the date of such termination,
exercise the Option to the extent, but only to the extent, that
the Option or portion thereof was exercisable as of the date 45
days after the fiscal quarter-end immediately preceding the date
of termination, and at the end of such 30-day period (or the end
of 45 days after the immediately preceding fiscal quarter-end, if
later) the Option shall terminate and expire with respect to all
shares.
6.2 Death, Disability, Retirement or
Termination Without Cause. In the event that the Grantee's
employment terminates for any reason other than as set forth in
Section 6.1, including without limitation by reason of death,
Disability, retirement on or after attainment of age 65 (or, with
the consent of the Committee, age 55), or termination by the
Company or a Subsidiary without Cause, then the Option granted
hereunder shall continue to become exercisable in accordance with
Section 4.4.
6.3 Definitions. For purposes of this
Section 6, "Cause" shall mean: (i) willful misconduct or gross
negligence in connection with the performance of material job
duties after a demand for correction is delivered to the Grantee
which identifies in reasonable detail the alleged willful
misconduct or gross negligence and such alleged willful misconduct
or gross negligence has not been cured after a 60-day time period
has elapsed; (ii) conviction for any felony or other similarly
serious crime that (a) carries a maximum penalty of more than five
years in prison and (b) materially affects the property or
business relationships of Next Level or the Company; or (iii)
substantial and repeated failure to perform reasonable, customary
and appropriate job duties (other than any such failure resulting
from physical or mental illness or due solely to poor job
performance) after a demand for substantial performance is
delivered to the Grantee which identifies in reasonable detail the
manner in which the Grantee has not substantially performed his or
her duties and such failure has not been cured after a 60-day time
period has elapsed. For purposes of this Section and without
limitation, the following shall be deemed termination by the
Company or a Subsidiary without Cause: (i) any refusal by the
Grantee to relocate his or her principal place of employment to a
location that is more than 65 miles from the Grantee's current
principal place of employment; and (ii) any activity by the
Company or any Subsidiary that constitutes constructive
termination under applicable law.
5
<PAGE>
6.4. No Extension of Exercise Term.
Notwithstanding any other term hereof, in no event may the Option
be exercised by anyone after the expiration of the Exercise Term.
7. Effect of Change of Control.
Notwithstanding anything contained in this Agreement to
the contrary, in the event of a Change of Control the Option shall
become immediately and fully exercisable, except, in the case of a
Change in Control after March 31, 2000, with respect to any shares
as to which the Option had not become exercisable pursuant to
Section 4.4 by the date 45 days after March 31, 2000.
8. Nontransferability.
The Option shall not be transferable other than by will
or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Internal Revenue Code
or by such other means as explicitly permitted pursuant to
Rule 16b-3 under the 1934 Act. During the lifetime of the
Grantee, the Option shall be exercisable only by the Grantee.
9. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be
interpreted or construed to confer upon the Grantee any right with
respect to continuance of employment by the Company or any
Subsidiary, nor shall this Agreement or the Plan interfere in any
way with the right of the Company or any Subsidiary to terminate
the Grantee's employment at any time.
10. Adjustments.
In the event of a Change in Capitalization, the
Committee may make appropriate adjustments to the number and class
of shares of Stock or other stock or securities subject to the
Option and the purchase price for such shares or other stock or
securities. The Committee's adjustment shall be made in
accordance with the provisions of Section 18 of the Plan and shall
be final, binding and conclusive for all purposes of the Plan and
this Agreement.
6
<PAGE>
11. Terminating Events.
Subject to Section 7 hereof, upon the effective date of
(i) the liquidation or dissolution of the Company or (ii) a merger
or consolidation of the Company (a "Transaction"), the Option
shall continue in effect in accordance with its terms and the
Grantee shall be entitled to receive in respect of all shares of
Stock subject to the Option, upon exercise of the Option, the same
number and kind of stock, securities, cash, property or other
consideration that each holder of shares of Stock was entitled to
receive in the Transaction.
12. Withholding of Taxes.
The Company shall have the right to deduct from any
distribution of cash to any Grantee, an amount equal to the
federal, state and local income taxes and other amounts as may be
required by law to be withheld (the "Withholding Taxes") with
respect to any Option. If a Grantee is entitled to receive shares
of Stock upon exercise of an Option, the Grantee shall pay the
Withholding Taxes to the Company prior to the issuance of such
shares of Stock. Payment of the applicable Withholding Taxes may
be made, as determined by the Committee in its discretion, in any
one or any combination of (i) cash, (ii) shares of Stock owned by
the Grantee prior to the exercise of the Option and valued at its
Fair Market Value on the business day immediately preceding the
date of exercise, or (iii) by making a Tax Election (as described
below). For purposes of this Article 12, a Grantee may make a
written election (the "Tax Election"), which may be accepted or
rejected at the discretion of the Committee, to have withheld a
portion of the shares of Stock issuable to him or her upon
exercise of the Option and valued at its Fair Market Value on the
date preceding the date of exercise, provided that in respect of a
Grantee who may be subject to liability under Section 16(b) of the
1934 Act either (i) (A) the Grantee makes the Tax Election at
least six (6) months after the date the Option was granted,
(B) the Option is exercised during the ten day period beginning on
the third business day and ending on the twelfth business day
following the release for publication of the Company's quarterly
or annual statements of earnings (a "Window Period") and (C) the
Tax Election is made during the Window Period in which the Option
is exercised or prior to such Window Period and subsequent to the
immediately preceding Window Period or (ii) (A) the Tax Election
is made at least six months prior to the date the Option is
exercised and (B) the Tax Election is irrevocable with respect to
the exercise of all Options which are exercised prior to the
expiration of six months following an election to revoke the Tax
Election.
13. Grantee Bound by the Plan.
The Grantee hereby acknowledges receipt of a copy of the
Plan and agrees to be bound by all the terms and provisions
thereof.
7
<PAGE>
14. Modification of Agreement.
This Agreement may be modified, amended, suspended or
terminated, and any terms or conditions may be waived, but only by
a written instrument executed by the parties hereto.
15. Severability.
Should any provision of this Agreement be held by a
court of competent jurisdiction to be unenforceable or invalid for
any reason, the remaining provisions of this Agreement shall not
be affected by such holding and shall continue in full force in
accordance with their terms.
16. Governing Law.
The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
State of Delaware without giving effect to the conflicts of laws
principles thereof.
17. Successors in Interest.
This Agreement shall inure to the benefit of and be
binding upon any successor to the Company. This Agreement shall
inure to the benefit of the Grantee's legal representatives. All
obligations imposed upon the Grantee and all rights granted to the
Company under this Agreement shall be final, binding and
conclusive upon the Grantee's heirs, executors, administrators and
successors.
18. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as
a result of, or in any way relate to, the interpretation,
construction or application of this Agreement shall be determined
by the Committee. Any determination made hereunder shall be
final, binding and conclusive on the Grantee and Company for all
purposes. The foregoing shall not, however, apply to any dispute
or disagreement with respect to the provisions of Article 4 or 6.
8
<PAGE>
GENERAL INSTRUMENT CORPORATION
By:________________________________
Title:_____________________________
Name of Grantee:___________________
9
<PAGE>
ANNEX B
Form of Employee Restricted Stock Agreement
<PAGE>
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (this "Agreement") is
entered into as of this ___ day of ______, 1995, between Next
Level Communications, a California corporation ("NLC"), and
_____________________________ (the "NLC Employee").
Recitals
A. The Boards of Directors of General Instrument
Corporation, a Delaware corporation ("GIC"), NLC Acquisition
Corp., a California corporation and a wholly-owned subsidiary of
GIC ("Newco") and NLC deem it advisable and in the best interests
of their respective shareholders to consummate, and have approved,
the business combination (the "MERGER") provided for in the
Agreement and Plan of Merger, dated August __, 1995, by and among
GIC, Newco and NLC, in which Newco will merge with and into NLC in
a reverse triangular merger with NLC as the surviving corporation
(the "SURVIVING CORPORATION") of the Merger.
B. NLC and the NLC Employee are parties to a Stock
Purchase Agreement (the "NLC STOCK PURCHASE AGREEMENT"), pursuant
to which NLC issued shares of NLC Common Stock to be exchanged in
the Merger for shares of GIC Common Stock.
1. REPURCHASE RIGHTS. The NLC Employee hereby
grants to the Surviving Corporation, effective upon the
effectiveness of the Merger, with respect to shares of common
stock of GIC ("GIC Common Stock") issued in the Merger in exchange
for shares of NLC Common Stock held by the NLC Employee,
repurchase rights (the "REPURCHASE RIGHTS") on the same terms and
conditions as are set forth in Article V of the NLC Stock Purchase
Agreement, except as modified herein.
2. SHARES SUBJECT TO REPURCHASE RIGHTS. Shares
of GIC Common Stock issued in the Merger in exchange for shares of
NLC Common Stock that had ceased to be subject to the Repurchase
Rights under the terms of the NLC Stock Purchase Agreement prior
to the effective time of the Merger (the "Effective Time") shall
not be subject to the Surviving Corporation's Repurchase Rights
hereunder. The remaining shares of GIC Common Stock issued in the
Merger in exchange for shares of NLC Common Stock subject to the
NLC Stock Purchase Agreement shall cease to be subject to the
Repurchase Rights in accordance with the same schedule that would
have been applicable to the shares of NLC Common Stock for which
such shares of GIC Common Stock were exchanged had the Merger not
occurred.
<PAGE>
3. RESTRICTIONS ON TRANSFER. The NLC Employee
shall not transfer, assign, encumber or otherwise dispose of any
of the shares of GIC Common Stock which are subject to the
Surviving Corporation's Repurchase Rights hereunder.
4. SHARE CERTIFICATES. Certificates for all
shares of GIC Common Stock subject to the Surviving Corporation's
Repurchase Rights hereunder shall be held by the Surviving
Corporation. Each deposited certificate shall be accompanied by a
stock power duly executed by the NLC Employee.
5. TERMINATION OF EMPLOYMENT. If the NLC
Employee shall cease to be employed by the Surviving Corporation,
GIC or any affiliate thereof (the "GIC EMPLOYERS") by reason of
(i) death, (ii) Disability (as defined below), (iii) retirement on
or after attainment of age 65 (or, with the consent of GIC, age
55), or (iv) termination by the GIC Employers without Cause (as
defined below, and including a voluntary termination following a
deemed termination by the GIC Employers without Cause, as provided
below), then all shares of GIC Common Stock held by such NLC
Employee that are subject to the Surviving Corporation's
Repurchase Rights shall, immediately upon such cessation of
employment, cease to be subject to the Surviving Corporation's
Repurchase Rights hereunder. The Surviving Corporation's
Repurchase Rights shall apply on the same terms and conditions as
are set forth in Article V of the NLC Stock Purchase Agreement
upon a termination of employment for any reason other than as set
forth above.
6. DEFINITION OF CAUSE. For purposes of this
Agreement, "Cause" shall mean: (i) willful misconduct or gross
negligence in connection with the performance of material job
duties after a demand for correction is delivered to the NLC
Employee which identifies in reasonable detail the alleged willful
misconduct or gross negligence and such alleged willful misconduct
or gross negligence has not been cured after a 60-day time period
has elapsed; (ii) conviction for any felony or other similarly
serious crime that (a) carries a maximum penalty of more than five
years in prison and (b) materially affects the property or
business relationships of the Surviving Corporation or GIC; or
(iii) substantial and repeated failure to perform reasonable,
customary and appropriate job duties (other than any such failure
resulting from physical or mental illness or due solely to poor
job performance) after a demand for substantial performance is
delivered to the NLC Employee which identifies in reasonable
detail the manner in which the NLC Employee has not substantially
performed his or her duties and such failure has not been cured
after a 60-day time period has elapsed.
2
<PAGE>
7. DEFINITION OF DISABILITY. For purposes of
this Agreement, "Disability" means a mental or physical condition
which, in the opinion of the Surviving Corporation, renders an NLC
Employee unable or incompetent to carry out the job
responsibilities which such NLC Employee held or the duties to
which such NLC Employee was assigned at the time the disability
was incurred, and which is expected to be permanent or for an
indefinite duration.
8. CERTAIN TERMINATIONS WITHOUT CAUSE. For
purposes of this Agreement and without limitation, the following
shall be deemed termination by the GIC Employers without Cause:
(i) any refusal by the NLC Employee to relocate his or her
principal place of employment to a location that is more than 65
miles from the NLC Employee's current principal place of
employment; and (ii) any activity by GIC Employers that
constitutes constructive termination under applicable law.
9. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing
in this Agreement shall be interpreted or construed to confer upon
the NLC Employee any right with respect to continuance of
employment by GIC Employers, nor shall this Agreement interfere in
any way with the right of GIC Employers to terminate the NLC
Employee's employment at any time.
10. WITHHOLDING. The NLC Employee hereby
agrees to reimburse GIC for (or to make payment of) any federal,
state or local taxes and any other amounts as are required by law
to be withheld from the NLC Employee's compensation income as a
result of the vesting of any GIC Common Stock issued in the Merger
to the NLC Employee, in each case, such reimbursement or payment
to be made within 10 days of the vesting of such stock.
11. MODIFICATION OF AGREEMENT. This Agreement
may be modified, amended, suspended or terminated, and any terms
or conditions may be waived, but only by a written instrument
executed by the parties hereto.
12. SEVERABILITY. Should any provision of this
Agreement be held by a court of competent jurisdiction to be
unenforceable or invalid for any reason, the remaining provisions
of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
13. GOVERNING LAW. The validity,
interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Delaware without
giving effect to the conflicts of laws principles thereof.
14. SUCCESSORS IN INTEREST. This Agreement
shall inure to the benefit of and be binding upon any successor to
the Surviving Corporation. This Agreement shall inure to the
benefit of the NLC Employee's legal representatives. All
obligations imposed upon the NLC Employee and all rights granted
to the Surviving Corporation under this Agreement shall be final,
binding and conclusive upon the NLC Employee's heirs, executors,
administrators and successors.
3
<PAGE>
15. AMENDMENT OF NLC STOCK PURCHASE AGREEMENT.
To the extent this Agreement modifies the provisions of the NLC
Stock Purchase Agreement, it shall be deemed an amendment thereof.
In witness whereof, the parties hereto name executed
this Agreement as of the date first above written.
By:____________________________
Print Name:____________________
Next Level Communications
By:____________________________
Print Name:____________________
Title:_________________________
4
<PAGE>
ANNEX C
Form of Optionee Restricted Stock Agreement
<PAGE>
Optionee Version
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (this "Agreement") is
entered into as of this ___ day of ______, 1995, between Next
Level Communications, a California corporation ("NLC"), and
__________________________ (the "NLC STOCKHOLDER").
Recitals
A. The Boards of Directors of General Instrument Corporation,
a Delaware corporation ("GIC"), NLC Acquisition Corp., a
California corporation and a wholly-owned subsidiary of GIC
("NEWCO") and NLC deem it advisable and in the best interests of
their respective shareholders to consummate, and have approved,
the business combination (the "MERGER") provided for in the
Agreement and Plan of Merger, dated August __, 1995, by and among
GIC, Newco and NLC, in which Newco will merge with and into NLC in
a reverse triangular merger with NLC as the surviving corporation
(the "SURVIVING CORPORATION") of the Merger.
B. Upon exercise of stock options held by the NLC
Stockholder, NLC and the NLC Stockholder became parties to a Stock
Purchase Agreement (the "OPTIONEE STOCK PURCHASE AGREEMENT"),
pursuant to which NLC issued shares of NLC Common Stock to be
exchanged in the Merger for shares of GIC Common Stock.
1. REPURCHASE RIGHTS. The NLC Stockholder
hereby grants to the Surviving Corporation, effective upon the
effectiveness of the Merger, with respect to shares of common
stock of GIC ("GIC Common Stock") issued in the Merger in exchange
for shares of NLC Common Stock held by the NLC Stockholder,
repurchase rights (the "REPURCHASE RIGHTS") on the same terms and
conditions as are set forth in Article V of the Optionee Stock
Purchase Agreement, except as modified herein.
<PAGE>
2. SHARES SUBJECT TO THE REPURCHASE RIGHTS.
Forty percent (40%) of the shares of GIC Common Stock issued in
the Merger in exchange for shares of NLC Common Stock held by the
NLC Stockholder shall not be subject to the Repurchase Rights (the
"Immediately Vested Shares"). The remaining 60% of such shares
shall cease to be subject to the Repurchase Rights in accordance
with the schedule set forth in the Optionee Stock Purchase
Agreement (with no additional shares ceasing to be subject to the
Repurchase Rights until such time as the Immediately Vested Shares
would otherwise have ceased to be subject to the Repurchase Rights
under the schedule set forth in the Optionee Stock Purchase
Agreement in the absence of the preceding sentence).
3. RESTRICTIONS ON TRANSFER. The NLC
Stockholder shall not transfer, assign, encumber or otherwise
dispose of any of the shares of GIC Common Stock which are subject
to the Surviving Corporation's Repurchase Rights hereunder.
4. SHARE CERTIFICATES. Certificates for all
shares of GIC Common Stock subject to the Surviving Corporation's
Repurchase Rights hereunder shall be held by the Surviving
Corporation. Each deposited certificate shall be accompanied by a
stock power duly executed by the NLC Stockholder.
5. NO RIGHT TO CONTINUED RELATIONSHIP. Nothing
in this Agreement shall be interpreted or construed to confer upon
the NLC Stockholder any right with respect to continuance of any
consulting or other relationship between the NLC Stockholder and
the Surviving Corporation, GIC or any affiliate thereof, nor shall
this Agreement interfere in any way with the right of the
Surviving Corporation, GIC or any affiliate thereof to terminate
any such relationship at any time.
6. WITHHOLDING. The NLC Employee hereby agrees
to reimburse GIC for (or to make payment of) any federal, state or
local taxes and any other amounts as are required by law to be
withheld from the NLC Employee's compensation income as a result
of the vesting of any GIC Common Stock issued in the Merger to the
NLC Employee, in each case, such reimbursement or payment to be
made within 10 days of the vesting of such stock.
7. MODIFICATION OF AGREEMENT. This Agreement
may be modified, amended, suspended or terminated, and any terms
or conditions may be waived, but only by a written instrument
executed by the parties hereto.
8. SEVERABILITY. Should any provision of this
Agreement be held by a court of competent jurisdiction to be
unenforceable or invalid for any reason, the remaining provisions
of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
9. GOVERNING LAW. The validity,
interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Delaware without
giving effect to the conflicts of laws principles thereof.
10. SUCCESSORS IN INTEREST. This Agreement
shall inure to the benefit of and be binding upon any successor to
the Surviving Corporation. This Agreement shall inure to the
benefit of the NLC Stockholder's legal representatives. All
obligations imposed upon the NLC Stockholder and all rights
granted to the Surviving Corporation under this Agreement shall be
final, binding and conclusive upon the NLC Stockholder's heirs,
executors, administrators and successors.
2
<PAGE>
11. AMENDMENT OF NLC STOCK PURCHASE AGREEMENT.
To the extent this Agreement modifies the provisions of the NLC
Stock Purchase Agreement, it shall be deemed an amendment thereof.
In witness whereof, the parties hereto name executed this
Agreement as of the date first above written.
By:________________________________
Print Name:________________________
NEXT LEVEL COMMUNICATIONS
By:________________________________
Print Name:________________________
Title:_____________________________
3
<PAGE>
ANNEX D
General Instrument Corporation
Annual Report on 10-K
for the fiscal year ended December 31, 1994
<PAGE>
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
(Mark One) FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ________ to __________.
Commission file number 1-5442
GENERAL INSTRUMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3575653
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
181 West Madison Street 60602
Chicago, IL (Zip Code)
(Address of principal
executive offices)
(312) 541-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 New York Stock Exchange
5% Convertible Junior New York Stock Exchange
Subordinated Notes due 2000
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K .
------
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $2.8 billion as
of March 15, 1995 (based on the closing price of the stock on
the New York Stock Exchange on that date). For purposes of this
computation, shares held by affiliates and by directors and
officers of the registrant have been excluded. Such exclusion
of shares held by directors and officers is not intended, nor
shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
Number of shares of Common Stock, par value $.01 per share,
outstanding as of March 15, 1995: 122,361,067.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1994 are incorporated by
reference in Parts I, II, III and IV. Portions of the Company's
definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the
Company's fiscal year are incorporated by reference in Part III.
PART l
Item 1. BUSINESS
Unless the context otherwise requires, references to the
"Company" or "GI" include General Instrument Corporation and its
direct or indirect subsidiaries, including General Instrument
Corporation of Delaware ("GI Delaware"), the Company's principal
operating subsidiary.
General
General Instrument Corporation (the "Company" or "GI") is a
leading worldwide supplier of broadband communications systems
and equipment. Through its two Broadband Communications segment
divisions, GI Communications (formed through a merger of the
Company's former Jerrold Communications and VideoCipher divisions
- - See "Business - GI Communications Division") and CommScope
(which together represented 84% of the Company's consolidated
sales in the year ended December 31, 1994), the Company supplies
a broad range of technologies and products required for the
distribution of video programming to consumers over cable and
satellite television systems. Through its Power Semiconductor
Division (which represented 16% of the Company's consolidated
sales in the year ended December 31, 1994), the Company is also a
leading manufacturer of discrete power rectifying and transient
voltage suppression components used in telecommunications,
automotive and consumer electronic products. Information
regarding the Company's organization and industry segments appear
in Notes 1, 11 and 14 to the Company's consolidated financial
statements included in the Annual Report to Stockholders for the
year ended December 31, 1994 (the "1994 Annual Report"),
incorporated herein by reference.
The Company's Broadband Communications Strategy
The Company's strategy is to enhance its market leadership
position as a provider of broadband systems and equipment by
emphasizing the following factors:
TECHNOLOGICAL LEADERSHIP AND NEW PRODUCT DEVELOPMENT.
GI is a worldwide leader in the
development and implementation of new enabling
technologies for advanced television signal transmission.
GI produced the first commercial application of digital
compression products and has been a leader in the
development of addressable cable television subscriber
terminals, advanced fiber optic electronics and high-
capacity coaxial cable.
HIGHLY INTEGRATED PRODUCT LINE.
GI has a broad, highly integrated product line
which is one of the largest in the broadband equipment
industry. The Company believes this extensive product
line gives it a significant competitive advantage in
developing new broadband technologies, in anticipating and
serving customer needs, and in providing customers with
highly integrated end-to-end systems.
INCREASING THE INSTALLED BASE.
The Company believes that it has supplied the
majority of the addressable systems in use by cable
television operators in the United States and abroad.
GI's strategy has been to expand the number of installed
systems which utilize its hardware and software to control
network security, services and programming access and to
increase its product content in these systems.
RAPID INTERNATIONAL EXPANSION.
The Company believes that the development of
international markets will be an important factor in its
future growth due to the relatively low penetration of
cable television systems and growing demand for
entertainment programming abroad. The Company believes
that its leadership position in the U.S. market enhances
its ability to provide analog and digital cable, satellite
and wireless products to its growing international
customer base.
STRATEGIC ALLIANCES.
GI has forged alliances with partners in other industries
possessing complementary technological and marketing
capabilities in order to maximize new opportunities, such
as the emerging market for multimedia equipment and the
increasing telephone company demand for broadband
equipment for video applications.
Broadband Communications
The Company's Broadband Communications segment consists of the
GI Communications and CommScope divisions. The GI Communications
Division was formed in 1993 by combining the Company's former
Jerrold Communications and VideoCipher divisions. This
combination was undertaken due to the rapid convergence of the
broadband technologies used for the wired and wireless
distribution of television programming by the cable, satellite,
and telephone industries. The names Jerrold(R) and
VideoCipher(R) remain as GI product brands. The GI
Communications Division is the world's largest manufacturer of
addressable systems and subscriber equipment, and is a leading
manufacturer of fiber optic and RF (radio frequency) distribution
electronics for broadband television systems. GI Communications
is also the world's largest manufacturer of access control,
scrambling, and descrambling equipment used by television
programmers for the satellite distribution of their proprietary
programming. In addition, GI Communications is leading the
development and commercialization of digital video compression
and decompression equipment for use in broadband cable, satellite
and wireless transmission systems. GI's CommScope division is
the largest supplier of coaxial cable for the U.S. cable
television industry.
GI Communications Division
Analog Terrestrial Products. The Company's principal analog
terrestrial products include subscriber and distribution hardware
and software. Analog terrestrial subscriber products represented
27%, 24% and 25% of the Company's consolidated sales in the years
ended December 31, 1994, 1993 and 1992, respectively. Subscriber
products include primarily addressable systems which permit
control, through a set-top terminal, of a subscriber's cable
television services from a central headend computer without
requiring access to the subscriber's premises. Addressable
systems also enable a cable television operator to more easily
provide pay-per-view programming services and multiple tiers of
programming packages. Analog terrestrial distribution products
represented 13%, 11% and 10% of the Company's consolidated sales
in the years ended December 31, 1994, 1993 and 1992,
respectively. Distribution products include headend signal
processing equipment, distribution amplifiers, fiber optic
transmission equipment, and passive components for wired
television distribution systems.
Beginning in mid-1992 and continuing through 1994, GI has
experienced significant increases in purchase orders for its
analog products both from domestic and international customers.
GI's sales of analog addressable systems reached their highest
levels to date in 1994 when the Company shipped more than 4.7
million analog addressable set-top terminals, a 73% increase over
1993 shipments. The Company believes that during this period
cable operators have sought to improve the quality, capacity and
capabilities of their networks and to increase their revenue per
subscriber by increasing their capital spending for addressable
systems and distribution infrastructure upgrades. GI expects
cable operators in the U.S. and abroad to continue to upgrade
their basic networks and invest in new system construction
primarily for four reasons: first, new competition has arisen
from other television programming sources, such as direct
broadcast satellite ("DBS") and cable networks planned by some
telephone companies; second, a majority of U.S. cable subscribers
do not yet have addressable terminals, and more than 60% are
served by a system that is not capable of offering more than 54
channels of programming; third, analog addressable systems are
the preferred choice for cable operators that have subscribers
with an expected usage profile that does not justify the higher
cost of more advanced digital systems; and fourth, international
markets, where cable penetration is low and demand for
entertainment programming is growing, are being developed using
U.S. architecture and systems. In addition, the Company has
continued to increase the functionality and features of its
analog addressable subscriber terminals. Its latest product, the
CFT 2200, scheduled to begin shipment in the second quarter of
1995, incorporates a user feature platform that will allow the
cable operator to write applications for new services including
electronic program guides, supplementary sports and entertainment
information and play-along game shows. This addressable terminal
can be modularly upgraded to deliver digital audio, providing CD-
quality simulcasts of premium services, and can also be upgraded
to GI's DigiCipher(R) II digital compression technology.
Digital Terrestrial Products. The Company believes that an
important future market for GI Communications will be the
commercialization of advanced digital broadband systems and
equipment, which will provide for greatly expanded channel
capacity and programming options, improved quality and security
of signal transmission and the capability of delivering enhanced
features and services. The Company believes that its potential
position in this developing market is significantly enhanced by
GI's leadership in a key enabling technology, digital
compression, which allows the broadcast of multiple digital
channels in the same bandwidth occupied by one uncompressed video
channel. Although there can be no assurances as to the
commercial development of this technology, digital compression is
considered to be the basis for the development of the "500-
channel" systems and interactive multimedia applications such as
video-on-demand. The Company's DigiCipher system was the first
digital video compression system to demonstrate capabilities over
cable and satellite television networks.
The Company believes that the commercialization of digital
broadband systems will follow a two-stage process. First,
programmers and operators of commercial headends will use digital
equipment to increase channel capacity, improve signal quality
and enhance security. This stage began in late 1993 when GI
Communications began shipping its first-generation DigiCipher I
digital satellite encoders and decoders for programmers and cable
television commercial headend operators. Second, the Company
expects that cable, satellite and other broadband network
operators will begin to deploy digital terminals in their
customers' homes in order to take advantage of the enhanced
capabilities of the digital networks. The rate of deployment
will depend largely on consumer demand for the new services made
available through the digital network and the relative cost of
the more advanced digital terminals. To date, GI has obtained
orders and letters of intent for more than 2.6 million of its
DigiCable digital subscriber terminals from 11 major cable system
operators. In addition, GI has entered into a letter of intent
and is negotiating a definitive agreement under which it expects
to supply digital and analog equipment for the deployment of Bell
Atlantic Corporation's announced large scale broadband network.
GI has also entered into an agreement under which it expects to
supply digital and analog equipment for the first three sites of
GTE Corporation's announced broadband network.
GI's DigiCable terminals will incorporate the Company's latest
generation digital compression system, DigiCipher II, which is
compatible with the recently finalized industry standard for
digital compression and transport, Motion Picture Experts Group 2
standard ("MPEG-2"). The DigiCipher II system ("MPEG-2/DC-II")
has the capacity to carry various video, audio and data elements
through a complex information infrastructure that will have an
improved capability to interact with other consumer devices using
MPEG-2 compression. The features of MPEG-2 were not finalized
until November 1994 which, in addition to other system design
issues, has caused delays in the deployment of MPEG-2/DC-II
products. As a result, volume shipments of these advanced
digital cable terminals are not expected to begin until late 1995
and there can be no assurance that additional delays will not
occur. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - New Technologies; Digital
Products", incorporated herein by reference from the 1994 Annual
Report.
Analog and Digital Satellite Products. GI Communications'
satellite products consist primarily of analog and digital access
control, scrambling and descrambling products for satellite-based
distribution of television programming. Satellite products
represented 23%, 22% and 16% of the Company's consolidated sales
in the years ended December 31, 1994, 1993 and 1992,
respectively. GI is the largest manufacturer of access control,
scrambling, and descrambling equipment used by television
programmers for the satellite distribution of their proprietary
programming.
The Company's analog satellite products are the exclusive
systems for the distribution of encrypted C-Band satellite-
delivered programming to cable television operators and large-
diameter backyard satellite dish owners. The system consists
primarily of scramblers, installed at the originating point for
the programming, and descramblers, which are installed at the
commercial headends of most cable television systems or purchased
by consumers for use with their backyard C-Band satellite dishes.
As a result of a number of factors, including significant black
market economic incentives, the Company's first generation
system, VideoCipher II, was illegally modified ("pirated"),
beginning in the mid-1980s, by approximately 1.3 million
consumers to receive programming without paying for the service.
In 1989, GI introduced VideoCipher II Plus(TM), a second
generation product which, to GI's knowledge, has not been
"pirated." In 1991, in recognition of the need to provide for
ongoing security enhancements, GI introduced VideoCipher RS(TM),
which provides the ability to upgrade security by inserting a
credit-card-like TVPass Card(TM) into a module rather than
replacing the entire module. In 1993, the Company completed a
two-part security upgrade program pursuant to which GI replaced
the VideoCipher II units of the customers of several providers of
premium programming with VideoCipher RS units and those
programmers ceased transmission of the VideoCipher II programming
signals. The Company believes this program has restored an
acceptable level of security to the backyard C-Band satellite
dish market. In addition, the Company believes that the security
upgrade resulted in the one-time sale of more than 800,000
VideoCipher RS units between the second-quarter of 1992 and the
second-quarter of 1994 to former "pirate" consumers who wanted to
restore their access to scrambled programming.
From 1991 through 1993, more than 250,000 new backyard C-Band
satellite dishes were installed annually in North America, each
requiring the use of an analog VideoCipher descrambler in order
to receive scrambled programming. In 1994, new installations
totaled more than 350,000 satellite dishes. The Company believes
that the introduction of the Hughes DirecTV and PRIMESTAR
satellite television services has contributed to increased
awareness about satellite programming and has resulted in a
higher rate of new installation of backyard C-Band satellite
equipment. The Company is a supplier to PRIMESTAR but not to
Hughes DirecTV. The Company expects sales opportunities for
VideoCipher RS(TM) modules to potential new owners of C-Band
satellite dishes to continue through the first quarter of 1995
(although there can be no assurance as to the amount of those
sales), and then possibly decline, perhaps substantially,
thereafter. The Company believes that the providers of C-Band
delivered programming using VideoCipher analog equipment
represent an important future opportunity for sales of the
Company's DigiCipher satellite systems, although there can be no
assurance that such sales will occur.
GI Communication's digital satellite products include
primarily the DigiCipher I system, the world's first digital
compression, access control and encryption transport system,
designed for the delivery of video entertainment signals. As in
the analog satellite system, the digital system relies on
encoders at the origination point of the programming, and
decoders, either at commercial headends or at consumers' homes
for use with their own satellite dishes. DigiCipher I encoders
and commercial decoders have been shipped worldwide and hold the
leading share of the equipment used by programmers of satellite
distributed digital video programming. As of December 31, 1994,
DigiCipher I encoders were being used by 17 different
programmer/operators to transmit 164 digital channels in North
America and 12 programmer/operators to transmit 86 digital
channels internationally. In most cases, the Company expects
these programmers to upgrade to GI's new MPEG-2/DC-II system
after it becomes available in mid-1995.
The Company supplies DigiCipher I digital consumer receivers
to PRIMESTAR Partners, a consortium of cable television operators
and GE Americom, which is offering a medium-power Ku-band direct-
to-home satellite television system currently transmitting 96
digital video channels. PRIMESTAR's business generally competes
with the Hughes DirecTV high-power Ku-band satellite television
system. Under agreements with PRIMESTAR, GI will be PRIMESTAR's
exclusive provider of receivers through 1996. GI began shipments
of DigiCipher I consumer decoders/receivers in the second quarter
of 1994 and volumes are expected to increase in 1995. Deployment
of MPEG-2/DC-II digital products for PRIMESTAR Partners, expected
to begin in mid-1995 will include an upgrade to MPEG-2/DC-II, for
a fee, of DigiCipher I receivers currently in use. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - New Technologies; Digital Products",
incorporated herein by reference from the 1994 Annual Report.
CommScope
CommScope (which represented 22%, 25% and 27% of the Company's
consolidated sales for the years ended December 31, 1994, 1993
and 1992, respectively) is the largest manufacturer and supplier
of coaxial cable for cable television applications in the U.S. in
terms of sales volume, with more than a 50% market share.
CommScope also manufactures fiber optic cable under a non-
exclusive license from AT&T Corporation for sale to cable
television customers in the United States. In addition,
CommScope manufactures and sells other electronic cable primarily
for local area network applications in the United States.
The Company believes that CommScope's competitive strength in
the coaxial cable market is due to its extensive coaxial cable
product line and its efficient, low-cost manufacturing and
delivery capability. CommScope's manufacturing facility in
Catawba, North Carolina is highly automated, operates 24 hours a
day and is capable of producing approximately 400 miles of trunk
and distribution coaxial cable and over 5 million feet of
dropwire per day. In 1994, CommScope shipments of dropwire and
distribution coaxial cable increased an average of 15% over the
levels shipped in 1993. The Company believes this growth is a
result of the network upgrades being undertaken by CommScope's
traditional cable television customers, in addition to increasing
orders from new customers such as telephone companies and
international cable television operators. In order to meet
increased demand, CommScope is expanding its Catawba, North
Carolina facility for distribution coaxial cable and is
constructing a new manufacturing facility in Scottsboro, Alabama
to be used primarily for the production of dropwire.
Growth in demand for coaxial cable has occurred despite the
replacement of coaxial cable with fiber optic cable in the trunk
portion of many cable television networks. This is because the
vast majority of the coaxial cable used in a typical, modern
cable television network occurs beyond the trunk, in the
distribution portion of the network, and in the dropwire into the
home. The Company believes that broadband networks will have an
ongoing need for coaxial cable to maintain, expand and upgrade
their facilities. The Company believes that coaxial cable
remains the most efficient means for the transmission of
broadband signals to the home over short distances because it is
less expensive to install in short lengths than fiber optic
cable, has less costly electronics and has the necessary capacity
to handle upstream and downstream signal transmission.
CommScope has recently received orders from U.S. telephone
operating companies, several of which have announced plans to
install broadband networks for the delivery of video, telephone
and other services to some portion, or all, of their telephone
service areas. The broadband networks that are being proposed by
some of the telephone companies utilize hybrid fiber
optic/coaxial cable technologies similar to those being utilized
by many cable television operators. While there is no assurance
that these proposed networks will be built, to the extent they
are implemented, they could represent a significant incremental
sales opportunity for CommScope beyond its traditional cable
television customer base.
Cable produced by CommScope for local area network
applications also grew significantly in 1994 with sales for these
applications increasing by more than 40%. CommScope is expanding
the capacity of its Claremont, North Carolina facility in order
to meet the growing demand for local area network and other
electronic cable.
International Markets
The Company believes that international markets represent a
key growth opportunity for its sales of broadband equipment.
During the year ended December 31, 1994, GI's international
broadband equipment sales increased 82% over the year ended
December 31, 1993, and accounted for approximately 23% of GI's
total broadband equipment revenues in 1994.
International markets employ broadband technology in three
ways: through broadband television systems similar to those in
the United States; through Multichannel Multipoint Distribution
Systems ("MMDS") or wireless microwave systems; and through
direct broadcast satellite ("DBS") systems. MMDS is typically
used in areas where the cost of installing a cable television
distribution infrastructure is not justified due to the low
density of homes, a relatively small potential subscriber base,
or geographic constraints. DBS systems with digital compression
capabilities are expected to have significant growth
internationally as programmers and satellite operators seek to
maximize their limited satellite transponder capacity in order to
reach geographically dispersed subscribers.
In certain countries, like the United Kingdom, operators have
been using system architectures that rely on U.S. broadband
designs partly because many of these systems are being developed
by affiliates of certain U.S. cable television operators and
telephone companies. In addition to the United Kingdom, plans
for new construction of significant systems have been announced
in Hong Kong, Thailand, Australia, Latin America and the Middle
East. The Company believes that these markets present
significant opportunities because cable, wireless and satellite
television penetration is low in these areas. For example,
according to industry sources, less than 35% of the households in
Western Europe have access to cable, compared with more than 95%
having access in the United States. In South America, industry
sources estimate that out of the region's approximately 72
million television households, less than 7 million receive any
sort of multichannel television service.
The Company believes that it enjoys significant competitive
strengths in these markets because of its leadership in the
United States market for broadband communications equipment, its
strong technology, its relationships with the U.S. cable
operators who are building many of the systems in international
markets, and its ability to deliver complete systems due to its
fully-integrated product line. The Company believes that, to
date, it has supplied a majority of the addressable systems and
equipment in use in international markets. However, because of
the need to form alliances in order to operate effectively in
many international markets and the larger number of competitors
in international markets than in U.S. markets, among other
factors, there can be no assurance as to the Company's future
success as international markets expand.
Power Semiconductor Division
The Power Semiconductor Division (which represented 16%, 19%
and 22% of the Company's consolidated sales in the years ended
December 31, 1994, 1993 and 1992, respectively) is a world leader
in the design, manufacture and sale of low-to-medium power
rectifiers and transient voltage suppressers in axial, bridge and
surface mount and array packages. These products are used
throughout the electrical and electronics industries to condition
current and voltage and to protect electrical circuits from power
surges. Applications include components for circuits in consumer
electronics, telecommunications, lighting ballasts, home
appliances, computers and automotive and industrial products.
The demand for increased electronic functions, global sourcing
and higher reliability within these markets is adding to the
growth of the Power Semiconductor Division worldwide business.
The Company believes that the competitive strengths of the
Power Semiconductor Division are the quality of its products, its
global sales and distribution channels and the low cost and
efficiency of its operation. The Division is a leader in sales
of low-to-medium power rectifiers and transient voltage
suppressers in North America, Southeast Asia and Europe, with 71%
of its sales, for the year ended December 31, 1994, generated
from customers outside of the United States.
New products and technologies continue to play a significant
role in the Power Semiconductor Division's growth. The
Division's patented PAR (Passivated Anisotrophic Rectifier)
process is serving to increase the reliability of many automotive
electronics applications. The Division has also developed a new
line of transient voltage protection and diode arrays, using
monolithic chip technology, which allows customers to use a small
single component to replace numerous larger components in
telecommunications and computer applications.
The Power Semiconductor Division has undertaken a significant
capacity expansion in its Taiwan, U.S. and Ireland facilities in
order to meet the increased demand for its products worldwide.
Technology and Licensing
The Company believes it is in the unique position of having
produced, and of currently producing, the majority of the world's
analog addressable systems, while also developing the digital
technology that will eventually replace these systems. As a
result, GI has sought to build upon its core enabling
technologies, digital compression, encryption and conditional
access and control, in order to lead the transition of the market
for broadband communications networks from analog to digital
systems.
GI has continued development efforts in digital compression
which are leading to the introduction of its MPEG-2/DC-II product
line. In an effort to make its DigiCipher II system architecture
and products widely available, the Company has chosen to make
available for licensing significant elements of its compression
technology. To date, licensees of GI's DigiCipher II compression
technology include Scientific-Atlanta, Inc., Hewlett-Packard
Company and Zenith Electronics Corporation. In addition, GI has
licensed Motorola, Inc., SGS-THOMPSON Microelectronics, Inc., LSI
Logic Corporation and C-Cube Microsystems to use DigiCipher II
technology to manufacture semiconductor circuits for use in
digital video products.
The Company has also entered into other license agreements,
both as licensor and licensee, covering certain products and
processes with various companies. Among those agreements, in
1993, GI granted an unaffiliated third party a license under
certain GI patents regarding addressable converters pursuant to
which GI will earn royalties of $1.5 million per year for five
years . The Company also holds a non-exclusive worldwide license
under an unaffiliated third party's patent regarding encryption
and decryption of satellite television signals. This license
agreement requires the payment of certain royalties, which are
not expected to be material to the Company's financial
statements.
Research and Development
The Company actively pursues the development of new
technologies and applications. Research and development
expenditures for the year ended December 31, 1994 were $111
million and are expected to be approximately $135 million for the
year ending December 31, 1995, compared to $74 million and $58
million for the years ended December 31, 1993 and 1992,
respectively. The Company's efforts are focused on: continued
development of the next generation of cable terminals, which
incorporate digital compression and multimedia capabilities;
development of enhanced addressable analog terminals; advanced
digital systems for cable and satellite television distribution;
and product development through strategic alliances. Emerging
research and development activities include broadband telephony
products and interactive multimedia technologies for broadband
networks.
Sales and Distribution
The Company's Broadband Communications products and services
are marketed primarily to cable television operators, cable and
satellite television programmers and programming services, and
telephone companies planning the development of cable networks.
Broadband Communications systems are sold primarily through the
efforts of sales engineers or other sales personnel employed by
the Company who are skilled in the technology of the particular
system. The Company markets VideoCipher descrambling modules
through an open distribution strategy, in which the Company and
its licensee sell descrambling modules to manufacturers of
Integrated Receiver/Descramblers, distributors, dealers,
consumers and others. The Company's Power Semiconductor products
are marketed to a wide variety of industries in the United States
and abroad. They are sold through distributors and sales
representatives, as well as directly by the Division's sales
personnel.
Because a limited number of cable television operators provide
services to a large percentage of cable television households in
the United States, the loss of some or all of them as customers
could have a material adverse effect on the Company's sales. Tele-
Communications, Inc., together with its affiliates, accounted for
15% of GI's consolidated sales for the year ended December 31,
1994, and was the only customer of GI which accounted for 10% or
more of GI's consolidated sales during such period.
Patents
The Company's policy is to protect its proprietary position
by, among other methods, filing United States and foreign patent
applications to protect technology, inventions and improvements
that the Company considers important to the development of its
business. Although the Company believes that its patents provide
a competitive advantage, the Company relies equally on its
proprietary knowledge and continuing technological innovation to
develop and maintain its competitive position.
Backlog
The backlog information set forth below includes only orders
for products scheduled to be shipped within six months. Orders
may be revised or canceled, either pursuant to their terms or as
a result of negotiations; consequently, it is impossible to
predict accurately the amount of backlog orders that will result
in sales.
Backlog
(In millions)
------------------------------
December 31, December 31,
1994 1993
------------ ------------
Broadband
Communications $578 $418
Power Semiconductor 122 95
------- -------
Total $700 $513
======= =======
Competition
The Company's products and services compete with those of a
substantial number of foreign and domestic companies, some with
greater resources, financial or otherwise, than the Company, and
the rapid technological change occurring in the Company's markets
are expected to lead to the entry of new competitors. The
Company's ability to anticipate such changes and introduce
enhanced products on a timely basis will be a significant factor
in the Company's ability to expand and remain competitive.
Existing competitors' actions and new entrants may have an
adverse impact on the Company's operations. The Company believes
that it enjoys a strong competitive position due to its large
installed cable television equipment base, its strong
relationships with the major cable television operators, its
technology leadership and new product development capabilities,
and the likely need for compatibility of new technologies with
currently installed systems. There can be no assurance, however,
that competitors will not be able to develop systems compatible
with, or that are alternatives to, the Company's proprietary
technology or systems.
Employees
At December 31, 1994, approximately 12,300 people were
employed by GI. Of these employees, approximately 5,100, 4,500
and 2,100 were located at GI's U.S., Taiwan and Mexico
facilities, respectively, with the balance located in Puerto
Rico, Japan and Europe. GI believes its relations with its
employees and, where they are represented by unions, its
relations with their unions, are good. As of December 31, 1994,
approximately 5,300 of GI's employees were covered by collective
bargaining agreements. Of these employees, approximately 4,300
were located at GI's Taiwan facilities, approximately 700 were
located at GI's Mexico facilities and the balance were located at
GI's Westbury, New York and certain European facilities.
Raw Materials
Raw materials are purchased from many sources in the United
States, as well as from sources in the Far East, Canada and
Europe. The Company's products include certain components that
are currently available only from single sources. The Company has
in effect inventory controls and other policies intended to
minimize the effect of any interruption in the supply of these
components. There is no single supplier, the loss of which would
have a continuing material adverse effect on GI's production.
Environment
The Company is subject to various federal, state, local and
foreign laws and regulations governing the use, discharge and
disposal of hazardous materials. The Company's manufacturing
facilities are believed to be in substantial compliance with
current laws and regulations. Compliance with current laws and
regulations has not had, and is not expected to have, a material
adverse effect on the Company's financial condition. The Company
is also involved in remediation programs, principally with
respect to former manufacturing sites, which are proceeding in
conjunction with federal or state regulatory oversight. In
addition, the Company is currently named as a "potentially
responsible party" with respect to the disposal of hazardous
wastes at seven hazardous waste sites located in four states.
The Company engages independent consultants to assist
management in evaluating potential liabilities related to
environmental matters. Management assesses the input from these
independent consultants along with other information known to the
Company in its effort to continually monitor these potential
liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has
been named a potentially responsible party. Such assessments
include the Company's share of remediation costs, information
known to the Company concerning the size of the hazardous waste
sites, their years of operation and the number of past users and
their financial viability. Although the Company estimates, based
on assessments and evaluations made by management, that its
exposure with respect to these environmental matters could be as
high as $64 million, the Company believes that the reserve for
environmental matters of $45 million at December 31, 1994 is
reasonable and adequate. However, there can be no assurance that
the ultimate resolution of these matters will approximate the
amount reserved. Further information regarding the Company's
environmental matters appears in Note 8 to the Company's
consolidated financial statements included in the 1994 Annual
Report, incorporated herein by reference.
Capital Expenditures
Capital expenditures were $136 million, $67 million and $37
million in the years ended December 31, 1994, 1993 and 1992,
respectively. Such expenditures were primarily in support of new
product development, cost reduction, capacity expansion and
production maintenance programs. In 1995, the Company expects to
continue to expand its capacity to meet current and future
demands for analog and digital products, cables and power
rectifiers with capital expenditures for the year ending December
31, 1995 expected to approximate $170 million.
Item 2. PROPERTIES
GI has manufacturing, warehouse, sales, research and
development, and administrative facilities worldwide which have
an aggregate floor space of approximately 3 million square feet.
Of these facilities, aggregate floor space of approximately 1.1
million square feet is leased, and the remainder is owned by GI.
Leases expire on various dates through the year 2004. GI
operates manufacturing facilities in ten locations worldwide
containing floor space of approximately 1.4 million square feet.
The Power Semiconductor Division utilizes three facilities with
an aggregate floor space of approximately .4 million square feet.
GI does not believe there is any material long-term excess
capacity in its facilities, although utilization is subject to
change based on customer demand. GI believes that its facilities
and equipment generally are well maintained, in good operating
condition and suitable for GI's purposes and adequate for its
present operations.
Item 3. LEGAL PROCEEDINGS
On October 25, 1994, the Company settled a U.S. Government
claim relating to GI's former Government Systems Division
("GSD"), which was sold by GI in 1991. The Company had
previously received three subpoenas, dated November 28, 1990,
February 6, 1992 and June 8, 1992, from the U.S. Attorney's
Office for the Eastern District of New York in connection with a
grand jury investigation of conduct by GSD prior to the
acquisition, in August 1990, of General Instrument Corporation,
then a publicly traded company, by affiliates of Forstmann Little
& Co., a private investment firm. The claim alleged improper
certification for reimbursement of overhead costs in connection
with certain contracts by former GSD employees. Under the terms
of the settlement with the U.S. Attorney, the Company agreed to
plead guilty to a misdemeanor and to pay a fine of $200,000 and
to make restitution of $9.8 million. The Company recorded a
charge of $4 million in 1994 to cover amounts that had not been
previously provided. The U.S. Attorney expressly acknowledged in
its court papers that there was no evidence implicating the
Company's current management or owners. The Company agreed to
the settlement because it is no longer in the defense business
and had neither the personnel nor the information adequately to
defend the litigation.
GI is involved in various litigation matters, including as
described below, the ultimate disposition of which, in GI's
opinion, will not have a material adverse effect on the financial
statements of the Company.
Based on published reports in the press, the Company believes
that the Antitrust Division of the Department of Justice ("DOJ")
is pursuing a broad investigation of arrangements and practices
that affect the cable television industry. On August 27, 1993,
the Company received a Civil Investigative Demand ("CID") from
the DOJ for documents and information relating to an
investigation of whether the antitrust laws have been violated by
agreements or unilateral action in restraint of trade in markets
for encryption hardware and software. On February 4, 1994, the
Company received a second CID from the DOJ for documents and
information relating to an investigation of whether the antitrust
laws have been violated by agreements in restraint of trade and
attempted monopolization in markets relating to delivery of
analog and digital video programming. The Company has complied
with these requests.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the three months ended December 31, 1994.
Additional Item. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company as
of March 15, 1995. In connection with the Company's initial
public offering, on April 6, 1992, each executive officer of GI
Delaware as of that date, was appointed to serve as an executive
officer of the Company. Certain executive officers of the
Company also serve as president of the various divisions and
subsidiaries of GI Delaware. Officers serve at the discretion of
the Board of Directors.
Name Age Position(s) with the Company
- -------------------- --- -----------------------------------
Daniel F. Akerson 46 Chairman of the Board of Directors
and Chief Executive Officer
Richard S. Friedland 44 President, Chief Operating Officer
and Director
J. A. Blanchard, III 52 Executive Vice President
Paul J. Berzenski 42 Vice President and Controller
Charles T. Dickson 40 Vice President and Chief Financial
Officer
Thomas A. Dumit 52 Vice President, General Counsel
and Secretary
Richard C. Smith 50 Vice President-Taxes, Treasurer
and Assistant Secretary
Frank M. Drendel 50 Chairman, President and Chief
Executive Officer of CommScope,
Inc., a subsidiary of GI
Delaware and Director of the
Company
Ronald A. Ostertag 54 Vice President of the Company and
President, Power Semiconductor
Division
Laurence L. Osterwise 47 Vice President of the Company and
President, GI Communications
Division
The principal occupations and positions for the past several
years of each of the executive officers of the Company are as
follows:
Daniel F. Akerson has served as Chairman of the Board and
Chief Executive Officer of the Company since August 1993 and as a
director of the Company since July 1993. He was President of the
Company from August 1993 to October 1993. He served as Chief
Operating Officer and President of MCI Communications Corporation
("MCI") from 1992 to August 1993. He served as Executive Vice
President and Group Executive of MCI from 1990 to 1992, Executive
Vice President and Chief Financial Officer of MCI from 1987 to
1990, and Senior Vice President of MCI from 1987 to 1988, and
held various positions within MCI since 1983. Mr. Akerson is a
General Partner of FLC Partnership, LP, the General Partner of
Forstmann Little & Co.
Richard S. Friedland has been a director of the Company since
October 1993. He became President and Chief Operating Officer of
the Company and GI Delaware in October 1993. He was Chief
Financial Officer of the Company and GI Delaware from March 1992
to January 1994 and Vice President, Finance of the Company from
May 1991 to October 1993. He was Vice President-Finance and
Assistant Secretary of GI Delaware from October 1990 to October
1993 and Vice President and Controller of GI Delaware from
November 1988 to January 1994. He is a director of Department
56, Inc.
J. A. Blanchard, III became Executive Vice President of the
Company on January 10, 1994. He was Chairman and Chief Executive
Officer of Harbridge Merchant Services from 1991 to 1993. From
1989 to 1991 he was a Senior Vice President at AT&T and prior to
that a Group Vice President of AT&T from 1986 to 1989. He is a
director of Telular Corporation and of Xpedite Systems, Inc.
Paul J. Berzenski became Controller of the Company in January
1994 and Vice President of the Company in November 1994. He was
Assistant Controller of GI Delaware from January 1991 to January
1994 and a Controller in the Company's former Jerrold
Communications Division from January 1988 to January 1991.
Charles T. Dickson became Vice President and Chief Financial
Officer of the Company on January 17, 1994. He was Vice
President, Finance and Administration of several divisions of MCI
from 1988 to 1993.
Thomas A. Dumit became Vice President, General Counsel and
Secretary of GI Delaware in January 1991. From January 1988
through 1990, Mr. Dumit was Senior Vice President and General
Counsel of Whitman Corporation, a diversified company. From 1986
to 1987 he was Senior Vice President and General Counsel of
Household Financial Services, a consumer finance division of
Household International, Inc., and from 1984 to 1985 he was Vice
President and General Counsel of American Hospital Supply
Corporation.
Richard C. Smith has been Vice President of GI Delaware since
March 1989, Treasurer of the Company since September 1991 and
Assistant Secretary of GI Delaware since June 1986. Mr. Smith
has been Vice President and Assistant Secretary of the Company
since May 1991 and has been Treasurer of the Company since March
1992. He was Assistant Treasurer of GI Delaware from June 1986
to June 1987 and from February 1991 to September 1991. From June
1986 to November 1994 he was Director of Taxes for GI Delaware
and from May 1991 to November 1994 he was Director of Taxes for
the Company. From June 1987 to March 1989 he was also Director,
Risk Management and Customs for GI Delaware.
Frank M. Drendel served as a director of GI Delaware and its
predecessors from 1987 to March 1992, when he was elected to
serve as a director of the Company. He has served as Chairman
and President of CommScope since 1986 and has served as Chief
Executive Officer of CommScope since 1976. Mr. Drendel was
Executive Vice President of the predecessor to the Company from
September 1986 to November 1988. From February 1981 to September
1986, Mr. Drendel was Executive Vice President and, from July
1982 to September 1986, he was Vice Chairman of the Board, of M/A-
COM. Mr. Drendel is a director of Alcatel Alsthom Compagnie
Generale d'Electricite.
Ronald A. Ostertag has been Vice President of GI Delaware
since February 1989, and President, Power Semiconductor Division
since September 1990. From April 1989 to September 1990 he was
Senior Vice President - Operations for the former VideoCipher
division and from August 1984 to April 1989 was Vice President
and General Manager of the Computer Products division of GI
Delaware.
Laurence L. Osterwise became Vice President of the Company and
President of GI Communications Division in November 1994. He was
employed by IBM Corporation from 1969 to November 1994, serving
as General Manager of Production Industries Consulting and
Services from January 1994 to November 1994, Corporate Director
of Market Driven Quality from December 1991 to January 1994, U.S.
Vice President of Market Driven Quality from January 1991 to
December 1991, Site General Manager Rochester, Minnesota and
Director, Application Business Systems from 1985 to 1991 and in
various capacities prior to 1985.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required by this Item is contained in Notes
7, 11 and 16 to the consolidated financial statements
included in the 1994 Annual Report, incorporated herein by
reference.
As of March 15, 1995 the approximate number of
stockholders of record of the Company's Common Stock was
598.
Item 6. SELECTED FINANCIAL DATA
Information required by this Item is contained in the
Five Year Summary included in the 1994 Annual Report,
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this Item is contained in
Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the 1994 Annual
Report, incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is contained in the
consolidated financial statements of the Company as of
December 31, 1994 and 1993 and for each of the years ended
December 31, 1994, 1993 and 1992, the notes to the
consolidated financial statements, and the independent
auditors' report thereon, and in the Company's unaudited
quarterly financial data for the two year period ended
December 31, 1994, and such information is incorporated
herein by reference from the 1994 Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning directors
of the Company is included in the Company's definitive Proxy
Statement for the 1995 Annual Meeting of Stockholders, filed
with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year (the "1995 Proxy
Statement") in the section captioned "Election of
Directors," and such information is incorporated herein by
reference. Information required by this item concerning the
executive officers of the Company is included in Part I of
this Annual Report on Form 10-K under the section captioned
"Additional Item. Executive Officers of the Registrant", as
permitted by General Instruction G(3). Information required
by this Item concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included in the 1995
Proxy Statement under the caption "Compliance with Section
16(a) of the Exchange Act," and such information is
incorporated herein by reference. Theodore J. Forstmann and
Nicholas C. Forstmann, both of whom are directors of the
Company, are brothers.
Item 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the
1995 Proxy Statement in the section captioned "Further
Information Concerning the Board of Directors and
Committees" under the subsections captioned "-Compensation
Committee Interlocks and Insider Participation" and "-
Director Compensation" and in the section captioned
"Compensation of Executive Officers" (other than the
subsections thereof captioned "-Compensation Committee
Report on Compensation of Executive Officers of the Company"
and "-Performance Graph"), and such information is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information required by this Item is included in the
1995 Proxy Statement in the section captioned "Security
Ownership of Certain Beneficial Owners and Management", and
such information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is included in the
1995 Proxy Statement in the section captioned "Other Related
Party Transactions" and is included in Note 13 to the
consolidated financial statements included in the 1994
Annual Report, and such information is incorporated herein
by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Balance Sheets at December 31, 1994
and 1993
For the years ended December 31, 1994, 1993 and 1992:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
Independent Auditors' Report
I. Condensed financial information - Parent Company only
II. Valuation and qualifying accounts
All other schedules have been omitted because they
are not applicable, not required or the information
required is included in the consolidated financial
statements or notes thereto.
3. Exhibits
The exhibits are listed in the accompanying Index to
Exhibits.
(b) Reports on Form 8-K
None.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
General Instrument Corporation:
We have audited the consolidated financial statements of
General Instrument Corporation (the "Company") as of
December 31, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, and have issued our
report thereon dated January 31, 1995; such consolidated
financial statements and report are included in your 1994
Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement
schedules of the Company, listed in Item 14(a) 2. These
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 31, 1995
<TABLE>
GENERAL INSTRUMENT CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(In thousands except share data)
<CAPTION>
December 31,
---------------------------
1994 1993
---------- ---------
<S> <C> <C>
ASSETS
Investment in subsidiary $656,876 $382,113
Note receivable from subsidiary 500,000 500,000
Interest receivable from subsidiary 71,249 23,749
Deferred financing fees, less accumulated
amortization of $3,067and $1,056, respectively 11,013 13,024
---------- ---------
Total assets $1,239,138 $ 918,886
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to subsidiary $60,918 $28,739
---------- ---------
Accrued interest payable 1,042 1,042
---------- ---------
Convertible Junior Subordinated Notes 500,000 500,000
---------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; no shares issued - -
Common Stock, $.01 par value; 175,000,000 shares
authorized; 122,231,348 and 120,261,610 issued at
December 31, 1994 and 1993, respectively 1,222 601
Additional paid-in capital 543,728 502,423
Retained earnings (accumulated deficit) 132,634 (113,901)
---------- ---------
677,584 389,123
Less - Treasury stock, at cost, 11,259 and 11,784 shares of
of Common Stock at December 31, 1994 and 1993,
respectively (17) (18)
- Unearned compensation (389) -
---------- ---------
Total stockholders' equity 677,178 389,105
---------- ---------
Total liabilities and stockholders' equity $1,239,138 $918,886
========== =========
<FN>
Note: Investment in subsidiary is accounted for under the equity method of accounting.
See notes to consolidated financial statements included in the 1994 Annual Report, incorporated
herein by reference.
</FN>
</TABLE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
(In thousands)
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 47,500 $ 52,224 $ 57,000
Interest expense (27,011) (41,474) (57,000)
----------- ----------- -----------
Interest Income - net 20,489 10,750 -
Income Taxes (7,171) (3,763) -
----------- ----------- -----------
Net Income - Parent Company 13,318 6,987 -
Net income (loss)
of subsidiary 233,217 83,596 (52,993)
----------- ----------- -----------
Net income (loss) $ 246,535 $ 90,583 $ (52,993)
=========== =========== ===========
<FN>
Note 1:
The parent company files a consolidated income tax return with its subsidiary.
The consolidated income tax provisions were $9,714, $23,526 and $14,941 for
the years ended December 31, 1994, 1993 and 1992, respectively.
Note 2:
Statements of cash flows are not required since the parent company did not
have any cash flows from operations. Interest income - net for the years ended
December 31, 1994 and 1993 relates to intercompany transactions.
See notes to consolidated financial statements included in the 1994 Annual
Report, incorporated herein by reference.
</FN>
</TABLE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
Balance Balance
at at
beginning end of
of period Additions Deductions (1) Other period
---------- ---------- ------------- ----- -------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful Accounts:
Year ended December 31, 1994 $7,012 $1,967 ($1,397) - $7,582
========== ========== ============= ===== =======
Year ended December 31, 1993 $8,246 $2,262 ($3,496) - $7,012
========== ========== ============= ===== =======
Year ended December 31, 1992 $6,353 $2,533 ($640) - $8,246
========== ========== ============= ===== =======
<FN>
(1) Accounts receivable written off - net of recoveries
</FN>
</TABLE>
<PAGE>
ANNEX E
Excerpts from General Instrument Corporation
1994 Annual Report to Stockholders
<PAGE>
<PAGE> 18
1994 Financial Index:
Five Year Summary 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations 20
Management's Responsibility 26
Independent Auditors' Report 26
Consolidated Statements of Operations 27
Consolidated Balance Sheets 28
Consolidated Statements of Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
<PAGE> 19
<TABLE> Twelve Months
Ended
Five Year Summary December 31, August 15,
<CAPTION> Pro forma for Ten Months 1990
change in Ended Through
Year Ended December 31, fiscal year December 31, February 28,
(In millions, except per share data) 1994 1993 1992 1991(1) 1991 1991
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $2,036 $1,393 $1,075 $ 929 $ 785 $ 533
Cost of sales 1,404 956 755 668 566 406
Selling, general and
administrative 180 149 137 123 103 69
Research and development 111 74 58 57 46 32
Operating income 316 188 98 54 48 13
Interest expense (54) (73) (112) (125) (104) (68)
Income (loss) before
extraordinary item and
cumulative effect of
changes in accounting
principles 248(2) 90 (41) (111) (94) (58)
Net income (loss) $ 247(2) $ 91(3) $ (53)(4) $ (111) $ (94) $ (58)
Weighted average shares
outstanding (5) 123 122 98 73 73 73
Primary earnings (loss) per share
before extraordinary item
and cumulative effect
of changes in accounting
principles (5) $ 2.01(2) $ .74 $ (.42) $(1.52) $(1.29) $ (.79)
Fully diluted earnings (loss)
per share before extraordinary
item and cumulative effect
of changes in accounting
principles (5) 1.89(2) .74 (.42) (1.52) (1.29) (.79)
December 31, February 28,
1994 1993 1992 1991 1991
Balance Sheet Data (at end of periods):
Working capital (negative) $ 213 $ (16) $ (14) $(150) $ (51)
Property, plant and equipment, net 344 262 266 286 310
Total assets 2,109 1,776 1,727 1,783 1,941
Long-term debt, including current maturities 797 840 989 1,254 1,353
Other non-current liabilities 187 209 138 171 191
Redeemable securities _ _ _ 4 4
Stockholders' equity 677 389 291 27 121
<FN>
(1) The pro forma statement of operations data for the twelve months ended
December 31, 1991 was derived from historical
statements of operations of the Company adjusted to give effect to the
change in fiscal year end from the last day of February to December 31st.
(2) Includes an income tax benefit of $30, or $.24 per primary share and
$.20 per fully diluted share, as a result of a reduction in a valuation
allowance, as of December 31, 1994, related to domestic deferred income tax
assets.
(3) Includes a cumulative effect credit of approximately $10 and a
cumulative effect charge of approximately $10 to reflect the adoption of
Financial Accounting Standards Board Statements No. 109, Accounting for
Income Taxes and No. 106, Employers' Accounting for Postretirement Benefits
other than Pensions, respectively.
(4) Includes a $12 extraordinary charge for the write-off of deferred
financing costs in conjunction with the early extinguishment of debt.
(5) On July 6, 1994, the Company's Board of Directors declared a
two-for-one split of the Company's Common Stock, which was effected in the
form of a 100% stock dividend on August 8, 1994. All share and per share
data have been restated for all periods presented to reflect the stock
split.
</FN>
</TABLE>
<PAGE> 20
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Segment Information:
Net Sales
Broadband Communications $1,720 $1,125 $ 844
Power Semiconductor 316 268 231
Total $2,036 $1,393 $1,075
</TABLE>
Comparison of Results of Operations for the Year Ended December 31, 1994 with
the Year Ended December 31, 1993
Net Sales. Net sales for the year ended December 31, 1994, were
$2,036 compared to $1,393 for the year ended December 31, 1993, an increase
of $643, or 46%. This increase reflects continued higher sales volumes in
both the Broadband Communications and Power Semiconductor segments, partially
offset by a decline in selling prices of certain products. Broadband
Communications' sales increased $595, or 53%, to $1,720 in 1994, primarily as
a result of increased sales volume of analog addressable systems, distribution
electronics and CommScope cable products. This higher sales volume reflects
increased investment in infrastructure by major cable television operators in
the United States as well as the deployment of new cable television systems
in international markets. International sales of cable television electronics
and CommScope cables increased 75% for the year ended December 31, 1994 in
comparison to 1993. In addition, sales of DigiCipher digital compression
products represented in excess of 30% of the Broadband Communications sales
increase. Sales of DigiCipher digital compression products in 1994
represented the start of the second stage of the commercialization of digital
broadband systems, during which satellite programmers, cable operators and
other network providers will begin to deploy digital terminals in their
subscribers' homes in order to take advantage of the enhanced capabilities of
digital networks. This stage began with the satellite market during the
second quarter of 1994, when GI began shipping its first generation
DigiCipher I consumer receivers to PRIMESTAR Partners for the medium power
Ku-band direct-to-home satellite market. See "New Technologies; Digital
Products" below. During 1994, the Company continued sales of VideoCipher RS(TM)
analog satellite receiver consumer modules to persons who had been receiving
without authorization (or "pirating") the commercial satellite programming
data signals. In 1994, these sales declined to minimal levels as expected.
However, shipments of VideoCipher RS analog satellite receiver consumer
modules for new owners of C-band satellite dishes increased in 1994 over
1993. The Company expects sales opportunities to potential new owners of
C-band satellite dishes to continue through the first quarter of 1995
(although there can be no assurance as to the amount of those sales), and to
decline, perhaps substantially, thereafter.
Power Semiconductor sales increased $48, or 18%, in 1994 in
comparison to 1993. This increase reflects higher sales volumes to all major
end user product markets in which Power Semiconductor products are
incorporated, partially offset by a decline in selling prices of certain
products. The most significant sales volume increases were in the sales of
discrete power rectifying and transient voltage suppression components to be
incorporated in computers, consumer electronics, automotive and
telecommunications products. International sales increased $35, or 18% to
$224 for the year ended December 31, 1994 in comparison to 1993.
Gross Profit (Net sales less cost of sales). Gross profit increased
$197, or 45%, to $633 in 1994 from $436 in 1993, and was approximately 31% of
sales in each period. Broadband Communications segment gross profit increased
49% over 1993 and was approximately 31% of sales in each period. Broadband
Communications gross profit and gross profit margin were positively affected
by: the 53% increase in sales discussed above; reduced material costs because
of higher volume purchasing; and improved per unit labor and overhead costs
resulting from increased production. These positive effects were partially
offset by the shift in product mix to DigiCipher digital compression
products, which initially carry lower margins. Power Semiconductor gross
profit increased 28% from 1993 to 1994 and increased as a percentage of sales
to 34% in 1994 from 31% in 1993, primarily as a result of the 18% increase in
sales discussed above, and improved per unit labor and overhead costs resulting
from increased production volumes, partially offset by decreased selling
prices of certain products.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expense increased $30, or 20%, in 1994 in comparison
to 1993, and decreased as a percentage of sales to 9% in 1994 from 11% in
1993. The increase in SG&A expense was principally attributable to increased
<PAGE> 21
(Dollars in millions)
marketing and selling expenditures,which contributed to the higher sales
volumes discussed above. The Company has been increasing
its sales force, field support and marketing activities to take advantage of
increased growth opportunities in international cable and satellite
television and worldwide telecommunications markets. SG&A expense in 1993
also included a charge of approximately $6 to provide for costs to be
incurred in conjunction with the combining of the Company's former Jerrold
Communications and VideoCipher divisions into the GI Communications Division.
Research and Development. Research and development expense increased
$37, or 51%, to $111 in 1994 from $74 in 1993, and was approximately 5% of
sales in each period. The Company's efforts are focused on: continued
development of the next generation of cable terminals, which incorporate
digital compression and multimedia capabilities; development of enhanced
addressable analog terminals; advanced digital systems for cable and
satellite television distribution; and product development through strategic
alliances. Emerging research and development activities include broadband
telephony products and interactive multimedia technologies for broadband
networks.
Operating Income. Operating income increased by $128, or 69%, to $316
in 1994 from $188 in 1993.
Other Income (Expense). Other income (expense) for the year ended
December 31, 1994 consisted primarily of a charge related to the write-down
of non-operating real estate.
Other income (expense) for the year ended December 31, 1993 included
a net gain on the sale of a portion of a partnership interest in an affiliate
and equity in losses of this unconsolidated affiliate. Also included was a $7
charge related to the write-down of a facility which was principally offset
by a gain on the settlement of a lawsuit with regard to patent infringements.
Interest Expense. Interest expense declined $19 to $54 in 1994 from
$73 in 1993. The decline was due primarily to lower interest rates which were
principally attributable to the June 1993 debt restructuring and the July
1994 amendment and restatement of the senior bank credit agreement of General
Instrument Corporation of Delaware ("GIDelaware"), the Company's principal
operating subsidiary. See "Liquidity and Capital Resources" below.
Gain (Loss) From Divestiture Businesses and Assets. During the year
ended December 31, 1994, the Company recognized a net loss of $3 which was
principally comprised of a $4 charge related to a settlement of certain legal
matters associated with a former divestiture business, partially offset by
gains on the sale of certain real estate holdings and other divestiture
assets. Charges related to the carrying costs associated with divestiture
assets (principally real estate) were not significant.
During 1993, the Company substantially completed its divestiture
program with the sale of its Wagering Group for an amount that approximated
net book value. During the year ended December 31, 1993, the Company
recognized a net gain of $0.3 which was comprised of $4 in gains on the
settlement of an action related to the Company's divested Defense Systems
business, offset by charges related to changes in the estimated amount of
divestiture liabilities retained and carrying costs associated with the
remaining divestiture assets (principally real estate). Carrying costs
attributable to real estate held for sale were not significant.
Income Taxes. Income taxes decreased $14 in 1994 from 1993 due
primarily to the recognition of an income tax benefit of $30 as a result of a
reduction in a valuation allowance, as of December 31, 1994, related to
domestic deferred income tax assets. This benefit was partially offset by
increased taxes on higher foreign sourced income. Additionally, it is
anticipated that the Company's effective income tax rates for 1995 will
increase in comparison to 1994 and 1993. See Note 6 to the consolidated
financial statements for further discussion.
Cumulative Effect of a Change in Accounting Principle. Effective
January 1, 1994, the Company adopted Financial Accounting Standards Board
Statement No. 112, Employers' Accounting for Postemployment Benefits ("SFAS
No. 112"). As a result of adopting SFAS No. 112, the Company recorded a
cumulative effect charge to income of approximately $2. The annual charge to
operations as a result of adopting SFAS No. 112 is not significant.
Comparison of Results of Operations for the Year Ended December 31, 1993 with
the Year Ended December 31, 1992
Net Sales. Net sales for the year ended December 31, 1993, were
$1,393 compared to $1,075 for the year ended December 31, 1992, an increase
of $318, or 30%. This increase reflects continued higher sales volumes in
both the Broadband Communications and Power Semiconductor segments, partially
offset by a decline in selling prices of certain CommScope and Power
Semiconductor products. Broadband Communications' sales increased $281, or 33%,
to $1,125 in 1993 primarily as a result of increased sales volume of the GI
Communications and CommScope divisions' cable
<PAGE> 22
(Dollars in millions)
television and satellite products, partially offset by a decline in
selling prices of certain CommScope coaxial cable products.
The increases in Broadband Communications segment sales reflect continued
increased investment in infrastructure by major cable television operators in
the United States. GI Communications Division sales increased $226, or 41%,
due to increased sales volume of distribution electronics, analog addressable
terminals, VideoCipher RS analog satellite receiver consumer modules and
DigiCipher digital compression products. The Company believes that the
increase in VideoCipher RS analog satellite receiver consumer module sales
volume is attributable to sales to persons who had been receiving without
authorization (or "pirating") the commercial data signals and further
believes that those persons purchased consumer descrambler modules as a
result of the effectiveness of actions taken to make "pirating" of the
commercial data signals more difficult. CommScope sales increased by $55, or
19%, as compared to 1992, principally reflecting increased coaxial cable
sales volume, partially offset by a decline in selling prices of certain
coaxial cable products.
Power Semiconductor sales increased $37, or 16% to $268 in 1993. This
increase reflects higher sales volumes to all end user product markets in
which Power Semiconductor products are incorporated, including computers,
consumer electronics, lighting ballasts, automotive and telecommunications
products. The most significant sales volume increases were realized in the
sale of discrete power rectifying and transient voltage suppression
components to be incorporated in computer, lighting ballasts and consumer
electronics products. Power Semiconductor sales also reflect incremental
sales attributable to the acquisition, in August 1992, of General
Semiconductor Ireland ("GSI"), partially offset by a decline in selling
prices of certain products. The GSI operations contributed approximately $27
to 1993 sales as compared to $11 in 1992.
Gross Profit (Net sales less cost of sales). Gross profit increased
$117, or 37%, to $436 in 1993 from $319 in 1992, and increased as a
percentage of sales to 31% in 1993 from 30% in 1992. Broadband Communications
segment gross profit increased 37% over 1992 (constant as a percentage of
sales at 31%), reflecting the 33% increase in sales, as discussed above, as
well as an increase in the proportion of VideoCipher RS analog satellite
receiver consumer module sales, which have higher margins, partially offset
by a charge of $12 associated with costs to be incurred in effecting
enhancements to the Company's DigiCipher digital compression technology, and
incremental depreciation and amortization in 1993 relating to the adoption of
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. See "Cumulative Effect of Changes in Accounting Principles" below.
Power Semiconductor Division gross profit increased 36% from 1992 to 1993,
and increased as a percentage of sales to 31% in 1993 from 27% in 1992. The
increase was due primarily to an increase in the proportion of sales of
transient voltage suppression components, which have higher margins, and
lower per unit manufacturing costs associated with the higher sales volumes
discussed above.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expense increased $12, or 9%, in 1993 in comparison
to 1992. SG&A expense was 11% of sales in 1993 as compared to 13% in 1992.
The increase in SG&A expense was principally attributable to increased
marketing and selling expenditures, which contributed to the higher sales
volumes discussed above, and a charge of $6 to provide for costs to be incurred
in conjunction with the combining of the Company's former Jerrold
Communications and VideoCipher divisions into the GI Communications Division.
SG&A expense in 1993 also included $2 of compensation expense attributable to
stock appreciation rights compared to $9 of compensation expense in 1992
related to the issuance of Common Stock, the granting of stock options and
the effects of stock appreciation rights. SG&A expense in 1992 also included
$9 of expense related to funding for Digital Cable Radio, a digital cable
audio venture. GI sold a portion of its ownership interest in Digital Cable
Radio in January 1993, thereby reducing future funding requirements.
Research and Development. Research and development expense of $74 in
1993 increased 27% in comparison to 1992 when research and development
expense was $58. This increase reflected the continued focus on development
activities for the next generation of cable terminals, which incorporate
digital compression and multimedia capabilities, and on advanced digital
systems for cable and satellite television distribution. Other major programs
included enhancement of addressable analog terminals, distribution
electronics, wireless terminal development and security enhancements for both
satellite and cable products.
Operating Income. Operating income in 1993 increased by $90, or 92%,
to $188 from $98 in 1992.
Other Income (Expense). See "Comparisonof Results of Operations for
the Year Ended December 31, 1994 with the Year Ended December
<PAGE> 23
(Dollars in millions)
31, 1993-Other Income (Expense)" above for 1993 components.
Other income (expense) for the year ended December 31, 1992 included
miscellaneous items that were not significant.
Interest Expense. Interest expense declined $38 in 1993 primarily as
a result of lower interest rates attributable to the restructuring of the
Company's senior and subordinated debt and a reduction in the amount of debt
outstanding. See "Liquidity and Capital Resources" below for further
discussion of the debt restructuring.
Gain (Loss) From Divestiture Businesses and Assets. See "Comparison
of Results of Operations for the Year Ended December 31, 1994 with the Year
Ended December 31, 1993_Gain (Loss) from Divestiture Businesses and Assets"
above for 1993 components.
During the year ended December 31, 1992, the Company recognized a net
loss of approximately $15 which was comprised of a $32 charge, which
represented the anticipated loss on sale of the Wagering Group, net of a gain
of approximately $11 from the sale of marketable securities and a $6 gain on
the settlement of an action related to the Company's divested Defense Systems
business.
Income Taxes. Income taxes increased $9 in 1993 from 1992, due
primarily to increased profitability in the foreign jurisdictions in which
the Company has operations.
Cumulative Effect of Changes in Accounting Principles. Effective
January 1, 1993, the Company adopted Financial Accounting Standards Board
Statements No. 109, Accounting for Income Taxes ("SFAS No. 109"), and No.
106, Accounting for Postretirement Benefits other than Pensions ("SFAS No.
106"). As a result of adopting SFAS No. 109 and SFAS No. 106, the Company
recorded a cumulative effect credit to income of approximately $10 and a
cumulative effect charge to income of approximately $10, respectively (see
Notes 6 and 10 to the consolidated financial statements). As a result of
adopting SFAS No. 109, the assets and liabilities that were adjusted to fair
value net of tax effects, as of the date of the Acquisition, were remeasured
to their unamortized gross amounts as of January 1, 1993. Consequently, there
was an increase in depreciation and amortization expense in 1994 and 1993 of
approximately $4 and $8, respectively.
Liquidity and Capital Resources
Cash provided by operations for the year ended December 31, 1994 was $162
compared to $166 in 1993 and a negative $9 in 1992. Cash provided by operation
s in 1994 was relatively constant with 1993 as the impact of increased
earnings in 1994 was offset by increased working capital. Cash provided by
operations in 1993 was impacted by costs associated with the issuance of debt,
as described below.
The improvement in cash flow from operations in 1993 compared to 1992
reflects increased sales volume and improved operating margins. Cash provided
by operations in 1992 was impacted by significant expenditures related to the
VideoCipherRegistration Mark security upgrade program and the payment of lump
sum royalties pursuant to a license under an unaffiliated third party's
patent regarding encryption and decryption of satellite television signals.
At December 31, 1994, working capital was $213 compared to a negative
$16 at December 31, 1993 and a negative $14 at December 31, 1992. The working
capital increase in 1994 over 1993 was due principally to increased sales
volume and projected business growth with corresponding increases in accounts
receivable, inventory, and accounts payable. Based on current levels of order
input and backlog, as well as significant sales agreements not yet reflected
in order and backlog levels, the Company believes that working capital levels
are appropriate to support future operations. There can be no assurance,
however, that future industry specific developments or general economic
trends will not alter the Company's working capital requirements. The
increase in working capital at December 31, 1994 also reflects the recognition
of net current deferred tax assets of $90 as a result of reductions in a
valuation allowance related to domestic deferred income taxes, and the
reclassification of $31 of debt outstanding at December 31, 1993 from
short-term to long-term in connection with the 1994 amendment and restatement
of GIDelaware's senior bank credit agreement, as discussed below.
Working capital at December 31, 1993 was relatively constant with the
1992 level but there were several significant changes in 1993 including:
increased accounts receivable and inventory reflecting increased and
projected sales; reduced accrued interest payable as a result of the
restructuring of the Company's existing indebtedness, as discussed below; a
reduction in assets held for sale due to the sale of the Company's remaining
divestiture business and the use of the proceeds to repay long-term debt;
increased accounts payable reflecting increased sales and investment in plant
and equipment; and an increase in the current maturities of long-term debt
consistent with the maturity payment schedule in effect at December 31, 1993.
<PAGE> 24
(Dollars in millions)
During the year ended December 31, 1994, the Company invested
$136 in equipment and facilities compared with $67 in 1993
and $37 in 1992. The higher level of capital spending was attributable to
capacity expansion across all businesses to meet increased current and future
demands. In 1995, the Company expects to continue to expand its capacity to
meet increased current and future demands for analog and digital products,
cables, and power rectifiers with capital expenditures for the year ending
December 31, 1995 expected to approximate $170.
The Company's research and development expenditures (principally
focused on the Broadband Communications businesses) were $111 for the year
ended December 31, 1994 compared to $74 in 1993 and $58 in 1992, and are
expected to approximate $135 for the year ending December 31, 1995. See
"Comparison of Results of Operations for the Year Ended December 31, 1994
with the Year Ended December 31, 1993_Research and Development" above for
further discussion.
At December 31, 1994, the Company had $5 of cash and cash equivalents
on hand compared to $6 at December 31, 1993 and $19 at December 31, 1992. At
December 31, 1994, long-term debt (including current maturities) was $797,
compared to $840 at December 31, 1993 and $989 at December 31, 1992.
In June 1993, the Company completed a two-part program to restructure
its existing indebtedness in order to lower its interest costs and obtain
greater operating flexibility. The first part of this program was consummated
with the public offering of $500 principal amount of 5% Convertible Junior
Subordinated Notes (the "Notes"). The second part of this program encompassed
amending and restating the senior bank credit agreement of GI Delaware to
include $275 of term loans and a $225 revolving credit facility maturing on
December 31, 1998, and to provide for lower interest rates and less
restrictive financial and operating covenants. The proceeds from the offering
of the Notes and borrowings under the revolving credit facility were used to
prepay the entire $600 of the Company's 9-1/2% Subordinated Debentures.
Effective July 7, 1994, the Company further amended and restated the
senior bank credit agreement of GI Delaware (as further amended and restated,
the "Credit Agreement") to lower its interest costs, increase available
credit commitments and obtain greater operating flexibility. The Credit
Agreement provides for a $500 unsecured Revolving Credit Facility which
matures on December 31, 1999 and converted all outstanding term loans to
long-term revolving credit loans under the new Revolving Credit Facility.
Amounts outstanding as of December 31,1994 under this facility are classified
as long-term based on the Company's intent and ability to maintain these
loans on a long-term basis. The Revolving Credit Facility commitment will be
reduced by $50 each year commencing December 31, 1995.
The Company also has a $15 uncommitted borrowing facility pursuant to
which the aggregate amount of borrowings outstanding under this facility and
the Revolving Credit Facility cannot exceed the total available credit
commitment under the Credit Agreement. At December 31, 1994, the Company had
borrowings of $240 and credit commitments, which the Company had not borrowed
against, of $260 under its revolving credit facilities.
The Credit Agreement contains numerous financial and operating
covenants, including: restrictions upon incurring indebtedness and liens;
entering into any transaction to acquire or merge with any entity; making
certain other fundamental changes; selling property; and paying dividends. At
December 31, 1994, the Company was in compliance with all financial and
operating covenants.
The Company's principal source of liquidity both on a short-term and
long-term basis is cash flow provided by operations. Occasionally, however,
the Company may borrow against the Credit Agreement to supplement cash flow
from operations. The Company believes that based upon its analysis of its
consolidated financial position, its cash flow during the past 12 months and
the expected results of operations in the future, operating cash flow and
available funding under the Credit Agreement will be adequate to fund
operations, research and development expenditures, capital expenditures and
debt service for the next 12 months. The Company intends to repay its
remaining indebtedness primarily with cash flow from operations. There can be
no assurance, however, that future industry specific developments or general
economic trends will not adversely affect the Company's operations or its
ability to meet its cash requirements.
On a selective basis, the Company enters into interest rate cap or
swap agreements to reduce the potentially negative impact of increases in
interest rates on its outstanding variable rate debt. In the fourth quarter
of 1994, the Company entered into two interest rate cap agreements to hedge
an aggregate notional amount of $150 of outstanding variable rate borrowings
under the Credit Agreement covering the period from January 3, 1995 through
January 3, 1996. The Company monitors its underlying interest rate exposures on
its variable rate debt on an ongoing basis and believes that it can modify or
adapt its hedging strategies as needed. See Note 12 to the
<PAGE> 25
(Dollars in millions)
consolidated financial statements for additional information on the
Company's hedging strategies.
New Technologies; Digital Products
The Company is entering a new competitive environment in which its success
will be dependent upon numerous factors, including its ability to continue to
develop appropriate technologies and successfully implement applications
based on those technologies. The Company believes that a key step in the
evolution of cable television system architecture and satellite delivery of
programming will be the implementation of digital video compression, which
converts television signals to a digital format and then compresses the
signals of several channels of television programming into the bandwidth
currently used by just one channel. GI has developed a digital compression
system, DigiCipher, that enables satellite programmers and cable television
operators to deliver, over their existing networks, four to ten times as much
information as is possible with existing analog technology.
GI has been shipping its first-generation DigiCipher I digital
encoders and decoders for satellite programmers and cable television
commercial headend operators since 1993, and began deployment of DigiCipher I
consumer receivers to PRIMESTAR Partners for the medium power Ku-band
direct-to-home satellite market in the second quarter of 1994. The Company's
DigiCipher II compression system is compatible with the recently finalized
industry standard for digital compression and transport, Motion Picture
Experts Group 2 ("MPEG2"). The development of the DigiCipher II System
("MPEG2/DCII") has taken longer than anticipated as a result of several
factors, including increased system complexity, evolving international MPEG2
standards and other system design issues. Consequently, volume deployment of
MPEG2/DCII digital products, which had been anticipated in early 1995, is now
expected to begin in mid-1995 for satellite products and late 1995 for cable
products, although there can be no assurance that additional delays will not
occur.
Deployment of MPEG2/DCII digital products for PRIMESTAR Partners,
expected to begin in mid-1995, will include an upgrade to MPEG2/DCII, for a
fee, of DigiCipher I receivers currently in use. As a result of the high
costs of initial production, DigiCipher I products and the upgrades to
MPEG2/DCII that are shipped during 1995 will carry substantially lower
margins than the Company's mature analog products. As the Company progresses
through the initial stages of production of its MPEG2/DCII products, the
Company expects margins of its digital products to improve.
With other new technologies and applications under development, the
Company believes it is well positioned to take advantage of the opportunities
presented in the new competitive environment. There can be no assurance,
however, that these technologies and applications will be successfully
developed, or, if they are successfully developed, that they will be
implemented by the Company's traditional customers or that the Company will
otherwise be able to successfully exploit these technologies and
applications.
Foreign Exchange
A significant portion of the Company's products are manufactured or assembled
in countries outside the United States. In addition, as discussed above, the
Company's sales of its equipment into international markets have grown. These
foreign operations are subject to risk with respect to currency exchange
rates. The Company monitors its underlying exchange rate exposures on an
ongoing basis and continues to implement selective hedging strategies to
reduce the market risks from changes in exchange rates. See Note 12 to the
consolidated financial statements.
Effect of Inflation
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the
past few years, the rate of inflation has been low and has not had a material
impact on the Company's results of operations.
<PAGE> 26
Management's Responsibility
Management is responsible for the preparation and accuracy of the
consolidated financial statements and other information included in this
report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles using, where
appropriate, management's best estimates and judgments.
In meeting its responsibility for the reliability of the consolidated
financial statements, management has developed and relies on the Company's
system of internal accounting control. The system is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed as authorized and are properly recorded. The system is augmented by
written policies and procedures and an internal audit department.
The Board of Directors reviews the consolidated financial statements
and reporting practices of the Company through its Audit Committee, which is
composed entirely of directors who are not officers or employees of the
Company. The committee meets with the independent auditors, internal auditors
and management to discuss audit scope and results and to consider internal
control and financial reporting matters. Both the independent and internal
auditors have direct unrestricted access to the Audit Committee. The entire
Board of Directors reviews the Company's financial performance and financial
plan.
/s/ Daniel F. Ackerson /s/ Charles T. Dickson
- ----------------------- -----------------------
Daniel F. Akerson Charles T. Dickson
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
To the Board of Directors and Stockholders of General Instrument Corporation:
We have audited the consolidated balance sheets of General Instrument
Corporation and its subsidiaries (the "Company"), as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. 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 generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of General
Instrument Corporation and its subsidiaries at December 31, 1994 and 1993 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Notes 6 and 10 to the consolidated financial
statements, effective January 1, 1994, the Company changed its method of
accounting for postemployment benefits and, effective January 1, 1993,
changed its methods of accounting for income taxes and postretirement
benefits other than pensions, to conform with Statements of Financial
Accounting Standards Nos. 112, 109 and 106, respectively.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
January 31, 1995
<PAGE> 27
<TABLE>
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31,
(In thousands, except per share data) 1994 1993 1992
<S> <C> <C> <C>
Net Sales $2,036,323 $1,392,522 $1,074,695
Operating Costs and Expenses:
Cost of sales 1,403,585 956,154 755,466
Selling, general and administrative 179,631 149,362 137,335
Research and development 111,462 73,741 58,149
Amortization of excess of cost over fair value of
net assets acquired 25,574 25,722 25,883
Total operating costs and expenses 1,720,252 1,204,979 976,833
Operating Income 316,071 187,543 97,862
Other income (expense)-net (2,001) (1,516) 775
Investment income 823 913 1,330
Interest expense (53,574) (73,371) (111,634)
Gain (loss) from divestiture businesses and
assets-net (3,153) 323 (14,787)
Income (loss) before Income Taxes,
Extraordinary Item and Cumulative
Effect of Changes in Accounting Principles 258,166 113,892 (26,454)
Provision for income taxes (9,714) (23,526) (14,941)
Income (loss) before Extraordinary Item and
Cumulative Effect of Changes in
Accounting Principles 248,452 90,366 (41,395)
Extraordinary charge resulting from the write-off of
deferred financing costs in conjunction with
the early extinguishment of debt _ _ (11,598)
Cumulative effect of changes in accounting principles:
Accounting for postemployment benefits (1,917) _ _
Accounting for income taxes _ 10,331 _
Accounting for postretirement benefits
other than pensions _ (10,114) _
Net Income (loss) $ 246,535 $ 90,583 $ (52,993)
Weighted Average Shares Outstanding 123,393 122,237 97,985
Earnings (loss) Per Share:
Primary:
Income (loss) before extraordinary item and
cumulative effect of changes in
accounting principles $ 2.01 $ .74 $ (.42)
Extraordinary charge resulting from the write-off
of deferred financing costs in conjunction
with the early extinguishment of debt _ _ (.12)
Cumulative effect of changes in accounting
principles-net (.01) _ _
Net income (loss) $ 2.00 $ .74 $ (.54)
Fully Diluted:
Income (loss) before extraordinary item and
cumulative effect of changes in
accounting principles $ 1.89 $ .74 $ (.42)
Extraordinary charge resulting from the write-off
of deferred financing costs in conjunction
with the early extinguishment of debt _ _ (.12)
Cumulative effect of changes in accounting
principles-net (.01) _ _
Net income (loss) $ 1.88 $ .74 $ (.54)
See notes to consolidated financial statements.
</TABLE>
<PAGE> 28
<TABLE>
Consolidated Balance Sheets
<CAPTION>
(Dollars in thousands, except share data) December 31, 1994 December 31, 1993
<S>
Assets <C> <C>
Current Assets:
Cash and cash equivalents $ 5,128 $ 5,584
Accounts receivable, less allowance for doubtful accounts of
$7,582 and $7,012, respectively 306,754 211,719
Inventories 214,180 108,951
Prepaid expenses and other current assets 13,620 9,274
Deferred income taxes, net of valuation allowance 93,446 3,079
Assets held for sale 8,636 12,504
Total current assets 641,764 351,111
Property, plant and equipment_net 343,868 262,173
Intangibles, less accumulated amortization of $78,460 and $61,081,
respectively 161,410 178,789
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $110,952 and $85,378, respectively 904,184 941,483
Investments and other assets 10,113 12,237
Deferred income taxes, net of valuation allowance 29,238 6,254
Deferred financing costs, less accumulated amortization of $22,980
and $17,313, respectively 18,374 24,041
Total Assets $2,108,951 $1,776,088
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 162,529 $ 118,291
Accrued interest payable 2,737 3,227
Income taxes payable 52,670 63,136
Accrued liabilities 208,383 149,559
Current portion of long-term debt 2,155 33,000
Total current liabilities 428,474 367,213
Deferred income taxes 21,990 3,134
Long-term debt 794,694 807,204
Other non-current liabilities 186,615 209,432
Commitments and contingencies (See Note 8)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000
shares authorized; no shares issued _ _
Common Stock, $.01 par value; 175,000,000 shares authorized;
122,231,348 and 120,261,610 shares issued at December 31, 1994 and
1993, respectively 1,222 601
Additional paid-in capital 543,728 502,423
Retained earnings (accumulated deficit) 132,634 (113,901)
677,584 389,123
Less Treasury stock, at cost, 11,259 and 11,784 shares of Common
Stock at December 31, 1994 and 1993, respectively (17) (18)
Unearned compensation (389) _
Total stockholders' equity 677,178 389,105
Total Liabilities and Stockholders' Equity $2,108,951 $1,776,088
See notes to consolidated financial statements.
</TABLE>
<PAGE> 29
<TABLE>
Consolidated Statements of Stockholders' Equity
<CAPTION> Retained
Common Stock Additional Earnings Common
Paid-In (Accumulated Stock In Unearned
(In thousands) Shares Amount Capital Deficit) Treasury Compensation
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 16,500 $ 165 $178,173 $(151,491) $ _ $ _
Issuance of Class B Common Stock
and stock options at less than
fair value _ _ 5,734 _ _ _
Reclass redeemable securities _ _ 4,978 _ _ _
Conversion of Class B Common
Stock to Common Stock 1,882 19 (19) _ _ _
Two-for-one stock split 18,382 184 (184) _ _ _
Exercise of stock options 85 1 453 _ _ _
Purchase of Common Stock _ _ _ _ (18) _
Issuance of Common Stock 22,000 220 306,110 _ _ _
Net loss _ _ _ (52,993) _ _
Balance, December 31, 1992 58,849 589 495,245 (204,484) (18) _
Exercise of stock options 1,282 12 6,212 _ _ _
Costs associated with the sale of
Common Stock _ _ (2,743) _ _ _
Exchange of stock appreciation
rights for stock options _ _ 3,703 _ _ _
Issuance of Treasury stock _ _ 6 _ _ _
Net income _ _ _ 90,583 _ _
Balance, December 31, 1993 60,131 601 502,423 (113,901) (18) _
Two-for-one stock split 60,131 601 (601) _ _ _
Exercise of stock options 1,954 20 9,076 _ _ _
Issuance of Treasury stock _ _ 15 _ 1 _
Issuance of restricted stock 15 _ 480 _ _ (389)
Tax benefit from a reduction in
a valuation allowance related
to domestic deferred income
tax assets _ _ 32,335 _ _ _
Net income _ _ _ 246,535 _ _
Balance, December 31, 1994 122,231 $1,222 $543,728 $132,634 $(17) $(389)
See notes to consolidated financial statements.
</TABLE>
<PAGE> 30
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31,
(In thousands) 1994 1993 1992
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 246,535 $ 90,583 $ (52,993)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 97,350 97,458 107,589
Loss (gain) from divestiture businesses
and assets_net 3,153 (323) 14,787
Write-down of a facility held for sale _ 7,425 _
Write-off of deferred financing costs _ _ 11,598
Issuance of Class B Common Stock and stock
options at less than fair value _ _ 5,734
Costs associated with the issuance of debt (357) (17,803) _
Accounts receivable (95,035) (61,683) (16,654)
Inventories (105,229) (16,608) (23,969)
Prepaid expenses and other current assets (4,446) (3,010) 7,139
Deferred income taxes (50,435) (485) 3,742
Accounts payable, income taxes payable and
other accrued liabilities 60,513 47,496 (53,782)
Other non-current liabilities 4,605 23,953 (12,308)
Other 5,126 (1,145) (238)
Cash provided by (used in) operating activities 161,780 165,858 (9,355)
Investment Activities:
Acquisition of General Semiconductor Ireland, net of
cash acquired of $250 _ _ (16,214)
Proceeds from sale of assets 6,876 38,708 28,396
Additions to property, plant and equipment (135,740) (67,060) (37,370)
Proceeds from the sale of property, plant
and equipment 1,334 1,013 5,172
Net funding of divestiture businesses and assets _ (5,902) (20,872)
Investments in other assets _ (4,000) _
Cash used in investment activities (127,530) (37,241) (40,888)
Financing Activities:
Proceeds from issuance of Convertible Junior
Subordinated Notes _ 500,000 _
Costs associated with the sale of Common Stock (447) (1,792) _
Issuance of Common Stock_net _ _ 306,330
Issuance of Class B Common Stock to
management investors _ _ 1,478
Borrowings under Taiwan loan _ _ 60,000
Treasury stock acquired _ _ (18)
Proceeds from stock options 9,096 6,224 454
Net proceeds from (repayments of) revolving
credit facilities (26,645) 1,500 (3,500)
Repayments of debt (16,710) (648,050) (321,757)
Cash (used in) provided by financing activities (34,706) (142,118) 42,987
Decrease in cash and cash equivalents (456) (13,501) (7,256)
Cash and cash equivalents, beginning of the year 5,584 19,085 26,341
Cash and cash equivalents, end of the year $ 5,128 $ 5,584 $ 19,085
Supplemental Cash Flow Information:
Income taxes paid $ 70,815 $ 19,957 $ 14,422
Interest paid $ 45,594 $ 87,709 $ 107,240
See notes to consolidated financial statements.
</TABLE>
<PAGE> 31
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
1 Summary of Significant Accounting Policies
Basis of Presentation. General Instrument Corporation (the
"Company" or "GI") was organized in August 1990 in connection with the
acquisition of General Instrument Corporation, then a publicly traded
company, by affiliates of Forstmann Little & Co.("FL &Co."), a private
investment firm (the "Acquisition"). The Acquisition has been accounted
for in accordance with the purchase method of accounting, and the
accompanying consolidated financial statements of the Company reflect the
purchase price allocation to assets acquired and liabilities assumed
based upon their then determined fair values.
Principles of Consolidation. The accompanying consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
Revenue Recognition. The Company recognizes revenue when
products are shipped and services are performed.
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.
Inventories. Inventories are stated at the lower of cost,
determined on a first-in, first-out (FIFO) basis, or market.
Property, Plant and Equipment. Property, plant and equipment
is stated at cost. Provisions for depreciation are computed using the
straight-line method for the following:
Asset Life
Building and improvements 5-35 years
Leasehold improvements Economic useful
life or lease term,
whichever is
shorter
Machinery and equipment 3-10 years
Deferred Financing Costs. All costs associated with the
issuance of debt are being amortized over the life of the
related debt using the interest method.
Intangible Assets. Intangible assets consist primarily of
patents which are being amortized on a straight line basis over a range
of 5 to 17 years.
Excess of Cost Over Fair Value of Net Assets Acquired. The
excess of cost over fair value of net assets acquired is being amortized
on a straight line basis over forty years. Management continually
reassesses the appropriateness of both the carrying value and remaining
life of the excess of cost over fair value of net assets acquired, by
assessing recoverability based on forecasted operating cash flows, on an
undiscounted basis, and other factors. Management believes that, as of
December 31, 1994, the carrying value and remaining life of the excess of
cost over fair value of net assets acquired continues to be appropriate.
Foreign Currency Translation. The Company has determined the
U.S. dollar to be the functional currency of all foreign subsidiaries.
Accordingly, gains and losses recognized as a result of translating foreign
subsidiaries' monetary assets and liabilities from local foreign currencies
to U.S. dollars are reflected in the accompanying consolidated statements
of operations. To hedge foreign currency exposure with regard to such
monetary assets and liabilities, the Company enters into foreign currency
forward contracts on a month to month basis (See Note 12). Foreign
currency transaction gains and losses during each of the three years in
the period ended December 31, 1994 were not significant.
Benefit Plans. Substantially all employees, including certain
employees of the divested businesses, are covered by pension plans. The
benefits under the plans are based on years of service and compensation
levels. Contributions to pension funds are made when actuarial
computations prescribe such funding. Effective January 1, 1994, the
Company adopted Financial Accounting Standards Board Statement No. 112,
Employers' Accounting for Postemployment Benefits ("SFASNo. 112", See
Note 10).
Income Taxes. Deferred income taxes reflect the future tax
consequences of differences between the financial reporting and tax bases
of assets and liabilities. Deferred income taxes have been provided for
the income tax liability which would be incurred on the repatriation of
undistributed earnings of the Company's foreign subsidiaries.
Other Income and Expense. Costs and gains derived from
non-operating assets are included in "Other income (expense) _ net" in
the accompanying consolidated statements of operations.
In 1994, other income (expense) consisted primarily of a
charge related to the write-down of non-operating real estate. In 1993,
other income (expense) included a net gain on the sale of a portion of a
partnership interest in an affiliate and equity in losses of this
unconsolidated affiliate (See Note 15). Also included was a $7 million
charge related to the write-down of a facility which was principally
offset by a gain on the settlement of a lawsuit with regard to patent
infringements. In 1992, other income (expense) included miscellaneous
items that were not significant.
Earnings (Loss) Per Share. Primary earnings (loss) per share
is computed based on the weighted average number of common and common
equivalent
<PAGE> 32
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
shares outstanding during the applicable periods.
Fully diluted earnings (loss) per share computations for all
periods are based on net income (loss) adjusted for interest and
amortization of debt issuance costs related to convertible debt and the
weighted average number of common shares outstanding adjusted for the
dilutive effect of stock options and convertible securities.
The computations of primary and fully diluted earnings (loss)
per share assume the exercise of stock options using the treasury stock
method and to the extent that stock options are antidilutive, they are
excluded from the computation (See Note 11 regarding the two-for-one
split of the Company's Common Stock during 1994).
Reclassifications. Certain reclassifications have been made
to prior years' financial statements to conform to the current year
presentation.
2 Assets Held for Sale
At the time of the Acquisition, the Company identified certain
businesses and assets which it intended to divest. At December 31, 1993,
this program was substantially completed with the sales of the Company's
Defense Systems Group in 1991, Transportation Electronics Division in
1992 and Wagering Group in 1993. As of December 31, 1994, assets held for
sale consisted of the former headquarters office of the Company's Power
Semiconductor Division and a real estate property related to the divested
Wagering Group.
The net loss from divestiture businesses and assets for the
year ended December 31, 1994 of approximately $3 million, included in the
accompanying consolidated statement of operations, was principally
comprised of a $4 million charge related to the settlement of certain
legal matters associated with a former divestiture business, partially
offset by gains on the sale of certain real estate holdings and other
divestiture assets. Charges related to carrying costs associated with
divestiture assets (principally real estate) were not significant.
The net gain from divestiture businesses and assets for the
year ended December 31, 1993 of approximately $0.3 million included in
the accompanying consolidated statement of operations was comprised of $4
million in gains on the settlement of an action related to the Company's
divested Defense Systems business, offset by charges related to changes
in the estimated amount of divestiture liabilities retained and carrying
costs associated with the remaining divestiture assets (principally real
estate) which were not significant.
The net loss from divestiture businesses and assets for the
year ended December 31, 1992 of approximately $15 million included in the
accompanying statement of operations was comprised of a $32 million
charge, which represented the anticipated loss on sale of the Wagering
Group, net of a gain of approximately $11 million from the sale of
marketable securities and a $6 million gain on the settlement of an
action related to the Company's divested Defense Systems business.
<TABLE>
3 Inventories
Inventories consist of:
<CAPTION>
December 31, 1994 December 31, 1993
<S> <C> <C>
Raw materials $ 81,987 $ 44,971
Work in process 25,822 14,657
Finished goods 106,371 49,323
$214,180 $108,951
</TABLE>
<TABLE>
4 Property, Plant and Equipment-net
Property, plant and equipment-net consists of:
<CAPTION>
December 31, 1994 December 31, 1993
<S> <C> <C>
Land and land improvements $ 93,983 $ 98,090
Buildings, improvements and leasehold improvements 65,824 58,410
Machinery and equipment 439,452 318,160
599,259 474,660
Less accumulated depreciation (255,391) (212,487)
$ 343,868 $ 262,173
</TABLE>
<PAGE> 33
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
<TABLE>
5 Accrued Liabilities
Accrued liabilities are summarized as follows:
December 31, 1994 December 31, 1993
<S> <C> <C>
Salaries and wages $ 39,018 $ 27,902
Payroll, state and local taxes 9,965 6,340
Product and warranty reserves 85,694 34,221
Other 73,706 81,096
$208,383 $149,559
</TABLE>
<TABLE>
6 Income Taxes
The domestic and foreign components of income
(loss) before income taxes, extraordinary item and
cumulative effect of changes in accounting principles
are as follows:
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Domestic $194,112 $ 54,414 $(66,873)
Foreign 64,054 59,478 40,419
$258,166 $113,892 $(26,454)
The components of the provision for income taxes
are as follows:
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S>
Current: <C> <C> <C>
Federal $ 26,153 $ 2,620 $ _
Foreign 19,680 11,098 8,760
State 7,614 3,398 2,439
53,447 17,116 11,199
Deferred:
Federal 55,534 11,167 _
Foreign 3,543 4,832 3,573
State 3,941 (6,148) 169
63,018 9,851 3,742
Net change in valuation allowance (106,751) (3,441) _
Provision for income taxes $ 9,714 $ 23,526 $ 14,941
The provision for deferred income taxes arises from
the following:
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Fixed and intangible assets $ (6,795) $(15,439) $ (249)
Working capital (20,636) (5,549) 1,339
Employee benefits 4,230 (6,827) 1,452
Domestic tax loss carryforwards 63,819 42,073 _
Tax credit carryforwards 1,638 (4,977) _
Undistributed foreign earnings 4,820 _ _
Other 15,942 570 1,200
$ 63,018 $ 9,851 $ 3,742
</TABLE>
<PAGE> 34
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
<TABLE>
The differences between the U.S. statutory income
tax rate and the effective tax rate are summarized below:
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% (34.0%)
Valuation allowance benefit (41.3) (19.5) _
Domestic loss for which no current
benefit could be derived _ _ 13.7
State income taxes, net 2.9 (2.4) 9.9
Foreign operations 2.9 0.3 9.7
Non-deductible purchase accounting items 3.5 7.9 62.2
Other permanent items, net 0.8 (0.6) (5.0)
Effective rate 3.8% 20.7% 56.5%
</TABLE>
<TABLE>
Deferred income taxes as recorded in the
accompanying consolidated balance sheets were
comprised of the following:
<CAPTION>
December 31, 1994 December 31, 1993
Asset Liability Net Asset Liability Net
<S> <C> <C> <C> <C> <C> <C>
Current Deferred Income Taxes:
Domestic net operating loss
carryforward (expiring
through 2007) $18,193 $ - $18,193 $ _ $ _ $ _
_
Accounts receivable and
inventory reserves 24,883 _ 24,883 14,000 _ 14,000
Product and warranty reserves 19,884 _ 19,884 9,754 _ 9,754
Employee benefits 6,227 _ 6,227 8,978 _ 8,978
Other current assets (842) _ (842) 570 _ 570
Other current liabilities 25,101 _ 25,101 19,195 _ 19,195
93,446 _ 93,446 52,497 _ 52,497
Valuation allowance _ _ _ (49,418) _ (49,418)
$93,446 $ _ $93,446 $ 3,079 $ _ 3,079
Non-Current Deferred Income Taxes:
Domestic net operating loss
carryforward (expiring
through 2007) $ _ $ _ $ _ $72,907 $ _ $ 72,907
Domestic capital loss
carryforward (expiring
in 1996) 32,118 _ 32,118 31,450 _ 31,450
Tax credit carryforwards 5,787 _ 5,787 7,425 _ 7,425
Fixed assets and
intangible assets (48,057) _ (48,057) (54,561) 291 (54,852)
Environmental liabilities 17,787 _ 17,787 18,413 _ 18,413
Employee benefits 21,960 _ 21,960 23,439 _ 23,439
Product and warranty reserves 10,567 _ 10,567 11,388 _ 11,388
Investments and other assets 12,397 _ 12,397 12,939 _ 12,939
Other non-current 13,163 21,990 (8,827) 13,004 2,843 10,161
65,722 21,990 43,732 136,404 3,134 133,270
Valuation allowance (36,484) _ (36,484) (130,150) _ (130,150)
$ 29,238 $21,990 $ 7,248 $ 6,254 $3,134 $ 3,120
</TABLE>
<PAGE> 35
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
Effective January 1, 1993, the Company adopted Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes
("SFAS No. 109"). Prior to the adoption of SFAS No. 109, the Company
accounted for income taxes under the deferral method and prior periods
have not been restated to reflect this change in accounting principle.
As a result of adopting SFAS No. 109, the Company recorded a cumulative
effect credit to income of approximately $10 million and recorded
deferred tax assets of approximately $182 million, deferred tax
liabilities of approximately $3 million and a valuation allowance of
approximately $173 million to fully reserve its domestic deferred tax
assets. The realization of these domestic deferred income tax assets were
not considered to be more likely than not as a result of domestic tax
losses and capital losses incurred since the date of the Acquisition.
Subsequent to January 1, 1993, the valuation allowance had
been periodically reduced to the extent that the Company generated
domestic taxable income. During 1994, the Company reduced the valuation
allowance by $90 million as domestic taxable income was generated, $10
million of such reduction adjusted goodwill since certain benefits were
attributable to the pre-Acquisition period. In addition, based on
operating trends, positive industry and technological developments and
management's assessment of expected domestic taxable income included in
the Company's planning process, the Company recorded a further reduction
to the valuation allowance, as of December 31, 1994, of approximately $63
million. Such reduction resulted in an income tax benefit of $30 million,
an increase in stockholders' equity of $32 million ($10 million of which
arose in 1994 as a result of stock options exercised) and a reduction in
goodwill of $1 million. The valuation allowance which exists at December
31, 1994, relates principally to domestic capital loss carryforwards
which can only be utilized to the extent the Company can generate
domestic capital gains.
In August 1993, the U.S. Congress enacted the Omnibus Budget
Reconciliation Act of 1993 (the "Act") which, among other things, increased
the Federal income tax rates for Corporations to 35% from 34%, effective
January 1, 1993. The effect of this Act on the 1993 provision for income
taxes was not significant.
<TABLE>
7 Long-Term Debt
Long-term debt consists of:
<CAPTION>
December 31, 1994 December 31, 1993
<S> <C> <C>
Senior bank indebtedness:
Term loans $ _ $261,250
Revolving credit facilities 240,000 22,000
Taiwan loan 56,849 56,954
Convertible Junior Subordinated Notes 500,000 500,000
796,849 840,204
Less current maturities 2,155 33,000
Long-term debt $794,694 $807,204
</TABLE>
In 1993, the Company completed a two-part program to restructure its
existing indebtedness in order to lower its interest costs and obtain
greater operating flexibility. The first part of this program was
completed when the Company consummated a public offering (the "Note
Offering") of an aggregate principal amount of $500 million of 5%
Convertible Junior Subordinated Notes (the "Notes"). The Notes mature on
June 15, 2000 and have semi-annual interest payments on each June 15th
and December 15th, which commenced December 15, 1993. The Notes are not
redeemable prior to June 18, 1996 and are thereafter redeemable in whole
or in part at the Company's option at amounts decreasing from 102.857% of
principal at June 18, 1996 to 100% of principal at June 15, 2000. Holders
of the Notes have a repurchase right, whereby, in the event certain
changes of control of the Company occur, each holder will have the right,
at the holder's option, to require the Company to repurchase all or any
part of the holder's Notes at 100% of principal plus accrued interest to
the repurchase date. The Company incurred expenses of approximately $14
million associated with the Note Offering and
<PAGE> 36
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
capitalized these costs as deferred financing costs which are being
amortized over the term of the Notes.
The second part of this program encompassed amending and
restating the senior bank credit agreement of General Instrument
Corporation of Delaware ("GIDelaware"), the Company's principal operating
subsidiary, to include $275 million of term loans and a $225 million
revolving credit facility, maturing on December 31, 1998, and to provide
for lower interest rates and less restrictive financial and operating
covenants. In connection with this amendment and restatement of GI
Delaware's senior bank credit agreement, the Company incurred
approximately $4 million of expenses that were capitalized and will be
amortized through December 31, 1998 using the interest method. The
proceeds of the Note Offering and borrowings under the revolving credit
facility were used to prepay the entire $600 million of the Company's
9-1/2% Subordinated Debentures.
In July 1994, the Company further amended and restated the
senior bank credit agreement of GI Delaware (as further amended and
restated, the "Credit Agreement") to lower its interest costs and
commitment fees, increase available credit commitments and obtain greater
operating flexibility. The Credit Agreement provides for a $500 million
unsecured Revolving Credit Facility, which matures on December 31, 1999
and converted all outstanding term loans to long-term revolving credit
loans under the new Revolving Credit Facility. Amounts outstanding as of
December 31, 1994, under this facility, are classified as long-term based
on the Company's intent and ability to maintain these loans on a
long-term basis. The Revolving Credit Facility commitment will be reduced
by $50 million per year commencing December 31, 1995. The Credit
Agreement requires the Company to pay a commitment fee of .225% per annum
of the unused portion of the total commitment, and agent fees of $63 per
quarter. The Credit Agreement permits the Company to choose between two in
terest rate options. The interest rate options are ABR (Adjusted Base Rate),
which is based on the bank's prime rate, and a Eurodollar rate (LIBOR)
plus 5/8 of 1%. The interest rates and commitment fees are subject to
change based on the Company's performance with respect to certain
financial ratios and credit ratings by nationally recognized statistical
rating companies contained in the Credit Agreement.
The Company also has a $15 million uncommitted borrowing
facility, pursuant to which the aggregate amount of borrowings
outstanding under this facility and the Revolving Credit Facility cannot
exceed the total available credit commitment under the Credit Agreement.
At December 31, 1994 and 1993, the Company had credit commitments of $260
million and $203 million, respectively, which the Company had not borrowed
against, under its revolving credit facilities.
The Credit Agreement contains certain restrictions, including
restrictions on additional borrowings and payment of dividends, and
requires the maintenance of certain financial ratios. In addition, under
the Credit Agreement certain changes in control of the Company would
cause an event of default, and the banks could declare all outstanding
borrowings under the Credit Agreement immediately due and payable. None
of the restrictions contained in the Credit Agreement are expected to
have a significant effect on the ability of the Company to operate. As of
December 31, 1994 and 1993 the Company was in compliance with all
financial and operating covenants under existing senior bank credit
agreements.
The Company has a $60 million loan agreement with a
consortium of banks in Taiwan (the "Taiwan Loan Agreement"). Borrowings
under the Taiwan Loan Agreement are secured by a mortgage on land and
buildings in Taiwan.
In July 1994, the interest rate under the Taiwan Loan
Agreement was reduced from the Singapore Interbank Offered Rate (SIBOR)
plus 1-1/4% to SIBOR plus 3/4% and in October 1994, the Taiwan Loan
Agreement was amended to extend required installment repayment dates and
maturity by one year. The borrowings under the Taiwan Loan Agreement will
mature on June 30, 2000 with nine semi-annual installments of $2,155 to
be paid beginning December 31, 1995 and the remaining balance to be paid
at maturity.
The effective interest rate on the Company's long-term debt
at December 31, 1994 and 1993 was 5.62% and 4.93%, respectively.
In 1992, the Company utilized the net proceeds of $306
million from the initial public offering of the Company's Common Stock,
as described in Note 11, for the repayment of debt and, accordingly,
recorded an extraordinary charge of $12 million to reflect the write-off
of deferred financing costs in conjunction with the early extinguishment
of debt.
<PAGE> 37
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
8 Commitments and Contingencies
The Company leases office space, manufacturing and warehouse
facilities, transportation, and other equipment under operating leases
which expire at various dates through the year 2004. Rent expense
for the years ended December 31, 1994 and 1993 is net of sublease
income of $58 and $109, respectively. There was no sublease income in
1992. Total rent expense was as follows:
Year ended December 31,
1994 $12,565
1993 9,385
1992 9,309
Future minimum lease payments required under these lease
arrangements as of December 31, 1994 were as follows:
1995 $10,099
1996 9,053
1997 5,799
1998 4,561
1999 2,428
Thereafter 7,688
Future minimum lease payments have not been reduced by minimum
sublease rentals of $363 due in the future under noncancellable
subleases.
The Company is either a plaintiff or a defendant
in several pending legal matters. In addition, the Company is
subject to various federal, state, local and foreign laws and regulations
governing the use, discharge and disposal of hazardous materials. The
Company's manufacturing facilities are believed to be in substantial
compliance with current laws and regulations. Compliance with current
laws and regulations has not had, and is not expected to have, a material
adverse effect on the Company's financial condition. The Company is also
involved in remediation programs, principally with respect to former
manufacturing sites, which are proceeding in conjunction with federal and
state regulatory oversight. In addition, the Company is currently named
as a "potentially responsible party" with respect to the disposal of
hazardous wastes at seven hazardous waste sites located in four states.
The Company engages independent consultants to assist
management in evaluating potential liabilities related to environmental
matters. Management assesses the input from these independent consultants
along with other information known to the Company in its effort to
continually monitor these potential liabilities. Management assesses its
environmental exposure on a site-by-site basis, including those sites
where the Company has been named as a potentially responsible party. Such
assessments include the Company's share of remediation costs, information
known to the Company concerning the size of the hazardous waste sites,
their years of operation and the number of past users and their financial
viability. Although the Company estimates, based on assessments and
evaluations made by management, that its exposure with respect to these
environmental matters could be as high as $64 million, the Company
believes that the reserve for environmental matters of $45 million at
December 31, 1994 ($44 million at December 31, 1993) is reasonable and
adequate. However, there can be no assurance that the ultimate resolution
of these matters will approximate the amount reserved.
Based on the factors discussed above, capital expenditures
and expenses for the Company's remediation programs, and the
proportionate share of the cost of the necessary investigation and
eventual remedial work that may be needed to be performed at the sites
for which the Company has been named as a "potentially responsible
party," are not expected to have a material adverse effect on the
Company's financial condition, results of operations or cash flows. The
Company's present and past facilities have been in operation for many
years, and over that time in the course of those operations, GI's
facilities have used substances which are or might be considered hazardous,
and GI has generated and disposed of wastes which are or might be considered
hazardous. Therefore, it is possible that additional environmental issues
may arise in the future which the Company cannot now predict.
<PAGE> 38
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
9 Employee Benefits
Net pension cost consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
Domestic Foreign Domestic Foreign Domestic Foreign
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 2,113 $ 3,149 $ 1,808 $ 3,033 $ 1,453 $ 2,861
Interest 6,580 4,851 6,638 4,287 5,270 3,957
Loss (return) on plan assets 5,974 (2,092) (11,776) (1,853) (4,860) (1,584)
Net amortization and deferral (12,097) (99) 4,949 (22) (692) 422
Net pension cost $ 2,570 $ 5,809 $ 1,619 $ 5,445 $ 1,171 $ 5,656
</TABLE>
<TABLE>
The funded status of the pension plans and the
related amounts as recorded in the accompanying
consolidated balance sheets were as follows:
<CAPTION>
December 31, 1994 December 31, 1993
Domestic Foreign Domestic Foreign
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits $ 71,604 $ 8,828 $ 79,252 $ 6,180
Accumulated benefits $ 73,540 $ 29,793 $ 81,881 $ 22,453
Projected benefit obligation $ 83,017 $ 64,302 $ 91,725 $ 55,074
Market value of plan assets 64,849 28,955 76,255 26,911
Funded status (18,168) (35,347) (15,470) (28,163)
Unrecognized loss 7,422 15,356 7,294 9,608
Accrued pension obligation $(10,746) $(19,991) $ (8,176) $(18,555)
Actuarial assumptions:
Discount rate 8.5% 8% 7.25% 9%
Investment return 9.5% 8% 10% 9%
Compensation increases 5.5% 6% 4.75% 7%
</TABLE>
The impact of the changes in the actuarial assumptions, as of
December 31, 1994, has been reflected in the funded status
of the domestic and foreign pension plans and the Company believes that
such changes will not have a material effect on net pension cost in 1995.
Domestic and foreign net pension cost for the year ended December 31,
1994 was actuarially determined using discount rates of 7.25% and 9%,
respectively, investment return assumptions of 10% and 9%, respectively,
and compensation increases of 4.75% and 7%, respectively.
The domestic pension plans consist principally of a qualified
retirement plan which has satisfied the full funding limitation
requirement under the Employee Retirement Income Security Act of 1974
("ERISA") and therefore, no contributions were made to the plan during
1994. It is not anticipated that any pension contributions will be
required under ERISA during 1995. In 1994, the Company established
unfunded supplemental retirement plans for certain members of management.
Net pension cost and accrued pension obligations for these plans are
included in the disclosed amounts above. The foreign pension plans
consist principally of a Taiwan pension plan, which is funded under
Taiwan's statutory requirements. Pension contributions for the Taiwan
pension plan during 1994 were $4 million and are expected to approximate
a comparable amount during 1995. Management believes that cash flow
provided by operations will be sufficient to fund all future
contributions.
Domestic plans' assets consist of fixed income and equity
securities. Foreign plan assets principally consist of fixed income
securities.
One of the Company's subsidiaries maintains an Employees
Profit Sharing and Savings Plan (the "Profit Sharing and Savings Plan").
The majority of contributions to the Profit Sharing and Savings Plan are
made at the discretion of the subsidiary's Board of Directors. In
addition, eligible employees may elect to contribute up to 10% of their
salaries. The subsidiary contributes an amount equal to 50% of the first
4% of the employee's salary that the employee contributes. During the
years ended December 31, 1994, 1993 and 1992, the subsidiary contributed
$6,065, $4,279 and $3,418, respectively
<PAGE> 39
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
to the Profit Sharing and Savings Plan, $5,193, $3,710, and $3,000,
respectively, of which was discretionary.
The Company maintains a voluntary savings plan covering all
domestic non-union employees. Eligible employees not covered by the
Profit Sharing and Savings Plan (as described in the preceding paragraph)
may elect to contribute up to 10% of their salaries. Effective January 1,
1994, the Company increased its contribution to an amount equal to 50% of
the first 6% of the employee's salary that the employee contributes from
an amount equal to 50% of the first 4% of the employee's salary that the
employee contributed. The Company contributed $1,900, $1,184 and $1,206
in the years ended December 31, 1994, 1993 and 1992, respectively, under
this plan.
10 Postretirement and Postemployment Benefits Other Than Pensions
Postretirement. The Company maintains an unfunded
contributory group medical plan (the "Plan") for all full-time U.S.
employees, not covered by a collective bargaining agreement, who retire
under the General Instrument Pension Plan directly after active service.
The Plan is the primary provider of benefits for retirees up to age 65.
After age 65 Medicare becomes the primary provider. In 1993, the Company
adopted Financial Accounting Standards Board Statement No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions ("SFAS No.
106"). Under SFAS No. 106, the Company is required to recognize the cost
of providing and maintaining postretirement benefits during employees'
active service periods. Upon adoption of SFAS No. 106, the Company
recorded a cumulative effect charge to income of approximately $10
million to recognize the accumulated postretirement benefit obligation as
of January 1, 1993, which had not been previously accrued.
Subsequent to the adoption of SFAS No. 106, in 1993 the Company
amended the Plan with respect to future retirees. The effects of these plan
amendments are being amortized as a reduction in determining net
postretirement benefit cost. Net postretirement benefit cost consisted of
the following:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993
<S> <C> <C>
Service Cost $ 663 $ 458
Interest 1,424 1,646
Amortization of Prior Service Cost (515) (472)
Net postretirement benefit cost $1,572 $1,632
</TABLE>
<TABLE>
The status of the Plan and the related amounts as recorded in the
accompanying consolidated balance sheets were as follows:
<CAPTION>
December 31, 1994 December 31, 1993
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees $13,380 $13,513
Active participants 6,306 8,429
Total accumulated postretirement benefit obligation 19,686 21,942
Unrecognized prior service cost 8,563 9,078
Unrecognized gain (loss) 1,868 (696)
Accrued postretirement benefit obligation $30,117 $30,324
Discount rate used in determining APBO 8.5% 7.25%
</TABLE>
The assumed rate of future increases in health care cost during 1994
and 1993 was 16.0% and 13.0% for pre- and post-age
65 retirees, respectively, and is expected to decline to 6.5% by the year
2004. Under the amended Plan, the actuarially determined effect of a one
percentage point increase in the assumed health care cost trend rate on
annual net postretirement benefit cost and the APBO would be $0.4 million
and $3 million, respectively. During the years ended December 31, 1994,
1993 and 1992, the Company paid approximately $2 million, $1 million and
$1 million, respectively, for postretirement benefits.
Postemployment. Effective January 1, 1994, the Company
adopted SFAS No. 112. Under SFAS No. 112, the Company is required to
accrue the cost of providing benefits to employees after employment but
before retirement. The postemployment benefit obligation relates
principally to medical costs for former employees on long-term disability.
<PAGE> 40
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
The Company's previous accounting policy had been to expense costs of
providing postemployment benefits on an as-incurred basis. Upon adoption
of SFAS No. 112, the Company recorded a cumulative effect charge to
income of approximately $2 million to recognize the accumulated
postemployment benefit obligation as of January 1, 1994.
11 Stockholders' Equity
On July 6, 1994, the Company's Board of Directors declared a
two-for-one split of the Company's Common Stock, which was effected in
the form of a 100 percent stock dividend on August 8, 1994 to
stockholders of record on July 18, 1994. Common Stock has been increased
by the par value of the additional 60,131 shares of Common Stock issued
with an offsetting reduction to additional paid-in capital. Common Stock
in Treasury was increased by approximately 6 shares. All stock option,
share and per share data have been restated for all periods presented to
reflect the stock split. In addition, the conversion price of the Notes
into Common Stock and the number of shares reserved for issuance upon
conversion of the Notes were adjusted to give effect to the stock split.
Common Stock par value remained at $.01 per share.
During 1992, the Company's Restated Certificate of
Incorporation was amended to redesignate Class A Common Stock as Common
Stock. This redesignation has been reflected in the accompanying
consolidated financial statements.
In June 1992, the Company sold 44 million shares of Common
Stock in an initial public offering, receiving net proceeds of $306
million after deducting underwriting discounts and expenses. The net
proceeds were utilized to repay indebtedness. During 1992, the Company
recorded a charge of approximately $7 million for compensation expense
relating to the grants of options and stock appreciation rights ("SARs")
and the issuance of Class B Common Stock which was subsequently exchanged
for Common Stock as described below. Such charge is included in selling,
general and administrative expense in the accompanying consolidated
statement of operations for the year ended December 31, 1992. Additional
paid-in capital was increased by approximately $6 million in connection
with the issuance of Class B Common Stock and options.
Prior to the initial public offering, all of the Common Stock
issued and outstanding was owned by affiliates of FL & Co. Class B Common
Stock was owned by management investors. In March 1992, the Company sold
806 additional shares of Class B Common Stock to certain management
investors. Immediately prior to the closing of the initial public
offering, each outstanding share of Class B Common Stock, formerly
classified as redeemable securities, was exchanged for .6067 shares of
Common Stock and the Company issued 36,764 shares of Common Stock
pursuant to a two-for-one stock split.
During 1993, the authorized number of shares of Common Stock
was increased to 175 million.
In March and September of 1993, affiliates of FL & Co. and
certain current and former directors, senior managers and other employees
of the Company sold an aggregate 20 million shares and 13 million shares,
respectively, of Common Stock pursuant to public offerings. The Company
received no proceeds from these offerings. Costs associated with these
offerings have been charged to additional paid-in-capital.
In May 1993, the Board of Directors adopted the General
Instrument Corporation 1993 SAR Replacement Stock Option Plan. Pursuant
to this plan, the Company granted approximately 288 stock options to
certain holders of SARs in consideration for the amendment and
cancellation of the rights under the Stock Appreciation Right Agreement
("SAR Agreement") between the Company and each such holder. These stock
options were granted at an exercise price of $2.75 per share (the
reference price with respect to the SARs) and are exercisable consistent
with the vesting schedule as stipulated in the SAR Agreement. The SARs
become fully vested on the third anniversary of the date of grant.
Consistent with this plan, the Company charged its SARs reserves and
increased additional paid-in-capital by approximately $4 million. At
December 31, 1994, there were approximately 31 SARs outstanding.
In May 1993, the stockholders of the Company approved the
General Instrument Corporation 1993 Long-Term Incentive Plan and the
Amended and Restated Certificate of Incorporation of the Company to
eliminate Class B Common Stock and provisions relating to multiple
classes of common stock. The 1993 Long-Term Incentive Plan provides for
the granting of stock options, SARs, restricted stock, performance units,
performance shares, and phantom stock to employees of the Company and its
subsidiaries and the granting of stock options to non-employee directors
of the Company.
In June 1993, the Company issued $500 million principal
amount of Convertible Junior Subordinated Notes (see Note 7), which are
initially convertible into Common Stock at a conversion price of $23.75
per share. Approximately 21 million shares were
<PAGE> 41
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
reserved for issuance upon conversion of the Notes.
In May 1994, the stockholders approved an increase of 5
million shares of Common Stock that may be awarded under the 1993
Long-Term Incentive Plan. As of December 31, 1994, the exercise prices of
all stock options granted under the 1993 Long-Term Incentive Plan were
equal to the closing price of the Common Stock on the New York Stock
Exchange on the date of grant.
In November 1994, the Company awarded 15 shares of restricted
stock which are earned through continued employment. Unearned
compensation, based on the excess of the market value of the shares
awarded over the price paid by the recipient at the date of grant, was
charged to stockholders' equity and is being amortized to expense over
the vesting period which expires in April 1997.
<TABLE>
The following table summarizes stock option activity relating
to the Company's stock option plans.
<CAPTION>
Number of Option Price
Shares (range per share)
<S> <C> <C>
Outstanding at December 31, 1991 3,600 $ $ 2.75
Grants 1,014 1.51
Exercised (170) 1.51 - 2.75
Outstanding at December 31, 1992 4,444 1.51 - 2.75
Grants 3,069 15.88 - 28.88
Exercised (2,564) 1.51 - 2.75
Exchange of SARs 288 2.75
Cancelled (178) 2.75 - 15.88
Outstanding at December 31, 1993 5,059 1.51 - 28.88
Grants 4,470 25.19 - 32.13
Exercised (1,955) 1.51 - 23.50
Cancelled (2,637) 2.75 - 29.94
Outstanding at December 31, 1994 4,937 1.51 - 32.13
Exercisable at December 31, 1994 1,116 1.51 - 23.50
</TABLE>
At December 31, 1994 and 1993 the Company had approximately 6,100 and
3,000 shares, respectively, reserved in connection with its stock award
plan.
12 Derivatives and Other Financial Instruments
Derivative financial instruments are utilized by the Company to
reduce market risks arising from changes in foreign exchange rates and
interest rates. The Company does not use derivative financial instruments
for trading purposes, nor does it engage in currency or interest rate
speculation. The Company believes that the various counterparties with
which the Company enters into interest rate hedge agreements and currency
exchange contracts consist of only financially sound institutions and,
accordingly, believes that the credit risk for non-performance of these
contracts or concentration of instruments with a single counterparty is
remote. The Company monitors its underlying exchange rate and interest
rate exposures and its derivative hedging instruments on an ongoing basis
and believes that it can modify or adapt its hedging strategies as
needed.
Foreign Exchange Instruments. The Company enters into forward
exchange contracts on a month-to-month basis to hedge foreign currency
exposure with regard to certain monetary assets and liabilities
denominated in currencies other than the U.S. dollar. These contracts
generally do not subject the Company's results of operations to risk of
exchange rate movements because gains and losses on these contracts
generally offset, in the same period, gains and losses on the monetary
assets and liabilities being hedged.
On a selective basis, the Company enters into forward
exchange and purchased option contracts to hedge the currency exposure of
contractual and other firm commitments denominated in foreign currencies.
The Company may also enter into forward exchange and purchased option
contracts designed to hedge the currency exposure of anticipated but not
yet committed transactions expected to be denominated in foreign
currencies. The purpose
<PAGE> 42
Notes to Consolidated Financial Statements (continued)
(In thousands, unless otherwise noted)
of these activities is to protect the Company from the risk that the
eventual net cash flows in U.S. dollars from foreign receivables and
payables will be adversely affected by changes in exchange rates. Gains
and losses on hedges related to contractual and other firm commitments
are deferred and recognized in the Company's results of operations in the
same period as the gain or loss from the underlying transactions. Gains
and losses on forward exchange contracts used to hedge anticipated but
not yet committed transactions are recognized in the Company's results of
operations as changes in exchange rates for the applicable foreign
currencies occur. Historically, foreign exchange contracts with respect
to contractual and other firm commitments and anticipated, but not yet
committed, transactions have been short-term in nature and the gains and
losses recognized in the Company's results of operations with respect to
these contracts have not been significant. In addition, purchased options
have had no intrinsic value at the time of purchase.
The Company generally settles forward exchange contracts at
maturity, at prevailing market rates. The Company recognizes in its
results of operations, over the life of the contract, the amortization of
contract premium or discount. The amortization of these premiums or
discounts during each of the three years in the period ended December 31,
1994 was not significant. As of December 31, 1994 and 1993, the Company
had outstanding forward exchange contracts in the amounts of
approximately $3 million and $1 million, respectively, comprised of
foreign currencies which were to be purchased (principally the Irish
Punt) and approximately $36 million and $24 million, respectively,
comprised of foreign currencies which were to be sold (principally the
Japanese yen, Hong Kong dollar, Deutschemark, Canadian dollar, French
franc, and Pound sterling). All outstanding forward exchange contracts at
December 31, 1994 and 1993 had original maturities of one month and the
fair values of such contracts approximated their carrying values.
Accordingly, deferred gains or losses on such contracts at December 31,
1994 and 1993 were not significant. As of December 31, 1994 and 1993, the
Company had no purchased option contracts outstanding.
Interest Rate Instruments. On a selective basis, the Company
from time to time enters into interest rate cap or swap agreements to
reduce the potentially negative impact of increases in interest rates on
its outstanding variable rate debt under the Credit Agreement. The
Company recognizes in its results of operations over the life of the
contract, as interest expense, the amortization of contract premium
incurred from buying interest rate caps. Net payments or receipts
resulting from these agreements are recorded as adjustments to interest
expense. The effect of interest rate instruments on the Company's results
of operations in each of the three years in the period ended December 31,
1994 was not significant.
In the fourth quarter of 1994, the Company entered into two
interest rate cap agreements to hedge an aggregate notional amount of
$150 million of outstanding variable rate borrowings under the Credit
Agreement. Each contract has a notional amount of $75 million and a
one-year term, covering the period from January 3, 1995 through January
3, 1996. At December 31, 1994, the fair value of these cap agreements
approximated the $1 million carrying value.
Other Financial Instruments. The carrying value of cash and
cash equivalents approximates fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amount
of the Company's senior bank indebtedness approximates fair value because
the underlying instruments have variable interest rates that adjust to
market on a short-term basis. The estimated fair value of the Notes,
which are publicly traded, as of December 31, 1994 and 1993 was $633
million and $655 million, respectively, based on quoted market prices.
13 Related Party Transactions
Since 1992, officers and directors of the Company have periodically
traveled in aircraft leased by related parties, for which the Company
paid such related parties at commercial rates. During the years ended
December 31, 1994, 1993 and 1992, payments totaling $50, $112 and $397,
respectively, were made with respect to such travel. In addition, a
subsidiary of the Company from time to time enters into transactions with
companies owned or controlled by one of its officers. In 1992, a related
party sold an aircraft to an unrelated third party for $1,650 and,
following the sale, the subsidiary entered into an operating lease
agreement for this aircraft. During the years ended December 31, 1993 and
1992, the subsidiary received $25 and $297, respectively, from related
parties for aircraft maintenance services provided. Additionally, during
the years ended December 31, 1994, 1993 and 1992, charges totaling
$2,137, $603 and $989, respectively, were made to related parties for
aircraft services.
<PAGE> 43
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
14 Segment Information
The Company's major business segments are Broadband Communications
and Power Semiconductor. Broadband Communications
offers a variety of products and services for the cable and satellite
television industries, including active and passive electronics, subscriber
terminals, coaxial and fiber optic cable, and encryption/decryption
equipment for the scrambling and descrambling of satellite television
programming. Products offered by Power Semiconductor include discrete
power rectifying and transient voltage suppression components.
Operating profit (loss) represents net revenue less operating
expenses including the effects of acquisition adjustments, but excluding
interest, unallocated corporate expenses and income taxes. Identifiable
assets are those used in the operations of each segment or geographic
area.
<TABLE>
<CAPTION>
United States(1) Europe Far East 0ther Eliminations Consolidated
Operations by Geographic Area:
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Net sales $1,822,383 $151,644 $ 32,803 $29,493 $ _ $2,036,323
Transfers (2) 140,691 32,772 221,930 23,264 (418,657) _
Net revenue 1,963,074 184,416 254,733 52,757 (418,657) 2,036,323
0perating profit 300,797 16,854 20,186 4,336 _ 342,173
Identifiable assets 1,688,647 85,007 179,426 17,331 _ 1,970,411
Year ended December 31, 1993:
Net sales 1,224,968 123,752 28,483 15,319 _ 1,392,522
Transfers (2) 111,507 15,289 163,171 17,331 (307,298) _
Net revenue 1,336,475 139,041 191,654 32,650 (307,298) 1,392,522
0perating profit 183,635 9,334 15,218 821 _ 209,008
Identifiable assets 1,517,015 66,749 163,957 6,101 _ 1,753,822
Year ended December 31, 1992:
Net sales 926,932 113,214 22,838 11,711 _ 1,074,695
Transfers (2) 95,943 90 131,093 15,791 (242,917) _
Net revenue 1,022,875 113,304 153,931 27,502 (242,917) 1,074,695
Operating profit (loss) 84,750 9,435 15,692 (213) _ 109,664
Identifiable assets 1,476,017 55,937 141,268 5,876 _ 1,679,098
<FN>
(1) Net export sales to unaffiliated customers were $413,442, $237,923 and
$194,723 for the years ended December 31, 1994, 1993 and 1992, respectively,
principally to the Far East, Europe and Canada. During the years ended
December 31, 1994, 1993 and 1992, one customer, including its affiliates,
accounted for approximately 15%, 11% and 10%, respectively, of the Company's
consolidated net sales. Sales to this customer are made primarily from the
Broadband Communications segment.
(2) Principally product assembly which is accounted for at cost plus a
nominal profit.
</FN>
</TABLE>
<PAGE> 44
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
<TABLE>
<CAPTION>
Broadband Power
Communications Semiconductor Corporate Consolidated
Operations by Segment:
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Net sales $1,720,634 $315,689 $ _ $2,036,323
Operating profit 281,612 60,561 _ 342,173
Corporate expenses _ _ (26,102) (26,102)
Identifiable assets 1,600,559 369,852 _ 1,970,411
Corporate assets _ _ 129,904 129,904
Assets held for sale _ 1,961 6,675 8,636
Total assets 1,600,559 371,813 136,579 2,108,951
Capital expenditures 112,080 23,406 254 135,740
Depreciation and amortization expense 77,333 19,642 375 97,350
Year ended December 31, 1993:
Net sales 1,124,749 267,773 _ 1,392,522
Operating profit 165,617 43,391 _ 209,008
Corporate expenses _ _ (21,465) (21,465)
Identifiable assets 1,397,321 356,501 _ 1,753,822
Corporate assets _ _ 9,762 9,762
Assets held for sale _ 2,328 10,176 12,504
Total assets 1,397,321 358,829 19,938 1,776,088
Capital expenditures 43,630 23,319 111 67,060
Depreciation and amortization expense 73,501 23,546 411 97,458
Year ended December 31, 1992:
Net sales 843,635 231,060 _ 1,074,695
Operating profit 84,875 24,789 _ 109,664
Corporate expenses _ _ (11,802) (11,802)
Identifiable assets 1,331,671 347,427 _ 1,679,098
Corporate assets _ _ 12,697 12,697
Assets held for sale _ _ 35,700 35,700
Total assets 1,331,671 347,427 48,397 1,727,495
Capital expenditures 28,759 8,231 380 37,370
Depreciation and amortization expense 73,465 33,436 688 107,589
</TABLE>
15 Interest in Digital Cable Radio
In January 1993, the Company sold a portion of its partnership
interest in Digital Cable Radio ("DCR") which resulted in a net gain of
approximately $3 million. This gain was included in other income
(expense) in the accompanying consolidated statement of operations. Upon
the consummation of the sale, the Company reduced its interest in the
partnership from approximately 50% to approximately 20% and, accordingly,
modified its accounting for DCR from consolidation to the equity method.
During the year ended December 31, 1993, the Company incurred losses of
$3 million representing its share of DCR's operating results. These
losses were included in other income (expense) in the accompanying
statement of operations. In April 1994, DCR admitted a third party
investor into the partnership and, as a result, the Company's interest in
DCR was further diluted to approximately 18%. Consequently, the Company
began accounting for its interest in DCR utilizing the cost method.
During the year ended December 31, 1994, the Company's share of DCR's
operating results was not significant.
<PAGE> 45
Notes to Consolidated Financial Statements
(In thousands, except per share data, unless otherwise noted)
16 Quarterly Financial Data (Unaudited)
<TABLE>
Summarized quarterly data for 1994 and 1993 are
as follows:
<CAPTION>
Quarter Ended
March 31, June 30, September 30, December 31,
1994(a) 1993(b) 1994 1993 1994 1993(c) 1994(d) 1993(e)(f)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $432,521 $303,244 $508,783 $311,761 $554,750 $369,145 $540,269 $408,372
Gross profit 149,152 93,778 154,913 95,266 165,370 112,897 163,302 134,427
Income before
cumulative
effect of changes
in accounting
principles 52,901 11,193 52,001 12,269 56,781 27,367 86,768 39,537
Net income $50,984 $11,410 $52,001 $12,269 $56,781 $27,367 $86,768 $39,537
Earnings per share:(g)
Primary:
Income before
cumulative effect
of changes in
accounting
principles $ .43 $ .09 $ .42 $ .10 $ .46 $ .22 $ .70 $ .32
Net income .41 .09 .42 .10 .46 .22 .70 .32
Fully diluted:
Income before
cumulative effect
of changes in
accounting principles .41 .09 .40 .10 .44 .22 .64 .32
Net income .40 .09 .40 .10 .44 .22 .64 .32
Common Stock
Prices:(g)(h)
High $ 30 7\8 $ 18 1\8 $ 31 5\8 $ 20 9\16 $ 33 1\2 $ 28 1\8 $ 34 5\8 $ 30 1\8
Low 21 1\2 11 5\8 21 1\4 12 13\16 28 3\8 18 3\4 26 3\4 25 1\4
<FN>
(a) Includes a cumulative effect charge of $2 million to reflect the
adoption of SFAS No. 112 (See Note 10).
(b) Includes a net cumulative effect credit of $0.2 million to reflect the
adoption of SFAS No. 109 and SFAS No. 106 (See Notes 6 and 10).
(c) Includes a charge of $12 million for costs to be incurred in effecting
enhancements to the Company's DigiCipher digital compression technology. This
charge is included in cost of sales in the accompanying consolidated
statement of operations.
(d) Includes an income tax benefit of $30 million as a result of a reduction
in a valuation allowance related to domestic deferred income tax assets (See
Note 6).
(e) Includes a charge of $7 million related to the write-down of a facility
held for sale which was principally offset by a gain on the settlement of a
lawsuit (See Note 1 - Other Income and Expense).
(f) Includes a charge of approximately $6 million related to the combining
of the Jerrold Communications and VideoCipher divisions into one division,
the GI Communications Division. This charge is included in selling, general
and administrative expense in the accompanying consolidated statement of
operations, to provide for costs associated with this reorganization.
(g) On July 6, 1994, the Company's Board of Directors declared a two-for-one
split of the Company's Common Stock, which was effected in the form of a 100%
stock dividend on August 8, 1994. Earnings per share and Common Stock Price
data have been restated to reflect the stock split.
(h) The New York Stock Exchange is the principal market on which these
securities are traded. Since the Acquisition, the Company has not paid
dividends on its Common Stock.
</FN>
</TABLE>
<PAGE>
ANNEX F
General Instrument Corporation
Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to__________
Commission file number 1-5442
General Instrument Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3575653
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
181 West Madison Street, Chicago, Illinois 60602
(Address of principal executive offices)
(Zip Code)
(312) 541-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
As of August 1, 1995 there were 123,276,737 shares of Common
Stock outstanding.
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
ASSETS
<CAPTION>
(Unaudited)
June 30, December 31,
1995 1994
-------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,589 $ 5,128
Accounts receivable, less allowance for
doubtful accounts of $13,921
and $7,582, respectively 314,205 306,754
Inventories 264,537 214,180
Prepaid expenses and other current assets 29,710 22,256
Deferred income taxes 117,907 93,446
-------- ---------
Total current assets 742,948 641,764
Property, plant and equipment - net 377,520 343,868
Intangibles, less accumulated
amortization of $86,540 and $78,460,
respectively 153,330 161,410
Excess of cost over fair value of net
assets acquired, less accumulated
amortization of
$123,303 and $110,952, respectively 868,736 904,184
Investments and other assets 19,325 10,113
Deferred income taxes, net of valuation
allowance 24,651 29,238
Deferred financing costs, less
accumulated
amortization of $25,604 and $22,980, 15,750 18,374
respectively ---------- ---------
TOTAL ASSETS $2,202,260 $2,108,951
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
(Unaudited)
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 180,763 $ 162,529
Accrued interest payable 4,256 2,737
Income taxes payable 51,407 52,670
Accrued liabilities 210,489 208,383
Current portion of long-term debt 4,310 2,155
------------ -----------
Total current liabilities 451,225 428,474
------------ -----------
Deferred income taxes 26,108 21,990
------------ -----------
Long-term debt 733,339 794,694
------------ -----------
Other non-current liabilities 191,451 186,615
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value;
20,000,000 shares authorized;
no shares issued - -
Common Stock, $.01 par value;
400,000,000 shares authorized;
122,835,016 and 122,231,348
issued at June 30, 1995 and
December 31, 1994, respectively 1,228 1,222
Additional paid-in capital 555,361 543,728
Retained earnings 243,741 132,634
------------ -----------
800,330 677,584
Less - Treasury stock, at cost,
11,259 shares of
Common Stock (17) (17)
Unearned compensation (176) (389)
------------ -----------
Total stockholders' equity 800,137 677,178
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,202,260 $2,108,951
============ ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - In Thousands, Except Net Income Per Share)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $611,639 $508,783 $1,220,356 $941,305
--------- -------- ---------- --------
OPERATING COSTS AND
EXPENSES:
Cost of sales 416,269 353,870 834,153 637,239
Selling, general
and administrative 58,879 45,437 122,913 84,562
Research and
development 37,116 26,883 70,775 52,898
Amortization of
excess of cost
over fair value
of net assets
acquired 6,175 6,403 12,351 12,824
--------- -------- ---------- --------
Total operating
costs and
expenses 518,439 432,593 1,040,192 787,523
--------- -------- ---------- --------
OPERATING INCOME 93,200 76,190 180,164 153,782
Other expense, net (783) (1,943) (857) (3,007)
Interest expense, net (12,342) (13,681) (25,370) (26,575)
--------- -------- ---------- --------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 80,075 60,566 153,937 124,200
Provision for income (26,024) (8,565) (42,830) (19,297)
taxes --------- -------- ---------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE
IN ACCOUNTING
PRINCIPLE 54,051 52,001 111,107 104,903
Cumulative effect of a
change in accounting
principle - - - (1,917)
--------- -------- ---------- --------
NET INCOME $ 54,051 $ 52,001 $ 111,107 $102,986
========= ======== ========== ========
Weighted Average Shares
Outstanding 123,741 123,211 123,499 123,084
Net Income per share
Primary:
Income before
cumulative effect
of a change in
accounting principle $0.44 $0.42 $0.90 $0.85
Cumulative effect of
a change in
accounting principle - - - (0.01)
--------- -------- ---------- --------
Net income $0.44 $0.42 $0.90 $0.84
========= ======== ========== ========
Fully Diluted:
Income before
cumulative effect
of a change in
accounting
principle $0.40 $0.40 $0.82 $0.81
Cumulative effect of
a change in
accounting principle - - - (0.01)
--------- -------- ---------- --------
Net income $0.40 $0.40 $0.82 $0.80
========= ======== ========== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited - In Thousands)
<CAPTION>
Un-
Addit- Common earned Total
Common Stock ional Stock in Comp- Stock-
-------------- Paid-In Retained Trea- ensa- holders'
Shares Amount Capital Earnings sury tion Equity
------ ------ -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31,
1994 122,231 $1,222 $543,728 $132,634 ($17) ($389) $677,178
Net income for
the six
months ended
June 30, 1995 111,107 111,107
Exercise of
stock options 604 6 7,397 7,403
Tax benefit
from exercise
of stock
options 5,236 5,236
Costs
associated
with the sale
of Common
Stock (1,000) (1,000)
Amortization
of unearned
compensation 213 213
------- ------ -------- -------- -------- ------- --------
BALANCE, JUNE
30, 1995 122,835 $1,228 $555,361 $243,741 ($17) ($176) $800,137
======= ======= ======== ======== ======== ======= ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In Thousands)
<CAPTION>
Six Months Ended
June 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $111,107 $102,986
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 52,856 46,433
Accounts receivable (1,451) (74,831)
Inventories (50,357) (50,627)
Prepaid expenses and other current
assets (7,454) (3,088)
Deferred income taxes (2,719) (1,234)
Accounts payable, income taxes
payable and other accrued liabilities 36,812 49,627
Other non-current liabilities (2,407) 9,967
Other (2,779) (503)
-------- --------
Net cash provided by operating activities 133,608 78,730
-------- --------
INVESTMENT ACTIVITIES:
Proceeds from sale of assets - 278
Additions to fixed assets - net (63,166) (54,750)
Investments in other assets (6,506) -
-------- --------
Net cash used in investment activities (69,672) (54,472)
-------- --------
FINANCING ACTIVITIES:
Costs associated with the sale of
Common Stock (678) (336)
Proceeds from the issuance of
Flexible Term Notes 10,800 -
Repayments of debt - (16,603)
Net proceeds (repayments) revolving
credit facilities (70,000) 26,000
Proceeds from stock options 7,403 3,233
-------- --------
Net cash (used in) provided by financing
activities (52,475) 12,294
-------- --------
Increase in cash and cash equivalents 11,461 36,552
Cash and cash equivalents, beginning of
the period 5,128 5,584
-------- --------
Cash and cash equivalents, end of the
period $ 16,589 $ 42,136
======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1995, the
consolidated statements of income for the three and six months
ended June 30, 1995 and 1994, the consolidated statements of cash
flows for the six months ended June 30, 1995 and 1994 and the
consolidated statement of stockholders' equity for the six months
ended June 30, 1995 of General Instrument Corporation (the
"Company") are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management,
necessary for a fair presentation of the interim period financial
statements. There were no adjustments of a non-recurring nature
recorded during the three and six months ended June 30, 1995 and
1994, except for an adjustment in March 1995 to reflect the
settlement of certain tax matters (See Note 4) and a cumulative
effect adjustment to reflect the adoption, as of January 1, 1994,
of Financial Accounting Standards Board Statement No. 112 ("SFAS
112"), Employers' Accounting for Postemployment Benefits. These
consolidated financial statements should be read in conjunction
with the Company's December 31, 1994 consolidated financial
statements and notes thereto.
Certain reclassifications have been made to the comparative prior
period financial statements to conform to the current period
presentation.
2. INVENTORIES
Inventories consist of:
June 30, 1995 December 31, 1994
------------- -----------------
Raw Materials $ 98,974 $ 81,987
Work in Process 28,153 25,822
Finished Goods 137,410 106,371
---------- --------------
Inventories $ 264,537 $214,180
=========== ==============
<PAGE>
3. LONG-TERM DEBT
Long-term debt consists of:
June 30, 1995 December 31, 1994
------------- -----------------
Senior indebtedness:
Revolving credit
facilities $170,000 $240,000
Taiwan Loan 56,849 56,849
Flexible Term
Notes 10,800 -
Convertible Junior
Subordinated Notes 500,000 500,000
---------- -------------
Total 737,649 796,849
Less current
maturities 4,310 2,155
---------- -------------
Long-Term debt $733,339 $794,694
=========== ==============
In January 1995, CommScope, Inc., an indirect wholly-owned
subsidiary of the Company, entered into an $11 million loan
agreement in connection with the issuance of notes by the
Alabama State Industrial Development Authority (the "Flexible
Term Notes"). Borrowings under the loan agreement bear
interest at variable rates based upon current market
conditions for short-term financing. The loan agreement will
mature on January 1, 2015 and any remaining amounts
outstanding under the Flexible Term Notes will be due and
payable on that date.
4. INCOME TAXES
The provision for income taxes for the three and six months
ended June 30, 1995 is based on the expected annual effective
rate reduced by a $12 million credit for the settlement of
certain tax matters.
5. STOCKHOLDERS' EQUITY
In April 1995, affiliates of Forstmann Little & Co. and
certain current and former directors of the Company sold an
aggregate of 15.6 million shares of Common Stock in a public
offering. The Company received no proceeds from such
offering.
In April 1995, the stockholders approved an amendment to the
Company's Certificate of Incorporation which increased the
number of authorized shares of Common Stock from 175 million
to 400 million.
<PAGE>
GENERAL INSTRUMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
NET SALES
Net sales for the three months ended June 30, 1995 ("Second
Quarter 1995") were $612 compared to $509 in the three months
ended June 30, 1994 ("Second Quarter 1994"), an increase of
$103, or 20%. Net sales were $1,220 in the six months ended
June 30, 1995 ("First Half 1995") compared to $941 in the six
months ended June 30, 1994 ("First Half 1994"), an increase
of $279 or 30%. These increases relate primarily to higher
sales volume which occurred in both the Broadband
Communications and Power Semiconductor segments.
Broadband Communications sales increased 16% or $69 and 28%
or $223 in Second Quarter 1995 and First Half 1995,
respectively, over the comparable 1994 periods, primarily as
a result of increased sales volume by the Communications
Division of DigiCipher TM digital compression products,
distribution electronics and CommScope cable products. The
higher sales volume primarily reflects commercialization of
digital broadband systems, as well as continued cable
television operator infrastructure spending in the United
States and continued deployment of new cable television
systems in international markets. International sales of
cable television products increased 52% and 56% in Second
Quarter 1995 and First Half 1995, respectively, over the
comparable 1994 periods. Satellite system sales increased
57% and 72% in Second Quarter 1995 and First Half 1995,
respectively, over Second Quarter 1994 and First Half 1994.
The increased satellite system sales in 1995, due primarily
to sales of digital consumer receivers to Primestar Partners,
were partially offset by a decline in the sales of
VideoCipher RS TM analog satellite receiver consumer modules.
In 1994, the Company had significant sales of these modules
to persons who had been receiving without authorization (or
"pirating") the commercial satellite programming data
signals. In 1995 these sales were at minimal levels as
expected.
Power Semiconductor sales increased 44% and 39% in Second
Quarter 1995 and First Half 1995, respectively, over the
comparable 1994 periods. These increases were a result of
broad-based global demand, primarily from automotive,
computer, and consumer electronics customers for power
rectifiers and protection devices.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit increased $40, or 26%, to $195 in Second Quarter
1995 from $155 in Second Quarter 1994 and was 31.9% of sales
in Second Quarter 1995 compared to 30.4% of sales in Second
Quarter 1994. Gross profit increased $82, or 27%, to $386 in
First Half 1995 from $304 in First Half 1994 and was 31.6%
and 32.3% of sales in First Half 1995 and First Half 1994,
respectively.
The increase in gross profit during 1995 principally reflects
the higher sales volume discussed above. The increased gross
profit margin in Second Quarter 1995 compared to Second
Quarter 1994 primarily reflects efficiencies gained through
these higher volumes. The decrease in gross profit margin in
First Half 1995 from First Half 1994 reflects a shift in
product mix from higher margin VideoCipher RS TM analog
satellite receiver consumer modules to DigiCipher TM digital
compression products, which initially carry lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses
increased $13 to $59 in Second Quarter 1995 from $45 in
Second Quarter 1994, and increased as a percentage of sales
to 10% in Second Quarter 1995 from 9% in Second Quarter 1994.
SG&A expenses increased $38 to $123 in First Half 1995 from
$85 in First Half 1994 and increased as a percentage of sales
to 10% in First Half 1995 compared to 9% in First Half 1994.
The increase in SG&A expense in both Second Quarter 1995 and
First Half 1995 over the comparable 1994 periods, reflects
higher sales volume and additional marketing and selling
costs incurred by the Company to increase its sales force,
field support and marketing activities to take advantage of
increased growth opportunities in international cable and
satellite television and worldwide telecommunications
markets. The 1995 expenses also include $5 and $12, in
Second Quarter 1995 and First Half 1995, respectively,
related to a national advertising campaign to support sales
of C-Band satellite systems as well as a $6 provision during
the First Half 1995 related to the potential uncollectibility
of certain receivables.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expense was $37 in Second
Quarter 1995 compared to $27 in Second Quarter 1994 and was
6% and 5% of sales, respectively. R&D expense for First Half
1995 and First Half 1994 was $71 and $53, respectively, and
was 6% of sales in each period. This level of spending,
principally focused on the Broadband Communications business,
reflects continued development of the second generation of
cable set-top terminals, which incorporate digital
compression and multimedia capabilities; development of
enhanced addressable analog terminals; development of
advanced digital systems for cable and satellite television
distribution; and product development through strategic
alliances. Emerging R&D activities include development of
broadband telephony products and interactive multimedia
technologies for broadband networks. The Company's research
and development expenditures are expected to approximate $130
for the year ending December 31, 1995.
NET INTEREST EXPENSE
Net interest expense was $12 in Second Quarter 1995 compared
to $14 in Second Quarter 1994, and $25 for First Half 1995
compared to $27 in First Half 1994. The levels of interest
expense reflect lower weighted average borrowings in 1995
partially offset by higher interest rates.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 112, Employers'
Accounting for Postemployment Benefits ("SFAS No. 112"). As
a result of adopting SFAS No. 112, the Company recorded a
cumulative effect charge to income of $2.
INCOME TAXES
The effective income tax rates increased to 32.5% and 27.8%
in Second Quarter 1995 and First Half 1995, respectively,
from 14.1% and 15.5% in Second Quarter 1994 and First Half
1994, respectively. The increases in the effective tax rates
in 1995 are attributable to the Company having a valuation
allowance related to domestic deferred tax assets in 1994
which was reduced during 1994, to the extent that domestic
taxable income was generated. As of December 31, 1994, the
majority of the Company's domestic deferred tax assets were
determined to be realizable and therefore there was no
valuation allowance impact on income taxes in 1995. In
addition, during First Half 1995, the Company recorded a $12
credit to income related to the settlement of certain tax
matters.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, working capital was $292 compared to $213
at December 31, 1994. The working capital increase of $78
was due principally to an inventory build-up to support
business growth and new products and increased deferred tax
assets. Based on current levels of order input and backlog,
as well as significant sales agreements not yet reflected in
order and backlog levels, the Company believes that
operational working capital levels are appropriate to support
future operations and the rollout of new products. There can
be no assurance, however, that future industry specific
developments or general economic trends will not alter the
Company's working capital requirements. At June 30, 1995,
the Company had borrowings of $170 under its revolving credit
facilities and credit commitments, which the Company had not
borrowed against, of $330.
In January 1995, CommScope, Inc., an indirect wholly-owned
subsidiary of the Company, entered into an $11 loan agreement
in connection with the issuance of notes by the Alabama State
Industrial Development Authority. See Note 3 to the
consolidated financial statements.
During First Half 1995, the Company invested $64 in equipment
and facilities. These capital expenditures were used to
expand capacity to meet increased current and future demands
for analog and digital products, coaxial cable and
rectifiers. Capital expenditures for the year ending
December 31, 1995 are expected to approximate $180.
At June 30, 1995, the Company had $17 of cash and cash
equivalents on hand compared to $5 at December 31, 1994. At
June 30, 1995, long-term debt, including current maturities,
was $738 compared to $797 at December 31, 1994.
The Company's principal source of liquidity both on a short-
term and long-term basis is cash flow provided by operations.
Occasionally, however, the Company may borrow against its
revolving credit facilities to supplement cash flow from
operations. The Company believes that, based upon an
analysis of its consolidated financial position, its cash
flow during the past 12 months and the expected results of
operations in the future, operating cash flow and available
funding under its revolving credit facilities will be
adequate to fund operations, research and development
expenditures, capital expenditures and debt service for the
next 12 months. The Company intends to repay its remaining
indebtedness primarily with cash flow from operations. There
can be no assurance, however, that future industry specific
developments or general economic trends will not adversely
affect the Company's operations or its ability to meet its
cash requirements.
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The Company held its Annual Meeting of Stockholders (the
"Meeting" ) on April 26, 1995.
At the Meeting, the stockholders approved and adopted an
amendment to the Company's Amended and Restated Certificate
of Incorporation to increase the number of shares of
Common Stock that the Company has the authority to issue
from 175,000,000 to 400,000,000. 96,483,054 votes were
cast for the approval of the amendment, 15,484,381 votes
were cast against the approval of the amendment, and there
were 299,044 abstentions.
Also at the Meeting, the stockholders approved the
General Instrument Corporation Annual Incentive Plan for
the purpose of qualifying the compensation payable to the
Chief Executive Officer under the Annual Incentive Plan as
performance based compensation eligible for exclusion from
the tax deduction limitation of Section 162(m) of the
Internal Revenue Code. 108,398,923 were cast for the
approval of the amendment, 3,536,936 votes were cast
against the approval of the amendment, and there were
330,620 abstentions.
Four directors were nominated for election at the Meeting
and each was elected. John Seely Brown received
111,828,826 votes for election and 437,653 votes were
withheld. Theodore J. Forstmann received 111,640,582
votes for election and 625,897 votes were withheld. Morton
M. Meyerson received 111,820,442 votes for election and
446,037 votes were withheld. Felix G. Rohaytn received
111,814,793 votes for election and 451,686 votes were
withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
(b) Report on Form 8-K
The Company filed a report on Form 8-K dated April
17, 1995 reporting the release of the Company's
operating results for the three months ended March 31,
1995.
<PAGE>
ANNEX G
Excerpts from General Instrument Corporation
1995 Proxy Statement
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors consists of three classes. Directors hold office for
staggered terms of three years and until their successors have been duly elected
and qualified. One of the three classes will be elected each year at the Annual
Meeting of Stockholders to succeed the directors whose terms are ending. The
directors in Class I and Class II are serving terms ending at the Annual Meeting
of Stockholders in 1996 and 1997, respectively.
Four directors in Class III are to be elected at the 1995 Annual Meeting;
and proxies cannot be voted for more than four nominees. The directors so
elected will hold office as directors until the 1998 Annual Meeting of
Stockholders and until their respective successors have been duly elected and
qualified.
Unless otherwise directed, proxies in the accompanying form will be voted
FOR the nominees listed below. If any one or more of the nominees is unable to
serve for any reason or withdraws from nomination, proxies will be voted for the
substitute nominee or nominees, if any, proposed by the Board of Directors. The
Board has no knowledge that any nominee will or may be unable to serve or will
or may withdraw from nomination. All of the following nominees are present
directors of the Company whose terms end at the 1995 Annual Meeting. Information
concerning nominees for terms ending at the 1998 Annual Meeting of Stockholders
and for directors in Class I and Class II is set forth below.
NOMINEES FOR TERMS ENDING AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS
JOHN SEELY BROWN, age 54, has been a director of the Company since July
1993. He has been Chief Scientist of Xerox Corporation since 1992 and corporate
vice president of Xerox Corporation since 1990. From 1986 to 1990 he was Vice
President, Advanced Research, Palo Alto Research Center, of Xerox Corporation
and Associate Director of the Institute for Research on Learning. He is also the
director of the Xerox Palo Alto Research Center. He is a Fellow of the American
Association for Artificial Intelligence and a member of the National Academy of
Education.
THEODORE J. FORSTMANN, age 55, served as a director of General Instrument
Corporation of Delaware ("GI Delaware"), the Company's sole direct subsidiary,
from August 1990 to March 1992, when he was elected to serve as a director of
the Company. He has been a General Partner of FLC Partnership, L.P., the General
Partner of Forstmann Little & Co., since he co-founded Forstmann Little & Co. in
1978. He is a director of The Topps Company, Inc. and Department 56, Inc.
MORTON H. MEYERSON, age 56, has been a director of the Company since July
1993. Since 1992, he has served as Chairman and Chief Executive Officer of Perot
Systems Corporation, a computer and communication services company. From 1989 to
1992, he was a private investor. He was President from 1979 to 1986, and Vice
Chairman in 1986, of Electronic Data Systems Corp., a company which designs,
installs and operates business information and communication systems. He serves
on a number of corporate and advisory boards, including Energy Service Company,
Inc., the National Park Foundation, the School of American Research in Santa Fe
and the Wharton School of Business of the University of Pennsylvania; SEI Center
for Advanced Studies in Management.
FELIX G. ROHATYN, age 66, has been a director of the Company since October
1993. He has been a general partner of Lazard Freres & Co., Investment Bankers,
since 1960 and served as Chairman of the Municipal Assistance Corporation for
the City of New York from 1975 to October 1993. He is a director of Pfizer Inc.
and Howmet Corporation.
2
<PAGE>
DIRECTORS WHOSE TERMS END AT THE 1996 ANNUAL MEETING OF STOCKHOLDERS
DANIEL F. AKERSON, age 46, has served as Chairman of the Board and Chief
Executive Officer of the Company since August 1993 and as a director of the
Company since July 1993. He was President of the Company from August 1993 to
October 1993. He served as Chief Operating Officer and President of MCI
Communications Corporation ("MCI") from 1992 to August 1993. He served as
Executive Vice President and Group Executive of MCI from 1990 to 1992, Executive
Vice President and Chief Financial Officer of MCI from 1987 to 1990, and Senior
Vice President of MCI from 1987 to 1988, and held various positions within MCI
since 1983. Mr. Akerson is a General Partner of FLC Partnership, L.P., the
General Partner of Forstmann Little & Co.
FRANK M. DRENDEL, age 50, served as a director of GI Delaware and its
predecessors from 1987 to March 1992, when he was elected to serve as a director
of the Company. He has served as Chairman and President of CommScope, Inc., a
subsidiary of the Company ("CommScope"), since 1986 and has served as Chief
Executive Officer of CommScope since 1976. Mr. Drendel was Executive Vice
President of the predecessor to the Company from September 1986 to November
1988. From February 1981 to September 1986, Mr. Drendel was Executive Vice
President and, from July 1982 to September 1986, he was Vice Chairman of the
Board of M/A-COM, Inc. Mr. Drendel is a director of Alcatel Alsthom Compagnie
Generale d'Electricite.
STEVEN B. KLINSKY, age 38, served as a director of GI Delaware from August
1990 to March 1992, when he was elected to serve as a director of the Company.
He has been a General Partner of FLC Partnership, L.P., the General Partner of
Forstmann Little & Co., since December 1986.
PAUL G. STERN, age 56, has been a director of the Company since February
1994. He has been associated with Forstmann Little & Co. since July 1993. From
March 1989 through March 1993, he served as Chairman and Chief Executive Officer
of Northern Telecom Ltd., a manufacturer of digital telecommunications
equipment. He is a director of The Dow Chemical Company, LTV Steel Co., Inc.,
Varian Associates, Inc. and Whirlpool Corporation. Mr. Stern also serves on the
White House National Security Telecommunications Advisory Committee.
ROBERT S. STRAUSS, age 76, has been a director of the Company since December
1992. He was a director of GI Delaware from August 1990 to September 1991. Mr.
Strauss, a founder of and partner in the law firm of Akin, Gump, Strauss, Hauer
& Feld, served as United States Special Trade Representative from 1977 to 1979
and as U.S. Ambassador to the Soviet Union and, upon its dissolution, to the
Russian Federation from August 1991 to November 1992. Mr. Strauss is a director
of Archer Daniels Midland Co.
DIRECTORS WHOSE TERMS END AT THE 1997 ANNUAL MEETING OF STOCKHOLDERS
LYNN FORESTER, age 40, has been a director of the Company since February
1995. She has been President and Chief Executive Officer of FirstMark Holdings,
Inc., an owner and operator of telecommunications companies, since 1984. From
1989 to December 1994, she was also Chairman and Chief Executive Officer of TPI
Communications International, Inc., a radio common carrier and paging company.
She is a member of the U.S. Advisory Council on the National Information
Infrastructure.
NICHOLAS C. FORSTMANN, age 48, served as a director of GI Delaware from
August 1990 to March 1992, when he was elected to serve as a director of the
Company. He has been a General Partner of FLC Partnership, L.P., the General
Partner of Forstmann Little & Co., since he co-founded Forstmann Little & Co. in
1978. He is a director of The Topps Company, Inc. and Department 56, Inc.
RICHARD S. FRIEDLAND, age 44, has been a director of the Company since
October 1993. He became President and Chief Operating Officer of the Company and
GI Delaware in October 1993. He was Chief Financial Officer of the Company and
GI Delaware from March 1992 to January 1994 and Vice President, Finance of the
Company from May 1991 to October 1993. He was Vice President-Finance and
Assistant Secretary of GI Delaware from October 1990 to October 1993 and Vice
President and Controller of GI Delaware from November 1988 to January 1994. He
is a director of Department 56, Inc.
3
<PAGE>
J. TRACY O'ROURKE, age 60, served as a director of GI Delaware from
September 1990 to March 1992, when he was elected to serve as a director of the
Company. He has been Chairman and Chief Executive Officer of Varian Associates,
Inc., a manufacturer of electronic devices, semiconductor manufacturing
equipment and analytical instruments, since early 1990. Mr. O'Rourke was
Executive Vice President and Chief Operating Officer of Rockwell International
from 1989 to 1990 and President of Allen-Bradley Inc., an electrical equipment
manufacturer, from 1981 to 1989. He is a director of National Semiconductor
Corp.
FURTHER INFORMATION CONCERNING THE BOARD
OF DIRECTORS AND COMMITTEES
The Board of Directors of the Company directs the management of the business
and affairs of the Company, as provided by Delaware law, and conducts its
business through meetings of the Board and three standing committees: Executive,
Audit and Compensation. In addition, from time to time, special committees may
be established under the direction of the Board when necessary to address
specific issues. The Company has no nominating or similar committee.
COMMITTEES OF THE BOARD -- BOARD MEETINGS
The Board of Directors of the Company held five meetings in 1994. Each
incumbent director attended 75% or more of the aggregate of (i) meetings of the
Board held during the period for which he served as a director and (ii) meetings
of all committees held during the period for which he served on those
committees, other than Steven B. Klinsky. Average attendance at all such
meetings of the Board and committees was approximately 90%.
The EXECUTIVE COMMITTEE of the Board has the authority, between meetings of
the Board of Directors, to exercise all powers and authority of the Board in the
management of the business and affairs of the Company that may be lawfully
delegated to it under Delaware law. The Committee consists of Daniel F. Akerson,
Theodore J. Forstmann and Steven B. Klinsky. The Executive Committee held 4
meetings in 1994.
The AUDIT COMMITTEE's principal functions are to review the scope of the
annual audit of the Company by its independent auditors, review the annual
financial statements of the Company and the related audit report of the Company
as prepared by the independent auditors, recommend the selection of independent
auditors each year and review audit and any non-audit fees paid to the Company's
independent auditors. The audit reports of the Internal Audit Department are
also available for review by the Audit Committee, and the head of that
department attends Audit Committee meetings and gives reports to and answers
inquiries from the Audit Committee. The Audit Committee reports its findings and
recommendations to the Board for appropriate action. The Audit Committee is
composed of three non-employee directors: J. Tracy O'Rourke, Chairman; John
Seely Brown; and Felix G. Rohatyn. The Committee held 4 meetings in 1994.
The COMPENSATION COMMITTEE is responsible for executive compensation,
including recommending to the Board of Directors the compensation to be paid to
the Chief Executive Officer and determining the compensation for all other
executive officers. The Compensation Committee is also responsible for
administering the General Instrument Corporation 1993 Long-Term Incentive Plan
(the "1993 Long-Term Incentive Plan") and the Annual Incentive Plan. The
Committee consists of Nicholas C. Forstmann, Chairman; Morton H. Meyerson; and
Robert S. Strauss. Messrs. Forstmann, Meyerson and Strauss, who are non-employee
directors, are "disinterested persons" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934 (the "Exchange Act"). The Committee held 7
meetings in 1994.
4
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In connection with the Company's initial public offering in June 1992, the
Company's Board of Directors established a Compensation Committee composed of
three non-employee directors. Messrs. Nicholas C. Forstmann, Morton H. Meyerson
and Robert S. Strauss served as members of the Compensation Committee during
1994, and are currently the members of the Compensation Committee.
Nicholas C. Forstmann served as President of the Company from June 30, 1990
through March 30, 1992, which was prior to the Company's initial public offering
in June 1992. Nicholas C. Forstmann received no compensation from the Company
for services rendered in such capacity.
An affiliate of Forstmann Little & Co. provides aircraft maintenance
services to the Company and charged the Company $2,137,000 for services in 1994.
DIRECTOR COMPENSATION
Prior to July 1993, directors did not receive any fees for serving on the
Company's Board of Directors, or any committees thereof, but were reimbursed for
their out-of-pocket expenses arising from attendance at meetings of the
Company's Board of Directors or committees thereof. In addition, each director
who is neither a partner in FLC Partnership, L.P., the general partner of
Forstmann Little & Co., nor a current or former officer of the Company or its
subsidiaries, was granted an option to purchase 80,000 shares of Common Stock in
connection with his election to the board of directors of GI Delaware or, after
the Company's initial public offering in June 1992, the Board of Directors of
the Company.
Effective as of July 28, 1993 (as adjusted on February 15, 1994 to reflect
the two-for-one split of Common Stock), the Board of Directors approved the
following standard compensation arrangements for non-employee directors: (i)
each non-employee director receives $1,000 for attending, whether in person or
by telephone, each meeting of the Board of Directors or any committees thereof
of which he or she is a member and is reimbursed for all actual expenses in
connection with attending any meeting of the Board of Directors or any
committees thereof of which he or she is a member (limited to the cost of first
class travel on a commercial airline with respect to air travel expenses); (ii)
the Company provides, for the benefit of each non-employee director, an
insurance policy in the face amount of $200,000, payable in the event of
accidental death or dismemberment of the director while in attendance at, or
traveling in connection with, a meeting of the Board of Directors or any
committee thereof, or while engaged in or traveling in connection with other
business of the Company; and (iii) each non-employee director elected on or
after July 28, 1993 receives, effective as of the date of such election, a grant
of an option to purchase 80,000 shares of Common Stock pursuant to the 1993
Long-Term Incentive Plan at an exercise price per share equal to the fair market
value of a share of Common Stock on the date of grant, which option becomes
exercisable with respect to one-third of the underlying shares on each of the
first three anniversaries of the date of grant. The Company also requests that
each non-employee director directly or indirectly own at least 1,000 shares of
Common Stock while a director of the Company. The non-employee directors of the
Company who are partners of Forstmann Little & Co. have declined to receive any
of the foregoing compensation.
5
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth individual compensation information for all
services rendered in all capacities during the periods described below for the
individual who served as Chief Executive Officer during 1994 and the four most
highly compensated executive officers (other than the Chief Executive Officer)
who were serving as executive officers at December 31, 1994. The following table
sets forth compensation information for each of those individuals for the fiscal
years ended December 31, 1994, 1993 and 1992.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
---------------------------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (A) COMPENSATION (B) OPTIONS(#)(C) COMPENSATION
- -------------------------- ----------- ------------- -------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Daniel F. Akerson......... 1994 $ 838,367 $728,000 $ 66,365(d) 150,000 $ 18,190(e)
Chairman of the 1993 306,119(f) 560,000 22,553(d) 800,000 49,901
Board of Directors 1992 -- -- -- -- --
and Chief Executive
Officer
Richard S. Friedland...... 1994 420,000 327,600 -- 270,000 5,460(g)
President, Chief 1993 327,340 67,840 -- 236,000 5,457
Operating Officer 1992 274,167 -- 449,685(h) -- 5,324
and Director of the
Company
Frank M. Drendel.......... 1994 398,808 163,757 -- 72,000 17,154(i)
Chairman, President 1993 398,808 81,385 -- 34,000 22,314
and Chief Executive 1992 398,808 -- -- -- 22,660
Officer of
CommScope and Director
of the Company
J.A. Blanchard, III....... 1994 317,137(j) 206,139 -- 120,000 5,380(g)
Executive Vice 1993 -- -- -- -- --
President 1992 -- -- -- -- --
Thomas A. Dumit........... 1994 310,999 134,753 -- 48,000 5,460(g)
Vice President, 1993 299,000 49,351 -- 30,000 5,457
General Counsel and 1992 285,000 -- -- -- 5,324
Secretary
<FN>
- ------------------------
(a) Amounts reported for 1994 reflect cash bonus awards paid pursuant to the
Annual Incentive Plan in 1995 with respect to performance in 1994. Amounts
reported for 1993 reflect cash bonus awards paid pursuant to the Annual
Incentive Plan in 1993 or 1994 with respect to performance in 1993. The
Company did not have a management bonus plan for 1992.
(b) Unless otherwise indicated, with respect to any individual named in the
above table, the aggregate amount of perquisites and other personal
benefits, securities or property was less than either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
(c) Reflects the number of shares of Common Stock underlying options granted.
All of the options were granted pursuant to the 1993 Long-Term Incentive
Plan. Each grant set forth for 1994 was made in connection with the
cancellation of an option to purchase the same number of shares,
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
previously granted in 1994, except the grant set forth to Mr. Friedland,
with respect to which an option to purchase 70,000 shares had previously
been granted in 1994 and the remainder had been granted in 1993. Those
options granted, and subsequently cancelled, in 1994 are not reflected in
the table for any named individual. Options granted to Mr. Friedland and
reflected in the table for 1993 include an option to purchase 200,000
shares which was cancelled in connection with the regrant in 1994 of an
option to purchase the same number of shares. See "-- Option Grants in Last
Fiscal Year," "-- Option Repricing" and "Compensation Committee Report on
Compensation of Executive Officers of the Company -- Option Repricing."
(d) Reflects cost and tax reimbursement for expenses incurred by Mr. Akerson
for travel to Chicago, the location of the Company's executive offices.
(e) Reflects payment by the Company in 1994 of (i) premiums of $960 for term
life insurance on behalf of Mr. Akerson, (ii) premiums of $12,730 under a
Split Dollar Agreement regarding a life insurance policy in respect of Mr.
Akerson, and (iii) the matching contribution of $4,500 under the Savings
Plan for Mr. Akerson.
(f) Reflects compensation of Mr. Akerson from August 13, 1993, when Mr. Akerson
joined the Company as an executive officer, through December 31, 1993.
(g) Reflects payment by the Company in 1994 of (i) premiums for term life
insurance of $960 on behalf of each of Messrs. Friedland and Dumit and $880
on behalf of Mr. Blanchard, and (ii) the matching contribution by the
Company under the Savings Plan in the amount of $4,500 for 1994 for each of
Messrs. Friedland, Blanchard and Dumit.
(h) Reflects the excess of the fair market value of securities purchased from
the Company in March 1992 over the price paid for such securities.
(i) Reflects (i) the matching contribution under the CommScope Savings Plan in
the amount of $2,659 for 1994, (ii) the allocation of $13,280 to Mr.
Drendel's account under the CommScope Savings Plan for 1994, and (iii)
payment by CommScope in 1994 of premiums of $1,215 for term life insurance
on behalf of Mr. Drendel.
(j) Reflects compensation of Mr. Blanchard from January 12, 1994, when Mr.
Blanchard joined the Company as an executive officer, through December 31,
1994.
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1994
The following table sets forth further information with respect to grants of
stock options during the fiscal year ended December 31, 1994 to the executives
listed in the Summary Compensation Table. These grants were made pursuant to the
1993 Long-Term Incentive Plan and are reflected in the Summary Compensation
Table. The per share exercise price of each option equals the closing market
price per share of the Common Stock on the date of grant. No stock appreciation
rights were granted during fiscal year 1994.
10
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------------------- -----------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION
NAME (A) FISCAL YEAR (B) ($/SHARE) DATE 5%($) 10%($)
- -------------------- ---------------- ----------------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel F. Akerson 150,000(c) 6.2% $ 25.1875 3/23/2004 $2,376,045 $ 6,021,360
Richard S. Friedland 270,000(c) 11.2% 25.1875 3/23/2004 4,276,881 10,838,448
Frank M. Drendel 72,000(c) 3.0% 25.1875 3/23/2004 1,140,502 2,890,253
J.A. Blanchard, III 120,000(c) 5.0% 25.1875 3/23/2004 1,900,836 4,817,088
Thomas A. Dumit 48,000(c) 2.0% 25.1875 3/23/2004 760,334 1,926,835
<FN>
- --------------------------
(a) Each grant set forth in this table was made in connection with the
cancellation of all options granted from October 27, 1993 through February
2, 1994 ("Old Options"). On March 23, 1994, each holder of Old Options was
granted an option to purchase the same number of shares of Common Stock
that had been subject to his or her Old Option. Old Options were granted on
February 2, 1994 at an exercise price of $29.6875, to become exercisable
with respect to one-third of the shares on February 2 in each of 1995, 1996
and 1997, and with an expiration date of February 2, 2004, to the following
individuals listed in the table: Mr. Akerson, an option to purchase 150,000
shares; Mr. Friedland, an option to purchase 70,000 shares; Mr. Drendel, an
option to purchase 72,000 shares; and Mr. Dumit, an option to purchase
48,000 shares. An Old Option to purchase 120,000 shares was granted on
January 12, 1994 to Mr. Blanchard at an exercise price of $29.9375, to
become exercisable with respect to one-third of the shares on January 12 in
each of 1995, 1996 and 1997, and with an expiration date of January 12,
2004. An Old Option to purchase 200,000 shares was granted on October 27,
1993 to Mr. Friedland at an exercise price of $28.875, to become
exercisable with respect to one-third of the shares on October 27 in each
of 1994, 1995 and 1996. See " -- Option Repricing" and "Compensation
Committee Report on Compensation of Executive Officers of the Company --
Option Repricing."
(b) Total options granted to employees in 1994 do not include Old Options
granted in 1994 to purchase an aggregate of 1,903,900 shares, but do
include the options granted in connection with the cancellation of the Old
Options.
(c) The option becomes exercisable with respect to one-third of the shares
covered thereby on March 23 in each of 1995, 1996 and 1997.
</TABLE>
OPTION EXERCISES AND VALUES FOR FISCAL YEAR 1994
The following table sets forth as of December 31, 1994, for each of the
executives listed in the Summary Compensation Table (i) the total number of
shares received upon exercise of options during fiscal 1994, (ii) the value
realized upon such exercise, (iii) the total number of unexercised options to
purchase Common Stock (exercisable and unexercisable) held and (iv) the value of
such options which were in-the-money at December 31, 1994 (based on the
difference between the closing price of Common Stock at fiscal year end December
31, 1994 and the exercise price of the option). None of the executive officers
holds SARs.
11
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE- MONEY OPTIONS AT
ACQUIRED ON VALUES FISCAL YEAR-END (#) FISCAL YEAR-END ($)(A)
EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel F. Akerson 15,000 $ 91,875 484,998 450,002 $3,205,819 $ 2,778,556
Richard S. Friedland 0 -- 9,000 297,000 127,125 1,680,750
Frank M. Drendel 893,514 24,214,197 0 97,500 -- 706,688
J.A. Blanchard, III 0 -- 0 120,000 -- 577,500
Thomas A. Dumit 0 -- 7,500 70,500 105,938 548,813
<FN>
- ------------------------------
(a) Based on the difference between the closing price of $30.00 per share at
December 31, 1994, as reported on the New York Stock Exchange Composite
Tape, and the exercise price of the option.
</TABLE>
OPTION REPRICING
The following table sets forth certain information with respect to repricing
of options from June 1992, when the Company first became a reporting company
under the Exchange Act, through the fiscal year ended December 31, 1994, for all
executive officers of the Company, including those listed in the Summary
Compensation Table. For further information regarding such repricing of options,
see "Compensation Committee Report on Compensation of Executive Officers of the
Company -- Option Repricing."
TEN-YEAR OPTION REPRICING
<TABLE>
<CAPTION>
NUMBERS OF LENGTH OF
SECURITIES MARKET PRICE EXERCISE ORIGINAL OPTION
UNDERLYING OF STOCK AT PRICE AT TIME NEW TERM REMAINING
OPTIONS TIME OF OF REPRICING EXERCISE AT DATE OF
REPRICED OR REPRICING OR OR AMENDMENT PRICE REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) ($) ($) AMENDMENT
- --------------------------------------------- ------- ----------- ------------- ------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel F. Akerson ........................... 3/23/94 150,000 $ 25.1875 $ 29.6875 $ 25.1875 9 yrs., 10 mos.
Chairman and Chief Executive Officer
Richard S. Friedland ........................ 3/23/94 200,000 25.1875 28.875 25.1875 9 yrs., 7 mos.
President and Chief Operating Officer 3/23/94 70,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Frank M. Drendel ............................ 3/23/94 72,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
President, CommScope, Inc.
J.A. Blanchard, III ......................... 3/23/94 120,000 25.1875 29.9375 25.1875 9 yrs., 10 mos.
Executive Vice President
Thomas A. Dumit ............................. 3/23/94 48,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Vice President, General Counsel and
Secretary
Paul J. Berzenski ........................... 3/23/94 20,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Vice President and Controller
Charles T. Dickson .......................... 3/23/94 90,000 25.1875 29.875 25.1875 9 yrs., 10 mos.
Vice President and Chief Financial Officer
Lee R. Keenan ............................... 3/23/94 24,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Vice President -- Human Resources
Ronald A. Ostertag .......................... 3/23/94 72,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Vice President and President, Power
Semiconductor Division
Richard C. Smith ............................ 3/23/94 24,000 25.1875 29.6875 25.1875 9 yrs., 10 mos.
Vice President -- Taxes, Treasurer and
Assistant Secretary
</TABLE>
12
<PAGE>
EMPLOYMENT ARRANGEMENTS
In November 1988, Frank M. Drendel entered into an employment agreement with
GI Delaware and CommScope, providing for his employment as President and Chief
Executive Officer of CommScope for an initial term ending on November 28, 1991.
The agreement provides for a minimum salary, which is less than Mr. Drendel's
current salary, and provides that Mr. Drendel will participate, on a
substantially similar basis as the presidents of the other broadband divisions
of the Company, in any management incentive compensation plan for executive
officers that the Company maintains. Commencing on November 29, 1989 (subject to
early termination by reason of death or disability or for cause), the agreement
extends automatically so that the remaining term is always two years, unless
either party gives notice of termination, in which case the agreement will
terminate two years from the date of such notice. As of the date of this Proxy
Statement, neither party has given notice of termination. Pursuant to the
agreement, Mr. Drendel is eligible to participate in all benefit plans available
to CommScope senior executives. The agreement prohibits Mr. Drendel, for a
period of five years following the term of the agreement, from engaging in any
business in competition with the business of CommScope or the other broadband
communications businesses of GI Delaware, in any country where CommScope or GI
Delaware's other broadband communications divisions then conduct business.
The Company currently does not have a formal severance policy for executive
officers. In October 1993, the Compensation Committee delegated to the Chief
Executive Officer the authority to determine severance, on a case-by-case basis,
for eligible corporate officers within specified guidelines. These guidelines
are as follows: (i) base salary continuation for up to twelve months; (ii)
payment of a prorated portion of his target bonus for the year in which the
officer is terminated (based on the number of days of employment for that year);
and (iii) continuation of medical, dental and life insurance until the earlier
of the end of the period of base salary continuation or the individual's
eligibility for coverage under another employer's plan. The Chief Executive
Officer will, on a case-by-case basis, determine whether terminated officers
should receive severance and, if so, will determine, within the guidelines set
forth above, severance packages based on his subjective assessment of various
factors, including the officer's contribution to the Company, years of service
and prior compensation from the Company.
Except for the General Instrument Corporation Pension Plan for Salaried and
Hourly Paid Non-Union Employees (the "GI Pension Plan"), the General Instrument
Corporation Supplemental Executive Retirement Plan (the "GI SERP") and the
CommScope, Inc. Supplemental Executive Retirement Plan (the "CommScope SERP")
described below, the Savings Plan, the CommScope Savings Plan, the 1993
Long-Term Incentive Plan, and the Annual Incentive Plan, and as described above,
there are no compensatory plans or arrangements with respect to any of the
executive officers named in the Summary Compensation Table which are triggered
by, or result from, the resignation, retirement or any other termination of such
executive's employment, a change-in-control of the Company or a change in such
executive's responsibilities following a change-in-control.
18
<PAGE>
GI PENSION PLAN AND GI SERP
The following table shows, as of December 31, 1994, estimated aggregate
annual benefits payable upon retirement at age 65 under the GI Pension Plan and
the GI SERP.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS
UPON RETIREMENT, WITH
AVERAGE ANNUAL BASIC REMUNERATION YEARS OF SERVICE INDICATED
DURING SIXTY CONSECUTIVE CALENDAR --------------------------------------------
MONTHS PRIOR TO RETIREMENT 15 YEARS 20 YEARS 25 YEARS 30 YEARS
- ------------------------------------------------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
$125,000.......................................................... $ 26,302 $ 35,069 $ 43,836 $ 52,603
150,000.......................................................... 31,927 42,569 53,211 63,853
175,000.......................................................... 37,552 50,069 62,586 75,103
200,000.......................................................... 43,177 57,569 71,961 86,353
225,000.......................................................... 48,802 65,069 81,336 97,603
242,280.......................................................... 52,690 70,253 87,816 105,379
250,000.......................................................... 52,690 70,253 87,816 105,379
300,000.......................................................... 52,690 70,253 87,816 105,379
</TABLE>
The compensation covered by the GI Pension Plan and the GI SERP is
substantially that described under the "Salary" column of the Summary
Compensation Table. However, pursuant to Section 401(a)(17) of the Internal
Revenue Code, the maximum amount of compensation that can be considered in
computing benefits under the GI Pension Plan for 1994 was $150,000. Under the GI
SERP, compensation for 1994 in excess of $150,000, but not exceeding $242,280,
is considered in computing benefits. Accordingly, the total compensation covered
by the GI Pension Plan and the GI SERP for the calendar year 1994 for each of
Messrs. Akerson, Friedland, Blanchard and Dumit was $242,280. Credited years of
service under both the GI Pension Plan and the GI SERP as of December 31, 1994
are as follows: Messrs. Akerson (1 year), Friedland (16 years), and Dumit (3
years). As of December 31, 1994, Mr. Blanchard had not completed one year of
eligible service with the Company for purposes of the GI Pension Plan and the GI
SERP. Mr. Drendel does not participate in the GI Pension Plan or the GI SERP
because he is an employee of CommScope. Estimated benefits set forth in the
Pension Plan Table were calculated on the basis of a single life annuity and
Social Security covered compensation as in effect during 1994. Such estimated
benefits are not subject to any deduction for Social Security or other offset
amounts.
COMMSCOPE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
CommScope maintains the CommScope SERP for the benefit of certain executives
of CommScope and its subsidiaries. The CommScope SERP provides for the payment
of a monthly retirement (or early retirement) benefit to participants who retire
from CommScope on or after age 65 (or, for early retirement benefits, on or
after age 55 with 10 years of service). Frank M. Drendel is the only executive
named in the Summary Compensation Table who participates in the CommScope SERP.
Mr. Drendel, as well as all other individuals who were participants in the
CommScope SERP on August 22, 1990, is fully vested in his benefits under the
CommScope SERP and, thus, could retire prior to attaining age 65 (or age 55 in
the case of early retirement) and receive a deferred benefit.
The monthly benefits provided under the CommScope SERP are payable over 15
years and are equal to one-twelfth of a specified percentage, which does not
exceed 50%, of the participant's highest consecutive 12 months earnings during
the participant's final 60 months of employment. Early retirement benefits are
subject to actuarial reductions. Based on compensation earned for the calendar
year which ended December 31, 1994, the estimated annual benefit payable to Mr.
Drendel on or after attaining age 65 is $132,936.
19
<PAGE>
OTHER RELATED PARTY TRANSACTIONS
CommScope, from time to time, leases aircraft from FMD Autocar Ltd. ("FMD"),
a corporation that is wholly owned by Frank M. Drendel. In 1994, CommScope made
lease payments to FMD for aircraft rentals in the amount of $50,484.
An affiliate of Forstmann Little & Co. provides aircraft maintenance
services to the Company and charged the Company $2,137,000 in 1994 for those
services.
The Company believes that the terms of these transactions were no less
favorable to CommScope and the Company, as the case may be, than the terms which
could be obtained from an unrelated third party.
<PAGE>
ANNEX H
Section 1300 et seq. of the
California Corporation Code
CALIFORNIA CORPORATIONS CODE
SECTIONS 1300-1304: DISSENTERS' RIGHTS
1300 SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR
MARKET VALUE; "DISSENTING SHARES" AND DISSENTING SHAREHOLDER.
(a) If the approval of the outstanding shares
(Section 152) of a corporation is required for a reorganization
under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds
shares to purchase for cash at their fair market value the shares
owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted
for any stock split, reverse stock split, or share dividend which
becomes effective thereafter.
(b) As used in this chapter, "dissenting shares"
means shares which come within all of the following descriptions:
(1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed on any
national securities exchange certified by the Commissioner of
Corporations under subdivision (o) of Section 25100 or (B) listed
on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however,
that this provision does not apply to any shares with respect to
which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for payment are
filed with respect to 5 percent or more of the outstanding shares
of that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of
record on the effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of
this paragraph applies in any case
<PAGE>
where the approval required by Section 1201 is sought by written
consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded
that the corporation purchase at their fair market value, in
accordance with Section 1301.
(4) Which the dissenting shareholder has submitted
for endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting
shareholder" means the recordholder of dissenting shares and
includes a transferee of record.
1301 DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR
PURCHASE OF SHARES.
(a) If, in the case of a reorganization, any
shareholders of a corporation have a right under Section 1300,
subject to compliance with paragraphs (3) and (4) of subdivision
(b) thereof, to require the corporation to purchase their shares
for cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304
and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting
shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under
such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose
their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the
corporation to purchase the shareholder's shares of cash under
Section 1300, subject to compliance with paragraphs (3) and (4) of
subdivision (b) thereof, and who desires the corporation to
purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not
effective for any purpose unless it is received by the corporation
or any transfer agent thereof (1) in the case of shares described
in clause (i) or (ii) of paragraph (1) of subdivision (b) of
Section 1300 (without regard to the provisos in that paragraph),
not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after
the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of
the shares held of record by the shareholder which the shareholder
demands that the corporation purchase
2
<PAGE>
and shall contain a statement of what such shareholder claims to
be the fair market value of those shares as of the day before the
announcement of the proposed reorganization or shortform merger.
The statement of fair market constitutes an offer by the
shareholder to sell the shares at such price.
1302 DISSENTING SHARES, STAMPING OR ENDORSING.
Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal
office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement
that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or
(b) if the shares are uncertificated securities, written notice of
the number of shares which the shareholder demands that the
corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation the new certificates,
initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of
the original dissenting holder of the shares.
1303 DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE
WITH INTEREST; TIME OF PAYMENT.
(a) If the corporation and the shareholder agree
that the shares are dissenting shares and agree upon the price of
the shares, the dissenting shareholder is entitled to the agreed
price with interest thereon at the legal rate on judgments from
the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306,
payment of the fair market value of dissenting shares shall be
made within 30 days after the amount thereof has been agreed or
within 30 days after any statutory or contractual conditions to
the reorganization are satisfied, whichever is later, and the case
of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
1304 DISSENTERS ACTIONS; JOINDER; CONSOLIDATION;
APPOINTMENT OF APPRAISERS.
(a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to
agree upon the fair market values of the shares, then the
shareholder demanding purchase of such shares as dissenting shares
or any
3
<PAGE>
interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder, but not thereafter, may file a complaint in the
superior court of the proper county praying the court to determine
whether the shares are dissenting shares or the fair market value
of the dissenting shares or both or may intervene in any action
pending on such a complaint.
(b) Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
(c) On the trial of the action, the court shall
determine the issues. If the status of the shares as dissenting
shares is in issue, the court shall first determine that issue.
If the fair market value of the dissenting shares is in issue, the
court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Certificate of Incorporation and Bylaws of GI provide for indemnification,
to the fullest extent permitted by the DGCL, of any person who is or was
involved in any manner in any investigation, claim or other proceeding, by
reason of the fact that such person is or was a director or officer of GI,
against all expenses and liabilities actually and reasonably incurred by such
person in connection with the investigation, claim or other proceeding. GI's
Bylaws also provide that GI may advance litigation expenses to a director,
officer, employee or agent upon receipt of an undertaking by or on behalf of
such director, officer, employee or agent to repay such amount if it is
ultimately determined that the director, officer, employee or agent is not
entitled to be indemnified by GI.
GI's Certificate of Incorporation provides that directors of GI shall not be
liable to GI or any of its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability in respect of (i) a breach
of the director's duty of loyalty to GI or its stockholders, (ii) any acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) any willful or negligent declaration of an
unlawful dividend, stock purchase or redemption, or (iv) any transaction from
which the director derived an improper personal benefit. GI's Certificate of
Incorporation also provides that if the DGCL is amended to permit further
elimination or limitation of the personal liability of directors, then the
liability of the directors of GI shall be eliminated or limited to the fullest
extent permitted by the DGCL as so amended.
GI has entered into agreements to indemnify its directors and officers in
addition to the indemnification provided for in GI's Certificate of
Incorporation and Bylaws. These agreements, among other things, will indemnify
GI's directors and officers to the fullest extent permitted by Delaware law for
certain expenses (including attorneys' fees), liabilities, judgments, fines and
settlement amounts incurred by such person arising out of or in connection with
such person's service as a director or officer of GI or an affiliate of GI.
Policies of insurance are maintained by GI under which its directors and
officers are insured, within the limits and subject to the limitations of the
policies, against certain expenses in connection with the defense of, and
certain liabilities which might be imposed as a result of, actions, suits or
proceedings to which they are parties by reason of being or having been such
directors or officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of August 30, 1995, among GI, NLC
Acquisition Corp. and Next Level (attached on Annex A to the Prospectus/Consent
Solicitation Statement).
3.1 Amended and Restated Certificate of Incorporation of GI.**
3.2 Certificate of Amendment to the Amended and Restated Certificate of GI.
3.3 Amended and Restated By-Laws of GI.*****
4.1 Specimen Form of GI's Common Stock Certificate.***
II-1
<PAGE>
4.2 Indenture, dated as of June 15, 1993, between General Instrument
Corporation and Continental Bank.****
5 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to the validity
of the securities being registered.
8 Opinion of Cooley Godward Castro Huddleson & Tatum as to certain tax
matters.
10.1 Second Amended and Restated Credit Agreement, dated as of June 30,
1994, among General Instrument Corporation, the banks and other financial
institutions from time to time parties thereto, Chemical Bank, as
Administrative Agent for the Banks, and Chemical Bank, Continental Bank N.A.,
Deutsche Bank AG, The Nippon Credit Bank, Ltd., The Bank of Nova Scotia, The
Toronto-Dominion Bank, National Westminster Bank PLC, and the Bank of Tokyo
Trust Company, as Co-agents.*****
10.2 Amended and Restated Guarantee, dated as of July 7, 1994, by the
Company in favor of Chemical Bank.*****
10.3 Amended and Restated Guarantee, dated as of July 7, 1994, by Cable/Home
Communication Corporation and CommScope, Inc. in favor of Chemical Bank.*****
10.4 Form of Employee Subscription Agreement, dated as of December 1990,
between the Company and certain Management Investors.*+
10.5 Form of Employee Subscription Agreement, dated as of March 21, 1992,
between GI and certain Management Investors.*+
10.6 Form of Waiver of Certain GI Rights under the agreement referred to in
10.5.*+
10.7 Form of Stock Option Agreement, dated as of August 15, 1990, in
connection with the purchase of CommScope (including form of Stockholder's
Agreement).*+
10.8 Form of Outside Director Stock Option Agreement (including form of
Outside Director Stockholder's Agreement).*+
10.9 Employment Agreement, dated as of November 28, 1988, between CommScope
and Frank M. Drendel.*+
10.10 Form of Indemnification Agreement between the Company and its directors
and executive officers.*****
10.11 Registration Rights Agreement between GI, GI Corporation of Delaware,
MBO-IV and Instrument Partners.*
10.12 Form of Amendment to Outside Director Stock Option Agreement (including
form of Outside Director Stockholder's Agreement) between the Company and each
of James M. Denny, J. Tracy O'Rourke, Derald H. Ruttenberg and William C.
Lowe.*+
10.13 The General Instrument Corporation 1993 Long-Term Incentive Plan
(including form of Stock Option Agreement).****+
10.14 General Instrument Corporation Annual Incentive Plan.*****+
10.15 Amendment, dated May 20, 1993, to the Employment Agreement referred to
in 10.9.****+
II-2
<PAGE>
10.16 GI Deferred Compensation Plan.*****+
11 Statement re computation of per share earnings.***** and ******
21 Subsidiaries of GI.****
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5).
23.2 Consent of Cooley Godward Castro Huddleson & Tatum (included in
Exhibit 8).
23.3 Consent of Deloitte & Touche LLP with respect to Next Level
Communications' financial statements
23.4 Consent of Deloitte & Touche LLP with respect to General Instrument
Corporation's financial statements
24 Power of Attorney (included on page II-4).
* Incorporated by reference from Registration Statement No. 33-46854.
** Incorporated by reference from Registration Statement No. 33-63152.
*** Incorporated by reference from Registration Statement No. 33-50215.
**** Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
***** Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
****** Incorporated by reference from Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995.
+ Management contract or compensatory plan.
(b) GI Financial Statement Schedules
I. Condensed financial information - Parent Company only
II. Valuation and Qualifying Accounts
The schedules appear at pages 16-18 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 included as Annex D to the
Prospectus/Consent Solicitation Statement. All other schedules have been
omitted because they are not applicable, not required or the information
required is included in the consolidated financial statements or notes thereto.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, 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 Chicago, State of
Illinois, on September 5, 1995.
GENERAL INSTRUMENT CORPORATION
By: /s/ Richard S. Friedland
Richard S. Friedland
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard S. Friedland, Charles T. Dickson,
Richard C. Smith and Thomas A. Dumit, and each of them, as his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, including any and all pre-effective and post-effective amendments,
and any and all documents in connection therewith, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, and hereby
ratifies, approves and confirms all that his said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes may lawfully do or cause to
be done by virtue hereof.
II-4
<PAGE>
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Daniel F. Akerson Chairman of the Board
Daniel F. Akerson and Director September 5, 1995
/s/ Richard S. Friedland President, Chief
Richard S. Friedland Executive Officer
and Director (Principal
Executive Officer) September 5, 1995
/s/ Charles T. Dickson Vice President and
Charles T. Dickson Chief Financial
Officer (Principal
Financial Officer) September 5, 1995
/s/ Paul J. Berzenski Vice President and
Paul J. Berzenski Controller (Principal
Accounting Officer) September 5, 1995
/s/ John Seely Brown Director September 5, 1995
John Seely Brown
/s/ Frank M. Drendel Director September 5, 1995
Frank M. Drendel
/s/ Lynn Forester Director September 5, 1995
Lynn Forester
/s/ Nicholas C. Forstmann Director September 5, 1995
Nicholas C. Forstmann
/s/ Theodore J. Forstmann Director September 5, 1995
Theodore J. Forstmann
/s/ Steven B. Klinsky Director September 5, 1995
Steven B. Klinsky
/s/ Morton H. Meyerson Director September 5, 1995
Morton H. Meyerson
/s/ J. Tracy O'Rourke Director September 5, 1995
J. Tracy O'Rourke
/s/ Felix G. Rohatyn Director September 5, 1995
Felix G. Rohatyn
II-5
<PAGE>
/s/ Paul G. Stern Director September 5, 1995
Paul G. Stern
/s/ Robert S. Strauss Director September 5, 1995
Robert S. Strauss
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ------- ------- -------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of
August 30, 1995, among GI, NLC Acquisition Corp.
and Next Level (attached on Annex A to the
Prospectus/Consent Solicitation Statement).
3.1 Amended and Restated Certificate of Incorporation
of GI.**
3.2 Certificate of Amendment to the Amended and Restated
Certificate of GI.
3.3 Amended and Restated By-Laws of GI.*****
4.1 Specimen Form of GI's Common Stock Certificate.***
4.2 Indenture, dated as of June 15, 1993, between
General Instrument Corporation and Continental
Bank.****
5 Opinion of Fried, Frank, Harris, Shriver &
Jacobson as to the validity of the securities
being registered.
8 Opinion of Cooley Godward Castro Huddleson &
Tatum as to certain tax matters.
10.1 Second Amended and Restated Credit Agreement,
dated as of June 30, 1994, among General
Instrument Corporation, the banks and other
financial institutions from time to time
parties thereto, Chemical Bank, as
Administrative Agent for the Banks, and
Chemical Bank, Continental Bank N.A.,
Deutsche Bank AG, The Nippon Credit Bank,
Ltd., The Bank of Nova Scotia, The Toronto-Dominion
Bank, National Westminster Bank PLC, and the
Bank of Tokyo Trust Company, as Co-agents.*****
10.2 Amended and Restated Guarantee, dated as of July
7, 1994, by the Company in favor of Chemical
Bank.*****
10.3 Amended and Restated Guarantee, dated as of July
7, 1994, by Cable/Home Communication Corporation
and CommScope, Inc. in favor of Chemical Bank.*****
10.4 Form of Employee Subscription Agreement, dated as
of December 1990, between the Company and certain
Management Investors.*+
1
<PAGE>
<S> <C> <C>
10.5 Form of Employee Subscription Agreement, dated as
of March 21, 1992, between GI and certain
Management Investors.*+
10.6 Form of Waiver of Certain GI Rights under the
agreement referred to in 10.5.*+
10.7 Form of Stock Option Agreement, dated as of August
15, 1990, in connection with the purchase of
CommScope (including form of Stockholder's
Agreement).*+
10.8 Form of Outside Director Stock Option Agreement
(including form of Outside Director Stockholder's
Agreement).*+
10.9 Employment Agreement, dated as of November 28, 1988,
between CommScope and Frank M. Drendel.*+
10.10 Form of Indemnification Agreement between the Company
and its directors and executive officers.*****
10.11 Registration Rights Agreement between GI,
GI Corporation of Delaware, MBO-IV and
Instrument Partners.*
10.12 Form of Amendment to Outside Director Stock
Option Agreement (including form of Outside Director
Stockholder's Agreement) between the Company and
each of James M. Denny, J. Tracy O'Rourke, Derald H.
Ruttenberg and William C. Lowe.*+
10.13 The General Instrument Corporation 1993 Long-Term
Incentive Plan (including form of Stock Option
Agreement).****+
10.14 General Instrument Corporation Annual Incentive
Plan.*****+
10.15 Amendment, dated May 20, 1993, to the Employment
Agreement referred to in 10.14.****+
10.16 GI Deferred Compensation Plan.*****+
11 Statement re computation of per share earnings.
***** and ******
13 Annual Report to Stockholders for fiscal year
ended December 31, 1994, attached to the
Prospectus/Consent Solicitation Statement as Annex E.
(The Annual Report, except for those portions
thereof which are expressly referred to in the text
of the Prospectus/Consent Solicitation Statement,
is being furnished for the information of the
Commission and is not to be deemed "filed" as part
of the Form S-4.)
21 Subsidiaries of GI.****
2
<PAGE>
<S> <C> <C>
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5).
23.2 Consent of Cooley, Godward Castro Huddleson & Tatum
(included in Exhibit 8).
23.3 Consent of Deloitte & Touche LLP with respect to
General Instrument Corporation's financial statements.
23.4 Consent of Deloitte & Touche LLP with respect to Next
Level Communications' financial statements.
24 Power of Attorney (included on page II-4).
<FN>
__________________
* Incorporated by reference from Registration Statement
No. 33-46854.
** Incorporated by reference from Registration Statement
No. 33-63152.
*** Incorporated by reference from Registration Statement
No. 33-50215.
**** Incorporated by reference from Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
***** Incorporated by reference from Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
****** Incorporated by reference from Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995.
+ Management contract or compensatory plan.
</TABLE>
3
EXHIBIT 3.2
STATE OF DELAWARE
OFFICE OF THE SECRETARY STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE,
DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "GENERAL INSTRUMENT CORPORATION",
FILED IN THIS OFFICE ON THE TWENTY-EIGHT DAY OF APRIL, A.D. 1995,
AT 10 O'CLOL A.M.
<PAGE>
/s/ Edward J. Freel
Edward J, Freel, Secretary of
State
2234650 AUTHENTICATION: 7618120
950192040 DATE: 08-23-95
AMENDMENT TO THE
AMENDED AND RESTATE CERTIFICATE OF INCORPORATION
OF
GENERAL INSTRUMENT CORPORATION
General Instrument Corporation, a corporation organized and
existing under and by virtue of the General Corporation Law of the
State of Delaware (the "Corporation") DOES HEREBY CERTIFY:
FIRST: That pursuant to Section 242(a) of the General
Corporation Law of the State of Delaware, the directors of the
Corporation adopted a resolution setting forth a proposed
amendment to the Amended and Restate Certificate of Incorporation
of the Corporation, and declared said Amendment to be advisable.
The resolution setting forth the proposed amendment is as follows:
"FOURTH: The aggregate number of shares of all
classes of capital stock which the Corporation shall
have the authority to issue is (i) 400,000,000 shares
of common stock, par value $.01 per share ("Common
Stock"), and (ii) 20,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock")."
SECOND: That the said amendment was duly adopted in
accordance with the provisions of Section 242(b) (1) of the
General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, General Instrument Corporation has
caused this Certificate to be signed by Thomas A. Dumit, its Vice
President and attested by Richard C. Smith, its Assistant
Secretary, this 28th day of April, 1995.
GENERAL INSTRUMENT CORPORATION
By: /s/ Thomas A. Dumit
Thomas A. Dumit, Vice
President
Attest:
By: /s/ Richard C. Smith
Richard C. Smith
Assistant Secretary
<PAGE>
EXHIBIT 5
September 5, 1995
General Instrument Corporation
181 West Madison Street
Chicago, Illinois 60602
Ladies and Gentlemen:
We are acting as special counsel to General Instrument
Corporation, a Delaware corporation (the "Company"), in connection
with the preparation and filing of the Registration Statement on
Form S-4 (the "Registration Statement") of the Company relating to
the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of shares of the Company's Common Stock, par
value $.01 per share ("GI Common Stock"), to be issued pursuant to
the terms of an Agreement and Plan Merger (the "Merger
Agreement"), dated August 30, 1995, among the Company, Next Level
Communications, a California corporation ("NLC") and NLC
Acquisition Corp., a California corporation and wholly-owned
subsidiary of the Company ("Newco"), pursuant to which (i) Newco
will merge with and into NLC, with NLC continuing as the surviving
corporation, and (ii) all shares of Series A Preferred Stock and
Common Stock, no par value, of NLC will be converted into the
number of shares of GI Common Stock determined pursuant to the
Merger Agreement.
We have examined the originals, or certified, conformed or
reproduction copies, of all such records, agreements, instruments
and documents as we have deemed relevant or necessary as the basis
for the opinions hereinafter expressed. In all such examinations,
we have assumed the genuineness of all signatures on original or
certified copies and the conformity to original or certified
copies of all copies submitted to us as conformed or reproduction
copies. As to various questions of fact relevant to such
opinions, we have relied upon certificates and statements of
public officials and officers or representatives of the Company
and of others.
<PAGE>
General Instrument Corporation - 2 - September 4, 1995
Based upon the foregoing and subject to the limitations set
forth herein, it is our opinion that the shares of GI Common Stock
to be issued pursuant to the Merger Agreement have been duly
authorized and will be (when issued pursuant to the Merger
Agreement) validly issued, fully paid and non-assessable.
This opinion is limited to the General Corporation Law of
the State of Delaware.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to this
firm under the caption "Experts" in the Prospectus/Consent
Solicitation Statement forming part of the Registration Statement.
In giving such consent, we do not hereby admit that we are in the
category of such persons whose consent is required under Section 7
of the Securities Act of 1933, as amended.
The opinion expressed herein is solely for your benefit and
may not be relied upon in any manner for any purpose except as
specifically provided for herein.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Robert C. Schwenkel
-----------------------------------
Robert C. Schwenkel
<PAGE>
EXHIBIT 8
September 5, 1995
Next Level Communications
6153 State Farm Drive
Rohnert Park, California 94928
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the
Agreement and Plan of Merger dated August 30, 1995 (the
"Agreement") by and among General Instrument Corporation, a
Delaware corporation ("Acquiror"), NLC Acquisition Corp., a
California corporation and wholly-owned subsidiary of Acquiror
("Sub"), and Next Level Communications, a California corporation
("Target"). Sub will merge with and into Target (the "Merger")
pursuant to the Agreement.
Except as otherwise provided, capitalized terms not defined herein
have the meanings set forth in the Agreement or in certificates
delivered to us by Acquiror, Sub and Target containing certain
representations of Acquiror, Sub and Target (the "Certificate of
Representations"). All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
We have acted as counsel to Target in connection with the Merger.
As such, and for the purpose of rendering this opinion, we have
examined originals, certified copies or copies otherwise
identified to our satisfaction as being true copies of the
original of the following documents (including all exhibits and
schedules attached thereto):
(A) the Agreement;
(B) the Certificate of Representations;
(C) Continuity of Interest Certificates from certain
Target shareholders (the "Continuity of Interest Certificates");
and
(D) such other instruments and documents related to the
formation, organization and operation of Acquiror, Sub and Target
and related to the consummation of the Merger and the transactions
contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed
(without any independent investigation or review thereof) that:
<PAGE>
Next Level Communications
September 5, 1995
Page 2
1. Original documents (including signatures) are
authentic, documents submitted to us as copies conform to the
original documents, and there is (or will be prior to the Closing)
due execution and delivery of all documents where due execution
and delivery are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made
or agreed to by Acquiror, Sub and Target, their managements,
employees, officers, directors and shareholders in connection with
the Merger, including but not limited to those set forth in the
Agreement (including the exhibits), the Certificate of
Representations and the Continuity of Interest Certificates, will
be true and accurate at all relevant times, and all covenants
contained in such agreements will be performed without waiver or
breach of any material provision thereof;
3. The Merger will be effective under the applicable
state law;
4. The continuity of interest requirement as specified
in Treas. Reg. section 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions
will be satisfied;
5. The continuity of business enterprise requirement as
specified in Treas. Reg. section 1.368-1(d) and as interpreted in
certain Internal Revenue Service rulings and federal judicial
decisions will be satisfied;
6. After the Merger, Target will hold "substantially
all" of its and Sub's properties within the meaning of Section
368(a)(2)(E)(i) of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations promulgated thereunder;
7. To the extent any expenses relating to the Merger
(or the "plan of reorganization" within the meaning of Treas. Reg.
section 1.368-1(c) with respect to the Merger) are funded directly
or indirectly by a party other than the incurring party, such
expenses will be within the guidelines established in Revenue
Ruling 73-54, 1973-1 C.B. 187;
8. No outstanding indebtedness of Acquiror, Target or
Sub has represented or will represent equity for tax purposes; and
no outstanding equity of Acquiror, Target or Sub has represented
or will represent indebtedness for tax purposes; and no
outstanding security, instrument, agreement or arrangement that
provides for, contains, or represents either a right to acquire
Target capital stock or to share in the appreciation thereof
constitutes or will constitute "stock" for purposes of Section
368(c) of the Code;
9. Neither Acquiror, Sub, or Target is, or will be at
the time of the Merger: (a) an "investment company" within the
meaning of Section 368(a)(2)(F) of the Code; or (b) under the
jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A) of the Code; and
<PAGE>
Next Level Communications
September 5, 1995
Page 3
10. No Target shareholders (other than holders of
Founders Common Stock) will receive any consideration for their
shares other than Acquiror Common Stock; those certain options to
purchase 2,570,375 shares of Acquiror Common Stock, which options
become exercisable based upon sales of Surviving Corporation
through March 31, 2000, as provided in the Agreement as
compensation for services rendered and to be rendered by
shareholder-employees of Target are in fact paid for services and
will not be separate consideration for, or allocable to, any of
their Target stock; none of the Acquiror Common Stock to be
received by any shareholder-employees of Target in the Merger will
be separate consideration for, or allocable to, services rendered
or to be rendered by such shareholder-employees; the dollar value
of all consideration other than Acquiror Common Stock, if any,
received in the Merger by the holders of Founders Common Stock
will not exceed $2.25 per share of Founders Common Stock;
effective elections under Section 83(b) of the Code have been and
will be made with respect to all Target stock currently held by
shareholder-employees of Target which were subject to forfeiture
restrictions when issued and all Acquiror Common Stock to be
received in the Merger by shareholder-employees of Target which
will be subject to forfeiture restrictions; all outstanding
options and warrants to acquire Next Level Stock will be exercised
prior to the Merger, and the shares of Next Level Stock issued
upon such exercises will be treated as outstanding stock for tax
purposes; and holders of fewer than 1% of the outstanding Target
stock will perfect dissenters' rights.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth
herein, we are of the opinion that, if the Merger is consummated
in accordance with the provisions of the Agreement and the
exhibits thereto, for federal income tax purposes:
The Merger will be a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
This opinion does not address the various state, local or foreign
tax consequences that may result from the Merger. In addition, no
opinion is expressed as to any federal income tax consequence of
the Merger except as specifically set forth herein and this
opinion may not be relied upon except with respect to the
consequences specifically discussed herein.
No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any other transaction
whatsoever including the Merger if all the transactions described
in the Agreement are not consummated in accordance with the terms
of the Agreement and without waiver of any material provision
thereof. To the extent any of the representations, warranties,
statements and assumptions material to our opinion and upon which
we have relied are not complete, correct, true and accurate in all
material respects at all relevant times, our opinion would be
adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal
income tax consequences of the Merger and is not binding on the
Internal Revenue
<PAGE>
Next Level Communications
September 5, 1995
Page 4
Service or the courts. The conclusions are based on the Code,
existing judicial decisions, administration regulations and
published rulings. No assurance can be given that future
legislative, judicial or administrative changes would not
adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no
responsibility to advise you of any new developments in the
application or interpretation of the federal income tax laws.
In addition to your request for our opinion on this specific
matter of federal income tax law, you have asked us to review the
discussion of federal income tax issues contained in Acquiror's
Form S-4 Registration Statement filed in connection with the
Merger ("Registration Statement"). We have reviewed the
discussion entitled "Certain Federal Income Tax Considerations"
contained in the Registration Statement and believe that such
information fairly presents the current federal income tax law
applicable to the Merger and the material federal tax consequences
to Acquiror, Target and Sub, and their shareholders as a result of
the Merger.
We consent to the reference to our firm under the caption "Certain
Federal Income Tax Considerations" in the Prospectus/Consent
Solicitation Statement included in the Registration Statement and
to the filing of this opinion as an exhibit to the Registration
Statement.
This opinion is being delivered in connection with the filing of
the Registration Statement. It is intended for the benefit of
Target and its shareholders; it may not be relied upon or utilized
for any other purpose or by any other person or entity and may not
be made available to any other person or entity without our prior
written consent.
Very truly yours,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: /s/ Susan Cooper Philpot
-----------------------------------
Susan Cooper Philpot
SCP/jkw
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of
General Instrument Corporation on Form S-4 of our report dated
September 1, 1995 relating to the financial statements of Next
Level Communications as of and for the year ended June 30, 1995
(which expresses an unqualified opinion and includes an emphasis
paragraph relating to its development stage and an explanatory
paragraph relating to a litigation uncertainty), appearing in the
Prospectus, which is part of this Registration Statement. We also
consent to the references to us under the headings "Selected
Financial Data of Next Level" and "Experts" in such Prospectus.
/S/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Francisco, Californina
September 5, 1995
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement on Form
S-4 of our reports dated January 31, 1995 appearing in and incorporated
by reference in the Annual Report on Form 10-K of General
Instrument Corporation for the year ended December 31, 1994
and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 5, 1995
