-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYtghl4eLQiaoLWL2Khu0DCzaGlOiMO3psMIidO98H42z/UuRjsEyaHahohHLafd +NmkJUDlFDflEvO1Zd/PdQ== 0001047469-98-028940.txt : 19980803 0001047469-98-028940.hdr.sgml : 19980803 ACCESSION NUMBER: 0001047469-98-028940 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980731 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL INSTRUMENT CORP CENTRAL INDEX KEY: 0001035881 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 364134221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12925 FILM NUMBER: 98675251 BUSINESS ADDRESS: STREET 1: 101 TOURNAMENT DRIVE CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: (215)323-1 MAIL ADDRESS: STREET 1: 101 TOURNAMENT DRIVE CITY: HORSHAM STATE: PA ZIP: 19044 FORMER COMPANY: FORMER CONFORMED NAME: NEXTLEVEL SYSTEMS INC DATE OF NAME CHANGE: 19970314 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to __________ Commission file number 001-12925 GENERAL INSTRUMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-4134221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 TOURNAMENT DRIVE, HORSHAM, PENNSYLVANIA, 19044 (Address of principal executive offices) (Zip Code) (215) 323-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of July 15, 1998, there were 151,746,136 shares of Common Stock outstanding. PAGES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 3-4 Consolidated Statements of Operations 5 Consolidated Statement of Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8-16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17-21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 4. Submission of Matters to a Vote of Securities Holders 24 ITEM 5. Other Information 24-25 ITEM 6. Exhibits 25 SIGNATURES 26 INDEX TO EXHIBITS 27 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
(Unaudited) June 30, December 31, 1998 1997 ----------- ----------- Cash and cash equivalents $ 82,854 $ 35,225 Short-term investments 25,659 30,346 Accounts receivable, less allowance for doubtful accounts of $3,120 and $3,566, respectively 323,000 343,625 Inventories 261,031 288,078 Deferred income taxes 121,494 105,582 Other current assets 14,112 21,862 ----------- ----------- Total current assets 828,150 824,718 Property, plant and equipment, net 226,918 236,821 Intangibles, less accumulated amortization of $91,547 and $86,333, respectively 76,171 82,546 Excess of cost over fair value of net assets acquired, less accumulated amortization of $114,919 and $108,123, respectively 457,418 471,186 Deferred income taxes 19,889 5,634 Investments and other assets 84,723 54,448 ----------- ----------- TOTAL ASSETS $ 1,693,269 $ 1,675,353 =========== ===========
See notes to consolidated financial statements. 3 GENERAL INSTRUMENT CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited) June 30, December 31, 1998 1997 ----------- ----------- Accounts payable $ 203,780 $ 200,817 Other accrued liabilities 170,993 188,250 ----------- ----------- Total current liabilities 374,773 389,067 Deferred income taxes 5,663 5,745 Other non-current liabilities 62,525 65,730 ----------- ----------- Total liabilities 442,961 460,542 ----------- ----------- Commitments and contingencies (See Note 5) Stockholders' Equity: Preferred Stock, $.01 par value; 20,000,000 shares authorized; no shares issued - - Common Stock, $.01 par value; 400,000,000 shares authorized; 151,686,994 and 148,358,188 shares issued at June 30, 1998 and December 31, 1997, respectively 1,517 1,484 Additional paid-in capital 1,282,428 1,213,566 Accumulated deficit (49,165) (19,236) Accumulated other comprehensive income, net of taxes of $9,129 and $11,347, respectively 15,530 18,999 ----------- ----------- 1,250,310 1,214,813 Less-Treasury Stock, at cost, 6,134 shares of Common Stock (2) (2) ----------- ----------- Total stockholders' equity 1,250,308 1,214,811 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,693,269 $ 1,675,353 =========== ===========
See notes to consolidated financial statements. 4 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1998 1997 1998 1997 --------- --------- --------- --------- NET SALES $ 488,505 $ 450,403 $ 905,425 $ 858,431 Cost of sales 347,384 332,785 671,316 627,299 --------- --------- --------- --------- GROSS PROFIT 141,121 117,618 234,109 231,132 --------- --------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 45,883 51,890 101,768 94,644 Research and development 42,266 49,630 158,169 100,675 Amortization of excess of cost over fair value of net assets acquired 3,562 3,560 7,123 7,118 --------- --------- --------- --------- Total operating expenses 91,711 105,080 267,060 202,437 --------- --------- --------- --------- OPERATING INCOME (LOSS) 49,410 12,538 (32,951) 28,695 Other expense - net (796) (1,324) (9,804) (1,853) Interest expense - net (284) (6,420) (1,264) (13,511) --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 48,330 4,794 (44,019) 13,331 Benefit (provision) for income taxes (18,367) (4,388) 14,090 (7,965) --------- --------- --------- --------- NET INCOME (LOSS) $ 29,963 $ 406 $ (29,929) $ 5,366 ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE - BASIC $ 0.20 $ (0.20) ========= ========= EARNINGS (LOSS) PER SHARE - DILUTED $ 0.19 $ (0.20) ========= ========= PRO FORMA EARNINGS PER SHARE - BASIC AND DILUTED $ - $ 0.04 ========= ========= WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC 151,226 150,450 WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED 160,863 150,450 PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING 148,700 148,700
See notes to consolidated financial statements. 5 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited - In thousands)
Accumulated Common Stock Additional Other Common Total --------------------- Paid-In Accumulated Comprehensive Stock-In Stockholders' Shares Amount Capital Deficit Income Treasury Equity --------- --------- ------- ------- ------ -------- ------ BALANCE, JANUARY 1, 1998 148,358 $ 1,484 $1,213,566 $(19,236) $18,999 $ (2) $1,214,811 Net loss (29,929) (29,929) Exercise of stock options and related tax benefit 3,329 33 57,216 57,249 Amortization of warrant costs 11,646 11,646 Net change in investments (3,469) (3,469) -------- ------- ---------- -------- ------- -------- ---------- BALANCE, JUNE 30, 1998 151,687 $ 1,517 $1,282,428 $(49,165) $15,530 $ (2) $1,250,308 ======== ======= ========== ======== ======= ======== ==========
See notes to consolidated financial statements. 6 GENERAL INSTRUMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - In thousands)
SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ----------- ----------- OPERATING ACTIVITIES: Net income (loss) $ (29,929) $ 5,366 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 50,307 45,660 Gain on sale of short-term investment (4,529) - Losses from asset sales and write-downs, net 6,714 - Loss from equity investments 17,852 - Changes in assets and liabilities: Accounts receivable 13,103 49,560 Inventories 13,133 (18,800) Prepaid expenses and other current assets 2,427 779 Deferred income taxes (28,031) 4,620 Non-current assets (436) - Accounts payable and other accrued liabilities (1,458) (21,806) Other non-current liabilities (3,206) 3,041 Other (901) (2,105) ----------- ----------- Net cash provided by operating activities 35,046 66,315 ----------- ----------- INVESTING ACTIVITIES: Additions to property, plant and equipment (40,091) (36,547) Investments in other assets (1,995) (20,778) Proceeds from sale of short-term investment 4,529 - ----------- ----------- Net cash used in investing activities (37,557) (57,325) ----------- ----------- FINANCING ACTIVITIES: Transfers to Distributing Company - (8,990) Proceeds from stock option exercises 50,140 - ----------- ----------- Net cash provided by (used in) financing activities 50,140 (8,990) ----------- ----------- Change in cash and cash equivalents 47,629 - Cash and cash equivalents, beginning of period 35,225 - ----------- ----------- Cash and cash equivalents, end of period $ 82,854 $ - =========== ===========
See notes to consolidated financial statements. 7 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) 1. COMPANY BACKGROUND General Instrument Corporation ("General Instrument" or the "Company"), formerly NextLevel Systems, Inc., is a leading worldwide supplier of systems and components for high-performance networks, delivering video, voice and Internet/data services to the cable, satellite and telephony markets. General Instrument is the world leader in digital and analog set-top systems for wired and wireless cable television networks, as well as hybrid fiber/coaxial network transmission systems used by cable television operators and is a leading provider of digital satellite systems for programmers, direct-to-home satellite network providers and private networks for business communications. Through its limited partnership interest in Next Level Communications, L.P. (the "Partnership")(see Note 10), the Company provides telephone network solutions through the Partnership's NLevel3-Registered Trademark- Switched Digital Access system. The Company was formerly the Communications Business of the former General Instrument Corporation (the "Distributing Company"). In a transaction that was consummated on July 28, 1997, the Distributing Company (i) transferred all the assets and liabilities relating to the manufacture and sale of broadband communications products used in the cable television, satellite, and telecommunications industries to the Company (then a wholly-owned subsidiary of the Distributing Company) and all the assets and liabilities relating to the manufacture and sale of coaxial, fiber optic and other electric cable used in the cable television, satellite and other industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii) distributed all of its outstanding shares of capital stock of each of the Company and CommScope to its stockholders on a pro rata basis as a dividend. Approximately 147.3 million shares of the Company's common stock, par value $.01 per share (the "Common Stock"), based on a ratio of one for one, were distributed to the Distributing Company's stockholders of record on July 25, 1997 (the "Communications Distribution"). On July 28, 1997, approximately 49.1 million shares of CommScope common stock, based on a ratio of one for three, were distributed to the Company's stockholders of record on that date (the "CommScope Distribution" and, together with the Communications Distribution, the "Distributions"). On July 28, 1997, the Company and CommScope began operating as independent entities with publicly traded common stock, and the Distributing Company retained no ownership interest in either the Company or CommScope. Additionally, immediately following the Communications Distribution, the Distributing Company was renamed General Semiconductor, Inc. ("General Semiconductor") and effected a one for four reverse stock split. 2. BASIS OF PRESENTATION The accompanying interim consolidated financial statements reflect the results of operations, financial position, changes in stockholders' equity and cash flows of General Instrument. The consolidated balance sheet as of June 30, 1998, the consolidated statements of operations for the three and six months ended June 30, 1998 and 1997, the consolidated statement of stockholders' equity for the six months ended June 30, 1998 and the consolidated statements of cash flows for the six months ended June 30, 1998 and 1997 of General Instrument are unaudited and reflect all adjustments of a normal recurring nature (except for those charges disclosed in Notes 5, 9, 10 and 12) which are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The consolidated statements of operations for the three and six months ended June 30, 1997 include an allocation of general corporate expenses from the Distributing Company. In the opinion of management, general corporate administrative expenses have been allocated to the Company on a reasonable and consistent basis using management's estimate of services provided to the Company by the Distributing Company. However, such allocation is not necessarily indicative of the level of expenses which would have been incurred had the Company been operating as a separate stand alone entity during the periods presented. 8 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) Prior to the Distributions, the Company participated in the Distributing Company's cash management program, and the accompanying consolidated statements of operations for the three and six months ended June 30, 1997 include an allocation of net interest expense from the Distributing Company. To the extent the Company generated positive cash, such amounts were remitted to the Distributing Company. To the extent the Company experienced temporary cash needs for working capital purposes or capital expenditures, such funds were historically provided by the Distributing Company. Net interest expense has been allocated based upon the Company's net assets as a percentage of the total net assets of the Distributing Company. The allocations were made consistently in each period, and management believes the allocations are reasonable. However, these interest costs would not necessarily be indicative of what the actual costs would have been had the Company operated as a separate, stand-alone entity. Subsequent to the Distributions, the Company is responsible for all cash management functions using its own resources or purchased services and is responsible for the costs associated with operating as a public company. Prior to the Distributions, the Company's financial results included the costs incurred under the Distributing Company's pension and postretirement benefit plans for employees and retirees of the Company. Subsequent to the Distributions, the Company's financial results include the costs incurred under the Company's own pension and postretirement benefit plans. The provision for income taxes for the periods prior to the Distributions was based on the Company's expected annual effective tax rate calculated assuming the Company had filed separate tax returns under its then existing structure. For the three and six months ended June 30, 1998, income taxes were computed based upon the expected annual effective tax rate. The financial information included herein, related to the periods prior to the Distributions, may not necessarily reflect the consolidated results of operations, financial position and cash flows of the Company since the Company was not a separate stand-alone entity. 9 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) 3. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated statements of operations presented below give effect to the Distributions as if they had occurred on January 1, 1997. The unaudited pro forma statements of operations set forth below do not purport to represent what the Company's operations actually would have been had the Distributions occurred on January 1, 1997 or to project the Company's operating results for any future period. The unaudited pro forma information has been prepared utilizing the historical consolidated statements of operations of the Company which were adjusted to reflect: (i) an additional $1.8 million and $3.6 million of selling, general and administrative costs for the three and six months ended June 30, 1997, respectively, to eliminate the allocation of corporate expenses to CommScope and General Semiconductor, as such costs subsequent to the Distributions were no longer allocable and were expected to be incurred by the Company in the future; and (ii) a net debt level of $100 million at January 1, 1997. Three months ended Six months ended June 30, 1997 June 30, 1997 ------------- ------------- Net sales $ 450,403 $ 858,431 Cost of sales 332,785 627,299 --------- --------- Gross profit 117,618 231,132 Operating expenses: Selling, general and administrative 53,690 98,244 Research and development 49,630 100,675 Amortization of excess of cost over fair value of net assets acquired 3,560 7,118 --------- --------- Total operating expenses 106,880 206,037 --------- --------- Operating income 10,738 25,095 Other expense - net (1,324) (1,853) Interest expense - net (1,900) (3,800) --------- --------- Income before income taxes 7,514 19,442 Provision for income taxes (5,488) (10,387) --------- --------- Net income $ 2,026 $ 9,055 ========= ========= Weighted-average shares outstanding 148,700 148,700 Earnings per share - basic and diluted $ 0.01 $ 0.06 ========= ========= 10 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) 4. INVENTORIES Inventories consist of: JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- Raw materials $ 107,144 $ 111,148 Work in process 17,054 19,676 Finished goods 136,833 157,254 ---------- ---------- Total inventories $ 261,031 $ 288,078 ========== ========== 5. COMMITMENTS AND CONTINGENCIES The Company is either a plaintiff or a defendant in several pending legal matters. In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had, and is not expected to have, a material adverse effect on the Company's financial statements. On May 5, 1998, the action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL INSTRUMENT CORP., pending in the United States District Court for the Eastern District of North Carolina, was dismissed with prejudice. In addition, on May 4, 1998, the action entitled NEXT LEVEL COMMUNICATIONS V. BROADBAND TECHNOLOGIES, INC., was dismissed with prejudice. These dismissals were entered pursuant to a settlement agreement under which, among other things, the Partnership has paid BroadBand Technologies $5 million and BroadBand Technologies and the Partnership have entered into a perpetual cross-license of patents applied for or issued currently or during the next five years. The Company also has granted BroadBand Technologies a covenant not to sue on all Company patents applied for or issued currently or during the next five years. A securities class action is presently pending in the United States District Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates numerous class action complaints filed in various courts between October 10 and October 27, 1995, is brought by plaintiffs, on their own behalf and as representatives of a class of purchasers of the Distributing Company's common stock during the period March 21, 1995 through October 18, 1995. The complaint alleges that the Distributing Company and certain of its officers and directors, as well as Forstmann Little & Co. and certain related entities, violated the federal securities laws, namely, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), prior to the Distributions, by allegedly making false and misleading statements and failing to disclose material facts about the Distributing Company's planned shipments in 1995 of its CFT 2200 and DigiCipher-Registered Trademark- products. Also pending in the same court, under the same name, is a derivative action brought on behalf of the Distributing Company. The derivative action alleges that, prior to the Distributions, the members of the Distributing Company's Board of Directors, several of its officers and Forstmann Little & Co. and related entities have breached their fiduciary duties by reason of the matter complained of in the class action and the defendants' alleged use of material non-public information to sell shares of the Distributing Company's stock for personal gain. The court had granted the defendants' motions to dismiss the original complaints in both of these actions, but allowed the plaintiffs in each action an opportunity to file amended complaints. Amended complaints were filed on November 7, 1997. The defendants have answered the amended consolidated complaint in the class actions, denying liability, and have filed a renewed motion to dismiss the derivative action. The Company intends to vigorously contest these actions. An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was brought in February 1996 by certain holders of preferred stock of Next Level Communications ("NLC"), which merged into a subsidiary of the Distributing Company in 11 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) September 1995. The action was originally filed in the Northern District of California and was subsequently transferred to the Northern District of Illinois. The plaintiffs allege that the defendants violated federal securities laws by making misrepresentations and omissions and breached fiduciary duties to NLC in connection with the acquisition of NLC by the Distributing Company. Plaintiffs seek, among other things, unspecified compensatory and punitive damages and attorneys' fees and costs. On September 23, 1997, the district court dismissed the complaint, without prejudice, and the plaintiffs were given until November 7, 1997 to amend their complaint. On November 7, 1997, plaintiffs served the defendants with amended complaints, which contain allegations substantially similar to those in the original complaint. The defendants have filed a motion to dismiss parts of the amended complaint and have answered the balance of the amended complaint, denying liability. The Company intends to vigorously contest this action. In connection with the Distributions, the Company has agreed to indemnify General Semiconductor in respect of its obligations, if any, arising out of or in connection with the matters discussed in the preceding two paragraphs. On February 19, 1998, a consolidated securities class action complaint entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the United States District Court for the Northern District of Illinois, Eastern Division, naming the Company and certain former officers and directors as defendants. The complaint was filed on behalf of stockholders who purchased or otherwise acquired stock of the Company between July 25, 1997 and October 15, 1997. The complaint alleged that the defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false and misleading statements about the Company's business, finances and future prospects. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants served upon the plaintiffs a motion to dismiss the remaining counts of the complaint. On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION V. NEXT LEVEL COMMUNICATIONS, L.P. was filed in the Superior Court of the State of Delaware in and for New Castle County. DSC alleged that the defendants misappropriated trade secrets relating to a switched digital video product, and that the defendants conspired to misappropriate the trade secrets. The plaintiffs sought monetary and exemplary damages and attorney fees. On May 14, 1998, the United States District Court for the Eastern District of Texas issued a preliminary injunction preventing DSC from proceeding with this litigation. DSC has filed a notice of appeal of that order. On July 6, 1998, the defendants filed a motion for summary judgment with the district court requesting a permanent injunction preventing DSC from proceeding with this litigation. In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for Arbitration against the Company alleging that the Company breached the terms of a license agreement with StarSight by (a) developing a competing product that wrongfully incorporates StarSight's technology and inventions claimed within a certain StarSight patent, (b) failing to promote and market the StarSight product as required by the license agreement, and (c) wrongfully using StarSight's technical information, confidential information and StarSight's graphical user interface in breach of the license agreement. StarSight is seeking injunctive relief as well as damages. The Company has denied StarSight's allegations and is vigorously defending the arbitration action. The arbitration proceeding was originally scheduled to begin before an arbitration panel of the American Arbitration Association in San Francisco, California in July 1998. Due to the resignation of one of the panel members two days before the arbitration proceeding was expected to begin, the proceeding has been postponed until a third arbitrator is selected and a new scheduling order is issued. The Company currently anticipates the proceeding to begin in 1999. While the ultimate outcome of the matters described above cannot be determined, management does not believe that the final disposition of these matters will have a material adverse effect on the Company's financial statements. 12 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) 6. EARNINGS (LOSS) PER SHARE AND PRO FORMA EARNINGS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding adjusted for the dilutive effect of stock options and warrants (unless inclusion of such common stock equivalents would be anti-dilutive). The dilutive effect of options and warrants of 9,637 shares for the Second Quarter 1998 was computed using the treasury stock method. Further, since the computation of diluted loss per share is anti-dilutive for the six months ended June 30, 1998, the amounts reported for basic and diluted loss per share are the same. Prior to the Distributions, the Company did not have its own capital structure, and pro forma per share information has been presented for the three and six months ended June 30, 1997. The pro forma weighted-average number of shares outstanding used in the pro forma per share calculation for the three and six months ended June 30, 1997 equaled the number of common shares issued and common equivalent shares existing on the date of the Distributions. 7. LONG-TERM DEBT In July 1997, the Company entered into a bank credit agreement (the "Credit Agreement") which provides a $600 million unsecured revolving credit facility and matures on December 31, 2002. The Credit Agreement permits the Company to choose between two interest rate options: an Adjusted Base Rate (as defined in the Credit Agreement), which is based on the highest of (i) the rate of interest publicly announced by The Chase Manhattan Bank as its prime rate, (ii) 1% per annum above the secondary market rate for three-month certificates of deposit and (iii) the federal funds effective rate from time to time plus 0.5%, and a Eurodollar rate (LIBOR) plus a margin which varies based on certain performance criteria. The Company is also able to set interest rates through a competitive bid procedure. In addition, the Credit Agreement requires the Company to pay a facility fee on the total loan commitment. The Credit Agreement contains financial and operating covenants, including limitations on guarantee obligations, liens and sale of assets, and requires the maintenance of certain financial ratios. In addition, under the Credit Agreement, certain changes in control of the Company would result in an event of default, and the lenders under the Credit Agreement could declare all outstanding borrowings under the Credit Agreement immediately due and payable. None of the restrictions contained in the Credit Agreement is expected to have a significant effect on the Company's ability to operate. As of June 30, 1998, the Company was in compliance with all financial and operating covenants under the Credit Agreement. At June 30, 1998, the Company had available credit of $500 million under the Credit Agreement. The Company had approximately $109 million of letters of credit outstanding at June 30, 1998. 8. OTHER EXPENSE-NET Other expense-net for the Second Quarter 1998 and for the six months ended June 30, 1998 includes $7 million and $18 million, respectively, related to the Company's share of the Partnership losses, including the charges described in Note 12, partially offset by $2 million and $5 million, respectively, related to a gain on the sale of a portion of the Company's investment in Ciena Corporation and $5 million for both periods related to proceeds received from the settlement of an insurance claim. 9. RESTRUCTURINGS In the fourth quarter of 1997, the Company announced a plan to streamline the cost structure of its San 13 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) Diego-based satellite business and reduced this unit's headcount by 225. Additionally, the Company closed its Puerto Rico satellite TV manufacturing facility, which manufactured receivers used in the private network, commercial and consumer satellite markets for the reception of analog and digital television signals, and reduced headcount by 1,100. The Company recorded a pre-tax charge of $36 million during the fourth quarter of 1997 related to the restructuring. Current satellite receiver manufacturing has been subcontracted to a third party manufacturer. As part of the restructuring plan, the Company recorded an additional $16 million of pre-tax charges in the first quarter of 1998 primarily related to severance and other employee separation costs, costs associated with the closure of various facilities and the write-down of certain assets to their estimated net realizable values. Of these charges, $9 million were recorded as cost of sales and $6 million as SG&A. Through June 30, 1998, the Company has made severance and other restructuring related payments of $17 million. Substantially all of the remaining severance and other employee separation costs are expected to be paid during 1998. Also, during the first quarter of 1998, the Company moved its corporate headquarters from Chicago, Illinois to Horsham, Pennsylvania. In connection with the Distributions (see Note 1), during the second quarter of 1997 and the six months ended June 30, 1997, the Company recorded pre-tax charges to cost of sales of $16 million and $18 million, respectively, for employee costs related to dividing the Distributing Company's Taiwan operations between the Company and General Semiconductor. 10. THE PARTNERSHIP In January 1998, the Company transferred the net assets, principally technology, and the management and workforce of NLC to the newly formed Partnership in exchange for approximately an 89% limited partnership interest (subject to additional dilution). The limited partnership interest is included in "investments and other assets" in the accompanying consolidated balance sheet at June 30, 1998. The operating general partner, which was formed by Spencer Trask & Co., has acquired approximately an 11% interest in the Partnership and has the potential to acquire up to an additional 11% in the future. Net assets transferred to the Partnership of $44 million primarily included property, plant and equipment, inventories and accounts receivable partially offset by accounts payable and accrued expenses. Pursuant to the Partnership agreement, the operating general partner controls the Partnership and is responsible for developing the business plan and infrastructure necessary to position the Partnership as a stand-alone company. The Company, as the limited partner, has certain protective rights, including the right to approve an alteration of the legal structure of the Partnership, the sale of the Partnership's principal assets, the sale of the Partnership, a change in the general partner and a change in the limited partner's financial interests in the Partnership. Since the operating general partner controls the day-to-day operations of the Partnership and has the ability to make decisions typical of a controlling party, the Partnership's operating results have not been consolidated with the operating results of the Company subsequent to the January 1998 transfer. In addition, in January 1998, the Company advanced $75 million to the Partnership in exchange for an 8% debt instrument (the "Note"), and the Note contains normal creditor security rights, including a prohibition against incurring amounts of indebtedness for borrowed money in excess of $10 million. Since the repayment of the Note is solely dependent upon the results of the Partnership's research and development activities and the commercial success of its product development, the Company recorded a charge to research and development expense during the quarter ended March 31, 1998 to fully reserve for the Note concurrent with the funding. The Company is accounting for its interest in the Partnership as an investment under the equity method of accounting. Further, the Company's share of the Partnership's losses related to future research 14 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) and development activities will be offset against the $75 million reserve discussed above. For the three and six months ended June 30, 1998, the Company's share of the Partnership's losses was $7 million and $18 million, respectively, (net of the Company's share of research and development expenses of $10 million and $19 million, respectively). The Company has eliminated its interest income from the Note against its share of the Partnership's related interest expense on the Note. 11. COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement requires that an enterprise report the change in its net assets during the period from nonowner sources. Since this statement only requires additional disclosures, it had no impact on the Company's consolidated financial position or cash flows. For the three and six months ended June 30, 1998 and 1997, other comprehensive income comprised unrealized gains and losses on investments. Comprehensive income is summarized below:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------ ------------------------ 1998 1997 1998 1997 --------- --------- --------- --------- Net income (loss) $ 29,963 $ 406 $ (29,929) $ 5,366 Other comprehensive income (loss) 3,904 7,307 (3,469) 18,487 --------- --------- --------- --------- Total comprehensive income (loss) $ 33,867 $ 7,713 $ (33,398) $ 23,853 ========= ========= ========= =========
12. OTHER CHARGES The Company incurred approximately $33 million of certain other pre-tax charges during the first quarter of 1998. Of these charges, $18 million has been reflected in cost of sales and $7 million has been reflected in SG&A expense. These charges relate to the write-down of inventories and certain other assets to their net realizable value, and moving costs associated with relocating certain assets to other facilities owned by the Company. The remaining $8 million of charges are included in "other expense-net" and relate to costs incurred by the Partnership, which the Company accounts for under the equity method. Such costs are primarily related to the BBT litigation settlement (see Note 5) and compensation expense related to key executives of an acquired company. 13. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED SEGMENT REPORTING - In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and is effective for fiscal periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the reporting of information about operating segments, including related disclosures about products and services, geographic areas and major customers, and requires the reporting of selected information about operating segments in interim financial statements. The Company is currently evaluating the disclosure requirements of this statement and will include the necessary disclosures in the year-end financial statements as required in the initial year of adoption. PENSION AND OTHER POSTRETIREMENT DISCLOSURES - In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106." This statement, which is effective for fiscal years beginning after December 15, 1997, 15 GENERAL INSTRUMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands, unless otherwise noted) requires revised disclosures about pension and other postretirement benefit plans. Since the above two statements only revise financial statement disclosures, their adoption will not have any impact on the Company's consolidated financial position, results of operations or cash flows. DERIVATIVE AND HEDGE ACCOUNTING - In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued and is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial statements. 14. SUBSEQUENT EVENT On June 17, 1998, the Company entered into an Asset Purchase Agreement (the "Agreement") with two affiliates of Tele-Communications, Inc., TCIVG-GIC, Inc. ("TCIVG") and NDTC Technology, Inc. ("NDTC Technology" and, collectively with TCIVG, "TCI") pursuant to which the Company agreed to acquire from TCIVG, in exchange for 21,356,000 shares of the Company's Common Stock, certain assets, a license to certain intellectual property from NDTC Technology which will enable the Company to conduct authorization services and future cash consideration as discussed below. The Company's provision of services under the aforementioned license is intended to provide the cable industry with a secure access control platform to support widespread deployment of digital terminals and related systems and applications. On July 17, 1998 the transaction was consummated. The Agreement provides the Company with minimum revenue guarantees from TCI over the first nine years from the date of closing. The Company has contracted with NDTC Technology for certain support services during the first nine years following the date of closing, with renewable one-year terms. The Agreement gives the Company the right to license the technology for a period of 20 years. As mentioned above, the Agreement contains a provision for TCIVG to pay the Company $50 million over the first five years from the date of closing in equal monthly installments which represents a reduction of purchase price. The net purchase price of approximately $280 million will be allocated to the license and the assets acquired based on their respective estimated fair values. The Company expects to amortize the license over the license term of 20 years. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES Net sales for the three months ended June 30, 1998 ("Second Quarter 1998") were $489 million compared to $450 million for the three months ended June 30, 1997 ("Second Quarter 1997"), an increase of $39 million, or 9%. Net sales for the six months ended June 30, 1998 were $905 million compared to $858 million for the six months ended June 30, 1997, an increase of $47 million, or 5%. The increases in net sales for the three and six month periods reflect increased sales of digital cable systems, partially offset by lower sales of analog cable terminals and satellite systems for private and commercial networks. Analog and digital products each represented approximately 50% of total sales of the Company for the six months ended June 30, 1998, compared to approximately 63% and 37%, respectively, for the six months ended June 30, 1997. Worldwide broadband sales (consisting of digital and analog cable and wireless television systems and network transmission systems) of $380 million and $689 million for Second Quarter 1998 and for the six months ended June 30, 1998, respectively, increased $61 million, or 19%, and $71 million, or 11%, respectively, from the comparable 1997 periods primarily as a result of increased U.S sales volume of digital cable terminals and headends, partially offset by the expected decline in sales of basic analog cable network systems. These sales reflect the increasing commitment of cable television operators to deploy state-of-the-art digital and interactive advanced analog systems in order to offer advanced entertainment, interactive services and Internet access to their customers. During the Second Quarter 1998 and Second Quarter 1997, net broadband sales in the U.S. were 83% and 70%, respectively, combined U.S. and Canadian sales were 84% and 73%, respectively, and all other international sales were 16% and 27%, respectively, of total worldwide broadband sales. For the six months ended June 30, 1998 and 1997, net broadband sales in the U.S. were 82% and 69%, respectively, combined U.S. and Canadian sales were 84% and 73%, respectively, and all other international sales were 16% and 27%, respectively, of total worldwide broadband sales. Worldwide satellite sales of $109 million and $216 million for Second Quarter 1998 and the six months ended June 30, 1998, respectively, decreased $22 million, or 17%, and $24 million, or 10%, respectively, from the comparable 1997 periods primarily as a result of lower private and commercial network sales. During the Second Quarter 1998 and Second Quarter 1997, net satellite sales in the U.S. were 96% and 75%, respectively, combined U.S. and Canadian sales were 96% and 85%, respectively, and all other international sales were 4% and 15%, respectively, of total worldwide satellite sales. For the six months ended June 30, 1998 and 1997, net satellite sales in the U.S. were 95% and 79%, respectively, combined U.S. and Canadian sales were 98% and 86%, respectively, and all other international sales were 2% and 14%, respectively, of total worldwide satellite sales. The decrease in broadband and satellite international sales during the 1998 periods was experienced in all international regions. The largest decreases in sales during the first half of 1998 were experienced in the Asia/Pacific and Latin American regions and there can be no assurance that international sales will return to 1997 levels in the near term. TCI and Time Warner, including affiliates, each represented approximately 14% of the revenues of the Company for the year ended December 31, 1997. For the six months ended June 30, 1998, TCI, Primestar and Time Warner accounted for approximately 24%, 14% and 11% of total Company sales, respectively. GROSS PROFIT Gross profit of $141 million and $234 million for Second Quarter 1998 and the six months ended June 30, 1998, respectively, increased $23 million, or 20%, and $3 million, or 1%, respectively, from the comparable 1997 periods. Gross profit was 29% and 26% of sales for Second Quarter 1998 and the six months ended June 30, 1998, respectively, compared to 26% and 27%, respectively, for the comparable 1997 periods. Gross profit for the six months ended June 30, 1998 included $27 million of charges recorded in the first quarter of 1998, primarily related to severance and other employee separation costs, costs associated with the closure of various facilities and the write-down of certain assets to their net realizable values. Gross profit for Second Quarter 1997 and the six 17 months ended June 30, 1997 included $16 million and $18 million, respectively, of charges for employee costs related to dividing the Distributing Company's Taiwan operations between the Company and General Semiconductor. Gross profit increases primarily reflect increased sales levels. SELLING, GENERAL AND ADMINISTRATIVE Selling, general & administrative ("SG&A") expense was $46 million and $102 million for the Second Quarter 1998 and the six months ended June 30, 1998, respectively, compared to $52 million and $95 million, respectively, for the comparable 1997 periods. SG&A expense as a percentage of sales was 9% and 11% for the Second Quarter 1998 and the six months ended June 30, 1998, respectively, and 12% and 11%, respectively, for the 1997 periods. SG&A spending for the six months ended June 30, 1998 included $13 million of charges primarily related to severance and other employee separation costs, costs associated with the closure of various facilities, including moving costs and costs associated with changing the Company's corporate name. SG&A spending for the Second Quarter 1997 and the six months ended June 30, 1997 included $6 million of charges primarily for legal and other professional fees directly related to the Communications Distribution. SG&A spending for the 1997 periods also included SG&A expenses related to NLC. RESEARCH AND DEVELOPMENT Research and development ("R&D") expense was $42 million and $158 million for the Second Quarter 1998 and six months ended June 30, 1998, respectively, compared to $50 million and $101 million, respectively, for the comparable 1997 periods. R&D expense for the six months ended June 30, 1998 included a $75 million charge to fully reserve the Partnership Note (see Note 10). R&D spending in 1998 is focused on new product opportunities, including advanced digital services, high-speed internet and data systems, and next generation transmission network systems. In addition, the Company is incurring R&D expense to develop analog and digital products for international markets, reduce costs and expand the features of its digital cable and satellite systems. OTHER EXPENSE - NET Other expense was $1 million and $10 million for the Second Quarter 1998 and the six months ended June 30, 1998, respectively, compared with $1 million and $2 million, respectively, for the comparable 1997 periods. Other expense increased in the first half of 1998 from the comparable 1997 period primarily due to the Company's equity interest in the Partnership's loss (see Notes 8 and 10), which includes the BBT litigation settlement (see Note 5) and compensation expense related to key executives of an acquired company, partially offset by a gain on the sale of a portion of the Company's investment in Ciena Corporation and settlement of an insurance claim. INTEREST EXPENSE - NET Net interest expense for the three and six months ended June 30, 1997 represents an allocation of interest expense from the Distributing Company and was allocated based upon the Company's net assets as a percentage of the total net assets of the Distributing Company for the period prior to the date of the Communications Distribution. Net interest expense allocated to the Company was $6 million and $14 million for the Second Quarter 1997 and for the six months ended June 30, 1997, respectively. Subsequent to July 25, 1997, the date of the Communications Distribution, net interest represents actual net interest expense incurred by the Company. Pro forma interest expense for the Second Quarter 1997 and the six months ended June 30, 1997 includes a reduction of interest expense of $5 million and $10 million, respectively, to reflect an assumed net debt level of $100 million at January 1, 1997. INCOME TAXES Through the date of the Distributions, income taxes were determined as if the Company had filed separate tax returns under its existing structure for the periods presented. Accordingly, future tax rates could vary from the historical effective tax rates depending on the Company's future tax elections. The Company recorded a provision 18 for income taxes of $18 million and a benefit for income taxes of $14 million for the Second Quarter 1998 and the six months ended June 30, 1998, respectively, and a provision for income taxes of $4 million and $8 million, respectively, for the comparable 1997 periods based upon the expected annual effective tax rate. LIQUIDITY AND CAPITAL RESOURCES Prior to the Distributions, the Company participated in the Distributing Company's cash management program. To the extent the Company generated positive cash, such amounts were remitted to the Distributing Company. To the extent the Company experienced temporary cash needs for working capital purposes or capital expenditures, such funds were historically provided by the Distributing Company. At the date of the Distributions, $125 million of cash was transferred to the Company. For the six months ended June 30, 1998 and 1997, cash provided by operations was $35 million and $66 million, respectively. Cash provided by operations in the first half of 1998 primarily reflects cash generated from operations, partially offset by the funding provided to the Partnership related to its R&D activities and payments related to the restructuring. Cash provided by operations in the first half of 1997 primarily represents cash generated by the broadband business, partially offset by increased inventory levels to support business growth. At June 30, 1998 and December 31, 1997, working capital was $453 million and $436 million, respectively. The Company believes that working capital levels are adequate to support the growth of the digital business, however, there can be no assurance that future industry-specific developments or general economic trends will not continue to alter the Company's working capital requirements. During the six months ended June 30, 1998 and 1997, the Company invested $40 million and $37 million, respectively, in equipment and facilities. The Company expects to continue to expand its capacity to meet increased current and anticipated future demands for digital products, with capital expenditures for the year expected to approximate $120 million. The Company's R&D expenditures were $158 million (including the $75 million funding related to the Partnership's R&D activities) and $101 million during the first six months of 1998 the first six months of 1997, respectively. The Company expects total R&D expenditures to approximate $245 million (including the $75 million funding related to the Partnership) for the year ending December 31, 1998. The Company has a bank credit agreement (the "Credit Agreement") which provides a $600 million unsecured revolving credit facility and matures on December 31, 2002. The Credit Agreement permits the Company to choose between two competitive interest rate options. The Credit Agreement contains financial and operating covenants, including limitations on guarantee obligations, liens and the sale of assets, and requires the maintenance of certain financial ratios. None of the restrictions contained in the Credit Agreement is expected to have a significant effect on the Company's ability to operate. As of June 30, 1998, the Company was in compliance with all financial and operating covenants contained in the Credit Agreement and had available credit of $500 million. In January 1998, the Company announced that, subject to the completion of definitive agreements, Sony Corporation of America will purchase 7.5 million new shares of common stock of the Company for $188 million. In January 1998, the Company transferred the net assets, principally technology, and the management and workforce of NLC to a newly formed limited partnership in exchange for approximately an 89% (subject to additional dilution) limited partnership interest. Additionally, the Company advanced to the Partnership $75 million, utilizing available operating funds and borrowings under its Credit Agreement, in exchange for the Note. Since the repayment of the Note is solely dependent upon the results of the Partnership's research and development activities and the commercial success of its product development, the Company recorded a charge to fully reserve for the Note concurrent with the funding (see Note 10). The Company will make an additional $50 million equity investment in the Partnership in November, 1998 to fund the Partnership's growth and assist the Partnership in meeting its forecasted working capital requirements. 19 The Company's management assesses its liquidity in terms of its overall ability to obtain cash to support its ongoing business levels and to fund its growth objectives. The Company's principal sources of liquidity both on a short-term and long-term basis are cash flows provided by operations and borrowings under the Credit Agreement. The Company believes that based upon its analysis of its consolidated financial position and its expected operating cash flows from future operations, along with available funding under the Credit Agreement, cash flows will be adequate to fund operations, research and development and capital expenditures. There can be no assurance, however, that future industry-specific developments or general economic trends will not adversely affect the Company's operations or its ability to meet its cash requirements. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED SEGMENT REPORTING - In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and is effective for fiscal periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the reporting of information about operating segments, including related disclosures about products and services, geographic areas and major customers, and requires the reporting of selected information about operating segments in interim financial statements. The Company is currently evaluating the disclosure requirements of this statement and will include the necessary disclosures in the year-end financial statements as required in the initial year of adoption. PENSION AND OTHER POSTRETIREMENT DISCLOSURES - In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106." This statement, which is effective for fiscal years beginning after December 15, 1997, requires revised disclosures about pension and other postretirement benefit plans. Since the above two statements only revise financial statement disclosures, their adoption will not have any impact on the Company's consolidated financial position, results of operations or cash flows. DERIVATIVE AND HEDGE ACCOUNTING - In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued and is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial statements. NEW TECHNOLOGIES The Company operates in a dynamic and competitive environment in which its success will be dependent upon numerous factors, including its ability to continue to develop appropriate technologies and successfully implement applications based on those technologies. In this regard, the Company has made significant investments to develop advanced systems and equipment for the cable and satellite television, Internet/data delivery and local telephone access markets. Additionally, the future success of the Company will be dependent on the ability of the cable and satellite television operators to successfully market the services provided by the Company's advanced digital terminals to their customers. Furthermore, as a result of the higher costs of initial production, digital products presently being shipped carry lower margins than the Company's mature analog products. Management of the Company expects cable television operators in the United States and abroad to continue to purchase analog products to upgrade their basic networks and to develop, using U.S. architecture and systems, international markets where cable penetration is low and demand for entertainment programming is growing. However, management expects that demand in North America for its basic analog cable products will continue to decline. As the Company continues to introduce new products and technologies and such technologies gain market acceptance, there can be no assurance that sales of products based on new technologies will not affect the Company's product sales mix and/or will not have an adverse impact on sales of certain of the Company's other products. 20 INTERNATIONAL MARKETS Management of the Company believes that additional growth for the Company will come from international markets, although the Company's international sales decreased in the first half of 1998 in comparison to the prior year, and there can be no assurance that international sales will increase to 1997 levels in the near future. In order to support the Company's international product and marketing strategies, it is currently expected that the Company will add operations in foreign markets in the following areas, among others: customer service, sales, finance, product warehousing and expansion of manufacturing capacity at existing facilities. Although no assurance can be given, management expects that the expansion of international operations will not require significant increased levels of capital expenditures. EFFECT OF INFLATION The Company continually attempts to minimize any effect of inflation on earnings by controlling its operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material impact on the Company's results of operations. READINESS FOR YEAR 2000 The Company has identified and evaluated the changes to its computer systems and products necessary to achieve a year 2000 date conversion, and required conversion and testing efforts are currently underway and are expected to be completed by mid 1999. The Company continues to communicate with its suppliers, customers and others with which it does business to understand the impact of any year 2000 issues on the Company. However, there can be no assurance that the companies with which the Company does business will achieve a year 2000 conversion in a timely fashion, or that such failure to convert by another company will not have an adverse effect on the Company. The Company does not expect the cost of achieving year 2000 compliance will exceed $5 million. Additionally, based on the current status of these efforts, the Company believes that it will be able to manage its total year 2000 transition without any material adverse effect on its business operations, products or financial prospects. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q may include forward-looking statements concerning, among other things, the Company's prospects, developments and business strategies. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "subject to" and "scheduled." These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These risks include, but are not limited to, uncertainties relating to general political and economic conditions, uncertainties relating to government and regulatory policies, uncertainties relating to customer plans and commitments, the Company's dependence on the cable television industry and cable television spending, signal security, the pricing and availability of equipment, materials and inventories, technological developments, the competitive environment in which the Company operates, changes in the financial markets relating to the Company's capital structure and cost of capital, the uncertainties inherent in international operations and foreign currency fluctuations and authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission. Reference is made to Exhibit 99 in this Form 10-Q for a further discussion of such factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. These foreign operations are subject to market risk changes with respect to currency exchange rate fluctuations, which could impact the Company's consolidated financial statements. The Company monitors its underlying exchange rate exposures on an ongoing basis and continues to implement selective hedging strategies to reduce the market risks from changes in exchange rates. On a selective basis, the Company enters into contracts to hedge the currency exposure of monetary assets and liabilities, contractual and other firm commitments denominated in foreign currencies and the currency exposure of anticipated, but not yet committed, transactions expected to be denominated in foreign currencies. The use of these derivative financial instruments allows the Company to reduce its overall exposure to exchange rate movements since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. Foreign currency exchange contracts are sensitive to changes in exchange rates. As of June 30, 1998, a hypothetical 10% fluctuation in the exchange rate of foreign currencies applicable to the Company, principally the New Taiwan and Canadian dollars, would result in a net $2 million gain or loss on the contracts the Company has outstanding, which would offset the related net loss or gain on the assets, liabilities and transactions being hedged. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 5, 1998, the action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL INSTRUMENT CORP., pending in the United States District Court for the Eastern District of North Carolina, was dismissed with prejudice. In addition, on May 4, 1998, the action entitled NEXT LEVEL COMMUNICATIONS V. BROADBAND TECHNOLOGIES, INC., was dismissed with prejudice. These dismissals were entered pursuant to a settlement agreement under which, among other things, the Partnership has paid BroadBand Technologies $5 million and BroadBand Technologies and the Partnership have entered into a perpetual cross-license of patents applied for or issued currently or during the next five years. The Company also has granted BroadBand Technologies a covenant not to sue on all Company patents applied for or issued currently or during the next five years. On February 19, 1998, a consolidated securities class action complaint entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the United States District Court for the Northern District of Illinois, Eastern Division, naming the Company and certain former officers and directors as defendants. The complaint was filed on behalf of stockholders who purchased or otherwise acquired stock of the Company between July 25, 1997 and October 15, 1997. The complaint alleged that the defendants violated Sections 11 and 15 of the Securities Act, and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false and misleading statements about the Company's business, finances and future prospects. On April 9, 1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May 5, 1998, the defendants served upon the plaintiffs a motion to dismiss the remaining counts of the complaint. On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION V. NEXT LEVEL COMMUNICATIONS, L.P. was filed in the Superior Court of the State of Delaware in and for New Castle County. DSC alleged that the defendants misappropriated trade secrets relating to a switched digital video product, and that the defendants conspired to misappropriate the trade secrets. The plaintiffs sought monetary and exemplary damages and attorney fees. On May 14, 1998, the United States District Court for the Eastern District of Texas issued a preliminary injunction preventing DSC from proceeding with this litigation. DSC has filed a notice of appeal of that order. On July 6, 1998, the defendants filed a motion for summary judgment with the district court requesting a permanent injunction preventing DSC from proceeding with this litigation. In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for Arbitration against the Company alleging that the Company breached the terms of a license agreement with StarSight by (a) developing a competing product that wrongfully incorporates StarSight's technology and inventions claimed within a certain StarSight patent, (b) failing to promote and market the StarSight product as required by the license agreement, and (c) wrongfully using StarSight's technical information, confidential information and StarSight's graphical user interface in breach of the license agreement. StarSight is seeking injunctive relief as well as damages. The Company has denied StarSight's allegations and is vigorously defending the arbitration action. The arbitration proceeding was originally scheduled to begin before an arbitration panel of the American Arbitration Association in San Francisco, California in July 1998. Due to the resignation of one of the panel members two days before the arbitration proceeding was expected to begin, the proceeding has been postponed until a third arbitrator is selected and a new scheduling order is issued. The Company currently anticipates the proceeding to begin in 1999. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The following matters were voted upon at the Annual Meeting of Stockholders of General Instrument Corporation held in Philadelphia, Pennsylvania on May 27, 1998: (a) On the election of the following nominees as directors of the Company to serve until the 2001 Annual Meeting of Stockholders: NUMBER OF VOTES FOR WITHHELD Edward D. Breen 136,191,596 2,021,456 Alex J. Mandl 136,306,825 1,906,227 (b) To approve the General Instrument Corporation Amended and Restated 1997 Long-Term Incentive Plan: NUMBER OF VOTES FOR AGAINST ABSTENTIONS BROKER NON-VOTES 111,727,591 26,148,723 336,738 - (c) To approve the General Instrument Corporation Annual Incentive Plan: NUMBER OF VOTES FOR AGAINST ABSTENTIONS BROKER NON-VOTES 116,549,582 2,173,181 356,508 19,133,781 (d) To ratify the appointment by the Board of Directors of Deloitte & Touche LLP as independent auditor for the 1998 fiscal year: NUMBER OF VOTES FOR AGAINST ABSTENTIONS BROKER NON-VOTES 138,016,481 93,445 103,126 - ITEM 5. OTHER INFORMATION Pursuant to an Asset Purchase Agreement, dated as of June 17, 1998 (the "Asset Purchase Agreement"), among the Company and two affiliates of Tele-Communications, Inc., TCIVG-GIC, Inc. ("TCIVG") and NDTC Technology, Inc. ("NDTC Technology" and, collectively with TCIVG, "TCI"), the Company issued on July 17, 1998, 21,356,000 shares of Common Stock (the "Transaction Shares") to TCIVG as consideration for the acquisition by the Company of assets and a license relating to TCIVG's authorization business that controls the receipt of cable programming services delivered to subscribers by TCI's Headend In The Sky-Registered Trademark- (HITS). In exchange for the Transaction Shares, the Company received certain physical assets (the "Authorization Center"), and a license from NDTC Technology to the Company of associated intellectual property (the "License"). 24 The Authorization Center provides services for authorizing and de-authorizing individual set-top terminals throughout the United States for the decoding and receipt of premium and pay-per-view programming signals from HITS. NDTC Technology has agreed to operate the Authorization Center for the Company, for an annual fee, pursuant to a services agreement with the Company. If annual gross revenues of the Authorization Center are below a specified amount for each of the first nine years following the acquisition, TCI is obligated to pay the Company the difference between the actual gross revenues received and the specified amount. In addition, TCIVG will pay to the Company $50,000,000 over the first five years following the closing in equal monthly installments. The number of shares to be issued to TCIVG as consideration under the Asset Purchase Agreement was established based upon the closing price of the Common Stock on December 16, 1997 (the date on which the Company executed a letter of intent with respect to the transaction). The issuance of the Transaction Shares to TCIVG was exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. TCIVG is entitled to specified demand and piggyback registration rights for the Transaction Shares and has agreed to certain transfer restrictions. Tele-Communications, Inc. and its affiliates may in the ordinary course of their business be customers of the Company. In connection with an agreement to purchase digital set-top terminals from the Company, the Company issued National Digital Television Center, Inc., a wholly-owned subsidiary of Tele-Communications, Inc., warrants to purchase shares of Company Common Stock. Such warrants are not presently exercisable. A description of this transaction and the issuance of the warrants is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 under Item 1. Business - Recent Developments and under Note 14. Stockholders' Equity in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Restated Certificate of Incorporation of the Company Exhibit 3.2 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock Exhibit 3.3 Amended and Restated By-Laws of the Company Exhibit 10.1 Asset Purchase Agreement among TCIVG-GIC, Inc., NDTC Technology, Inc. and General Instrument Corporation dated as of June 17, 1998 Exhibit 10.2 License Agreement by and between NDTC Technology, Inc. and General Instrument Corporation dated as of July 17, 1998. Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information (b) Reports on Form 8-K None 25 SIGNATURE 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. GENERAL INSTRUMENT CORPORATION /s/ Marc E. Rothman -------------------------------------- Marc E. Rothman Vice President and Controller (Signing both in his capacity as Vice President on behalf of the Registrant and as chief accounting officer of the Registrant) JULY 31, 1998 - ------------- Date 26 INDEX TO EXHIBITS EXHIBIT DESCRIPTION Exhibit 3.1 Restated Certificate of Incorporation of the Company Exhibit 3.2 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock Exhibit 3.3 Amended and Restated By-Laws of the Company Exhibit 10.1 Asset Purchase Agreement among TCIVG-GIC, Inc., NDTC Technology, Inc. and General Instrument Corporation dated as of June 17, 1998 Exhibit 10.2 License Agreement by and between NDTC Technology, Inc. and General Instrument Corporation dated as of July 17, 1998. Exhibit 27 Financial Data Schedule Exhibit 99 Forward-Looking Information 27 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF GENERAL INSTRUMENT CORPORATION (Pursuant to Section 245 of the General Corporation Law of the State of Delaware) The undersigned, Robert A. Scott, certifies that he is the Senior Vice President, Legal and Secretary of General Instrument Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), and does hereby further certify as follows: (1) The name of the Corporation is General Instrument Corporation. (2) The Corporation's original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on January 6, 1997. The Corporation's original name was NextLevel Systems of Delaware, Inc. A Certificate of Amendment, which changed the Corporation's name to NextLevel Systems, Inc., was filed with the Secretary of State of the State of Delaware on January 17, 1997. An Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 25, 1997. The Corporation changed its name to General Instrument Corporation pursuant to a Certificate of Ownership and Merger which was filed with the Secretary of State of the State of Delaware and became effective on February 2, 1998. (3) This Restated Certificate of Incorporation, which restates the Certificate of Incorporation of the Corporation as heretofore amended, was duly adopted by the Board of Directors of the Corporation in accordance with Sections 141 and 245 of the General Corporation Law of the State of Delaware (the "GCL"). (4) This Restated Certification of Incorporation only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as heretofore amended. There is no discrepancy between the provisions of the Corporation's Certificate of Incorporation as heretofore amended and the provisions of this Restated Certificate of Incorporation. (5) Pursuant to Section 103(a) of the GCL, this Restated Certificate of Incorporation shall become effective at 8:00 a.m. on June 22, 1998 (the "Effective Date"). (6) The text of the Certificate of Incorporation of the Corporation is restated to read in its entirety as follows: FIRST: The name of the Corporation is General Instrument Corporation. SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the GCL. FOURTH: The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is 420,000,000 shares divided into two classes of which 20,000,000 shares of par value $.01 per share shall be designated Preferred Stock and 400,000,000 shares of par value $.01 per share shall be designated Common Stock. 2 A. Common Stock 1. Dividends. Subject to the preferential rights, if any, of the Preferred Stock, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property, or in shares of Common Stock. 2. Voting Rights. Except as otherwise required by law, at every annual or special meeting of stockholders of the Corporation, every holder of Common Stock shall be entitled to one vote, in person or by proxy, for each share of Common Stock standing in such holder's name on the books of the Corporation. 3. Liquidation, Dissolution, or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and of the preferential amounts, if any, to which the holders of Preferred Stock shall be entitled, the holders of all outstanding shares of Common Stock shall be entitled to share ratably in the remaining net assets of the Corporation. B. Preferred Stock 1. Issuance. The Board of Directors of the Corporation is authorized, subject to limitations prescribed by law, to provide for the issuance of shares of Preferred Stock of the Corporation from time to time in one or more series, each of which series shall have such distinctive designation or title as shall be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or 3 resolutions providing for the issue of such series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Delaware. 2. Amendment. Except as may otherwise be required by law or this Restated Certificate of Incorporation, the terms of any series of Preferred Stock may be amended without the consent of the holders of any other series of Preferred Stock or of any class of Common Stock of the Corporation. FIFTH: The business and affairs of the Corporation shall be managed by and under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or this Restated Certificate of Incorporation directed or required to be exercised or done by the stockholders. A. Number of Directors. Except as otherwise fixed by or pursuant to the provisions of this Restated Certificate of Incorporation relating to the rights of the holders of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the then authorized number of directors of the Corporation, but in no event shall the number of directors be fewer than three. No director need be a stockholder. B. Classes and Terms of Directors. The directors shall be divided into three classes (I, II and III), as nearly equal in number as possible, and no class shall include less than one director. The initial term of office for members of Class I shall expire at the annual meeting of stockholders in 1998; the initial term of office for 4 members of Class II shall expire at the annual meeting of stockholders in 1999; and the initial term of office for members of Class III shall expire at the annual meeting of stockholders in 2000. At each annual meeting of stockholders beginning in 1998, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, and shall continue to hold office until their respective successors are elected and qualified. In the event of any increase in the number of directors fixed by the Board of Directors, the additional directors shall be so classified that all classes of directors have as nearly equal numbers of directors as may be possible. In the event of any decrease in the number of directors, all classes of directors shall be decreased equally as nearly as may be possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. C. Newly-Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or any other cause shall be filled only by a majority of the directors then in office, even if less than a quorum is then in office, or by the sole remaining director, and shall not be filled by stockholders. Directors elected to fill a newly created directorship or other vacancies shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor has been elected and has qualified. D. Removal of Directors. Subject to the rights of the holders of any series of Preferred Stock then outstanding, the directors or any director may be removed from office at any time, but only for cause, at a meeting called for that purpose, and only by the affirmative vote of the holders of at least a majority of the voting power of all 5 issued and outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. E. Rights of Holders of Preferred Stock. Notwithstanding the foregoing provisions of this Article FIFTH, whenever the holders of any one or more series of Preferred Stock issued by the Corporation shall have the right, voting separately by series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the rights and preferences of such Preferred Stock as set forth in this Restated Certificate of Incorporation or in the resolution or resolutions of the Board of Directors relating to the issuance of such Preferred Stock, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such rights and preferences. F. Written Ballot Not Required. Elections of directors need not be by written ballot unless the By-laws of the Corporation shall otherwise provide. SIXTH: To the fullest extent permitted under the law of the State of Delaware, including the GCL, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for damages for any breach of fiduciary duty as a director. No amendment to or repeal of this Article SIXTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. In the event that the GCL is hereafter amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be so eliminated or limited to the fullest extent permitted by the GCL as so amended without further action by either the Board of Directors or the stockholders of the Corporation. 6 SEVENTH: Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative ("Proceeding"), by reason of the fact that such person (the "Indemnitee") is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such Proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as such a director or officer, shall be indemnified and held harmless by the Corporation to the full extent permitted by law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), or by other applicable law as then in effect, against all expense, liability, losses and claims (including attorneys' fees, judgments, fines, excise taxes under the Employee Retirement Income Security Act of 1974, as amended from time to time, penalties and amounts to be paid in settlement) actually incurred or suffered by such Indemnitee in connection with such Proceeding. EIGHTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, repeal, alter, amend, or rescind the By-laws of the Corporation. In addition, the By-laws of the Corporation may be adopted, repealed, altered, amended or rescinded by the affirmative vote of the holders of at least a majority of the voting power of all the issued and outstanding shares of capital stock of the Corporation entitled to vote thereon. 7 NINTH: The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, General Instrument Corporation has caused this Restated Certificate of Incorporation to be signed by Robert A. Scott, its Senior Vice President, Legal and Secretary, on this 19th day of June, 1998. GENERAL INSTRUMENT CORPORATION By: /s/ Robert A. Scott -------------------- Robert A. Scott Senior Vice President, Legal and Secretary 8 EX-3.2 3 CERTIFICATE OF DESIGNATION Exhibit 3.2 GENERAL INSTRUMENT CORPORATION. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) I, Keith A. Zar, Vice President and General Counsel of General Instrument Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, do hereby certify: That pursuant to the authority conferred upon the Board of Directors by the Corporation's Certificate of Incorporation (the "Certificate of Incorporation"), the Board of Directors on June 10, 1997, adopted the following resolution creating a series of 400,000 shares of Preferred Stock designated as Series A Junior Participating Preferred Stock: WHEREAS, the Certificate of Incorporation provides that the Corporation is authorized to issue 20,000,000 shares of preferred stock, none of which are outstanding, now therefore it is. RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by Article FOURTH of the Certificate of Incorporation, a series of Preferred Stock of the Corporation be, and it hereby is, created out of the authorized but unissued shares of the capital stock of the Corporation, such series to be designated Series A Junior Participating Preferred Stock (the "Participating Preferred Stock"), to consist of four hundred thousand (400,000) shares, par value $.01 per share, of which the preferences and relative and other rights, and the qualifications, limitations or restrictions thereof, shall be as follows: 1. FUTURE INCREASE OR DECREASE. Subject of paragraph 4(e) of this resolution, the number of shares of said series may at any time or from time to time be increased or decreased by the Board of Directors notwithstanding that shares of such series may be outstanding at such time of increase or decrease. 2. DIVIDEND RATE. (a) The holders of shares of Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of each November, February, May and August in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) 1,000 times the aggregate per share amount of all cash dividends and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Participating Preferred Stock. (b) On or after the first issuance of any share or fractional share of Participating Preferred Stock, no dividend on Common Stock shall be declared unless concurrently therewith a dividend or distribution is declared on the Participating Preferred Stock as provided in paragraph (a) above; and the declaration of any such dividend on the Common Stock shall be expressly conditioned upon payment or declaration of and provision for a dividend on the Participating Preferred Stock as above provided. In the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. The Board of Directors may fix a record date for the determination of holders of shares of Participating Preferred Stock entitled to receive -2- payment of a dividend distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. DISSOLUTION, LIQUIDATION AND WINDING UP. In the event of any voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation (hereinafter referred to as a "Liquidation"), the holders of Participating Preferred Stock shall receive at least $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Participating Preferred Stock shall be entitled to receive at least an aggregate amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock (the "Participating Preferred Liquidation Preference"). 4. VOTING RIGHTS. The holders of shares of Participating Preferred Stock shall have the following voting rights: (a) Each share of Participating Preferred Stock shall entitle the holder thereof to one thousand (1,000) votes on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise provided herein, or by law, the Certificate of Incorporation or the Amended and Restated Bylaws of the Corporation (the "Bylaws"), the holders of shares of Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) If and whenever dividends on the Participating Preferred Stock shall be in arrears in an amount equal to six quarterly dividend payments, then and in such event the holders of the Participating Preferred Stock, voting separately as a class (subject to the provisions of subparagraph (d) below), shall be entitled at the next annual meeting of the stockholders or at any special meeting to elect two (2) directors. Each share of Participating Preferred Stock shall be entitled to one vote, and holders of fractional shares shall have the right to a fractional vote. Upon election, such directors shall become additional directors of the Corporation and the authorized number of directors of the Corporation shall thereupon be automatically increased by such number of directors. Such right of the holders of Participating Preferred Stock to elect directors may be exercised until all dividends in default on the Participating Preferred Stock shall have been paid in full, and dividends for the current dividend period declared and funds therefor set apart, and when so paid and set apart, the right of the holders of Participating Preferred Stock to elect such number of directors shall cease, the term of such directors shall thereupon terminate, and the authorized number of directors of the Corporation shall thereupon return to the number of authorized directors otherwise in effect, but subject always to the same provisions for the vesting of such special voting rights in the case of -3- any such future dividend default or defaults. The fact that dividends have been paid and set apart as required by the preceding sentence shall be evidenced by a certificate executed by the President and the chief financial officer of the Corporation and delivered to the Board of Directors. The directors so elected by holders of Participating Preferred Stock shall serve until the certificate described in the preceding sentence shall have been delivered to the Board of Directors or until their respective successors shall be elected or appointed and qualify. At any time when such special voting rights have been so vested in the holders of the Participating Preferred Stock, the Secretary of the Corporation may, and upon the written request of the holders of record of 10% or more of the number of shares of the Participating Preferred Stock then outstanding addressed to such Secretary at the principal office of the Corporation in the State of Illinois, shall, call a special meeting of the holders of the Participating Preferred Stock for the election of the directors to be elected by them as hereinabove provided, to be held in the case of such written request within forty (40) days after delivery of such request, and in either case to be held at the place and upon the notice provided by law and in the Bylaws of the Corporation for the holding of meetings of stockholders; PROVIDED, HOWEVER, that the Secretary shall not be required to call such a special meeting (i) if any such request is received less than ninety (90) days before the date fixed for the next ensuing annual or special meeting of stockholders or (ii) if at the time any such request is received, the holders of Participating Preferred Stock are not entitled to elect such directors by reason of the occurrence of an event specified in the third sentence of subparagraph (d) below. (d) if, at any time when the holders of Participating Preferred Stock are entitled to elect directors pursuant to the foregoing provisions of this paragraph 4, the holders of any one or more additional series of Preferred Stock are entitled to elect directors by reason of any default or event specified in the Certificate of Incorporation, as in effect at the time of the certificate of designation for such series, and if the terms for such other additional series so permit, the voting rights of the two or more series then entitled to vote shall be combined (with each series having a number of votes proportional to the aggregate liquidation preference of its outstanding shares). In such case, the holders of Participating Preferred Stock and of all such other series then entitled so to vote, voting as a class, shall elect such directors. If the holders of any such other series have elected such directors prior to the happening of the default or event permitting the holders of Participating Preferred Stock to elect directors, or prior to a written request for the holding of a special meeting being received by the Secretary of the Corporation from the holders of not less than 10% of the then outstanding shares of Participating Preferred Stock, then such directors so previously elected will be deemed to have been elected by and on behalf of the holders of Participating Preferred Stock as well as such other series, without prejudice to the right of the holders of Participating Preferred Stock to vote for directors if such previously elected directors shall resign, cease to serve or fail to stand for reelection while the holders of Participating Preferred Stock are entitled to -4- vote. If the holders of any such other series are entitled to elect in excess of two (2) directors, the Participating Preferred Stock shall not participate in the election of more than two (2) such directors, and those directors whose terms first expire shall be deemed to be the directors elected by the holders of Participating Preferred Stock; PROVIDED that, if at the expiration of such terms the holders of Participating Preferred Stock are entitled to vote in the election of directors pursuant to the provisions of this paragraph 4, then the Secretary of the Corporation shall call a meeting (which meeting may be the annual meeting or special meeting of stockholders referred to in subparagraph (c)) of holders of Participating Preferred Stock for the purpose of electing replacement directors (in accordance with the provisions of this paragraph 4) to be held on or prior to the time of expiration of the expiring terms referred to above. (e) Except as otherwise set forth herein or required by law, the Certificate of Incorporation or the Bylaws, holders of Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. No consent of the holders of outstanding shares of Participating Preferred Stock at any time outstanding shall be required in order to permit the Board of Directors to: (i) increase the number of authorized shares of Participating Preferred Stock or to decrease such number to a number not below the sum of the number of shares of Participating Preferred Stock then outstanding and the number of shares with respect to which there are outstanding rights to purchase; or (ii) to issue Preferred Stock which is senior to the Participating Preferred Stock, junior to the Participating Preferred Stock or on a parity with the Participating Preferred Stock. 5. REDEMPTION. The shares of Participating Preferred Stock shall not be redeemable. 6. CONVERSION RIGHTS. The Participating Preferred Stock is not convertible into Common Stock or any other security of the Corporation. -5- IN WITNESS WHEREOF, the undersigned Vice President and General Counsel of the Corporation declares under penalty or perjury the truth, to the best of his knowledge, of this Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. Executed this 23rd day of July, 1998 in Chicago, Illinois By: /s/ Keith A. Zar -------------------------------- Keith A. Zar Vice President and General Counsel -6- EX-3.3 4 BYLAWS AMENDED AND RESTATED BY-LAWS OF GENERAL INSTRUMENT CORPORATION (formerly NextLevel Systems, Inc., hereinafter called the "Corporation") (As of May 21, 1998) ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation within the State of Delaware shall be in the City of Wilmington, County of New Castle. Section 2. Other Offices. The Corporation may also have an office or offices other than said registered office at such place or places, either within or without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders for the election of directors or for any other purpose shall be held at any such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. Annual meetings of stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver thereof. At such annual meetings, the stockholders shall elect by a plurality vote the directors standing for election and transact such other business as may properly be brought before the meeting in accordance with these Amended and Restated By-Laws. Section 3. Special Meetings. Special meetings of stockholders, for any purpose or purposes, unless otherwise prescribed by statute may be called by the Board of Directors, the Chairman of the Board of Directors, if one shall have been elected, or the President and shall be called by the Secretary upon the request in writing of a stockholder or stockholders holding of record at least a majority of the voting power of the issued and outstanding shares of capital stock of the Corporation entitled to vote at such meeting. Section 4. Notice of Meetings. Except as otherwise expressly required by statute, written notice of each annual and special meeting of stockholders stating the date, place and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Notice shall be given personally or by mail and, if by mail, shall be sent in a postage prepaid envelope, addressed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Notice by mail shall be deemed given at the time when the same shall be deposited in the United States mail, postage prepaid. Notice of any meeting shall not be required to be given to any person who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, in person or by proxy. Neither the business to be transacted at, nor the purpose of, an annual or special meeting of stockholders need be specified in any written waiver of notice. Section 5. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or, in such person's absence or if one shall not have been elected, the President, shall act as chairman of the meeting. The Secretary or, in such person's absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 6. Conduct of Business. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. Section 7. Quorum, Adjournments. The holders of a majority of the voting power of the issued and outstanding shares of capital stock of the 2 Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented by proxy at any meeting of stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. Voting. Except as otherwise provided by statute or the Certificate of Incorporation and these Amended and Restated By-Laws, each stockholder of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of capital stock of the Corporation standing in such stockholder's name on the record of stockholders of the Corporation: (a) on the date fixed pursuant to the provisions of Section 7 of Article V of these Amended and Restated By-Laws as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting; or (b) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given, or, if notice is waived, at the close of business on the date next preceding the day on which the meeting is held. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for such stockholder by a proxy signed by such stockholder or such stockholder's attorney-in-fact, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Any such proxy shall be delivered to the secretary of the meeting at or prior to the time designated in the order of business for so delivering such proxies. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation or of these Amended and Restated By-Laws, a different vote is required, in which case such 3 express provision shall govern and control the decision of such question. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by such stockholder's proxy, if there be such proxy. Section 9. List of Stockholders Entitled to Vote. At least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder shall be prepared. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city, town, or village where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 10. Inspectors. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may appoint one or more inspectors. Each inspector, before entering upon the discharge of such inspector's duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of such inspector's ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided by statute or in the Certificate of Incorporation, any action required to be taken or which may be taken at any annual or special meeting of the 4 stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of any such corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 12. Advance Notice Provisions for Election of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 12 and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 12. In addition to any other applicable requirements, for a nomination to be made by a stockholder such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the date of the annual meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for 5 election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 12. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 13. Advance Notice Provisions for Business to be Transacted at Annual Meeting. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 13 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 13. 6 In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the date of the annual meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 13, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 13 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. 7 ARTICLE III DIRECTORS Section 1. Place of Meetings. Meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. Section 2. Annual Meeting. The annual meeting of the Board of Directors may be held at such time or place (within or without the State of Delaware) as shall be specified in a notice thereof given as hereinafter provided in Section 5 of this Article III. Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if one shall have been elected, or by two or more directors of the Corporation or by the President. Section 5. Notice of Meetings. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by law or these Amended and Restated By-Laws. Notice of each special meeting of the Board of Directors for which notice shall be required, shall be given by the Secretary as hereinafter provided in this Section 5, in which notice shall be stated the time and place of the meeting. Except as otherwise required by these Amended and Restated By-Laws, such notice need not state the purposes of such meeting. Notice of any special meeting, and of any regular or annual meeting for which notice is required, shall be given to each director at least (a) four hours before the meeting if by telephone or by being personally delivered or sent by telex, telecopy, or similar means or (b) two days before the meeting if delivered by mail to the director's residence or usual place of business. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopy, or similar means. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Any director may waive notice of any meeting by a writing signed by the director entitled to the notice and filed with the minutes or corporate records. The 8 attendance at or participation of the director at a meeting shall constitute waiver of notice of such meeting, unless the director at the beginning of the meeting or promptly upon such director's arrival objects to holding the meeting or transacting business at the meeting. Section 6. Organization. At each meeting of the Board of Directors, the Chairman of the Board, if one shall have been elected, or, in the absence of the Chairman of the Board or if one shall not have been elected, the President (or, in the President's absence, another director chosen by a majority of the directors present) shall act as chairman of the meeting and preside thereat. The Secretary or, in such person's absence, any person appointed by the chairman shall act as secretary of the meeting and keep the minutes thereof. Section 7. Quorum and Manner of Acting. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute or the Certificate of Incorporation or these Amended and Restated By-Laws, the affirmative vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice need only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. Section 8. Action by Consent. Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. Section 9. Telephonic Meeting. Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear 9 each other. Participation by such means shall constitute presence in person at a meeting. Section 10. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, including an executive committee, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of any member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each such committee, to the extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which require it; provided, however, that no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to stockholders for approval or (b) adopting, amending or repealing any by-law of the Corporation. Each such committee shall serve at the pleasure of the Board of Directors and have such name as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors. Section 11. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 12. Resignations. Any director of the Corporation may resign at any time by giving written notice of such director's resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 10 Section 13. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because such person's or persons' votes are counted for such purposes if (a) the material facts as to such person's or persons' relationship or interest and as to the contract or transaction are disclosed or are known to the directors or committee who then in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum, (b) the material facts as to such person's or persons' relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall include a President, one or more Vice Presidents (including Senior, Executive or other classifications of Vice Presidents) and a Secretary. The Board of Directors, in its discretion, may also choose as an officer of the Corporation a Chairman of the Board and a Vice Chairman of the Board and may choose other officers (including a Treasurer, one or more Assistant Secretaries and one or more Assistant Treasurers) as may be necessary or desirable. Such officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any officer of the Corporation the power to choose such other officers and to proscribe their respective duties and powers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Amended and Restated By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the 11 Board and Vice Chairman of the Board of Directors, need such officers be directors of the Corporation. Section 2. Term. All officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 3. Resignations. Any officer of the Corporation may resign at any time by giving written notice of such officer's resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. Section 4. Removal. Any officer may be removed at any time by the Board of Directors with or without cause. Section 5. Compensation. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that such officer is also a director of the Corporation. Section 6. Chairman of the Board. The Chairman of the Board, if one shall have been elected, shall be a member of the Board, an officer of the Corporation and, if present, shall preside at each meeting of the Board of Directors or the stockholders. The Chairman of the Board shall advise and counsel with the President, and in the President's absence with other executives of the Corporation, and shall perform such other duties as may from time to time be assigned to the Chairman of the Board by the Board of Directors. ARTICLE V STOCK CERTIFICATES AND THEIR TRANSFER Section 1. Stock Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. If the Corporation shall be 12 authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restriction of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Facsimile Signatures. Any or all of the signatures on a certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person was such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or the owner's legal representative, to give the Corporation a bond in such sum as it may direct sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its records; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry 13 of transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 5. Transfer Agents and Registrars. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. Section 6. Regulations. The Board of Directors may make such additional rules and regulations, not inconsistent with these Amended and Restated By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. Section 7. Fixing the Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 8. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. General. Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative ("Proceeding") brought by reason of the fact that such person (the "Indemnitee") is 14 or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such Proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as such a director or officer, shall be indemnified and held harmless by the Corporation to the full extent authorized by the General Corporation Law of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), or by other applicable law as then in effect, against all expenses, liabilities, losses and claims (including attorneys' fees, judgments, fines, excise taxes under the Employee Retirement Income Security Act of 1974, as amended from time to time, penalties and amounts to be paid in settlement) actually incurred or suffered by such Indemnitee in connection with such Proceeding (collectively, "Losses"). Section 2. Derivative Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any Proceeding brought by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person (also an "Indemnitee") is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against Losses actually incurred or suffered by the Indemnitee in connection with the defense or settlement of such action or suit if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, provided that no indemnification shall be made in respect of any claim, issue or matter as to which Delaware law expressly prohibits such indemnification by reason of an adjudication of liability of the Indemnitee unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. Indemnification in Certain Cases. Notwithstanding any other provision of this Article VI, to the extent that an Indemnitee has been wholly successful on the merits or otherwise in any Proceeding referred to in Sections 1 or 2 of this Article VI on any claim, issue or matter therein, the 15 Indemnitee shall be indemnified against Losses actually incurred or suffered by the Indemnitee in connection therewith. If the Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Corporation shall indemnify the Indemnitee, against Losses actually incurred or suffered by the Indemnitee in connection with each successfully resolved claim, issue or matter. In any review or Proceeding to determine such extent of indemnification, the Corporation shall bear the burden of proving any lack of success and which amounts sought in indemnity are allocable to claims, issues or matters which were not successfully resolved. For purposes of this Section 3 and without limitation, the termination of any such claim, issue or matter by dismissal with or without prejudice shall be deemed to be a successful resolution as to such claim, issue or matter. Section 4. Procedure. (a) Any indemnification under Sections 1 and 2 of this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Indemnitee is proper (except that the right of the Indemnitee to receive payments pursuant to Section 5 of this Article VI shall not be subject to this Section 4) in the circumstances because the Indemnitee has met the applicable standard of conduct. Such determination shall be made promptly, but in no event later than 60 days after receipt by the Corporation of the Indemnitee's written request for indemnification. The Secretary of the Corporation shall, promptly upon receipt of the Indemnitee's request for indemnification, advise the Board of Directors that the Indemnitee has made such request for indemnification. (b) The entitlement of the Indemnitee to indemnification shall be determined in the specific case (1) by the Board of Directors by a majority vote of the directors who are not parties to such Proceeding, even though less than a quorum (the "Disinterested Directors"), or (2) if there are no Disinterested Directors, or if such Disinterested Directors so direct, by independent legal counsel, or (3) by the stockholders. (c) In the event the determination of entitlement is to be made by independent legal counsel, such independent legal counsel shall be selected by the Board of Directors and approved by the Indemnitee. Upon failure of the Board of Directors to so select such independent legal counsel or upon failure of the Indemnitee to so approve, such independent legal counsel shall be selected by the American Arbitration Association in New York, New York or such other person as such Association shall designate to make such selection. 16 (d) If the Board of Directors or independent legal counsel shall have determined that the Indemnitee is not entitled to indemnification to the full extent of the Indemnitee's request, the Indemnitee shall have the right to seek entitlement to indemnification in accordance with the procedures set forth in Section 6 of this Article VI. (e) If the person or persons empowered pursuant to Section 4(b) of this Article VI to make a determination with respect to entitlement to indemnification shall have failed to make the requested determination within 60 days after receipt by the Corporation of such request, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be absolutely entitled to such indemnification, absent (i) misrepresentation by the Indemnitee of a material fact in the request for indemnification or (ii) a final judicial determination that all or any part of such indemnification is expressly prohibited by law. (f) The termination of any proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the rights of the Indemnitee to indemnification hereunder except as may be specifically provided herein, or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or create a presumption that (with respect to any criminal action or proceeding) the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful. (g) For purposes of any determination of good faith hereunder, the Indemnitee shall be deemed to have acted in good faith if the Indemnitee's action is based on the records or books of account of the Corporation or an affiliate, including financial statements, or on information supplied to the Indemnitee by the officers of the Corporation or an affiliate in the course of their duties, or on the advice of legal counsel for the Corporation or an affiliate or on information or records given or reports made to the Corporation or an affiliate by an independent certified public accountant or by an appraiser or other expert selected with reasonable care to the Corporation or an affiliate. The Corporation shall have the burden of establishing the absence of good faith. The provisions of this Section 4(g) of this Article VI shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in these Amended and Restated By-Laws. 17 (h) The knowledge and/or actions, or failure to act, of any other director, officer, agent or employee of the Corporation or an affiliate shall not be imputed to the Indemnitee for purposes of determining the right to indemnification under these Amended and Restated By-Laws. Section 5. Advances for Expenses and Costs. All expenses (including attorneys' fees) incurred by or on behalf of the Indemnitee (or reasonably expected by the Indemnitee to be incurred by the Indemnitee within three months) in connection with any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding within twenty days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting from time to time such advance or advances whether or not a determination to indemnify has been made under Section 4 of this Article VI. The Indemnitee's entitlement to such advancement of expenses shall include those incurred in connection with any Proceeding by the Indemnitee seeking an adjudication or award in arbitration pursuant to these Amended and Restated By-Laws. The financial ability of an Indemnitee to repay an advance shall not be a prerequisite to the making of such advance. Such statement or statements shall reasonably evidence such expenses incurred (or reasonably expected to be incurred) by the Indemnitee in connection therewith and shall include or be accompanied by a written undertaking by or on behalf of the Indemnitee to repay such amount if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor pursuant to the terms of this Article VI. Section 6. Remedies in Cases of Determination Not to Indemnify or to Advance Expenses. (a) In the event that (i) a determination is made that the Indemnitee is not entitled to indemnification hereunder, (ii) advances are not made pursuant to Section 5 of this Article VI or (iii) payment has not been timely made following a determination of entitlement to indemnification pursuant to Section 4 of this Article VI, the Indemnitee shall be entitled to seek a final adjudication either through an arbitration proceeding or in an appropriate court of the State of Delaware or any other court of competent jurisdiction of the Indemnitee's entitlement to such indemnification or advance. (b) In the event a determination has been made in accordance with the procedures set forth in Section 4 of this Article VI, in whole or in part, that the Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration referred to in paragraph (a) of this Section 6 shall be de novo and the Indemnitee shall not be prejudiced by reason of any such prior determination that the Indemnitee is not entitled to indemnification, and the Corporation shall bear the burdens of proof specified in Sections 3 and 4 of this Article VI in such proceeding. 18 (c) If a determination is made or deemed to have been made pursuant to the terms of Sections 4 or 6 of this Article VI that the Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration in the absence of (i) a misrepresentation of a material fact by the Indemnitee or (ii) a final judicial determination that all or any part of such indemnification is expressly prohibited by law. (d) To the extent deemed appropriate by the court, interest shall be paid by the Corporation to the Indemnitee at a reasonable interest rate for amounts which the Corporation indemnifies or is obliged to indemnify the Indemnitee for the period commencing with the date on which the Indemnitee requested indemnification (or reimbursement or advancement of expenses) and ending with the date on which such payment is made to the Indemnitee by the Corporation. Section 7. Rights Non-Exclusive. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. Section 8. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. Section 9. Definition of Corporation. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, 19 including service with respect to an employee benefit plan, shall stand in the same position under this Article VI with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. Section 10. Other Definitions. For purposes of this Article VI, references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VI. Section 11. Survival of Rights. The indemnification and advancement of expenses provided by, or granted pursuant to this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. No amendment, alteration, rescission or replacement of these Amended and Restated By-Laws or any provision hereof shall be effective as to an Indemnitee with respect to any action taken or omitted by such Indemnitee in Indemnitee's position with the Corporation or any other entity which the Indemnitee is or was serving at the request of the Corporation prior to such amendment, alteration, rescission or replacement. Section 12. Indemnification of Employees and Agents of the Corporation. The Corporation may, by action of the Board of Directors from time to time, grant rights to indemnification and advancement of expenses to employees and agents of the Corporation with the same scope and effect as the provisions of this Article VI with respect to the indemnification of directors and officers of the Corporation. Section 13. Savings Clause . If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each person entitled to indemnification under the first paragraph of this Article VI as to all losses actually and reasonably incurred or suffered by such person and for which indemnification is available to such person pursuant to this Article VI to the full extent permitted 20 by any applicable portion of this Article VI that shall not have been invalidated and to the full extent permitted by applicable law. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Subject to the provisions of statute and the Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation. Section 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors may think conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Seal. The seal of the Corporation shall be in such form as shall be approved by the Board of Directors. Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed, and once fixed, may thereafter be changed, by resolution of the Board of Directors. Section 5. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. Section 6. Execution of Contracts, Deeds, Etc. The Board of Directors may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. 21 Section 7. Voting of Stock in Other Corporations. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board or the President, from time to time, may (or may appoint one or more attorneys or agents to) cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation. In the event one or more attorneys or agents are appointed, the Chairman of the Board or the President may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chairman of the Board or the President may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the circumstances. ARTICLE VIII AMENDMENTS These Amended and Restated By-Laws may be repealed, altered, amended or rescinded in whole or in part, or new By-Laws may be adopted by either the affirmative vote of the holders of at least a majority of the voting power of all of the issued and outstanding shares of capital stock of the Corporation entitled to vote thereon or by the Board of Directors. 22 EX-10.1 5 ASSET PURCHASE AGREEMENT - -------------------------------------------------------------------------------- ASSET PURCHASE AGREEMENT among TCIVG-GIC, Inc., NDTC Technology, Inc. and General Instrument Corporation Dated as of June 17, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS AND TERMS . . . . . . . . . . . . . . . . . . . . . . . . . .1 SECTION 1.1 SPECIFIC DEFINITIONS . . . . . . . . . . . . . . . . . . .1 SECTION 1.2 OTHER TERMS. . . . . . . . . . . . . . . . . . . . . . . .9 ARTICLE II TRANSFER OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 SECTION 2.1 TRANSFER OF ASSETS . . . . . . . . . . . . . . . . . . . .9 SECTION 2.2 GROSS REVENUE DEFICIENCY AMOUNT. . . . . . . . . . . . . .9 SECTION 2.3 EXCLUDED ASSETS. . . . . . . . . . . . . . . . . . . . . 10 SECTION 2.4 ASSUMPTION OF LIABILITIES. . . . . . . . . . . . . . . . 11 SECTION 2.5 EXCLUDED LIABILITIES . . . . . . . . . . . . . . . . . . 11 SECTION 2.6 CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.7 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.8 DELIVERIES BY GI . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.9 DELIVERIES BY TCI. . . . . . . . . . . . . . . . . . . . 12 SECTION 2.10 ALLOCATION OF PURCHASE PRICE; DISCOUNT . . . . . . . . . 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF TCI . . . . . . . . . . . . . . . . . 13 SECTION 3.1 ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . 13 SECTION 3.2 CORPORATE AUTHORIZATION. . . . . . . . . . . . . . . . . 13 SECTION 3.3 CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . . 14 SECTION 3.4 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . . 14 SECTION 3.5 BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . 14 SECTION 3.6 FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . 14 SECTION 3.7 LITIGATION AND CLAIMS. . . . . . . . . . . . . . . . . . 14 SECTION 3.8 ASSIGNED CONTRACTS . . . . . . . . . . . . . . . . . . . 15 SECTION 3.9 TITLE TO PROPERTY. . . . . . . . . . . . . . . . . . . . 15 SECTION 3.10 FINDER'S FEES. . . . . . . . . . . . . . . . . . . . . . 15 SECTION 3.11 INVESTMENT INTENT. . . . . . . . . . . . . . . . . . . . 15 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GI. . . . . . . . . . . . . . . . . . 16 SECTION 4.1 ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . 16 -i- SECTION 4.2 CORPORATE AUTHORIZATION. . . . . . . . . . . . . . . . . 16 SECTION 4.3 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . 16 SECTION 4.4 CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . . 17 SECTION 4.5 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . . 17 SECTION 4.6 SEC REPORTS; FINANCIAL STATEMENTS. . . . . . . . . . . . 17 SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS . . . . . . . . . . 18 SECTION 4.8 BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . 18 SECTION 4.9 FINDERS' FEES. . . . . . . . . . . . . . . . . . . . . . 18 SECTION 4.10 RIGHTS AGREEMENT . . . . . . . . . . . . . . . . . . . . 18 SECTION 4.11 EQUITY PERCENTAGE. . . . . . . . . . . . . . . . . . . . 18 ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 5.1 ACCESS . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 5.2 CONTINUED PROVISION OF ADDRESSABLE SET-TOP SERVICES. . . 19 SECTION 5.3 REASONABLE EFFORTS; GOOD FAITH . . . . . . . . . . . . . 19 SECTION 5.4 TRANSFER TAXES . . . . . . . . . . . . . . . . . . . . . 19 SECTION 5.5 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . 19 SECTION 5.6 GI'S ACCESS. . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 5.7 BULK TRANSFER LAWS . . . . . . . . . . . . . . . . . . . 20 SECTION 5.8 NOTICE OF DEVELOPMENTS . . . . . . . . . . . . . . . . . 20 SECTION 5.9 STOCKHOLDERS MEETING . . . . . . . . . . . . . . . . . . 20 SECTION 5.10 TRANSFERS TO COMPETITORS . . . . . . . . . . . . . . . . 20 SECTION 5.11 RIGHTS IN THE EVENT OF A PUBLIC OFFERING . . . . . . . . 20 SECTION 5.12 REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . 21 SECTION 5.13 ANTI-DILUTION PROTECTION . . . . . . . . . . . . . . . . 31 SECTION 5.14 RESTRICTIONS ON TRANSFERABILITY OF SHARES. . . . . . . . 31 SECTION 5.15 NO PUBLIC ANNOUNCEMENT . . . . . . . . . . . . . . . . . 33 SECTION 5.16 SEC REPORTS. . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.17 HSR ACT FILING . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.18 MFN. . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE VI CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 6.1 CONDITIONS TO THE OBLIGATIONS OF GI. . . . . . . . . . . 34 SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF TCI AND NDTC. . . . . . 35 ARTICLE VII SURVIVAL; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 7.1 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . 35 -ii- SECTION 7.2 INDEMNIFICATION BY GI. . . . . . . . . . . . . . . . . . 36 SECTION 7.3 INDEMNIFICATION BY TCI AND NDTC. . . . . . . . . . . . . 36 SECTION 7.4 INDEMNIFICATION PROCEDURES . . . . . . . . . . . . . . . 36 SECTION 7.5 LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . 37 ARTICLE VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 8.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 8.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . 38 ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 9.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 9.2 AMENDMENT; WAIVER. . . . . . . . . . . . . . . . . . . . 39 SECTION 9.3 ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 9.4 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . 39 SECTION 9.5 FULFILLMENT OF OBLIGATIONS . . . . . . . . . . . . . . . 39 SECTION 9.6 PARTIES IN INTEREST. . . . . . . . . . . . . . . . . . . 40 SECTION 9.7 RETURN OF INFORMATION. . . . . . . . . . . . . . . . . . 40 SECTION 9.8 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.9 SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.10 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.11 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.12 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.13 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . 40 -iii- SCHEDULES Schedule 1.1(b) Fixtures and Equipment EXHIBITS A Agreement Regarding Addressable Set-Top Services B Agreement Regarding HITS Signals C License Agreement D Promissory Note E Services Agreement -iv- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of June 17, 1998, among TCIVG-GIC, Inc. ("TCI"), a Colorado corporation, NDTC Technology, Inc., a Colorado corporation ("NDTC") and General Instrument Corporation, a Delaware corporation formerly known as NextLevel Systems, Inc. ("GI"). W I T N E S S E T H: WHEREAS, the parties hereto and certain of their Affiliates have entered into a series of agreements, including (i) a Digital Terminal Purchase Agreement, dated as of December 16, 1997 (the "PURCHASE AGREEMENT") and (ii) a Warrant Issuance Agreement, dated as of December 16, 1997 (the "WARRANT ISSUANCE AGREEMENT"); WHEREAS, the parties hereto desire that TCI sell to GI, and GI purchase from TCI, the Transferred Assets and that GI and NDTC enter into licenses and service agreements related thereto, all as more fully set forth herein; WHEREAS, the consideration for the transactions contemplated by this Agreement is based on the price of the Common Stock as of December 16, 1997, the date on which National Digital Television Center, Inc. and GI entered into a Memorandum of Agreement with respect to the transactions contemplated by this Agreement (the "MEMORANDUM OF AGREEMENT"); NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND TERMS SECTION 1.1 SPECIFIC DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: "ACCESS AND CONTROL BUSINESS" shall mean all aspects of the business, as hereafter conducted by GI or its Affiliates from time to time, of providing access and control or authorization services that use any part of the technology or intellectual property that is licensed to GI pursuant to the License Agreement (or sublicensed by GI in accordance with the terms of the License Agreement), without regard to where such services are provided, including, without limitation, the business of providing Addressable Set-Top Services. Without limiting the foregoing, Access and Control Business includes the authorization and deauthorization of the receipt of programming signals (including, without limitation, signals hereafter provided by HITS as part of its programming transport business) or other signals, including data signals, by set-top boxes and other devices, whether such set-top boxes or other devices are stand alone devices or are integrated into a television set or other device such as a personal computer or game machine. The Access and Control Business also includes the sale and downloading by GI of the headend management software that it licenses from NDTC. "ADDRESSABLE SET-TOP SERVICES" means "Set-Top Authorization Services," "IPPV Services" and "HMS Download Services." "Set-Top Authorization Services" means the authorization and/or deauthorization of the receipt of the signal(s) of specified programming services or other signals by means of analog or digital set-top converter boxes or other devices in subscriber households or locations. "IPPV Services" means the collection and processing of information regarding impulse pay-per-view purchases by subscribers for the purpose of billing subscribers for those purchases. "HMS Download Services" means the downloading of headend management software that GI licenses from NDTC into equipment at headend or other reception sites. "AFFILIATE" shall mean, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the Person specified. "AGREEMENT" shall mean this Asset Purchase Agreement, as it may from time to time be amended, supplemented or restated. "AGREEMENT REGARDING ADDRESSABLE SET-TOP SERVICES" shall mean the agreement of the same name in the form of EXHIBIT A, as it may from time to time be amended, supplemented or restated. "AGREEMENT REGARDING HITS SIGNALS" shall mean the agreement of the same name in the form of EXHIBIT B, as it may from time to time be amended, supplemented or restated. "ANCILLARY AGREEMENTS" shall mean the Agreement Regarding Addressable Set-Top Services, the Agreement Regarding HITS Signals and the Services Agreement. "ASSIGNED CONTRACTS" shall mean (i) all agreements in effect as of the Closing Date between TCI or its Affiliates and operators of cable television systems or other multichannel video programming distribution systems with respect to the receipt by such operators of Addressable Set-Top Services and (ii) all maintenance agreements that relate to the Fixtures and Equipment. "ASSUMED LIABILITIES" shall have the meaning set forth in Section 2.4. "BENEFIT PLANS" shall mean each and all "employee benefit plans" as defined in Section 3(3) of ERISA, maintained or contributed to by TCI or in which TCI participates or participated and that provides benefits to employees of TCI or their spouses or covered dependents, including (i) any such plans that are "employee welfare benefit plans" as defined in Section 3(1) of ERISA and (ii) any such plans that are "employee pension benefit plans" as defined in Section 3(2) of ERISA. -2- "BUSINESS DAY" shall mean any day other than Saturday, Sunday or a day on which banking institutions in Denver, Colorado or New York City are authorized or obligated by Law to close. "CHANGE IN CONTROL OF GI" shall mean: (i) the acquisition by a Person (including its Affiliates) or by a "group" ("group" being used in this definition within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder), in each case that is not engaged as one of its principal lines of business in manufacturing consumer electronics, of (a) beneficial ownership ("beneficial ownership" being used in this definition within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of securities of GI representing 20% or more of the voting power of the outstanding voting securities of GI, or (b) assets of GI representing 20% or more of the aggregate fair market value of all of the assets of GI immediately prior to such sale or purchase, in each case in one transaction or a series of related transactions (it being agreed, however, that any sale to or purchase by a Person of part or all of the assets of, or telephony business conducted by, NextLevel Communications L.P. or its successors (or GI's interest therein) shall not constitute a Change in Control); (ii) the acquisition by a Person (including its Affiliates) or by a "group," in each case that is engaged as one of its principal lines of business in manufacturing consumer electronics, of (a) beneficial ownership of securities of GI representing 35% or more of the voting power of the outstanding voting securities of GI or (b) assets of GI representing 35% or more of the aggregate fair market value of all of the assets of GI immediately prior to such sale or purchase, in each case in one transaction or a series of related transactions (it being agreed, however, that any sale to or purchase by a Person of part or all of the assets of, or telephony business conducted by, NextLevel Communications L.P. or its successors (or GI's interest therein) shall not constitute a Change in Control); (iii) a merger, consolidation or other reorganization involving GI pursuant to which beneficial ownership of securities representing 20% or more of the voting power of the outstanding voting securities of the merged, consolidated or reorganized entity are held by a Person (including its Affiliates) or by a group, in each case that is not engaged as one of its principal lines of business in manufacturing consumer electronics and that did not have beneficial ownership of securities representing at least 20% of the voting power of the outstanding voting securities of GI immediately prior to such transaction; or (iv) a merger, consolidation or other reorganization involving GI pursuant to which beneficial ownership of securities representing 35% or more of the voting power of the outstanding voting securities of the merged, consolidated or reorganized entity are held by a Person (including its Affiliates) or by a group, in each case that is engaged as one of its principal lines of business in manufacturing consumer electronics and that did not have beneficial ownership of securities representing at least 35% of the voting power of the outstanding voting securities of GI immediately prior to such transaction. For purposes of the foregoing, (i) any determination of fair market value shall be conclusively made by GI and shall be evidenced by a certificate of two of its officers and (ii) "outstanding voting securities" shall mean all voting securities of GI outstanding at the time of determination (assuming conversion of all outstanding convertible securities of GI that are convertible within 60 days following the date of determination and assuming exercise of all outstanding Rights to purchase securities of GI that are exercisable within 60 days following the date of determination, other than employee options and Rights under the Rights Agreement). -3- "CLAIM NOTICE" shall have the meaning set forth in SECTION 7.4. "CLOSING" shall mean the closing of the transactions contemplated by this Agreement. "CLOSING DATE" shall have the meaning set forth in SECTION 2.7. "CLOSING PRICE" of a share of Common Stock on any Trading Day means the last reported sales price, regular way, for such Trading Day as reported on the New York Stock Exchange. "COMMISSION" shall mean the Securities Exchange Commission. "COMMON STOCK" shall mean the common stock, par value $.01 per share, of GI. "COMPETITOR" shall have the meaning set forth in the Warrant Issuance Agreement. "CONSIDERATION" shall have the meaning set forth in SECTION 2.6. "ENCUMBRANCES" shall mean liens, charges, encumbrances, security interests, options, or any other restrictions or third party rights. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXCLUDED ASSETS" shall have the meaning set forth in SECTION 2.3. "EXCLUDED LIABILITIES" shall have the meaning set forth in SECTION 2.5. "FAIR MARKET VALUE" shall mean (i), as to any Registrable Securities which are shares of Common Stock, (x) the number of such shares proposed to be sold times (y) the average daily Closing Prices of the Common Stock for the period of 30 consecutive Trading Days commencing 45 Trading Days prior to the date of the initial request for registration, and (ii), as to any other Registrable Securities, the fair market value of such securities, as determined in good faith by the board of directors of GI. "FIXTURES AND EQUIPMENT" shall mean the items listed in SCHEDULE 1.1(B). "GAAP" shall mean United States generally accepted accounting principles. "GI" shall have the meaning set forth in the first paragraph of this Agreement. "GI INDEMNIFIED PARTIES" shall have the meaning set forth in SECTION 7.3. -4- "GOVERNMENTAL ENTITY" shall mean any government or any agency, bureau, board, commission, court, department, office, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "GROSS REVENUE DEFICIENCY AMOUNT" shall mean with respect to calendar years 1998 through 2006, the amount, if any, by which the actual Gross Revenues for such year are less than the Minimum Gross Revenue Amount for such year. "GROSS REVENUES" shall mean an amount equal to the gross revenues derived by GI and its Affiliates from or related to the Access and Control Business as conducted in the United States of America (including its territories and possessions) and Canada; provided, that for purposes of calculating Gross Revenues, GI or its Affiliates will be deemed to have received at least twenty-five cents per month for each analog or digital set-top box or other device that is authorized or deauthorized by or on behalf of GI or its Affiliates in connection with the operation by GI or its Affiliates of an Access and Control Business. If the amount received by GI or its Affiliates with respect to the authorization or deauthorization of a set-top box or other device is greater than twenty-five cents per month, the actual amount received by GI or its Affiliates shall be used in calculating Gross Revenues. "HITS" shall mean Headend In The Sky, Inc., a Colorado corporation. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "HOLDERS" shall have the meaning set forth in the Warrant Issuance Agreement. "INDEMNIFIED PARTIES" shall have the meaning set forth in SECTION 7.3. "INDEMNIFYING PARTY" shall have the meaning set forth in SECTION 7.4. "INTELLECTUAL PROPERTY" shall mean all intellectual property rights of NDTC and its Affiliates, including: trademarks, service marks, brand names, certification marks, trade dress, assumed names, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in-part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; computer software (including software, data and related documentation); non-public information, trade secrets, know-how (including, without limitation, research and development, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings and specifications) and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any Person; writings and other works, whether copyrightable or not in any -5- jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; any similar intellectual property or proprietary rights; and any claims or causes of action arising out of or related to any infringement or misappropriation of any of the foregoing. "LAW" shall mean all laws, statutes and ordinances and all regulations, rules and other pronouncements of Governmental Entities having the effect of law of the United States, any foreign country, or any domestic or foreign state, province, commonwealth, city, country, municipality, territory, protectorate, possession or similar instrumentality, or any Governmental Entity thereof. "LICENSE AGREEMENT" shall mean the license to specified Intellectual Property, in the form of EXHIBIT C. "LITIGATION" shall have the meaning set forth in SECTION 3.7. "LOSSES" shall have the meaning set forth in SECTION 7.2. "MANUALS AND WARRANTIES" shall mean originals or copies of all operating manuals and warranties relating to the Fixtures and Equipment. "MATERIAL ADVERSE EFFECT" shall mean an effect that would, following Closing, be materially adverse to the business, prospects, assets, liabilities, condition (financial or otherwise) or results of operations of GI's Access and Control Business taken as a whole. "MEMORANDUM OF AGREEMENT" shall have the meaning set forth in the fourth paragraph of this Agreement. "MINIMUM GROSS REVENUE AMOUNT" with respect to a given calendar year shall be as set forth below: Year Minimum Gross Revenue Amount ---- ---------------------------- 1998 $5,429,557 (prorated as specified below) 1999 $8,958,092 2000 $18,633,912 2001 $33,062,223 2002 $44,434,942 2003 through 2006 $36,793,902 The Minimum Gross Revenue Amount for calendar year 1998 will be prorated based on the number of calendar days remaining in 1998 as of the Closing Date, calculated on the basis of a 365 day year. -6- "NDTC" shall have the meaning set forth in the first paragraph of this Agreement. "NDTC INDEMNIFIED PARTIES" shall have the meaning set forth in SECTION 7.2. "NOTE" shall mean a promissory note in the form attached hereto as EXHIBIT D. "NOTICE" shall have the meaning set forth in SECTION 9.1. "NOTICE PERIOD" shall have the meaning set forth in SECTION 7.4. "ORDER" shall mean any ruling, decree, rule, judgment, order or injunction of any Governmental Entity. "PARTIES" shall mean TCI, NDTC and GI. "PERMITTED ENCUMBRANCES" shall have the meaning set forth in SECTION 3.9(B). "PERSON" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership, limited liability company or other entity, or any government or any agency or political subdivision thereof. "PURCHASE AGREEMENT" shall have the meaning set forth in the second paragraph of this Agreement. "REGISTRABLE SECURITIES" shall mean any Shares. As to any particular Registrable Securities once issued, such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (iii) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by GI and subsequent disposition of them shall not require registration or qualification of them under the Securities Act, or (iv) such securities shall have ceased to be outstanding. "REGISTRATION EXPENSES" shall mean any and all expenses incident to performance of or compliance with SECTION 5.12, including, without limitation, (i) all Commission and stock exchange or National Association of Securities Dealers, Inc. registration, filing fees and listing expenses, (ii) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters in connection with blue sky qualification of any Shares, (iii) all printing, messenger and delivery expenses, (iv) the fees and disbursements of counsel for GI and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, (v) the fees and disbursements of counsel retained in connection with such registration by Holders of the Shares -7- being registered, and (vi) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, including the fees and expenses of any special experts retained in connection with the requested registration. "RELATED TO" shall mean primarily related to, or used or held for use or intended to be used primarily in connection with. "RIGHTS" has the meaning specified in SECTION 4.11. "RIGHTS AGREEMENT" shall mean the Rights Agreement, dated as of June 12, 1997, as amended, between GI and ChaseMellon Shareholder Services, L.L.C., as rights agent. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SERVICES AGREEMENT" shall mean the Master Service Agreement, in the form of EXHIBIT E, pursuant to which NDTC will provide certain services to GI in respect of its Access and Control Business following the Closing. "SHARES" shall mean the shares of Common Stock received as the Consideration hereunder and any shares of capital stock of GI that are received after Closing in respect of such shares as a result of a stock split or dividend by, or a reorganization of, GI. "STOCKHOLDERS MEETING" shall have the meaning set forth in the Warrant Issuance Agreement. "TAXES" shall mean all federal, state, local or foreign taxes, including but not limited to income, gross receipts, windfall profits, value added, severance, property, production, sales, use, license, excise, franchise, employment, withholding or similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties. "TCI, ET. AL." shall mean Tele-Communications, Inc. ("TCI") and any Person in which TCI, directly or indirectly, owns at least twenty percent (20%) of the outstanding equity interests. "TRADING DAY" means a day on which the New York Stock Exchange is open for the transaction of business (unless such trading shall have been suspended for the entire day). "TRANSFERRED ASSETS" shall have the meaning set forth in SECTION 2.1. "TRANSFER TAXES" shall have the meaning set forth in SECTION 5.4. "TVN" shall mean TVN Entertainment Corporation. "TVN AGREEMENT" shall mean the Service and License Agreement entered into as of June 9, 1997 between NDTC and TVN. -8- "WARRANTHOLDER" shall have the meaning set forth in the Warrant Issuance Agreement. "WARRANT ISSUANCE AGREEMENT " shall have the meaning set forth in the second paragraph of this Agreement. "WARRANT SHARES" shall have the meaning set forth in the Warrant Issuance Agreement. SECTION 1.2 OTHER TERMS Other terms may be defined elsewhere in the text of this Agreement and, unless otherwise indicated, shall have such meaning throughout this Agreement. SECTION 1.3 OTHER DEFINITIONAL PROVISIONS (a) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The words "including" or "includes" when used in this Agreement shall be construed without limitation. ARTICLE II TRANSFER OF ASSETS SECTION 2.1 TRANSFER OF ASSETS On the terms and subject to the conditions set forth herein, at the Closing, TCI agrees to sell, convey, transfer, assign and deliver to GI, and GI agrees to purchase and acquire from TCI, free and clear of Encumbrances other than Permitted Encumbrances, all of TCI's direct or indirect right, title and interest, in and to the Fixtures and Equipment, all Manuals and Warranties, and the Assigned Contracts (collectively, the "TRANSFERRED ASSETS"). SECTION 2.2 GROSS REVENUE DEFICIENCY AMOUNT; MAXIMUM GROSS REVENUE AMOUNT (a) On the terms and subject to the conditions set forth herein, after the Closing, TCI shall pay to GI, in immediately available funds, the Gross Revenue Deficiency Amount (if any) for each of calendar years 1998 through 2006 as follows. GI shall deliver to TCI within 45 Business Days after the end of each of calendar years 1998 through 2006, a certificate signed by the chief financial officer of GI that sets forth Gross Revenues for the preceding calendar year and GI's calculation of the Gross Revenue Deficiency Amount, if any, for such year, such certificate to be accompanied by supporting documentation for the calculations in such certificate. Within ten Business Days following its receipt of such certificate, TCI will either pay to GI, in immediately available funds, the Gross Revenue Deficiency Amount, if any, reflected in such certificate or notify GI in writing that it disagrees with GI's calculation of the Gross Revenue Deficiency Amount. If TCI notifies GI that it disagrees with GI's calculation, TCI and GI shall negotiate in good faith to -9- reach agreement on the disputed calculation within ten Business Days following TCI's notice to GI, and TCI shall promptly pay to GI, in immediately available funds, any agreed upon Gross Revenue Deficiency Amount upon such agreement. GI agrees to use all reasonable commercial efforts following Closing and through December 31, 2006 to sell Addressable Set-Top Services. TCI's obligation to pay the Gross Revenue Deficiency Amount shall not apply in any particular year if GI discontinues a substantial portion of its Access and Control Business at any time following Closing and such discontinuation directly results in such Gross Revenue Deficiency Amount. (b) If TCI transfers more than 60% of the Shares following Closing, TCI will assign its obligations under SECTION 2.2(A) to an Affiliate of TCI that is reasonably acceptable to GI, and such entity shall assume TCI's obligations under SECTION 2.2(A) pursuant to an assumption agreement reasonably satisfactory to GI. (c) GI and TCI and its Affiliates intend that Gross Revenues for calendar years 2003 through 2011 derived from the sale of GI's Addressable Set-Top Services to TCI, et. al. will not exceed the following amounts: Year 2003: $37,982,031; Year 2004: $39,195,740; Year 2005: $40,435,475; Year 2006: $42,052,894; Year 2007: $43,735,010; Year 2008: $45,484,411; Year 2009: $47,303,787; Year 2010: $49,195,938; Year 2011: $51,163,776 (such Gross Revenues derived from TCI, et. al. being referred to herein as "Gross Revenues from TCI"). GI shall deliver to TCI within 45 business days after the end of each of calendar years 2003 through 2011, a certificate signed by the chief financial officer of GI that sets forth Gross Revenues from TCI for the preceding calendar year, such certificate to be accompanied by supporting documentation for the calculations in such certificate. If Gross Revenues from TCI exceeds the amount specified above for a given year, the amount of the excess shall be paid to NDTC pursuant to the Services Agreement with respect to any year (or portion thereof) for which the Services Agreement is in effect and shall be paid to TCI with respect to any year (or portion thereof) for which the Services Agreement is not in effect. Any payment due to TCI hereunder shall be paid by GI within 45 business days following the end of each applicable calendar year. (d) GI agrees that it will keep and maintain in accordance with generally accepted accounting principles, accurate books and records with respect to Gross Revenues and Gross Revenues from TCI and will require any other Person whose revenues are included in Gross Revenues or Gross Revenues from TCI to maintain such books and records. GI shall make such books and records available to TCI or its designees upon reasonable notice for inspection and audit during normal business hours at GI's offices, any such audit to be performed at TCI's expense unless the audit reveals an under calculation by GI of Gross Revenues or Gross Revenues from TCI by 5% or more in which case GI shall reimburse TCI for its costs and expenses in conducting such audit. SECTION 2.3 EXCLUDED ASSETS Notwithstanding anything herein to the contrary, from and after the Closing, TCI and its Affiliates shall retain all of their direct and indirect right, title and interest in and to, and there shall be excluded from the conveyance, assignment, transfer or delivery to GI hereunder, all assets of TCI or its Affiliates not specifically included in the Transferred Assets, including, without limitation, the Intellectual Property (collectively, the "EXCLUDED ASSETS"). -10- SECTION 2.4 ASSUMPTION OF LIABILITIES. (a) On the terms and subject to the conditions set forth herein, at the Closing, GI agrees to assume and discharge or perform when due, all liabilities, obligations and commitments of TCI or its Affiliates under the Assigned Contracts assigned or otherwise transferred to GI, arising on or after the Closing Date (the "ASSUMED LIABILITIES"). (b) From and after the Closing, GI also agrees that it will provide Set-Top Authorization Services (as defined in the TVN Agreement) to TVN in accordance with the terms of the TVN Agreement for so long as TVN has not exercised its rights thereunder to use the technology licensed to it to provide Set-Top Authorization Services itself. From and after the Closing, NDTC shall direct TVN to make the payments provided for in Section 5 of such agreement to GI for so long as GI is providing the Set-Top Authorization Services to TVN. SECTION 2.5 EXCLUDED LIABILITIES. Notwithstanding any other provision of this Agreement, GI shall not and does not assume, agree to pay, perform or discharge, or otherwise have any liability or responsibility for any liability or obligation of TCI or its Affiliates not included in the Assumed Liabilities, regardless of whether such liability or obligation is fixed or contingent, asserted or unasserted, and whether arising prior to, on or after the Closing Date (collectively, the "EXCLUDED LIABILITIES"). Without limiting the generality of the foregoing, the Excluded Liabilities shall include: (a) All liabilities arising out of or relating to the Excluded Assets; (b) All liabilities for Taxes imposed with respect to the taxable periods, or portions thereof, ending on or before the Closing Date; (c) All indebtedness for money borrowed; (d) All liabilities or obligations arising from any Litigation, investigation or other proceeding pending or threatened in respect of TCI or its business or any of its Affiliates, directors or officers; (e) All liabilities or obligations of TCI or any TCI Benefit Plan with respect to any of TCI's current or former employees, directors, consultants or advisors whether arising prior to, on or after the Closing Date, including, but not limited to, (A) liabilities and obligations under any TCI Benefit Plan, (B) liabilities and obligations in respect of any payroll Taxes, (C) liabilities and obligations arising from any employee or employment related Litigation, (D) liabilities and obligations in respect of any collective bargaining agreement to which TCI is or was a party and (E) liabilities and obligations in respect of any severance, bonus or vacation pay agreements or arrangements; and (f) All liabilities relating to the Transferred Assets that arose prior to Closing. -11- SECTION 2.6 CONSIDERATION. On the terms and subject to the conditions set forth herein, GI agrees to transfer and deliver, free and clear of all Encumbrances, 21,356,000 shares of newly issued Common Stock (as the same may be adjusted pursuant to the terms of this Agreement, the "CONSIDERATION"). SECTION 2.7 CLOSING The Closing shall take place at a mutually agreeable location at 10:00 A.M., on the second Business Day following the date on which any applicable waiting periods under the HSR Act shall have expired and all other conditions to the obligations of the Parties have been fulfilled or waived by the Party entitled to the benefit of such conditions, or at such other time as the Parties hereto may mutually agree. The date on which the Closing occurs is called the "CLOSING DATE". SECTION 2.8 DELIVERIES BY GI. At the Closing, GI shall deliver to TCI the following: (a) newly issued certificate(s) representing the Consideration, free and clear of all Encumbrances; (b) such instruments of assumption and other instruments or documents, in form and substance reasonably acceptable to TCI, as may be necessary to effect GI's assumption of the Assumed Liabilities; (c) a correct and complete copy of GI's Amended and Restated Certificate of Incorporation; (d) an opinion of in-house counsel to GI with respect to the issuance of the Consideration, dated the Closing Date, in form and substance reasonably satisfactory to TCI; (e) such other instruments and documents, in form and substance reasonably acceptable to TCI, as may be necessary to effect the Closing; (f) a duly executed original of each of the Ancillary Agreements; and (g) a duly executed original of the License Agreement. SECTION 2.9 DELIVERIES BY TCI. At the Closing, TCI shall deliver to GI the following: (a) bills of sale and any other customary instruments of sale and conveyance, in form and substance reasonably acceptable to GI, transferring to GI all Transferred Assets; (b) assignments, in form and substance reasonably acceptable to GI, assigning to GI all Assigned Contracts included in the Transferred Assets; -12- (c) the duly executed Note; (d) such other instruments and documents, in form and substance reasonably acceptable to GI, as may be necessary to effect the Closing; (e) a duly executed original of each of the Ancillary Agreements; and (f) an original of the License Agreement, duly executed by NDTC. SECTION 2.10 ALLOCATION OF PURCHASE PRICE; DISCOUNT. GI and TCI agree that the Consideration will be allocated to the Transferred Assets and the License Agreement for all purposes (including Tax and financial accounting) pursuant to an allocation schedule to be agreed upon by GI and TCI within 15 Business Days following Closing (the "Allocation Schedule"). GI and TCI will file all Tax returns and information reports in a manner consistent with the Allocation Schedule. In addition, GI and TCI agree that, solely for purposes of Tax reporting, the Closing Date stock market price of the Common Stock will be discounted by 35% and all Tax returns and information reports filed by them will be consistent with and reflect such discount. Promptly following Closing, TCI will deliver a valuation report to GI that supports such discount. ARTICLE III REPRESENTATIONS AND WARRANTIES OF TCI Each of TCI and NDTC severally represents and warrants to GI with respect to itself and its own assets and operations as follows: SECTION 3.1 ORGANIZATION AND QUALIFICATION. Each of TCI and NDTC is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation and TCI has all requisite corporate power and authority to own and operate the Transferred Assets and to carry on its business as currently conducted. Each of TCI and NDTC is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of the Transferred Assets or the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, as the case may be, individually or in the aggregate, would not have a Material Adverse Effect. Each of TCI and NDTC is, directly or indirectly, a wholly-owned subsidiary of Tele-Communications, Inc. SECTION 3.2 CORPORATE AUTHORIZATION. Each of TCI and NDTC has full corporate power and authority to execute and deliver this Agreement, the Note and each of the Ancillary Agreements to which it is a party, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by TCI and NDTC of this Agreement, the Note and each of the Ancillary Agreements to which it is a party have been duly and validly authorized and no additional corporate authorization or consent is required in connection with the execution, delivery and performance by either of them of this Agreement, the Note or the Ancillary Agreements to which it is a party. -13- SECTION 3.3 CONSENTS AND APPROVALS. Except for applicable requirements of the HSR Act, if any, and except with respect to consents required under any Assigned Contract, no consent, approval, waiver, expiration of waiting period or authorization is required to be obtained by TCI, NDTC or any of their Affiliates, and no notice or filing is required to be given by TCI, NDTC or any of their Affiliates to, or made by TCI, NDTC or any of their Affiliates with, any Governmental Entity or other Person in connection with the execution, delivery and performance by them of this Agreement, the Note and the Ancillary Agreements to which they are party, other than in all cases where the failure to obtain such consent, approval, waiver or authorization, or to give or make such notice of filing, individually or in the aggregate, would not have a Material Adverse Effect. SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance by TCI and NDTC of this Agreement, the Note and each of the Ancillary Agreements to which it is party, and the consummation of the transactions contemplated hereby and thereby, does not and will not (whether after the filing of notice or the lapse of time or both) (i) violate any provision of the charter, by-laws or other organizational documents of TCI or NDTC, (ii) subject to obtaining the consents referred to in SECTION 3.3, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration of any right or obligation of TCI or NDTC under, or to a loss of any benefit to which TCI or NDTC is entitled under, any Assigned Contract or result in the creation of any Encumbrance upon any of the Transferred Assets, or (iii) assuming the consents, approvals, waivers, authorizations, notices and filings in SECTION 3.3 and SECTION 4.4 are obtained or made or given, as the case may be, violate or result in a breach of or constitute a default under any Law or Order to which TCI or NDTC is subject, including any Governmental Authorization, other than in the cases of clauses (ii) and (iii), any violation, breach, default or Encumbrance that, individually or in the aggregate, would not have a Material Adverse Effect. SECTION 3.5 BINDING EFFECT. This Agreement constitutes, and the Note and each of the Ancillary Agreements when executed and delivered by the parties thereto will constitute, a valid and legally binding obligation of TCI and NDTC enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. SECTION 3.6 FINANCIAL INFORMATION. Exhibit A to the Memorandum of Agreement was prepared in good faith on a reasonable basis; and TCI believes that the underlying assumptions provide a reasonable basis for the forecasts contained therein. Notwithstanding the foregoing, TCI does not represent that GI's Access and Control Business will achieve the results set forth on Exhibit A to the Memorandum of Agreement and GI acknowledges that actual results may materially differ from such results. SECTION 3.7 LITIGATION AND CLAIMS. There is no civil, criminal or administrative action, suit, demand, claim, hearing, proceeding or investigation (collectively, "LITIGATION") pending or, to the knowledge of TCI, threatened, involving its provision of Addressable Set-Top Services or any of the Transferred Assets. -14- SECTION 3.8 ASSIGNED CONTRACTS. Immediately prior to the Closing Date, TCI will deliver to GI a complete list of the Assigned Contracts, together with true and complete copies thereof. Each Assigned Contract is a valid and binding agreement of TCI or its Affiliates and is in full force and effect. SECTION 3.9 TITLE TO PROPERTY. (a) Except to the extent that certain items are to be provided by NDTC pursuant to the Services Agreement and except with respect to the Third Party Licenses (as defined in the License Agreement), the Transferred Assets and the License Agreement constitute all the assets, properties and rights that are necessary for GI to provide Addressable Set-Top Services following Closing in all material respects as currently provided by TCI. The properties, machinery and equipment included in the Transferred Assets are in good operating condition, taking into account the age of such properties, machinery and equipment and ordinary wear and tear. (b) TCI has title to the personal property included in the Transferred Assets free and clear of all Encumbrances, except (i) liens for Taxes, assessments and other governmental charges not yet due and payable or due but not delinquent or being contested in good faith by appropriate proceedings and (ii) mechanics', workmen's, repairmen's, warehousemen's, carriers' or other like liens arising or incurred in the ordinary course of business, original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business (all items included in (i) and (ii) are referred to collectively herein as the "PERMITTED ENCUMBRANCES"). SECTION 3.10 FINDER'S FEES. There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of TCI or any of its Affiliates who might be entitled to any fee or commission from TCI or any of its Affiliates in connection with the transactions contemplated by this Agreement. SECTION 3.11 INVESTMENT INTENT. TCI acknowledges that the shares of capital stock issuable as the Consideration hereunder have not been registered under the Securities Act, or under any state or foreign securities laws. TCI is purchasing such shares solely for investment with no present intention to distribute any of such shares to any person, and TCI will not sell or otherwise dispose of any of such shares, except in compliance with the registration requirements or exemption provisions under the Securities Act and the rules and regulations promulgated thereunder, and any other applicable securities laws. TCI is acquiring such shares solely for its own account and not with a view to a sale or distribution thereof in violation of any securities laws. TCI acknowledges that it has received, or has had access to, all information which it considers necessary or advisable to enable it to make a decision concerning its purchase of such shares, provided that the foregoing shall not limit or otherwise affect the rights or remedies of TCI hereunder with respect to the breach of any representations, warranties, covenants or agreements of GI contained herein. -15- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GI GI represents and warrants to TCI and NDTC as follows: SECTION 4.1 ORGANIZATION AND QUALIFICATION. GI is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has all requisite corporate power and authority to own or lease all of its properties and assets and to carry on its business as currently conducted. GI is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, as the case may be, individually or in the aggregate, would not have a material adverse effect on its business, financial condition or results of operations. SECTION 4.2 CORPORATE AUTHORIZATION. GI has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by GI of this Agreement and each of the Ancillary Agreements have been duly and validly authorized and no additional corporate authorization or consent is required in connection with the execution, delivery and performance by GI of this Agreement and each of the Ancillary Agreements. SECTION 4.3 CAPITALIZATION. (a) The authorized capital stock of GI consists of 400,000,000 shares of Common Stock, and 20,000,000 shares of preferred stock, par value $.01 per share, issuable in series ("PREFERRED STOCK"), of which no series have been issued. The rights, privileges and preferences of the Common Stock and Preferred Stock are as stated in GI's Amended and Restated Certificate of Incorporation. As of May 31, 1998, there are issued and outstanding 151,410,786 shares of Common Stock, no shares of Preferred Stock and no other shares of capital stock. All issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance with all applicable state and federal securities laws. As of the date of this Agreement, there are no outstanding options, warrants or other rights to purchase or otherwise acquire equity securities of GI, securities convertible into or exchangeable for equity securities of GI, options, warrants or other rights to purchase or otherwise acquire any such equity securities or convertible or exchangeable securities, or agreements to issue or grant any of the foregoing, other than pursuant to employee benefit plans of GI, the Rights Agreement, a proposed agreement with Sony Corporation of America or its affiliate pursuant to which the Company may issue up to 7,500,000 shares of Common Stock, and warrant agreements between GI and certain cable television multiple system operators (including the Warrant Issuance Agreement ) pursuant to which up to 28,715,960 shares of Common Stock may be issued. (b) All shares of capital stock issuable as the Consideration hereunder (i) are duly authorized in GI's Amended and Restated Certificate of Incorporation, (ii) have been duly authorized to be issued by GI's Board of Directors and (iii) will, upon transfer and delivery of the consideration -16- therefor, be duly and validly issued, fully paid and nonassessable and free of Encumbrances. GI has delivered to TCI a true and complete copy of its Amended and Restated Certificate of Incorporation, as in effect on the date hereof. SECTION 4.4 CONSENTS AND APPROVALS. Except for approval by the board of directors of GI and applicable requirements of the HSR Act, the Securities Act, the Exchange Act , the New York Stock Exchange and state securities laws, if any, no consent, approval, waiver, expiration of waiting period or authorization is required to be obtained by GI from, and no notice or filing is required to be given by GI or any of its Affiliates to, or made by GI or any of its Affiliates with, any Governmental Entity or other Person in connection with the execution, delivery and performance by GI of this Agreement and each of the Ancillary Agreements, other than in all cases those the failure of which to obtain, give or make would not, individually or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of GI or materially impair or delay the ability of GI to effect the Closing. SECTION 4.5 NON-CONTRAVENTION. The execution, delivery and performance by GI of this Agreement and each of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, does not and will not (whether after the filing of notice or the lapse of time or both) (i) violate any provision of GI's Amended and Restated Certificate of Incorporation or By-laws or (ii) assuming the consents, approvals, waivers, authorizations, notices and filings in SECTION 3.3 and SECTION 4.4 are obtained or made or given, as the case may be, violate or result in a breach of or constitute a default under any Law or Order to which GI is subject, other than a violation, breach, default or Encumbrance that, individually or in the aggregate, would not have a material adverse effect on the business, financial condition or results of operations of GI. SECTION 4.6 SEC REPORTS; FINANCIAL STATEMENTS. (a) Since July 25, 1997, GI has filed all forms, reports, statements and other documents (such filings by GI are collectively referred to as the "SEC REPORTS"), required to be filed by it with the Commission, except where the failure to file any such forms, reports, statements and other documents would not, individually or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of GI. The SEC Reports, including all SEC Reports filed after the date of this Agreement and prior to the Closing Date, (i) were or will be prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to such SEC Reports at the time of filing thereof and (ii) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the SEC Reports, including all SEC Reports filed after the date of this Agreement and prior to the Closing Date (i) have been or will be prepared in accordance with the published rules and regulations of the Commission and GAAP applicable at the time of filing -17- thereof, applied on a consistent basis throughout the periods involved (except (A) to the extent required by changes in GAAP and (B) as may be indicated in the notes thereto) and (ii) fairly present, or will fairly present, in all material respects the consolidated financial position of GI and its Subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated (including reasonable estimates of normal and recurring year-end adjustments), except that (x) any unaudited interim financial statements were or will be subject to normal and recurring year-end adjustments, and (y) any pro forma financial statements contained in such consolidated financial statements are not necessarily indicative of the consolidated financial position of GI and its Subsidiaries, as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated. (c) GI has delivered to TCI in the form filed with the SEC, complete copies of all SEC Reports filed prior to the date of this Agreement. SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, except as set forth in the SEC Reports or in GI's press releases delivered to TCI or in connection with transactions contemplated by this Agreement, no event has occurred which has had or would have, individually or in the aggregate, a material adverse effect on the business, financial condition or results of operations of GI, other than events that generally affect GI's industry. SECTION 4.8 BINDING EFFECT. This Agreement constitutes, and each of the Ancillary Agreements when executed and delivered by the parties thereto will constitute, a valid and legally binding obligation of GI enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. SECTION 4.9 FINDERS' FEES. Except for the GI's retention of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lazard Freres & Co., LLC, there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of GI or any of its Affiliates who might be entitled to any fee or commission from GI or any of its Affiliates in connection with the transactions contemplated by this Agreement. SECTION 4.10 RIGHTS AGREEMENT. Neither the consummation of the transactions contemplated by this Agreement nor the consummation of the transactions contemplated by the Warrant Issuance Agreement or the Purchase Agreement triggers a characterization of TCI as an "Acquiring Person" within the meaning of the Rights Agreement. SECTION 4.11 EQUITY PERCENTAGE. As of the date hereof, the Consideration represents at least 10% of the fully diluted equity securities of GI on an as-issued basis, assuming exercise, conversion or exchange of all outstanding options, warrants or other rights to purchase or otherwise acquire equity securities of GI, securities convertible into or exchangeable for equity securities of GI, options, warrants or other rights to purchase or otherwise acquire any convertible or exchangeable securities of GI ("RIGHTS") (other than Rights issuable under the Rights Agreement) -18- and all Rights issuable in connection with the Transaction (as defined in the Warrant Issuance Agreement). ARTICLE V COVENANTS SECTION 5.1 ACCESS. Prior to the Closing, TCI shall permit GI and its representatives to have full access, during regular business hours and upon reasonable advance notice, to the Transferred Assets and its personnel involved in TCI's provision of Addressable Set-Top Services, subject to reasonable rules and regulations of TCI, and shall furnish, or cause to be furnished, to GI, any financial and operating data and other information (including Tax records) that is available with respect to the Transferred Assets as GI shall from time to time reasonably request; provided, that the foregoing will not require TCI to permit any inspection, or to disclose any information, that in the reasonable judgment of TCI would result in the disclosure of any trade secrets or confidential information of third parties or violate any of its obligations to third parties with respect to confidentiality; provided, however, that upon request by GI, TCI shall use its commercially reasonable efforts to obtain consents from third parties to permit such inspections. SECTION 5.2 CONTINUED PROVISION OF ADDRESSABLE SET-TOP SERVICES. Except as may otherwise be contemplated by this Agreement or as GI may consent to in writing, from the date hereof and until the Closing, TCI shall (i) provide Addressable Set-Top Services only in the ordinary course consistent with past practice; (ii) use its reasonable best efforts to preserve intact the Transferred Assets; (iii) maintain the Transferred Assets in good operating condition and repair to enable it to provide Addressable Set-Top Services in the manner in which they are currently provided; and (iv) continue its existing insurance policies (or comparable insurance) in full force and effect with responsible companies. SECTION 5.3 REASONABLE EFFORTS; GOOD FAITH. The Parties shall cooperate and use their respective reasonable efforts to fulfill the conditions precedent to the other Party's obligations hereunder, including but not limited to, securing as promptly as practicable all consents, approvals, waivers and authorizations required in connection with the transactions contemplated hereby and shall otherwise use their reasonable efforts to cause the consummation of such transactions in accordance with the terms and conditions hereof. SECTION 5.4 TRANSFER TAXES. All excise, sales, use, transfer (including real property transfer), stamp, documentary, filing, recordation and other similar taxes that may be imposed or assessed as the result of the transactions effected pursuant to this Agreement, (the "TRANSFER TAXES"), shall be borne equally by TCI and GI. SECTION 5.5 FURTHER ASSURANCES. At any time after the Closing Date, TCI and GI shall promptly execute, acknowledge and deliver any other assurances or documents reasonably requested -19- by TCI and GI, as the case may be, and necessary for TCI and GI, as the case may be, to satisfy its respective obligations hereunder or obtain the benefits contemplated hereby. SECTION 5.6 GI'S ACCESS. For a period of five years from the Closing Date, TCI shall provide GI with reasonable access to its personnel and independent accountants and advisors, and to such of its and their data and work papers that relate to, and is not otherwise available to GI with respect to, TCI's provision of Addressable Set-Top Services, that is reasonably required to enable GI to comply with applicable U.S. securities laws or to comply with any court order applicable to GI; PROVIDED, HOWEVER, that GI shall reimburse TCI for its reasonable out-of-pocket expenses incurred in connection with performing its obligations under this SECTION 5.6 and provided further that if GI is required to provide audited financial statements with respect to TCI's provision of Addressable Set-Top Services prior to Closing, such financial statements shall be audited by an auditor selected by TCI and reasonably acceptable to GI. SECTION 5.7 BULK TRANSFER LAWS. GI hereby waives compliance by TCI with the provisions of any so-called "bulk transfer law" of any jurisdiction in connection with the transfer of the Transferred Assets to GI. SECTION 5.8 NOTICE OF DEVELOPMENTS. From the date hereof and until the Closing, each Party shall give prompt written Notice to the other Party of any breach or potential breach of any of the representations and warranties made by such Party in this Agreement of which it has knowledge or of any facts that may have a Material Adverse Effect. No disclosure pursuant to this SECTION 5.8, however, shall be deemed to amend the various Schedules to this Agreement or to prevent or cure any misrepresentation or any breach of any warranty, covenant or agreement made by either Party herein. SECTION 5.9 STOCKHOLDERS MEETING. TCI agrees to vote, at the Stockholders Meeting, if any, all shares of Common Stock then owned by it in the manner required of the Warrantholder under Section 10(d) of the Warrant Issuance Agreement. SECTION 5.10 TRANSFERS TO COMPETITORS. TCI shall not knowingly sell, transfer, pledge, hypothecate, assign or otherwise dispose of any Shares to a Competitor at any time prior to the earlier of December 31, 2002 or the date on which there is a Change in Control of GI without first complying with procedures identical to the provisions of Sections 7 and 8(d) of the Warrant Issuance Agreement applicable to transfers by the Warrantholder of Warrant Shares. Notwithstanding the foregoing, if a Competitor makes a "tender offer" (within the meaning of the Exchange Act) for any Shares, TCI shall be permitted to tender its Shares or a portion thereof in connection with such tender offer. SECTION 5.11 RIGHTS IN THE EVENT OF A PUBLIC OFFERING. In the event that at any time prior to December 31, 2005, TCI desires to sell any of the Shares in a registered public offering for cash, TCI shall first offer such Shares for sale to GI in accordance with procedures identical to the provisions of Section 8 of the Warrant Issuance Agreement applicable to any such sale by the -20- Warrantholder of Warrant Shares; PROVIDED, that references in such Section 8 to Section 19 will be deemed to refer to SECTION 5.12 of this Agreement. SECTION 5.12 REGISTRATION RIGHTS. (a) DEMAND REGISTRATION RIGHTS. (i) At any time and from time to time after the date hereof, TCI and any transferee of Registrable Securities who has agreed to succeed to the rights and obligations of the transferor of such securities under this SECTION 5.12 by executing an instrument in form and substance reasonably acceptable to GI (the "TRANSFEREES"; and together with TCI, the "HOLDERS") shall have the right to request GI to effect the registration under the Securities Act of all or part of their Registrable Securities. Holders shall exercise such right by giving of a notice stating (A) the number of Registrable Securities to be included in such registration statement and (B) Holder's intended method of distribution (which may include an underwritten offering). Upon receipt by GI of any such request, GI shall promptly give notice of such proposed registration to all Holders who hold Registrable Securities and thereupon shall, as expeditiously as possible, use reasonable efforts to effect the registration under the Securities Act of: (A) all Registrable Securities that GI has been requested to register pursuant to clause (i) of this SECTION 5.12(A); and (B) all other Registrable Securities that Holders have, within 20 days after GI has given such notice, requested GI to register; all to the extent requisite to permit the sale or other disposition by the Holders of the Registrable Securities so to be registered. (ii) If the managing underwriter, selected pursuant to SECTION 5.12(I)(A) of the public offering to be effected pursuant to a registration statement filed pursuant to clause (i) of this SECTION 5.12(A) of any Registrable Securities shall advise GI in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration (including securities of GI that are not Registrable Securities) exceeds the number that can be sold in such offering without having an adverse effect on such offering, GI will include in such registration to the extent of the number that GI is so advised can be sold in such offering: (A) FIRST, Registrable Securities requested to be included in such registration by Holders pro rata based on the number of shares to be included; and -21- (B) SECOND, other securities of GI proposed to be included pursuant to SECTION 5.12(A)(VIII) in such registration, in accordance with the priorities, if any, then existing among GI and the holders of such other securities. (iii) The Holders requesting inclusion in a registration statement under this SECTION 5.12(A) may withdraw from any requested registration pursuant to this SECTION 5.12(A) by giving written notice to GI prior to the date an underwriting agreement is executed or such registration statement becomes effective; PROVIDED, HOWEVER, that for a period of three months after such withdrawal, such Holders may not request any registration pursuant to this SECTION 5.12(A), unless (A) such Holders pay GI for its out-of-pocket expenses relating to such registration, (B) the registration statement had not been filed within 90 days of the initial request for registration pursuant to SECTION 5.12(A)(I) or had not become effective within 120 days of such request or (C) GI otherwise failed to comply with its obligations under this SECTION 5.12 with respect to such registration. (iv) GI shall not be required to effect more than a total of three effective registrations under this SECTION 5.12(A) . Notwithstanding the foregoing, if the Holders withdraw from an offering after the registration statement for the shares to be offered thereby has become effective due to the occurrence of any of the events set forth in SECTIONS 5.12(C)(VI), (VII) OR (VIII), then such registration shall not be counted as an effective registration for purposes of this SECTION 5.12(A)(IV). (v) GI shall not be required to effect a registration pursuant to this SECTION 5.12(A) unless the offering includes Registrable Securities having a Fair Market Value of at least $10 million in the aggregate. (vi) GI shall not be required to effect any registration within six (6) months of the effective date of any other registration under this SECTION 5.12(A). (vii) If the managing underwriter in an underwritten offering has not limited the number of Registrable Securities to be underwritten, then GI may include securities for its own account or for the account of others in such registration statement and underwriting if the managing underwriter so agrees and if the number of Registrable Securities held by Holders which would otherwise have been included in such registration statement and underwriting will not thereby be limited. The inclusion of such shares shall be on the same terms as the registration of Registrable Securities held by the Holders. In the event that the managing underwriter excludes some of the securities to be registered, the securities to be sold for the account of GI and any other holders shall be excluded in their entirety prior to the exclusion of any Registrable Securities of the Holders. (b) "PIGGYBACK" REGISTRATIONS. If GI at any time proposes to register any of its securities under the Securities Act (other than pursuant to Section 5.12(A)) on a registration statement on Form S-1, S-2 or S-3 ) or on any other form upon which may be registered securities similar to the -22- Registrable Securities for sale to the general public except Form S-4 and Form S-8, GI will at each such time give prompt notice to the Holders of its intention to do so setting forth the date on which GI proposes to file such registration statement, which date shall be no earlier than 30 days from the date of such notice, and advising the Holders of their night to have Registrable Securities included therein. Upon the written request of the Holders given to GI not less than 5 days prior to the proposed filing date of such registration statement set forth in such notice, GI will use reasonable best efforts to cause each of the Registrable Securities that GI has been requested to register by the Holders to be registered under the Securities Act. If the securities to be so registered for sale include securities to be sold for the account of GI and to be distributed by or through a firm of underwriters of recognized standing under underwriting terms appropriate for such transaction, then the Registrable Securities shall also be included in such underwriting, PROVIDED that if, in the reasonable written opinion of the managing underwriter or underwriters, the total amount of such securities to be so registered, when added to such Registrable Securities, will exceed the maximum amount of GI's securities that can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, GI will include in such registration to the extent of the number which GI is so advised can be sold in such offering securities determined as follows: (i) if such registration as initially proposed by GI was solely a primary registration of its securities: (A) FIRST, the securities proposed by GI to be sold for its own account, (B) SECOND, any Registrable Securities requested to be included in such registration pro rata among the Holders of such Registrable Securities and the holders of such other shares of Common Stock on the basis of the number of Registrable Securities and other shares of Common Stock requested to be included by each such holder, and (C) THIRD, any other securities of GI proposed to be included in such registration statement in accordance with the provisions, if any, then existing among the holders of such securities, and (ii) if such registration as initially proposed by GI was in whole or in part requested by holders of securities of GI, other than Holders of Registrable Securities, pursuant to demand registration nights, (A) FIRST, such securities held by the holders initiating such registration, pro rata among the holders thereof, on the basis agreed upon by such holders and GI, (B) SECOND, Registrable Securities requested to be included in such registration pro rata among the Holders of such Registrable Securities and the holders of such other shares of Common Stock on the basis of the number of Registrable -23- Securities and other shares of Common Stock requested to be included by each such holder, and (C) THIRD, any securities of GI proposed to be included in such registration statement in accordance with the priorities, if any, then existing among the holders of such securities. To the extent that the managing underwriter in an underwritten offering pursuant to this SECTION 5.12(B) determines that the public sale or other distribution of any Registrable Securities, shares of Common Stock or other securities of GI other than those included in such underwritten offering should be delayed following the effective date of such registration statement, the Holders agree to enter, together with and on the same terms as GI and any other holders of securities included in such registration statement, into an agreement not to sell any other Registrable Securities, shares of Common Stock or other securities of GI during such period following the effective date of such registration statement as the managing underwriter reasonably determines is necessary in connection with such underwritten offering, which period shall in no event exceed 180 days following the effective date of such registration statement. The Holders requesting inclusion in a registration statement under this SECTION 5.12(B) may withdraw from any requested registration pursuant to this SECTION 5.12(B) by giving written notice to GI prior to the date an underwriting agreement is executed or such registration statement becomes effective. (c) GI'S OBLIGATIONS IN REGISTRATION. If and whenever GI is obligated by the provisions of this SECTION 5.12 to use reasonable best efforts to effect the registration of any Registrable Securities under the Securities Act, GI will: (i) prepare and file with the Commission, as expeditiously as possible within 90 days after the initial request from holders to register such Registrable Securities, a registration statement with respect to such Registrable Securities and use reasonable best efforts to cause such registration statement to become effective within 180 days after such initial request and to remain effective; PROVIDED, HOWEVER, that GI shall not be required to keep such registration statement effective, or to prepare and file any amendments or supplements thereto, later than the earlier of (x) such time as all Registrable Securities have been sold and (y) 5:00 P.M., New York City time, on the last business day of the sixth month following the date on which such registration statement becomes effective under the Securities Act or such longer period during which the Commission requires that such registration statement be kept effective with respect to any of the Registrable Securities so registered; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with provisions of the -24- Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement whenever the Holders for whom such Registrable Securities are registered or are to be registered shall desire to dispose of the same, subject, however, to the proviso contained in the immediately preceding clause (i); (iii) furnish each Holder for whom such Registrable Securities are registered or are to be registered such numbers of copies of each registration statement and printed prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act, and such other documents and information as such Holder may reasonably request in order to facilitate the disposition of such Registrable Securities; (iv) use reasonable best efforts to register or qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each Holder shall reasonably request, and do any and all other acts and things that may be necessary or advisable to enable such Holder to consummate the disposition in such jurisdictions of such Registrable Securities except that GI shall not for any purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this clause (iv) be obligated to be so qualified, (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction unless GI is already subject to general service of process in such jurisdiction; (v) furnish to the Holders for whom such Registrable Securities are registered or are to be registered at the time of the disposition of such Registrable Securities by such Holders a signed copy of an opinion of counsel for GI reasonably acceptable to such holders as to such matters as such holders may reasonably request and substantially to the effect that, a registration statement covering such Registrable Securities has been filed with the Commission under the Securities Act and has been made effective by order of the Commission; said registration statement and the prospectus contained therein comply as to form in all material respects with the requirements of the Securities Act and, based upon such investigation and inquiry as said counsel deems necessary or appropriate, nothing has come to said counsel's attention that would cause it to believe that either said registration statement or said prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein (in the case of said prospectus, in the light of the circumstances under which they were made) not misleading; said counsel knows of no legal or governmental proceedings required to be described in said prospectus that are not described as required, or of my contract or documents of a character required to be described in said registration statement or said prospectus or to be filed as an exhibit to said registration statement or to be incorporated by reference therein that is not described and filed as required; no stop order has been issued by the Commission suspending the effectiveness of such registration statement and that, to the best of such counsel's knowledge, no proceedings for the issuance of such a stop order are -25- threatened or contemplated; and the applicable provisions of the securities or blue sky laws of each state in which GI shall be required, pursuant to clause (iv) of this SECTION 5.12(C), to register or qualify such Registrable Securities, have been compiled with, assuming the accuracy and completeness of the information furnished to such counsel with respect to each filing relating to such laws; it being understood that said counsel may rely, as to all factual matters and financial data treated therein, on certificates of GI (copies of which shall be delivered to such Holders), and as to all questions of the laws of each state in which GI shall be so required to register or qualify such Registrable Securities, on the opinion of counsel from such state reasonably acceptable to such Holders, copies of which shall be delivered to such Holders; (vi) immediately notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (vii) advise each Holder of Registrable Securities covered by such registration statement, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose; and use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to the seller of Registrable Securities covered by such Registration Statement, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than forty-five (45) days after the end of any twelve (12) month period (or ninety (90) days, if such period is a fiscal year) (a) commencing at the end of any fiscal quarter in which Securities are sold to underwriters in an underwritten offering, or (b) if not sold to underwriters in such an offering, beginning with the first day of the month of GI's first fiscal quarter commencing after the effective date of a registration statement; (viii) permit any holder holding Registrable Securities covered by such registration statement or prospectus to withdraw their Registrable Securities from such registration statement or prospectus if such Holder has informed GI that it reasonably believes that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; -26- (ix) enter into such customary agreements (including an underwriting agreement in customary form, if applicable) and take all such other actions as holders of a majority of the Registrable Securities being sold or the underwriters retained by such Holders, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities, including customary opinions and indemnification and lock-up agreements; (x) if requested by the managing underwriters or a Holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities including, without limitation, information with respect to the securities being sold to such underwriters, the purchase piece being paid therefor by such underwriters and with respect to any other terms of the underwritten offering of the Registrable Securities to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (xi) list such Registrable Securities on any securities exchange on which the Common Stock is then listed, if such Registrable Securities are not already so listed and if such listing is then permitted under the rules of such exchange, and provide a transfer agent and registrar for such Registrable Securities covered by such registration statement not later than the effective date of such registration statement; and (xii) obtain a CUSIP number for all Registrable Securities (unless already obtained) not later than the effective date of such registration statement. The period of time that GI is obligated to keep any registration statement effective, or to prepare and file any amendments or supplements thereto, pursuant to Section 5.12(C)(I) shall be extended by the number of days that any such Holder is unable to sell Registrable Securities due to the matters discussed in SECTIONS 5.12(C)(VI) AND (VII) above. (d) PAYMENT OF REGISTRATION EXPENSES. GI shall pay all Registration Expenses in connection with each registration pursuant to this SECTION 5.12. (e) INFORMATION FROM HOLDERS. Notices and requests delivered by TCI to GI pursuant to this SECTION 5.12 shall contain the information required by SECTION 5.12(A)(I). (f) INDEMNIFICATION. (i) INDEMNIFICATION BY GI. In the event of any registration under the Securities Act of any Registrable Securities pursuant to this SECTION 5.12, GI hereby agrees to indemnify and hold harmless the Holders, their respective agents, directors and officers, each -27- other person, if any, who controls (within the meaning of the Securities Act) the Holders and each other person (including underwriters) who participates in the offering of such Registrable Securities, against any losses, claims, damages or liabilities, to the extent that such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement, on the effective date thereof, under which such Registrable Securities were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein or in any amendment or supplement to any preliminary prospectus or final prospectus (if used during the period GI is required to keep such registration statement current in any such case), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by GI of the Securities Act or state securities or blue sky laws and relating to action or inaction required of GI in connection with the registration or qualification of securities under such laws and will reimburse such Holders, such agents, directors and officers and each such controlling person or participating person (including underwriters) for any legal or any other expenses reasonably incurred by such Holders, such agents, directors and officers or such controlling person or participating person (including underwriters) in connection with investigating or defending any such loss, claim, damage, liability or proceeding, PROVIDED, that GI will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, said preliminary or final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to GI by an instrument duly executed by such Holder or such controlling or participating person (including underwriters), as the case may be, specifically for use in the preparation of such registration statement; and PROVIDED, FURTHER, that, with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, GI will not be liable to any holder to the extent that any loss, claim, damage, liability or expense results from the fact that a current copy of the final prospectus was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Securities concerned to such Person if it is determined that it was the responsibility of such Holder to provide such Person with a current copy of the final prospectus and such current copy of the final prospectus was provided to such Holders and would have cured the defect giving rise to such loss, claim, damage, liability or expense. (ii) INDEMNIFICATION BY THE HOLDERS. The Holders, each individually and not jointly, agree to indemnify and hold harmless GI, its respective agents, directors and officers, each other person, if any, who controls (within the meaning of the Securities Act) GI and each other person (including underwriters) who participates in the offering of such Registrable Securities, against all losses, claims, damages and liabilities to which GI, may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement of any material fact -28- contained in any such registration statement, on the effective date thereof, under which such Registrable Securities were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein or in any amendment or supplement to any preliminary prospectus or final prospectus (if used during the period GI is required to keep such registration statement current in any such case), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only if and to the extent that any such loss, claim, damage or liability arises out of or is based upon any such statement or omission made in such registration statement, said preliminary or final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to GI by an instrument duly executed by the Holders or such underwriter, as the case may be, and specifically stated to be for use in the preparation of such registration statement. (iii) NOTICES OF CLAIMS, ETC. Each party entitled to be indemnified pursuant to SECTION 5.12(F)(I) OR (II) above, promptly but not later than 30 days after its receipt of notice of the commencement of any action against it in respect of which indemnity may be sought from any indemnifying party pursuant to this SECTION 5.12(F), shall notify such indemnifying party in writing of the commencement thereof. In case any such action shall be brought against any indemnified party and it shall notify such indemnifying party of the commencement thereof, such indemnifying party will be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel satisfactory to such indemnified party, and such indemnified party may participate in such defense, which participation by the indemnified party shall be at its expense unless (i) the employment of counsel by such indemnified party has been authorized by the indemnifying party, (ii) the indemnified party shall have been advised by its counsel in writing that there is a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assure the defense of such action, in each of which cases the fees and expenses of the indemnified party's counsel shall be at the expense of the indemnifying party. The failure of any such indemnified party to give notice as provided herein shall not relieve such indemnifying party of its obligations under this SECTION 5.12(F) unless such failure to give notice shall materially adversely affect such indemnifying party in the defense of any such claim or any such litigation. With respect to any claim or litigation the defense of which is being conducted by such indemnifying party, no indemnified party shall, except with the consent of such indemnifying party, consent to entry of any judgment or enter into any settlement of any claim as to which indemnity may be sought. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. -29- (iv) CONTRIBUTION. To the extent that the undertaking to indemnity, pay and hold harmless set forth in paragraphs (i) and (ii) of this SECTION 5.12(F) may be unenforceable because it is violative of any law or public policy, each party that would have been required to provide the indemnity shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified liabilities incurred by each party entitled to indemnification under this SECTION 5.12(F); provided that in no event shall a Holder of Registrable Securities be required to contribute an amount greater than the dollar amount of net proceeds received by such holder upon the sale of such Registrable Securities. (g) EXCHANGE OF CERTIFICATES. As soon as possible after the effectiveness of any registration statement under the Securities Act pursuant to this SECTION 5.12, GI will deliver to the Holders of any Shares so registered, upon demand of the Holders and their delivery to GI of a certificate or certificates representing such Shares bearing the legend set forth in SECTION 5.13, a new certificate or certificates representing such Shares but not bearing such legend. (h) OBLIGATIONS OF THE HOLDERS. The Holders agree: (i) that upon receipt of any notice from GI of the happening of any event of the kind described in SECTION 5.12(C)(VI), the Holders will forthwith discontinue its disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until its receipt of the copies of the supplemented or amended prospectus contemplated by SECTION 5.12(C)(VI) and, if so directed by GI, will use it reasonable best efforts to deliver to GI (at GI's expense) all copies, other than permanent file copies, then in such Holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice, and (ii) that they will immediately notify GI at any time when a prospectus relating to the registration of such Registrable Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which information previously furnished by such Holder to GI in writing specifically for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. (i) UNDERWRITTEN REGISTRATION. (A) If any of the Registrable Securities covered by a registration pursuant to SECTION 5.12(A) are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in Fair Market Value of such Registrable Securities included in such offering. No Person may participate in any such underwritten registration hereunder unless such Person (a) agrees to sell its Registrable Securities, GI Common Stock or other securities of GI on the basis provided in an underwriting agreement provided by the Holders of a majority in Fair Market Value of the Registrable Securities to be sold in such underwritten offering and (b) completes -30- and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. (B) If any of the Registrable Securities covered by a registration pursuant to SECTION 5.12(B) are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority in Fair Market Value of securities being registered. No Holder may participate in any such underwritten registration hereunder unless such Holder (a) agrees to sell its Registrable Securities on the basis provided in an underwriting agreement approved by GI or the holders of a majority in Fair Market Value of the securities being registered and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. (j) EXCHANGE ACT COMPLIANCE. The Company shall comply with all of the reporting requirements of the Exchange Act and shall comply with all other public information reporting requirements of the Commission which are conditions to the availability of Rule 144 for the sale of Registrable Securities. GI shall cooperate with each Holder in supplying such information as may be necessary for such Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of Rule 144. SECTION 5.13 ANTI-DILUTION PROTECTION. The Parties agree that if, after the date of this Agreement and prior to the Closing Date, GI shall take any of the actions described in Section 17(b), (c), (d) or (i) of the Warrant Issuance Agreement, the number of shares of Common Stock issuable as the Consideration hereunder shall be appropriately adjusted to achieve the same result as the adjustments set forth in such Sections of the Warrant Issuance Agreement. SECTION 5.14 RESTRICTIONS ON TRANSFERABILITY OF SHARES. Notwithstanding any provisions contained in this Agreement to the contrary, the Shares shall not be transferable except upon the conditions specified in this SECTION 5.14 and SECTIONS 5.9 and 5.10, which conditions are intended, among other things, to ensure compliance with the provisions of the Securities Act in respect of the transfer of the Shares. TCI agrees that it will not (i) transfer any Shares prior to delivery to GI of the opinion of counsel (which opinion shall be reasonably satisfactory to GI) referred to in, and to the effect described in, clause (i) of SECTION 5.14(B), or until registration of such Shares under the Securities Act has become effective, or (ii) transfer any Shares without compliance with SECTIONS 5.9 and 5.10. TCI agrees that such opinion of counsel must be reasonably satisfactory to GI. For a period of three years beginning on the Closing Date, TCI agrees that it will not transfer the Shares or any shares of capital stock of GI received upon conversion, or in respect of, the Shares other than (i) to an Affiliate of TCI which agrees to be bound by the same restrictions as TCI or (ii) pursuant to an Order. Notwithstanding the foregoing, (x) the three year transfer restriction set forth in this SECTION 5.14 shall terminate upon a Change in Control of GI and (y) if there is a "tender offer" (within the meaning of the Exchange Act) that applies to the Shares, TCI may transfer its Shares in connection with such tender offer. -31- (a) RESTRICTIVE LEGEND; TCI'S REPRESENTATION. Unless and until otherwise permitted by this SECTION 5.14, each certificate representing Shares, and any certificate issued at any time upon transfer of, or in exchange for or replacement of, any certificate bearing the legend set forth below shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF OR AN EXEMPTION UNDER SUCH ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN ASSET PURCHASE AGREEMENT DATED AS OF JUNE 17, 1998, BY AND BETWEEN THE HOLDER AND GENERAL INSTRUMENT CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF GENERAL INSTRUMENT CORPORATION." TCI and each holder of Shares by its acceptance of such security further understands that such security may bear a legend as contemplated by this SECTION 5.14. (b) STATEMENT OF INTENTION TO TRANSFER; OPINION OF COUNSEL. TCI, by its acceptance of this Agreement, agrees that prior to any transfer of any Shares, TCI will deliver to GI a notice of such proposed transfer and a signed copy of the opinion of TCI's counsel reasonably satisfactory to GI as to the necessity or non-necessity for registration under the Securities Act in connection with such transfer. (i) If, in the opinion of TCI's counsel (which opinion shall be reasonably satisfactory to GI), the proposed transfer of any Shares may be effected without registration under the Securities Act of such Shares, then TCI shall be entitled to transfer such Shares in accordance with the intended method of disposition specified in the notice delivered by TCI to GI, subject to compliance with the provisions of SECTION 5.10 of this Agreement. (ii) Notwithstanding the foregoing provisions of this SECTION 5.14(B), no opinion of any counsel need be furnished (x) in the event of any proposed transfer of any Shares to an institutional investor who is an "accredited investor" as defined in Regulation D promulgated under the Securities Act and which transfer is otherwise exempt from the registration requirements of the Securities Act or (y) in the event of any proposed transfer of Shares in connection with a registration under the Securities Act. (c) TERMINATION OF RESTRICTIONS. Notwithstanding the foregoing provisions of this SECTION 5.14, the restrictions imposed by this SECTION 5.14 upon the transferability of the Shares shall cease and terminate as to any particular Shares when, (i) such Shares shall have been effectively registered under the Securities Act and sold by TCI in accordance with such registration or (ii) in the opinion -32- of counsel for the holder of such Shares, if such opinion is reasonably satisfactory in form and substance to GI, such restrictions are no longer required in order to ensure compliance with the Securities Act. If and whenever the restrictions imposed by this SECTION 5.14 and by SECTION 5.10 shall terminate as to a Share as hereinabove provided, TCI may and GI shall, as promptly as practicable upon the request of TCI and at GI's expense, cause to be stamped or otherwise imprinted upon the certificates representing such Shares a legend in substantially the following form: "The restrictions on transferability of this [THESE] [SECURITIES] terminated on _________, and are of no further force or effect." All certificates issued upon transfer, division or combination of, or in substitution for, any Shares entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this SECTION 5.14 shall terminate as to any Shares, as hereinabove provided, TCI shall be entitled to receive from GI without expense, a new certificate representing such Shares not bearing the restrictive legend set forth in Subsection (a) of this SECTION 5.14. SECTION 5.15 NO PUBLIC ANNOUNCEMENT. Neither Party hereto shall make any public announcement concerning the transactions contemplated by this Agreement without the prior approval of the other Party, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, in the event any such public announcement is required by law to be made by the Party proposing to make the same, such Party shall consult in good faith with the other Party before the making of such public announcement. SECTION 5.16 SEC REPORTS. GI will promptly deliver to TCI copies of all forms, reports, statements and other documents filed by it with the Commission after the date of this Agreement. SECTION 5.17 HSR ACT FILING. As soon as practicable but in any event no later than 10 days after the date of this Agreement, GI and TCI will each complete and file, or cause to be completed and filed, any notification and report required to be filed under the HSR Act with respect to the transactions contemplated by this Agreement and each such filing shall request early termination of the waiting period imposed by the HSR Act. The parties shall use their commercially reasonable efforts to respond as promptly as reasonably practicable to any inquiries received from the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") for additional information or documentation and to respond as promptly as reasonably practicable to all inquiries and requests received from any other Governmental Authority in connection with antitrust matters. The parties shall use their respective commercially reasonable efforts to overcome any objections which may be raised by the FTC, the Antitrust Division or any other Governmental Authority having jurisdiction over antitrust matters. Each of the parties will coordinate with the other party with respect to its filings and will cooperate to prevent inconsistencies between their respective filings and will furnish to each other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions under the HSR Act. -33- SECTION 5.18 MFN. GI agrees that if it gives or offers, or has given or offered, to any third party any term or condition with respect to the receipt by such party of Addressable Set-Top Services which is more favorable to such third party than TCI, et. al. are then receiving from GI, including, without limitation, price and any other economic or non-economic term, provision, covenant or consideration (a "More Favorable Provision"), GI will promptly offer such More Favorable Provision to TCI, et. al. for the same amount of time that such More Favorable Provision is or was available to such third party. A More Favorable Provision shall include any pertinent term, provision, covenant or consideration, regardless of whether there is a term, provision, covenant or consideration concerning the subject matter of such More Favorable Provision in this Agreement or whether such term, provision, covenant or consideration relates to all of such third party's set-tops or less than all. GI agrees to provide to TCI a written certification on each annual anniversary date of this Agreement, signed by a duly authorized officer of GI, stating that GI has satisfied its obligations under this Section 5.18. ARTICLE VI CONDITIONS TO CLOSING SECTION 6.1 CONDITIONS TO THE OBLIGATIONS OF GI. The obligation of GI to effect the Closing is subject to the satisfaction (or waiver) prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of TCI, NDTC and their Affiliates set forth in this Agreement and the Ancillary Agreements shall be true and correct in all material respects as of the Closing Date with the same force and effect as if such representations and warranties had been made at and as of the Closing Date, all of the covenants and agreements set forth in this Agreement and the Ancillary Agreements to be complied with or performed by TCI, NDTC or their Affiliates at or prior to the Closing shall have been complied with and performed, and TCI shall have delivered to GI a certificate of an authorized officer, in form and substance reasonably satisfactory to GI, certifying that the conditions set forth in SECTION 6.1(A) have been satisfied. (b) NO LAW OR ORDER, ETC. No Law shall have been enacted and no Order shall have been issued (and no such Order shall be in effect) that would, nor shall any Litigation by any Governmental Entity be pending or threatened that, if adversely determined, would (a) prevent consummation of any of the transactions contemplated by this Agreement or the Ancillary Agreements, (b) cause any of the transactions contemplated by this Agreement or the Ancillary Agreements to be rescinded following consummation, or (c) affect adversely the ability of GI to operate its Access and Control Business or own the Transferred Assets. (c) NECESSARY CONSENTS. Any applicable waiting period under the HSR Act shall have terminated or expired, and the Parties shall have received all other authorizations, consents and approvals of Governmental Entities and other parties, in form and substance satisfactory to GI and -34- TCI, that are required for the consummation of the transactions contemplated hereby. In addition, GI shall have obtained board of director approval of this Agreement and the transactions contemplated hereby. (d) ANCILLARY AGREEMENTS. TCI, NDTC or their Affiliates shall have executed and delivered the Ancillary Agreements and made the other deliveries specified in SECTION 2.8. SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF TCI AND NDTC. The obligations of TCI and NDTC to effect the Closing is subject to the satisfaction (or waiver) prior to the Closing of the following conditions: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of GI set forth in this Agreement and the Ancillary Agreements shall be true and correct in all material respects as of the Closing Date, with the same force and effect as if such representations and warranties had been made at and as of the Closing Date, all of the covenants and agreements set forth in this Agreement and the Ancillary Agreements to be complied with or performed by GI at or prior to the Closing shall have been complied with and performed in all material respects, and GI shall have delivered to TCI and NDTC a certificate of an authorized officer, in form and substance reasonably satisfactory to TCI, certifying that the conditions set forth in SECTION 6.2(A) have been satisfied. (b) NO LAW OR ORDER, ETC. No Law shall have been enacted and no Order shall have been issued (and no such Order shall be in effect) that would, nor shall any Litigation by any Governmental Entity be pending or threatened that, if adversely determined, would (a) prevent consummation of any of the transactions contemplated by this Agreement or the Ancillary Agreements, or (b) cause any of the transactions contemplated by this Agreement or the Ancillary Agreements to be rescinded following consummation, or (c) affect adversely the ability of TCI to own the Consideration. (c) NECESSARY CONSENTS. Any applicable waiting period under the HSR Act shall have terminated or expired, and the Parties shall have received all other authorizations, consents and approvals of Governmental Entities and other parties, in form and substance satisfactory to GI and TCI, that are required for the consummation of the transactions contemplated hereby. (d) ANCILLARY AGREEMENTS. GI shall have executed and delivered the Ancillary Agreements and made the other deliveries specified in SECTION 2.7. (e) SHARE LISTING. The shares of capital stock to be issued as the Consideration shall have been listed for trading, subject to official notice of issuance, on the New York Stock Exchange or such other exchange or quotation system on which the Common Stock is then listed or traded. -35- ARTICLE VII SURVIVAL; INDEMNIFICATION SECTION 7.1 SURVIVAL. The representations and warranties of GI, TCI and NDTC contained in this Agreement shall survive the Closing for the period set forth in this SECTION 7.1. All of the representations and warranties of GI, TCI and NDTC contained in this Agreement shall survive and terminate upon expiration of twelve months after the Closing Date; IT BEING UNDERSTOOD that in the event Notice of any claim for indemnification under SECTION 7.2(I) or SECTION 7.3(I) hereof shall have been given (within the meaning of SECTION 9.1) within the applicable survival period, the representations and warranties that are the subject of such indemnification claim shall survive until such time as such claim is finally resolved. Neither GI, TCI nor NDTC shall have any indemnification obligation with respect to any indemnification claim made for breach of a representation or warranty contained in this Agreement if such claim is made after the end of the applicable survival period. SECTION 7.2 INDEMNIFICATION BY GI. GI hereby agrees that it shall indemnify, defend and hold harmless TCI, NDTC, their Affiliates, and, if applicable, their respective directors, officers, shareholders, partners, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "NDTC INDEMNIFIED PARTIES") from, against and in respect of any damages, claims, losses, charges, actions, suits, proceedings, deficiencies, interest, penalties, and reasonable costs and expenses (including without limitation reasonable attorneys' fees, removal costs, remediation costs, closure costs, fines, penalties and expenses of investigation and ongoing monitoring) (collectively, "LOSSES") imposed on, sustained, incurred or suffered by or asserted against any of the NDTC Indemnified Parties, directly or indirectly relating to or arising out of (i) any breach of any representation or warranty made by GI contained in this Agreement, (ii) the breach of any covenant or agreement of GI contained in this Agreement, or (iii) any matter with respect to the Transferred Assets or GI's Access and Control Business that relates to the period after Closing other than those matters arising out of a breach by TCI, NDTC or their Affiliates of their respective obligations under any Ancillary Agreement. SECTION 7.3 INDEMNIFICATION BY TCI AND NDTC. Each of TCI and NDTC hereby severally agrees that it shall defend and hold harmless GI, its Affiliates and, if applicable, their respective directors, officers, shareholders, partners, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "GI INDEMNIFIED PARTIES"; collectively with the NDTC Indemnified Parties, the "INDEMNIFIED PARTIES") from, against and in respect of any Losses imposed on, sustained, incurred or suffered by or asserted against any of the GI Indemnified Parties, directly or indirectly relating to or arising out of (i) any breach of any representation or warranty made by such party contained in this Agreement, (ii) in the case of TCI, all Excluded Liabilities, (iii) the breach of any covenant or agreement of such party contained in this Agreement and (iv) in the case of TCI, the failure of TCI or any of its Affiliates to comply with the provisions of the "bulk transfer" or similar Laws of any jurisdiction (including any so-called "tax bulk sales provisions") in connection with the transactions contemplated by this Agreement. -36- SECTION 7.4 INDEMNIFICATION PROCEDURES. With respect to third party claims other than those relating to Taxes, all claims for indemnification by any Indemnified Party hereunder shall be asserted and resolved as set forth in this SECTION 7.4. In the event that any written claim or demand for which an indemnifying party, TCI, NDTC or GI, as the case may be (an "INDEMNIFYING PARTY"), would be liable to any Indemnified Party hereunder is asserted against or sought to be collected from any Indemnified Party by a third party, such Indemnified Party shall promptly, but in no event more than 30 days following such Indemnified Party's receipt of such claim or demand, notify the Indemnifying Party of such claim or demand and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim and demand) (the "CLAIM NOTICE"); PROVIDED, HOWEVER, that if the Claim Notice has been given within any applicable survival period, failure to notify the Indemnifying Party within such 30-day period shall relieve the Indemnifying Party of its indemnification obligation only to the extent that the Indemnifying Party is actually prejudiced thereby. The Indemnifying Party shall have 30 days from the effective date of the Claim Notice under SECTION 9.1 (the "NOTICE PERIOD") to notify the Indemnified Party (a) whether or not the Indemnifying Party disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such claim or demand and (b) whether or not it desires to defend the Indemnified Party against such claim or demand. All costs and expenses incurred by the Indemnifying Party in defending such claim or demand shall be a liability of, and shall be paid by, the Indemnifying Party. Except as hereinafter provided, in the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such claim or demand, the Indemnifying Party shall have the right, and shall use its reasonable efforts, to defend the Indemnified Party by appropriate proceedings and shall have the sole power to direct and control such defense. If any Indemnified Party desires to participate in any such defense it may do so at its sole cost and expense. Neither the Indemnifying Party nor the Indemnified Party shall settle a claim or demand without the consent of the other party (which consent will not be unreasonably withheld or delayed). If the Indemnifying Party elects not to defend the Indemnified Party against such claim or demand, whether by not giving the Indemnified Party timely Notice as provided above or otherwise, then the amount of any such claim or demand, or, if the same be contested by the Indemnified Party, then that portion thereof as to which such defense is unsuccessful (and the reasonable costs and expenses pertaining to such defense) shall be the liability of the Indemnifying Party hereunder. To the extent the Indemnifying Party shall direct, control or participate in the defense or settlement of any third party claim or demand, the Indemnified Party will give the Indemnifying Party and its counsel access to, during normal business hours, the relevant business records and other documents, and shall permit them to consult with the employees and counsel of the Indemnified Party. Regardless of which Person assumes control of the defense of any claim, each party shall cooperate in the defense thereof. SECTION 7.5 LIMITATION OF LIABILITY. Notwithstanding any contrary provision of this Agreement, neither TCI nor NDTC shall be liable to GI and GI shall not be liable to TCI or NDTC, for any amounts representing their or their customers' respective loss of profits, loss of business or indirect special, exemplary, consequential, or punitive damages, whether the basis of the liability is breach of contract, tort (including negligence and strict liability), statutes, or any other legal theory. -37- ARTICLE VIII TERMINATION SECTION 8.1 TERMINATION. This Agreement may be terminated: (a) at any time prior to the Closing by agreement of GI and TCI; or (b) at any time prior to the Closing by either GI or TCI, by giving written Notice of such termination to the other Party, if the Closing shall not have occurred on or prior to the date that is one year after the date of this Agreement; PROVIDED THAT the terminating Party is not then in material breach of its obligations under this Agreement in a manner which has contributed to the failure of the Closing to have occurred by such date; or (c) at any time prior to the Closing by either GI or TCI if there shall be in effect any Law or non-appealable final Order of any Governmental Entity having competent jurisdiction that prevents the consummation of the Closing; or (d) by TCI at any time after June 26, 1998 if GI does not notify TCI in writing on or before such date that it has obtained board of director approval of this Agreement and the transactions contemplated hereby and that such approval is no longer a condition to GI's obligations hereunder; provided that once such notice is given by GI, TCI's right to terminate pursuant to this Section 8.1(d) shall end. SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement in accordance with SECTION 8.1 hereof, this Agreement shall thereafter become void and have no effect, and no Party shall have any liability to the other Party or their respective Affiliates, directors, officers or employees, except for the obligations of the Parties contained in this SECTION 8.2 and in Sections 9.7 and 9.8 and except that nothing herein will relieve any Party from liability for any breach of this Agreement prior to such termination. ARTICLE IX MISCELLANEOUS SECTION 9.1 NOTICES. All notices, consents, requests, waivers or other communications required or permitted under this Agreement (each a "NOTICE") shall be in writing and shall be sufficiently given (a) if hand delivered, (b) if sent by nationally recognized overnight courier, (c) if sent by registered or certified mail, postage prepaid, return receipt requested, or (d) if sent by telecopier, provided that the telecopier delivery is promptly followed by a telephone confirmation thereof, in each case addressed as follows: -38- if to TCI or NDTC: c/o National Digital Television Center, Inc. 4100 East Dry Creek Road Littleton, Colorado 80122 Telephone: (303) 486-3815 Telecopy: (303) 486-3890 Attn: David Beddow, Senior Vice President with a copy to: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Telephone: (303) 267-5500 Telecopy: (303) 488-3207 Attn: Legal Department if to GI: General Instrument Corporation 101 Tournament Drive Horsham, Pennsylvania 19044 Telephone: (215) 323-1000 Telecopy: (215) 323-1293 Attn: Robert A. Scott Vice President - Legal with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telephone: (212) 859-8000 Telecopy: (212) 859-4000 Attn: Lois Herzeca or such other address as shall be furnished by any of the Parties in a Notice. Any Notice shall be deemed given upon receipt. SECTION 9.2 AMENDMENT; WAIVER. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Parties, or in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. -39- SECTION 9.3 ASSIGNMENT. No Party to this Agreement may assign any of it rights or obligations under this Agreement without the prior written consent of the other Party; provided, that GI may assign its rights and obligations hereunder (other than the obligation to issue Common Stock) (i) to any wholly-owned subsidiary of GI or (ii) to a purchaser of substantially all of GI's assets and TCI and NDTC may each assign its rights and obligations hereunder to any Affiliate of such party or to any entity to whom TCI hereafter transfers the Transferred Assets; provided, however, that no such assignment shall relieve the assignor from liability hereunder. Any attempted assignment in contravention hereof shall be null and void. The foregoing shall not be deemed to modify the restrictions on transfer of the Shares set forth in Article V. SECTION 9.4 ENTIRE AGREEMENT. This Agreement (including all Schedules and Exhibits hereto), the Ancillary Agreements and the Warrant Issuance Agreement contain the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters. SECTION 9.5 FULFILLMENT OF OBLIGATIONS. Any obligation of any Party to any other Party under this Agreement or any of the Ancillary Agreements, which obligation is performed, satisfied or fulfilled by an Affiliate of such Party, shall be deemed to have been performed, satisfied or fulfilled by the such Party. SECTION 9.6 PARTIES IN INTEREST. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. Except as expressly provided in ARTICLE VII with respect to Indemnified Parties, and except with respect to the provisions of Section 5.18 being enforceable by TCI, et. al, nothing in this Agreement, express or implied, is intended to confer upon any Person other than the Parties or their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. SECTION 9.7 RETURN OF INFORMATION. If for any reason whatsoever the transactions contemplated by this Agreement are not consummated, GI shall promptly return to TCI all information regarding its provision of Addressable Set-Top Services furnished to it by TCI or its affiliates, agents, employees, or representatives (including all copies, if any, thereof), and shall not use or disclose the information contained therein for any purpose or make such information available to any other Person. SECTION 9.8 EXPENSES. Except as otherwise expressly provided in this Agreement, regardless whether the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such expenses. SECTION 9.9 SCHEDULES. The disclosure of any matter in any schedule to this Agreement shall be deemed to be a disclosure for all purposes of this Agreement to which such matter is evident from the face of the Schedule. -40- SECTION 9.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER. SECTION 9.11 COUNTERPARTS. This Agreement may be executed with counterpart signature pages or in one or more counterparts, all of which shall be one and the same Agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to all the Parties. SECTION 9.12 HEADINGS. The heading references herein and the table of contents hereto are for convenience purposes only, do no constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. SECTION 9.13 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons, or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. -41- IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the date first written above. TCI: TCIVG-GIC, INC. By: /s/ Larry E. Romrell ------------------------------- Name: Title: NDTC: NDTC TECHNOLOGY, INC. By: /s/ David D. Beddow ------------------------------- Name: Title: GI: GENERAL INSTRUMENT CORPORATION By: /s/ Edward D. Breen ------------------------------- Name: Title: -42- EX-10.2 6 LICENSE AGREEMENT Exhibit 10.2 LICENSE AGREEMENT This License Agreement ("License") is made on July 17, 1998 by and between NDTC Technology, Inc., a Colorado corporation ("Licensor"), and General Instrument Corporation, a Delaware corporation ("Licensee"). Licensor and Licensee sometimes are referred to collectively in this License as "parties" and each individually as a "party." RECITALS Licensor's Affiliate and Licensee are parties to that certain Asset Purchase Agreement dated June 17, 1998 ("Asset Purchase Agreement"). The execution and delivery of this License is a condition to the consummation of the transactions contemplated by the Asset Purchase Agreement. AGREEMENT In consideration of the mutual covenants and promises stated in this License and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. 1.1 GENERAL DEFINITIONS. Unless expressly stated otherwise in this License, capitalized terms have the meaning accorded them by the Asset Purchase Agreement. 1.2 SPECIFIC DEFINITIONS. As used in this License, the following terms have the following meanings: 1.2.1 "AFFILIATE" means with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the Person specified. 1.2.2 "DERIVATIVE WORKS" means any work based on or incorporating the Software and/or documentation relating thereto, including, but not limited to, translations, abridgements, condensations, improvements, updates, enhancements, or any other form in which the Software may be recast, transformed or adapted, any new material, information or data relating to and derived from the Software, the preparation, use and/or distribution of which in the absence of this License or other authorization from the owner, would constitute infringement under applicable laws. 1.2.3 "DOMESTIC TERRITORY" means the United States of America and Canada. 1.2.4 "END-USER DEVICE" means a unit of receiving, or receiving and transmitting, equipment possessed by a consumer which is a termination node of a network. Without limitation, examples of End-User Devices are or may be cable television converters, satellite receivers, integrated receiver decoders, pay-per-view modules, personal computers, television sets, telephones, personal data assistants and other types of equipment, which may contain microprocessors and may be programmable, and which may combine the functionality of one or more of the foregoing. 1.2.5 "ENHANCEMENTS" means modifications, additions or substitutions, other than Maintenance Modifications, made by Licensor to Executable Code or the Licensed Documentation, that accomplish incidental, performance, structural, or functional improvements. 1.2.6 "EXECUTABLE CODE" means a series of one or more instructions executable after suitable processing by a computer or other programmable machine, without compilation or assembly. 1.2.7 "EXECUTABLE CODE" means executable code of the Software including executable code for the Enhancements and Maintenance Modifications. 1.2.8 "HITS" means Headend in the Sky-Registered Trademark-, a registered trademark of Licensor. 1.2.9 "INTERNATIONAL TERRITORY" means the entire world other than the Domestic Territory. 1.2.10 "LICENSEE DERIVATIVE WORKS" means Derivative works created by Licensee and/or its employees, agents or contractors. 1.2.11 "LICENSED DOCUMENTATION" means any textual and graphic materials related to the Executable Code and delivered to Licensee under this License. 1.2.12 "MAINTENANCE MODIFICATIONS" means modifications, updates, or revisions made by Licensor to the Executable Code, the Licensed Documentation or any of them, that correct errors, support new releases of operating systems, or support new models of input-output devices with which any of such Executable Code is designed to operate. 1.2.13 "MASTER SERVICE AGREEMENT" means the agreement of the same name entered into by Licensor and Licensee and dated July 17, 1998 pursuant to which Licensor will provide certain services to manage the Access and Control Business of Licensee. 1.2.14 "PERSON" means any natural person, corporation, business, trust, joint venture, association, company, partnership, limited liability company or other entity, or any government or any agency or political subdivision thereof. 2 1.2.15 "SOFTWARE" means the HITS Control Programs, the HITS Support Programs and the HITS Other programs listed in Schedule 1 to this License. 1.2.16 "SOURCE CODE"means a series of instructions or statements in an English-like high-level computer language or in a relatively low-level language such as the assembly language for a particular processor. 1.2.17 "SOURCE CODE" means source code for the Software including source code for Enhancements and Maintenance Modifications. 1.2.18 "SOURCE CODE DOCUMENTATION" means the materials which Licensor provides for use with the Source Code. 1.2.19 "TECHNOLOGY" means the Software, the Executable Code, the Licensed Documentation, the Source Code, the Source Code Documentation, the Enhancements and Maintenance Modifications. 1.2.20 "TERM" means the term of this License as set forth in Section 4.1. 1.2.21 "TVN" means TVN Entertainment Corporation. 1.2.22 "TVN LICENSE" means the Service and License Agreement entered into as of June 9, 1997 between Licensor and TVN. 1.2.23 "THIRD PARTY APPLICATIONS" means the third party applications software programs listed in Schedule 1 to this License. 1.2.24 "THIRD PARTY LICENSES" means the licenses between Licensee and various third parties in respect of the Third Party Applications which are necessary to enable Licensee to use the Software. 2. GRANT OF RIGHTS. 2.1 EXECUTABLE CODE LICENSE. 2.1.1 Subject to the terms, conditions and restrictions stated in this License, Licensor grants to Licensee, without the right to sublicense (apart from rights granted under Sections 2.1.3 and 2.1.4 hereof): (a) an exclusive (save as to Licensor, Licensor's Affiliates and TVN (whose rights are those set forth in the TVN License)), royalty-free right to use the Executable Code and the Licensed Documentation in the International Territory and in the 3 Domestic Territory for the purpose of Licensee engaging in the service of authorizing End-User Devices as part of the Access and Control Business; (b) a non-exclusive, royalty-free right to use the Executable Code and Additional Licensed Documentation in the International Territory and in the Domestic Territory for the purpose of Licensee engaging in the Access and Control Business; it being understood and agreed that the rights retained by Licensor and Licensor's Affiliates pursuant to this Section 2.1.1 shall not include the right to license a third party (other than Licensee and TVN to the extent set forth in the TVN License) to use the Executable Code and the Licensed Documentation for the purpose of authorizing consumers to utilize End-User Devices. 2.1.2 Subject to Section 2.1.3 and 2.1.4, the licenses granted in Section 2.1.1 are solely for Licensee's use and not for use with, for or on behalf of any third party (other than in connection with Licensee performing End-User Device authorization services for third parties or Licensee performing the services of the Access and Control Business). 2.1.3 Licensee may sublicense the Executable Code as incorporated into a computing device for use as part of that device by cable system operators and/or end-users who are receiving access and control services from Licensee, provided that Licensee requires that each such cable system operator or end-user, as the case may be, enter into an agreement containing language previously approved by Licensor, which approval shall not be unreasonably withheld or delayed, which affords reasonable protection to Licensor's rights in the Executable Code. 2.1.4 Subject to Licensor's prior written consent, which approval shall not be unreasonably withheld or delayed, and subject to Section 2.1.6, Licensee may sublicense the Executable Code and the Licensed Documentation on the terms of Section 2.1.1 to a joint venture partner of Licensee in connection with the business of the joint venture conducted in the International Territory. As a condition of giving its consent, Licensor may require that the joint venture partner enter into an agreement for the benefit of Licensor under which the joint venture partner agrees to be bound by the terms of this License and which otherwise affords Licensor reasonable protection of its rights, such agreement to be reasonably acceptable to Licensor. 2.1.5 Licensee may sublicense the Executable Code to any or all of the following wholly-owned subsidiaries of Licensee for use in the Access and Control Business, provided that each such sublicensee shall enter into an agreement for Licensor's benefit agreeing to be bound by the terms of this License and providing that the sublicense shall terminate in the event that the sublicensee is no longer wholly-owned by Licensee: (i) Access Control Center, Inc.; (ii) DBS Services, Inc.; (iii) General Instrument Authorization Services, Inc.; and (iv) General Instrument (Canada), Inc. 4 2.1.6 Licensee may not export the Executable Code or the Licensed Documentation, in whole or in part, or any copies thereof, out of the Domestic Territory without Licensor's prior written consent, which consent shall not be unreasonably withheld or delayed. As a condition of giving that consent Licensor may impose restrictions on the geographic location of any export, may require Licensee to comply with security arrangements and may impose other requirements that Licensor believes are reasonably necessary for the protection of Licensor's rights in the Executable Code and the Licensed Documentation, and that may be necessary to ensure compliance with U.S. export laws. 2.2 COPIES. Licensee (or a permitted sublicensee under Sections 2.1.3, 2.1.4 or 2.1.5 hereof) may make copies of the Licensed Documentation that accompanies the Executable Code in support of Licensee's authorized use of the Executable Code. Licensee may also make such copies of the Executable Code as are necessary for Licensee (or a permitted sublicensee under Sections 2.1.3 or 2.1.4 hereof) to use the Executable Code in accordance with this License. Licensee may not decompile, disassemble, reverse engineer, copy, create a derivative work, or otherwise use, reproduce, modify, or distribute the Executable Code except as stated in this License. 2.3 OTHER REQUIRED SOFTWARE AND AUTHORIZATIONS. This License does not include any sublicense of or other right with respect to any of the Third Party Applications. Licensee acknowledges that (i) hardware and software other than the Software will be required in order for the Licensee to be able to use the Software in accordance with Section 2.1, and (ii) the authorization of certain third parties may be necessary for Licensee's use of the Third Party Applications. Licensee shall be responsible for obtaining licenses for its use of the Third Party Applications on or before August 31, 1998. Licensor shall reasonably cooperate with Licensee in Licensee's securing such licenses for Third Party Applications. In addition, Licensor and Licensee will jointly approach Oracle with respect to negotiating such licenses that Licensee may require from Oracle for the Third Party Applications and negotiating a separate agreement for support of such licenses by Oracle for the benefit of Licensee. Licensor and Licensee will use their reasonable commercial efforts to complete the agreements with Oracle on or before August 31, 1998. 2.4 SOURCE CODE LICENSE. 2.4.1 Subject to the terms, conditions and restrictions stated in this License, Licensor grants to Licensee: (a) an exclusive (save as to Licensor, Licensor's Affiliates and TVN (whose rights are set forth in the TVN License)), royalty-free license (without the right to sublicense) to use the Source Code, including all machine readable programs, program listings and the Source Code Documentation in the Domestic Territory and the International Territory for the purpose of Licensee engaging in the service of authorizing End-User Devices as part of the Access and Control Business; and (b) a non-exclusive, royalty-free license (without the right to 5 sublicense) to use the Source Code, including all machine readable programs, program listings and the Source Code Documentation in the Domestic Territory and the International Territory for the purpose of Licensee engaging in the Access and Control Business; it being understood and agreed that the rights retained by Licensor and Licensor's Affiliates pursuant to this Section 2.4.1. shall not include the right to license a third party (other than Licensee and TVN to the extent set forth in the TVN License) to use the Source Code and the Source Code Documentation for the purpose of authorizing consumers to utilize End-User Devices. 2.4.2 Licensee shall use the Source Code only for its own use. The licenses granted in Section 2.4.1 and 2.4.4 do not grant to Licensee any right to use the Source Code with or for or on behalf of any third party (other than in connection with Licensee performing End-User Device authorization services for third parties or Licensee performing the services of the Access and Control Business). 2.4.3 Licensee may make copies of the Source Code and the Source Code Documentation, only to the extent necessary to enable Licensee to exercise its rights under Sections 2.4.1 and 2.4.4 provided that: (a) Licensee places any copies in a secure location, notifies Licensor in writing within 5 business days of making the copy of the address of the location, and does not move the copy from that location without notifying Licensor in writing of the new location within 5 business days of the move; (b) Licensee does not export the Source Code or the Source Code Documentation, in whole or in part, or any copy thereof out of the Domestic Territory without Licensor's prior written consent. As a condition of giving that consent Licensor may impose restrictions on the geographic location of any export, may require Licensee to comply with security arrangements and may impose other requirements which Licensor believes are reasonably necessary for the protection of Licensor's rights in the Source Code and the Source Code Documentation and that may be necessary to ensure compliance with U.S. export laws. 2.4.4 Subject to the terms, conditions and restrictions stated in this License, Licensor grants to Licensee, a non-exclusive, royalty-free license, without the right to sublicense, to modify the Source Code and the Source Code Documentation to create Derivative Works for use by the Licensee in the Access and Control Business. 2.4.5 Licensor retains all rights in the Source Code and the Software and the right of modification granted in Section 2.4.4 does not modify any of such rights. Notwithstanding the foregoing, Licensee shall be the sole owner of the Licensee Derivative Works. Licensee hereby grants to Licensor a non-exclusive, irrevocable, royalty free license, 6 with the right to sublicense to Licensor's Affiliates, to use, reproduce and modify the Licensee Derivative Works. Licensee agrees to execute (in recordable form where appropriate) any instruments and/or documents as Licensor may reasonably request to give effect to this Section 2.4.5 and Section 2.4.7. 2.4.6 Licensor will deliver to Licensee the Source Code and the Source Code Documentation in a form agreed by the Parties. 2.4.7 Licensee shall cause all modifications to the Source Code to be fully and completely documented and shall within six (6) weeks after creation of the modification deposit a copy of the documentation together with a copy of the modification with Licensor at the address listed for Licensor in Section 9 hereof. 2.5 TITLE. Apart from rights expressly granted under this License, title and all ownership and proprietary rights to the Technology (including without limitation copyright, patent and trade secret rights) in all its expressions shall remain in Licensor, and Licensee shall take no action inconsistent with such title, ownership and proprietary rights. The original and any copies of the Technology or any part thereof which are made by Licensee shall be the property of Licensor. 2.6 LIMITATION. Unless expressly stated otherwise in the License, Licensee shall not permit any other person or entity to make any use of the Technology whatsoever. 2.7 PROPRIETARY NOTICES. Licensee shall not remove any copyright notices, trademark notices or other proprietary legends of Licensor contained in or on the Technology. 2.8 SECURITY. Licensee shall insure that the Technology, any copies of thereof, and any information and materials relating to the Technology in the custody of Licensee shall be protected at all times from unauthorized access or use by a third party, or misuse, damage or destruction by any person. 3. DELIVERY, INSTALLATION, TRAINING AND MAINTENANCE. 3.1 DELIVERY. On or before commencement of the Term, Licensor will furnish to Licensee one copy of each of the Executable Code and the Licensed Documentation. 3.2 TRAINING. (a) Unless otherwise provided in the Master Service Agreement, Licensor will provide up to sixteen (16) staff hours of training to Licensee's nominated personnel at no charge to Licensee in respect of (i) the Technology as originally delivered to 7 Licensee and (ii) each Enhancement. At the request of Licensee, Licensor will provide additional training at $200 per staff hour. (b) Licensee will provide up to sixteen (16) staff hours of training to Licensor's nominated personnel at no charge to Licensor in respect of each of Licensee's Derivative Works. At the request of Licensor, Licensee will provide additional training at $200 per staff hour. 3.3 DOCUMENTATION. Licensor will furnish to Licensee one copy of the documentation listed in Schedule 2 to this License. 3.4 MAINTENANCE AND ENHANCEMENTS. During the Term, Licensor shall deliver to Licensee Enhancements and Maintenance Modifications if, as and when such Enhancements and Maintenance Modifications are developed by Licensor. Licensee shall use the Enhancements and the Maintenance Modifications in accordance with Section 2. Except as may be provided in the Master Service Agreement, Licensor shall have no obligation to deliver any other Enhancements or modifications to or versions or releases of the Software. 4. TERM AND TERMINATION 4.1 TERM AND TERMINATION. This License shall become effective on the Closing Date and shall continue for a period of twenty (20) years, unless earlier terminated in accordance with this Section 4. Termination is permitted for material breach of this License, upon thirty (30) days written notice to the other party and an opportunity to cure within such thirty (30) day period. In addition, Licensee may terminate this License for convenience by providing thirty (30) days prior written notice to Licensor. 4.2 INSOLVENCY OF LICENSEE OR LICENSOR. This License shall terminate automatically upon the happening of any of the following events: (a) The filing by Licensee of a voluntary petition in bankruptcy or an assignment for the benefit of creditors; or (b) The filing against the Licensee of an involuntary petition in bankruptcy unless such petition is dismissed within ninety (90) days of filing; This License shall not terminate upon the bankruptcy of Licensor. 4.3 EFFECT OF TERMINATION. Upon termination of this License for any reason, Licensee's rights under this License shall cease, and Licensee shall immediately: 8 (a) Return to Licensor all copies of the Technology or any of it, and all information relating to the Technology, however embodied, to Licensor, except information related to Licensee's own technology or Licensee's Derivative Works; (b) Permanently destroy or disable all copies of the Technology in Licensee's possession or control; and (c) Provide Licensor with a written statement certifying that Licensee has complied with the foregoing obligations, all rights and licenses. 4.4 NO LIABILITY FOR EXPIRATION OR LAWFUL TERMINATION. Neither party shall have the right to recover damages or to indemnification of any nature, whether by way of lost profits, expenditures for promotion, payment for goodwill or otherwise, made in connection with the business contemplated by this License, due to the permitted or lawful termination of this License. EACH PARTY WAIVES AND RELEASES THE OTHER FROM ANY CLAIM TO COMPENSATION OR INDEMNITY FOR TERMINATION OF THE BUSINESS RELATIONSHIP CONTEMPLATED BY THIS LICENSE UNLESS TERMINATION IS IN MATERIAL BREACH OF THIS LICENSE. 5. CONFIDENTIAL INFORMATION. 5.1 PROPRIETARY INFORMATION. Licensee acknowledges that the Technology is confidential proprietary information belonging to Licensor which embodies substantial trade secrets of Licensor and Licensee will take all reasonable steps to maintain its confidential proprietary nature. Licensee will not disclose the Technology or any portion thereof, to any third party without Licensor's prior written consent. The foregoing restriction shall not apply with respect to any information which (i) is expressly permitted by this License to be disclosed; (ii) is or becomes generally available to the public through any means other than by breach by the Licensee of its obligations under the License; (iii) was in the possession of Licensee as of the date of this License as evidenced by written records in Licensee's possession as at such date; (iv) is disclosed in order to comply with an order of a court or governmental agency of competent jurisdiction, provided that Licensee gives to Licensor immediate notice of such order and cooperates with Licensor in using all reasonable efforts to obtain an appropriate protective order or equivalent; (v) is independently developed or formulated by Licensee without use of the Technology as evidenced by written records in Licensee's possession. 5.2 REMEDIES. Licensor and Licensee each acknowledge that disclosure or use of the Technology or Licensee Derivative Works in violation of Sections 2 or 5 of this License would cause irreparable harm to Licensor and Licensee for which monetary damages may be difficult to ascertain or an inadequate remedy. Each party therefore acknowledges that the other party will 9 have the right, in addition to its other rights and remedies, to seek and obtain injunctive relief for any violation of Sections 2 or 5 of this License. 6. REPRESENTATIONS AND WARRANTY 6.1 LICENSOR REPRESENTATIONS. Licensor warrants and represents to Licensee that: 6.1.1 It is duly organized, validly existing and in good standing under the laws of each jurisdiction in which its activities require such qualification; 6.1.2 The execution, delivery and performance of this License have been duly authorized by all necessary corporate action and this License constitutes the legal, valid and binding obligation of Licensor, enforceable in accordance with its terms against Licensor except as such enforceability may be affected by bankruptcy, reorganization, insolvency, moratorium or laws affecting creditors' rights generally or by general principles of equity; 6.1.3 It has full corporate power and authority to enter into this License and to perform its obligations hereunder; 6.1.4 It is the sole owner of the Technology or otherwise has authority to grant the rights licensed hereunder to Licensee; 6.1.5 The execution and delivery of this License, and the performance by Licensor of its obligations hereunder, will not violate, breach, conflict with or cause a default under any law, rule, regulation, order, agreement or instrument to which Licensor is a party or by which it is bound, or of Licensor's constituent documents; 6.1.6 No consent, approval or authorization of any person is needed in order for Licensor to perform its obligations pursuant to this License; and 6.1.7 Listed in Schedule 1 is a true, correct and complete list of all Third Party Licenses which are necessary under Section 2.1 for the effectiveness of the licenses granted thereunder. 6.1.8 Each employee, consultant or agent of Licensor who is developing or who will develop Technology for Licensor is or will be (as the case may be) obligated by contract to assign to Licensor all of such Technology. 6.2 LICENSEE REPRESENTATIONS. Licensee warrants and represents to Licensor that: 10 6.2.1 It is duly organized, validly existing and in good standing under the laws of each jurisdiction in which its activities require such qualification; 6.2.2 The execution, delivery and performance of this License have been duly authorized by all necessary corporate action and this License constitutes the legal, valid and binding obligation of Licensee, enforceable in accordance with its terms against Licensee except as such enforceability may be affected by bankruptcy, reorganization, insolvency, moratorium or laws affecting creditors' rights generally or by general principles of equity; 6.2.3 It has full corporate power and authority to enter into this License and to perform its obligations hereunder; 6.2.4 The execution and delivery of this License, and the performance by Licensee of its obligations hereunder, will not violate, breach, conflict with or cause a default under any law, rule, regulation, order, agreement or instrument to which Licensee is a party or by which it is bound, or of Licensee's constituent documents; 6.2.5 No consent, approval or authorization of any person is needed in order for Licensee to perform its obligations pursuant to this License; and 6.2.6 Each employee, consultant or agent of Licensor who is developing or who will develop the Licensee Derivative Works for Licensee is or will be (as the case may be) obligated by contract to assign to Licensee all of such Licensee Derivative Works. 6.2.7 The entities listed in Section 2.1.5 are wholly-owned subsidiaries of Licensee. 6.3 LIMITED WARRANTY. Licensor represents and warrants that the media, if any, on which the Technology is recorded will be free from defects in materials and workmanship for a period of ninety (90) days after delivery. Licensor's sole liability with respect to breach of this warranty is to replace the defective media. 6.4 GENERAL DISCLAIMER. EXCEPT AS SPECIFIED IN THIS LICENSE, THE TECHNOLOGY AND LICENSEE DERIVATIVE WORKS ARE PROVIDED "AS IS" AND ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THE TECHNOLOGY, ARE HEREBY DISCLAIMED. LICENSOR SHALL HAVE NO LIABILITY WHATSOEVER IN RELATION TO THE LICENSEE DERIVATIVE WORKS. SUBJECT TO SECTION 7.5, LICENSEE SHALL HAVE NO LIABILITY WHATSOEVER IN RELATION TO THE TECHNOLOGY. 11 6.5 LIMITATION. The limited warranty set forth in Section 6.3 is expressly subject to Section 6.6. 6.6 LIMITATION OF LIABILITY. EXCEPT FOR DAMAGES PAYABLE TO A THIRD PARTY FOR WHICH A PARTY IS REQUIRED TO INDEMNIFY ANOTHER PARTY PURSUANT TO SECTIONS 7.2 AND 7.5 HEREOF OR A BREACH OF SECTIONS 2 OR 5 HEREOF, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS LICENSE (INCLUDING LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), NO MATTER WHAT THEORY OF LIABILITY, EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY OF SUCH DAMAGES, FURTHER, LIABILITY FOR SUCH DAMAGES SHALL BE EXCLUDED, EVEN IF THE EXCLUSIVE REMEDIES PROVIDED FOR IN THIS LICENSE FAIL OF THEIR ESSENTIAL PURPOSE. The provisions of this Section 6.6 allocate the risks under this License between Licensor and Licensee and the parties have relied upon the limitations set forth herein in determining whether to enter into this License. 7. LIMITED INDEMNITY. 7.1 PRE-RELEASE. The parties acknowledge that the Technology may be in pre-release form and that Licensor shall not be liable for any defects or deficiencies in the Technology, process or design created by, with or in connection with the Technology whether or not such defects and/or document deficiencies are caused, in whole or in part, by defects or deficiencies in the design or implementation of the Technology or Licensed Documentation. Upon first commercial release of the Technology by Licensor, Licensor will provide to Licensee a limited indemnity as described in Sections 7.2 and 7.3 below. 7.2 INDEMNITY. Licensor shall indemnify and hold harmless Licensee and its permitted sublicensees against any claim that the use by Licensee or its permitted sublicensees of the Technology violates the U.S. patent, copyright or trade secret rights of any third party, provided that Licensee: (i) provides notice of the claim promptly to Licensor; (ii) gives Licensor sole control of the defense and settlement of the claim; (iii) provides to Licensor, at Licensor's expense, all available information, assistance and authority to defend; and (iv) has not compromised or settled such proceeding without Licensor's prior written consent. The indemnity set forth in this Section 7.2 shall not apply in any situation where the claim relates to (x) any technology or intellectual property incorporated in the Technology or used in the development of the Technology which technology or intellectual property is licensed by Licensee to Licensor or any Affiliate of Licensor under any agreement, (y) the modification of the Technology by Licensee or (z) the use of the Technology together with other hardware or software not 12 previously approved by Licensor, but only to the extent that the claim is based on such combined use. 7.3 REMEDIATION. Should the Technology, or any portion thereof become, or in Licensor's opinion be likely to become, the subject of a claim of infringement for which indemnity is provided under Section 7.2, Licensor shall, in addition to the obligations specified in Section 7.2, as Licensee's sole and exclusive remedy, elect to: (i) obtain for Licensee the right to use such Technology; (ii) replace or modify the Technology so that it becomes non-infringing; or if alternatives (i) or (ii) are not commercially practicable; (iii) accept the return of the Technology and reimburse to Licensee the costs incurred in returning the Technology (provided that in such event, Licensee agrees to use reasonable efforts to minimize such costs by deactivating such Technology from a central facility to the extent reasonably possible). 7.4 LIMITATION. THIS SECTION 7 STATES THE ENTIRE LIABILITY OF LICENSOR WITH RESPECT TO INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS BY THE TECHNOLOGY, LICENSOR SHALL HAVE NO OTHER LIABILITY WITH RESPECT TO INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY AS A RESULT OF USE, LICENSE, OR SALE OF TECHNOLOGY OR TOOLS. 7.5 INDEMNITY BY LICENSEE. Except for claims for which Licensor is obligated to indemnify Licensee under Section 7.2, Licensee shall defend, at Licensee's expense, any and all claims brought against Licensor by third parties, and shall pay all damages awarded by a court of competent jurisdiction, or such settlement amount negotiated by Licensee, arising out of or in connection with (a) Licensee's use, reproduction, modification or distribution of the Technology or the Licensee Derivative Works or any of them or (b) Licensee's failure to obtain the Third Party Licenses. Licensee's obligation to provide indemnification under this Section 7.5 shall arise provided that Licensor: (i) provides notice of the claim promptly to Licensee; (ii) gives Licensee sole control of the defense and settlement of the claim; (iii) provides to Licensee, at Licensee's expense, all available information, assistance and authority to defend; and (iv) has not compromised or settled such proceeding without Licensee's prior written consent. 8. ATTORNEYS' FEES AND COSTS. If any suit is brought or an attorney retained to collect any money due under this License, or to collect a judgment for breach of this License, the prevailing party shall be entitled to recover, in addition to any other remedy, reimbursement for attorneys' fees, court costs, investigation costs and other related expenses incurred in connection therewith. 9. NOTICE. All notices, requests, demands and other communications called for or contemplated hereunder will be in writing and will be deemed to have been duly given if delivered when deposited in the United States mail, first class postage prepaid, addressed as follows, or to any other address of which a party gives notice to the other: 13 If to Licensor to: NDTC Technology, Inc. 4100 East Dry Creek Road Littleton, CO 80122 Attn: David Beddow with a copy to: Tele-Communications, Inc. 5619 DTC Parkway Englewood, CO 80111 Attn: Legal Department 14 If to Licensee to: General Instrument Corporation 101 Tournament Drive Horsham, PA 19044 Attn: Robert A. Scott, Esq. Vice President- Legal 10. AUDIT In furtherance of Licensor's rights hereunder, Licensor may, at Licensor's initial expense and without notice to Licensee but during Licensee's normal business hours, enter upon any of Licensee's premises to audit Licensee's compliance with the terms of this License. In the event that Licensor discovers, during the course of such audit, that License has materially violated any of the terms of this License, then in addition to all other remedies available to Licensor, Licensee shall be responsible for payment of all costs of such audit. 11. MISCELLANEOUS 11.1 MODIFICATION. This License may not be modified other than by a written amendment executed by each of the parties hereto. 11.2 GOVERNING LAW. This License shall be construed in accordance with the laws of the State of Colorado and of the United States. 11.3 SEVERABILITY. If any provision or part thereof in this License is held invalid, illegal or unenforceable for any reason, the remainder of this License will nonetheless remain in full force and effect. 11.4 TAXES. Licensee shall pay any and all sales, use, excise or other taxes (other than taxes measured on the gross income of Licensor) assessed or payable by reason of or with respect to this License. 11.5 BINDING AGREEMENT. This License will benefit and be binding upon the parties hereto and their respective heirs, representatives, successors and permitted assigns. 11.6 HEADINGS. The headings in this License are for purpose of reference only and shall not be construed as part of this License. 11.7 ENTIRE AGREEMENT. This License and, to the extent terms are incorporated from such agreements or reference is made thereto, the Asset Purchase Agreement and the Master 15 Service Agreement constitute the entire understanding and agreement of the parties hereto with respect to the licensing of the Technology and supersede all prior agreements and understandings, written or oral, among any of the parties with respect to such subject matter. 11.8 TRANSFER RESTRICTIONS. Licensee may not assign any of its rights or delegate any of its duties under this License without Licensor's prior written consent. Any attempted assignment or delegation without consent shall be null and void. Licensor may assign its rights and delegate its duties under this License without Licensee's consent, provided, however, that (i) Licensee's consent shall be required in the case of a direct assignment to a competitor of Licensee in the Access and Control Business, and (ii) Licensee's consent shall be required in connection with a sale of the stock of Licensor to a competitor of Licensee in the Access and Control Business or a merger of Licensor with a competitor of Licensee in the Access and Control Business, unless such direct assignment, sale of stock or merger of Licensor is part of a larger transaction that involves other Affiliates of Licensor. 11.9 U.S. GOVERNMENT RESTRICTED RIGHTS. The Technology is provided to Licensee with Restricted Rights. Use, duplication or disclosure of the Technology to, by or on behalf of the U.S. Government, its agencies and/or instrumentalities (the "Government") is subject to the restrictions stated in subparagraph (c)(1)(ii) or the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013, or subparagraphs (c)(1) and (2) of the Commercial Computer Software --- Restricted Rights at 48 CFR 52.227-19, and/or the particular department or agency regulations or rules which provide Licensor with protection equivalent to or greater than such cited clauses and subparagraphs. Licensee shall comply with all requirements of the Government to obtain such Restricted Rights protection. The manufacturer of the Technology is National Digital Television Center, Inc., 4100 East Dry Creek Road, Littleton, Colorado 80122. 11.10 COMPLIANCE WITH LAWS. The Technology is subject to U.S. export control laws, including the U.S. Export Administration Act and its associated regulations, and may be subject to export or import regulations in other countries. Licensee agrees to comply strictly with all such regulations and acknowledges that it has the responsibility to obtain such licenses to export, re-export or import the Technology, Documentation or Product(s) as may be required after delivery of the Technology to Licensee. Licensee shall make reasonable efforts to notify and inform its employees having access to the Technology of Licensee's obligation to comply with the requirements stated in this Section 11.10. 11.11 SURVIVAL. The parties' rights and obligations under Sections 2.4.5, 2.4.7, 4, 5, 6.6,7, 8, 9, 10 and 11 shall survive expiration or termination of this License. 11.12 NO WAIVER. The failure of either party to enforce a provision of this License shall not be deemed a waiver of that provision. 16 11.13 DISCLAIMER OF FRANCHISE. The relationship created hereby is that of licensor and licensee and the parties acknowledge and agree that nothing herein shall be deemed to constitute Licensee as a franchisee of Licensor. Licensee hereby waives the benefit of any state or federal statues dealing with the establishment and regulation of franchises. 11.14 RELATIONSHIP OF THE PARTIES. It is expressly understood that the parties intend by this License to establish the relationship of independent contractors, and do not intend to undertake the relationship of principal and agent or to create a joint venture or partnership between themselves or their respective successors in interest. Neither party shall have any authority to create or assume, in the name of or on behalf of the other party any obligation, expressed or implied, nor to act or purport to act as an agent or legally empowered representative of the other party hereto for any purpose whatsoever. 11.15 FORCE MAJEURE. Neither party will be in default or otherwise liable for any delay in or failure of its performance under this License where such delay or failure arises by reason of any Act of God, acts of the common enemy, the elements, electrical storms, earthquake, floods, fires or other natural disasters, epidemics, quarantine restrictions, national emergency or war, sabotage, acts, acts of governmental authority, willful or criminal misconduct of third parties, strikes, failure or delay in transportation, freight embargoes or other causes beyond its control ("Force Majeure"); provided that financial inability does not constitute an event of Force Majeure. 17 The parties have caused this License to be executed by their duly authorized representatives or officers as of the date first above written. LICENSOR: LICENSEE: NDTC TECHNOLOGY, INC., GENERAL INSTRUMENT CORPORATION, a Colorado corporation a Delaware corporation By: /s/ David D. Beddow By: /s/ Richard C. Smith ---------------------------- ------------------------------ Title: Vice President Title: Executive Vice President ------------------------- --------------------------- 18 EX-27 7 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GENERAL INSTRUMENT CORPORATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 82,854 25,659 326,120 (3,120) 261,031 828,150 487,019 (260,101) 1,693,269 374,773 0 0 0 1,517 1,248,791 1,693,269 905,425 905,425 671,316 671,316 0 0 (1,264) (44,019) 14,090 (29,929) 0 0 0 (29,929) (0.20) (0.20)
EX-99 8 FORWARD LOOKING INFORMATION EXHIBIT 99 GENERAL INSTRUMENT CORPORATION EXHIBIT 99 -- FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company's Form 10-K, the Company's Annual Report to Stockholders, any Form 10-Q or Form 8-K of the Company, or any other oral or written statements made by or on behalf of the Company, may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," and "scheduled" and similar expressions. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The actual results of the Company may differ significantly from the results discussed in forward-looking statements. Factors that might cause such a difference include, but are not limited to: uncertainties relating to general political, economic and competitive conditions in the United States and other markets where the Company operates; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; the Company's dependence on the cable television industry and cable television spending; signal security; the pricing and availability of equipment, materials and inventories; technological developments; the competitive environment in which the Company operates; changes in the financial markets relating to the Company's capital structure and cost of capital; the uncertainties inherent in international operations and foreign currency fluctuations; authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities Exchange Commission; and the factors set forth below. FACTORS RELATING TO THE DISTRIBUTION In a transaction that was consummated on July 28, 1997, the former General Instrument Corporation (the "Distributing Company") (i) transferred all the assets and liabilities relating to the manufacture and sale of broadband communications products used in the cable television, satellite, and telecommunications industries to the Company (which was then named "NextLevel Systems, Inc." and was a wholly-owned subsidiary of the Distributing Company) and transferred all the assets and liabilities relating to the manufacture and sale of coaxial, fiber optic and other electric cable used in the cable television, satellite and other industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii) then distributed all of the outstanding shares of capital stock of each of the Company and CommScope to its stockholders on a pro rata basis as a dividend (the "Distribution"). Immediately following the Distribution, the Distributing Company changed its corporate name to "General Semiconductor, Inc." ("General Semiconductor"). Effective February 2, 1998, the Company changed its corporate name from "NextLevel Systems, Inc." to "General Instrument Corporation." The Distribution Agreement, dated as of June 12, 1997, among the Company, CommScope and the Distributing Company (the "Distribution Agreement") and certain other agreements executed in connection with the Distribution (collectively, the "Ancillary Agreements") allocate among the Company, CommScope, and General Semiconductor and their respective subsidiaries responsibility for various indebtedness, liabilities and obligations. It is possible that a court would disregard this contractual allocation of indebtedness, liabilities and obligations among the parties and require the Company or its subsidiaries to assume responsibility for obligations allocated to another party, particularly if such other party were to refuse or was unable to pay or perform any of its allocated obligations. Pursuant to the Distribution Agreement and certain of the Ancillary Agreements, the Company has agreed to indemnify the other parties (and certain related persons) from and after consummation of the Distribution with respect to certain indebtedness, liabilities and obligations, which indemnification obligations could be significant. Although the Distributing Company has received a favorable ruling from the Internal Revenue Service, if the Distribution were not to qualify as a tax free spin-off (either because of the nature of the Distribution or because of events occurring after the Distribution) under Section 355 of the Internal Revenue Code of 1986, as amended, then, in general, a corporate tax would be payable by the consolidated group of which the Distributing Company was the common parent based upon the difference between the fair market value of the stock distributed and the Distributing Company's adjusted basis in such stock. The corporate level tax would be payable by General Semiconductor and could substantially exceed the net worth of General Semiconductor. However, under certain circumstances, the Company and CommScope have agreed to indemnify General Semiconductor for such tax liability. In addition, under the consolidated return rules, each member of the consolidated group (including the Company and CommScope) is severally liable for such tax liability. CERTAIN RESTRICTIONS UNDER CREDIT FACILITIES The Credit Agreement dated as of July 23, 1997, as amended, among the Company, certain banks, and The Chase Manhattan Bank, as Administrative Agent, contains certain restrictive financial and operating covenants, including, among others, requirements that the Company satisfy certain financial ratios. The failure of the Company to satisfy such covenants could cause the Company to be unable to borrow under the Credit Agreement and would cause the Company to seek alternative sources of working capital financing and, depending upon the Company's financial condition at such time, could have a material adverse effect on the operations and financial condition of the Company. DEPENDENCE OF THE COMPANY ON THE CABLE TELEVISION INDUSTRY AND CABLE TELEVISION CAPITAL SPENDING The majority of the Company's revenues come from sales of systems and equipment to the cable television industry. Demand for these products depends primarily on capital spending by cable television system operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore the Company's sales and profitability, may be affected by a variety of factors, including general economic conditions, the continuing trend of cable system consolidation within the industry, the financial condition of domestic cable television system operators and their access to financing, competition from direct-to-home ("DTH"), satellite, wireless television providers and telephone companies offering video programming, technological developments that impact the deployment of equipment and new legislation and regulations affecting the equipment used by cable television system operators and their customers. There can be no assurance that cable television capital spending will increase from historical levels or that existing levels of cable television capital spending will be maintained. Although the domestic cable television industry is comprised of thousands of cable systems, a small number of cable television multiple system operators ("MSO's") own a majority of cable television systems and account for a significant portion of the capital expenditures made by cable television system operators. The loss of business from a significant MSO could have a material adverse effect on the business of the Company. THE IMPACT OF REGULATION AND GOVERNMENT ACTION In recent years, cable television capital spending has been affected by new legislation and regulation, on the federal, state and local level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. During 1993 and 1994, the Federal Communications Commission (the "FCC") adopted rules under the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), regulating rates that cable television operators may charge for lower tiers of service and generally not regulating the rates for higher tiers of service. In 1996, the Telecommunications Act of 1996 (the "Telecom Act") was enacted to eliminate certain governmental barriers to competition among local and long distance telephone, cable television, broadcasting and wireless services. The FCC is continuing its implementation of the Telecom Act which, when fully implemented, may significantly impact the communications industry and alter federal, state and local laws and regulations regarding the provision of cable and telephony services. Among other things, the Telecom Act eliminates substantially all restrictions on the entry of telephone companies and certain public utilities into the cable television business. Telephone companies may now enter the cable television business as traditional cable operators, as common carrier conduits for programming supplied by others, as operators of wireless distribution systems, or as hybrid common carrier/cable operator providers of programming on so-called "open video systems." The economic impact of the 1992 Cable Act, the Telecom Act and the rules thereunder on the cable television industry and the Company is still uncertain. On June 24, 1998, the FCC released a Report and Order entitled IN THE MATTER OF IMPLEMENTATION OF SECTION 304 OF THE TELECOMMUNICATIONS ACT OF 1996 - COMMERCIAL AVAILABILITY OF NAVIGATION DEVICES (the "Retail Sales Order"), which promulgates rules providing for the commercial availability of navigation devices, including set-top devices and other consumer equipment, used to receive video signals and other services from multichannel video programming distributors ("MVPDs"), including cable television system operators. The Retail Sales Order mandates that (i) subscribers have a right to attach any compatible navigation device to an MVPD system regardless of its source and (ii) service providers are prohibited from taking actions which would prevent navigation devices that do not perform conditional access functions from being made available by retailers, manufacturers, or other affiliated vendors. To accomplish subscribers' right to attach, the FCC has ordered that (i) MVPDs must provide technical information concerning interface parameters necessary to permit navigation devices to operate with their systems; (ii) MVPDs must separate out security functions from non-security functions by July 1, 2000; and (iii) after January 1, 2005, MVPDs may not provide new navigation devices for sale, lease or use that perform both conditional access functions and other functions in a single integrated device. Unless modified or overturned, the Retail Sales Order will require set-top device manufacturers, such as the Company, to develop a separate security module to be available for sale to other manufacturers who want to build set-top devices, as well as ultimately prevent the Company from offering set-top devices in which the security and non-security functions are integrated. In addition, the Retail Sales Order may require the Company to offer its set-top devices through retail distribution channels, an area in which the Company has limited experience. The competitive impact of the Retail Sales Order is still uncertain, and there can be no assurance that the Company will be able to compete successfully with other consumer electronics manufacturers interested in manufacturing set-top devices, many of which have greater resources and retail sales experience than the Company. In February 1998, PRIMESTAR, the nation's second largest provider of satellite television entertainment, entered into agreements with the Company, pursuant to which the Company will manufacture integrated receiver decoders ("IRDs") for PRIMESTAR's planned high power retail and wholesale service. Offering a high-power service would enable PRIMESTAR to provide expanded channel capacity and smaller receiving dishes to its subscribers. As the result of a pending Department of Justice proceeding seeking to block PRIMESTAR's acquisition of high-powered satellites from American Sky Broadcasting LLC ("ASkyB"), there is uncertainty concerning PRIMESTAR's ability to provide this proposed service. There can be no assurance that PRIMESTAR will ultimately gain governmental approval to acquire the ASkyB assets or that it will be able to secure another high-powered orbital slot, and accordingly, there can be no assurance that the Company will realize the benefits of its agreement with PRIMESTAR. There can be no assurance that future legislation, regulations or government action will not have a material adverse effect on the operations and financial condition of the Company. TELECOMMUNICATIONS INDUSTRY COMPETITION AND TECHNOLOGICAL CHANGES AFFECTING THE COMPANY The Company will be significantly affected by the competition among cable television system operators, satellite television providers and telephone companies to provide video, voice and data/Internet services. In particular, although cable television operators have historically provided television services to the majority of U.S. households, DTH satellite television has attracted a growing number of subscribers and the regional telephone companies have begun to offer competing cable and wireless cable services. This competitive environment is characterized by rapid technological changes, particularly with respect to developments in digital compression and broadband access technology. The Company believes that, as a result of its development of new products based on emerging technologies and the diversity of its product offerings, it is well positioned to supply each of the cable, satellite and telephone markets. The future success of the Company, however, will be dependent on its ability to market and deploy these new products successfully and to continue to develop and timely exploit new technologies and market opportunities both in the United States and internationally. There can be no assurance that the Company will be able to continue to successfully introduce new products and technologies, that it will be able to deploy them successfully on a large-scale basis or that its technologies and products will achieve significant market acceptance. The future success of the Company will also be dependent on the ability of cable and satellite television operators to successfully market the services provided by the Company's advanced digital terminals to their customers. Further, there can be no assurance that the development of products using new technologies or the increased deployment of new products will not have an adverse impact on sales by the Company of certain of its other products. In addition, because of the competitive environment and the nature of the Company's business, there have been and may continue to be claims by third parties asserting their intellectual property rights and challenging the Company's ability to deploy new technologies. COMPETITION The Company's products and services compete with those of a substantial number of foreign and domestic companies, some with greater resources, financial or otherwise, than the Company, and the rapid technological changes occurring in the Company's markets are expected to lead to the entry of new competitors. The Company's ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in the Company's ability to expand and remain competitive. Existing competitors' actions and new entrants may have an adverse impact on the Company's sales and profitability. For a discussion of competitive factors in regards to retail consumer electronic manufacturers see "The Impact of Regulation and Government Action". The Company believes that it enjoys a strong competitive position because of its large installed cable television equipment base, its strong relationships with the major cable television system operators, its technological leadership and new product development capabilities, and the likely need for compatibility of new technologies with currently installed systems. There can be no assurance, however, that competitors will not be able to develop systems compatible with, or that are alternatives to, the Company's proprietary technology or systems. INTERNATIONAL OPERATIONS; FOREIGN CURRENCY RISKS U.S. broadband system designs and equipment are being employed in international markets, where cable television penetration is low. In addition, the Company is developing new products to address international market opportunities. However, the impact of the economic crises in Asia and Latin America has significantly affected the Company's results in these markets. There can be no assurance that international markets will rebound to historical levels or that such markets will continue to develop or that the Company will receive additional contracts to supply systems and equipment in international markets. International shipments of certain of the Company's products require export licenses issued by the U.S. Department of Commerce prior to shipment in accordance with U.S. export control regulations. The Company has made a voluntary disclosure to the U.S. Department of Commerce with respect to a number of violations by the Company of these export control regulations. While the Company does not expect these violations to have a material adverse effect on the Company's operations or financial condition, there can be no assurance that these violations will not result in the imposition of sanctions or restrictions on the Company. A significant portion of the Company's products are manufactured or assembled in Taiwan and Mexico. In addition, the Company's operations are expanding into new international markets. These foreign operations are subject to the usual risks inherent in situating operations abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions by foreign governments, nationalizations, the laws and policies of the United States affecting trade, foreign investment and loans, and foreign tax laws. The Company's cost-competitive status relative to other competitors could be adversely affected if the New Taiwan dollar or another relevant currency appreciates relative to the U.S. dollar. ENVIRONMENT The Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on the Company's financial condition. The Company's present and past facilities have been in operation for many years, and over that time in the course of those operations, such facilities have used substances which are or might be considered hazardous, and the Company has generated and disposed of wastes which are or might be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future, which the Company cannot now predict. -----END PRIVACY-ENHANCED MESSAGE-----