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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 QUARTER ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27877
NEXT LEVEL COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3342408
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (707) 584-6820
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter quarter that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of our common stock, par value $0.01 per share,
outstanding as of May 1, 2001 was approximately 85,028,029.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Condensed Consolidated Financial Statements................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................. 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
(In thousands, except share data, unaudited)
MARCH 31, MARCH 31,
2001 2000
------------ ------------
REVENUES
Equipment $ 28,063 $ 29,689
Software 675 790
------------ ------------
Total revenues 28,738 30,479
------------ ------------
COST OF REVENUES
Equipment 22,532 24,891
Software 108 57
------------ ------------
Total cost of revenues 22,640 24,948
------------ ------------
Gross profit 6,098 5,531
OPERATING EXPENSES
Research and development 14,095 13,844
Selling, general and administrative 14,510 9,565
Non-cash compensation charge -- 2,384
------------ ------------
Total operating expenses 28,605 25,793
------------ ------------
Operating loss (22,507) (20,262)
Interest income, net 109 1,832
------------ ------------
Net loss $ (22,398) $ (18,430)
============ ============
Basic and diluted net loss per share $ (0.26) $ (0.23)
============ ============
Shares used to compute basic and
diluted net loss per share 84,628,471 79,767,349
============ ============
See notes to condensed consolidated financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 and December 31, 2000
(In thousands, except share data, unaudited)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Current Assets:
Cash and cash equivalents $ 8,707 $ 35,863
Restricted marketable securities 5,625 25,000
Trade receivables, less allowance for doubtful accounts of $1,332 and $1,332 28,879 34,646
Other receivables 1,929 2,836
Inventories, net 106,801 86,764
Prepaid expenses and other 2,025 2,123
--------- ---------
Total current assets 153,966 187,232
Property and equipment, net 52,842 53,593
Long-term investments 16,750 15,000
Goodwill, less accumulated amortization of $8,558 and $6,883, respectively 16,138 17,813
Other assets 2,078 2,078
--------- ---------
Total Assets $ 241,774 $ 275,716
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 49,644 $ 53,367
Accrued liabilities 47,349 32,609
Notes payable 5,000 25,000
Deferred revenue 2,532 5,661
Current portion of capital lease obligations 253 330
--------- ---------
Total current liabilities $ 104,778 $ 116,967
Long-term obligations -- --
Stockholders' Equity:
Common stock - $.01 par value, 400,000,000 shares authorized, 84,838,000
and 84,443,000 shares issued and outstanding, respectively 780 776
Additional paid-in-capital $ 438,654 $ 438,123
Accumulated deficit (302,308) (279,910)
Unearned compensation (130) (240)
--------- ---------
Total Stockholders' Equity 136,996 158,749
--------- ---------
Total Liabilities and Stockholders' Equity $ 241,774 $ 275,716
========= =========
See notes to condensed consolidated financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(In thousands, unaudited)
MARCH 31, MARCH 31,
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (22,398) $ (18,430)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation charge -- 2,384
Depreciation and amortization 4,650 2,745
Equity in net loss of investee 250 --
Changes in assets and liabilities:
Trade receivables 5,767 (1,500)
Inventories (20,037) 228
Other assets 1,005 (12,271)
Accounts payable (3,723) 5,658
Accrued liabilities and deferred revenue 11,611 (3,012)
--------- ---------
Net cash used in operating activities (22,875) (24,198)
INVESTING ACTIVITIES:
Purchases of property and equipment (2,114) (2,531)
Proceeds from sale of marketable securities 19,375 30,106
Long-term investments (2,000) --
Proceeds from notes receivable -- 5
--------- ---------
Net cash used in investing activities 15,261 27,580
FINANCING ACTIVITIES:
Issuance of common stock 535 --
Repayments of borrowings (20,000) (24,853)
Repayment of capital lease obligations (77) (151)
Initial public offering expenses, net -- (847)
--------- ---------
Net cash used in financing activities (19,542) (25,851)
Net Decrease in Cash and Cash Equivalents (27,156) (22,469)
Cash and Cash Equivalents, Beginning of Period 35,863 128,752
--------- ---------
Cash and Cash Equivalents, End of Period $ 8,707 $ 106,283
========= =========
See notes to condensed consolidated financial statements.
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NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Next Level Communications, Inc. (the "Company") is a leading provider of
broadband communications systems that enable telephone companies and other
emerging communications service providers to cost effectively deliver voice,
data and video services over the existing copper wire telephone infrastructure.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and pursuant
to the rules and regulations of the Securities and Exchange Commission. While
these financial statements reflect all adjustments (consisting of normal
recurring items) which are, in the opinion of management, necessary to present
fairly the results of the interim period, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements and notes should be read in
conjunction with the financial statements and notes thereto, for the year ended
December 31, 2000 contained in the Company's Annual Report on Form 10-K. Certain
prior period amounts have been reclassified to conform to the current period
presentation. The results of operations for the three months ended March 31,
2001 are not necessarily indicative of the operating results for the full year.
2. INVENTORIES
Inventories at March 31, 2001 and December 31, 2000 consist of (in
thousands):
March 31, December 31,
2001 2000
--------- ------------
Raw materials $ 47,468 $ 29,525
Work-in-process 852 1,935
Finished goods 70,886 68,101
--------- ---------
Total 119,206 99,561
Less reserves and allowances (12,405) (12,797)
--------- ---------
Inventories, net $ 106,801 $ 86,764
========= =========
3. NOTES PAYABLE
The Company had entered into a revolving bank line of credit ("Line"),
which was due to expire on October 1, 2001, under which the Company could have
borrowed up to the lesser of $50 million or the value of pledged collateral. At
March 31, 2001, the balance outstanding was $5.0 million. Interest on the Line
was at IBOR plus .7%. The line was secured by $5.0 million of marketable
securities held by a custodian. On May 7, 2001, the balance on the line was 0,
and the Company terminated the line.
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4. TAX SHARING AND ALLOCATION AGREEMENT WITH MOTOROLA
In December 2000, the Company received a $15 million advance from
Motorola related to a tax sharing and allocation agreement. The Company received
an additional $17.3 million in January 2001 and the tax agreement was finalized
in February 2001. The amount advanced to the Company is based on an estimate of
the present value of income tax benefits to Motorola from the inclusion of the
Company's operating losses for the period from January 6, 2000 to May 17, 2000
in Motorola's consolidated tax return. To the extent Motorola does not achieve
the expected tax benefits by September 30, 2006, the Company must repay any
difference. In addition, should the Company obtain certain specified levels of
financing from independent third parties, it must also repay all or a portion of
the advance. The Company has included such $32.3 million in accrued liabilities
at March 31, 2001.
5. NET LOSS PER SHARE
Basic net loss per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed based on the weighted average
number of common shares outstanding plus the dilutive effect of outstanding
stock options and warrants. Diluted net loss per common share was the same as
basic net loss per common share for all periods presented since the effect of
any potentially dilutive common stock equivalents is excluded, as they are
anti-dilutive because of the Company's losses. As of March 31, 2001 and 2000,
the Company had securities outstanding that could potentially dilute basic
earnings per share in the future, but were excluded from the computation of
diluted net loss per share, as their effect would have been anti-dilutive. Such
outstanding securities consist of the following (in thousands):
March 31,
------------------
2001 2000
------ ------
General Partner's warrants 5,592 8,480
Outstanding employee options 22,897 15,262
------ ------
Total 28,489 23,742
====== ======
6. COMPREHENSIVE LOSS
The following table sets forth the calculation of comprehensive loss:
Three Months Ended March 31,
---------------------------
2001 2000
-------- --------
Net Loss $(22,398) $(18,430)
Unrealized losses on marketable securities -- (88)
-------- --------
Total comprehensive loss $(22,398) $(18,518)
======== ========
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7. RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, was effective for the Company beginning January 1, 2001.
SFAS No. 133 requires that all derivative instruments be measured at fair value
and recognized in the balance sheet as either assets or liabilities. The initial
adoption of FAS 133 did not have a material effect on the Company's financial
statements.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some of the statements in the following discussion and elsewhere in this
report constitute forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among other things, those
listed under "Risk Factors" and elsewhere in this report.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
OVERVIEW
We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over the
existing copper wire telephone infrastructure. We commenced operations in July
1994 and recorded our first sale in September 1997. From January 1998 until
November 1999, we operated through Next Level Communications L.P., which was
formed in connection with the transfer of all of the net assets, management and
workforce of a wholly owned subsidiary of General Instrument. In November 1999,
the business and assets of that partnership were merged into Next Level
Communications, Inc. as part of our recapitalization. In January 2000, General
Instrument was acquired by Motorola, Inc., making us an indirect subsidiary of
Motorola.
We generate our revenues primarily from sales of our equipment. A small
number of customers have accounted for a large part of our revenues to date, and
we expect this concentration to continue in the future. Qwest (formerly U S
WEST) accounted for 52% of our total revenues for the quarter ended March 31,
2001 and 84% of our total revenues for the quarter ended March 31, 2000. Our
agreements with our largest customers are cancelable by these customers on short
notice and without penalty, and do not obligate the customers to purchase any
products. In addition, our significant customer agreements generally contain
fixed-price provisions. As a result, our ability to generate a profit on these
contracts depends upon our ability to produce and market our products at costs
lower than these fixed prices.
The timing of our revenues is difficult to predict because of the length
and variability of the sales cycle for our products. Customers view the purchase
of our products as a significant and strategic decision. As a result, customers
typically undertake significant evaluation, testing and trial of our products
before deploying them. This evaluation process frequently results in a lengthy
sales cycle, typically ranging from nine months to more than a year. While our
customers are evaluating our products and before they place an order, if at all,
we may incur substantial sales and marketing expenses and expend significant
management efforts.
Revenues. Our revenues consist primarily of sales of equipment and sales
of data communications software. We recognize equipment revenues upon shipment
of our products. Software revenues consist of sales to original equipment
manufacturers that supply communications software and hardware to distributors.
We recognize software license revenues when a noncancelable license agreement
has been signed, delivery has occurred, the fees are fixed and determinable and
collection is probable. The portion of revenues from new software license
agreements that relates to our obligations to provide customer support is
deferred and recognized ratably over the maintenance period.
Cost of revenues. Cost of equipment revenues includes direct material and
labor, depreciation and amortization expense on property and equipment, warranty
expenses, license fees and manufacturing and service
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overhead. Cost of software revenues primarily includes the cost of the media the
software is shipped on, which is usually CDs, and documentation costs.
Research and development. Research and development expenses consist
principally of salaries and related personnel expenses, consultant fees,
prototype component expenses and development contracts related to the design,
development, testing and enhancement of our products. We expense all research
and development costs as incurred.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for personnel
engaged in direct marketing and field service support functions, executive,
accounting and administrative personnel, recruiting expenses, professional fees
and other general corporate expenses.
RESULTS OF OPERATIONS
Revenues. Total revenues in the period ended March 31, 2001 decreased to
$28.7 million from $30.5 million in the first quarter of 2000. The decrease was
primarily due to a decrease in equipment sales to Qwest, partially offset by an
increase in equipment sales to independent operating companies. Total revenues
for the current period included $28.1 million of equipment sales, compared to
$29.7 million in the first quarter of 2000. Qwest accounted for $15.1 million of
equipment revenue in the first quarter of 2001 as compared to $25.5 million in
the first quarter of 2000. As a result of the merger between U S WEST and Qwest,
Qwest slowed its purchases of our equipment while it re-evaluates its plans
regarding the deployment of VDSL across its network. Sales to Qwest in the
future are dependent upon its decision regarding the deployment of our product.
Sales to independent operating companies were $11.8 million in the first quarter
of 2001, compared to $4.1 million in the first quarter of 2000. We expect to
continue to derive substantially all of our revenues from sales of equipment to
Qwest and local, foreign and independent telephone companies for the foreseeable
future. The growth in equipment revenue in future quarters will depend upon
whether and how quickly our existing customers roll out broadband services in
their coverage areas and whether and how quickly we obtain new customers.
Software revenue remained comparable in both quarters decreasing slightly
in the period ended March 31, 2001 to $675,000 from $790,000 in the period ended
March 31, 2000. We expect demand for our software to remain relatively flat in
the near term because the market for these products is mature.
Cost of Revenues. Total cost of revenues decreased to $22.6 million in
the period ended March 31, 2001 from $24.9 million in the period ended March 31,
2001. Our gross margin percentage increased to 21.2% in the first quarter of
2001 from 18.1% in the first quarter of 2000. The increase in our gross margin
percentage was primarily the result of an increase in sales of our higher margin
products. We currently expect gross margin improvements in the latter part of
2001 as we increase sales of our higher margin products, and continue
implementing cost reductions. In the future, cost of revenues as a percent of
revenues may fluctuate due to a wide variety of factors, including the customer
mix, the product mix, the timing and size of orders which are received, the
availability of adequate supplies of key components and assemblies, our ability
to introduce new products and technologies on a timely basis, the timing of new
product introductions or announcements by us or our competitors, price
competition and unit volume.
Research and development. Research and development expenses increased to
$14.1 million in the period ended March 31, 2001 from $13.8 million in the
period ended March 31, 2000. The increase was primarily due to an increase in
research and development personnel. We believe that continued investment in
research and development is critical to attaining our strategic product
development and cost reduction objectives and, as a result, expect these
expenses to continue to increase in absolute dollars. We expense all of our
research and development costs as incurred.
Selling, general and administrative. Selling, general and administrative
expenses increased to $14.5 million in the period ended March 31, 2001 from $9.6
million in the period ended March 31, 2000. The increase was primarily
attributable to increased goodwill amortization, and the increase in the scale
of our operations including additional personnel in our operations,
administration, sales and marketing organizations, promotional expenses,
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consulting expenses and other administrative expenses. We have generated higher
sales expenses by hiring new sales representatives in our efforts to increase
the number and size of our customer accounts. We expect selling, general and
administrative expenses to increase as required to support potential future
revenue growth.
Non-cash compensation charge. Substantially all of our employees had been
granted contingently exercisable stock options that became options to purchase
our common stock upon our recapitalization in 1999. In addition, tandem stock
options were granted in January 1997 to some of our employees. As a result,
non-cash compensation expense was recognized upon the completion of our initial
public offering based on the difference between the exercise price of these
options and the initial public offering price of our common stock. The non-cash
compensation expense related to these option grants in the period ended March
31, 2000 was $2.4 million. There was no such expense in 2001.
Interest income, net. Interest income, net, in the period ended March 31,
2001 decreased to $109,000 from $1.8 million in the period ended March 31, 2000
due primarily to lower cash balances. In 2001, the amount represents interest
earned on cash balances in a money market account, and in 2000, the amount
represents interest earned on proceeds from our initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $22.9 million in the quarter
ended March 31, 2001 and $24.2 million in the quarter ended March 31, 2000. In
the current quarter, the use of cash in operating activities was primarily due
to our net losses and a $20 million increase in our inventories, partially
offset by a $14.7 million increase in accrued liabilities. The increase in
inventory is due to amounts purchased related to commitments we had with our
suppliers. The increase in accrued liabilities is primarily related to amounts
received from Motorola in connection with a tax sharing agreement, which we must
repay to the extent certain tax benefits are not realized by Motorola or we
obtain specified levels of third party financing. During the quarter ended March
31, 2000, the cash used in operating activities was primarily due to net losses;
additionally, $12.7 million was used to pay taxes associated with the exercise
of Motorola options by our employees.
Net cash provided by investing activities of $15.3 million in the period
ended March 31, 2001 and $27.6 million in the period ended March 31, 2000 was
primarily attributable to the sale of marketable securities, partially offset by
capital expenditures to support our engineering and testing activities. As we
increase the scope of our operations, we expect that our capital expenditures
will increase. In accordance with our agreement with Virtual Access, we made an
additional $2.0 million investment in that company in the period ended March 31,
2001.
Net cash used in financing activities was $19.5 million in the period
ended March 31, 2001 and $25.9 million in the period ended March 31, 2000. In
both periods, substantially all cash used was used to repay borrowings on our
line of credit.
At March 31, 2001, we had $8.7 million of cash and cash equivalents and
$49.2 million of working capital.
We have commitments with suppliers to purchase a total of approximately
$64 million of components in 2001.
In December 1999, we entered into a revolving bank line of credit under
which we had the ability to borrow up to the lesser of $50 million or the value
of pledged collateral. At March 31, 2001, the balance outstanding was $5.0
million and the line was secured by $5.0 million of marketable securities. On
May 7, 2001, the balance on the line was 0 and we terminated the line.
We anticipate that operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may use cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. Our long-term operating and capital
lease obligations are generally less than $3.0 million per year. Other than
capital lease commitments, we have no material commitments
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for capital expenditures. As we increase the scope of our operations, we expect
that our capital expenditures will increase.
We are in the process of negotiating the terms of a financing from
Motorola, which we expect will provide us with sufficient cash on hand to meet
our working capital and capital expenditure requirements for at least the next
12 months. However, it may still be necessary to obtain additional equity or
debt financing either during or after the next 12 months if we are not able to
generate sufficient cash from operating activities to meet our working capital
and capital expenditure needs. In the event additional financing is required, we
may not be able to raise it on acceptable terms, or at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, was effective for us beginning January 1, 2001. SFAS No.
133 requires that all derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities. The initial
adoption of SFAS No. 133 did not have a material effect on our financial
statements.
RISK FACTORS
You should carefully consider the risk factors set forth below.
WE HAVE INCURRED NET LOSSES AND NEGATIVE CASH FLOW FOR OUR ENTIRE HISTORY, WE
EXPECT TO INCUR FUTURE LOSSES AND NEGATIVE CASH FLOW, AND WE MAY NEVER ACHIEVE
PROFITABILITY
We incurred net losses of $22.4 million in the quarter ended March 31,
2001 and $74.8 million in the year ended December 31, 2000. Our ability to
achieve profitability on a continuing basis will depend on the successful
design, development, testing, introduction, marketing and broad commercial
distribution of our broadband equipment products.
We expect to continue to incur significant product development, sales and
marketing, and administrative expenses. In addition, we depend in part on cost
reductions to improve gross profit margins because the fixed-price nature of
most of our long-term customer agreements prevents us from increasing prices. As
a result, we will need to generate significant revenues and improve gross profit
margins to achieve and maintain profitability. We may not be successful in
reducing our costs or in selling our products in sufficient volumes to realize
cost benefits from our manufacturers. We cannot be certain that we can achieve
sufficient revenues or gross profit margin improvements to generate
profitability.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We recorded our first sale in September 1997. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. You should consider our prospects in light of the heightened risks
and unexpected expenses and difficulties frequently encountered by companies in
an early stage of development. These risks, expenses and difficulties, which are
described further below, apply particularly to us because the market for
equipment for delivering voice, data and video services is new and rapidly
evolving. Due to our limited operating history, it will be difficult for you to
evaluate whether we will successfully address these risks.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND THESE
FLUCTUATIONS MAY MAKE OUR STOCK PRICE VOLATILE.
Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly in the future. As a result, we believe
that quarter-to-quarter comparisons of our operating results may not be
meaningful. Fluctuations in our quarterly revenues or operating results may
cause volatility in the price of our
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stock. It is likely that in some future quarter our operating results may be
below the expectations of public market analysts and investors, which may cause
the price of our stock to fall. Factors likely to cause variations in our
quarterly revenues and operating results include:
- delays or cancellations of any orders by Qwest, which accounted
for approximately 52% of our revenues in the quarter ended March
31, 2001, or by any other customer accounting for a significant
portion of our revenues;
- variations in the timing, mix and size of orders and shipments of
our products throughout a quarter or year;
- new product introductions by us or by our competitors;
- the timing of upgrades of telephone companies' infrastructure;
- variations in capital spending budgets of telephone companies; and
- increased expenses, whether related to sales and marketing,
product development or administration.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activity. Because most of our operating expenses are fixed in the short term, we
may not be able to quickly reduce spending if our revenues are lower than we had
projected and our results of operations could be harmed.
OUR CUSTOMER BASE OF TELEPHONE COMPANIES IS EXTREMELY CONCENTRATED AND THE LOSS
OF OR REDUCTION IN BUSINESS FROM EVEN ONE OF OUR CUSTOMERS, PARTICULARLY QWEST,
COULD CAUSE OUR SALES TO FALL SIGNIFICANTLY.
A small number of customers have accounted for a large part of our
revenues to date. We expect this concentration to continue in the future. If we
lose one of our significant customers, our revenues could be significantly
reduced. Qwest accounted for 52% and 84% of total revenues in the quarters ended
March 31, 2001 and 2000. Our agreements with our customers are cancelable by
these customers on short notice, without penalty, do not obligate the customers
to purchase any products and are not exclusive. As a result of the merger
between U S WEST and Qwest, Qwest slowed its purchases of our equipment while it
re-evaluates its plans regarding the deployment of VDSL across its network.
Sales to Qwest in the future are dependent upon their decision regarding the
deployment of our product. A significant reduction in purchases of our equipment
by Qwest could have a material adverse effect on us.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FINANCING TO FUND OUR BUSINESS AND, AS A
RESULT, WE MAY NOT BE ABLE TO GROW AND COMPETE EFFECTIVELY.
We are currently negotiating the terms of a financing from Motorola. In
addition, we may need to raise additional funds if our estimates of revenues or
capital requirements change or prove inaccurate. If we cannot secure the
financing with Motorola or cannot raise these additional funds, we may not be
able to grow our business. We may need additional capital if we need to respond
to unforeseen technological or marketing hurdles or if we desire to take
advantage of unanticipated opportunities. In addition, we expect to review
potential acquisitions that would complement our existing product offerings or
enhance our technical capabilities that could require potentially significant
amounts of capital. Funds may not be available at the time or times needed on
terms acceptable to us, if at all. If adequate funds are not available, or are
not available on acceptable terms, we may not be able to take advantage of
market opportunities, to make acquisitions, to develop new products or to
otherwise respond to competitive pressures effectively.
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CONSOLIDATION AMONG TELEPHONE COMPANIES MAY REDUCE OUR SALES.
Consolidation in the telecommunications industry may cause delays in the
purchase of our products and cause a reexamination of strategic and purchasing
decisions by our customers. In addition, we may lose relationships with key
personnel within a customer's organization due to budget cuts, layoffs, or other
disruptions following a consolidation. For example, our sales to NYNEX,
previously one of our largest clients, have decreased significantly as a result
of a shift in focus resulting from its merger with Bell Atlantic. In addition,
as a result of the merger between U S WEST and Qwest, Qwest has slowed its
purchases of our equipment while it re-evaluates its plans regarding deployment
of VDSL across its network.
BECAUSE OUR SALES CYCLE IS LENGTHY AND VARIABLE, THE TIMING OF OUR REVENUE IS
DIFFICULT TO PREDICT, AND WE MAY INCUR SALES AND MARKETING EXPENSES WITH NO
GUARANTEE OF A FUTURE SALE.
Customers view the purchase of our products as a significant and
strategic decision. As a result, customers typically undertake significant
evaluation, testing and trial of our products before deployment. This evaluation
process frequently results in a lengthy sales cycle, typically ranging from nine
months to more than a year. Before a customer places an order, we may incur
substantial sales and marketing expenses and expend significant management
efforts. In addition, product purchases are frequently subject to unexpected
administrative, processing and other delays on the part of our customers. This
is particularly true for customers for whom our products represent a very small
percentage of their overall purchasing activities. As a result, sales forecasted
to be made to a specific customer for a particular quarter may not be realized
in that quarter; and this could result in lower than expected revenues.
A SIGNIFICANT MARKET FOR OUR PRODUCTS MAY NOT DEVELOP IF TELEPHONE COMPANIES DO
NOT SUCCESSFULLY DEPLOY BROADBAND SERVICES SUCH AS HIGH-SPEED DATA AND VIDEO.
Telephone companies have just recently begun offering high-speed data
services, and most telephone companies have not offered video services at all.
Unless telephone companies make the strategic decision to enter the market for
providing broadband services, a significant market for our products may not
develop. Sales of our products largely depend on the increased use and
widespread adoption of broadband services and the ability of our customers to
market and sell broadband services, including video services, to their
customers. Certain critical issues concerning use of broadband services are
unresolved and will likely affect their use. These issues include security,
reliability, speed and volume, cost, government regulation and the ability to
operate with existing and new equipment.
Even if telephone companies decide to deploy broadband services, this
deployment may not be successful. Our customers have delayed deployments in the
past and may delay deployments in the future. Factors that could cause telephone
companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which our products are designed include the
following:
- industry consolidation;
- regulatory uncertainties and delays affecting telephone companies;
- varying quality of telephone companies' network infrastructure and
cost of infrastructure upgrades and maintenance;
- inexperience of telephone companies in obtaining access to video
programming content from third party providers;
- inexperience of telephone companies in providing broadband
services and the lack of sufficient technical expertise and
personnel to install products and implement services effectively;
- uncertain subscriber demand for broadband services; and
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- inability of telephone companies to predict return on their
investment in broadband capable infrastructure and equipment.
Unless our products are successfully deployed and marketed by telephone
companies, we will not be able to achieve our business objectives and increase
our revenues.
GOVERNMENT REGULATION OF OUR CUSTOMERS AND RELATED UNCERTAINTY COULD CAUSE OUR
CUSTOMERS TO DELAY THE PURCHASE OF OUR PRODUCTS.
The Telecommunications Act requires telephone companies, such as the
regional Bell operating companies, to offer their competitors cost-based access
to some elements of their networks, including facilities and equipment used to
provide high-speed data and video services. These telephone companies may not
wish to make expenditures for infrastructure and equipment required to provide
broadband services if they will be forced to allow competitors access to this
infrastructure and equipment. The Federal Communications Commission, or FCC,
announced that, except in limited circumstances, it will not require incumbent
carriers to offer their competitors access to the facilities and equipment used
to provide high-speed data services. Nevertheless, other regulatory and judicial
proceedings relating to telephone companies' obligations to provide elements of
their network to competitors are pending. The FCC also requires incumbent
carriers to permit competitive carriers to collocate their equipment with the
local switching equipment of the incumbents. The FCC's collocation rules
recently have been vacated in part and continue to be subject to regulatory and
judicial proceedings. The uncertainties caused by these regulatory proceedings
may cause these telephone companies to delay purchasing decisions at least until
the proceedings and any related judicial appeals are completed. The outcomes of
these regulatory proceedings, as well as other FCC regulation, may cause these
telephone companies not to deploy services for which our products are designed
or to further delay deployment. Additionally, telephone companies' deployment of
broadband services may be slowed down or stopped because of the need for
telephone companies to obtain permits from city, state or federal authorities to
implement infrastructure.
OUR CUSTOMERS AND POTENTIAL CUSTOMERS WILL NOT PURCHASE OUR PRODUCTS IF THEY DO
NOT HAVE THE INFRASTRUCTURE NECESSARY TO USE OUR PRODUCTS.
The copper wire infrastructures over which telephone companies may
deliver voice, data and video services using our products vary in quality and
reliability. As a result, some of these telephone companies may not be able to
deliver a full set of voice, data and video services to their customers, despite
their intention to do so, and this could harm our sales. Even after installation
of our products, we remain highly dependent on telephone companies to continue
to maintain their infrastructure so that our products will operate at a
consistently high performance level. Infrastructure upgrades and maintenance may
be costly, and telephone companies may not have the necessary financial
resources. This may be particularly true for our smaller customers and potential
customers such as independent telephone companies and domestic local telephone
companies. If our current and potential customers' infrastructure is inadequate,
we may not be able to generate anticipated revenues from them.
IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PRODUCTS
ACHIEVE WIDESPREAD ACCEPTANCE, THE DEMAND FOR OUR PRODUCTS MAY NOT DEVELOP.
Technologies that compete with our products include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If these alternative
technologies are chosen by our existing and potential customers, our business,
financial condition and results of operations could be harmed. In particular,
cable operators are currently deploying products that will be capable of
delivering voice, high-speed data and video services over cable, including
products from General Instrument, our principal stockholder, and Motorola, its
parent. Our technology may not be able to compete effectively against these
technologies on price, performance or reliability.
Our customers or potential customers that also offer cable-based services
may choose to purchase cable-based technologies. Cable service providers that
offer not only data and video but also telephony over cable systems will give
subscribers the alternative of purchasing all communications services from a
single communications
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service provider, allowing the potential for more favorable pricing and a single
point of contact for bill payment and customer service. If these services are
implemented successfully over cable connections, they will compete directly with
the services offered by telephone companies using our products. In addition,
several telephone companies have commenced the marketing of video services over
direct broadcast satellite while continuing to provide voice and data services
over their existing copper wire infrastructure. If any of these services are
accepted by consumers, the demand for our products may not develop and our
ability to generate revenues will be harmed.
WE FACE INTENSE COMPETITION IN PROVIDING EQUIPMENT FOR TELECOMMUNICATIONS
NETWORKS FROM LARGER AND MORE WELL-ESTABLISHED COMPANIES, AND WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY WITH THESE COMPANIES.
Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than we do. These competitors
may undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products than
we are able to, which could result in the loss of current customers and impair
our ability to attract potential customers.
Our significant current competitors include Advanced Fibre
Communications, Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks, RELTEC (acquired by BAE Systems, CNI
Division, formerly GEC Marconi), Scientific Atlanta, Siemens and our largest
stockholder, General Instrument/Motorola, as well as emerging companies that are
developing new technologies. Some of these competitors have existing
relationships with our current and prospective customers. In addition, we
anticipate that other large companies, such as Matsushita Electric Industrial
which markets products under the Panasonic brand name, Microsoft, Network
Computer, Philips, Sony, STMicroelectronics and Toshiba America will likely
introduce products that compete with our N(3) Residential Gateway product in the
future. Our customer base may be attracted by the name and resources of these
large, well-known companies and may prefer to purchase products from them
instead of us.
CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND NEGATIVELY
AFFECT OUR SALES.
Consolidation in the telecommunications equipment industry may strengthen
our competitors' positions in our market, cause us to lose customers and hurt
our sales. For example, as a result of the merger between U S WEST and Qwest,
Qwest has slowed its purchases of our equipment while it re-evaluates its plans
regarding the deployment of VDSL across its network. In addition, Alcatel
acquired DSC Communications, Lucent acquired Ascend Communications and BAE
Systems, CNI Division, formerly GEC Marconi, acquired RELTEC. Acquisitions such
as these may strengthen our competitors' financial, technical and marketing
resources and provide them access to regional Bell operating companies and other
potential customers. Consolidation may also allow some of our competitors to
penetrate new markets that we have targeted, such as domestic local, independent
and international telephone companies. This consolidation may negatively affect
our ability to increase revenues.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE.
Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:
- the increasing use of the Internet;
- the growth in remote access by telecommuters;
- the increasingly diverse distribution sources for high quality
digital video; and
- other industry and technological trends.
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We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost-effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall and we could lose revenues.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THE LOSS OF THEIR SERVICES COULD DISRUPT OUR OPERATIONS AND OUR CUSTOMER
RELATIONSHIPS.
None of our executive officers or key employees is bound by an employment
agreement. Many of these employees have a significant number of options to
purchase our common stock. Many of these options are currently vested and some
of our key employees may leave us once they have exercised their options. In
addition, our engineering and product development teams are critical in
developing our products and have developed important relationships with our
regional Bell operating company customers and their technical staffs. The loss
of any of these key personnel could harm our operations and customer
relationships.
COMPETITION FOR QUALIFIED PERSONNEL IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY
IS INTENSE, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE
PERSONNEL, OUR ABILITY TO GROW OUR BUSINESS MAY BE HARMED.
Competition for qualified personnel in the telecommunications equipment
industry, specifically in the Rohnert Park, California area, is intense, and we
may not be successful in attracting and retaining such personnel. Failure to
attract qualified personnel could harm the growth of our business.
We are actively searching for research and development engineers and
sales and marketing personnel who are in short supply. Competitors and others
have in the past and may in the future attempt to recruit our employees. In
addition, companies in the telecommunications industry whose employees accept
positions with competitors frequently claim that the competitors have engaged in
unfair hiring practices. We may receive such notices in the future as we seek to
hire qualified personnel and such notices may result in material litigation and
related disruption to our operations.
OUR OPERATIONS AND CUSTOMER RELATIONSHIPS MAY BECOME STRAINED DUE TO RAPID
EXPANSION.
We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities both inside and outside the United States. This rapid
growth places a significant demand on management and operational resources. Our
management, personnel, systems, procedures, controls and customer service may be
inadequate to support our future operations. To manage expansion effectively, we
must implement and improve our operational systems, procedures, controls and
customer service on a timely basis. We expect significant strain on our order
and fulfillment process and our quality control systems if significant expansion
of business activity occurs. If we are unable to properly manage this growth,
our operating results, reputation and customer relationships could be harmed.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY AFFECT OUR ABILITY
TO COMPETE, AND WE COULD LOSE CUSTOMERS.
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual provisions to
protect our intellectual property. There is no guarantee that these safeguards
will protect our intellectual property and other valuable confidential
information. If our methods of protecting our intellectual property in the
United States or abroad are not adequate, our competitors may copy our
technology or independently develop similar technologies and we could lose
customers. In addition, the laws of some foreign countries do not protect our
proprietary rights as fully as do the laws of the United States. If we fail to
adequately protect our intellectual property, it would be easier for our
competitors to sell competing products, which could harm our business.
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THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS, LICENSE ADDITIONAL TECHNOLOGY OR PAY MONETARY
DAMAGES.
From time to time, third parties, including our competitors and
customers, have asserted patent, copyright and other intellectual property
rights to technologies that are important to us. We expect that we will
increasingly be subject to infringement claims as the number of products and
competitors in our market grows and the functionality of products overlaps, and
our products may currently infringe on one or more United States or
international patents. The results of any litigation are inherently uncertain.
In the event of an adverse result in any litigation with third parties that
could arise in the future, we could be required:
- to pay substantial damages, including paying treble damages if we
are held to have willfully infringed;
- to halt the manufacture, use and sale of infringing products;
- to expend significant resources to develop non-infringing
technology; and/or
- to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail. In
addition, we indemnify our customers for patent infringement claims, and we may
be required to obtain licenses on their behalf, which could subject us to
significant additional costs.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND ANY DISRUPTION IN THEIR MANUFACTURE
OF OUR PRODUCTS WOULD HARM OUR OPERATING RESULTS.
We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We rely primarily on two large contract
manufacturers: SCI Systems and ACT Manufacturing. The efficient operation of our
business will depend, in large part, on our ability to have these and other
companies manufacture our products in a timely manner, cost-effectively and in
sufficient volumes while maintaining consistent quality. As our business grows,
these manufacturers may not have the capacity to keep up with the increased
demand. Any manufacturing disruption could impair our ability to fulfill orders
and could cause us to lose customers.
WE HAVE NO LONG-TERM CONTRACTS WITH OUR MANUFACTURERS, AND WE MAY NOT BE ABLE TO
DELIVER OUR PRODUCTS ON TIME IF ANY OF THESE MANUFACTURERS STOP MAKING OUR
PRODUCTS.
We have no long-term contracts or arrangements with any of our contract
manufacturers that guarantee product availability, the continuation of
particular payment terms or the extension of credit limits. If our manufacturers
are unable or unwilling to continue manufacturing our products in required
volumes, we will have to identify acceptable alternative manufacturers, which
could take in excess of three months. It is possible that a source may not be
available to us when needed or be in a position to satisfy our production
requirements at acceptable prices and on a timely basis. If we cannot find
alternative sources for the manufacture of our products, we will not be able to
meet existing demand. As a result, we may lose existing customers, and our
ability to gain new customers may be significantly constrained.
OUR INABILITY TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE OF OUR
DEPENDENCE ON COMPONENTS FROM KEY SOLE SUPPLIERS COULD RESULT IN DELAYS IN THE
DELIVERY OF OUR PRODUCTS AND COULD HARM OUR REVENUES.
Some parts, components and equipment used in our products are obtained
from sole sources of supply. If our sole source suppliers or we fail to obtain
components in sufficient quantities when required, delivery of our
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products could be delayed resulting in decreased revenues. Additional
sole-sourced components may be incorporated into our equipment in the future. We
do not have any long-term supply contracts to ensure sources of supply. In
addition, our suppliers may enter into exclusive arrangements with our
competitors, stop selling their products or components to us at commercially
reasonable prices or refuse to sell their products or components to us at any
price, which could harm our operating results.
THE OCCURRENCE OF ANY DEFECTS, ERRORS OR FAILURES IN OUR PRODUCTS COULD RESULT
IN DELAYS IN INSTALLATION, PRODUCT RETURNS AND OTHER LOSSES TO US OR TO OUR
CUSTOMERS OR END-USERS.
Our products are complex and may contain undetected defects, errors or
failures. These problems have occurred in our products in the past and
additional problems may occur in our products in the future and could result in
the loss of or delay in market acceptance of our products. In addition, we have
limited experience with commercial deployment and we expect additional defects,
errors and failures as our business expands from trials to commercial deployment
at certain customers. We will have limited experience with the problems that
could arise with any new products that we introduce. Further, our customer
agreements generally include a longer warranty for defects than our
manufacturing agreements. These defects could result in a loss of sales and
additional costs and liabilities to us as well as damage to our reputation and
the loss of our customers.
WE DO NOT HAVE SIGNIFICANT EXPERIENCE IN INTERNATIONAL MARKETS AND MAY HAVE
UNEXPECTED COSTS AND DIFFICULTIES IN DEVELOPING INTERNATIONAL REVENUES.
We plan to extend the marketing and sales of our products
internationally. International operations are generally subject to inherent
risks and challenges that could harm our operating results, including:
- unexpected changes in telecommunications regulatory requirements;
- limited number of telephone companies operating internationally;
- expenses associated with developing and customizing our products
for foreign countries;
- tariffs, quotas and other import restrictions on
telecommunications equipment;
- longer sales cycles for our products; and
- compliance with international standards that differ from domestic
standards.
To the extent that we generate international sales in the future, any
negative effects on our international business could harm our business,
operating results and financial condition. In particular, fluctuating exchange
rates may contribute to fluctuations in our results of operations.
MOTOROLA MAY EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS AND AFFAIRS AND
OUR STOCKHOLDER VOTES AND, FOR ITS OWN REASONS, COULD PREVENT TRANSACTIONS WHICH
OUR OTHER STOCKHOLDERS MAY VIEW AS FAVORABLE.
Motorola beneficially owns approximately 76% of the outstanding shares of
our common stock as of March 31, 2001. Motorola will be able to exercise
significant influence over all matters relating to our business and affairs,
including approval of significant corporate transactions, which could delay or
prevent someone from acquiring or merging with us and could prevent you from
receiving a premium for your shares.
We do not know whether Motorola's plans for our business and affairs will
be different than our existing plans and whether any changes that may be
implemented under Motorola's control will be beneficial or detrimental to our
other stockholders.
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OUR PRINCIPAL STOCKHOLDER AND ITS PARENT MAY HAVE INTERESTS THAT CONFLICT WITH
THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS AND US AND MAY CAUSE US TO FORGO
OPPORTUNITIES OR TAKE ACTIONS THAT DISPROPORTIONATELY BENEFIT OUR PRINCIPAL
STOCKHOLDER.
It is possible that Motorola could be in a position involving a conflict
of interest with us. In addition, individuals who are officers or directors of
Motorola and of us may have fiduciary duties to both companies. For example, a
conflict may arise if our principal stockholder were to engage in activities or
pursue corporate opportunities that may overlap with our business. These
conflicts could harm our business and operating results. Our certificate of
incorporation contains provisions intended to protect our principal stockholder
and these individuals in these situations. These provisions limit your legal
remedies.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE.
The stock markets have in general, and with respect to high technology
companies, including us, in particular, recently experienced extreme stock price
and volume volatility, often unrelated to the financial performance of
particular companies. The price at which our common stock will trade in the
future is likely to also be highly volatile and may fluctuate substantially due
to factors such as:
- actual or anticipated fluctuations in our operating results;
- changes in or our failure to meet securities analysts'
expectations;
- announcements of technological innovations by us or our
competitors;
- introduction of new products and services by us or our
competitors;
- limited public float of our common stock;
- conditions and trends in the telecommunications and other
technology industries; and
- general economic and market conditions.
SALES OF SHARES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY.
As of May 1, 2001, Motorola owned 64,103,724 shares of our common stock,
FMR Corporation owned 5,601,500 shares of our common stock and Kevin Kimberlin
Partners, LP and its affiliates owned 2,933,128 shares of our common stock and
its affiliates held warrants to purchase an additional 4,288,764 shares of our
common stock. If Motorola, FMR, Kevin Kimberlin Partners LP and its affiliates
or any of our other stockholders sells substantial amounts of common stock,
including shares issued upon exercise of outstanding options and warrants, in
the public market, the market price of the common stock could fall. In addition,
any distribution of shares of our common stock by Motorola to its stockholders
could also have an adverse effect on the market price.
Motorola and Kevin Kimberlin Partners LP and its related persons and
their transferees are entitled to registration rights pursuant to which they may
require that we register their shares under the Securities Act.
In addition, as of May 1, 2001, there were outstanding options to
purchase 22,593,364 shares of our common stock. Subject to vesting provisions
and, in the case of our affiliates, volume and manner of sale restrictions, the
shares of common stock issuable upon the exercise of our outstanding employee
options will be eligible for sale into the public market at various times.
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ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE.
Several provisions of our certificate of incorporation and by-laws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder
approval;
- providing for a classified board of directors with staggered,
three-year terms;
- prohibiting cumulative voting in the election of directors;
- restricting business combinations with interested stockholders;
- limiting the persons who may call special meetings of
stockholders;
- prohibiting stockholder action by written consent;
- establishing advance notice requirements for nominations for
election to the board of directors and for proposing matters that
can be acted on by stockholders at stockholder meetings; and
- requiring super-majority voting to effect amendments to our
certificate of incorporation and by-laws.
Some of these provisions do not currently apply to Motorola and its
affiliates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate fluctuation. We
do not engage in any hedging activities, and we do not use derivatives or equity
investments for cash investment purposes. The marketable securities portfolio is
classified as available for sale and recorded at fair value on the balance
sheet. Our portfolio consists solely of corporate bonds, commercial paper and
government securities, and therefore, our market risk is deemed relatively low.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is included as part of this report:
Exhibit
No. Description of Exhibit
---- ----------------------
10.1 Severance agreement between Mr. Keeler and us effective as of
December 4, 2000.
10.2 Tax allocation and sharing agreement between Motorola Inc., and
us effective February, 2001.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXT LEVEL COMMUNICATIONS, INC.
Date: May 14, 2001 By: /s/ J. MICHAEL NORRIS
-----------------------------------------
J. Michael Norris
Chief Executive Officer and President
Date: May 14, 2001 By: /s/ JAMES T. WANDREY
-----------------------------------------
James T. Wandrey
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Severance agreement between Mr. Keeler and us effective December 4, 2000.
Tax allocation and sharing agreement between Motorola Inc., and us
10.2 effective February, 2001.
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