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Next Level Communications, Inc.
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NEXT LEVEL COMMUNICATIONS, INC.
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the annual meeting of the stockholders of Next
Level Communications, Inc., a Delaware corporation, has been called by our board
of directors, to be held at 10 North Martingale Road, 4th Floor, Schaumburg,
Illinois 60173 on May 29, 2002 at 9:00 a.m., Central time.
The purpose of the meeting is to consider and act on the following:
1. To elect two directors to serve for a term of three years and one
director to serve for a term of two years until their successors are
duly elected and qualified;
2. To ratify the appointment of Deloitte & Touche LLP as our independent
auditors for the year ending December 31, 2002; and
3. To transact such other business as may properly come before the meeting
and any adjournment or postponement thereof.
Our stockholders of record at the close of business on April 15, 2002 are
entitled to vote at the annual meeting and any adjournment or postponement
thereof. Since the majority of our outstanding shares must be represented at the
meeting to constitute a quorum, all stockholders are urged either to attend the
annual meeting or to vote by proxy.
Whether or not you expect to attend the annual meeting in person, please
complete, date, sign and promptly return the accompanying proxy card in the
enclosed postage-prepaid envelope.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Keith A. Zar
Keith A. Zar
Secretary
Rohnert Park, California
April 30, 2002
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE SIGN AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY ASV POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON. THANK YOU FOR ACTING PROMPTLY.
NEXT LEVEL COMMUNICATIONS, INC.
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
------------------------
PROXY STATEMENT
------------------------
GENERAL INFORMATION
GENERAL
The enclosed proxy is solicited on behalf of the board of directors of Next
Level Communications, Inc., for use at our annual meeting of stockholders to be
held on May 29, 2002 at 9:00 a.m., Central time, or at any adjournment or
postponement thereof, for the purposes set forth in this proxy statement and in
the accompanying notice of annual meeting of stockholders. The annual meeting
will be held at 10 North Martingale Road, 4th Floor, Schaumburg, Illinois 60173.
Only holders of record of our common stock at the close of business on April 15,
2002, which is the record date, will be entitled to vote at the annual meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use either by (1) delivering to our corporate
secretary a written notice of revocation or a duly executed proxy bearing a
later date or (2) attending the annual meeting and voting in person.
RECORD DATE, VOTING AND SOLICITATION
We are first mailing these proxy solicitation materials on or about April
30, 2002 to the holders of our common stock on the record date, who are entitled
to notice of and to vote at the annual meeting. Each share of common stock
entitles its holder to one vote on matters to be acted upon at the annual
meeting. At the record date, 86,006,986 shares of our common stock were issued
and outstanding.
Votes cast by proxy or in person at the annual meeting will be tabulated by
the inspector of elections. The inspector of elections will also determine
whether or not a quorum is present. In general, Delaware law provides that a
quorum consists of a majority of the shares entitled to vote and present in
person or represented by proxy. The inspector of elections will treat
abstentions and broker non-votes as shares that are present and entitled to vote
for purposes of determining the presence of a quorum. Directors will be elected
by a plurality of the votes cast that are present in person or represented by
proxy. Abstentions, withheld votes and broker non-votes will not effect the
election of directors. All other proposals require the favorable vote of a
majority of the votes present and entitled to vote on the particular proposal.
Abstentions will have the same effect as votes against such a proposal. Broker
non-votes will not be counted as votes for or against such proposal and will not
be included in counting the number of votes necessary for approval of the
proposal. Any proxy which is returned using the form of proxy enclosed and which
is not marked as to a particular item will be voted for the election of
directors nominated by the board of directors, for ratification of the
appointment of the designated independent auditors and as the proxy holders deem
advisable on other matters that may come before the annual meeting, as the case
may be, with respect to the item not marked.
The cost of soliciting proxies is being borne by us. We have retained
MacKenzie Partners, Inc. to assist in the proxy solicitation for a fee of $3,000
plus expenses. In addition, we may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies may also be solicited
by certain of our directors, officers and regular employees, without additional
compensation, personally or by telephone.
1
PROPOSAL NO. 1: ELECTION OF DIRECTORS
BOARD OF DIRECTORS
Our board of directors is divided into three classes. Class I consists of
three directors who are serving a term expiring at the annual meeting of
stockholders to be held in 2003. Class II consists of three directors who are
serving a term expiring at the annual meeting of stockholders to be held in
2004. Class III consists of three directors who are serving a term expiring at
this annual meeting of stockholders. In each case, a director serves for the
designated term and until his or her respective successor is duly elected and
qualified.
The following table sets forth certain information with respect to our
directors as of April 15, 2002:
NAME OF DIRECTOR AGE PRINCIPLE OCCUPATION DIRECTOR SINCE CLASS
---------------- --- -------------------- -------------- -----
J. Michael Norris.................... 55 Chairman of the Board, President 2000 III
and Chief Executive Officer
Eugene Delaney....................... 45 President of Asia Pacific and 2000 III
Senior Vice President and
General Manager of GRRO, Global
Relations and Resources
Organization, Motorola, Inc.
Craig Kornblau....................... 43 President, Universal Studios 2001 II
Home Video and Executive Vice
President and General Manager,
Universal Music and Video
Distribution
Ferdinand C. Kuznik.................. 61 Former Executive Vice President 2000 I
and President, Motorola Europe,
Middle East and Africa
Paul S. Latchford.................... 46 President, Spencer Trask Media 1999 II
and Communications Group
John McCartney....................... 48 Deputy Chairman, Datatec, Ltd. 1999 I
James G. Roseland.................... 59 Former Senior Vice President and 2000 II
Director of Finance, Motorola
Inc.
Richard Severns...................... 56 Senior Vice President and 2000 I
Director of Finance, Networks
Sector, Motorola Inc.
J. Michael Norris has served as our President and Chief Executive Officer
since December 2000. He has served as our Chairman of the Board since April
2001. Before joining us, Mr. Norris was Senior Vice President and General
Manager of the Network Management Group at Motorola. Mr. Norris was an original
founder of Motorola's Network Management Group, responsible for Motorola's
Global Cellular Service Operating Joint Ventures worldwide, International
Satellite Gateway Operations and Wireless Resale Operations, the domestic
wireless business of Motorola. Mr. Norris spent 29 years with Motorola.
Eugene Delaney has served as one of our directors since November 2000. Mr.
Delaney is President of Asia Pacific and Senior Vice President and General
Manager of GRRO, Global Relations and Resources Organization, Motorola, Inc. Mr.
Delaney has spent the past 25 years at Motorola. Beginning in June 1995, Mr.
Delaney served as Vice President and General Manager -- Japan Cellular
Infrastructure Division, and in 1997 Mr. Delaney became Corporate Vice President
of Cellular Infrastructure Group.
Craig Kornblau has been one of our directors since September 2001. Since
March 1999, Mr. Kornblau has been the President of Universal Studios Home Video
and also currently holds the title of Executive Vice President and General
Manager for Universal Music and Video Distribution. Prior to joining the
executive office of Universal Music & Video Distribution in January 1988, Mr.
Kornblau was Senior Vice President, Worldwide Operations and Logistics, for
Buena Vista Home Video.
Ferdinand C. Kuznik has been one of our directors since January 2000. Mr.
Kuznik recently retired from Motorola as Executive Vice President and President
of Motorola's operations in Europe, the Middle East and
2
Africa. Mr. Kuznik is on the board of directors of Cable Design Technologies
Corp. Mr. Kuznik joined Motorola in 1990.
Paul S. Latchford has been one of our directors since November 1999 and has
served as the President of the Spencer Trask Media and Communications Group, a
technology investment firm, since June 1999. From February 1997 to June 1999,
Mr. Latchford served as Principal Vice President of Global Business Development
for Bechtel Group, Inc., a telecommunications network engineering and
construction company. From February 1995 to February 1997, Mr. Latchford was
Vice President of Business Development and Operations for Bell Atlantic
International, a telecommunications company, for the Asia Pacific Region and
Executive Director of Business Development from March 1994 to February 1995.
John McCartney has been one of our directors since November 1999. Since
October 1998, Mr. McCartney has served as Deputy Chairman of Datatec, Ltd., a
networking and e-commerce company. From June 1997 to March 1998, Mr. McCartney
was President of the Client Access Business unit of 3Com Corporation, which
merged with U.S. Robotics Corporation in 1997. Mr. McCartney served on the board
of directors of U.S. Robotics Corporation from 1985 through 1997. Mr. McCartney
also served in various executive capacities at U.S. Robotics Corporation,
including as President and Chief Operating Officer from January 1987 to June
1997. Mr. McCartney serves on the board of directors of Datatec, A.M. Castle
Corp., Quotesmith.com and Altec Lansing Technologies.
James G. Roseland has served as a director since November 2000. He recently
retired as Senior Vice President and Director of Finance of Motorola Inc. Mr.
Roseland started his career with Motorola in 1968, holding various positions
primarily in the finance organization. At retirement he was Senior Vice
President and Director of Finance, Mergers and Acquisitions for Motorola's
Communications Enterprise. Immediately prior he was Senior Vice President and
Chief of Staff for the Personal Communications Sector. From 1995 until early in
2000 Mr. Roseland was Senior Vice President and Director of Finance for the
Messaging Information and Media Sector and its successor organization the
Personal Communications Sector.
Richard Severns has been one of our directors since January 2000. Mr.
Severns has held various positions with Motorola for the past 30 years, most
recently as Senior Vice President and Director of Finance for the Networks
Sector of Motorola.
There are no family relationships among our directors or executive
officers.
NOMINEES
Three directors may be elected at this annual meeting. Our board of
directors has nominated two current members of our board constituting Class III
directors to be re-elected and to serve a three-year term expiring at our annual
meeting of stockholders to be held in 2005, and one current appointed member of
our board constituting a Class II director to be elected and to serve a two-year
term expiring at our annual meeting of stockholders to be held in 2004. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the nominees named below, regardless of whether any other names are placed
in nomination by anyone other than one of the proxy holders. In the event that
any such nominee is unable or declines to serve as a director at the time of the
annual meeting, the proxy holders will vote in their discretion for a substitute
nominee. It is not expected that any nominee will be unable or will decline to
serve as a director. The term of office of each person elected as a director
will continue until his or her term expires and until his or her successor has
been elected and qualified. The nominees are:
- J. Michael Norris (Class III)
- Eugene Delaney (Class III)
- Craig Kornblau (Class II)
Our board has named fewer nominees than the number of directors set by our
board pursuant to our certificate of incorporation and bylaws. The board
continues to seek the best nominee for the open seat. Proxies cannot be voted
for a greater number of nominees than the number of nominees named.
3
BOARD MEETINGS AND COMMITTEES
Our board of directors held a total of five meetings during the year ended
December 31, 2001. Our board of directors has an audit committee and a
compensation committee. The board of directors does not have a nominating
committee or a committee performing the functions of a nominating committee.
The audit committee consists of Mr. Kornblau, Mr. Latchford and Mr.
McCartney, all of whom are outside directors, and held nine meetings during the
year ended December 31, 2001. The audit committee approves our independent
auditors, reviews the results and scope of annual audits and other accounting
related services and evaluates our internal controls.
The compensation committee consists of Mr. McCartney, Mr. Latchford and Mr.
Severns and held five meetings during the year ended December 31, 2001. Mr.
Severns is an executive officer of Motorola, our principal stockholder and
holder of a majority of our common stock through General Instrument. The
compensation committee makes recommendations to the board of directors in
connection with our stock option plans and matters of compensation, including
determining the compensation of our executive officers, except that a
subcommittee consisting of Mr. McCartney and Mr. Latchford, both of whom are
outside directors, makes recommendations as to matters subject to Section 162(m)
of the Internal Revenue Code.
None of the incumbent directors attended fewer than 75% of the aggregate
number of meetings of the board of directors and of the committees upon which
such director served during 2001, except for Mr. Kuznik, who attended 60% of the
aggregate meetings of the board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. Mr. Delaney and Mr. Severns are affiliated with Motorola; Motorola through
General Instrument holds a majority of our common stock. See "Certain
Relationships and Related Party Transactions."
DIRECTOR COMPENSATION
We pay our non-employee directors who are not employees of Motorola,
General Instrument or their respective affiliates a retainer of $20,000 per
year. In addition, we pay such directors a fee of $1,500 for each meeting of the
board of directors or a board committee that they attend. Non-employee directors
participate in our 1999 Equity Incentive Plan, pursuant to which such directors
are automatically granted options to purchase shares of our common stock on the
terms and conditions set forth in that plan. In most cases, options will vest
over the four-year period following the date of grant. Options generally expire
10 years after they are granted, except that they generally expire earlier if
the optionee's service terminates earlier.
During 1999, in accordance with that plan and prior to the consummation of
our initial public offering, Mr. Latchford and Mr. McCartney each were granted
options to purchase 20,000 shares of our common stock at an exercise price of
$11.00 per share. During 2000, Mr. Latchford, and Mr. McCartney each were
granted options to purchase 5,000 shares of our common stock at an exercise
price of $51.25 per share. During 2001, Mr. Latchford and Mr. McCartney each
were granted options to purchase 5,000 shares of our common stock at an exercise
price of $10.53 per share, Mr. Roseland was granted an option to purchase 20,000
shares of our common stock at an exercise price of $10.53 per share and Mr.
Kornblau was granted an option to purchase 20,000 shares at an exercise price of
$1.50 per share.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE NOMINEES LISTED
ABOVE.
4
PROPOSAL NO. 2: APPROVAL OF INDEPENDENT AUDITORS
Our board of directors has appointed the firm of Deloitte & Touche LLP,
independent auditors, to audit our financial statements for the year ending
December 31, 2002. In the event the stockholders do not ratify such appointment,
our board of directors will reconsider its selection. We expect representatives
of Deloitte & Touche LLP to be available at the annual meeting and they will
have the opportunity to respond to appropriate questions and to make a statement
if they desire.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPROVAL
OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 2002.
5
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common stock
as of April 15, 2002, as to:
- each person who is known by us to beneficially own more than five percent
of the outstanding shares of our common stock;
- each of our current directors;
- each of the executive officers named in the Summary Compensation Table
beginning on page 9 and;
- all of our directors and executive officers as a group.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
SHARES BENEFICIALLY
5% STOCKHOLDERS, DIRECTORS, OWNED(1)
NAMED EXECUTIVE OFFICERS, AND ---------------------
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER PERCENT
------------------------------------------- ---------- -------
Motorola Inc.(2)............................................ 92,241,050 80.8%
1303 East Algonquin Road
Schaumburg, Illinois 60196
Kevin Kimberlin Partners, LP(3)............................. 6,800,000 7.6%
535 Madison Avenue, 18th Floor
New York, New York 10022
Eugene Delaney.............................................. -- --
James F. Ide(4)............................................. 58,889 *
Craig Kornblau.............................................. -- --
Ferdinand C. Kuznik......................................... -- --
Paul S. Latchford(5)........................................ 23,118 *
John McCartney(6)........................................... 18,418 *
J. Michael Norris(7)........................................ 247,000 *
James G. Roseland(8)........................................ 5,000 *
Richard Severns............................................. -- --
T. Murat Uraz(9)............................................ 446,478 *
William A. Weeks(10)........................................ 387,727 *
Hans Van Welzen(11)......................................... 241,913 *
Keith A. Zar(12)............................................ 307,575 *
All directors and officers as a group (14 persons)(13)...... 1,763,689 2.0%
---------------
* Less than 1%
(1) Information with respect to beneficial ownership is based upon information
furnished by each director and officer or contained in filings made with
the Securities and Exchange Commission. Except as indicated in the
footnotes to this table, the stockholders named in this table have sole
voting and investment power with respect to all shares of our common stock
shown as beneficially owned by them, subject to community property laws
where applicable.
(2) Includes 14,312,442 shares of common stock subject to warrants currently
exercisable or exercisable within 60 days and 13,824,884 shares of common
stock subject to Series A Convertible Preferred Stock.
(3) Includes 3,900,000 shares of common stock subject to warrants held by
affiliates and currently exercisable. Kevin Kimberlin Partners, LP is
beneficially owned by entities controlled by, or affiliated with, Kevin
Kimberlin and Spencer Segura.
(4) Includes 38,889 options currently exercisable or exercisable within 60
days.
(5) Includes 22,918 options currently exercisable or exercisable within 60
days.
(6) Includes 17,918 options currently exercisable or exercisable within 60
days. Mr. McCartney disclaims beneficial ownership of 7,500 shares.
6
(7) Includes 225,000 options currently exercisable or exercisable within 60
days.
(8) Includes 5,000 options currently exercisable or exercisable within 60 days.
(9) Includes 409,644 options currently exercisable or exercisable within 60
days.
(10) Includes 381,517 options currently exercisable or exercisable within 60
days.
(11) Includes 237,249 options currently exercisable or exercisable within 60
days. Mr. Van Welzen's employment with us ended in December 2001.
(12) Includes 300,762 options currently exercisable or exercisable within 60
days.
(13) Includes 1,665,980 options held by such officers and directors currently
exercisable or exercisable within 60 days.
7
OUR EXECUTIVE OFFICERS
Our current executive officers are as follows:
NAME AGE POSITION
---- --- ------------------------------------------------------
J. Michael Norris.................... 55 President, Chief Executive Officer and Chairman of the
Board
Jeff Barnell......................... 44 Senior Vice President, Marketing and Product
Management
James F. Ide......................... 39 Senior Vice President, Chief Financial Officer and
Treasurer
T. Murat Uraz........................ 47 Senior Vice President and Chief Engineering Officer
William A. Weeks..................... 39 Senior Vice President and Chief Technical Officer
Keith A. Zar......................... 47 Senior Vice President, General Counsel, Chief
Administrative Officer and Secretary
J. Michael Norris has served as our President and Chief Executive Officer
since December 2000. He has served as our Chairman of the Board since April
2001. Before joining us, Mr. Norris was Senior Vice President and General
Manager of the Network Management Group at Motorola. Mr. Norris was an original
founder of Motorola's Network Management Group, responsible for Motorola's
Global Cellular Service Operating Joint Ventures worldwide, International
Satellite Gateway Operations and Wireless Resale Operations, the domestic
wireless business of Motorola. Mr. Norris spent 29 years with Motorola.
Jeff Barnell has served as our Senior Vice President for Marketing and
Product Management since April 2001. From March 2000 to January 2001,
Mr. Barnell was Vice President of Marketing for UrbanMedia Communications, a
multi-service CLEC. From March 1997 to January 2000, Mr. Barnell was Vice
President of Marketing for VPNet Technologies, a virtual private networking
company.
James F. Ide has served as our Senior Vice President, Chief Financial
Officer and Treasurer since September 2001, before which he served as Acting
Chief Financial Officer from July 2001 to September 2001 and Vice President of
Finance and Corporate Controller from April 2001 to July 2001. From February
2000 to March of 2001, Mr. Ide was Director of Finance for Motorola's Network
Management Group, a group of international cellular operating company joint
ventures. From August 1999 to February of 2000 Mr. Ide was Vice President and
Chief Financial Officer of Cwill Telecommunications (currently known as Navini
Networks), and from April 1998 to July 1999 he was self-employed. From February
1989 to March 1998, Mr. Ide held various positions with Motorola, including
Corporate Audit Manager and Senior Operations Controller for the Cellular
Subscriber Group in China. Prior to 1989, he was a senior auditor at Arthur
Andersen & Co.
T. Murat Uraz has served as our Senior Vice President and Chief Engineering
Officer since June 1999. From January 1995 to June 1999, Mr. Uraz held various
positions in our Engineering Department, including Vice President of
Engineering. From 1993 to January 1995, Mr. Uraz was a Broadband Engineering
Project Manager at Raynet Corporation, a telecommunications equipment company.
William A. Weeks has served as our Senior Vice President and Chief
Technical Officer since December 2000, before which he served as Senior Vice
President and Chief Strategic Officer since June 1999. From April 1996 to June
1999, Mr. Weeks served as our Vice President, Technology-West. From February
1995 to April 1996, Mr. Weeks served as our Senior Director of Technology. Mr.
Weeks was Director of Broadband Access Technology at U S WEST Advanced
Technologies from 1992 to February 1995. Prior to 1992, Mr. Weeks held various
positions with Ameritech Corp, AT&T Bell Laboratories and United
Telecommunications.
Keith A. Zar has served as our Senior Vice President, General Counsel and
Secretary since January 2000. He has served as Chief Administrative Officer
since April 2000. From February to December 1999, Mr. Zar was an outside legal
consultant to us. Mr. Zar was Senior Vice President of General Instrument from
October 1998 to February 1999, Senior Vice President and General Counsel of
General Instrument from April 1998 to October 1998, Vice President and General
Counsel of General Instrument from June 1997 to April 1998 and Assistant General
Counsel of General Instrument from July 1993 to June 1997.
8
There are no family relationships among our directors or executive
officers. Each executive officer serves at the sole discretion of our board of
directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows compensation information for our Chief Executive
Officer and our four other most highly paid executive officers.
ANNUAL COMPENSATION LONG-TERM
------------------------ COMPENSATION AWARDS ALL OTHER
SALARY BONUS SECURITIES COMPENSATION(1)
NAME AND PRINCIPAL POSITION AS OF 12/31/2001 YEAR ($) ($) UNDERLYING OPTIONS ($)
-------------------------------------------- ---- ------- ------- ------------------- ---------------
J. Michael Norris....................... 2001 425,000 100,000(2) -- 8,500
President, Chief Executive Officer and 2000 24,519 -- 600,000 --
Chairman of the Board 1999 -- -- -- --
Keith A. Zar............................ 2001 250,000 -- 145,000 8,500
Senior Vice President, General 2000 251,923 138,558 150,000 10,500
Counsel, Chief Administrative Officer 1999 -- -- 250,000 --
and Secretary
T. Murat Uraz........................... 2001 225,000 -- 48,000 8,500
Senior Vice President, 2000 224,231 110,994 150,000 10,500
Chief Engineering Officer 1999 182,712 73,085 190,000 4,264
William A. Weeks........................ 2001 225,000 -- 48,000 8,500
Senior Vice President and Chief 2000 223,806 110,784 150,000 8,964
Technical Officer 1999 160,859 56,301 253,334 4,944
Hans L. Van Welzen(3)................... 2001 224,423 -- 48,000 8,500
Senior Vice President, Sales 2000 192,558 165,823 150,000 10,500
1999 124,234 32,648 350,000 9,628
James F. Ide............................ 2001 136,692 58,742 130,000 4,258
Senior Vice President, Chief Financial 2000 -- -- -- --
Officer and Treasurer 1999 -- -- -- --
---------------
(1) Represents our matching 401(k) contribution.
(2) Represents a signing bonus payable to Mr. Norris upon his appointment as
Chief Executive Officer in December 2000, which was paid in 2001.
(3) Mr. Van Welzen's employment with us ended in December 2001.
9
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2001
The following table sets forth information for our named executive officers
with respect to grants of options to purchase our common stock made in the year
ended December 31, 2001 and the value of all options held by such executive
officers on December 31, 2001.
INDIVIDUAL GRANTS
-------------------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS DURING PRICE EXPIRATION BLACK-SCHOLES
NAME GRANTED YEAR(1) ($/SH) DATE VALUE($)(2)
---- ---------- ---------- -------- ---------- -------------
J. Michael Norris................ -- -- -- -- --
Keith A. Zar..................... 145,000 2.91% 8.625 01/092011 271,235
T. Murat Uraz.................... 48,000 0.96% 8.625 01/09/2011 89,788
William A. Weeks................. 48,000 0.96% 8.625 01/09/2011 89,788
Hans L. Van Welzen(3)............ 48,000 0.96% 8.625 01/09/2011 89,788
James F. Ide..................... 100,000 2.01% 5.125 04/02/2011 217,009
30,000 0.60% 2.43 08/29/2011 75,491
---------------
(1) Based on an aggregate total of 4,978,450 options granted to employees in
2001 under our option plans.
(2) This column represents the value of the options on December 31, 2001 using
the Black-Scholes option pricing model for the common stock, utilizing the
following assumptions: stock price volatility of 101%; dividend yield of 0%;
a 4-year expected option term; 4.55% risk-free interest rate; and no
adjustment for non-transferability or forfeiture. The actual value, if any,
that an executive officer may realize will depend on the excess of the
market price over the exercise price on the date the option is exercised so
there is no assurance that the value realized by an executive will be at or
near the value estimated by the Black-Scholes model, which is based on
assumptions as to the variables of stock price volatility, future dividend
yield and interest rate.
(3) Mr. Van Welzen's employment with us ended in December 2001.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED
DECEMBER 31, 2001 AND YEAR-END OPTION VALUES
The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options during 2001 and the
year-end number and value of unexercised options with respect to each of our
named executive officers. No stock appreciation rights were exercised by our
named executive officers in fiscal year 2001 or were outstanding at the end of
that year.
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 2001 DECEMBER 31, 2001($)(1)
NAME EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
J. Michael Norris........ -- -- 150,000/450,000 --/--
Keith A. Zar............. -- -- 184,414/359,586 --/--
T. Murat Uraz............ 22,334 167,840 280,060/222,273 181,440/--
William A. Weeks......... -- -- 261,352/249,981 89,598/--
Hans L. Van Welzen(2).... -- -- 193,749/216,751 --/--
James F. Ide............. -- -- --/130,000 --/27,600
---------------
(1) The fair market value of our common stock as reported by the Nasdaq National
Market at the close of business on December 31, 2001 was $3.35.
(2) Mr. Van Welzen's employment with us ended in December 2001.
10
COMPENSATION COMMITTEE REPORT
The following is a report of the compensation committee of our board of
directors describing the compensation policies applicable to our executive
officers during the year ended December 31, 2001. The committee recommends
salaries, incentives and other forms of compensation for our directors, officers
and other employees, administers our various incentive compensation and benefit
plans, including stock plans, and recommends policies relating to such incentive
compensation and benefit plans. Executive officers who are also directors have
not participated in deliberations or decisions involving their own compensation.
NEXT LEVEL COMMUNICATIONS' COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
Three members of our board of directors, Mr. McCartney, Mr. Latchford and
Mr. Severns, serve as the Compensation Committee of the board. The Compensation
Committee reviews, recommends and approves changes to Next Level's compensation
policies and benefits programs, administers the 1999 Equity Incentive Plan,
including approving stock option grants, and otherwise seeks to ensure that Next
Level's compensation philosophy is properly implemented and is consistent with
Next Level's best interests. Matters subject to the provisions of Internal
Revenue Code 162(m) as well as grants of equity compensation awards to
individuals subject to Section 16 of the Securities Exchange Act of 1934,
however, are independently reviewed and approved by a compensation subcommittee
consisting of Mr. McCartney and Mr. Latchford. The 2001 compensation levels for
Next Level's executive officers generally were determined on an individual basis
at the time of hiring.
COMPENSATION PHILOSOPHY
The Compensation Committee's goal is to provide a competitive compensation
package based on a review of publicly available information about the
compensation paid to similarly situated executives. The Compensation Committee
believes that a substantial portion of compensation should be tied to the
attainment of long-term and short-term objectives. To achieve these compensation
objectives, the Compensation Committee has developed a compensation philosophy
for executive officers consisting of base salary, annual incentive awards and
equity incentives.
Components of Executive Compensation
Base Salary. The Compensation Committee annually reviews each executive
officer's salary. In determining the appropriate salary, the Compensation
Committee considers, among other factors, the officer's scope of responsibility,
prior experience and past accomplishments. The Compensation Committee also
compares base salaries and salary ranges of similar positions in other companies
in relevant markets defined by company size, industry and location. Executive,
technical and other highly-compensated positions are valued in the national
market using data developed by nationally recognized compensation consulting
firms. Base salary for these positions is targeted at the median of a peer group
of publicly traded companies with similar products, markets and other comparable
characteristics. The peer group is reviewed regularly and generally established
on the basis of market capitalization value. The published compensation data
used by the Compensation Committee to establish base salary ranges, however, are
not necessarily drawn from the same peer group of companies included in the
Stock Performance Graph below. No executive officer received a salary increase
in 2001.
Annual Incentive Awards. Annual incentive awards, in the form of cash
payments, are designed to achieve specific short-term results and to further
long-term objectives. Financial and other objectives and program participants
are set at the beginning of each year. The process involves the board of
directors, the Compensation Committee, the Chief Executive Officer and program
participants. Goals and objectives are established for each program participant
at the beginning of the year. Performance is measured at year-end against these
pre-established objectives and annual incentive awards are determined based on
performance.
11
The Compensation Committee annually reviews potential incentive awards for
executive officers as a percentage of base salary and recommends adjustments to
the board of directors, based upon a review of Next Level's results and
performance versus objectives and personal performance of participants versus
objectives. Base salary and annual incentive awards (cash compensation) are
generally targeted at the 50th percentile of the peer group of companies
discussed above. No payments under the annual incentive plan were made in 2001.
Long-Term Equity Incentive Awards. The Compensation Committee emphasizes
the award of stock options and believes that in the highly competitive, emerging
markets in which Next Level operates, equity-based compensation provides the
greatest incentive for outstanding performance and the greatest alignment of
management and stockholder long-term interests. As a result, the Compensation
Committee has relied on long-term equity compensation as a substantial means of
compensating and motivating Next Level's executive officers. It is the
Compensation Committee's practice to set option exercise prices at not less than
100% of the stock's fair market value on the date of grant. Thus, the value of
the stockholders' investment in Next Level must appreciate before an optionee
receives any financial benefit from the option. Options are generally granted
for a term of ten years. Options granted to Next Level's executive officers
generally provide that they are not exercisable until one year after the date of
grant, at which time they become exercisable on a cumulative basis at an annual
rate that may vary for any particular grant.
Participation in Next Level's 1999 Equity Incentive Plan is available to
employees, outside directors and consultants. The Compensation Committee
annually reviews participants and potential award ranges considering
responsibility, authority and potential impact on Next Level. The opportunity
range for each participant is based on guidelines developed by nationally
recognized compensation consultants. At year end, the Compensation Committee
reviews Next Level's condition and performance and individual performance versus
long-term goals and determines awards for eligible participants. Awards may be
in the form of stock options, restricted stock, stock appreciation rights and
stock units, which are sometimes called "phantom shares," although to date all
awards have been in the form of stock options. In April 2000, the Compensation
Committee determined that it was in Next Level's best interest to grant stock
options to all employees on an ongoing basis as a means of retaining and
motivating individuals. This also allowed Next Level's employees to develop an
ownership position, thus aligning them with the long-term goals of both Next
Level and its other stockholders.
Chief Executive Officer Compensation. The Compensation Committee annually
reviews the Chief Executive Officer's performance and compensation and
recommends changes as appropriate to the board of directors. In its review, the
Compensation Committee considers Next Level's condition, operating results,
performance versus short-term and long-term objectives, economic environment,
industry conditions and increased stockholder value. The Compensation Committee
also considers the Chief Executive Officer's performance against short-term and
long-term objectives, compensation versus peers and other factors. In view of
industry conditions and Next Level's cash position, it was determined that no
annual incentive award would be paid to the Chief Executive Officer for 2001
performance. The Compensation Committee did execute an employee agreement with
Mr. Norris codifying his hiring agreement reached in December 2000. The
employment agreement calls for a salary of $425,000, a bonus target of 80%, a
lease to a house owned by us for $2,000 per month and an option grant of 600,000
shares vesting at 25% after one year and monthly thereafter over the subsequent
thirty-six months. The employment agreement also contains termination and change
of control provisions. Mr. Norris also received a signing bonus of $100,000 upon
his appointment as Chief Executive Officer in December 2000, which was paid in
2001.
Policy on Deductibility of Compensation
Section 162(m) of the U.S. Internal Revenue Code limits the tax
deductibility by a corporation of compensation in excess of $1.0 million paid to
any of its five most highly compensated executive officers. However,
compensation which qualifies as "performance-based" is excluded from the $1.0
million limit if, among other requirements, the compensation is payable only
upon attainment of pre-established, objective performance goals under a plan
approved by stockholders.
12
The Compensation Committee does not presently expect total cash
compensation payable for salaries to exceed the $1.0 million limit for any
individual executive. Having considered the requirements of Section 162(m), the
Compensation Committee believes that stock option grants to date meet the
requirement that such grants be "performance based" and are, therefore, exempt
from the limitations on deductibility. The Compensation Committee will continue
to monitor the compensation levels potentially payable under its cash
compensation programs, but intends to retain the flexibility necessary to
provide total cash compensation in line with competitive practice, Next Level's
compensation philosophy and Next Level's best interests.
COMPENSATION COMMITTEE
Paul Latchford
John McCartney
Richard Severns
SUBMITTED BY THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
13
STOCK PERFORMANCE GRAPHS
Set forth below is a comparison of the total stockholder return on our
common stock for the period beginning November 10, 1999 (date of our initial
public offering) and ending December 31, 2001 with the total stockholder return
for the same period for the Standard & Poor's 500 Index (S&P 500) and our "Peer
Group," the Standard & Poors High Technology Composite Index (S&P Tech). The
total stockholder return reflects the change in share price during the period,
assuming an investment of $100.00 on November 10, 1999 plus the reinvestment of
dividends, if any. No dividends were paid on our common stock during the period
shown. The stock price performance shown below is not necessarily indicative of
future stock price performance.
COMPARISON OF NEXT LEVEL COMMUNICATIONS, INC.,
THE S&P 500 AND OUR PEER GROUP
[PERFORMANCE GRAPH]
----------------------------------------------------------------------------------------------------------------------------
11/10/99 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/30/01 6/29/01 9/28/01 12/31/01
----------------------------------------------------------------------------------------------------------------------------
NXTV $100.00 $147.55 $214.29 $168.97 $130.31 $22.42 $10.34 $13.30 $ 6.03 $ 8.80
S&P 500 $100.00 $106.97 $109.11 $105.91 $104.69 $86.13 $84.48 $89.15 $75.79 $84.53
S&P Tech $100.00 $ 90.82 $78.38 $52.92 $88.27 $71.95 $39.81 $44.69 $30.05 $40.24
14
AUDIT COMMITTEE REPORT
The Audit Committee of the board of directors is comprised of independent
directors as required by the listing standards of the Nasdaq National Market.
The Audit Committee operates pursuant to a written charter adopted by the board
of directors.
The role of the Audit Committee is to oversee Next Level's financial
reporting process on behalf of the board of directors. Management has the
primary responsibility for Next Level's financial statements as well as Next
Level's financial reporting process, accounting principles and internal
controls. The independent auditors are responsible for performing an audit of
Next Level's financial statements and expressing an opinion as to the conformity
of such financial statements with accounting principles generally accepted in
the United States of America.
In this context, the Audit Committee has reviewed and discussed Next
Level's audited financial statements as of and for the year ended December 31,
2001 with management and the independent auditors. The Audit Committee has
discussed with the independent auditors the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communications with Audit Committees),
as modified or supplemented. In addition, the Audit Committee has received the
written disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), as modified or supplemented, and it has discussed with the auditors
their independence from Next Level. The Audit Committee has also considered
whether the independent auditors' provision of services covered in "All Other
Fees" below to Next Level is compatible with maintaining the independence of
Deloitte & Touche LLP.
Based on the reports and discussions described above, the Audit Committee
recommended to the board of directors that the audited financial statements be
included in Next Level's Annual Report on Form 10-K for the year ended December
31, 2001 for filing with the Securities and Exchange Commission.
AUDIT FEES
The aggregate fees billed by Deloitte & Touche LLP for professional
services rendered for the audit of Next Level's annual consolidated financial
statements for the fiscal year ended December 31, 2001 and for the reviews of
the condensed consolidated financial statements included in Next Level's
quarterly reports on Form 10-Q for such fiscal year were approximately $330,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no fees billed by Deloitte & Touche LLP to Next Level relating
to financial information systems design and implementation for the fiscal year
ended December 31, 2001.
ALL OTHER FEES
The aggregate fees billed by Deloitte & Touche LLP for services rendered to
Next Level other than services described above under "Audit Fees" for the fiscal
year ended December 31, 2001 were approximately $633,000. Such fees were
comprised of (i) audit related services of $202,000, (ii) tax compliance and
planning services of $140,000 and (iii) inventory process related services of
$291,000.
The audit committee has considered whether the provision of these services
is compatible with maintaining Deloitte & Touche LLP's independence.
AUDIT COMMITTEE
Craig Kornblau
Paul S. Latchford
John McCartney
SUBMITTED BY THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS
15
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Next Level Communications ("NLC" or the "Limited Partner") was incorporated
as a California corporation in 1994. In September 1995, NLC was acquired by
General Instrument Corporation ("General Instrument"). In January 1998, NLC
transferred its net assets, management and workforce to a newly formed limited
partnership, Next Level Communications L.P. (the "Partnership"), in exchange for
an 89% limited partnership interest. The Partnership recorded the net assets
transferred at their historical cost. At the same time, Spencer Trask (the
"General Partner") acquired an 11% general partner interest in the Partnership
in exchange for a $10.0 million cash contribution.
On August 24, 1999 the Partnership formed the Company as a wholly-owned
subsidiary. On November 9, 1999, we issued 9,775,000 shares of common stock at
$20.00 per share for net proceeds of $177.0 million in an initial public
offering. Prior to the completion of the offering, the following
recapitalization transactions occurred:
A note payable and accrued interest to General Instrument of $86.8 million
was converted into 4,337,633 shares of our common stock.
The Partnership and NLC (a wholly-owned subsidiary of General Instrument)
were merged into the Company. As part of this merger, the General Partner
received 5,863,329 shares of our common stock and General Instrument received
55,366,091 shares of our common stock in exchange for their respective
partnership interests.
We issued a common stock dividend of 4,400,000 shares to General Instrument
to reflect the additional value, $88.0 million, which will be received by us
upon exercise of the warrants described below. In accordance with the
partnership agreement NLC was entitled to receive the $88.0 million exercise
price. As a result of the recapitalization, such amounts are to be received by
us as these warrants are exercised. Accordingly, General Instrument received
$88.0 million of common stock (4,400,000 shares) because it would have received
that amount under the partnership agreement.
The General Partner's option in the partnership agreement to acquire up to
11% of NLC upon an initial public offering was converted into warrants to
acquire 8,480,102 shares our common stock at $10.38 per share. In 2000, warrants
to purchase 2,369,000 shares of common stock were exercised. The exercise price
of these warrants was paid through the surrender of additional warrants to
purchase 519,493 shares of common stock. We did not receive any cash proceeds.
At December 31, 2001, warrants to acquire 5,600,000 shares of common stock were
outstanding under this agreement.
On January 5, 2000, General Instrument consummated its merger with
Motorola. Consequently, Motorola is able to exercise a majority of our total
voting power and has the ability to control our board of directors and all
matters relating to our business and affairs. We do not know whether Motorola's
plans for our business and affairs will be different than our existing plans and
whether any changes that may be implemented under Motorola's control will be
beneficial or detrimental to our other stockholders.
Although Motorola has advised us that it currently intends to hold all of
its shares, neither Motorola, through its ownership of General Instrument, or
Spencer Trask and its related persons are subject to any contractual obligation
to retain any of its shares. As a result, we cannot assure you as to how long
Motorola or Spencer Trask and its related persons will maintain their remaining
beneficial ownership of our common stock.
It is possible that Motorola could be in a position involving a conflict of
interest with us. Two of our directors are employed by Motorola. These directors
or other individuals who are officers or directors of both Motorola and us have
fiduciary duties to both Motorola and us. For example, a conflict may arise if
Motorola were to engage in activities or pursue corporate opportunities that may
overlap with our business. Our certificate of incorporation contains provisions
intended to protect Motorola and these individuals in these situations.
16
CORPORATE AND INTERCOMPANY AGREEMENT WITH GENERAL INSTRUMENT
In November 1999, we entered into a corporate and intercompany agreement
with General Instrument under which we granted to General Instrument and its
affiliates a continuing option to purchase additional shares of common stock or
shares of non-voting capital stock. If we issue any additional equity
securities, General Instrument and its affiliates may exercise this option to
purchase:
- shares of common stock to the extent necessary for them to maintain their
then-existing percentage of the total voting power; and
- shares of non-voting capital stock to the extent necessary to own 80% of
any class of non-voting capital stock which may be outstanding.
The purchase price of the shares of common stock is the fair market value
of the common stock. The purchase price of non-voting capital stock will be the
price at which third parties may purchase this stock. The option expires if
General Instrument and its affiliates beneficially own less than 30% of our
outstanding common stock.
Under this agreement, we have agreed to obtain a release of General
Instrument from its Bell Atlantic guaranty as promptly as practicable.
This agreement also provides that, for as long as General Instrument and
its affiliates beneficially own a majority of the outstanding common stock, we
may not take any action which may be reasonably anticipated to result in a
violation by them of:
- any law or regulation, including the Internal Revenue Code or the
Employee Retirement Income Security Act;
- their certificates of incorporation or by-laws;
- any credit agreement or other material instrument binding upon them or
any of their assets; or
- any judgment, order or decree of any governmental authority having
jurisdiction over them or any of their assets.
This agreement also provides that the parties will provide reasonable
cooperation with respect to their tax filings and any tax audits. Under this
agreement, we will also indemnify General Instrument and its affiliates against
any lawsuits or other claims arising out of any of our or our predecessors'
activities or omissions before and after our initial public offering.
Under this agreement, we and our board of directors also appointed
additional directors nominated by Motorola on January 5, 2000.
This agreement also provides that we will enter into a similar agreement
for the benefit of any transferee or group of related transferees of General
Instrument which is unaffiliated with General Instrument of more than a majority
of the outstanding shares of our common stock in a single transaction or a group
of related transactions.
CROSS LICENSE AGREEMENT WITH GENERAL INSTRUMENT
In November 1999, we entered into a cross license agreement with General
Instrument. Under this agreement, General Instrument granted to us a
nonexclusive, perpetual, royalty free, worldwide license under all patent
applications and patents owned by General Instrument and any future patents
issued from these General Instrument patents and patent applications, to make
our NLevel(3) product or related switched digital video network equipment and
software. This grant did not include patent claims covering the implementations,
methods or devices primarily used or to be used by General Instrument. Also
under this agreement, we granted to General Instrument and its affiliates,
including Motorola, a nonexclusive, perpetual, royalty free, worldwide license
under all patent applications and patents owned by us and filed prior to our
initial public offering and any future patents issued from these patents and
patent applications to make digital cable subscriber terminals, satellite and
wireless subscriber terminals, cable modems, HFC telephony and
17
related headend, uplink, transmission or other network equipment and software.
This grant did not include patent claims covering the implementations, methods
or devices primarily used or to be used by us. We and General Instrument each
also licensed to the other the right to use confidential, technical and other
information in each other's possession as of the completion of our initial
public offering. These licenses do not include the right to sublicense to any
third parties. This agreement permits General Instrument and us to transfer
their or our licenses pursuant to a sale of its or our respective entire
business, a sale of an entire business unit that benefits from the license or to
any of General Instrument's or our respective affiliates.
REGISTRATION RIGHTS AGREEMENT WITH GENERAL INSTRUMENT AND SPENCER TRASK
In November 1999, we entered into a registration rights agreement with
General Instrument and Spencer Trask Investors, LLC. Under this agreement, we
granted to these stockholders and their transferees the right to request that we
use our best efforts to register their shares of our common stock and the shares
of common stock underlying their warrants under federal and state securities
laws so that they may sell or dispose of their shares in accordance with these
laws. So long as General Instrument and its affiliates own 30% of our
outstanding common stock, they will not be limited in the number of times they
may make that request. After their ownership declines below that level, they
will be able to cause us to effect up to four registrations of their shares.
Spencer Trask and its related persons and their transferees will be able to
cause us to effect up to three registrations of their shares. Under customary
"piggy-back" registration rights, General Instrument, Spencer Trask and their
transferees will also be entitled to include their shares in all registrations
of common stock we make, either for a sale by us or any of our stockholders,
subject to customary exceptions. We will pay for all out-of-pocket expenses
relating to these registrations and indemnify General Instrument, Spencer Trask
(and its related persons) and their transferees against certain liabilities
under securities laws. General Instrument and Spencer Trask and related persons
and their transferees may generally assign these registration rights to
transferees of their shares. This agreement also provides that we will enter
into a similar agreement for the benefit of any majority transferee. As defined
in the agreement a majority transferee is any transferee or group of related
transferees of General Instrument which is unaffiliated with General Instrument
of more than a majority of the outstanding shares of common stock in a single
transaction or a group of related transactions.
CHANGE OF CONTROL AGREEMENTS WITH EXECUTIVE OFFICERS
In April 2000, Mssrs. Weeks, Uraz and Zar each entered into agreements with
us providing for acceleration of all unvested stock options held by such
individuals immediately prior to the consummation of a change in control, as
defined in the agreement, notwithstanding any vesting schedule or other
provisions to the contrary in the agreements or plans evidencing such options.
In the event of an acquisition of Next Level by Motorola, 50% of the unvested
stock options held by such individuals shall become fully vested and immediately
exercisable immediately prior to the consummation of the acquisition by
Motorola, with the remainder of such individuals' unvested stock options vesting
in accordance with the original vesting schedule of the stock option agreement
and stock option plan pursuant to which such stock options were granted for the
period commencing on the consummation of the acquisition by Motorola and ending
on the 12 month anniversary following such acquisition. In 2001, Mssrs. Ide and
Barnell entered into similar change of control agreements with us.
SEVERANCE AGREEMENT WITH PETER KEELER
We entered into a Severance Agreement and General Release with Peter Keeler
effective as of December 4, 2000. Pursuant to the agreement, Mr. Keeler's
employment with us as Chief Executive Officer terminated as of December 4, 2000
and his position with us as Chairman of the Board of Directors terminated as of
March 31, 2001. Additionally, certain of Mr. Keeler's employee benefits were
extended through December 4, 2003 and Mr. Keeler's stock option agreements were
amended to allow his options to be exercised until the termination of the option
agreements.
18
MOTOROLA LOAN
During 2001 we entered into a note agreement with Motorola for $83.0
million which matures on May 17, 2003. Interest is payable monthly and is
determined on either the base rate, as defined in the agreement, plus 2% or the
Eurodollar rate plus 3 1/2% (5.4% at December 31, 2001).
In connection with the note agreement we granted warrants to purchase up to
10,000,000 shares of our common stock; 7,500,000 warrants have an exercise price
of $7.39 per share and 2,500,000 warrants have an exercise price of $4.29 per
share. Warrants to purchase 7,000,000 shares of our common stock were
exercisable at December 31, 2001. The remaining warrants become exercisable as
follows:
- 1,000,000 shares become exercisable unless, prior to May 17, 2002, all
borrowings under the note agreement have been repaid in full, and it has
been terminated;
- 1,000,000 shares become exercisable unless, prior to November 17, 2002
all borrowings under the note agreement have been repaid in full, and it
has been terminated; and
- 1,000,000 shares become exercisable unless, prior to February 17, 2003,
all borrowings under the note agreement have been repaid in full, and it
has been terminated.
We do not expect to repay amounts due under the agreement until its
maturity date of May 17, 2003. As a result, the estimated fair value of the
remaining 3,000,000 warrants will be adjusted in subsequent periods, up to their
respective measurement dates, to reflect changes in our stock price.
The fair value of the warrants of $37.4 million was recorded as a discount
to the note payable with a corresponding increase to additional paid-in capital.
The fair value of the warrants was estimated using the Black-Scholes option
pricing model with the following assumptions: no dividends; risk free interest
rate ranging from 4.3% to 4.9%; volatility of 101%; and a contractual life of
five years. As of December 31, 2001, no shares of common stock had been
purchased under the warrants.
We are amortizing the discount under the effective interest method up to
the maturity date (May 17, 2003) of the related note. During the year ended
December 31, 2001 we amortized $10.4 million of the discount, which has been
reflected as interest expense in our statement of operations. As of December 31,
2001, the Motorola note was recorded at $56.0 million, net of $27.0 million of
unamortized discount.
The note agreement with Motorola contains various covenants, including
compliance with net worth requirements, and restrictions on additional
indebtedness, capital expenditures and payment of dividends. As of December 31,
2001, we were not in compliance with the net worth financial covenant. On March
26, 2002, we and Motorola amended the note agreement to waive the debt covenant
violation and established revised financial covenants for net worth. We also
entered into a Registration Rights Agreement with Motorola in which we granted
to Motorola the right to request that we use our best efforts to register its
shares of our common stock issuable upon exercise of the warrants under federal
and state securities laws so that it may sell or dispose of its shares in
accordance with these laws. Motorola may exercise its rights under this
agreement on not more than four occasions. Under customary "piggyback"
registration rights, Motorola will also be entitled to include its shares in all
registrations of common stock we make, either for a sale by us or any of our
stockholders, subject to customary exceptions. We will pay for all out-of-pocket
expenses relating to these registrations and indemnify Motorola against certain
liabilities under securities laws. Motorola may assign these registration rights
to transferees of its shares.
TAX SHARING AND ALLOCATION AGREEMENT WITH MOTOROLA
In December 2000, we received a $15.0 million advance from Motorola related
to a tax sharing and allocation agreement (the "Tax Sharing Agreement"). During
2001 we received an additional $17.3 million in January 2001, and the Tax
Sharing Agreement was amended in February 2001. The amount advanced to us of
$32.3 million was based on an estimate of the present value of income tax
benefits to Motorola from the inclusion of our operating losses for the period
from January 6, 2000 to May 17, 2000 in Motorola's consolidated tax return. On
October 10, 2001, we received a revised calculation of the estimated present
value of income tax benefits to Motorola based upon actual net losses that were
included in Motorola's 2000 tax
19
return. The revised amount was $29.3 million. Under the original agreement, we
were required to repay the $3.0 million difference by October 15, 2001. On
October 15, 2001, the Loan Agreement between us and Motorola was amended to
include such $3.0 million (see above). To the extent Motorola does not achieve
the expected tax benefits by September 30, 2006, we must repay any difference.
In the event of a debt or equity security offering or a sale of assets in
excess of $25.0 million, the first $25.0 million of proceeds may be retained by
us; the next $25.0 million (between $25.0 million and $50.0 million) of such
proceeds will be allocated at least one-third to repay our obligations under the
Tax Sharing Agreement, and the balance may be retained by us; the next $25.0
million of such proceeds (between $50.0 million and $75.0 million) will be
allocated at least one-half to repay our obligations under the Tax Sharing
Agreement and the balance may be retained by us; amounts of such proceeds in
excess of $75.0 million must be used 100% first to repay our obligations under
the Tax Sharing Agreement (to the extent of such obligations) and then to repay
and reduce the amount owed under the note agreement.
MORTGAGE GUARANTEE BY MOTOROLA
On October 30, 2001, we received $20.0 million under a mortgage loan for a
company-owned office building. The loan is amortized over a twelve year period
with a ten year term and bears interest at an annual fixed rate of 7.51%. The
entire unpaid principal balance plus accrued interest thereon is due and payable
on November 1, 2011.
The mortgage is guaranteed by Motorola. In consideration for the guarantee,
we issued to Motorola warrants to purchase up to 400,000 shares of common stock
with an exercise price of $3.82 per share. Accordingly, the warrants were
recorded at the fair value of $0.7 million, with a discount to the mortgage loan
note payable and a corresponding increase to additional paid-in capital. The
fair value of the warrants was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividends; risk free interest rate
ranging from 4.3% to 4.9%; volatility of 101%; and a contractual life of five
years.
$30.0 MILLION REDEEMABLE CONVERTIBLE PREFERRED STOCK ISSUED TO MOTOROLA
On February 20, 2002, we issued $30.0 million of redeemable convertible
preferred stock ("Series A Preferred Stock") to Motorola, comprised of 6,912,442
shares at a purchase price of $4.34 per share. Each share of Series A Preferred
Stock is convertible, at the option of the holder, into two shares of our common
stock, or 13,824,884 shares in total. The Series A Preferred Stock is
redeemable, at the option of the holder, at an initial redemption price of $5.21
per share, on or after February 19, 2007. Dividends are cumulative at a rate of
7.5%, payable in cash or additional shares of Series A Preferred Stock, at our
option. Liquidation value is $10.85 per share. In conjunction with this
financing, we also issued to Motorola warrants to purchase 3,456,221 shares of
common stock at an exercise price of $2.17 per share and warrants to purchase
3,456,221 shares of common stock at an exercise price of $2.60 per share. The
warrants have a term of five years. We also entered into a Registration Rights
Agreement with Motorola in which we granted to Motorola the right to request
that we use our best efforts to register its shares of our common stock issuable
upon exercise of the warrants or upon conversion of the Series A Preferred Stock
under federal and state securities laws so that it may sell or dispose of its
shares in accordance with these laws. Motorola may collectively exercise its
rights under this agreement and under the Registration Rights Agreement between
us and Motorola dated as of May 16, 2001 on not more than four occasions. Under
customary "piggyback" registration rights, Motorola will also be entitled to
include its shares in all registrations of common stock we make, either for a
sale by us or any of our stockholders, subject to customary exceptions. We will
pay for all out-of-pocket expenses relating to these registrations and indemnify
Motorola against certain liabilities under securities laws. Motorola may assign
these registration rights to transferees of its shares.
$35.0 MILLION LINE OF CREDIT COMMITMENT FROM MOTOROLA
On March 29, 2002, Motorola agreed to make available to us up to an
additional $35.0 million in financing. Draw downs by us, when they occur, will
be treated, at Motorola's option, as either (i) additions to the existing Note
Payable Agreement with Motorola and subject to substantially the same terms
(interest
20
rate, maturity in May 2003, warrants, etc.) under such agreement or (ii)
additional issuances of redeemable convertible preferred stock, subject to
substantially the same terms as the February 2002 issuance of Series A Preferred
Stock described above.
MOTOROLA GUARANTEE OF VENDOR PAYMENT
On March 28, 2002, Motorola agreed to guarantee the full payment and
performance of our obligation to our vendor SCI Systems under our Note Payable
Agreement with SCI Systems, as amended on March 28, 2002.
CEO LEASE
As part of his employment agreement with us, Mr. Norris leases a house
owned by us for $2,000 per month.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers, and persons who own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of changes in ownership of our common stock and other
equity securities. Officers, directors and greater than ten percent stockholders
are required by SEC regulation, to furnish us with copies of all Section 16(a)
forms they file. To our knowledge, except for the late filing by Mr. Ide of a
Form 3, all of these filing requirements have been satisfied. In making this
statement, we have relied solely upon review of the copies of such reports
furnished to us and written representations from our officers and directors that
no other reports were required.
DEADLINE FOR RECEIPT OF STOCKHOLDER
PROPOSALS FOR 2003 ANNUAL MEETING
Proposals of stockholders that are intended to be presented by such
stockholders at our 2003 annual meeting of stockholders must be received by us
no later than December 30, 2002 in order that such proposals may be included in
the proxy statement and form of proxy relating to that meeting.
In addition, our bylaws provide for the timing and content of notice which
stockholders must provide to our corporate secretary for the nomination of
directors or other proposals to be properly presented at a stockholders meeting.
Pursuant to these provisions, notice of any such nomination or proposal must be
received by us not less than 60 nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; however, in the event that
the date of the annual meeting is advanced by more than 30 days, or delayed by
more than 60 days, from such anniversary date, notice by the stockholder to be
timely must be not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made.
21
OTHER MATTERS
As of the date of this proxy statement, our board of directors knows of no
other matters to be submitted to the annual meeting. As to other business, if
any, that may come before the annual meeting, it is intended that proxies in the
enclosed form will be voted in respect thereof in accordance with the judgment
of the person or persons voting the proxies.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Keith A. Zar
Keith A. Zar
Secretary
Rohnert Park, California
April 30, 2002
A COPY OF NEXT LEVEL'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO NEXT LEVEL COMMUNICATIONS,
INC., 6085 STATE FARM DRIVE, ROHNERT PARK, CALIFORNIA 94928, ATTENTION:
CORPORATE SECRETARY.
22
NEXT LEVEL COMMUNICATIONS, INC.
6085 STATE FARM DRIVE
ROHNERT PARK, CALIFORNIA 94928
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Keith A. Zar and J. Michael Norris as
Proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
Common Stock of Next Level Communications, Inc. (the "Company") held of record
by the undersigned on April 15, 2002, at the Company's Annual Meeting of
Stockholders to be held at 9:00 a.m., Central time, on May 29, 2002, and at any
adjournment or postponement thereof.
All other proxies heretofore given by the undersigned to vote shares of
stock of the Company, which the undersigned would be entitled to vote if
personally present at the Annual Meeting or any adjournment or postponement
thereof, are hereby expressly revoked.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2.
(Continued and to be signed and dated on reverse side)
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Please mark
your votes as [X]
indicated in
this example.
FOR WITHHOLD
all nominees listed AUTHORITY
below (except as marked for all nominees
to the contrary below) listed below
1. Election of Directors [ ] [ ]
(01) J. Michael Norris
(02) Eugene Delaney
(03) Craig Kornblau
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.
_______________________________________________________________
FOR AGAINST ABSTAIN
2. Ratification of the appointment of Deloitte & [ ] [ ] [ ]
Touche LLP as the Company's independent
auditors for 2002.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting or any adjournment
or postponement thereof.
Please date this Proxy and sign it exactly as your name or names appear on your
stock certificate. When shares are held by joint tenants, both should sign. When
signing as an attorney, executor, administrator, trustee or guardian please give
full title as such. If shares are held by a corporation, please sign in full
corporate name by the President or other authorized officer. If shares are held
by a partnership please sign in partnership name by an authorized person.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED
ENVELOPE.
Signature(s) _______________________________________ Dated: ______________, 2002
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